Q3 2022 NAPCO Security Technologies Inc Earnings Call
Greetings welcome to NAPCO Security technologies incorporated fiscal third quarter 2022 results conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference. Please press star zero.
And your telephone keypad. Please note. This conference is being recorded I will now turn the conference over to Patrick Mckillop Director of Investor Relations. Thank you you may begin.
Thank you good morning.
I'm, Patrick Mckillop director of Investor Relations for NAPCO Security technologies.
For joining us today for todays conference call to discuss our financial results for our fiscal third quarter 2022 by.
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.
W. W Dot NAPCO securities or column.
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.
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.
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.
Central market opportunities the 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.
Forwards.
Looking statements involve risks and uncertainties that may cause actual results.
Could 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, including our annual report on Form 10-K.
They're unknown unpredictable factors, our 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 cannot guarantee future results level of activity perform.
Our achievements you should not place undue reliance on these forward looking statements. All information provided in today's press 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.
I will turn the call over to <expletive> in a moment before I, but before I do I just wanted to mention a few things on the eye awesome.
We will be attending the Needham technology and media conference in New York on May the 17th.
<unk> also be attending the 22nd annual B Riley Securities Institutional Investor Conference in L. A on may 25th and 26th.
And then followed by Stifles Cross sector insights conference in Boston on June 7th through the ninth and.
And finally on August 10th or 11th we will be attending the Canaccord Genuity growth conference also in Boston.
Investor outreach 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.
With that out of the way, let me turn the call over to Richard So all away President and CEO of NAPCO security technologies.
The floor is yours.
Thank you Patrick good morning, everyone and welcome to our conference call.
Thank you for joining us today to discuss.
Our results.
We are pleased to report our fiscal Q3, 2022 record sales of $35 $9 million.
Our results reflect our sixth consecutive quarter of sales growth.
Recurring revenue continue to grow at a very strong rate.
Annual run rate is now approximately 50 million.
On April 2022 recurring.
Revenues.
Our balance sheet remains strong with our cash balances in excess of $47 million and.
And we have no debt.
We continue to focus on capitalizing on key industry trends, which include wireless fire and intrusion alarms.
Ooh security solutions, plus as it priced access control systems and.
And architectural locking products.
The management team here at NAPCO continues to focus on key metrics of growth profits and 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 will now turn the call over to our CFO Kevin Michelle.
He will provide an overview of our fiscal third 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.
For the third quarter net sales for the quarter increased 27% to.
To a quarterly record of $35.9 million.
As compared to $28 $2 million for the same period, one year ago.
Net sales for the nine months ended March 31, 'twenty 'twenty to incur.
Increased 28% to.
$100.4 million as compared to $78 $6 million for the same period a year ago.
This strong growth for both the three and nine months is primarily attributable to the continued strength of our commercial intrusion and fire alarm business as.
As well as access control and door locking products.
Recurring revenue for the quarter increased 35% to $12 million as compared to 8 million $8 $9 million last year and now has an annual run rate of $49 $9 million based on April 2022 recurring revenue.
Recurring revenue for the nine months ended March 31 2022.
Increased 37% to $33 $3 million as compared to $24 $3 million for the same period last year.
In addition, our equipment sales increased 23% for the quarter to $23 $9 million from $19 $3 million in the prior year period and for the nine months increased 24% to $67 million from $54 $2 million.
Same period last year.
Gross profit for the three months ended March 31 2022.
<unk>, 13%.
$14 $6 million with a gross margin of 41%.
As compared to $12 $9 million with a gross margin of 46% for the same period a year ago.
Gross profit for the nine months ended March 31, 2022 increased 13% to $39 $4 million with a gross margin of 39% as compared to $35 million with a gross margin of 45% of sales for the same period a year ago.
Gross profit on recurring revenue for the three months ended March 31, 2022 increased 37% to $10.5 million with a gross margin of 87%.
As compared to $7.6 million with a gross margin of 86% for the same period a year ago.
Gross profit on recurring revenue for the nine months ended March 31, 2022 increased 40%.
The $28 $9 million with a gross margin of 87%.
As compared to $27 million with a gross margin of 85% for.
For the same period a year ago.
The increase in gross profit was due primarily to the 35 and 37% increases in sales and the services for the three and nine months ended March 31 2022, respectively.
As compared to the same periods a year ago.
The increase in gross margin for the three and nine months ended was primarily due to the continued shift in mix to the company's fire radio services, which typically have a higher margin than those for intrusion radio services.
Gross profit on equipment sales for the three months ended March 31, 2022 decreased 23% to $4 $1 million at the gross margin of 17%.
As compared to $5.3 million or 27% of equipment sales for the same period a year ago.
Gross profit on equipment sales for the nine months ended March 31, 2022 decreased 26% to $10.5 million with a gross margin of 16% as compared to $14 $3 million with a gross margin of 26% for the same period a year ago.
The decrease in gross profit and gross margin on equipment sales for the three and nine months was primarily due to the continued inflation of freight and component parts cost related relating to the current worldwide supply chain problems.
And the continued shift in product mix to the company's Starlink radio products.
Products, which leads to the more profitable recurring service revenues.
And the aforementioned 17% gross margin on equipment sales for the quarter was more than double last quarters hardware margin of 8%.
This 900 basis point improvement is primarily due to the continuous stronger equipment sales revenue the development of alternative lower cost supply sources and delivery methods and the implementation of strategic price increases.
Research and development costs for the quarter increased 5% to $2 million or 6% of sales.
As compared to $1 $9 million or 7% of sales for the same quarter a year ago.
Research and development costs for the nine months ended March 31, 2022.
<unk>, 4% to $5 $9 million or 6% of sales as compared to $5 $7 million or 7% of sales.
Same period last year.
The increase was due primarily to increased payroll while the decrease as a percentage of net sales was due primarily to the increase in net sales.
Selling general and administrative expenses for the quarter increased 40% to $8 4 million or 23% of net sales.
As compared to $6 million or 21% of sales for the same period last year.
Selling general and administrative expenses for the nine months ended March 31, 2022 increased 33% to $24 million or 24% of net sales as compared to $18 million or 23% of net sales for the same period last year.
The increase in selling general and administrative expenses was due primarily to increased sales incentive compensation relating to the increase in net sales.
As well as an increase in legal and trade show expenses.
Yeah.
Operating income for the quarter was $441 million as compared to $5 million, but at the same period last year, an 18% decrease operating income for the nine months ended March 31, 2022 was $9 $6 million as compared to $11.4 million for the same period last year.
A 16% decrease.
The company's provision for income taxes for the three months ended March 31, 2022 increased by 427000 to $1.1 million as compared to $624000 for the same period, a year ago and the company's provision for income taxes for the nine months ended March 31, 2022.
Increased by 268000 to $1.7 million as compared to $1.4 million for the same period a year ago.
The company's effective rate for income tax was 13% for both the nine months ended March 31, 2022 as well as the nine months ended March 31, 2021.
Net income for the quarter was $2 $9 million or eight cents per diluted share as compared to $4.4 million or 12 cents per diluted share for the same period last year, a 34% decrease.
Net income for the nine months ended March 31, 2022 increased 18% to $11.7 million were 32 cents per diluted share.
As compared to $9.9 million or 27 cents per diluted share for the same period last year.
Adjusted EBITDA for the quarter was $5 $2 million or 14 cents per diluted share as compared to $5 $5 million or 15 cents per diluted share for the same period last year, a 5% decrease.
Adjusted EBITDA for the nine months ended March 31, 2022 increased 1% to $13 million or 35 cents per diluted share as compared to $12 $9 million 35 per diluted share in the same period last year.
Moving onto the balance sheet.
At March 31, 2022, 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.
Working capital defined as current assets less current liabilities was $87.1 million at March 31, 2022 as compared with working capital of $75 8 million at June 32021.
Current ratio defined as current assets divided by current liabilities was 4.8 to one at March 31, 2022, and 4.8 to one at June 30, 2021.
Cash provided by operating activities for the nine months was $8 $4 million as compared to $16 $4 million for the same period last year.
This decrease was primarily due to inventories increasing by 11 point to $11 $3 million as compared to a decrease of $5.7 million in the same period a year ago. The increase in inventories is primarily the result of the company level loading production output throughout the year as the <unk>.
These equipment sales are historically highest in the upcoming fourth quarter ending June 30th.
As well as the continued increasing component unit cost and increased volume of purchases of certain components that have become difficult to source during the worldwide supply chain problems.
Capex was $418000 during the quarter and we have no debt.
That concludes my formal remarks, and I would now like to return the call back to <expletive>.
Thank you Kevin.
Our fiscal Q3, 2022 with a sales record breaker.
In fact, it was the highest sales for any quarter in the company's history.
We are happy to see they were able to beat street consensus on revenue E. P. S net income and adjusted EBITDA metrics.
The quarter also marked our sixth consecutive quarter of the year over year sales growth.
And we look forward to surpassing the previous streak of 23 quarters that was disrupted in 2020 by COVID-19.
One key area of our success continues to come from the commercial fire and intrusion alarm business.
While the news headlines are dominated by talk of interest rate hikes and the potential for a recession in the U S. I'd like to remind you that we are highly recession resistant.
In one of our primary growth drivers the commercial fire alarm business, which is amazing story, not a discretionary item for building owners.
Commercial buildings must have and maintain a fire alarm system in order to receive a certificate of occupancy.
Given the high profitability and essential nature of this business, we focus on this as a key area of our resources.
The recurring revenue annual run rate is now at approximately 50 million.
As of April 2022.
Our starlink radios have seen an encouraging trend in activations in Q3 by growing 41% sequentially and 91% versus the same quarter a year ago.
We are optimistic that we could reach our previously mentioned goal of $150 million in recurring revenue earlier than 2026.
He lives are racing to complete commercial fire alarm system upgrades before the three G. Sunset at the end of calendar 2020 two.
And we believe that we are in a strong position to benefit from this as well as the continued need to upgrade legacy systems of old fashion copper wire phone lines.
There are still millions of buildings that need to upgrade from copper or replace an older three G cellular radio and our product line. The Starlink radios has the widest coverage with both AT&T and Verizon service and rich feature.
Sets, which are deal is love.
The constraints of the supply chain continue to be challenging, but clearly our strategy to temporarily sacrifice hardware gross margins by purchasing components at higher prices. So that we can continue to manufacture radios, which lead to continued.
High margin recurring revenue for each radio installed and operating is working.
Radio sales and Activations continue to be strong.
And while we are pleased that the equipment margins improved by 900 basis points to 17% in this quarter versus Q2, we continue to aggressively manage supply chain issues by developing alternative supply.
And sources and delivery Mezz message, while also reengineering products where necessary.
We believe in the next six to nine months, our new supplier sources. We are developing will begin to reinvigorate our equipment margins and returning them to the levels, we generated prior to the supply chain crisis.
Our backlogs are at historically high levels due to the supply chain issues, and we and could remain high for the remainder of 2022.
But we remain encouraged by the continued strength of our sell through statistics, we are seeing from several of our largest distributors.
And with Activations for our from our Starlink radios remaining strong we believe we are taking market share.
Competition based on this and customers are telling us that they can't get product from the competition, but they can get it from that though.
Cool security problem projects continue to ramp up and as mentioned earlier today in today's press release, our products were just selected for use in the school security project at very large school district in the U S, which has a student population.
<unk> of over 300000.
The project includes the upgrade of current security systems in over 750 School district buildings to the NAPCO Gemini X 255 security control panels provide.
Providing the very best protection for students and faculty.
The upgrade also includes replacing the existing telephone line based communications.
NAPCO Ultra high speed IP communication system.
Providing near instantaneous communications of events.
The school security office, allowing the fastest possible response to emergencies.
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 incidents has happened.
And that they are not spending all their day dealing with COVID-19 protocols and policies.
Our fully integrated solutions for the school security market remains a top priority given the healthy margins for those products generate.
The availability of grants for schools to fund these projects.
It's never been better.
As we mentioned during the last quarter's call.
The D O J awarded more than $125 million in school security grants to hundreds of schools and universities across the nation.
Many states continue to past funding initiatives as well, we remain focused on providing schools the products and solutions they need to protect their students and faculty.
Our strategy is to offer seamless security solutions, which allow for our dealers and us to generate recurring.
Revenue streams, we have experienced tremendous success over the last five years growing our recurring revenue and I believe the best is yet to come.
We will now be able to generate recurring revenue from all divisions of the company.
With the latest product addition, cold air access, which will get us recurring revenue from locking and access control, which has never been done in our industry before.
<unk> access is the industry's first cellular based access control system, which we believe is a billion dollar market opportunity.
The benefits of air Axis include no need for upfront investment and expensive hardware.
No need to it.
Fear with the corporate I T networks, which could be a major problem for installers and no onsite database backups or software updates.
Our R&D team remains hard at work.
They even developing even more products for the future, which will help grow our recurring revenue business.
We will begin our Q&A session portion of this call in a moment.
Our third fiscal quarter 2022 despite the continued supply chain challenges.
Does a successful one as we now have continued our sales growth streak with physical Q3, 2022 being the sixth consecutive quarter of sales growth.
We have a strong balance sheet no debt.
And have made the business decision to use the cash we have.
And spend more on raw materials and logistics in order to maintain our sales growth trends. We believe it's important to continue to grow our business and we are balancing the need for growth and profits.
Our seasoned management team has the experience from previous supply chain disruptions, which is helping us navigate the current supply chain disruptions in the current environment.
We are now in our fourth fiscal quarter historically, our strongest in terms of equipment sales.
We remain confident in our ability to deliver strong growth in both equipment and recurring revenue for the balance of fiscal year, 2022 and beyond.
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 wed now like to open the call for the Q&A session. Operator. Please proceed.
Yeah, if he would like to ask a question. Please press star one on your telephone keypad and confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue and for participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys.
Our first question is from Mike Walkley with Canaccord Genuity. Please proceed.
Great. Thanks for taking my question and congratulations on the strong results in the challenging environment.
Do you think.
Kevin I guess first question for you your strong balance sheet seems to be a competitive advantage.
Inventory were at more historical levels, then you'd probably even have closer to $60 million and net cash can you talk about you know your strong balance sheet and how building inventory is maybe helping you gain market share relative to the competition.
Yes, good question Mike.
So a lot of our competition doesn't have the balance sheet that we have so we have.
$47 million in cash no debt would have been like you said closer to $60 million. If we didn't grow the inventory. So why are we growing the inventory while we're growing it in part because it's very important to maintain our shipments of our cellular radios our ray.
He owes braying the beautiful recurring revenue that follows which has up to 87% gross margin as we've seen so if we have to pay more to get these components. So that we could ship out radios and not have any disruptions, we're going to do it.
If we could get our hands on the difficult to gauge components and by a one year or two year supply of them.
Because we don't want to have to keep going back and searching and searching we're gonna do it it pays off we have the money to do it and we also have the money to kind of break into the line of getting an advantage with some of our vendors. You know these are hard to get components. If we can convince.
Our.
Vendors that a we can pay fast we have solid cash flow. They don't have to worry about us move us to the front of the line so to speak.
We tell them, we're an essential business, which we are.
You know, we're dealing with life safety fire.
Those components and we're happy we're happy to pay pay fast and buy as many as these components that we can get our hands on so if the inventory has to grow so bad we don't care at this moment you know we'd be here before we spent a lot of time, reducing the inventory we reduced it by about 10.
Bucks, but we're in a different environment now now the size of the inventory doesn't matter as much what matters is the continuance of getting those products shipped out.
Fast as we can because that leads to the profitable growth situation that we're seeing and that we will continue to see.
Alright. Thank you that's helpful and for my follow up question, just given all of that backdrop and taken advantage of the balance sheet.
Q4 is your seasonally strong quarter and you built inventory ahead of that but how should we think of gross margin. Just given you know one the product mix and into just the ongoing supply issues.
Gross margin I think you said that should improve.
Six to nine months out, but how about just the short term on your seasonally strong fourth quarter on the equipment side. Thanks.
We believe that the fourth quarter will be helped.
By our volume of hardware, increasing over where it was in this quarter. So as you said, our fourth quarter seasonally strongest we expect hardware sales to be greater than what it was in Q3.
And that helps because then you start to get leverage from our Dominican factory. The more sales that we can push through that factory.
The more leverage we're going to get the more overhead absorption, we're going to get when you get overhead absorption the margins expand yeah, we're being conservative we were not going to return to the glory days of higher much higher margins in Q4, but you saw a 900 basis point improvement.
In Q3 over Q2, and we believe that the margins can continue to improve in Q4 by the time, we get to calendar 'twenty three when our new.
Fly sources are in place.
Then we could start to see the return to the margins that we used to see and we believe it's six to nine months away, maybe maybe a little sooner, but in the meantime, we'll do everything we can to improve margins.
That you've seen now that was 900 basis points better we wanted to do even better than that and we're constantly working to do things better than that working with our engineers, who are on site coming up with new ways to help get lower cost components.
<unk> logistics methods.
Better message to ship less by air more by Ocean. All these things help margins.
Couple of quarters back we did tremendous amount of sales promotion, which affected margins. We haven't had to do that where we're already gaining share we're selling our radio products. As an example to some of the biggest players in the industry.
And we continue to win market share, we don't have to do a big sales promotions. These customers are all coming to us naturally that helps margin and also winning school jobs that helps margins, we announced one today, we had one last quarter. There are other wins, we only in.
Now the big ones, but as you win more and more school jobs that has better gross margins and that helps improve the overall gross margin.
Right.
Congrats to everybody on the execution in the quarter and I'll jump back in the queue.
Thanks, Mike.
Our next question is from Jim Ricchiuti with Needham and company. Please proceed.
Thank you good morning, just.
Related to that last point that you made about the school security order that you highlighted today. This is separate from the one that you mentioned in the last earnings call.
It is it is it's.
It's very similar in a lot of ways. It's a very large school district, just like the last one the last one we got and we announced it with the Q2 earnings release, and we ship that in Q3.
This one we just got and it's different and it's big.
And our expectation is we'll ship a lot of it may be all of it in Q4.
Thank you and I wonder if.
You could talk a little bit about the inventory reserve issue that you reference in the quarterly press release today and you know to what extent that May also result in some higher professional expenses in the near term as you work through that.
Right so in the in the release.
We talked about.
The possibility that.
As a result.
Of.
The filing may be that may be delayed for up to five days.
And it has to do with a reevaluation of our inventory reserve reserve methodology.
And what why is this happening where this is coming from.
Well, we are a large.
A large accelerated filer.
We're a victim of our success so to speak as a result of being a large accelerated filer.
Our audited results get audited by an organization called the P. C E O b.
It's a nonprofit organization.
The Congress establish this years ago, what they do is they audit the auditors.
Our audit was selected for for being audited by Peekaboo I call them Peekaboo, It's P. C E O b.
And what are they what are they looking at everything looked great.
But they're looking at our inventory.
Reserve methodology.
And we've been doing the same methodology for 30 years, we spend a lot of time.
Getting into the details we look at every item very detailed very thorough that's our methodology.
The P C E O be determine that they need something that's not as judgmental.
That.
Because there's a lot of judgment that goes with it is when you look at every last item there judgments in the electronics industry everything is different every item has a story we go through it in detail they wanted a more mechanical.
Methodology.
Coming up with the inventory reserves.
So.
They they did make this determination we have to go along with it.
This is a noncash event, it's going to be very minor.
But we have to reevaluate our methodology and as a result of that we are potentially I'm not sure it's going to happen delay the filing of the Q by a couple of days, but it will have no effect on P&L.
And it'll have very minor effect, if any on the balance sheet.
Got it and last question.
<expletive> you alluded to.
Sell through metrics that were positive I wonder if you could expand on that a little bit.
Or.
Can you be a little clearer on what what the question is sure you you provided in the past.
Some commentary about sell through with some of your peers.
Larger do you know I was I wonder if you could you it sounds like you're seeing pretty good sell through in the core business. So I wonder if you could just comment a little bit more about that specifics.
He large distributors largest shoot distributors, we have our we monitor their sell through.
All doing really really well Kevin do you have the stats in a couple of those guys. Yeah, I I do <expletive> but so our number one distributor our largest distributor.
It was up a 111%.
Sell through stats in Q3 versus Q3, a year ago.
Number two guy was up 74.2%.
Sell through stats Q3 versus Q3, a year ago.
There are other ones I I like to look at the top two I went down to the third Guy he was up 37%.
They're all good there the sell through stats, which is a very good barometer.
Because that means the business is going well and they're going to have to come back and buy more more inventory, which they are doing has been super Super strong.
To have a sell through stat.
That's over 100% increase that's pretty powerful.
What what what you have to understand is that with the amount of production in the amount of shipping we're doing and our our backlog is still huge we have a huge backlog and it keeps growing and it's growing because of the fact that our dealers.
A very very busy there are installing a fire panels fire radios burglar paddles all over the place because people are concerned about what's going on and they need more protection.
So as much as we ship in and then you can see the results the orders keep rolling in and we expect this to continue.
And then we are dealing with a lot of distributors all over the world to get our parts.
And the factory is running six days a week.
And it's a it's a very unusual time.
I have that type of backlog because typically our backlog is a couple of hundred thousand dollars, but we're talking about.
$10 million backlog.
All I can about what is pouring in with the stats that Kevin is talking about we make very very unique product line.
Best in the industry.
The deal is that install or no. It's the best in the industry. It works in all kinds of applications, where the competition doesn't work when you're weak signals or what are the devices put into a lower basement in a commercial building our products work and we make we make sure that they are the best so people.
Recognize that and I can see this continuing to continue to grow and continue to do so were fighting to get out parts. We're reengineering a lot of the products with additional hardware changes and software changes such that we can use other products, which are less costly.
And more available.
And today's marketplace. So that's going to make our gross margins start to get back to where we were pre pre supply chain pre COVID-19 and that's what we're talking about when we're talking about six to nine months out.
It may happen faster, but we're doing all these things the company's management has been through shortages of parts before never as severe as this and we know how to deal with it so.
Specs that our results should be continuing in a strong way.
For the next year and beyond.
And then I have a few other questions, but I'll jump back in the queue and a joint.
Joining later again thank you.
Okay Jim.
Our next question is from Raj Sharma with B Riley. Please proceed.
Hi.
Thank you for taking my questions.
Iran Fascinations, congratulations on solid our equipment margins.
I had I had a couple of questions on <unk>, you mentioned that because of the shortages and radios in London.
Because of the supply chain.
You couldn't meet the growing demand.
That's a number you can quantify the amount of sales alarm sales.
Did you kind of lost or you would have done had you not had these.
So, but yes it would.
I wouldn't say la strategy, it's just backlogged.
Not lost it's deferred.
So <expletive> mentioned before backlog is 10 million.
So that's a good.
Guesstimate.
Of if there was zero supply chain issues.
Dominican facility. They can keep up we could get all the Dominican workers, we want we can run machines longer.
That is no issue, but getting the parts.
Tissue so.
So imagine if the sales in this past quarter.
There's $10 million higher I mean, that's what we'd be potentially looking at.
You know that.
I was just gonna be there Raj.
I will say ship me.
Of this 500 at this in a thousand that we get it out to them.
It comes piling in the next week.
Or even greater quantities and that quantity. So its turning it's just continuing to grow because dealers do appreciate the type of products. We have that are very unique in how they perform and the fact that we're a totally integrated system, where our radios in our control panels.
And our access control all integrated together.
It's a it's a time where people recognize dealers recognize that NAPCO as a one stop shop, we can get everything from that we can get all the technical answers for applications from them, whereas our competition some of them make walks some of them make alarms some of them make radios, but they don't have.
Integrated solution. So the dealers have recognized you know I need less aggravation of my life, Let me use the old NAPCO.
And I have everything answered and it's like when you were when you get something built in your home.
Yep this mechanic blaming that mechanic that the plumbing doesn't work with the same you know and its problems with US you don't have that issue because it's all integrated and designed to work together no mixed brands so while.
While our products do work in an open architecture way we.
We have every product 2000, excuse the dealers need.
So that's why the orders are piling in.
Thank you so that's pretty substantial 10 million.
Equipment revenues would have been higher but 10 Williams and obviously the recurring revenues that follow from that.
Yeah, we wanted to sorry revenue radios being installed even.
During the supply chain. So therefore, something that was of course, the dollar we pay $1.50.
Just two haven't because a radio once installed a control panel with a radio in it and inside of it once installed.
Gifts, you years and years and years of sales. It's the beginning of a sale and you years and years of sales at high margins. So we don't want to have any issues with that that's why we're willing to sacrifice a little bit of our margin. So we can buy parts, even though if they are more expensive.
But that'll come back under control as we say with our reengineering and with our additions we're seeing drive that we have going on.
Got it. Thank you and then on the school projects could you.
Kind of is there a way to estimate the amount of revenues that you would get from this new SKU product.
Correct.
Doors you.
You had you had was the Scoop project done in Q2 was that similar.
And the size.
Just wanted to get a sense of yep.
What is the equivalent revenues a little cutting revenues that would go with it if there are any.
Right. So the size the size of the of the two or the two orders they were similar.
One the one that we just got.
Is larger than the one that we know that we announced last quarter.
I can't give you specifics I, it's a matter of fact, when we first wrote the relief we wanted to put the name of the school district and give you more specifics.
To the size, where they're located all of that.
We couldn't get approval in time for the relief. So we had to make it more generic it's not sometimes the school districts don't want you to.
Now sit at all these guys. They just didn't approve it yet they may approve it and then we'll be able to be more.
Specific going forward.
But you know, there's it's hard to say.
How how many more of these we're going to get we just know there's 131000 K through 12 is out there and there's over 5000 universities and we know.
From experience end up hearing the tragic events that that had that happen every now and then.
With school shootings that most of them don't have equipment in place.
As a matter of fact, the one that we got last quarter.
They they went to a system, where they can block the classrooms from the inside.
And the reason they wanted that is theres. So many times, where the shootings occur where the teacher has to go into the hallway looking for somebody to lock the door.
Cause the doors are locked from the outside that's how these classrooms, where belt and this this particular school district.
Smart enough to make the move so now all of their classrooms can be blocked from the inside most districts. Most K through 12, most universities I know we've been talking about this for years, most still don't have anything.
They just go into Lockdown, they announced were in locked down and it's just words, but there's no equipment.
So this is a big area its hard for us to say Raj how many schools, we're gonna get how many doors, we know that when the school secure security was.
Stronger before the schools started to close because of Covid.
That the locking part of our business.
It was the largest segment of our hardware and it's it's still it's still the largest segment.
But it's not as large as it once was as it comes back it will become we believe.
A more significant portion.
Of overall hardware sales and school security jobs.
Jobs, they get us anywhere from 35, 50% gross margins.
So that's a big difference.
Then say a radio hardware margin, which is much lower but of course, the radios lead to recurring and there will be a time when the school jobs will have recurring revenue as well right now they don't but with air access they might going forward, we expect that they will.
Got it. Thank you. Thank you for asking the questions I'll take it offline.
Thanks Raj.
Our next question is from Jason Smith with Lake Street Capital markets. Please proceed.
Hey, guys. Thanks for taking my questions just wanted to follow up on your commentary on the equipment gross margin. So it's fair to say that you expect kind of equipment gross margin to get back above that 20% range, maybe in the second half of fiscal 'twenty three.
Okay.
Well.
We are our equipment gross margins were in the thirties.
That's where they were before any of this a supply chain stuff Covid started.
Our hardware margins on a weak quarter would be high twenties on a normal quarter would be a low to mid thirties and on a strong hardware quarter would be pushing 40%.
Big difference, obviously from where we are now.
But our goal is to get back to those levels and beyond because as the hardware sales become a larger and larger.
Then the margins will expand more.
So pre Covid days.
We were having a 20 million dollar hardware quarters.
And we just had and a Q3.
Hardware quarter that was over $23 million.
We expect going forward.
Our goal if you remember our goal our goal is to get to $150 million of hardware.
By 2026, that's a 37 and a half million dollar on average hardware quarter at.
At those levels, our margins will be higher than they were pre COVID-19, because that's a big difference 37, and a half million.
On average versus a 20 million dollar hardware quarter.
So.
We just did 17% we think we'll do better in Q4, we'll get some benefit from <unk>.
Having higher sales levels, because it's a Q4.
But the bigger picture is.
Is to get back to restore to the days of pre.
Pre COVID-19 proof supply chain and that would put us in the thirties and it'll take it'll take time, but we see six to nine months out we should start to see a bigger difference where.
Very happy with the 900 basis point improvement, but obviously, 17% is.
Good compared to last quarter, but it's not good enough. So we want a lot more than that.
Okay. That's really helpful. And then just as a follow up looking at the school security market. Obviously, there is Wednesday, you can't announce them, but to most recent wins seem to be pretty sizeable but in aggregate are you seeing the deal size in that market steadily increase.
What we're seeing is a lot of deals a lot of jobs that.
Been on hold now starting to come off of hold.
The jobs come in all sizes and shapes so.
When you win a school district job.
This one was in the one last quarter that we talked about those are big jobs. When you went to University.
Those are big.
Okay. So that they have lots of classrooms and lots of dorm rooms, those are big jobs, we're seeing.
That's starting to come back we only announced the ones. We could talk about the ones that are sizable there'll be more that we're gonna be announcing.
But theres a lot of wins that you know, they're smaller ones it could be a small school district it could be.
A small university they come in all sizes and shapes, but the key point I want to make is most don't have anything done which means the opportunity is still there it's huge.
And I believe will start to pick up as long as Covid doesn't get in our way again.
And there's no issues like that this market will come back to where it was.
Okay perfect. Thanks, a lot guys alright, Jason take care.
Our next question is from Brian Wright and bear with Imperial capital. Please proceed.
Great. Thank you very much.
In terms of backlog levels, you talked about great visibility for how long do you have that visibility is are your backlogs you know three months six months two years I'm, just trying to get a level and how far out visibility you can see.
Our backlog is any orders that had been placed.
So.
In most cases these.
These are or these are orders there.
At our current shipments if you can if you can.
If you can do it.
In a few cases, you know, we we talked about $10 million before as a number that.
Not all 10 million is current backlog.
A portion of it if I had to say.
Maybe 10% maybe 15%.
Is over time not all at once most of it all at once which means if you could ship at all if you had the product you could make that sale now.
In terms of visibility.
That backlog is we see it it's based on orders that are placed.
We're talking about you know backlog of potential orders that's different so if we're talking about what's the potential backlog for school jobs.
We know about a lot of them.
But we don't know when they're going to hit so like for example, the one that hit that we announced today, we've known about that one and now they've finally pulled the trigger.
And some of our last quarter.
But the backlog that we stated that's real those are orders that had been placed.
And there is an attorney.
So the sell through the Kevin was talking about before.
There are over 100% up so are the backlog is such that it's being eliminated and then.
Refills again, so you ship 500000 to particular distributor.
Next week another order comes in for a million dollars.
400000, and next door and it comes in for 600000, the following week, so it's turning backlog.
And that means that there's as we know there's millions of millions of buildings and schools in need protection.
And the other dealers are out working very hard doing that and we have a product so they're getting it from us plus we give them all the technical support and sales support and if you do a lot of seminars with them. So they understand the advantages of our product and that whole thing is worth.
King.
So.
The redesign of some of the things that we make which are big sellers.
We're doing it with a different type of component than we've been using for years, because it's available and because it does exactly the same job and it's less expensive. So we'll be able to get volume of those.
So we can get our backlog down to.
A couple of hundred thousand which should give a big shot in the arm to our.
Our sales and our profitability as we amortize the cost of our Dominican operation over more and more volume.
So we will be getting back to the type of numbers that Kevin was relating to you a couple of minutes ago.
Right and just last question real quick our long term guidance on change you don't see any issue at all with your kind of five year goals.
I would say, we don't we don't call. It guidance, we call. It goes right. What we believe is we might get there sooner.
It that's that's how we're feeling so we said by 2026.
It might very well be sooner.
Thank you.
Hi, Brian .
Yeah, we had never a question and answer session I would like to turn the conference back over to Richard for closing comments.
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.
The information we thank you for your interest and support and we look forward to speaking to you all again in a few months to discuss NAPCO fiscal Q.
<unk> two <unk>.
And full year 2022 results Bye bye and we wish you the best take care.
This does conclude today's conference you may disconnect your lines at this time and thank you for your participation.
[noise].
Yeah.
Yeah.
Yeah.
Okay.
Yeah.
Hum.
Yeah.
Okay.
Yeah.
Yeah.
Okay.
Yes.
Yeah.
Yeah.
Yeah.
Okay.
Yeah.
Hum.
Okay.
Yeah.
Hum.
Yeah.