Q1 2022 NAPCO Security Technologies Inc Earnings Call
Greetings and welcome to NAPCO Security Technologies, Inc. Fiscal first quarter 2022 earnings release conference call.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Patrick Mckillop director of Investor Relations. Thank you you may begin.
Good morning, My name is Patrick Mckillop, I'm, the director of Investor Relations for NAPCO security.
Thank you all for joining us for today's conference call to discuss our financial results.
For our fiscal first quarter 'twenty.
2022.
By now all of you should have had the opportunity to review the press release discussing the results.
If you have not a copy of the release is available in the Investor Relations section of our website Www Dot NAPCO security Dot com.
On the call today is Richard Soloway, President and CEO of NAPCO Security technologies, and Kevin do shell Senior Vice President and CFO.
Before we begin let me take a moment to read the forward looking statements.
This presentation contains forward looking statements that are based on current expectations estimates forecasts and projections of future performance based on management.
Judgment beliefs current trends and anticipated product performance.
These forward looking statements include without limitation statements relating to growth drivers of the company's business such as school security products.
And recurring revenue services potential market opportunities the benefits of our recurring revenue products to customers and dealers.
Our ability to control expenses and costs unexpected annual run rate for SaaS recurring monthly revenue.
Forward looking statements involve risks and uncertainties that may cause actual results to differ materially from those contained in the forward looking statements.
These factors include but are not limited to such risk factors described in our SEC filings.
Our annual report on Form 10-K.
Although unknown or unpredictable factors underlying assumptions subsequently proving to be incorrect could cause actual results to differ materially from those in the forward looking statements.
Although we believe that the expectations reflected in the forward looking statements are reasonable we can.
And not guarantee future results level of activity performance or achievements.
You should not place undue reliance on these forward looking statements all information provided in today's press release and this conference call is as of today's date unless otherwise stated.
And we undertake no duty to update such information.
Stepped as required under applicable law.
I'll turn the call over to <expletive> in a moment before I do I just wanted to mention a few things on the IR front.
We're planning more virtual N D ours until the end of calendar 2021 and we will be presenting at the Needham growth conference in January 2022.
Outreach is crucial especially for small cap companies such as NAPCO.
I would like to thank all of those folks that assist us in these conferences and marketing trips.
With that all the way, let me turn the call over to Richard Soloway, President and CEO of NAPCO Security technologies.
<expletive> the floor is yours.
Thank you Patrick Good morning, everyone welcome to our conference call.
Thank you for joining us today to discuss our results.
We are very excited to report our fiscal Q1 'twenty to 'twenty two record sales of $31.1 million and record net income of $7 $8 million.
Our results reflect another strong performance by NAPCO.
Recurring revenue continue to grow at a very strong rate and your annual run rate is now $40 million to $46 million.
Based on October 2021 recurring revenues.
Our balance sheet remains strong with our cash balances growing continuing to grow now in excess of $43 million.
We continue to focus on capitalizing on key industry trends, which include wireless fire and intrusion alarm School security solutions, plus enterprise access control systems and architectural locking products.
The management team here at NAPCO continues to focus on the key metrics of growth profits.
Our returns on equity and controlling costs. These metrics are important for us as well as our shareholders. We continue to execute our business strategy and our interests are aligned with our shareholders as senior management at NAPCO owns approximately 21% of the.
Equity.
Before I go into greater detail I'll now turn the call over to our CFO Kevin Michelle.
Provide an overview of our fiscal first quarter results and then I'll be back with more on our strategies and outlook Kevin the floor is yours.
Thank you <expletive> and good morning, everybody.
First quarter net sales increased 34%.
Two a first quarter record $31 $1 million.
As compared to $23 $2 million for the same period last year.
The increase in sales for the quarter, primarily related to increases in recurring service revenue.
Intrusion and access products and alarm.
Armlock and marks brand door locking products.
Recurring monthly revenue continued strong growth.
Increasing 41% for the quarter.
This strong growth is primarily attributable to the continued strength of our commercial intrusion fire alarm business.
Which has not been significantly affected by the Covid pandemic as buildings must remain secure.
Recurring revenue now has an annual run rate of $42 6 million based on October 2021 recurring revenue.
Also our equipment sales continued to rebound up 31% from the same period last year.
Gross profit for the three months ended September 32021 increase.
Increased 26%.
$13 $4 million.
The gross margin of 43%.
As compared to $10 $7 million with a gross margin of 46%.
Same period a year ago.
Gross margins for recurring revenue in the first quarter.
To be strong coming in at 86% compared to 84% for the same period a year ago.
While the overall gross profit increased by $2.8 million or 26% gross margin for equipment revenues was 22% as compared to 29% last year.
This decrease was primarily due to increased freight and component part cost relating to the current worldwide supply chain problems as.
As well as a shift in product mix to more of the company's Starlink radio products, which generate a lower gross margin than the company's locked into our access products, but leads to the more profitable recurring service revenues.
The increase in gross profit for the three months was primarily due to the aforementioned increased recurring revenue.
Increased sales of intrusion and access products.
As well as increased sales of door locking products.
Research and development expenses for the three months ended September 32021 were relatively constant at $1.9 million.
Or 6% of sales as compared to one $9 million or 8%.
Sales for the same period a year ago.
Selling general and administrative expenses for the three months ended September 32021.
Increased 19% to seven $3 million or 24% of sales.
As compared to $6 $1 million or 27% of sales for the same period a year ago.
The increase in selling general and administrative expenses was primarily due to trade show and advertising expenses, which were curtailed during the COVID-19 pandemic last year.
As well as increased sales commissions related to the 34% increase in sales.
The decrease in SG&A expenses as a percentage of sales from 27% to 24% was primarily due to the aforementioned increase sales.
Sales.
And speaking of trade shows we will be attending the upcoming International Security Conference at the Javits Center in New York City on November 17th and 18th and if anyone is interested in attending please reach out to Patrick.
Yeah.
Operating income for the quarter increased 56% to $4 $2 million as compared to $2 $7 million.
Same period last year.
Other income for the quarter increased by $3 $9 million and was related to the gain on the extinguishment of debt with such extinguishment occurring during the three months ended September 30, 2021.
The company's provision for income taxes for the three months ended September 32021.
Increased by $19000 to $348000.
As compared to $329000 for the same period a year ago.
The company's effective rate for income tax was 4% and 12% for the three months ended September 32021, and 2020, respectively. The.
The decrease in the company's effective rate for the three months ended September 32021 was due primarily to the income recognized as a result of the aforementioned extinguishment of debt being non taxable.
Net income for the quarter increased 234%.
Quarterly record of $7 $8 million as compared to $2 $3 million for the same period last year.
Earnings per share diluted for the quarter increased 223% to 42 cents as compared to 13 cents for the same period a year ago.
Adjusted EBITDA for the quarter increased 170% to $8 $6 million as compared to $3 $2 million for the same period a year ago.
Adjusted EBITDA per share diluted for the quarter increased 176% to 47 cents as compared to 17 cents.
Same period a year ago.
Net income earnings per share adjusted EBITDA and adjusted EBITDA per share for the quarter ended September 32021.
All reflected other income of $3 $9 million, which resulted from the previously mentioned extinguishment of debt.
Without such benefit net income earnings per share adjusted EBITDA and adjusted EBITDA per share would have been $3 8 million 21 cents for.
$4 7 million at 26 cents, respectively. All record results for any first fiscal quarter in the company's history.
Yeah.
Moving on to the balance sheet.
At September 32021, the company had $43 $2 million in cash and cash equivalents and marketable securities as compared to $40 2 million at June 32020.
Working capital defined as current assets less current liabilities was $81 $8 million at September 32021.
As compared with working capital of $75 8 million at June 32021.
Current ratio defined as current assets divided by current liabilities was $6 two to one at September 32021, and was four eight to one at June 32021.
Cash provided by operating activities for the quarter decreased by 8% to $3 $5 million as compared to $3 $8 million last year.
The decrease was primarily due to inventory increasing by $1.8 million at September 32021, compared to June 32021 levels and decreasing by $700000 at September 32020, compared to June 32020 levels.
This increase was primarily the result of the company significantly increasing purchases of certain components that it becomes difficult to source during the worldwide supply chain problems.
Capex was $522000 during the quarter versus $143000 in the year ago period.
That concludes my formal remarks, and I would now like to return the call back to <expletive>.
Thank you Kevin.
Our fiscal Q1, 2022 was a record breaker and I am proud of the NAPCO team for executing through the challenges that have been brought by the Covid pandemic.
The quarter also marks our fourth consecutive quarter of year over year sales growth and our goal is to surpass the previous streak of 23 quarters that was disrupted in 'twenty 'twenty by COVID-19.
The primary driver of our success comes from the commercial fire and intrusion alarm business.
Commercial buildings must have and maintain a fire alarm system in order to receive a certificate of occupancy.
And this is a mandatory non discretionary item.
We continue to focus on this segment of the business, giving its hard given its high profitability and essential nature.
The recurring revenue annual run rate is now at $42 $6 million as of October 2021.
And as a reminder, last quarter, we surpassed the goal of $40 million in annualized recurring revenue that we had set several years ago.
The constraints of the supply chain have impacted us as well as our competitors, but NAV goes delivery performance has been far better we are aggressively managing these issues by developing alternative supply sources and delivery methods, while also react.
Eric products where necessary.
We continue to remain focused on aggressively managing these logistical challenges to ensure that we remain well positioned to meet the needs of our clients.
The conversion of older legacy copper phone line technology is still in the early part of the replacement cycle with millions of buildings still requiring upgrades, which create opportunities for our starlink line of Universal fire intrusion and Iot.
<unk>.
Our starlink communicators offer the widest coverage in the U S dealers with both AT&T and Verizon LTE service.
Additionally, integrators and dealers will need to complete upgrades for their customers as AT&T and Verizon have both announced the sunset of the older three G.
So network and calendar year.
Year 2022.
Our fully integrated solutions for the school security market remains a top priority given the healthy margins.
From those products that have generated we believe this market remains a significant opportunity there.
Number of incidences of gunfire on school grounds have nearly doubled the previous high in 2019 as students return in school learning.
Remote learning last year.
School administrators, we believe we'll start to turn their attention back to the need for school solutions and security solutions as more incidents happen and they are not spending all day dealing with the COVID-19 protocols and policies.
Recently, we announced a school security projects and paid them, Texas Independent School District.
Were optimistic about more projects being announced during our fiscal 2022 year.
The availability of grants the schools to fund these security projects has never been better.
Options for funding are available from the U S Federal government and state governments, which in total are in the billions of dollars.
We remain focused on providing schools the products and solutions they need to protect their students and faculty.
Yeah.
Air access our latest product innovation was launched during our fiscal 2021.
And as you may recall this product will bring recurring revenue to the locking and access control divisions of the company.
If you have not had a recurring revenue products until now.
Air Axis is the industry's first cellular based access control system, which we believe is a billion dollar market opportunity.
The benefits of the air access include no need for upfront investment is expensive hardware.
No need to interfere with corporate I T networks, which can be a major problem for installers and no onsite database backups or software updates.
Well we are in the early stages of the launch we have received positive feedback from dealers.
The air Axis means it nalco NAPCO now generates recurring revenue from each division of the company.
E G alarms and connectivity.
<unk> and access control.
Lastly, as Kevin.
Obviously mentioned the ISC East trade show is November 17th and 18th in New York City at the Javits Center, we will be showcasing air access.
As well as many of our other new products and strategically important products.
We invite you to come by and see our booth displaying all of our products.
We will begin our Q&A session portion of this call in a moment.
Our first fiscal quarter 2022 was a very successful one.
And we have now started a new sales growth streak with fiscal Q1, 2022 being the fourth consecutive quarter of sales growth.
We remain excited about the fiscal 2022 and beyond year.
NAPCO Senior management maintains a high level of ownership in our equity approximately 21% and I would like to thank everyone for their support and for joining us in the exciting future we have.
Our formal remarks are now concluded we would now like to open the call for the Q&A session.
Operator. Please proceed.
Thank you ladies and gentlemen at this time, we will be conducting a question and answer session. If you'd like to ask you. A question you May press star one on your telephone keypad, a confirmation tone when the gigs and one is in the question queue.
You May press Star two if you would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star T.
Our first question comes from the line of Mike Walkley with Canaccord Genuity. Please proceed with your question.
Great. Thanks for taking my questions. Congratulations on the results, but it seems the NAPCO is navigating the supply chain, you know better than a lot of your competitors.
Can you maybe walk through what Youre seeing in terms of competitiveness and getting components and how maybe you're building in the Dominican Republic is helping you outperform the industry in terms of the supplying your your distribution channel.
Thanks, Mike.
We've been through a part shortages over the years.
In the eighties and the nineties.
And now with this and this is very severe but we have certain techniques that we've developed over the years to overcome.
A lot of the issues.
And.
That's why we are delivering starlink radios and control panels and other equipment, whereas our competitors are not able to deliver.
That doesn't doesn't mean, it's 100% perfect, but it's much better than the industry.
And we also have a backlog.
Could ship the backlog are the numbers would even be better, but we expect that we're gonna be catching up with more of the backlog.
In the current quarter.
The products are doing really well with the dealers and the installation. So the orders are piling in but we're very busy and a factory is able to handle it and as we said we can do a $100 million per shift that we could run three shifts and the Dominican.
There's a lot of our labor and it's priced right and people want to work on assembling electronic circuit boards and baking housings and all these type of things. We do so it is a great place plus we also get our deliveries of Dominican in six days.
<unk> to our competitors. It takes six weeks, if they could even get a boat into the USA. So there's a lot of advantages to the way. It was set up and we're happy about the way things are going.
Great. Thanks, that's helpful and my follow up question just.
Just on the the visibility into the school security systems. You mentioned, you know a contract win and you know clearly as these ramp that should help the mix and gross margins could you maybe talk about the pipeline there now that everybody's back in school and and how that business might come back and then maybe as a follow up for Kevin how that could have.
Impact product gross margins longer term.
Yeah, So Mike we're seeing more activity because now.
Schools are back the kids are back the <unk>.
Incidence Unfortunately are back.
We saw there was a shooting in Texas at a high school a few weeks ago.
And we saw a chairs barricaded against the door is just like a five years ago. So in many places nothing's changed and we know that the need is as great. As it was back then and now I think focus will change we've seen it start to change.
For us.
And we'll announce the wins that we get where we're allowed to.
And the one in Texas recently, they allowed us to announce it we will see more of it. We believe we believe this is something that's not going away. It does help the margins the margins on school security products.
Either through locking or access or both.
Very high margin products typically.
And that's where you'll see a shift back in the margin mix.
Now you're seeing radios dominate which we love we love the radios.
High gross margin product, but boy does it lead to profitability with recurring revenue.
But we want both we want both the recurring but we also want the higher margin hardware and we think we'll get it as this fiscal year.
And it.
Not only this year it would be us it's a big area for us and we think we'll start to get recurring revenue from the schools, which we never get as part of the whole air access solution.
Great that makes a lot of sense and last question for me I'll pass it on I know <unk>.
December quarter can be a little tricky with with year end inventory management from your distribution partners can you help us just think about levels of inventory through distribution partners and then also with supply constraints your ability maybe to meet demand in the December quarter should we think kind of a similar mix also as it relates to hardware gross margins.
For December quarter. Thank you.
Yeah, So Mike the December quarter, historically is always challenging logistically before we had any COVID-19 issues because of the holidays.
A lot of times you know.
The shipping slows down that last week of December.
What we're seeing with the distributors is tremendous sell through.
That hasn't changed the.
Sell through stats are as good or better than ever.
And what we're starting to see is they're buying more I don't think that they're being as tight on their supply on their shelves, we always liked with its three months supply.
And during Covid, they kind of slowed down and.
And maybe it was more like a month or month and a half they were trying to become just in time distributors.
They realized that you Wanna be online for product you want you don't want to be left short.
So they're placing their orders it seems to be at a more aggressive level then they happen.
Not quite returning to a three months supply, but better than the one one and a half months supply.
We believe we could meet the demand we work hard at making sure our customers get their products.
Our Q2 is typically like a Q1 in terms of volume.
We're hoping will be even better and.
And we do have a head start because we had.
<unk> backlog heading into Q2, so that could help.
But are you now.
You too.
It brings the same kind of levels of Q1 does but you know recurring keeps growing and that helps the sales grow.
We want to keep all four gained streak alive.
<unk> quarter in a row of sales over sales growth.
Great. That's helpful. Thanks for taking my question.
Yeah, Mike.
Our next question comes from the line of Jim Ricchiuti with Needham <unk> Company. Please proceed with your question.
Hi, Thanks, Good morning, Kevin I'm wondering if there's a way for you to vote.
Help us with sequential decline in it.
In terms of.
Getting a better sense on how much of it was mix and how much of it was.
Just the the supply chain issues that we're hearing about from everyone.
Yeah. So we haven't broken that out the mix is a key part of this you saw the margin the gross margin on hardware drop even last quarter.
As a result of the mix and that was a close to a $27 million of hardware quarter and yet the margin suffered a bit.
The radios are the predominant a hardware item at least it was in that quarter and in this quarter as well.
If I was going to say how much of each I would say the mix represents more than 50% of the reason for the decline in hardware margin.
But that's not to say that the other parts are not.
Important also.
And of the freight and materials freight is the biggest the bigger issue for US you guys probably read a lot about.
The supply chain mesh with freight.
We're lucky.
We have the ability to fly.
Product because the Dominican Republic is not that far away, we could fly finished goods if we have to.
And if we have to fly from Asia, we only have to supply we only have to fly components.
So that's a lot easier than if we're flying a complete finished goods either.
But it's expensive to fly, but we do it we want to make sure that a art sales dog suffer and B, we take advantage of the.
Problems that our competitors are having so.
So it's a real it's a real issue.
Let's say, it's not the primary issue the primary issue being the mix, but it's there it's real and I think it's going to continue for a while.
And we don't know if it's another year another six months.
Remember, we're doing pretty well we have our engineers here on site with US we could reengineer AD solutions for this these are all things we're doing that the competitors are not doing but it's a factor it's real but it'll change a as the supply chain clears up.
B as we get more locking sales sales from schools.
Things like that as the world gets more back to normal and we had that feeling that it's getting back to normal all our sales guys are out flying around the country trade shows or back things are getting normal and then for 2026, we still have our goal to hit $150 million of recurring revenue.
And $150 million of hardware with very strong margins on both sides. We haven't changed that goal that goal is still with us.
But it sounds like from a from the standpoint of some of the supply chain challenges.
That's going to necessarily improve.
In the next three to six months it sounds like this is just the environment. We're in and you guys are doing.
As good a job as you, possibly can in terms of navigating that.
I would say that's a good good.
The summary of it I think we're doing better than the competitors from what we hear.
We're able to supply the dealers are products.
And you remember this that our recurring revenue product is like planting a seed.
Put that that that seed in the ground and it keeps giving fruit for years and years and years. So we wanted to make sure. We got a lot of seeds out there that we're planting so that we keep getting lots of fruit through our through our forward years and as Kevin says in 2026 year we.
Still feel comfortable that we can hit those goals.
So I'm working very hard at it and it's paying off.
And just last question just on the revenues in the quarter would you.
Given some of the concern.
Would you your revenues have been higher in the quarter.
So you know how much of that possibly slip into <unk>.
Q2, or possibly be odd just given these kinds of supply chain challenges.
Our backlog was very high at the end of the quarter.
Several million dollars.
Just roughly.
I mean, just to show you how things wet.
He actually flew product it.
From the D R.
Got to JFK.
We thought we had this we're going to make these sales.
And the JFK workers they were only two workers working all day so.
Unload not only our cargo but anyone else's.
And the cargo didn't arrive on time.
Kind of messy out there there's not there's a lot of issues like that so we actually fluid we got at JFK and it never made it here.
The good news is we're here.
Here for this quarter.
Anything that was backlog heading into Q2 will go up by Q2.
Don't linger beyond.
So that's the good news, we haven't really had a nice head start as we headed into Q2.
Got it thanks a lot.
Okay great.
Our next question comes from the line of Jason Smith with Lake Street. Please proceed with your question.
Hey, guys. Thanks for taking my questions. Kevin just curious if like in the past you'd be willing to share some of the distributor sell through data that you saw in the quarter.
Yeah, I can give you a little taste and they just get my sheet.
You know it tastes really good is what I'll tell you our number one.
Distributor.
It was up 107% on a sell through stats.
In September compared to the.
The prior year.
Another one of our distributors was up 27%.
Another one was up 54%.
37%, 36%, 51% they were all up.
Not one was down.
And that bodes well for us for the future <unk> got to watch that stat. One that's that isn't positive that's indicative that sales.
I've got a drop we've seen nothing but stress.
And that's very good sign for us.
I.
I think it's you know, it's not only attributable to our products and the fact that they love our products.
But I think that I can't get a lot of them can't get delivery from the competitors.
So whatever they're doing with us they're turning to us in a greater way.
Than they were before we can deliver.
Competitive is not so much.
So we're picking up share in addition to.
Selling to our existing base, we're picking up share and people have said you guys have the best radios in the market.
Trolls with radio is built in.
You had air access while we want to try that out because that's going to solve a lot of problems for us and it's going to allow us to get recurring revenue, we don't want to deal with the the it departments in companies, where they don't want access control to go through their network because they are afraid of hacking.
And now with air access it's totally isolated from the network on the premise of the of the company.
It has so many advantages we also make upgrades to it.
In the cloud doesn't have to do it to the hardware there's no hardware on the site of the company. So it's all in the cloud and then Theres a lot of data you can get on your smartphone.
Air access so it looks like it's going to be a win win and it's created a new marketplace and as we said, it's $1 billion opportunity access control as a very big business. So we will have a recurring revenue from their logs with the connectivity fire burglary now locking and access because the law.
King is tied into the access control air access, it's an integrated locking access control cellular product.
And we'd like people to come we'd like we'd love to have.
The analysts and investors to come to the ISC show at the Javits Center will be happy to demonstrate it and you're going to see the prowess of NAPCO.
That show and this is a very important market for us so it's going to be great to introduce it to new people and to get a more share.
That's our goal.
Okay. No. That's really helpful. And then just as a follow up just given the supply chain backdrop and some of the dynamics in the school security market do you think fiscal 'twenty two is going to follow any sort of seasonal pattern like in the past or is that sort of out the window just given all the dynamics out there.
No I think seasonality is still part of it obviously recurring.
Which is a bigger a bigger part of our sales.
Is that affected by seasonality.
But I think our fourth quarter, which is the April may June quarter, I believe that still.
It will be the strongest quarter.
School security tends to be somewhat affected by seasonality.
They like to put product on the University side of things when the kids are out of school, which is really a December January type installment.
Install the on.
On campus and then.
For the summer months.
Usually we see sales in May and June because the kids are out of college by that.
So.
K through 12 could really occur any time of year.
The universities that's more seasonal.
But if we were targeting what our sales are going to look like this year as a whole.
We expect the sales each quarter to be greater than the prior quarter.
Okay perfect. Thanks, a lot guys.
Jason.
Our next question comes from the line of Brian Ruttenberg with Imperial Capital. Please proceed with your question.
Yes. Thank you very much our first question congratulations on the quarter.
But the first question is about its really related to gross margins, but price increases are as I understand it you've gone up about 3% on prices Asa gone up roughly 15% Allegiant depending on the product lines has gone up 20% yeah. It's all over the place.
But can you talk a little bit about potential price increases you're getting all of this demand a ton of demand.
And it seems like you're a little slower on the price increases than some of your competitors.
Brian I don't know, who told you at 3%, but we're not doing three we're not disclosing what it is but it's not three.
Right.
And each division is different.
So the NAPCO division will have a certain level of price increases versus your wambach versus arc versus continental.
Believe me there are price increases and each one is different.
We don't really want to comment on the specifics beyond that but where we're able to do it just like others are able to do it. This is the environment, we're in and where we're not going to sit back and do nothing.
One thing I'd like to say is that we'd like to pick up share we have great electro mechanical products and now all the products have recurring monthly revenue.
And we want to plant those seeds and pick up more share. So the company gets stronger and stronger over the years going forward and we don't want to be the highest price out there, but we want to get increases to cover our costs and that's what we're doing but picking up share.
Bodes for great sales in the future and we have a strategy to do that.
Okay can you talk about since you won't give me the number increase that you've had can you talk about how many price increases you've had this year or is it one is it to yes help me out a little bit on that.
I think we would call that a proprietary information.
Ah.
We don't really want to talk about that.
We raised our prices.
According to the way we think.
Which will not.
Not destroy our growth.
It will also cover our costs and it's it's not 3% like you are talking about in the beginning.
Okay Fair enough and then in terms of switching subjects to SG&A.
Can you talk a little bit about the SG&A level, you're talking about higher commissions are a lots of trade shows lots of things happening can you talk a little bit about.
This first quarter versus the second quarter, what you anticipate it.
It shouldn't be at these levels should be something higher or something lower.
From first quarter to second quarter fiscal 2022.
Yeah I would.
I would use a similar level in Q2 as to Q1.
Q1, Q2 last year, there was nothing going on trade show wise travel wise.
So working remotely that game is over we're out and about and so.
Tradeshows is expensive.
Flying in traveling is expensive.
But it's great to have the guys doing all that.
If I'm modeling this thing out I'm using SG&A civil similar level in Q2 to Q1.
And then final question just back to a little bit on gross margin on the equipment side.
You know this is kind of the base number of 22%. We don't anticipate any the question is do you anticipate any more a drop in gross margin or can you maintain this kind of low twenty's gross margin level.
Well, if I'm modeling I'm, using something similar and I'm, hoping to beat it.
Okay.
A lot of things.
Try to improve it.
And.
But being conservative.
Think for at least for Q2, I would I would model in the same same level as where we've been.
Great. Thank you very much and congratulations with Macquarie.
Thank you.
Our next question comes from the line of Raj Sharma with B Riley. Please proceed with your question.
Hi, Good morning, again, congratulations on solid results.
I had a question on your school she can be wins and the recent win in China.
Dayton, Texas four schools are 400 doors, what kind of revenues do they do.
400 dose translate into would that be more of a thousand a door or something in that and is there any access sort of when how do you. How do we look at each one of these wins sort of.
Is there a.
You know are you now that schools are reopened.
On these things is looking to be a quarter of when a quarter or two wins a quarter in school districts.
Well Greg.
First off Raj I don't know.
Should announce what this was worth this.
But it was for a little school district. It was worth a lot several hundred thousand I'll I'll give you that much.
And just imagine these little school districts, how many of them there are.
It really adds up real quick once the activity starts.
We only announced the ones we're allowed to if we don't announce it doesn't mean that there are when there are other wins.
We want to get to the point, where we're announcing a lot of them.
They help a lot on the margin side overall hardware side.
There is we expect a lot of them how fast we're going to get them hard to say, but we feel the activity has picked up already.
And.
As we said earlier.
Zara concentrating so much of a protocol now they're starting to think about safety.
So.
This problem in the country is here to stay and.
<unk>.
We've got the solutions to help a lot of these schools and this little school district in Texas, I commend them for doing something about it school district, not that far away from them did nothing.
And that had a shooting where they had a barricade chairs against the door.
Right.
Thank you and then on the equipment margin side don't want or don't want to beat the dead horse has been covered quite a bit here, but if I look at Q3.
On 19 around 19 million.
Equipment revenues the margins are around 27% and I know that you've talked about so it just seemed like there was a 500 basis points impact.
Is that all I know you talked about the higher cost from the supply chain constraints and the other part is the mix.
How long do these impacts on supply chain do you think.
Exists is that another quarter, and then really the freight issue.
On the gross margins once that feeds once that comes back to normal do you think that the current product mix.
Later alarms as more representative going forward.
Well I think the supply chain issues are going to last.
For six more months, maybe a year, it's hard to know exactly.
I don't think it's going away.
<unk> quarter as an example.
It's here for a while.
And I think we're doing a great job.
Dealing with it.
I think.
At <unk>.
<unk> 1919, 5 billion dollar level last year.
If that's what it was.
The margins were higher it was a different time the radios.
Have become a larger percentage of total hardware.
That's that's a big reason for the margin differential.
But when school security comes back in and even other areas that helped the locking and access parts of the business.
Then that even sit out somewhat the playing field becomes more more level.
Not quite there yet it's getting better at that part's getting bad, but we're not quite there yet.
Then the radios won't be the.
As dominant as the part of the overall hardware, although they're doing so well.
It's hard to say for sure we sell radios to a lot of big players now.
And the demand is unbelievable so.
That's partly why also that radios with such a big chunk of the total percentage of hardware sales, but.
But I think it'll it'll even out a little more as the year progresses I don't think it'll be what you see now it may take a couple of quarters to get to that point.
But we were really happy that even at a level, where the margins on hardware were 22%.
Which we werent happy about either look at the numbers that we put on the board.
Even with that.
Right.
We were happy that our sales grew 34%.
Is that a recurring was as strong as ever and the margins were as strong as ever that that carrier.
We did really well even with the 22% imagine once the 22% goes back to what it used to be.
Right and with the more radios you sell at that translate it that's a good thing that translates into higher recurring revenues all of these radios.
How the attach rates on revenues and recurring revenues for you or are some of these sort of.
Why do they all they all have recurring revenue stream with them.
They're all enrolled on our cloud we built the cloud and Ark Network operating center and.
They all get.
<unk> enrolled and then the dealer basis.
To utilize our dock service.
And it goes on and on and on for a year. After year, that's why I call. It planting the seeds for more of these radios that are installed in the role.
The runway of forgetting continuous recurring monthly revenue out of them.
Head so that's why we're.
We're pushing very hard to get lots of radios out there.
Have about.
5 million commercial buildings that have to be retooled get out of the get off of copper because copper's up being supported by the carriers.
So we have a lot of commercial buildings, we have millions of residential jobs, where people want their alarm to work, but the carriers don't want to support dial up which was copper. So that'll go to radio also then you have the access control and locking which now with air access is the.
Better path dealers to get.
Service and to get to win more jobs and the side benefit to them as they get recurring revenue instead of just a service agreement to replace broken parts now they can supply service to their end user accounts. So it's all part of the vision that we have to convert the company too.
By 2026.
$250 million worth of recurring revenue.
And remember years ago, we predicted $40 million by the end of last year and a lot of people looked at US Cross side and we did it and now we have a lot of momentum. So the 2026 year, we're very comfortable with getting the recurring revenue with the new products with the convert.
<unk>.
Ah copper with the fact that the <unk> is coming down the carriers not gonna be supplying <unk> surface. So those radios that are out there that it <unk> have to be converted over to the new technology, which we have.
And so there's a lot of good things a lot of winded our back.
Got it. Thank you. Thank you for answering the questions again, congratulations and I'll take this offline.
Thanks Raj.
Right.
Our next question is a follow up question from the line of Jim Ricchiuti. Please proceed with your question.
Hi, Thanks.
The other question I had is just with respect to new product pipeline.
I Wonder if you could talk a little bit.
Again.
I don't expect you to pre announcing new products ahead of their release, but terms of what you're doing.
Working with some of the larger players in the market. How active is the new product pipeline and can you give us a sense as to whether some.
Some of this may begin contributing later in the fiscal year or is this looking out to fiscal 'twenty three.
Well, we have a lot of new products in the pipeline in each of our divisions, the alarm and connectivity division. The access control division of locking division and now the products are being integrated so.
At the dealers.
Get all the answers that they need on a customization on commercial buildings.
For access control locking and radio our Starlink radio. So there is a lot of new development going on all the time and a lot of the big companies that are the major names in the industry.
<unk> to us to get products, because the fact that technically they perform better.
They have more functionality.
We're able to customize them as required by the large companies.
And we can deliver.
So a lot of good things.
There'll be a.
As I said why don't you come to the ISC show.
And and November and see what we've got you'll hear and feel the pulse of what the deal is talking about and you'll see that we are on track to pick up a lot of share we have a lot of happy dealers because they are making recurring revenue where they never made it before in the past week.
Get the recurring revenue, but every product that gets enrolled in our backend knock we'd get a recurring revenue stream that's paid to us by the dealer.
And the dealer makes a large recurring revenue amount and we get.
A portion of it so we want lots of dealers out there.
Closing more deals and.
Getting more work because then they roll the products on the cloud.
So come onto the show.
Okay. Thanks for the insight.
Last question.
Kevin It sounds like.
You gave us some nice color in terms of how to think about opex.
Seem to be pretty well insulated in terms of cost and D. G.
D R.
I'm wondering.
From.
Higher.
Trade show expense and travel expense any other cost pressures that you're.
Feeling in the business that might change some of that opex assumptions looking out a couple of quarters.
No I think you know the big ones is tradeshow commissions.
Give salary increases every year, we're doing more advertising than we than we did a year ago.
Things like that that that's the main thing there is nothing.
Unusual on the horizon that would change the picture as you probably know we manage.
Both SG&A and R&D are really tightly make sure.
That.
Just because sales grow we don't have the expenses grow dramatically along with it.
We take pride that the percentage of SG&A as a percentage of sales R&D as a percentage of sales is dropping as our sales growth. So I don't expect anything unusual.
Thank you.
Okay.
There are no further questions in the queue I'd like to hand, the call back to management for closing remarks.
Okay. Thank you everyone for participating in today's conference call.
As always should you have any further questions. Please feel free to call Patrick Kevin or myself for further information.
Thank you for your interest and support and we look forward to speaking to you all again in a few months to discuss Nap goes fiscal Q2 'twenty two results.
Bye bye.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.