Q2 2022 NAPCO Security Technologies Inc Earnings Call

Speaker 1: Greetings and welcome to Napco Security Technology Zinc, fiscal second quarter 2022 earnings conference call.

Greetings and welcome to NAPCO Security Technologies, Inc. Fiscal second quarter 2022 earnings conference call.

Speaker 1: At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation.

At this time, all parts of the bench Arnaud listen only mode.

Question and answer session will follow the formal presentation.

Speaker 1: If anyone should require operator assistance during a conference, please press star zero on your telephone keypad. As a reminder, this conference is

If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

As a reminder, this conference is being recorded.

Speaker 1: It is now my pleasure to introduce your host, Patrick McKillop, Director of Investor Relations. Thank you. You may begin.

It is now my pleasure to introduce your host Patrick Mckillop director of Investor Relations. Thank you you may begin.

Speaker 2: Thank you. Hello, my name is Patrick McKillop. I'm the Director of Investor Relations for NAPCO Security.

Thank you Hello, My name is Patrick Mckillop, I'm, the director of Investor Relations for NAPCO security.

Speaker 2: Good morning and thank you all for joining us for today's conference call to discuss our financial results for our fiscal second quarter 2022.

Morning, and thank you all for joining us for today's conference call to discuss our financial results for our fiscal second quarter 2022.

Speaker 2: By now, all of you should have had the opportunity to review the press release discussing the results.

By now all of you should have had the opportunity to review the press release discussing the results. If you have not a copy the release is available in the Investor Relations section of our website.

Speaker 2: If you have not, a copy of the release is available in the Investor Relations section of our website, www.napgosecurity.com.

W. W Dot NAPCO security Dot com.

Speaker 2: On the call today is Richard Solaway, President and CEO of Mapgo, Security Technologies, and Kevin Bruchelle, Executive Vice President and CFL. Before we begin, let me take a moment to read the full-looking statement.

On the call today is Richard Soloway, President and CEO of NAPCO Security technologies, and Kevin Michel Executive Vice President and CFO .

Before we begin let me take a moment to read the forward looking statements.

Speaker 2: This presentation contains forward-looking statements that are based on current expectations, estimates, forecasts, and projections of future performance based on management's judgment, beliefs, current trends, and anticipated product performance.

This presentation contains forward looking statements are based on current expectations estimates.

Forecast and projections of future performance based on management's judgment beliefs current trends and anticipated product performance.

Speaker 2: These four-looking statements include without limitation, statements relating to the 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.

These forward looking statements include without limitation statements relating to the growth drivers of the company's business, such as school security products and recurring revenue services potential market opportunities.

Benefits of our recurring revenue products to customers and dealers, our ability to control expenses and costs and expected annual run rate for SaaS recurring monthly revenue.

Speaker 2: and expected annual run rate for SAS recurring monthly revenue.

Speaker 2: Forward-looking statements involve risks and uncertainties that may cause actual results to different material from those contained in the forward-looking statement.

Forward looking statements involve risks and uncertainties that may cause actual results to differ materially from those contained in the forward looking statements.

Speaker 2: These factors include, but are limited to, such risk factors as described in our SEC filings, including our annual report on Form 10-K . Other unknown or unpredictable factors or underlying assumptions subsequently proving to be incorrect could cause actual results to differ materially from those in the forward-looking statement.

These factors include but are not limited to such risk factors as described in our SEC filings.

Including our annual report on Form 10-K .

Other unknown or unpredictable factors or underlying assumptions subsequently proving to be incorrect could cause actual results to differ materially.

Those in the forward looking statements, although we believe that the expectations reflected in the forward looking statements are reasonable we cannot guarantee future results level of activity performance or achievements.

Speaker 2: Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results. Level of activity, performance, or achievement.

Speaker 2: 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, except as required under applicable law.

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.

We undertake no duty to update such information, except as required under applicable law.

Speaker 2: I will turn the call over to <expletive> in a moment, but before I do I just want to mention a few things on the I-Out front.

I will turn the call over to <expletive> in a moment, but before I do I just wanted to mention a few things on the IR front.

Speaker 2: We are hosting virtual NDRs this week with Canaccord Genuity and Be Riley on separate days. And if you're interested in having a one-on-one meeting with us, please reach out to your sales rep at either.

We are hosting virtual N D. R's this week with Canaccord Genuity and B Riley on separate days and if you're interested in having a one on one meeting with US. Please reach out to your sales rep at either firm.

Speaker 2: Invest in our reaches crucial, especially for a small cap company such as NAPGO. And I would like to thank all those folks that assist us in these conferences and marketing through.

Our reach is crucial especially for small cap companies, such as NAPCO and I would like to thank all of those folks that assist us in these conferences and marketing trips.

Speaker 2: In addition, we will be attending the International Security Conference, the industry's largest trade show, which is taking place March 22nd through the 25th in Las Vegas at the Venetian Expo Center. Please contact me if you're interested.

In addition, we will we will be attending the international Security Conference.

The industry's largest trade show.

Which is taking place March 22nd through the 25th.

In Las Vegas at the Venetian Expos in it.

Please contact me if you're interested in attending.

Speaker 2: With that out of the way, let me turn the call over to Richard Sallowway, President and CEO of Napco Security Technologies, <expletive> Flores-Ur.

With that out of the way, let me turn the call over to Richard So all the way President and CEO of NAPCO Security Technologies, Inc.

The floor is yours.

Speaker 3: Thank you, Patrick. Good morning, everyone, and welcome to our conference.

Thank you Patrick good morning, everyone and welcome to our conference call.

Speaker 3: Thank you for joining us today to discuss our results.

Thank you for joining us today to discuss our results.

Speaker 3: We're pleased to report our fiscal Q2 2022 record sales of 33.4 million.

We are pleased to report our fiscal Q2, 2022 record sales of $33 4 million.

Our results reflect our fifth consecutive quarter of sales growth.

Recurring revenue continued to grow at a very strong rate and run rate is now 46.2 million.

On January 20th 20 to recurring revenues.

Speaker 3: balance sheet remains strong with our cash balances continuing to grow now in excess of 47 million dollars and we

Our balance sheet remains strong with a cash balance is continuing to grow now in excess of $47 million.

And we have no debt.

Speaker 3: We continue to focus on capitalizing on key industry trends.

We continue to focus on capitalizing on key industry trends.

Speaker 3: which include wireless and cellular fire and intrusion alarm systems, school security solutions.

Which include wireless and cellular fire and intrusion alarm.

<unk> systems School security solutions.

Speaker 3: plus enterprise access control systems and architectural and architectural locking product.

Plus enterprise access control systems, and architectural and architectural locking products.

Speaker 3: The management team here at NAPCO continues to focus on the key metrics of growth, profits, returns on equity, and controlling costs.

The management team here at NAPCO continues to focus on the key metrics of growth profits and returns on equity and controlling costs.

Speaker 3: These metrics are important to 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.

These metrics are important to 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%.

The equity.

Speaker 3: Before I go into greater detail, I'll now turn the call over to our CFO , Kevin Buschel. He will provide an overview of our fiscal second quarter results, and then I'll be back with more of our strategies and outlook. Kevin? Thank you.

Before I go into greater detail I'll now turn the call the call over to our CFO Kevin Michelle.

He will provide an overview of our fiscal second quarter results and then I'll be back with more of our strategies and outlook Kevin.

Thank you <expletive> and good morning, everybody.

Speaker 4: For the second quarter, net sales increased 23% to a second quarter record $33.4 million, as compared to $27.2 million for the same period last year.

For the second quarter.

Net sales increased 23%.

To a second quarter record $33 $4 million as compared to $27 $2 million for the same period last year.

Speaker 4: That sales for the six months ended December 31, 2021, increased 28% to $64.5 million, as compared to $50.4 million for the same period a year ago. The increase in sales for the-

Net sales for the six months ended December 31, 2021 increased 28%.

$64 $5 million.

It's a $54 million to the same period a year ago.

The increase in sales for the three and six months were primarily related to increases in each of our sales segments recurring service revenue.

Speaker 4: were primarily related to increases in each of our sales segments.

Speaker 4: recurring service revenue, intrusion in access products, and alarm lock and Mark's brand door locking products.

Intrusion and access products and alarm lock and marks brand door locking products.

Speaker 4: Recurring revenue continued its strong growth, increasing 35% for the quarter to $11 million versus $8.2 million for the same period last year.

Recurring revenue continued its strong growth, increasing 35% for the quarter to $11 million versus $8 $2 million for the same period last year.

Speaker 4: And for the 6 months, recurring service revenue increased 37% to $21.3 million, as compared to $15.5 million for the same period a year ago.

And for the six months.

<unk> service revenue increased 37% to $21.3 million as compared to $15 $5 million for the same period a year ago.

Speaker 4: This strong growth is primarily attributable to the continued strength of our commercial intrusion and fire alarm business, which has not been significantly affected by the COVID pandemic, as buildings must remain secure.

This strong growth is primarily attributable to the continued strength of our commercial intrusion and fire alarm business, which has not been significantly affected by the COVID-19 pandemic as buildings must remain secure.

Speaker 4: Recurring revenue now has an annual run rate of $46.2 million based on January 2022 recurring revenue.

Revenue now has an annual run rate of $46 $2 million based on January 2022 recurring revenue.

Speaker 4: In addition, our equipment sales continued to rebound, increasing 18% for the quarter to $22.4 million from $19 million in the prior year period, and for the six months, increasing 24% to $43.2 million from $34.9 million for the same period. Last.

In addition, our equipment sales continue to rebound increasing 18% for the quarter to $22 $4 million from $19 million in the prior year period.

And for the six months increasing 24%.

$43 $2 million from $34 $9 million, but at the same period last year.

Speaker 4: Gross profit for the three months ended December 31, 2021 increased slightly to $11.44 million or 34% of sales as compared to $11.4 million or 42% of sales for the same period a year ago.

Gross profit for the three months ended December 31 2021.

Increased slightly to 11.44 million or 34% of sales asking to $11 4 million or 42% of sales for the same period a year ago.

Speaker 4: Gross profit for the six months ended December 31, 2021, increased 13% to $24.9 million, or 39% of sales as compared to $22 million, or 44% of sales for the same period a year ago.

Gross profit for the six months ended December 31, 2021 increased 13% to $24 $9 million or 39% of sales.

As compared to $22 million or 44% of sales for the same period a year ago.

Speaker 4: Gross profit on recurring revenue for the three months ended December 31, 2021.

Gross profit on recurring revenue for the three months ended December 31 2021.

Speaker 4: Increased to $9.6 million with a gross margin of 87%, as compared to $7 million with a gross margin of 85% for the same period a year ago.

Increased to $9 $6 million with a gross margin of 87%.

As compared to $7 million with a gross margin of 85%.

The same period a year ago.

Speaker 4: Gross profit on recurring revenue for the six months ended December 31, 2021 increased to $18.4 million with a gross margin of 87% as compared to $13.1 million with a gross margin of 85% for the same period a year ago.

Gross profit on recurring revenue for the six months ended December 31, 2021 increased to $18 $4 million with a gross margin of 87% as compared to $13 $1 million with a gross margin of 85% for the same period a year ago.

Speaker 4: The increasing gross profit on recurring revenue was due primarily to the 35 and 37% increases in sales of these services. The three and six months ended to send the 31 2021 respectively as compared to the same periods a year ago.

The increase in gross profit on recurring revenue was due primarily to the 35 and 37% increases in sales of these services for the three and six months ended December 31, 2021, respectively as compared to the same periods a year ago. The increase in gross margin up for both the three and six months.

Speaker 4: the increasing gross margin for both the three and six months and December 31, 2021.

As of December 31, 2021.

Speaker 4: do primarily to the continued shift in sales mix to more of the company's fire radio services, which typically have a higher margin than those for intrusion radio services.

Due primarily to the continued shift in sales mix to more of the company's fire radio services, which typically have a higher margin than those for intrusion radio services.

Speaker 4: Rose profit on equipment sales for the three months ended December 31, 2021 decreased to $1.8 million or 8% of equipment sales as compared to $4.4 million or 23% of equipment sales for the same period a year ago.

Gross profit on equipment sales for the three months ended December 31 2021.

Decreased to $1.8 million or 8% of equipment sales as compared to $4.4 million or 23% of equipment sales for the same period a year ago.

Speaker 4: Gross profit on equipment sales for the six months ended December 31, 2021.

Gross profit on equipment sales for the six months ended December 31 2021.

Speaker 4: decreased to $6.5 million or 15% of equipment sales as compared to $9 million or 26% of equipment sales for the same period a year ago.

Decreased to $6 $5 million or 15% of equipment sales.

As compared to $9 million or 26% of equipment sales for the same period a year ago.

Speaker 4: Decreases in gross profit and gross margin on equipment sales for the three and six months continue to be primarily the result of the dramatic effect of the current worldwide supply chain problems, particularly with increased freight and component parts costs.

Decreases in gross profit and gross margin on equipment sales for the three and six months continue to be primarily the result of the dramatic effect of the current worldwide supply chain problems, particularly with increased freight and component parts costs.

Speaker 4: In addition, two other factors affecting hardware margins were the continued shift in product mix to the company's Starlink radio product.

In addition to other factors affecting hardware margins with a continued shift in product mix to the company's Starlink radio products, which have lower gross margins than many of the companies other products, but reed to the very profitable recurring service revenues as well as more aggressive and another.

Speaker 4: which have lower gross margins than many of the companies other products, but lead to the very profitable recurring service revenues, as well as more aggressive, and another reason was more aggressive promotional pricing of these radios in order to increase the company market care of these products, and increase the highly profitable recurring monthly revenue that goes with it.

Isn't was more aggressive promotional pricing of these radios and what.

To increase the company's market share.

Of these products and increase the highly profitable recurring monthly revenue that goes with it.

Speaker 4: Research and development expenses for the three months ended December 31, 2021 increased 5% to $2 million or 6% of net sales as compared to 1.9 million or 7% of net sales for the same period a year ago.

Research and development expenses for the three months ended December 31, 2021 increased 5% to $2 million or 6% of net sales as compared to $1 9 million or 7% of net sales for the same period a year ago.

Speaker 4: Research and development expenses for the six months ended December 31, 2021, increased 3% to $3.9 million, or 6% of net sales as compared to $3.8 million, or 7% of net sales for the same period a year ago.

Research and development expenses for the six months ended December 31, 2021 increased 3% to $3 9 million or 6% of net sales as compared to $3 $8 million or 7% of net sales for the same period a year ago. The.

Speaker 4: The increases for the three and the six-month periods was due primarily to increased payroll, while the decreases as a percentage of net sales was due primarily to the increases in net sales.

The increases for the three and six months periods was due primarily to increased payroll while the decrease as a percentage of net sales was due primarily to the increases in net sales.

Speaker 4: Selling general and administrative expenses for the three months ended December 31, 2021.

Selling general and administrative expenses for the three months ended December 31, 2021 increase.

Speaker 4: Increase 39% to $8.2 million, or 25% of net sales, as compared to $5.9 million, or 22% of net sales for the same period a year ago.

Increased 39% to $8 $2 million or 25% of net sales as compared to $5 $9 million or 22% of net sales for the same period a year ago.

Speaker 4: Selling general and administrative expenses for the six months ended December 31, 2021, increased 29% to $15.5 million or 24% of net sales as compared to $12 million or 24% of net sales for the same period a year ago.

Selling general and administrative expenses for the six months ended December 31, 2021 increased 29% to $15 $5 million or 24% of net sales as compared to $12 million or 24% of net sales for the same period a year ago.

Speaker 4: The increase in selling general and administrative expenses for the quarter was due primarily to increased sales commissions relating to the increase in net sales as previously mentioned.

The increase in selling general and administrative expenses for the quarter was due primarily to increased sales commissions related to the increase in net sales as previously mentioned.

Speaker 4: as well as an increase in stock-based compensation expense, a non-cash item of $1.3 million.

As well as an increase in stock based compensation expense and noncash item of $1 $3 million.

Speaker 4: Operating income for the quarter was $1.3 million as compared to $3.7 million for the same period last year, a 65% decrease.

Operating income for the quarter was $1 $3 million as compared to $3 $7 million, but at the same period last year, a 65% decrease.

Speaker 4: Operating income for the six-month end of December 31, 2021 was $5.4 million as compared to $6.3 million for the same period last year, a 14% decrease.

Operating income for the six months ended December 31, 2021 was $5 $4 million as compared to $6 $3 million for the same period last year, a 14% decrease.

Speaker 4: The company's provision for income taxes for the three months ended December 31, 2021, decreased by $178,000 to $290,000, as compared to $469,000 for the same period a year ago.

The company's provision for income taxes for the three months ended December 31, 2021 decreased by $178000 to $291000 as compared to $469000 for the same period a year ago.

Speaker 4: The company's provision for income taxes for the six months ended December 31, 2021, decreased by $159,000 to $639,000.

The company's provision for income taxes for the six months ended December 31, 2021 decreased by $159000 to $639000.

Speaker 4: as compared to $798,000 for the same period a year ago.

As compared to $798000 for the same period a year ago.

Speaker 4: The company's effective tax rate was 22% and 13% for the three months ended December 31, 2021, and 2020, respectively, and was 7% and 13% for the six months ended December 31, 2021, and 2020, respectively.

Company's effective tax rate was 22% and 13% for the three months ended December 31, 2021, and 2020, respectively and.

And with 7% and 13% for the six months ended December 31, 2021, and 2020, respectively.

Speaker 4: Net income for the three months ended December 31, 2021 was $1 million or $0.20 per diluted share as compared to $3.2 million or $0.09 per diluted share for the same period a year ago, a 68% decrease.

Net income for the three months ended December 31, 2021 was $1 million.

Cents per diluted share.

As compared to $3 2 million or nine cents per diluted share for the same period, a year ago, a 68% decrease net income for the six months ended December 31, 2021 increased 59% to $8 $8 million or 24 cents per diluted share as compared to $5.

Speaker 4: Net income for the six months ended December 31, 2021, increased 59% to $8.8 million, or $0.24 per diluted share, as compared to $5.5 million, or $0.15 per diluted share, for the same period a year ago.

$5 million or 15 cents per diluted share for the same period a year ago.

Speaker 4: Just that EBITDA for the quarter was $3 million or 8 cents per deluded share as compared to $4.2 million or 11 cents per deluded share for the same period last year, a 29% increase.

Adjusted EBITDA for the quarter was $3 million or eight cents per diluted share as compared to $4 $2 million or 11 cents per diluted share for the same period last year, a 29% increase decrease.

Speaker 4: Adjusted EBITDA for the six months ended December 31, 2021, increased 57% to $11.6 million, or $0.31 per diluted share, as compared to $7.4 million, or $0.20 per diluted share in the same period.

Adjusted EBITDA for the six months ended December 31, 2021 increased 57% to $11 $6 million or 31 cents per diluted share as compared to $7 $4 million or 20 cents per diluted share in the same period last year.

Speaker 4: Moving on to the balance sheet, at December 31, 2021, the company had $47.4 million in cash, cash equivalents, and marketable securities, as compared to $40.2 million as of June 30, 2021, an 18% increase.

Moving on to the balance sheet.

At December 31, 2021, the company had $47 $4 million in cash cash equivalents and marketable securities as compared to $42 million as of June 32021, an 18% increase.

Speaker 4: Working capital defined as current assets less current liabilities was $83.9 million at December 31, 2021, as compared with working capital of $75.8 million at June 30, 2021.

Working capital defined as current assets less current liabilities was $83 $9 million at December 31, 2021.

As compared with working capital of $75 $8 million at June 30, 2021 .

Speaker 4: The current ratio defined as current assets divided by current liabilities.

And the current ratio defined as current assets divided by current liabilities was $5 three to one at December 31, 2021 and was 4.8 to one at June 32021.

Speaker 4: 5.3 to 1 at December 31, 2021, and was 4.8 to 1 at June 30, 2021.

Speaker 4: Cash provided by operating activities for the six months ended December 31 2021 was 7.8 million as compared to 8.9 million for the same period last year.

Cash provided by operating activities for the six months ended December 31, 2021 was $7 8 million as compared to $8 9 million for the same period last year.

Speaker 4: This decrease was primarily the result of increases in inventory.

This decrease was primarily the result of increases in inventory.

Speaker 4: Inventories at December 31, 2021 increased by $5.3 million from June 30, 2021.

Inventories at December 31, 2021 increased by $5 $3 million from June 32021.

Speaker 4: This increase is primarily the result of the continued increase in purchases of certain components that have become difficult to source during the worldwide supply chain problem.

This increase is primarily the result of the continued increase in purchases of certain components that it becomes difficult to source during the worldwide supply chain problems as.

Speaker 4: as well as the level loading of production output throughout the year as the company's sales are historically highest in the upcoming fourth quarter ending June 30th.

As well as the level loading of production output throughout the year as the company sales are historically highest in the upcoming fourth quarter ending June 30th.

Capex was $249000 during the quarter versus $246000 in the year ago period.

Speaker 4: CapEx was $249,000 during the quarter versus $246,000 in the year ago period. And as we've previously mentioned,

And as we've previously mentioned we have no debt.

Speaker 4: That concludes my formal remarks and I would now like to return the call back to <expletive> .

That concludes my formal remarks, and I would now like to return the call back to <expletive> .

Okay.

Speaker 3: Kevin, thank you. Our fiscal Q2 2022 was a sales record breaker, and I am proud of the NAPCA team for executing through the challenges that have been brought by the COVID pandemic.

Kevin. Thank you our fiscal Q2 2022 was the sales record break and I am proud of the NAPCO team executing through the challenges that have been brought by the Covid pandemic.

Speaker 3: The quarter-hostile marks, a fifth consecutive quarter of the year of the year sales growth.

The quarter also marked our fifth consecutive quarter of year over year sales growth.

Speaker 3: And we look forward to surpassing the previous streak of 23 quarters that was disrupted in 2020 by COVID-19.

Look forward to surpassing the previous streak of 23 quarters that was disrupted in 2020 by COVID-19.

Speaker 3: The primary driver of our success comes from the commercial fire and truce in Laundice.

The primary driver of our success comes from the commercial fire and intrusion alarm business.

Speaker 3: The commercial fire business is a mandatory, non-discretionary item, as commercial buildings must have and maintain a fire alarm system in order to receive a certificate of occupancy.

The commercial fire business is a mandatory non discretionary item.

As commercial buildings must.

And maintaining a fire alarm system in order to receive a certificate of occupancy.

Given the high probability and essential nature of this business. We focus on this is the key area of our resources.

Speaker 3: giving the high probability and essential nature of this business.

Speaker 3: We focus on this as a key area of our research.

Speaker 3: The recurring revenue annual run rate is now as 46.2 million as of January 2022.

The recurring revenue annual run rate is now at $46 2 million as of January 2022.

Speaker 3: And as a reminder, a few quarters ago, we surpassed the goal of $40 million in annualized recurring revenue that we had set several years ago.

And as a reminder of a few quarters ago, we surpassed the goal of $40 million in annual in annualized recurring revenue.

Several years ago.

Our starlink radios.

Speaker 3: Our Starlink radios have seen an encouraging trend in activations by growing 46% year over year and 11% sequentially in the month of December .

And encouraging trends in activations by growing 46% year over year and 11% sequentially in the month of December .

Speaker 3: If this pace of growth for activations continues, and we are working very hard to see that it does, we believe we could reach our previously mentioned goal of $150 million in recurring revenue in a few years earlier than the goal of 2026.

Is this pace of growth for Activations continues.

We are very working very hard to see that it does we believe we could reach our previously mentioned go over $150 million in recurring revenue in a few years earlier the goal of 2026.

Speaker 3: As dealers race to complete upgrades before the 3G sunset at the end of the calendar year 2022, plus the millions of buildings that still need to be converted from old fashioned copper line based systems we believe we are in a strong position to benefit from these growth drives.

As dealers race compete complete upgrades before the three G E.

The end of the calendar year 2022, plus the millions of buildings is still needs to be converted.

Zinc copper line based systems, we believe we are well.

Positioned to benefit from these growth drivers.

Speaker 3: Our advanced Starlink alarm communicators offer the widest coverage in the U.S. to dealers with both AT&T and Verizon LTE service.

Our advanced Starlink alarm communicators also the widest coverage in the U S dealers.

With AT&T and Verizon LTE service.

Speaker 3: The constraints of the supply chain have impacted us as well as our competitors.

The constraints of the supply chain and impacted us as well as our competitors are.

Speaker 3: Our margins have suffered in the near term due to the issues with the supply chain as we have made a decision to spend more on procuring the components we need and spend more on shipping them to our factory for assembly.

Our margins have suffered near term due to the issues with the supply chain as we have made the decision to spend more on procuring the components, we need and spend more on shipping them to our factory floor Assembly.

Speaker 3: In doing this, we ensure that our dealers can get the finished goods they need to complete the jobs they have.

In doing this we ensure that our dealers can get the finished goods they need to complete the jobs they have.

Speaker 3: if our dealers are unable to rely on us for the products they need to do to get the job done, they will move on.

If our dealers are unable to rely on us for the products they need to do to get the job done.

They will move on to a competitor so.

Speaker 3: So we believe that these temporary cost increases are worth it as we will build loyalty with our dealers.

So we believe that these temporary cost increases are worth it as we will build loyalty with our dealers.

Speaker 3: Even with our record sales, our backlogs are at historically high levels due to the supply chain issues and could remain high for the remainder of 2022.

Even with our record sales our backlogs are at historically high levels due to the supply chain issues and could remain high for the remainder of 2022.

Speaker 3: Our Starlink Redios have become a larger part of the product mix. And while the hardware has lower margins, it's the gateway to higher margin recurring revenues that we want.

Our starlink radios.

From a larger part of the product mix, while the hardware has lower margins, it's the gateway to higher margin recurring revenues that we won.

Speaker 3: As I mentioned earlier, our activations for Starlink remain strong, and we believe we are taking market share from our competitors based on this. And customers are telling us that they can't get products from the competition, so they're coming to us.

And as I mentioned earlier.

Patients with strong link remained strong and we believe we are taking market share from our.

Our competitors based on this.

And customers are telling us that they can't get product from the competition. So they are coming to us.

Speaker 3: We are aggressively managing supply chain issues by developing alternate supply sources and delivery methods while also re-engineering products where necessary.

We are aggressively managing supply chain issues by developing alternative supply sources and delivery medicines, while also reengineering products where necessary.

Speaker 3: Additionally, in order to alleviate margin pressure, we have recently issued strategic price increase.

Additionally, in order to alleviate margin British Hugh.

We recently issued strategic price increases.

Speaker 3: And potentially do so again in the near future as the supply chain issues may not abate anytime soon.

And potentially do so again in the near future.

Apply chain issues may not abate anytime soon.

We have started to see an uptick in school security projects recently, we received a large order which is not reflected in our Q2 results reported today from one of the largest school districts in the nation Raw marks Division Survivor series.

Speaker 3: We have started to see an uptake in school security process.

Speaker 3: Recently we received the large order, which is not reflected in our Q2 results reported today from one of the largest screen districts in the nation for our Mark's division, Survivor Series, La.

Thanks.

Speaker 3: These locks allow to teach us to be able to lock the classroom from the inside rather than going out into the hallway, and potentially exposing themselves to the intruder.

These blocks allows the teachers to be able to lock the clearance through for me as a rather.

Rather than going out into the hallway and potentially exposing themselves to the intruder.

Speaker 3: Our fully integrated solution to the school security market remains a top priority given the healthy margins for those products that are generated.

Our fully integrated solution to the school security market remains a top priority given the healthy margins for those products that generate.

Speaker 3: based on data collected by Education Week.

Based on data collected by education week.

Speaker 3: There are 34 schools here that is during 2021, which is a record since they began tracking data in 2018.

Third because school students.

2021, which is a method since they began tracking the data in 2018.

Speaker 3: Sadly, we just had a few incidences last week, one in a Minnesota school and another at a college in Virginia.

Sadly, we just had a few incidences list week, one in Minnesota School Another college in Virginia.

Speaker 3: We believe that this market remains a significant opportunity. School administrators have started to turn their attention back to the need for security solutions as more incidences happen. And they are not spending all day dealing with COVID protocols and policies.

We believe that this market remains a significant opportunity school administrators have started to turn their attention their attention back to the need for security solutions as more incidents happen and they are not spending all day dealing with COVID-19 protocols and policies.

Speaker 3: The availability of grants for schools to fund these security projects has never been better. Recently, the DOJ awarded more than $125 million in school security grants to hundreds of schools and universities.

The available.

Grants with schools to cloud security projects and has never been better recently, the Doj awarded more than $125 million in school security grid hundreds in schools and universities.

Speaker 3: The state of Virginia won a 12 million grants for school security projects, and the state of New York announced $5 million in grants for dozens of this-

The state of Virginia Order 12 billion in grids for school security projects.

And the state of New York announced $5 million ingredients with dozens of districts.

Speaker 3: We remain focused on providing schools, the products and solutions. They need to protect their students and faculty.

We remain focused on providing schools the products and solutions they need to protect their students and faculty.

Speaker 3: NAPCO's fundamental strategy is to offer seamless security solutions for its customers to generate recurring revenue for both the dealers and NAPCO. Recurring revenues in important growth.

NAPCO is fundamental strategy is to offer seamless security solutions for its customers, which generate recurring revenue with both the dealers and NAPCO.

Recurring revenue is an important growth driver for us.

Speaker 3: and our R&D team remains focused on developing new products that can help us generate more recurring revenue.

And the R&D team remains focused on developing new products that can help us generate more recurring revenue.

Speaker 3: such as a recently launched product called Air Act.

Such as our recently launched product called Air accidents.

Speaker 3: These products will bring recurring revenue to the locking and access control divisions of the company.

These products will bring recurring revenue to locking and access control divisions of the company.

Speaker 3: which have not had recovered revenue products until now.

Which have not had recurring revenue products until now.

Speaker 3: Air Access is the industry's first cellular-based access control system, which we believe is a billion dollar market opportunity.

Air accidents is the industry's first cellular based access control system, which we believe is a billion dollar market opportunity.

Speaker 3: The benefits of air access include no need for upfront investment in expensive hardware, no need to interfere with corporate IT networks, which can be a major problem for consumers and no outside database backups or software updates.

The benefits of interactions include no needs upfront investment is expensive hardware.

No need to see with corporate.

Networks, which could be a major problem for install.

And no outside database backups.

There are updates.

Speaker 3: Well, we are in the early stages of the launch. We've received positive feedback from Demons.

Well we are in the early stages of the launch we have received positive feedback from dealers.

Speaker 3: And as Patrick previously mentioned, we will be attending the industry's largest trade show, ISC West, which is taking place March 22 to 25 in Las Vegas at the Venetian Expo Center. And we will be showcasing Air Access as well as many other new products that are strategic.

And as Patrick previously mentioned, we will be attending the industry's largest trade show ISC west.

Which is taking place.

<unk> 22 to 25 in Las Vegas.

<unk> Lucentis, and we will be showcasing air axis as well as many other new products.

That are strategically important products.

Speaker 3: We invite you to come by and see our booth displaying all of our.

We invite you to come by and see our booth display all of our products.

Speaker 3: We'll begin our Q&A session portion of this call in a moment. Our second fiscal quarter, 2022, despite the continuous supply chain challenges, was a...

We will begin our Q&A session portion of this call in a moment.

Our second fiscal quarter 2022, despite the continued supply chain challenges was a successful one.

Speaker 3: As we now have continued our sales growth streak with physical quantity due to 2022, being the fifth consecutive quarter of sales growth.

As we now have continued our sales growth streak with physical quantity Q2, 2022 being the fifth consecutive quarter of sales growth.

Speaker 3: We have a strong balance sheet, no debt, and made the business decision to use some of our cash we have and spending more on raw materials and logistics in order to maintain our sales growth trend.

We have a strong balance sheet no debt.

<unk> made the business decision to use some of our peers, we we had.

Spending more on raw materials and logistics in order to maintain our sales growth trends.

Speaker 3: We believe it's important to continue to grow our business and we are balancing the needs of growth and profit.

We believe it is important to continue to grow our business and we are balancing the need for growth and profits.

Speaker 3: Our season management team has experienced from previous supply chain disruption.

<unk> management team has the experience from previous supply chain disruptions.

Speaker 3: which is helping us navigate the current environment.

Which is helping us navigate the current environment.

Speaker 3: We're excited about fiscal year 2022 and beyond. Napa Senior Management maintains a high level of ownership in their equity, approximately 21%. And I would like to thank everyone for their support and for joining us in the exciting future we have.

We are excited about fiscal year 2022 and beyond.

NAPCO Senior management maintains a high level of ownership in our equity approximately 20 won't present.

And I would like to thank everyone for their support and for joining us in the exciting Q2, we have.

Speaker 3: Our formal remarks are now concluded. We now would like to open the call for a Q&A session. Operator.

Our formal remarks are now concluded we'd now we'd like to open the call for a Q&A session.

Operator. Please proceed.

Speaker 1: Thank you. Ladies and gentlemen, at this time, we will begin conducting your question and answer session. If you'd like to ask a question, you may press star one on your telephone keypad. A confirmation tone will indicate your line is in the question two. You may press star two, if you would like to remove your question from the two. Four participants using speaker equipment, it may be necessary to pick up your hands that before pressing the star key. Our first question comes from the line of Mike Walkley with Canacor Genuity. Please proceed with your question.

Thank you ladies and gentlemen at this time, we will be conducting a question and answer session. If you'd like to ask a question you May press star one on your telephone keypad, a confirmation tone will indicate your line 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 Starkey. Our first question comes from the line of Mike Walkley with Canaccord Genuity. Please proceed with your question.

Speaker 5: Great, thanks. Thanks for the commentary on the accelerating activation.

Great. Thanks, Thanks for the commentary on the accelerating Activations.

Speaker 5: that should drive strong and even maybe accelerating recurring revenue trends.

It should drive strong.

Even maybe accelerating recurring revenue trend.

I guess for.

For both you Kevin.

You talk about the strategy to.

Speaker 5: gain share in the near term and how that's going to pay off for the longer term recurring revenue growth.

To gain share in the near term and how thats going to pay off for the longer term recurring revenue growth.

Speaker 6: How should we think about the near-term gross margins for the next few quarters, given this mid-shift to radios and the supply chain issues, versus the longer-term goal of giving, you know.

And how should we think about the near term gross margins for the next few quarters, given this mix shift to radios and the supply chain issues versus the longer term goal just given.

Let me handle the first part of that.

Speaker 3: So there's been many comments over the past year or so from people, investors, who said to us, you know, why don't you spend some of your money on increasing your business, growing the top line of your business?

So.

There's been many comments over the past year or so from people.

So to US you know why don't you spend some of your money.

On increasing your business.

Growing the top line of your business.

Speaker 3: And as you know we have we have a lot of cash so We figured the best way to grow our business is to pick up market share

And as you know we have we have a lot of cash so are we the.

The best way to grow our business is to pick up market share.

Speaker 3: And we have wonderful products, wonderful cellular products that the deal is loved. They're the best cellular products for reporting a fire alarm and burglar alarm situations to the central station.

And.

We have wonderful products wonderful cellular products that the deal is loved.

They are the best cellular products for reporting alarm fire alarms burglar alarm.

Situations to the central station.

Speaker 3: So the competition is having a lot of problems in building their products. A lot of the competition gets their complete product from Pacific Rim. We don't, what we do is we build it in our factory in the Dominican Republic and in New York.

So.

Competition is having a lot of problems and building their products a lot of the competition gets complete product from.

It's a grim.

We don't we do is we build in our factory in the Dominican Republic and in New York.

Speaker 3: So we're able to spend some of that cash that we have to fly the computer.

So we are able to spend some of that cash that we had.

To fly the components in <unk>.

Speaker 3: and build our products to have more availability for the dealers so they'd never run out because a dealer never wants to run out of a product. He wants to keep putting jobs in.

And build our products.

More availability for the dealers, so that never run up because of dealer.

Ever wants to run out of a product we wanted to keep putting jobs.

Speaker 3: So we're spending money on components. And some of these components are higher price than they were previously to the supply.

So we're spending money on components and some of these components are higher priced than they were previously through the supply chain.

Speaker 3: certain chips of higher price, the transformers of higher price, and there are certain manufacturers that have capacity and we have given them volume, even though their price is a higher, but they can give us delivery. Because the number one thing to remember is keep building these products, keep supplying the dealers.

Chips are higher priced transformers, a higher price and there are certain manufacturers enhanced capacity and we have given them volume, even though the prices are higher but they can give us delivery because the number one thing to remember is keep building these products keep supplying the dealers.

Speaker 3: The competition is not really doing that. The competition is out of components, or finish goods that they get from the Pacific Rim.

The competition is not really doing that the competition is out.

Components or finished goods that they get from the Pacific rim.

Speaker 3: And that's what we're doing. So we're spending more money on air freight, more money for buying components from alternate sources. And we're picking up share.

And that's what we're doing so we're spending more money on airfreight more money for buying components from alternative sources.

And we're picking up share and that share is very important because those products are sale that keeps on giving.

Speaker 3: And that share is very important because those products are a sale that keeps on getting.

Speaker 3: Once a consumer gets it installed by a dealer.

Once a consumer gets installed by a dealer.

He keeps.

It keeps the system alive, especially in the commercial fire because you need it.

The CMO in the building. So it is a sale that keeps giving has tremendous number of years of continuous.

Recurring revenue generation, so we don't want to Miss.

Speaker 3: So we don't want to miss a beat, and that's why we want to bring these products, these components in so we can continue to build finished goods.

And that's why we want to bring these products. These components and so we can continue to build finished goods.

Even with all of that.

Speaker 3: that I'm telling you about, where sales are up nicely in our product line, we still have the largest backlog in our history.

But I'm, telling you about where sales are up nicely in <unk>.

In our product line.

We still have the largest backlog in our history.

Speaker 3: There's so many dealers that are clamoring for our product.

So many dealers.

Clamoring for our products that we're running.

Speaker 3: that we're running longer shifts.

Longer shifts.

Speaker 3: putting in more hours, weekends, and we're building lots of products.

Putting in more hours weekends, and we're building lots of.

Speaker 3: And we still have a large backlog. So that bodes well for the future quarters. I think it's going to continue. The need for all of these cellular radio type of products. And now we've added our new air access product, which is cellular radio recurring revenue generator. So each of our divisions will be generating recurring revenue.

Product.

And.

And we still have a large backlog so that bodes well for the future quarters I think it's going to continue the need through all of these cellular radio type of products.

And now we've added a new air access product, which is cellular radio recurring revenue generator to each of our divisions will be generating recurring revenue.

Speaker 3: And as we stated in this, we had a 2026 goal of $150 million in recurring revenue.

And as we stated in this we ended 2026 go about $150 million in recurring revenue.

Speaker 3: We believe that we'll probably beat that by a couple of years at the rate things are going. So it's a very happy scenario. It was worth spending the money for the components and for the shipping. And that affected our profits in this current quarter. But we think it's the best thing to do for our company for future growth. And that's our strategy.

We believe that will probably beat that by a couple of years as the right things are going so it's a very happy scenario was worth spending the money for the <unk>.

<unk> entered the shipping and that affected that.

Our profits in this.

Quarter.

But we think it's the best thing to do for our company for future growth.

Uh huh.

And that's our strategy.

Speaker 4: Kevin, would you like to answer some of the other questions? Yes. So, Mike, so on the gross margin.

Kevin would you like to answer some of the other questions.

So Mike so on the gross.

Margin.

Going forward.

Speaker 4: We've strategically taken some price increases.

We have strategically taken some price increases.

Speaker 4: Not everything's been reflected. We took one in December . We haven't felt that yet. We will feel it this quarter. We might do another one in April . We have to see. It's strategic. We don't just do anything across the board. We don't wanna disrupt this avalanche of business that we're now getting on the radio side. So anything that protects that, we're gonna keep in mind. But price increases, strategically thought.

Not everything has been reflected we took one in December we haven't felt that yet we will feel it this quarter, we might do another one.

In April we have to say, it's strategic we don't just do anything across the board. We don't want to we don't want to disrupt this avalanche of business that we're now getting on the radio side. So anything that protects that we're going to keep in mind, but price increases strategically thought.

<unk> will help.

Speaker 4: We bought a lot of inventory. Our inventory is up $5 million since June 30th.

We bought a lot of inventory our inventories up $5 million since June 30.

Speaker 4: A lot of that is buying these hard to get components, lots of them, and that could carry us into future quarters.

A lot of that is buying these hard to get components lots of them.

And that could carry us into future quarters.

Speaker 4: So, you know, we've paid the price, we have it, we won't be scrambling around as much going forward.

So we've paid the price we have it we wont be scrambling around as much going forward.

Speaker 4: The mix will probably get better. School security gets higher margins. That helps the mix.

The mix will probably get better school security gets higher margin.

That helps the mix.

Speaker 4: and the overall mix of margins should go up as there's more school jobs in that mix. We announced the one big job that we just received. That's not reflected in Q2 numbers, but we'll see that in future quarters, probably in Q3, maybe even some in Q4. And there are other ones.

And the overall mix of margins should go up as there is more school jobs in that mix, we announced the one big job that we just received that's not reflected in Q2 numbers, but we'll see that in future quarters, probably in Q3, maybe even in some in Q4 and there are other ones.

Speaker 4: And then the other part is Q4 for us is our biggest quarter.

And then the other part is Q4 for us.

Is our biggest quarter.

And that's the April May June quarter.

Speaker 4: And we still expect that to be the biggest quarter. And you get leverage on the margins from that. Because you absorb overhead more rapidly. And so we expect.

And we still expect that to be the biggest quarter.

And you get leverage on the margins from that.

Fishing absorb absorb.

Overhead more rapidly.

And so we expect that to also happen.

Speaker 4: So we believe for the upcoming quarters the margins will get better and as the supply chain eases

So we believe for the upcoming quarters, the margins will get better and as the supply chain eases, we will get back to the historic gross margins that we're all used to.

Speaker 4: we'll get back to the historic gross margins that we're all used to. Great.

Alright. Thanks.

Just a.

A follow up question for me.

Speaker 5: Maybe if you can help us a little bit, Kevin, just, just think about the mix, you know, where our radios today versus maybe a year to two years ago. And I know from what you've shared in the past, you know, the locking and school project.

Maybe you can help us a little bit Kevin just just think about the mix you know where our radios today versus maybe a year to two years ago.

And I know what you've shared in the past the locking and school projects can help that margin maybe a little more color on this large school contracts the pipeline there and maybe you could touch on the opportunity with latches that seems like the Patel.

Speaker 6: and help that margin, maybe a little more color on this large school contract, the pipeline there, and maybe you could touch on the opportunity with latches. That seems like potential for some nice ramp in the locking higher margin business also. Right.

Potential for some nice ramp in the locking higher margin business also.

Right so radios.

Represent.

Speaker 4: very large portion or I'll say a larger portion of our hardware sales than they used

A very large portion or I'll say, a larger portion of our hardware sales than they used to so if you go back a couple of years ago.

Speaker 4: So if you go back a couple of years ago, radios was probably 15% of the hardware sales.

Radios was probably 15% of the hardware.

Sales.

Speaker 4: Today, in this last quarter, about 32 and a half percent. That's a big difference.

Today, and this last quarter about 32, 5%, that's a big difference.

Speaker 4: And as we've said, the margins are not as strong on the hardware side.

And as we've said the margins are not as strong on the hardware side.

Speaker 4: and we understand that and we're happy to see this happen because we know ultimately the big prize of the 87% recurring revenue.

And whereas.

We understand that and we were happy to see this happen because we know ultimately the big prize of the 87% recurring revenue.

Speaker 4: Um, so right now, radio is dominant.

So right now radios dominate.

Speaker 4: Radio's might still dominate, but you can just have some competition from the school side. Because...

Radio's might still dominate but it's going to have some competition from the school side because we've seen.

Speaker 4: an uptick in activity. We announced this one big order that we got. There's a bunch of other ones in the works. There's been so many shootings, unfortunately.

And an uptick in activity, we announced this one big order that we got there is a bunch of other ones in the works.

There's been so many shootings unfortunately it.

Speaker 4: Can't even keep track, there's so many. That leads to the.

You can't even keep track there's so many so many that leads to the.

Speaker 4: the security experts at the schools having to do something about this. So now we're seeing more and more activity and more and more money coming down to help the K through 12.

These security experts at the schools, having to do something about this so now we're seeing more and more activity and more and more money coming down to help the K through 12 that'll.

Speaker 4: that'll help our mix. We also believe with the infrastructure bill that was passed, that leads to airport renovations.

That'll help our mix.

Also believe with the infrastructure.

Bill that was passed that leads to airport.

Renovations.

Speaker 4: And typically, when there's airport renovations, that leads to.

And typically when Theres airport renovations that leads to.

Speaker 4: more locking deals for us.

More locking deals for us.

Speaker 4: Typically when I'm in an airport that has had it or is going through an airport renovation, we see our locks all over.

Typically when when I'm in an airport that has had or is going through it and airport renovation, we see our locks all over.

Speaker 4: that going to bode well for us. So these are all things that are going to help the margins, the mix.

That's going to bode well for us. So these are all things that.

That are going to help the margins the mix.

Speaker 4: But, you know, we are selling a lot of radios.

But you know we.

We are selling a lot of radios and.

Speaker 4: that while it doesn't have the margins that we all love, it does lead to the 87%. We have to always keep that in mind. That's the big prize.

<unk>.

While it doesn't have the margins that we all love it does lead to the 87% we have to always keep that in mind, that's the Big Prize.

Speaker 4: And then with Latch, we're just really starting out with them. Latch, we believe, is going to be a big partner with us.

And then with latched, we're just really starting out with them latch. We believe is going to be a big partner with us.

Speaker 4: And we haven't felt the effects of that, and that leads to more locking business.

And we haven't felt the effects of that and that leads to more locking business.

Speaker 4: uh... we have a very good relationship with them they love our products

We have a very good relationship with them they love our products and we expect to do a lot of big things. We haven't felt that yet we do expect to feel that in the upcoming quarters.

Speaker 4: We expect to do a lot of big things. We haven't felt that yet. We do expect to feel that in the upcoming quarter.

Speaker 5: Thanks. Last question for me, and I'll pass the line. The strategy makes total sense in the short term, keep the dealers happy. And you mentioned some initial feedback on air access was positive. Can you give a little more color on the feedback from the channel? And then also, just remind us, as this new business ramps, is this a little lower gross margin business to drive recurring revenue? Or how does that impact the model as it ramps over?

Thanks last question for me and I'll pass the line that strategy makes total sense in the short term to.

To keep the dealers happy and you mentioned some initial feedback on air access with positive can you give a little more color on the feedback from the channel and then also just remind us of that.

This new business ramps its a little lower gross margin business to drive recurring revenue or perhaps how does that impact the model as it ramps over time.

Speaker 3: Air Access product is a tremendous innovation that the dealers needed in the access control business, which is a multi-billion dollar business.

<unk> product.

<unk>.

A tremendous innovation dealers needed in the access control business, which is a multi billion dollar business.

Speaker 7: section of buildings and where people are allowed to go within buildings.

Action buildings.

Where people are allowed to go within buildings.

Speaker 7: And the air access system changes to gain where there's no wiring required through the IT department, utilizing their network.

And the air Axis.

System changes the game, where theres no wiring required.

True to the it department utilizing the network.

Speaker 7: which they're always very worried about because they're afraid that hackers can come in through the access control system and upset the network and ran some wires.

Which they're always very worried about because they're great attackers can come in.

Through the access control system and the network.

Ransomware type of things. So we eliminated that concept because of the fact that we make these great starlink radios, we modify the starlink radios to be the communications to be.

Speaker 3: So we eliminated that concept. Because of the fact that we make these great Starlink radios, we modified the Starlink radios to be the communications to the computers which run the air access, which run the access control system. So we don't have to go through the wires.

Computers, which run the air Axis, which run the access control system.

So don't have to go through the wiring.

Peter.

Speaker 7: which eliminates a lot of the politics in companies where the IT professionals don't want anything going to them.

Which eliminates a lot of the politics and companies, where the Iot professionals don't want anything going.

Speaker 3: into the network and the management gets involved and takes much longer to get jobs done and solved. And it's necessary to have access control today because you read about all the problems in buildings and people going where they shouldn't be going. It's a big problem. So this should help increase the access control business.

Okay.

The network management gets involved and it takes much longer to get jobs done.

And it's necessary that access control today.

Read about Hulu.

The.

Problems in buildings people go in where they shouldnt be going it's a big problem. So this should help increase the access control business and we're unique in the fact that we have.

Speaker 3: And we're unique in the fact that we have a wireless access control system using cellular and we get recovering revenue for each of the jobs that are put in by the dealer.

Wireless access control.

System, using cellular and we get recurring revenue for each of the jobs that are put in by the dealers.

Speaker 3: So it's a great renaissance in the business. It's something that will take us a year to train the access control dealers on how to install it.

So it's.

Great Renaissance in the business.

It's something that will take us a year.

To train the access.

Control dealers on how to install it.

Speaker 7: It is a little different, but it has all the functionality that it needs. The early feedback that we're getting is that it's a very exciting product. It's really easy to put in.

Because it is a little different but it has all the functionality needs and.

The early feedback that we're getting is that it's a very exciting product, it's really easy to put in.

Speaker 7: It gives a lot of functionality to the end user customer. We can get data on who's in the building where they are.

It gives a lot of functionality to the end user customer we can get data on who is in the building are where they are and what time. They came in and the deal. We can also do time and attendance.

Speaker 3: What time they came in and the dealer can also do time and attendance. So it has a lot of functionality, both the dealer that installs it and the end user where it's installed into. So we have very strong feelings of this is going to be a very successful product. Like store links have been in the Berglow Lombus.

So it has a lot of functionality for both the deal with the installs and the end use where its installed into.

So we have very strong feelings of this is going to be very successful.

Like slow links have been in the burglar alarm business.

Speaker 3: And now, each of our divisions, our strategy is, we want recurring revenue in each of our divisions. We're unique in the fact that we're the only manufacturer in the country that makes fire alarms, burglar alarms, locking products, and access control products.

And now each of our divisions and our strategies.

Non recurring revenue in each of our divisions. We are unique in the fact that we're the only manufacturer in the country. It makes fire alarms burglar alarms locking products access control products.

Speaker 7: We're unique in that way. So we make a totally integrated package of the dealings and soil and all kinds of buildings. Now we're gonna get recurring revenue in each of those categories.

Unique in that way, so we make a totally integrated package the dealer to install what kinds of buildings.

Now, we're going to get recurring revenue each of those categories.

Speaker 3: And that's very exciting for us. So it really makes very strong future for us.

And that's very exciting growth so it really it makes for a strong future growth.

Speaker 7: the 2026 goal of 150-150 for hardware and 150 for recurring. We now believe that we'll get to the 150 for the recurring a year or two earlier. That's how it looks right now. The activations are going sky-high consecutive activations, so it's a very exciting growth scenario for us.

The 2026 goal of 161 54.

Hardware and once this deep for recurring we now believe that we'll get to the 150 to the recurring a year or two earlier.

That's how it looks right now the activations.

<unk> Sky high.

Consecutive activations so.

It's a very exciting growth scenario for us.

Great. Thanks for taking my questions.

Thanks, Mike.

Speaker 1: Our next question comes from the line of Jamer Souti with Needhamming Company. Please receive your question.

Our next question comes from the line of Jim Ricchiuti with Needham <unk> Company. Please proceed with your question.

Speaker 8: I thank you. I just wanted to pursue again some of the moving parts around gross margins. I mean, I think we all appreciate the benefits of pursuing market share just given how attractive the recurring revenue business is. But what I'm wondering, maybe you could help us, Kevin, if we think about how much of the costs that you're incurring

Hi, Thank you.

Wanted to pursue again.

Some of the moving parts around gross margins I mean, I think we all appreciate the benefits of pursuing market share just given how attractive the recurring revenue businesses that but what I'm wondering maybe if you could help us Kevin if we think about how much of it.

The cost that you're incurring.

Speaker 8: might you be able to recover through some of the pricing actions that you're taking?

Might you be able to recover through some of the pricing actions that you're taking.

Speaker 8: uh... that you're taking an are you seeing any lead up at all and some of the uh... the freight expense we've heard from from some companies that they have maybe starting to ease or perhaps it's

You are taking in are you seeing any let up at all and some of the freight expense, where you've heard from from some companies that they may be starting to ease or perhaps its peak.

Speaker 4: Well, the price increase is definitely going to help. We haven't really felt the effect.

Well the price increase is definitely going to help.

We haven't really felt the effect.

Speaker 4: We're going to feel it more probably in this quarter.

Yes.

We're going to feel it more probably in this quarter.

Speaker 4: I don't really like to disclose how much we've done. We do it selectively, strategically, but it'll help the margins, it has to.

I don't really like to disclose how much we've done well.

We do it selectively strategically, but it'll it'll help the margin testing.

The airfare.

Speaker 4: has gotten better, and one of the reasons it's also gotten better is because we've bought up a lot of parts.

Has gotten better.

And one of the reasons, it's also gotten better.

Because we bought up a lot of parts.

Speaker 4: which means we don't have to keep flying. We bought a lot.

Which means we don't have to keep flying we bought a lot.

Speaker 4: We paid the price to get them here and we don't have to keep flying over and over and over.

We paid the price to get them here and we don't have to keep flying over and over and over we have them and it should last us a while.

Speaker 4: and it should last us a while. I don't see the supply chain issues abating any time soon. I think we're still in this situation for months to come. One of the advantages we also have, we didn't really talk about it.

I don't see the supply chain issues abating anytime soon.

I think we're still in this situation for months to come.

One of the advantages. We also have we didn't really talk about it.

Speaker 4: as <expletive> mentioned in his comments earlier, but we have our engineers right here in Amityville with us.

Is <unk>.

<expletive> mentioned in his in his comments earlier, but we have our engineers right here at <unk>.

<unk>, though with us.

Speaker 4: And if we can't get one of these parts, and it's difficult to get, no matter what we're doing.

And if we have we can't get one of these parts and its difficult to get no matter, what we're doing we get our engineers to redesign the product.

Speaker 4: We get our engineers to redesign the product, to utilize a part.

To utilize a part that we can get.

Speaker 4: And that helps. And yes, it utilizes engineers time where they might be doing R&D activities, but it allows us to keep going, to keep manufacturing. And without...

That helps and yes, it utilizes engineers' time, where they might be doing R&D activities, but it allows us to keep going to keep manufacturing and without.

Speaker 4: large material costs or airfare that we might be incurring otherwise.

The large material costs or airfare that we might be incurring otherwise.

Speaker 4: So I think we're doing a lot of good things. We have a lot of experience with this. We've been down this road before, maybe not quite like this, but I think we know how to manage this situation. So I think price increases will help. I think volume will help. And I think less airfare will help.

Oh I see.

Inc.

We're doing a lot of good things, we have a lot of experience with this we've been down this road before maybe not quite like this but I think we know how to manage this this situation. So I think price increases will help I think volume will help and I think less airfare will help so.

Speaker 4: So I think we hit rock bottom with the margins in this quarter, and I think they will get better in Q3 and much better in Q3.

I think we hit rock bottom with the margins in this quarter and I think they will get better in Q3 and much better in Q4.

Speaker 8: And again, it's going to take some time for some of these increases, presumably, to work their way through. I don't know if you want to comment or if you can comment on just the level of inventory that's out there at your distributors.

And again, it's going to take some time for some of these increases presumably to work their way through I don't know if you want to comment or if you can comment on just the level of inventory that's out there.

Your distributors.

Speaker 4: Well, I can't comment so much on the level of inventories that's out there, but what I can comment on is our sell-through. We haven't really...

Well I can I can't comment so much on the level of inventories that's out there, but what I can comment on.

Is our sell through.

We haven't really talked about the sell through stats.

Speaker 4: And if we talk about the cell through stats of our number one customer, our number one customer on the... And if we talk about the cell through stats of our number one customer on the...

And if we talk about the sell through stats of our number one customer.

Our number one customer.

On the.

Intrusion alarm side of the business.

Speaker 4: was up 108% for the December quarter versus a year ago, sell through their sales of our product, 108%. And sequentially, was up 29%. So their sell through was 29% greater in the December quarter than it was in the September quarter. And then if I look at our,

Was up 108%.

The December quarter.

Versus a year ago sell through their sales of our product 108% and.

And sequentially was up 29% so their sell through was 29% greater than the December quarter than it was in the September quarter.

And then if I look at our number two customer.

Speaker 4: That is strong, very strong, they were up 49.7 call it 50 percent.

That is strong very strong.

Sure.

They were up $49 seven call it 50%.

Speaker 4: year-over-year sell-through increase and sequentially up

Year over year sales.

Sell through increase.

And sequentially up 14%.

Speaker 4: And then when I look at that, so that's the alarm side. Then when I look at the locking side.

And then when I look at that so that's the arm side and then when I look at the locking side.

Speaker 4: Our number one customer was up 43% versus a year ago. Sell-through, their sales. And.

Our number one customer was.

It was up 43%.

Versus a year ago sell through their sales.

And sequentially it was up 7%.

Speaker 4: And the number two customer was up 13% versus a year ago, and sequentially up 2%. So these are very encouraging.

And then number two customer was up 13% versus a year ago and sequentially up 2%. So these are very encouraging stats. These.

Speaker 4: These stats showing sell-through is up, they're utilizing their inventory. That's why our bookings are so strong, why the backlog is at historic levels.

These stats showing sell through was up they're utilizing their inventory that's why our bookings are so strong why the backlog is at historic levels.

I think we're in a good position and we just have to navigate through supply chain issues and ultimately will be very good shape.

Speaker 4: That's very helpful and one last question for me and I'll jump back in the queue is if you can talk at all about how we might think about OPEX going forward. You've got a trade show, presumably, that's also going to attract more folks. The investments are coming back in on the sales and marketing side. How should we think about some of the OPEX levels going forward? So this quarter the OPEX obviously was higher than it was.

Very helpful. I Am Wonder last question for me and I'll jump back in the queue is if you can talk at all about how we might think about opex going forward, you've got tradeshow, presumably that's also going to be.

Track more folks.

The investments are coming back in on the sales and marketing side, how should we think about.

Some of the Opex levels going forward.

This quarter the Opex, obviously, it was higher than it was.

Speaker 4: in the year ago period or even in the prior quarter period, we did have the stock-based comp of 1.3 million, so obviously that impacted it. We won't see that again for the rest of this fiscal year. We'll see it again in Q2 of fiscal 23. So that won't have that anymore.

In the year ago period, or even in the prior quarter period, we did have the stock based comp of one 3 million sort of obviously that impacted it we won't see that again for the rest of this fiscal year, we will see it again in Q2 of fiscal 'twenty three so that.

Won't have that anymore.

Speaker 4: Um, commissions were higher this quarter than last year, even in the prior quarter, obviously with higher sales, higher commission.

Commissions were higher this quarter than last year, even than the prior quarter, obviously with higher sales higher commissions.

Speaker 4: And T&A trade show expenses were also higher this year versus a year ago. A year ago, our sales guys weren't traveling as much, there weren't as many shows, but there are now, and so that's back. So I would say the level that we saw in this quarter is kind of what I would expect for the next quarter, with the only addition being higher commission expenses.

And TNA Tradeshow expenses were also higher this year versus a year ago a year ago.

We werent Trapp, our sales guys, who aren't traveling as much there werent as many shows but there are now and so thats back. So I would say the level that we saw in this quarter is kind of what I would expect for the next quarter.

With the only addition, being higher commission expenses because of higher sales and we won't have the stock based comp.

Speaker 4: because of higher sales and we won't have the stock-based comp. Got it.

Got it thanks very much welcome.

Speaker 1: Our next question comes from the line of Jason Schmidt with Lake Street Capital. Please proceed with your question.

Our next question comes from the line of Jason Schmidt with Lake Street Capital. Please proceed with your question.

Speaker 9: Hey guys, thanks for taking my questions. Just curious if you could maybe quantify the backlog number, or maybe not a specific number, how much that backlog was up ending December .

Hey, guys. Thanks for taking my questions. Just curious if you could maybe quantify the backlog number or maybe not a specific number how much that backlog was up ending December .

Well I don't like to disclose it but I will tell you its historic it's in the millions we never had that much before.

Speaker 4: Well, I don't like to disclose it, but I will tell you it's historic, it's in the millions, we never had that much before, and it's concentrated in radios. The radios...

And it's concentrated in radios.

The radios are off the charts.

Speaker 4: We can't produce them fast enough, although we're giving our best effort to produce it fast.

We can't produce them fast enough, although we're giving our best effort to produce it fast enough.

Speaker 4: by doing all the things we've said, by getting the parts in any way we can get them, by increasing the labor in the DR. Labor is very easy to come by. We always hear how there are labor shortages here in the states, but in the Dominican Republic

Doing all the things, we've said by getting the parts in it.

Any way, we can get them by increasing the labor in the D. R.

Labor is very easy to come by we always hear how there are labor shortages here in the states, but in the Dominican Republic.

Speaker 4: You can get all the labor you want and we're doing that. We're expanding our night shift so we could produce more. We're adding more machinery so we could produce more.

You can get all the labor you want and we are doing that we're expanding our night shift so we could produce more we're adding more machinery. So we could produce more.

Speaker 4: So, we're doing everything in our power to...

So we're doing everything in our power.

To.

Speaker 4: get that backlog down and sometimes, you know, when business is super strong, it's a high-class problem. And that's how I would describe this. It's a high-class problem when you have record-breaking backlog and you also have record-breaking sales.

Get that backlog down and sometimes when business is super strong.

It's a high class problem and that's how I would describe this its a high class problem. When you have record breaking backlog and you also have record breaking sales.

That's kind of the situation we're in.

Speaker 9: Okay, that's helpful. And then just a follow-up for me, obviously a nice win in the school market and your comments make it seem like that space is starting to pick up a little bit. Just curious if some of that uptick is more on that K-12 side of the market or if you're also seeing some increasing interest on the college and university side?

Okay. That's helpful. And then just a follow up for me, obviously, a nice win in the school market and your comments make it seem like that space is starting to pick up a little bit just curious if some of that uptick is more on that K through 12 side of the market or if you're also seeing some increasing interest on the <unk>.

College and University side.

Speaker 4: Well, the win that we got is a school district, so that's K through 12.

Well the win that we got.

As a school district, so that's K through 12.

Speaker 4: There are a few universities that we're hoping that we can announce soon.

There are a few universities that we're hoping that we can announce soon.

Speaker 4: I think it's on both sides, as you've seen the shootings that have occurred, it's in both areas, the universities and the K-12s.

I think it's on both sides as you've seen the shootings that have occurred that's in both areas the universities and the K through 12.

No school is immune.

Speaker 4: from the craziness that's out there today. And so the concern is on all areas and we've seen uptick on both areas. So, we've seen uptick on both areas and we've seen uptick on both areas.

From the craziness that's out there today.

So.

The concern is on all areas and we've seen.

Uptick on both areas.

Okay. Thanks, a lot guys. Thank you Jason.

Speaker 1: Our next question comes from the line of Brian Ruttenberg with Imperial Capital. Please proceed with your question.

Our next question comes from the line of Brian Rotenberg with Imperial Capital. Please proceed with your question.

Speaker 10: Yes, and a lot of my questions have been asked and answered, but.

Yes.

A lot of my questions have been answered asked and answered but.

Speaker 11: Can you talk a little bit about the guidance? Is there going to be a step function in here? You've had really strong growth, especially on the recurring side, and you're talking about potentially, hitting the goal of 150 million, a couple of years earlier, should we expect a step function to happen in the next couple of quarters or in the next 12 months, something like that? Those are our goals.

Can you talk a little bit about the guidance.

Is there going to be a step function and here you've had really strong growth, especially on the recurring side and you're talking about potentially.

Hitting the goal of $150 million a couple years earlier should.

Should we expect a step function to happen.

The next couple of quarters or in the next 12 months something like that.

Well. These these are our goals.

And as we get more clarity.

Speaker 4: we may change our goal.

We may change our.

Goal.

Speaker 4: We're judging it based on sequential growth.

We're judging it based on sequential growth of Activations, we've seen tremendous tremendous.

Speaker 4: seen tremendous, tremendous sequential growth. I just got the January sequential.

Sequential growth.

I just got the January .

Sequential growth numbers.

And it was 16%.

Speaker 4: That's phenomenal. That means the January activations were 16% higher than the December activations, which were 11% higher than the November activations.

That's phenomenal that means the January activations were 16% higher than the December activations, which were 11% higher than the November activations.

So.

Speaker 4: We don't want to get ahead of ourselves and assume that every month is going to be 16%

We don't want to get ahead of ourselves.

And assume that every month is going to be 16%.

Better than the prior.

Speaker 4: But we can't look away from that. That's pretty powerful stuff. We'll watch it. We believe we'll probably get to the 150 sooner. Maybe a couple of years.

But we can't look away from that that's pretty powerful stuff.

Watch it we believe we'll probably get to the 150 sooner.

Maybe a couple of years sooner, but.

Speaker 4: We want a little more data before we specifically say that's what we think is going to happen. But right now that's our belief with the 16%. If you do the math and your activations are 16% higher than it was the prior month and you keep up something like that, even if you had 5% sequential growth every month, that's huge, huge. And that's kind of what we're feeling, right?

We want a little more data before we specifically say, that's what we think's going to happen, but right now that's our belief with a 16%. If you do the math and your Activations are 16% higher than it was the prior month and you keep up something like that even if you had 5% sequential growth every month that's huge.

Huge and that's kind of what we're feeling right now.

Speaker 10: Okay, and then just one other follow up on that. Your goal, I think five year goal was gross margins of, you know, 50% or better. Is that still realistic given everything that you're seeing right now?

Okay, and then just one other follow up on to that.

Our goal I think five year goal with gross margins of 50% or better.

That still realistic given everything that you're seeing right now.

Speaker 4: Well, based on what we're seeing right now, that's that's not realistic. But the expectation is that when things normalize.

Well based on what we're seeing right now that's that's not realistic, but the expectation is that when things normalize.

Speaker 4: that would be the expectation because the margin still expands based upon

That would be the expectation because the margin still expand based upon <unk>.

Volume.

Speaker 4: And if you have a $37.5 million hardware quarter, the margins are going to expand, because the only thing we're going to have to add is labor. And so the overhead absorption, all those theories.

And if you have a 37 $5 million of hardware quarter.

The margins are going to expand because the only thing we're going to have to add is labor and so the overhead absorption all of those theories still.

Speaker 4: still hold water. And the mix, we'll have to see how that goes. The radios are becoming a dominant part of the mix, but as schools come back, that might shift it the other way. So for right now, we're not feeling, obviously we're not feeling a 50% margin on hardware, but we believe that's temporary, and we believe that the

Still hold hold water.

And.

The mix will have to see how that goes the radios are becoming a dominant part of the mix, but as schools come back that might shift it the other way.

So.

But right now we're not feeling obviously, we're not feeling a 50% margin on hardware.

But we believe that's temporary.

And.

We believe that the.

Speaker 4: recurring, which might be more powerful than the 150.

Recurring which might be more powerful than the 150.

Speaker 4: at 80% margins would more than cover.

At 80% margins would more than cover.

Speaker 4: any decline that we believe is going to occur.

Any decline that we believe is going to occur in the hardware side, but we haven't given up on the hardware side. We're just in a period now.

Speaker 4: in the hardware side. But we haven't given up on the hardware side. We've just been a period now. It is what it is right now. We'll.

Is what it is right now.

We will come out of this and we believe be a lot stronger for it as <expletive> mentioned earlier, we have the cash we could use our money to do an acquisition why not why not use this cash.

Speaker 4: and we believe be a lot stronger for it. As <expletive> mentioned earlier, you know, we have the cash. We could use our money to do an acquisition.

Speaker 4: Why not use this cache to grow that recurring revenue? It's more definite and...

To grow that recurring revenue.

It's more definite and more powerful.

Alright, Thank you very much.

There are no further questions in the queue I'd like to hand, the call back to management for closing remarks.

Speaker 1: There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

Speaker 3: 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. We thank you for your interest and support and we look forward to meeting, speaking to you all again in a few months to discuss NAFTA's fiscal Q3-22 results.

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. We thank you for your interest and support and we look forward to meeting.

Speaking to you all again in a few months.

<unk> net.

Q3 22 results.

Bye bye.

Speaker 1: 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.

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.

Okay.