Q2 2023 NAPCO Security Technologies Inc Earnings Call
Greetings and welcome to NAPCO Security Technologies, Inc. Fiscal second quarter 2023 earnings results Conference call.
At this time all participants are in a listen only mode.
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 it is now my pleasure to introduce your host Patrick Mckillop, Vice President of Investor Relations. Thank you you may begin.
Thank you. Good morning, My name is Patrick Mckillop, Vice President of Investor Relations for NAPCO security.
Thank you all for joining us for today's conference call to discuss our financial results for our fiscal second quarter 2023.
By now all of you should have had the opportunity to review the press release discussing our results.
You have not a copy the release is available in the Investor Relations section of our website Www Dot NAPCO security Dot com.
On the call today is Richard Soloway, President and CEO of NAPCO Security Technologies, Inc.
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 growth drivers of the company's business, such as school security products and recurring revenue services.
Potential market opportunity the benefits of a recurring revenue products to customers and dealers our ability to control expense and cost and expected annual run rate for SaaS recurring monthly revenue forward looking statements involve risks and uncertainties that may cause actual results to differ materially from those kantar.
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.
Other unknown or unpredictable factors underlying assumptions.
So quentin and 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 performance or achievements you should not place undue reliance on these forward looking statements all informed.
<unk> provided in today's press release and this conference call 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.
I will turn the call over to <expletive> in a moment, but before I do I just wanted to mention that we are actively planning our investor relations calendar for more N. D are some conferences in the near future.
Mr Outreach is crucial especially for small cap companies, such as NAPCO and I would like to thank all of those folks that assist us.
And these conferences and marketing trips.
Also we invite you to come to visit our booth at the upcoming ISC West Trade show March 28 to the 31st in Las Vegas, Nevada, ISC West as the industry's largest trade show with over 30000 attendees.
That out of the way, let me turn the call over to Richard Soloway, President and CEO of NAPCO security technologies take 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 Q2, 'twenty twenty-three record sales of $42 3 million.
This is our ninth consecutive quarter of sales growth.
Recurring revenue continue to grow at a very strong rate and the annual run rate is now approximately 59 million.
On January 20th twenty-three recurring revenues.
Our balance sheet remains strong with our cash balances at $47 1 million and we have no debt.
We continue to focus on capitalizing on key industry trends, which include wireless fire and intrusion alarm.
School Security solutions, plus enterprise access control systems and architectural locking products.
The management team here at NAPCO continues to focus on the key metrics of growth profits 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 outlook.
They are aligned with our shareholders as senior management at NAPCO owns approximately 16, 5% of the equity.
Before I go into greater detail I'll now turn the call over to our CFO Kevin to shell.
An overview of our fiscal first quarter 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 second quarter increased 27% to a quarterly record of $42.3 million as compared to $33 $4 million for the same period, one year ago.
Net sales for the six months ended December 31, 2022 increased 27% to $81.8 million as compared to $65 million for the same period, one year ago.
Our equipment sales in Q2 increased 23% to.
$27 4 million as compared to $22 $4 million for the same year ago period.
And equipment sales for the six months period also increased 23% to $53 $1 million as compared to $43 2 million for the same period a year ago.
Recurring monthly revenue continued its strong growth, increasing 35% in Q2 to $14 $9 million compared to $11 million.
The same period last year and for the six months increased 35% to $28 $7 million versus $21 $3 million in the same period a year ago.
Our recurring service revenues now have a prospective annual run rate of approximately $59 million based on January 20th twenty-three recurring service revenues.
The increase in equipment sales for the quarter were primarily due to increases in both our alarm lock and marks door locking products as well as increased sales in our continental access control products. The increase in equipment sales for the six months was primarily due to increased sales of NAPCO intrusion products alarm lock and marks.
Door locking products and continental access control products.
Strong growth of our recurring revenue for both the three and six months ended December 31, 2022 was primarily attributable to the continued strength of our Starlink cellular radio products.
Given by increases in the commercial intrusion and fire alarm business.
Gross profit for the three months ended December 31, 2022 increased 70% to $19.4 million with a gross margin of 46% as compared to $11.4 million with a gross margin of 34% for the same period a year.
Ago.
Gross profit for the six months ended December 31, 2022 increased 51% to $37.6 million with a gross margin of 46%.
As compared to $24 $9 million with a gross margin of 39% for the same period a year ago.
Gross profit for equipment sales for the three months ended December 31, 2022 increased 245% to.
The $6 $2 million with a gross margin of 23%.
As compared to $1.8 million with a gross margin of 8%.
Same period a year ago.
Gross profit from equipment sales for the six months ended December 31 2022.
Increased 88% to $12.3 million with a gross margin of 23% as compared to $6 $5 million with a gross margin of 15% for the same period a year ago.
Gross profit for recurring revenues for the three months ended December 31, 2022 increased 37% to $13 $2 million with a gross margin of 89% as compared to $9 $6 million gross margin of 87%, but at the same period.
A year ago and gross profit on recurring revenues for the six months ended December 31, 2022 increased 38% to $25 $4 million with a gross margin of 88% as compared to $18 $4 million with a gross margin of 87%.
At the same period a year ago.
The significant increase in gross profit dollars as well as gross margin for equipment sales for both the three and six months ended December 31, 2022, which primarily the result of the aforementioned increases in equipment equipment revenues as.
As well as increased availability and lower cost of certain components and transportation costs.
As compared to the same period last year.
This was as a result of improvements within the company's supply chain.
The increase in revenues also resulted in improved overhead absorption rates from our Dominican Republic manufacturing facility.
The increase in gross profit dollars for recurring service revenues for both the three and six months ended December 31, 2022 was due to the continued strong sales of the company's starlink radios. They continued.
The increase in gross margin of our recurring revenue for both the three and six months was primarily due to increased service revenues relating to the company's fire radios, which have higher monthly selling prices than the company's intrusion radios.
Increased 12% to $2 $2 million.
5% of net sales as compared to $2 million or 6% of net sales for the same period, a year ago research and development expenses for the six months ended December 31, 2022 increased 19% to $4 $7 million or 6% of net sales as <unk>.
Compared to $3 $9 million or 6% of net sales for the same period a year ago.
The increase in dollars for the three and six month periods was due primarily to salary increases and some additional staff.
Selling general and administrative expenses for the three months ended December 31, 2022 decreased by 5% to $7.8 million or 18% of net sales as compared to $8 $2 million or 25% of net sales for the same period a year ago the decrease.
In dollars resulted primarily from higher stock option expense and legal expenses incurred in the three months ended December 31, 2021.
The decrease as a percentage of net sales was due primarily to the increase in net sales.
As well as the aforementioned decrease in expense dollars.
Selling general and administrative expenses for the six months ended December 31 2022.
<unk> increased by 5% to six $3 million or 20% of net sales from $15 $5 million or 24% of net sales for the same period a year ago.
The increase in dollars resulted primarily from increases in credit card processing fees insurance expense and commission expenses. The decrease as a percentage of net sales was due primarily to the increase in net sales is partially offset by the aforementioned increase in expense dollars.
Operating income for the quarter increased 643% to $9 $4 million as compared to $1.3 million for the same period last year and operating income for the six months ended December 31, 2022 with $16 $7 million.
As compared to $5.4 million for the same period last year, which is a 206% increase.
Okay.
The company's provision for income taxes for the three months ended December 31 2022.
Increased by $886000 to $1 $2 million and effective tax rate of 12% as compared to $291000 with an effective tax rate of 22%, but at the same period a year ago. The increase in the provision for income taxes for the three months was primarily due to.
Two higher taxable income.
The company's provision for income taxes for the six months ended December 31, 2022 increased by one $3 million to $1 $9 million with an effective rate of 11% as compared to $639000 with an effective tax rate of 7% so to say.
Jim period, a year ago.
The increase in the provision for income taxes for the six months was also primarily due to higher taxable income.
The effective tax rate for the six months ended December 31, 2021 was reduced due to other income of 3 million $3 $9 million being non taxable.
Yeah.
Net income for the three months ended December 31, 2022 was a quarterly record $8 $4 million or 23 cents per diluted share as compared to $1 million or three cents per diluted share for the same period a year ago.
714% increase.
Net income for the six months ended December 31, 2022 increased 69% to $14 $8 million or <unk>.
Per diluted share as compared to $8 $8 million or 24 cents per diluted share for the same period a year ago.
Net income and earnings per share in last year's Q1 benefited from $3 $9 million of other income.
From the forgiveness of debt without such benefit net income and diluted earnings per share for the six months ended.
Remember 31, 2021 would have been $4 $9 million.13, respectively.
<unk> EBITDA for the quarter was a quarterly record 10 $3 million or 28 cents per diluted share as compared to $3 $1 million or eight cents per diluted share for the same period last year.
232% increase.
EBITDA for the six months was $18 $6 million or 50 cents per diluted share.
As compared to $7.8 million or 21 cents per diluted share for the same period last year.
138% increase.
The EBITDA margin for the three months ended December 31, 2022 was 24%.
As compared to 9% in the prior year period and for the six months ended December 31, 2022, the EBITDA margin was 23%.
As compared to 12% in the prior year period.
Moving onto the balance sheet at December 31, 2022, the company had $47 $1 million in cash cash equivalents.
Best mints and marketable securities.
As compared to $46 $8 million as of June 32022.
Working capital defined as current assets less current liabilities was $101.6 million at December 31, 2022, as compared with working capital of $93 $1 million at June 32022.
The current ratio defined as current assets divided by current liabilities.
$6 six to one at December 31, 2022, and 4.5 to one at June 32022.
Cash provided by operating activities for the six months.
$10 million as compared to $7 $8 million for the same period last year.
This decrease was primarily due to inventories increasing by $14.8 million, resulting primarily from the company's decision to purchase hard to get parts used in products that generate recurring service revenues for the company.
The challenges from the supply chain crisis are beginning to subside and the company believes its inventory levels will begin to decrease in the latter part of fiscal 2023 and continuing in fiscal 2024.
Capex for the quarter was $444000 versus $249000 in the year ago period and for the six months ended December 31, 2022 was $816000 compared to $771000 in the prior year 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.
Second quarter was a sales record breaker.
Continue our sales continue our sales growth streak, which is now our ninth consecutive quarter of year over year sales growth.
Prior to the Covid.
We had 23 consecutive quarters of growth and we look forward to surpassing that streak in the future.
We are pleased that we were able to be published street consensus estimates for revenue E. P. S. Net income and adjusted EBITDA metrics. This outstanding performance is the result of the continued strong demand for each of our product lines, including NAPCO.
The fire and intrusion.
Our alarm lock and.
Mark's door locking products as well as our continental access control systems.
One key area of our success continues to come from the commercial fire and intrusion alarm business.
Ongoing concerns about a potential recession in the U S and rising interest rates remain as top headlines and I'd like to remind you that our company is highly 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 item.
Commercial buildings must have maintain a fire alarm system.
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.
Our equipment and recurring revenue both generated exceptional growth in this quarter, increasing 23% and 35% respectively.
The annual run rate for recurring revenue is now approximately 59 million as of January 2023.
Our starlink radios continue to have strong sales and we are optimistic that we can reach our previously mentioned goals, but $150 million in recurring revenue and $150 million of equipment revenue by the end of fiscal 'twenty 'twenty six or possibly.
Sooner.
Achievement of those goals as well as our gross margin goals of 80% for recurring revenue and 50% from equipment revenue could generate EBITDA margins in excess of 45%.
We estimate that there are millions of commercial buildings of all types, such as offices hospitals schools coffee shops, fast food restaurants and others.
Still require upgrades from old fashioned copper phone wires.
Our starlink radios have the widest coverage with both AT&T and Verizon service and rich feature sets, which are deal is love.
The three G. Since it was completed just a few weeks ago and management believes that a portion of the active NAPCO starlink radios. The laws communications due to the Verizon three G. Sunset I have not yet been replaced because alarm deal as expected the sunset.
Sunset to be delayed as was the case with the H T T. Three G sunset in 2021.
Ultimately the company anticipates that many or all these NAPCO three G radios will be replaced with NAPCO is newer generation radios, because alarm dealers must have new functioning and revenue produced your radios to monitor alarm conditions.
Resulting in both additional hardware revenue and increasing recurring revenue for the company.
We are pleased that the equipment margins improved by 1500 basis points to 23% in this quarter versus 8% the same period a year ago.
Margins for recurring revenues also improved by 200 basis points to 89% for this quarter versus 87% at the same period a year ago.
Constraints at the supply chain have largely abated and we believe that in the next three months the new suppliers to us since we have developed will begin to invigorate, our equipment margins and bring them to even higher levels than what we generated prior to the supply chain crisis.
The backlog for the company remains at a higher than normal level.
Although it continues to come down considerably and we remain confident and sustainable demand for our products going forward.
We remain encouraged by the continued strength of the sell throughs.
We are seeing from several of our largest distributors.
We believe that we are taking market share from our competition based on new customers continuing to tell us that they can't get product from the competition.
School administrators are focused on the need for security solutions and as more incidences continue to happen.
Fully integrated solutions for 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 is comprised of approximately 130000 K through 12 and 5000.
And colleges and universities across the country.
Our fully integrated technologies for the school security market continues to remain a top priority for NAPCO.
The available availability of grants to schools to fund these security projects has never been better.
We are excited to report that we recently received another school security project for a large school district in the state of Massachusetts, and the school will be using our continental access control products in its 125 schools.
Offering seamless security solutions, which allow for our dealers and us to generate recurring revenue streams is central to our strategy.
Historically recurring revenues have been from a NAPCO intrusion and alarms division, but the recently launched air access product.
Now with the recently launched <unk> product, we're now able to generate recurring revenue from all divisions of the company.
Air access to generate recurring revenue from locking and access control, which has never been done before air acts as the industry's first cellular based access control system, which we believe is a billion dollar opportunity.
The benefits of air actions include no need for upfront investment of expensive hardware no need to interfere with corporate networks, which can be a major problem for installers.
And no onsite database backups of software updates.
Our R&D team remains hard at work developing even more products in the future, which will help grow our recurring revenue business.
We have experienced tremendous success over the last five years growing our recurring revenue business and believe the best is yet to come.
Lastly.
I am pleased to announce that David Paterson, the Governor of New York for March 2008 until January 2011 has joined our board of directors.
David has vast experience in crime and security issues and as an outspoken advocate of safety by combating crime traditionally and with new methods and systems.
He will bring his unique perspective, so NAPCO and we plan for the future growth.
And success of the company.
We'll begin our Q&A session portion of the portion of this pool the moment.
Our fiscal second quarter 2023 was a record breaking a successful one.
We have a strong balance sheet no debt and continue to generate healthy profits. We believe we can continue this.
Renewed growth streak well beyond the 99 consecutive quarter streak. We are on now NAPCO Senior management owns approximately 16, 5% of your equity 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.
Now like to open the call for a Q&A session. Operator. Please proceed.
Thank you ladies and gentlemen at this time, we will be conducting a question and answer session. If you'd like to ask 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 he 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 Jim Ricchiuti with Needham <unk> Company. Please proceed with your question.
Regarding the horizon III Sunset are you.
Hearing from your channel partners, yet of the acceleration in demand that they might be anticipating as a result of this.
Yeah.
Kevin you want to take sure so Jim we know that the dealers who.
Failed to take action.
Sunset hit.
You know a lot of these dealers didn't think it was really going to happen because when they at&t's sunset came about.
David.
They kept delaying and delaying and delaying it the dealers thought it was going to get delayed this time.
Remember this with the dealers if they don't have an active radio.
They suffer they're losing recurring revenue remember they charge the end user recurring revenue just like we charge the dealer.
So the last thing they want is to lose their livelihood that recurring.
So we're starting to see a lot of scrambling around as these radios that went dark.
At the end of January 3rd.
Being replaced.
We're pretty confident that they're all going to be replaced and we're pretty confident there'll be replaced with our radios they'll go from a NAPCO three J radio to a NAPCO starlink five G radio there's also the possibility.
That some of the radios that go dark from other banks.
Could come over to the NAPCO side, because we believe we have a better offering than the competition.
So there's a lot of scurrying about let's watch what happens, but we think in the end, it's going to mean more radio sales and more recurring revenue for us.
Follow up.
And then.
Maybe for you Kevin if you could talk a little bit to some of the redesign activities.
When you start when you are you anticipating that that could produce more meaningful improvement and it's different gross margin.
Yeah, I can take that one so.
Several months ago, probably.
Probably about seven months ago, we said that we were going to.
<unk> embarked on the journey of getting another source.
To replace the traditional source, which is Texas instruments.
Our radio business.
Because we can't keep living with having to buy these hard to get parts for.
From brokers.
So it takes time.
To do this it's not like you just find the other source.
And you you pop it into the board and you're off to the races.
Theres redesigning of the board their software updates there is approvals from the <unk> of the world. It takes time.
Well, we're happy to say that we're almost done.
We're about seven months into this journey and probably by the end of this quarter were in the March quarter now we're gonna start utilizing these others. These new sources. These new sources will be the same cost that we were used to.
Before we had to start buying these parts from brokers and we're gonna still use T. I, it's not like we're going to give up on them, but you know they they can't keep up with us and they can't keep up with anyone actually they're having trouble with everybody, but we'll use them. If they can deliver will use the new source when they can do.
When we can get that from them, we don't anticipate any trouble from the new source and that should return margins to more normalized levels that we were used to before the COVID-19 and the supply chain hit.
We do have a lot of inventory at the higher price.
The higher priced inventory the inventory that we've been buying from these brokers, we got to work our way through it.
And then eventually will be exclusive with lower cost parts for our radios I think we'll start to feel a difference a little bit in Q3.
More in Q4, and certainly in fiscal 'twenty 'twenty four I think will really start to feel it and as we work through that inventory it'll also help.
Reduce the inventory overall, which you know were carrying a lot of extra inventory because we don't want to be short at all with radios radios leads to recurring which leads to going on forever.
Alright, just one quick final question, if I may just remind us so doubt ISC west and the impact that has on SG&A in this current quarter.
I I didn't see it go ahead <expletive>.
ISC West is completed.
Trade show.
In the industry, and we will get to see lots of dealers which are.
Great buyers and we'll be able to.
Pick up a lot of market share.
We show a lot of new products that that show we have a very large food right. The main section that's very important to you.
So our products allow our sales teams out there we'd like to have.
Any.
Any customers and also financial people come out and see it you'll get a feeling for the power of NAPCO in the industry and you can either.
Welcome to us.
As far as what the costs are Kevin maybe you can explain that yeah. So.
It'll hit at the show is March 28 through the 31st.
It's a Q3 for us fiscal Q3 expense an expense well worth it.
Got it.
In dollars plus a hit to SG&A. So for those of you that are modeling SG&A remember that our SG&A in Q3, we'll have that expense in it.
And should be you know somewhere in the neighborhood of five to 600000 higher than what you saw in this.
In this quarter that we just finished.
Got it thanks very much. Thank you Jim Thank you.
Our next question comes from the line of Brian Rotenberg with Imperial Capital. Please proceed with your question.
Yeah. Thank you very much first of all the gross margin question.
It looks like gross margins are going to continue on the equipment side expanding.
Talked about do you expect steady services gross margin is 89% sustainable.
Sustainable.
Well you know I I modeled this back when we did our 150 150 goal.
At 80% and I was thrilled at that time to be utilizing an 80% gross margin and it just keeps growing and growing and growing and growing at it I thought the top was 85 or up to 89 it.
It keeps growing mainly because we're selling more and more of a fire radios.
And that's because we get more money for those so the margins expand.
I think you know if I if I was modeling this I use mid eighties, maybe we'll keep it in the high eighties, it's not gonna go below mid eighties, maybe it will even hit 90% it's possible, but mid Eighty's is certainly great enough.
Okay, and then in terms of equipment revenue.
You beat me by a couple million dollars on the top line and revenue in the period.
Is that 27 $28 million is that a sustainable number for the third quarter, what you had in the second quarter.
Well you know the the comps get a little harder each quarter.
Third is a little harder than the second and the fourth was $30 million last year.
When I model this.
I model, 10% hardware growth with the expectation that we could possibly do better than that and continue we've been in the 20 <unk> the last several quarters.
We hope we can keep it up there's no no guarantees there's nothing we're seeing that says we cant do it but what I'd model them more conservative so I'm more of the 10% range, especially when we get to Q4, which is the $30 million and that would mean, 10% would be a $33 million, but you know.
Our guys are charged with I want 20% out of all of them and that's what we're pushing for.
Okay.
Very good and then just moving on with that cash.
Yeah, you you talk a little bit about inventory, maybe coming down over the next couple of quarters, so that should produce unless I'm missing something.
You can walk me through cash should increase sequentially from second to third quarter in third and fourth quarter is that correct.
That is 100% correct. So two things are happening so as the recurring revenue grows.
The cash grows with that too we haven't really felt it because we've been using a lot of that growth that the recurring brings us for inventory.
So as recurring.
So, yes, we expect cash to grow.
In the third quarter, and the fourth quarter and beyond.
Okay, So our recruiting tools and other things and payables arent going to other working capital isn't going to change dramatically, it's all about being sort of gas right exactly.
Okay, and then in terms of price increases I believe you on the product side you had a price increase in April one in July has have you had any other price increases in the last 90 days or do you plan any in the next 90.
We haven't had one since that second one.
And we're discussing it we haven't made that decision yet but typically.
Typically we take a price increase every year.
So at the very least we'd probably do one July we always do it. The question is would we do one beforehand, we were talking.
Okay and then last question in terms of backlog you mentioned backlog coming down are they still near record levels.
Worried about or have a question less worried about.
About your visibility.
With backlogs coming down slightly.
Backlogs was never a big thing here.
Backlog became a big thing when supply chain and.
When COVID-19 hit and it was up to 10 million and then we got it down to 6 million.
And now it's down to three and a half million dollars.
These are still historically high levels, we don't like we don't like backlog, we wanted to be able to ship dealers right. When they order. It. So we're working hard as fast as we kill the backlog, we get new orders when the demand is strong that's a good thing, but even with strong demand.
We're working to reduce that backlog to less than $1 billion, we're not there yet but working hard towards it.
Great well, thank you very much.
Thank you.
Yeah.
Our next question comes from the line of Raj Sharma with B Riley Securities. Please proceed with your question.
Hi, Thank you.
Congratulations on really really good results.
Thank you My question Yeah, absolutely My question was on the continental locking axis.
Due to all those increases in.
Those equipments indicative of the school security projects.
Certainly helped.
Yes.
Yes.
The the product line utilizes cellular technology.
Yes.
The fire and intrusion.
Helping out a lot because school security.
Where you don't have to wire the school, but you can get the locked that functionality out of it.
It goes through the cloud and people with the soap wallets get access.
Whats going on in the building.
It has to be locked out electronically it can be done so it's a great product.
It has great growth potential.
And.
One thing I'd like to point out in the one safety equipment.
By 2026, and 50 billion by 'twenty six.
Revenue.
It's why we've done so before.
We don't have air access this application included because the new product with us.
Typically a year in this case year and a half.
For it to become more mainstream with dealers because it is a very different but at Gibson deal of the benefit of recurring revenue.
We never had recurring revenue out of the product, it's kind of a what the fire alarm dealers get now for four of locking.
And access to dealers. So it's a very very new and exciting product suite.
With teaching the industry on how to sell it.
Yeah I understand there are access is do a minimal part of our non existent part of and see all of the.
Service contracts.
The equipment on the equipment side any estimate.
Of what the school security contributes to the equipment currently.
It's hard to say Raj because we get a lot of orders that go directly through distribution.
And we don't see it.
Or a lot.
C and.
What I look at hits to really get an indication I like to see what sort of locking sales as a percentage of our overall hardware.
And so I see that our locking sales.
Is.
About 59%.
Of our overall hardware sales that's a lot that's that's a very healthy thing.
And I know, it's because of schools, it's not only schools hospitals airports a lot of things, but when schools or are doing well with security and is doing well that number does better so I know it.
And there are lots of wins, we don't talk about.
We mentioned one of them in on this call.
Massachusetts School district for.
For some reason the schools don't let us really talk about it a lot they like to keep things quiet. We have mentioned a couple of really big wins on the largest school districts in the country, which we got over the last six months to top 10.
Two of the 10 largest school districts in the country.
So we were proud to get that.
I know, it's early stages I know, we sound like a broken record. Despite all the shootings that have gone on we're still in the early stages of this as most schools.
Still haven't done enough.
And now there's all kinds of money available from both the federal and the state governments to help them and of course, if it's a university Ah they have big endowments and can do it we're in the early and executive third inning. If you ask me on school security Big area I wish we could be more specific but we can't.
Got it got it and then on the inventory increase.
Increase the higher priced inventory I just wanted to understand on one hand.
The margins gross margins on equipment are gonna be helped because of the higher volumes.
And.
And the cost absorption on the other hand, youre going to have higher priced inventory.
Flow through the income statement.
I know you I know you just talked about that could you help me understand if if.
That is happening and what the cadence of that is happening in the next two quarters or largely the impact of higher priced inventory on gross margins.
That could impact.
That happened because when 24 or that's going to happen probably in the next two quarters.
It's getting it's going to keep our margins.
In the similar range to where they've been in this fiscal year.
The fourth quarter is probably going to benefit from a much higher <unk>.
Sales level and more overhead absorption so last year as an example, when we had a $30 million of hardware quarter.
Margins for equipment jumped to 27% you know twenty-seven may not sound like a lot.
Because in the old days it wasn't a lot compared to what the rest of last year looked like that was a significant jump.
We're going to see a jump probably in the fourth quarter, because as that volume overhead absorption from the Doj facility.
But we won't feel the back to the good old days, yet until we work through this inventory will start to feel more of it because we're not buying as much from the brokers. So that helps we got to work through that inventory that we did buy from the brokers and that will affect Q3.
And to some degree for by next year fiscal 2024, I think we get a lot of this behind us.
Got it and then just lastly could you give us some more color on the sell through at the dealers.
Are you still seeing in the top five dealers.
Robust year on year increases yes.
The sell through is still very good it's changed.
The old sell through we wanted that why did the distributors.
Cary three months supply of everything.
And once COVID-19 hit and supply chain crisis.
Then the distributors became just in time distributors, they want them to carry the bare minimum.
We don't love that they there is a good side to it.
Our business our orders come in very steady throughout the quarter. They come in weekly one after the other we don't have to wait till the end.
Was telling somebody earlier today I used to sit here in December on New year's Eve.
Everybody's out celebrating and I'm waiting for orders to come rolling in.
They've come in last minute as distributors waited to place their big orders to try to get the best deal they could.
Those days are in large part there over the orders come in very steady throughout the quarter if.
They don't have to go crazy with overtime and flying things as much and you couldn't forecast better.
The only negative is you've got to watch their inventory levels. They don't run too low and that they have product across the board. We don't want to ride out if a deal that comes into a distributor and they don't have the product. They go elsewhere, we better hope that the elsewhere as a place to care.
He's out product so we monitor it closely and make sure that you have.
Is everything on the shelf the days of the three months might be over but there are benefits from it.
Joe what I mentioned to you.
And realize that most of our production.
Production goes to distributors and the distributors are our customers.
That when Kevin is talking about the stats he's talking about these large distributors that have the products and he's watching over you know whats checking and what's selling to those dealers the dealers go to distributors and get the product.
Our business was founded on small and midsize dealers in every town and city, but now what's happening is we're getting big big ones are the a D teaser of the world are coming to us.
Siemens the Johnson controls they are coming to us and directly.
So.
It's a very very good thing that they are the products that we have.
For them everything in the industry functionality range.
And a lot of other feature sets talked about so the big companies, which have lots of installations want to use these type of products. So those come directly those large companies and everybody else goes through distribution Cabot is watching the vast number of dealers. We have we have more than 12000 dealers that go to <unk>.
Distribution and get the products, so everything seems to be checking well.
Got it. Thank you all those are my questions. Thank you for answering them I'll take it offline.
Thank you Raj.
Thank you your mind.
And here it is star one to ask a question. Our next question comes from the line of Christopher Hillary with Roubaix Capital. Please proceed with your question.
Hi, good morning.
Chris morning.
I wanted to ask today, if you could share any other metrics.
On the reoccurring business for example.
Could you share roughly how much is coming from the fire radios.
Would you discuss at all.
Annual pricing and how that might change and then lastly could you share any color on <unk>.
Products that you see eating your reoccurring revenue growth.
In the medium term out two or three years.
Okay.
We don't break out the radio sales, Chris not yet anyway, I know we've been asked about it.
And we can start doing that we just haven't done it yet what we have said is that fire radios as the largest piece of the various styling radios and in and around three or four years, it's the new covered for radios.
But yet it's taken over as the number one.
Seller within the group. So we'll look at that maybe eventually we're going to break it out there's no no I'm doing that so, but we haven't done it yet.
As far as looking three years I'll take maybe you want to talk about the.
Their access and the potential for that.
So our concept and our company is integrated solutions.
We have an integrated engineering departments develop some of these products in house you don't go offshore. It's all done in house, we have our own factory you don't use subcontractors.
And.
The Dominican Republic.
We have been getting recurring revenue in two of our segments, which is the fire alarm a burglar alarm, but we want to integrate it.
Our recurring revenue solution for all of our segments, which means the locking and access and the introduction of payer access gets us recurring revenue for every segment.
It is a great thing for locksmith and access control deal because they now can start getting recurring revenue like a fire a burglar alarm deal it can do and there's a very big.
It's.
There with the selling of these accounts like for instance, a fire a burglar alarm dealers sells an account to an ADT or another company. There's a 35 to 40 time monthly multiple that the dealer can get by selling one account to one of the large.
Alarm providers, so we think that the locksmiths and the.
The access control deal is we don't get that recurring revenue stream their products because those products don't really offer it but air access does and we think that.
Our focus groups and the initial training that we've done that we think that this is a 1 billion dollar industry.
Air access with recurring revenue unlocking.
And we're excited about it but it's going to take another six months to a year before it becomes more mainstream because it is a big change where.
Locksmith and access deal that never really got recurring revenue all they got was a service contract to replace the lock or did it come in Leubert lubricated or the upgrades in software or an access system on site now all this is done by air access and they can now give them.
Additional services.
Clients, which are very valuable for their end user clients. So.
We're very excited about the future of their access.
Yes.
Great. Thanks for that and then anything on your reoccurring revenue pricing per year that you could share with us how that tends to evolve or how you're planning on managing that.
Thank you.
Yes.
Louis.
You have a price list, we have a price list.
For each of the different.
Types of radios, we manage the action, including our we talk about it as radios, but NAPCO does more than radios NAPCO also.
The control panels with new work.
We are making.
Fire and burglary control panels and each of those control panels as a radio built into it in the past they all use copper, but as we know copper is dead.
And the dealers are switching their new jobs over too.
Radio and now we have radios builds into a control panels, which is very very popular product line with us very busy building. This control panels with bringing some side. So we do the rip and replace radios for all of the lines that are going that fire burglary will you keep the control.
Donald in the system that you have want to rip it out and put a radio there and our radio.
Called the Universal radio different than anything else on the market because the one radio does any type of control panel whenever it was made.
Whichever brand and is it works on everybody's it doesn't just work the NAPCO ecosystem.
Then we have our.
Control panel with the radio built did.
So we have this menu it's published menu.
What we make the most on fire radios, because the fire radios require more handshakes from the central station in other words more signals going back and forth. So there's more traffic and we charge more for those but.
We are keeping our pricing at the same price right and you can see with the margin side.
Yeah.
Thank you.
Thanks, Chris.
There are no further questions in the queue I'd like to hand, the call back to management for closing remarks.
Yeah.
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 for further information.
Thank you for your interest and support and we look forward to speaking to you all again in a few months discussed snap goes physical.
Fiscal Q3, 'twenty three results Bye bye 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.
Yeah.