Q4 2022 NAPCO Security Technologies Inc Earnings Call
[music].
Greetings and welcome to NAPCO security technologies fiscal fourth quarter and full year 2022 earnings 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 on your telephone keypad. As a reminder, this conference is being recorded I would now like to turn the conference over to your host Mr. Patrick Mckillop, Vice President of Investor Relations. Thank you you may begin.
Thank you.
I'm, Patrick Mckillop, Vice President of Investor Relations for NAPCO.
Charity.
For joining us for today's conference call to discuss our financial results for our fiscal fourth quarter and fiscal 2020.
The two year.
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.
Website W. W. W Dot NAPCO security Dot com.
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 statement.
This presentation contains forward looking statements that are based on current expectations estimates forecast 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 growth drivers of the company's business.
Such a 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 and expected annual run rate for SaaS recurring monthly revenue.
We're looking statements involve risks and uncertainties that may cause actual results to differ materially from those contained in the forward looking statements.
These factors include but are not.
We're not limited to such risk factors as described in our SEC filings.
Including our annual report 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.
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.
You should not place undue reliance on these forward looking statements.
All information provided in today's press release and this call.
Is that as of today's date, unless otherwise stated and we undertake no duty to update such information, except as required under applicable law.
Well, we're trying to call over to <expletive> in a moment, but before I do I just wanted to mention we are actively working on the IR schedule for this fall and hope to see you all soon.
Investor outreach is crucial 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 Soloway, President and CEO of NAPCO Security Technologies, Inc.
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 very pleased to report our fiscal 2022 record sales.
$143 6 million and record profits of $19 6 million.
Recurring revenue continue to grow at a very strong rate and the annual run rate is now approximately 54 million.
On July 2022 recurring revenues.
Our balance sheet remains strong with our cash balances in excess of 46 million and we have no debt.
We continue to focus on capitalizing on key industry trends, which include wireless fire and intrusion alarms School security solutions, plus enterprise access control systems and architectural locking products.
The management team here at NAPCO continues to focus on the key metrics of growth profits and returns on equity and controlling costs.
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.
Before I go into greater detail I'll now turn the call over to our CFO Kevin Michelle.
We'll provide an overview of our fiscal fourth quarter and fiscal year results and then I'll be back with more on our strategies and outlook Kevin.
Thank you <expletive> and good morning, everybody.
Net sales for the quarter increased 22%.
Quarterly record of $42 million as.
As compared to $35 $4 million for the same period, one year ago.
And net sales for the fiscal year ended June 32022 increased 26%.
To a record $143 $6 million as compared to $114 million.
The same period a year ago.
Recurring monthly revenue continued its strong growth, increasing 33% for Q4 to $12 $7 million.
Compared to $9 $5 million for the same period last year, and increasing 36% for the fiscal year to $46 million as compared to $33 $9 million.
Last year.
Recurring service revenues now have a prospective annual run rate of approximately $54 million based on July 2022 recurring service revenues.
In addition, our equipment sales in Q4 increased 18% to $35 million as compared to $25 $9 million for Q4 last year.
And for fiscal 2022 equipment sales increased 22% to $97.6 million as compared to $81 million last year.
This strong growth of our recurring.
Revenue is primarily attributable to the continued strength of our Starlink cellular radio products drip.
Driven by increases in the commercial intrusion and fire alarm business.
And the increase in equipment sales for the quarter and the fiscal year were related to increases in all segments of our business NAPCO intrusion products alarm lock and marks brand door locking products and continental access products.
Gross profit for the three months ended June 32022.
Increased 22% to $19 $2 million with a gross margin of 44% as compared to $15 $7 million with a gross margin of 44% for the same period a year ago.
Gross profit for the fiscal year ended June 32022.
Increased 17% to $59 $2 million with a gross margin of 41% as compared to $57 million with a gross margin of 45% for the same period a year ago.
Gross profit for recurring revenue for the fourth quarter increased 34% to $11.1 million with a very strong 87% gross margin.
As compared to $8 $3 million with a gross margin of 87% for the same period last year.
Gross profit for recurring revenue for fiscal 2022 increased 38% to $40 million with a gross margin of 87% as compared to $29 million with a gross margin of 86% last year 100 basis point improvement.
Gross profit for equipment sales for Q4.
Increased 9% to $8 $1 million with a gross margin of 27%.
As compared to seven 5 million with a gross margin of 29% last year.
The equipment gross margin of 27% and 800 basis point.
Improvement over the equipment margin last quarter Q3.
For fiscal 2022 gross profit decreased 12% to $19.1 million with a gross margin of 20% as compared to $21 $7 million with a gross margin of 27 last year.
The 800 basis point increase in equipment gross margins for the quarter as compared to the prior quarter was primarily driven by higher sales, which leads to more overhead cost absorption.
Dominican Republic manufacturing facility.
Well as improved product mix more higher margin equipment sales.
And by strategic price increases, which we've implemented on select products.
The decrease in gross margins for equipment sales for the quarter and fiscal year as compared to last year were primarily due to the continued inflation of freight and component part costs relating to the current worldwide supply chain problems as.
As well as increased sales of our Starlink radios, which have lower margins, but results in the more profitable recurring revenues.
Research and development costs for the quarter increased 8% to $2 $1 million or 5% of sales as.
As compared to $9 million or 5% of sales for the same quarter, a year ago research and development costs for fiscal year ended June 32022.
Increased 5% to $8 million or 6% of sales as compared to $7 $6 billion or 7% of sales for the same period last year.
The increase for the quarter and the full fiscal year was primarily due to salary increases and additional staff. The decrease in R&D as a percentage of net sales was due to the record increases in net sales.
Selling general and administrative expenses for the quarter increased 24% to $8 $9 million or 21% of net sales as compared to $7 $2 million or 20% of sales for the same period last year.
Selling general and administrative expenses for the fiscal year ended June 30, 2022.
Increased 31% to $32.9 billion or two 3% of net sales as compared to $25 $2 million or 22% of net sales for the same period last year.
The increase in selling general and administrative expenses for both the fourth quarter and the full fiscal year.
It was due primarily to increased sales incentive compensation relating to the aforementioned increase in net sales as.
As well as increases in trade show stock.
Stock based compensation, which occurred in Q2 and legal expenses.
Operating income for the quarter increased 25% to $8 $2 million as compared to $6 $6 million for the same period last year.
Operating income for the full fiscal year ended June 32022 increased 2% to $18 $2 million as compared to 17.9 millions of hours for the same period last year.
The companys provision for income taxes for the three months ended June 32020.
Decreased 56% to $476000.
With an effective tax rate of 6% as compared to $1.1 million with an effective tax rate of 16% for the same period last year.
For fiscal 2022 the provision for income taxes decreased 11% to $2 $2 million with an effective tax rate of 10% as compared to $2 $5 million with an effective tax rate of 14% last year.
The decrease in the effective tax rate for fiscal 2022 was primarily due to non taxable income of $3 $9 million, which occurred in Q2 from the extinguishment of debt.
Net income for the quarter increased 36% to a fourth quarter record $7 $5 million or 20 cents per diluted share.
As compared to $5 $5 million or 15 cents per diluted share for the same period last year.
Net income for the fiscal year ended June 32022 increased 27% to a record $19 $6 million or <unk> 53 cents per diluted share.
As compared to $15 $4 million or 42 cents per diluted share in the same period last year.
Adjusted EBITDA for the quarter increased 29% to a fourth quarter record $9 $3 million or 25 cents per diluted share as compared to $7 $2 million or 20 cents per diluted share for the same periods last year.
Adjusted EBITDA for the fiscal year ended June 32022 increased 13% to a record $22 $6 million or <unk> 61 cents per diluted share as compared to $21 million or 55 cents per diluted share in the same period last year.
The EBITDA margin for the fourth quarter of fiscal 2022 was 21% and.
And for the full fiscal year was 16%.
Moving onto the balance sheet.
At June 32022, the company had $46 $8 million in cash cash equivalents in marketable securities as compared to $40 $2 million as of June 32021.
Working capital defined as current assets less current liabilities.
With $93 $1 million at June 32022, as compared with working capital of $75 $4 million at June 32021.
The current ratio defined as current assets divided by current liabilities was 4.5 to one at June 32022.
And four 7% to one at June 30, 2021.
Cash provided by operating activities for fiscal 2022, with $8 $3 million as compared to $23 million for the same period last year.
This decrease was primarily due to inventories increasing in fiscal 2022 by $19 $3 million as compared to a decrease of $8 $8 million in the same period a year ago the increase.
In inventories is primarily the result of the continued increase in component unit cost and freight as well as increased volume of purchases of certain components that have become difficult to source during the worldwide supply chain problems.
Our inventory grew in fiscal 2022. This has also led to our strong sales growth as we continue to invest resources to maximize the production and sales of our Starlink cellular radios, which resulted in a highly profitable and continuous recurring revenue.
Capex for the quarter was 293000.
441000 in the year ago period, and Capex for the fiscal year 2022 was 1.482 million.
$1 million and $7000 in the year ago period.
And we have no debt.
That concludes my formal remarks, and I would now like to return the call back to <expletive>.
Kevin Thank you.
Fiscal 2022 with the sales record breaker.
Again, our fourth quarter was the highest sales for any quarter in the company's history.
We are pleased that we were able to beat street consensus on revenue equipped.
Equipment gross margin E P S.
Income.
And adjusted EBITDA metrics.
The quarter also marked our seventh consecutive quarter of 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.
Today's news headlines were all about the continued interest rate hikes and when the U S might fall into a recession.
Would like to remind you that our company is recession resistant.
80% of our business is commercial and one of our primary growth drivers the commercial fire alarm business is a mandatory.
Non discretionary items.
Commercial buildings must have maintained a fire alarm system in order to receive a certificate of occupancy.
Given the high probability profitability and the essential nature of this business.
We focus on this as a key area of our resources.
The recurring revenue annual run rate is now approximately $54 million as of July 2022.
Our starlink radios continue to have strong sales and we are optimistic that we could reach our previously mentioned goal of $150 million and reoccurring revenue earlier than 2026.
The three G sunset at the end of calendar 2022 is fast approaching.
And dealers are racing to complete commercial fire alarm upgrades.
We believe that we are in a strong position to benefit from this as well as the continued need to upgrade legacy systems from old fashioned copper phone lines.
Our starlink radios have the widest coverage with both AT&T and Verizon service and rich feature sets, which are dealers love it.
There are still millions of buildings that need to be upgraded from copper or replaced and older three G cellular radio system.
The constraints of the supply chain and continue to be challenging, but clearly our strategy to temporarily sacrifice hardware gross margin.
Purchasing components at higher prices. So we can continue to manufacture radios switch.
Which lead to continued high margin recurring revenues for each radio installed and operating is working.
Yes.
We are pleased that the equipment margins improved by 800 basis points.
27% in this quarter versus Q3, and we continue to aggressively manage supply chain issues by developing alternative supply sources and delivery methods.
Well also reengineering products when necessary.
We believe that in the next six to nine months new suppliers sources. We are developing will begin to reinvigorate our equipment margins and bring them to even higher levels than we have generated.
The backlog for the company remains at historic highs.
And could remain high for the remainder of 2022 due to the continued supply chain issues.
We remain encouraged by the continued strength of the sell through of statistics, we see from several of our largest distributors.
And with Activations for our Starlink radios remaining strong we believe that we are taking market share from our competition.
Based on this and customers telling us that.
They can't get product from the competition.
Our fully integrated technologies for the school security market continues to remain a top priority for NAPCO and school security projects continue to ramp up.
Ooh administrators and started to turn their attention back to the need for security solutions as more incidents has happened.
Our fully integrated solutions for the school security market generate healthy margins for our business and now more than ever we are laser focused on further penetration of the school security market, which.
Which is comprised of approximately 130000, K through 12, and 5000 colleges and universities across the country.
The availability of grants to schools the fun the security projects and has never been better.
As an example, we recently saw the Governor Mike Dewine of Ohio announced that 1183 schools in 81 counties will receive nearly 47 million in grant funding as part of this Ohio K through 12 School safety Grant Pro.
Graham.
Many other states continue the past funding initiatives as well.
Our strategy is to offer seamless security solutions, which allow our dealers and us generate recurring revenue streams.
We are now able to generate recurring revenue from all divisions of the company with the latest product addition, air access which will generate recurring revenue from a locking and access control divisions, which has never been done before.
Air Axis is the industry's first cellular based access control system, which we believe is a billion dollar market opportunity.
The benefits of air access to include.
No need upfront investment inexpensive hardware.
No need to interfere.
With the corporate I T networks, which can be a major problem for installers.
No onsite database backups or software updates.
Okay.
I think he cut out I think our speaker disconnected.
Thank you.
We'll have him back on the line momentarily, we're almost complete so.
Let me get let me one second.
Yeah.
Patrick can you paying him because I do not have the number for him his number came up restricted.
Oh sure real quick thank you.
And to the audience, we thank you for your patience and understanding.
Okay.
[noise].
Okay, we do have our speaker back with us and we thank you for your patience and understanding.
Thank you.
The recurring revenue annual run rate is now approximately $54 million as of July 2022.
Our starlink radios continued its strong sales and we are optimistic that we can reach our previously mentioned goal of $150 million.
Clearing revenue earlier than 2026.
The three Chi Sunset at the end of calendar 2022.
Fast approaching and dealers are racing to complete commercial fire alarm upgrades.
We believe we are.
We're in a strong position to benefit from this as well as the continued need to upgrade legacy systems from old Spansion copper phone lines.
Our starlink radios had the widest coverage with both AT&T and Verizon service and.
And feature rich sets of.
Functionality that our dealers luck.
There are still millions of buildings that need to either upgrade from copper or replacing older through G cellular radio.
The constraints in the supply chain continue to be challenging, but clearly a strategy to temporarily sacrifice all idea of gross margin.
Purchasing components at higher prices. So that we can continue to manufacture raytheon's, which lead to continued high margin recurring revenue each radio installed and operating is working well.
We are pleased that the equipment margins improved by 800 basis points to 27% in this quarter versus Q3, and we continue to aggressively manage supply chain issues by developing alternative supply sources and delivery investments while also reengineering.
That's really necessary.
We believe that next six to nine months new suppliers sources.
We will begin to reinvigorate our equipment margins and bring them to even higher levels than what we had previously generated.
The backlog for the company remains at historically high levels and could remain high for the remainder of 2022 due to the continued supply chain issues.
We remain encouraged by the continued strength of the Shelton statistics, we are seeing from several of our largest distributors.
And with activation in store I saw like radios remaining strong.
Believe that we are taking market share from our competition.
Based on this and customers telling us that they can't get product from the competition.
Our fully integrated technologies for the school security market continues to remain top priority for NAPCO and school security projects continue to ramp up.
School administrators and started turning their attention back to the need for security solutions as more incident happened.
Our fully integrated solutions to the school security.
Generate healthy margins for our business and now more than ever we are laser focused on further penetration of the school security market, which.
Which is composed of approximately 130000, K through 12, and 5000 colleges and universities across the country.
The availability of grants to schools to fund these security projects has never been better.
As an example, we recently saw the Governor Mike Dewine of Ohio announced.
<unk> 1183 schools in 81 counties will receive nearly 47 million in grant funding as part of his Ohio K through 12 schools JC Grant program.
Many other states continue to past funding initiatives as well.
Our strategy is to offer seamless security solutions, which allow for our dnas add ons to generate recurring revenue streams.
We are now able to generate recurring revenue from all divisions of the company.
The latest product addition, air access, which will generate recurring revenue from locking and access control, which has never been done before.
Air access is the industry's first cellular based access control system, which we believe is a billion dollar market opportunity.
The benefits of air acts as a green no.
No need for upfront investment and expensive hard winter no need to interfere with corporate IP networks, which can be a major problem for install news and no onsite database backups.
Oh software updates.
Our R&D team remains hard at work developing even more products for the future.
<unk> will help grow our recurring revenue business.
We have experienced tremendous success over the last five years growing our recurring revenue and believe the best is yet to come.
We will now begin our Q&A session portion of this call in a moment.
Our fiscal 2022.
Right.
<unk> supply chain supply chain challenges.
As a record breaking success of one where sales and profitability.
We have a strong balance sheet no debt and have made the business decision to use the cash we have.
Saying more on raw materials and logistics.
The minimum salary.
To ensure that we maintain our sales and profitability growth trends.
Our seasoned management team has experienced.
Previous supply chain disruptions, which is helping us navigate the current environment.
You'll know in our fiscal 2023 and believe the best is yet to come.
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 Rehabs.
Our formal remarks are now concluded we would now like to open the call for the Q&A session.
Operator. Please proceed thank you.
At this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad and confirmation tell them indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Our first question comes from Jim Ricchiuti with Needham <unk> Company. Please proceed with your question.
Hi, Thank you.
Question, just with respect to the growth the 18% growth that you saw on the equipment.
Business, how long how much of that would you say.
Kevin maybe you can answer this.
<unk> has always.
It was price driven because you did benefit from clearly from some price increases that you implemented.
Alright, so we added a.
Ah.
Price increase.
Of somewhere and then I really don't want to disclose the amount, but it was on selective products.
And if I was going to say how much of the 18% it contributed.
I would say.
Three or four points maybe at best.
Got it and.
Follow up question, just with respect to the equipment business.
The strength you saw in gross margins, obviously, there are puts and takes here a high volume quarter.
But I'm wondering.
What are you seeing in terms of.
Potentially a leveling off of component and expediting costs and is there any concern on your part or should we be mindful of any impact.
Impact from you being out in the market procuring components at higher prices that are obviously in your inventories as we think about gross margins on a go forward basis.
Okay.
Supply chain.
Crisis is not going away yet.
It's going to probably last.
Through the end of the calendar year maybe.
Maybe into 2023.
I'm not counting on it ending anytime soon I hope it does.
We've seen some improvement in logistics.
Some of the freight costs have come down slightly.
I haven't seen the improvements in component costs, although it's hard to get parts.
So that's why we continue to do everything we can to get them.
I'm not counting on the Texas instruments of the world to help us unless I could sit around and wait until 2024, which I won't.
So we're making our own alternative.
The supplier arrangements, where we have alternatives another six to nine months.
And we'll start seeing the benefit of that.
That will help the margins a lot.
It will also help us be even stronger than we were.
Before the supply chain because now we have much higher volumes that we put through our Dominican facility.
So you wind up getting that overhead absorption and gross margin expansion.
There is the higher inventory costs.
And that will affect the margins going forward.
That goes the other way.
But all in all given the volume that we expect to see given the dramatic improvement in costs.
That we expect to see when we have these alternative sources in place.
And given that we did another price increase.
This past July .
And we might do another one EBIT after that.
The margins will be much healthier.
In 2023 calendar 2023.
Got it and just <expletive> alluded to.
Sell through among your larger channel partners. So I wonder if you could just provide a little bit more color on that and I'll jump back in the queue. Thank you.
So we've seen we.
We keep we have very good stats on all our key distributors and.
And we watch what the sell through stats are these are these are there sales too.
Their customers.
And they remain very strong through the end of it for the end of fiscal year through June .
They remain very strong.
Year over year.
For all the divisions not just the NAPCO division.
But for alarm lock in for Mark.
That's to US a sign of the strength of the business.
We can sell all we wanted to the distributors, but if they don't sell it that doesn't do us any good. The fact that there is their sell through stats are strong.
That leads us to believe strength going forward.
And we do have as <expletive> mentioned in his remarks.
We do have a baked.
<unk> backlog as of June 30.
The $10 million range.
And that backlog.
Is.
Something the demand is huge.
We can't keep up with it Dominican factory could keep up with it.
Because we have the ability to.
To run $300 million out of that facility are three shifts.
But we can't keep up with it because we just can't get enough components to.
To keep up with the demand, although we're doing everything we can hence the larger inventory, hence the dramatic hardware grow.
<unk>.
Of 18% for the quarter and 22% for the year.
Got it thank you.
Yeah.
Our next question is from Jason Schmidt with Lake Street. Please proceed with your question.
Hey, guys. Thanks for taking my questions just regarding the backlog number.
Noted that it remains at record levels. So I assume it's kind of grown from that $10 million level, you talked about last quarter.
I would say Jason it's similar.
Similar amount to the $10 million level that we mentioned last quarter and then obviously this is as of June 30.
So even though we were able to ship.
Hardware sales of $30 million.
And we started the.
And we started the quarter with about $10 million and.
And backlog.
We still have that test. So that gives you an idea of the of the kind of demand. If we were able to ship every nickel out of here.
It would've been a 40 million dollar hardware quarter, which would've been amazing so demand is still strong for our products.
We're putting very good numbers on the board and we're doing everything we can to lower that backlog in the coming months.
All the all the products that we make for each of the divisions are all big demand by the dealers, it's a lot of need for security.
In commercial buildings schools and.
Uh huh.
A fire alarm system. So all the products are a big demand and we are shipping the products out as quickly as we can get them from one factory.
And.
The orders keep coming in which is a very very good thing.
And we spend a lot of time and engineering with.
Redoing some of our circuitry. So we could use components that we can buy.
A wonderful thing to have an integrated engineering department in the company and integrated manufacturing.
The vision of the company because it makes you much faster in your fleet.
If we can't get a particular part we will find another part redo our circuitry and usually you have a partner in the factory.
<unk> with it.
So we're doing a lot of that now.
As we talked about.
The hardest part.
Parts to get our micro processes of which we're re developing all new sources of microprocessors at six to nine months from now those processes will be our new brands and those new brands will help us.
Reduce our backlog so that we're shipping even more because as we ship more orders we get more orders.
It's it's.
The physician, we'd like to be in.
Okay. That's helpful and I know you guys don't provide guidance, but could you just talk about how order patterns have been for these first two months of the September quarter.
You know I don't like to talk too much about the current quarter that we're in but I will say that our.
First quarter, which used to be.
Yeah.
You know very very low as the summer months we.
We don't have that pattern anymore for example school security jobs.
You wouldn't see any.
When the kids were in school.
Those patterns have changed you'll see you could see school security orders any time of year nobody is waiting around for even for the kids to be out of school.
Can't wait.
And it really goes the same with other parts of the business.
People are doing what they can get their hands on product just like we are to get our hands on the hard to get components.
So it doesn't matter what time of year. It is.
Uh huh.
The business remains strong.
Okay Perfect and then just last one for me and I'll jump back into queue on the SG&A line, you mentioned kind of variable comp Tradeshows just given the strength in June would we expect SG&A to moderate a bit here in the September quarter.
We would Jason you know or.
A large part of the increase.
Of the SG&A.
It was commission driven.
So.
With hardware sales being up 18% for the quarter.
Recurring revenue being up 33% fitness for the quarter.
Hardware sales being up 22% for the full year and recurring up 36%.
Full year.
There was a lot of rewards that went to our sales team and rightfully so.
And you saw that in the Q4 numbers.
And so that will moderate somewhat in Q1.
That would be probably the biggest thing that will change.
Okay. Thanks, a lot guys. Thanks, Jason Thank you.
Our next question comes from Mike Walkley with Canaccord Genuity. Please proceed with your question.
Hey, guys. Good morning, it's Daniel on for Brian . Thanks for taking my questions. Congrats on the strong results.
Can you just talk about how your vendors are dealing with some of the price pressures.
Maybe how we should think about this impacting gross margins moving forward.
Our vendors.
By doing all they can to.
To keep up with the demand that that we're giving them.
But it depends on who the vendor is so in some cases.
I mentioned, Texas instruments earlier.
You know they are doing things to help.
And help them beyond the way by 2024.
Which is not good enough for us.
Other vendors, what Theyre doing is theyre trying to shift.
The <unk>.
Product to companies like us who have tremendous demand.
Our essential business, where we're dealing with fire in many cases.
We are deemed an essential business so they could shift.
The demand to us over other companies, who maybe don't have the backlog that we do are not or are not considered essential.
Then they will shift it.
We work these vendors day in and day out either.
Specifically.
Calling them letting them know what our needs are you have to be the squeaky wheel, we're still in a crisis.
We believe it has helped.
Because we believe that we've been able to deliver.
Product get our hands on these hard to get components better.
Than our competition.
And the reason for that is one.
We've been through these type of crises before maybe not exactly like this but we've been through this before we have the experience.
And we're relentless in trying to get what we need so.
This will go on for a few.
More months.
But we're not sitting back.
We are developing alternatives that we can get our hands on that is better priced.
And once that happens.
Say six months out from now.
You'll see a big change in the margins the pricing.
We'll be more normalized.
Great and a quick follow up could you provide us with some details on how your higher margin projects, such as schools and locking or Jordan.
For once.
<unk> came back to school.
Last September .
You started to see.
We started to see the horrific events that we were used to when the kids who are in school before that the shootings. It seemed like there was one every other week.
And when that started the activity for school security.
Started to increase.
And.
We announced a few wins recently.
We announced a win with Pepperdine University, who we've done five other jobs for.
We announced a couple of wins two very large school districts.
Districts have over 700 schools big districts big projects over time.
They don't buy all the equipment they need for every school all at once but over time.
They stay by the equipment they need there's a tremendous.
There's a tremendous demand that I believe is going to happen soon because the schools don't want to wait anymore.
The.
The event in Texas.
With several elementary.
Elementary School kids were killed.
The schools don't want to be the next one.
So I think that maybe for many of these schools will be the last straw.
Certainly money available.
<expletive> mentioned in his remarks.
Eight of Ohio money available for the K through 12.
There are the other states same thing has happened.
The colleges and universities have big endowments.
Money is not an issue.
Getting it done is the issue.
Getting to the point, where the classrooms are locked from the inside.
And you don't have to run into the hallway and get somebody to lock it from the outside.
That's the change that's coming.
So we've seen a lot of activity.
And we think this is a big area that will bode very well for our business.
In the upcoming months.
Great. Thanks, so much further details.
Youre welcome.
Our next question comes from Brian Ruttenberg with Imperial Capital. Please proceed with your question.
Great. Thank you very much first of all on cash generation.
In fiscal 'twenty three can you talk a little bit about what you anticipate I assume that inventory levels won't be at.
Increasing at the level that they have historically.
And then in terms of cash generation also talk about Capex about true cash to the balance sheet.
So Brian .
We expect.
That inventory levels will come down.
They're at very high levels now.
Part of the reason why they are at very high levels now Besides the fact that.
Where.
Buying a lot of those hard to get components.
Which we're happy that we're doing because it leads to the recurring revenue. Besides that we're buying a lot of that is.
There's two other factors that are that are driving the inventory up.
One is where we're on the road of taking an alternate path.
To get those changed components of these alternative sources.
We're buying basically two sets of parts.
And two sets of boards.
We're transitioning into a new way of operating.
With the radios, so it's almost like we're doubling our inventory level.
That will do two things it will help us.
In our cost structure going forward, but.
It'll help us meet the demand of the product. So we don't expect that backlog.
To be $10 million.
For too much longer.
If that backlog drops to just a couple of million.
That's a big change in inventory.
And also remember the inventory has higher overhead costs and it as.
As well.
And when we sell those products that inventory is going to drop.
Luckily we have the cash to do this you know.
Our cash.
At the end of June was about $46 million, if the inventory didn't grow the way it data would have been $66 million. So.
We have the strong balance sheet to do whatever it takes.
To keep the keep the lines moving to keep the radios out there moving to keep their recurring moving so we will do what it takes I.
I expect the inventory to drop if it doesn't happen right away, but the sales remained strong and the recurring keeps going which is what we expect to happen then so be it.
Our capex.
We don't have any big projects, we usually spend.
1 million to $2 million a year on Capex.
The only thing that would dramatically change that.
Is.
And we get to the point, where our building in the Dominican Republic, which can handle 300 million annual revenue on three shifts when.
When we outgrow that.
And I need a second building.
The land space.
And that would be a very high class problem and invest that other $5 million or so.
Put up a second building to do another 300 million.
And just to clarify that point that 300 million.
Alright.
Is that correct like equipment.
Perfect.
Thank you.
Got it.
Our next question is from Raj Sharma with B Riley. Please proceed with your question.
Hi, Thank you guys.
Excellent results I congratulate congratulate you.
I just have a question.
A couple of questions, though is it is it correct.
Assume that your revenues would've been higher by attending.
$10 million.
Over a few quarters each you didn't have supply chain issues.
And in this rising the inventory costs are the chief cause of the operating cash flow impact.
And usually these higher inventory costs will be in fact, youre youll recruitment margins in fiscal 'twenty, three or do you expect.
The gross margins just kind of hanging in if not improve.
Because of the higher equivalent revenues.
Okay. So raj so on the first part.
With a 10, if we didn't have a $10 million backlog, yes, our sales would have been.
Higher by $10 million, we did start the quarter with a $10 million backlog also and like 10 million at the end.
So.
Any way you want to look at it our sales would have been higher.
Typically historically, we don't have a backlog.
Our backlog is usually.
A few hundred thousand dollars, let's say up to $1 million at most in the in the norm.
So this was 10 times that yes, the sales would have been higher.
Will this keep up.
Hard to say I think it will I think a lot of this is driven by.
Thus taking market share from the competition.
We haven't really talked about it on this call but.
As an example, with our radio business, we do business now with a lot of big players the ABTS of the world.
Johnson controls Siemens.
These are big names.
They were just getting started with them.
Once they really start to roll.
Why wouldn't that demand keep up and then so we have a very very powerful offering.
So we expect demand to continue.
And as far as the.
Inventory and the cash flow.
The inventory the inventory once that once that inventory, that's higher cost is because of overhead and higher pricing.
Once that sells.
Those are higher costs and that will affect our gross margin.
On the other side we.
We took a price increase in April we took another one in July .
We're going to go to alternative sources that are going to be much much lower cost at <unk>.
We've been spending now.
We think in the end when it all shakes out the higher inventory cost, but these other changes and improvements and a better mix also more school projects, which helped the mix all the divisions being up which has better margins than the radios.
We think we're winning when you push it all together the overall margins will be better.
Better than what they were pre Covid days.
Our expectation.
And cash flows will improve inventories will come down, but again, we have the strength, we have the balance sheet to handle whatever it's going to come our way. The last time, we were in a big recession.
Back in OE.
He had no cash.
And lots of that.
It's a much different picture now to handle whatever comes our way.
Having almost $50 million in cash and no debt.
Perfect.
And then then on the school wins.
Are these existing customers or the new customers and also could you comment and maybe give some color on track.
Traction for air access and how do you see that.
Playing out in the next few quarters.
The school wins Pepperdine was one of them.
That was probably the fifth or sixth time, we've had a job through that with them.
They are a customer for life.
And you know when we started with them it's.
Started with they wanted to do the dorms.
And then they wanted it they came back.
In time classrooms, and they came back a third time.
And they wanted to do the admin offices and they came back a fourth time.
They wanted to do off site campuses, because they're they have campuses all over the place.
And now they've come back they put up additional dorms athletic buildings. So we just keep.
We'll keep supplying them as their needs.
Keep coming about the <unk>.
Are there too.
We're somewhat new there were big school districts.
And in the country, we cant really talk about who they were it's confidential, but they're big.
And they have over 700 schools in the district, each one of them.
Our expectation is we're.
We're going to see more of this.
And the the.
The demand is going to pick up we believe.
It's hard for us to get asked this all the time I'll just how much is your school business how much is it.
And we can't tell.
Because a lot of times the schools will buy directly.
From the integrator, who will buy directly from the distributor and we're not even involved if it is large we typically are involved but a lot of times, we're not so we really don't know.
But when we see the locking and the access business go up because it affects both of those.
We know that there's a lot of activity.
Schools, so that's happening.
As far as air access that's in the early stages.
You know it was introduced recently, we believe takes.
18 months before I'd say, a real contributor right now we're not getting any recurring revenue from the schools that would be one area, where I would expect eventually see something.
So we're very encouraged.
Everybody seems to be very excited about it the locking guys and the access guys have never gotten recurring revenue before this is going to give it to them, we're going to get it as well.
Just that one is going to take a little time.
We don't even include whatever contribution air access is going to have.
We don't include it.
When we project out to 2026.
I'd say that our recurring revenue will be $150 million.
Or sooner than 2026, we're not even counting that.
But we do still have high expectations for that product line.
Great. Thank you. Thank you that was splendid. Thank you for the excellent color. Thank you.
My question was offline. Thanks. Thanks.
Right.
We have reached the end of the question and answer session I would now like to turn the call back over to Richard <unk> for closing comments.
Thank you everyone for participating in today's conference call.
Always should you have any further questions. Please feel free to call, Patrick Kevin or myself and further information.
Thank you for your interest and support.
Look forward to speaking to you.
You all again in a few months to discuss net.
<unk> Q1 'twenty results.
Have a wonderful day everybody.
This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.
Okay.
Yeah.