Q3 2023 Napco Security Technologies Inc Earnings Call
Greetings welcome to NAPCO security technologies incorporated.
Fiscal third quarter 2023 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. Please note. This conference is being recorded.
I'll now turn the conference over to Patrick Mckillop.
This president of Investor Relations. Thank you you may begin.
Thank you good morning, I'm, Patrick Mckillop, Vice President of Investor Relations for NAPCO security.
You all for joining us today for todays conference call to discuss.
Financial results for our fiscal third quarter 2023 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.
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.
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 forecasts and projections about future performance based on management's judgment beliefs current trends and the 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 incurring revenue services.
Potential market opportunities.
Benefits over recurring revenue products to customers and dealers.
Our ability to control expenses and costs and expected annual run rate for SaaS recurring monthly revenue.
Forward looking statements involve risks and uncertainties that may cause actual results to differ.
From those contained in the forward looking statements.
Factors include but are not limited to such a risk factors described in our SEC filings, including our annual report.
The 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 expectations reflected in the forward looking statements are reasonable we cannot guarantee future results levels of activity performance instruments.
You should not place undue reliance on these forward looking statements.
All information provided in today's press release and this conference call is as of today's date unless otherwise stated.
We undertake no duty to update such information, except as required under applicable law.
Well, we're trying to call over to <expletive> in a moment I do I just want to mention some upcoming IR calendar of events that we have withdrawn our which are.
First the Needham technology, and media and media conference on Wednesday May 17th in New York City.
Followed by the B Riley Conference May.
May 24th through the 25th in Los Angeles, then we'll be at the William Blair growth Conference June six through the eighth in Chicago.
And finally, we will be attending the Wells Fargo Industrials Conference on June 13th 15th also in Chicago Investor.
Investor outreach is crucial, especially for small cap company, 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 there, but it's all away 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 Q3, 2023 record sales of $43 5 million.
This is our 10th consecutive quarter of sales growth.
Current revenue continued to grow at a very strong rate and the annual run rate is now approximately 63 million based on April 2023 recurring revenues.
Our balance sheet remains strong with a cash balance is at $56 9 million and we have no debt.
Yeah.
We continue to focus on capitalizing on key industry trends, which include wireless fire and intrusion alarm is 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.
Office and returns on equity.
And controlling our 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 10% of the equity.
Before I go into greater detail I will now turn the call over to our CFO , Kevin Michelle who will provide an overview of our fiscal third 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 three months ended March 31, 2023 <unk>.
Increased by 21%.
To a quarterly record $43 $5 million.
As compared to $35 $9 million for the same period a year ago.
Sales for the nine months ended March 31, 2023 increased by 25%.
$125 $3 million.
As compared to $124 million.
At the same period a year ago.
Recurring revenue for the quarter increased 26% to $15 $1 million as compared to $12 million, but at the same period last year.
Recurring revenue for the nine months ended March 31, 2023 increased 32% to $43 $8 million.
<unk> to $33 $3 million for the same period a year ago.
Our recurring service revenues net of a prospective annual run rate of approximately $63 million based on April 'twenty twenty-three recurring service revenues.
And that compares to $59 million run rate based on January 20th twenty-three recurring service revenues, which we reported back in February .
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 nine months was primarily due to increased sales of NAPCO intrusion products, which include styling products alarm lock and marks door locking products and continental access control products.
The strong growth of our recurring revenue for both the three and nine months ended March 31 2023.
Primarily attributable to the continued strength of our Starlink cellular radio products driven by increases in the commercial intrusion and fire alarm business.
Gross profit for the three months ended March 31, 2023 increased 51% to $22 $7 million with a gross margin of 52%.
As compared to $15 million with a gross margin of 42%.
The same period a year ago.
Gross profit for the nine months ended March 31 2023.
Increased by 51% to $63 million with a gross margin of 48%.
As compared to $39 $9 million with a gross margin of 40% for the same period a year ago.
Gross profit for equipment sales for the three months ended March 31, 2023 increased 98% to $9 million with a gross margin of 32%.
As compared to $4 $5 million with a gross margin of 19% for the same period a year ago.
Gross profit on equipment sales for the nine months ended March 31, 2023 increased 93%.
The $21 3 million Dallas with a gross margin of 26% as compared to $11 million with a gross margin of 16% the same period a year ago.
Gross profit for recurring revenue for the three months ended March 31 2023.
Increased 30% to $13 $7 million with a gross margin of 90%.
As compared to $10 $5 million with a gross margin of 87% for the same period a year ago.
Gross profit on recurring revenues for the nine months ended March 31, 'twenty twenty-three incur.
Increased 35% to $39 million.
With a gross margin of 89%.
As compared to $28 $9 million.
But the gross margin of 87% for 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 nine months ended March 31 2023.
Primarily due to the resulting the aforementioned increases in equipment revenues.
Which also improved overhead absorption rates.
Also the increased availability and lower cost of certain components.
Lower transportation expenses.
As well as a favorable shift in product mix.
As all of this as compared to the same period last year.
The increase in gross profit dollars for recurring service revenues.
For both the three are in the nine months ended March 31 2023.
It was due to the continued strong sales of the company's Starlink radios.
A continued increase in the gross margin for recurring revenue for both the three and the nine months.
This is primarily due to increased service revenues relating to the Companys fire radios.
Which have higher monthly selling prices than the company's intrusion radios.
Yeah.
Research and development expenses for the three months ended March 31 2023.
Increased 15% to $2 $3 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 nine months ended March 31 2023.
Increased 18% to $7 million or 6% of sales.
As compared to $5 $9 million or 6% of net sales.
For the same period a year ago.
The increase in dollars was due primarily to salary increases and some additional staff.
Selling general and administrative expenses for the three months ended March 31 2023.
It remained relatively constant at $8 $4 million.
As compared to $8 $4 million for the same period a year ago.
SG&A expenses as a percentage of net sales decreased to 19% for the three months ended March 31, 'twenty to 'twenty three.
As compared to 24% for the same period, a year ago. The decrease as a percentage of net sales was due primarily to the increase in net sales without the need to increase SG&A expenses.
SG&A expenses for the nine months ended March 31, 2023 increased by 3% to $24 $7 million from $24 million for the same period a year ago S.
SG&A expenses as a percentage of net sales decreased to 20% for the nine months ended March 31, 2023, as compared to 24% for the same period a year ago. The.
The increase in dollars resulted primarily from increases in legal expenses as well as credit card processing fees related to our monthly recurring service revenues.
The decrease as a percentage of net sales was due primarily to the increase in net sales as partially offset by these aforementioned decreases in expense dollars.
Yeah.
Operating income for the quarter increased 160%.
To $11.9 million as compared to $4.6 million for the same period last year.
Operating income for the nine months ended March 31 2023.
Increased 185%.
The $28 $6 million as compared to $10 million for the same period last year.
The company's provision for income taxes for the three months ended March 31, 2023 increased by $397000 to $1 $5 million with an effective tax rate of 12% as compared to 1.1 million with an effective tax rate of 26% for the same period a year.
[noise] ago the.
The increase in the provision for income taxes for the three months was primarily due to higher taxable income.
The company's provision for income taxes for the nine months ended March 31, 2023 increased by $1.7 million to $3.5 million with an effective tax rate of 12% as compared to $1.8 million with an effective tax rate of 13% for the.
The same period, a year ago, the increase in the provision for income taxes for the nine months was also primarily due to higher taxable income.
Net income for the quarter was a quarterly record $10.8 million.
Or 29 cents per diluted share.
As compared to $3 $3 million or nine cents per diluted share for the same period last year.
A 231% increase.
Net income for the nine months was $25 $7 million or 69 cents per diluted share as compared to $12 $1 million.
Or 33 cents per diluted share for the same period last year.
113% increase.
In addition, net income for the quarter was 25% of net sales.
That's compared to 9% for the same period last year and for the nine months ended March 31, 2023 was 20% of net sales as compared to 12% with the same period last year.
Adjusted EBITDA for the quarter was a quarterly record of $12 $7 million or <unk> 34 per diluted share as compared to $5 $7 million or 15 cents per diluted share for the same period last year, a 123% increase.
Adjusted EBITDA for the nine months was $31.4 million were 85 cents per diluted share.
As compared to $13 $5 million or 37 cents per diluted share for the same period last year and that is 132% increase.
The address the adjusted EBITDA margin for the quarter was 29%.
As compared to 16% for the same period last year.
And with 25% for the nine months ended March 31, 2023, as compared to 13% for the same period last year.
Net income and earnings per share for last year's nine month.
Period reflected.
Other income of $3 $9 million, which resulted from the extinguishment of debt during the quarter ended September 32021, and without such benefit last year and net income and earnings per share for the nine months ended March 31, 2021 would have been $8 $2 million.22 respective.
Lee.
Moving on to the balance sheet.
At March 31, 2023, the company had $56 $9 million in cash and cash equivalents other investments and marketable securities and that compared to $46 $8 million as of June 32022, and that's a 22% increase.
Working capital defined as current assets less current liabilities was $112 $9 million at March 31, 2023, and that compared with working capital of $93 $1 million at June 32022.
Current ratio, which is defined as current assets divided by current liabilities.
7.3 to one at March 31, 2023, and 4.5 to one at June 32022.
Cash provided by operating activities for the nine months ended March 31 2023.
$12.4 million.
And that compared to $8 $4 million for the same period last year.
And that's a 48% increase.
And capex for the quarter was $1 $7 million.
$418000 in the year ago period and for the nine months ended March 31 2023, it's.
$2.5 million compared to $1 $2 million in the prior year period.
And as <expletive> mentioned earlier, we have no debt.
That concludes my formal remarks, and I would now like to return the call back to <expletive>.
Kevin Thank you.
Our third quarter was the sales and profits record breaker.
Continuing our sales growth streak, which is now our 10th consecutive quarter of year over year sales growth.
Prior to Covid.
We had 23 consecutive quarters of growth and we look forward to support surpassing that streak in the future.
We are particularly pleased to see the strong growth in the gross margin on equipment revenues, which increased 13 100 basis points to 32% as compared to 19%.
Last year's Q3.
900 basis points, when compared to the gross margin of 23% last quarter.
This was primarily attributable to lower freight costs.
Kris overhead absorption.
Medical Republic factory.
Which occurred as a result of the large equipment sales increase.
And more favorable sales mix.
One key area of our success continues to come from our commercial fire and intrusion alarm business.
A potential recession, driven by higher interest rates from the U S. Federal reserve continues to dominate stock market headlines and I'd like to remind you that our company is highly recession resistant.
As 80% of our business is commercial.
The commercial firewall business is a mandatory nondescript with discretionary item.
Commercial buildings, most have and maintain a fire alarm system or in order to receive a certificate of occupancy.
Given the high profitability and the essential nature of this business we focus on this as a key area of our resources.
Our equipment and recurring revenue both generated strong growth this quarter, increasing 19% and 26% respectively.
The annual run rate for recurring revenue is now 63 million as of April 2023.
The quarterly increase in recurring revenue was affected by the Verizon three G Sunset, which occurred this past January .
There were still many thousands of three G radios that needs to be replaced and we anticipate that many of these will be replaced with snap goes newer generation radios, because the alarm dealers must have new functioning and recurring revenue producing radios.
To monitor alarm conditions.
This would result in both additional hardware revenue and increasing recurring revenue for the company. We believe we are still on track to reach our previously mentioned goals of 150 million dollar run rate in recurring revenue and $150 million.
A lot of equipment revenue by the end of fiscal 'twenty 'twenty six.
Achievement of those goals as well as our gross margin goals of 80% for recurring revenue.
And it was 90% in Q3 and 50% for 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 are still require upgrades from old fish in copper phone lines.
Our Starlink radio.
Has the widest coverage of both AT&T and Verizon service and rich feature sets, which are dealers love.
Margins for recurring revenue also improved by 200 basis points to 90% for this quarter.
88% in the same period a year ago.
The constraints of the supply chain have largely abated for us and what do you believe that in the next three months the new supplier sources. We have developed will begin to invigorate, our equipment margins, even further and bring them to even higher levels than what we generated.
Prior to the supply chain crisis.
Backlog for the company is getting closer to more normalized level levels from the extremely high levels, we had experienced in the last few quarters.
Inventory was down by $3 4 million from last quarter, and we remain encourage by the continued strength of the sell throughs statistics that we're seeing from several of our largest distributors.
School administrators are focused on the need for security solutions as more school shootings continue to happen.
We continue to see more funding initiatives as evidenced by recent announcements from Ohio with 624 schools received $42 million in security upgrades.
And in Missouri were 169 schools.
$20 million.
The Governor of Missouri has proposed an additional $50 million for their fiscal 'twenty 'twenty four year.
Pending approval.
Our fully integrated solutions for school security.
Generate nearly healthy margins for our business and now more than ever we are laser focused on further penetration of the school security market, which is.
Compromising of approximately comprised of approximately 130000, K through 12, and 5000 colleges and universities across the country.
[noise] fully integrated technologies for the school security market continues to remain a top priority for NAPCO.
Offering seamless security solutions, which allow for our dealers and us to generate recurring revenue streams is central to our strategy.
The recently launched air access products will enable us to generate recurring revenue from all divisions of the company.
Are access will generate recurring revenue from locking.
Access control, 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 product continues to make strides in the market and what do you expect more and more most of them in the future as the sales teams are actively educating locking and access control dealers about this new exciting opportunity for them with air access.
At the recent ISC West trade show back in March we unveiled a new product called Prima.
We are very excited about prime is a revolutionary seven inch super paddle.
For security fire video and automation.
Featuring intuitive use and set up smart self healing Wifi video and doorbell that prevents dealer truck rolls and an all new powerful backend.
Brahma was also named amongst security sales and integration magazines as the most valuable products for 2023 we expect to have this available to the deal is in early fiscal 'twenty 'twenty four.
Our R&D team remains hard at work developing even more products for the future, which will help us grow our recurring revenue business.
We have experienced tremendous success over the last several years growing our recurring revenue and believe the best is yet to come.
Lastly, as indicated in this morning's press release, we are excited to announce the initiation of our first ever dividend program as the company evolves and continues its strong growth patterns.
NAPCO has created tremendous shareholder value over the years and this dividend program is another way for us to continue to do so in the future.
We believe it is.
Porting to balance our capital allocation priorities, including investing in growth opportunities.
Maintaining a strong balance sheet and returning capital to shareholders.
We will begin our Q&A session portion of this call in a moment.
For our fiscal third quarter 2023 was a record breaking successful one.
We have a pristine balance sheet no debt.
Continue to generate strong sales and healthy profits. We believe we can continue this growth streak well beyond the 10 consecutive quarterly streak. We are now on.
I like to thank everyone for their support and for joining us in this exciting future we have.
Our formal remarks are now concluded.
We would now like to open the call for the Q&A session. Operator. Please proceed.
Thank you yeah, if he would like to ask a question. Please press star one on your telephone keypad.
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.
Sorry to pick up your handset before pressing the star keys.
Our first question is from Matt So with William Blair. Please proceed.
Hey, Thanks for taking my questions first wanted to start off with the.
Improvement in the equipment gross margins, which is good to see how should we think about the rate we saw in the third quarter in terms of a go forward rate, there's a bunch of moving parts within there. So just wanted to understand.
How durable that is going forward and then specifically on the mix component, maybe just some comments clarifying what you mean on the mix side, but what was strong what was weak that drove that benefit.
So Matt the.
The components that helped us get to 32%.
On the margins.
All of them.
Let's start with freight.
So the freight costs have come down I think they've come down for everybody. So we we benefit from that too.
We also did not have to fly components as much as we had been doing.
In the past during the supply chain problems.
Because during the supply chain prices if.
If we could get our hands on parts.
We would buy them, we buy a lot of them and we'd fly them, we don't want to run out.
Don't have to do that anymore.
So that's very sustainable going forward, we believe the days of having to fly like crazy because of shortages all over the place are over.
Supply chain is not totally over there are pockets of parts that you have to work hard to get still.
The crisis is still a little bit upon us nowhere near what it used to be.
So that's sustainable.
The overhead absorption, which comes from the Dominican Republic facility.
That's very sustainable as the volume of hardware.
<unk> to grow this quarter volume was $28 4 million of hardware sales.
The more goods that we pack into the Dominican facility.
The more overhead absorption, we're going to see.
And the more of the margins are going to expand.
That's sustainable.
The other part is the mix.
Mixes unpredictable the mix in this quarter.
Alarm lock sales were very strong.
And they dominated the quarter.
The other groups did well, but a landmark did particularly well in a long like has very strong margins.
So those margins compare to margins on radios. As example, radios don't have the greatest.
Gross margin of course, they lead to recurring revenue, which has 90% gross margin.
But from a hardware point of view.
Blocking is better.
So the mix was better from that point of view.
Is that sustainable.
We think we think it is but you know mix is hard to predict.
We want all pieces of the puzzle to contribute.
And in this particular quarter, they pretty much all did and that's why we were able to get the 32% we have not seen the benefit yet of a lot of raw material.
The benefit.
Remember, we bought a lot of components at very high costs.
And we had to do that to keep the recurring revenue going.
Now we have solutions to get away from that we don't have to buy parts from brokers.
But we have to work through that inventory that inventory is still high.
We cut our inventory level by $3 4 million this quarter, but we have a lot more work to do and further cutting of inventory.
And as we cut that inventory, we're going to work through those higher.
Cost of components and.
And that will lead to more normalize.
Lower costs remember, we talked about some of those micros that normally five or $6 being 10 times the amount.
We're going to start to see the benefit of that five or six dollar component cost.
More in the fiscal 'twenty four period, so that's a benefit.
For the.
The margins of equipment that are soon to come they're not there yet.
Very very helpful and just one more for me on the recurring revenue side.
What did you see in the quarter.
Absent the impact of the the Verizon three shut down how did the business performed excluding that impact versus your expectations and then with the radios that went dark.
How many of those did you turn on versus your expectations and what gives you confidence that you can go back out there and get some of the ones that have that are still shut off turned back on.
But if we saw with recurring revenues this quarter. Besides the that the three G sunset effect.
As we saw the margins continue to go up.
Which was nice to see you know now it's 90% last quarter was 89%.
That's primarily attributable.
Two the fact that.
Fire radios continue to be very strong.
And they become a larger and larger part of the mix.
The sunset.
A lot of these radios has to be replaced.
The dealers would be crazy not to replace them.
That's their livelihood, that's how they get recurring revenue.
It's a slow process slower at least than I would've thought.
First of all you would have thought they would've never let it go silent go dark they werent prepared they thought like the a T. M. T. So I've said it was going to keep getting delayed and delayed it wasn't delay on January 3rd boom. It happened.
They were caught short.
There's thousands and thousands of radios.
Good 30000 plus radios.
It affected us.
That's the difference between being at 35% increase year over year.
26%.
I modeled out just to see what's the impact.
An hour.
Our 2026 goal.
If 28, 26% is the new norm of growth rate.
And what it showed was instead of getting to our goal by the end of fiscal 2026.
We get their six months later.
However, my goal also use 80% as the gross margin for that and we're at 90%.
That more than makes up for it it's not to say that we think we're gonna stay at 26, we think a lot of these radios are going to be replaced.
And that rate's going to go up.
You know what even at 26%.
It's we're going to hit our goal anyway, and all hardware at coal which was.
$150 million by 2026.
We're way ahead of that that we need 10% growth.
To get to that and you could say if you look at our financials, we've been growing by 20%. This year, it's up 22% for nine months last year at 22%.
So that's why we're not worried about the overall goal of 150 150.
46% goal of EBITDA margin.
It's we'll get there a few months early a few months late big picture it doesn't matter.
Okay, great. Thank you very helpful. Appreciate it Youre welcome Matt.
Our next question is from Jason Schmidt at Lake Street Capital markets. Please proceed.
Hey, guys. Thanks for taking my questions. <expletive> I know you mentioned strong sell through data in March just curious if you think March benefited from any sort of pull in orders and how we should think about that seasonally strong June quarter for you guys.
Sell through come.
So the fact that the dealers are very very busy.
And I'm going to these distributors of ours, we have 200 locations and taking products from the distributors. So they can do the installations.
And I would expect with what we're seeing and reading the newspapers every single day that the deal is going to be Super Super busy.
Also the dealers are so busy there.
That they've neglected some of the radios that are we've been talking about not upgrading them because they say well you know we were caught.
Uh huh.
A deer in headlights, we didn't realize that the system would go down but were very busy doing new work.
And we will get all those radios and upgrade them to <unk>.
Starlink radios are the best radio.
Performance in the market rated number one across the board for range you can use it in all kinds of cities and country.
Get tremendous range compared to our competitors are and it has a lot of other features in there that the deal is like weird syncs with every control panel that's out there it's a universal product.
A product that's only dedicated for one brand so there's a lot of advantages.
And additionally, realize that the deal is very busy putting in the control panels and other products.
Starlink radios and every one of our control panels now as a radio built in so were getting recurring revenue from a control panels and all fire systems like never before and I at the ISC show that I was at the dealers were astounded the performance of.
I'll fire battles, where they can program them from their smartphone instead of going to keep it on the wall and program that made it really easy for them to adjust the fire products performance. So they were very excited.
Cited about at the show was a tremendous success I have to say that we had a big beautiful booths at that show.
And it was right at the main entrance the dealers that came in and there were thousands of thousands 30000 dealers came in and saw a totally integrated company like nothing else in the marketplace and it bodes well for the future for NAPCO for recurring revenue for hardware sales.
It was a very very exciting and the most exciting show since I started the company that we've ever had so I.
Expect things.
Things to keep along at a very high rate and I expect that this new prime a product that we showed which is a residential small business.
Product will become a universe of success in every one of those prime is gets us recurring revenue. So was a very very exciting show and a great. It.
It was a great.
The stage for us to show our entire company's product line.
Okay. That's helpful. And then just as a follow up curious if you guys implemented any sort of price increases in the March quarter, and just given some of it sounds like some of the supply chain dynamics that eased a bit how are you thinking about any future potential price increases this year.
We always take a price increase Jason.
So we didn't do one in March typically we take it in the.
July period, we have done some earlier.
<unk> supply chain, when we put two or three price increases.
In effect within our fiscal year.
I think we're kind of beyond that so.
So I think the next one will be July one.
Jason one other thing I'd like to say is being in the commercial business. We were 80% of commercial we don't really have pricing issues commercial deal is or.
Not as price sensitive as the us residential dealers.
So it's.
It's not really an issue with us is nothing to be concerned about.
If we need a price increase we can get it and.
Liz will pass it along because as I as we said a lot of those increases go into commercial properties fire properties, where you have to have a working fire alarm system, even if half the employees only show up if any employee show up in the building. The fire Marshall says you must have a working fire alarm system.
This is different than the residential business.
Okay perfect. Thanks, a lot guys.
Thanks, Jason.
Our next question is from Brian <unk> with Imperial capital. Please proceed.
Yes. Thank you very much I was wondering if you could dig down a little bit about school security give us an update and maybe tell us.
How much of your revenue right now is generated you know.
From school security directly or indirectly and and what the pipeline looks like.
School security remains strong.
We can't tell you exactly what percent of our revenue comes from school security because a lot of times it comes through distribution.
But we.
We know.
Two things one there's been a bunch of wins that we recently got we haven't announced it.
We always have to work to see if we're able to announce it so what we're working on that if it's announcer bowl will do it but.
But once that I always look at is.
What's the locking percentage of sales of hardware sales.
I know when the locking sales goes up as a percentage.
That means schools are doing well, it's to keep part of it.
And locking is 59% of all of our hardware sales that's a key stat.
We were in that range before.
Covid hit.
I think we were lower but it was similar it was in that range and then when Covid hit and the kids were at school.
That's that dropped.
And with Kids went back to school of course, we all know shootings came back with a vengeance.
And.
The school security.
Jobs come back also.
Theres more money.
Available.
The K through 12.
<expletive> mentioned a couple of them.
Earlier.
There's lots of money, we try to help the schools figure out how to get it that money, that's probably what seems to take the longest in terms of getting more jobs, but the monies there.
And of course the universities.
Half the money they have big endowments.
And the other thing that's helping locking sales I know you asked about.
Schools, but.
Infrastructure changes airport upgrades those are very very important and helpful to our locking sales.
And here in New York.
Both Laguardia and JFK airports, both going through upgrades and renovations.
And if you go walking into those airports, you'll see our trilogy locks everywhere.
And so and the same thing holds true in other other airports throughout the country. We've seen it everywhere. So those are good signs don't don't help out locking sales. Besides the schools, which is a key part.
Great and just as a follow up real quick on that in terms of the Lockheed market I have your biggest competitor started getting product out on time I know, there's been lots of things from ISC west and even last year talking about some of the largest locked producers if you will that be.
Had a tough time delivery.
None of our competitors make the ports in Asia.
It makes the locks we make our blocks in the Dominican Republic. So we get delivery in six weeks. We don't have a lot of interruptions are we don't have port problems shipping problems.
So we have a big advantage.
The competitors are still having trouble getting their production and it's it's helps us because it introduces our line of locked products to the Locksmiths integrators dealers and when once they start to use it.
It sells itself.
Amazing line of products, we go from the basic door locks.
Two very sophisticated network operated blocks. So we're really a one stop shop for the dealers and they get to see that so the COVID-19 was helpful from that point of view for us because of our set up our manufacturing and.
In engineering set up well in this hemisphere, so that worked out well.
Thank you.
Thanks, Brian .
As a reminder, the star one on your telephone keypad, if he would like to ask a question. Our next question is from Raj Sharma with B Riley Securities. Please proceed.
Hello, Thank you for taking my questions congratulations on the quarter.
Can you talk a little bit any color on the dealer sell throughs.
Is the mix changing you would alluded to bigger vars in the last call you switching.
Getting more of your business from them.
And are they experiencing similar growth rates.
Relative to the last few quarters is there any.
Slowdown at all that they are seeing.
Economic factors.
So.
The big accounts that we've talked about.
What's your ADT Johnson.
Johnson control.
And those are direct sales and we're just getting started with all three of them.
So they're not major.
Impact.
Customers yet.
Hope they will be.
They can be.
We actually as we've talked about in the past.
We took one of our top sales guys.
And made him the vice president of sales for National accounts.
So we want.
Him.
To develop those three accounts and get more of them.
And there are more out there it's not just those three.
But those are just getting started.
The distributors, that's where most of the.
That's where most of the sales continue.
Continue to come from.
And they've been doing well sell through stats are very good.
Yeah.
Especially this this past quarter unlocking was very strong, which we've talked about.
<unk>.
Margins are great on locking so we'd love to see that.
But.
The distributors are doing really well with us they have been for a while.
And the ordering pattern is good to know.
It used to be in the old days that the orders would come in at the very end of the quarters.
From these distributors and we'd be sitting here waiting for orders to come in at the end of March at the end of June at the end of September at the end of December that's changed they order more regularly it's better for us better for them. It's more efficient you don't that's one of the reasons why we don't have to fly as much.
It's also a contributor to the lower freight cost.
More of a steady.
The ordering process.
And so we're very happy with the way things are going with our distributors.
That's right.
One additional thing and that is that the makeup of our customer base.
Is very diversified the company built itself with a security dealers are all different types that could be alarm dealers locksmiths.
And system integrators that do the access control jobs.
These dealers have between one and three vans on the road, there's small dealers.
But there are community oriented dealers, they're everywhere and that's how NAPCO built its business the new deal as it were talking about the Johnson controls Adt's. These are brand new dealers that were adding to the smaller dealers.
And we've taken as Kevin said, one of our top sales guys, who made them ahead of National accounts now we've added another person along with them because you have other dealers, which we don't have wood chip, which they cool superregional dealers.
Sides other national dealers and.
<unk> well for the future for us because as the big guys start using it becomes a more and more volume and we have a very efficient factory to build it for them. So that's our growth our growth has diversified dealers as well as larger deal is largest ones in the business.
So are we also have our own engineering Department in house in Aberdeen.
Headquarters so some of the dealers requested certain features could be software or hardware features we're able to move very quickly compared to our competitors, which may have these things made in Asia, and it's very slow as far as getting a product upgrades new feature sets.
He is the products, we don't have that issue, we have a engineering department and headquarters right in our marketing and sales group.
So we get we get great.
Service to the large national accounts that have certain needs.
Got it.
Very helpful. Thank you and then the recurring on the recurring revenues came in a little lighter than expected margins still exceeded.
And you have confidence that the sunsetting.
And the radios going dark you should pick them up how should we look at.
So to the equipment sales and the recurring revenue growth in the next few quarters do you continue to see momentum in could you kind of comment on.
On the.
We expect the expected growth rates in the margins.
No.
And for the next few quarters.
Well, we grew the hardware.
By 22% last year, so far its 22% this year.
We have a Q4 very very high comp.
That'd be good yeah.
And we think.
For our full fiscal year.
We're now in the double digit range for hardware.
If you go back.
Number of years before that it wasn't the case, but that's the case of where we are now and.
And we don't see any reason that that's going to switch.
When it comes to recurring revenue.
We were growing in the mid thirties lately. This one dropped to 26 about why it dropped we think it'll come back will it come all the way back it's hard to say, we'll see over the next couple of quarters, regardless of whether it comes back to the 35% or it stays in the mid twenties.
Yes.
The picture is still very very strong.
As I said earlier, if we grow by 26%.
But for the next few years.
Alright side.
We will hit our $150 million goal.
Of 2027 six months F timeframe, we said, we would however pick up the.
10% on the margins because our goal was.
You know, 80% and it's 90%.
That's huge because our our recurring revenue at that point in time.
The $150 million.
10% differential that's $15 million so in the big picture, whether it's 26 or 30 or 35.
It doesn't matter, where on the right track with doing the right things and as far as the margins go.
Margins will only get better.
As we've talked about the margins used to be in the low to mid thirties, and then in the fourth quarter, they would jump up because of the overhead absorption.
There were a few a couple of years, where the margin suffered because of <unk>.
By chain.
Where did that we just finished with 32%. There's no reason to believe we can't get stronger on those quarters going forward.
It may not happen all at once.
Hey, when we have a $28 million to $33 million of hardware quoted you gotta get that overhead absorption when we work through the inventory the high inventory.
On those micros that we've talked about.
They start using five or six dollar micros, it's going to get the benefit of that so.
So hardware margins will only get better.
And we think there'll be in the Forty's and that ultimately our goal of 50% by 2026.
Got it and then just lastly, I know inventory levels have come down.
That's good the non current inventory levels.
The levels are still relatively unchanged.
How should we expect that to change the next few quarters.
As we work through the.
Very high level of inventory, we have that we bought.
Because they were hard to get.
That should come down.
Internally, we have we wanted to reduce inventory.
By at least another $10 million.
And obviously that will help our cash you'd be even more.
Cash has been growing dramatically and when it gets the help of reduction in inventory or is it just adds to the picture.
So.
You know our goal is to at least get another $10 million of inventory reduction.
Over the next 12 months and we're working hard towards that just to make our balance sheet, which looks great.
Look that much better.
Got it that's it for me and the questions and thank you I'll take it offline. Thanks Raj.
Our next question is from Jim Ricchiuti with Needham and company. Please proceed.
Alright, Thanks for getting me in technical problems getting into the queue.
Kevin just on that inventory question at what point do you think we cycle through some of this higher cost inventory or we won two quarters away from that how do we think about that two quarters I would say I would say by the time, we get to Q2.
Of fiscal 'twenty four.
Hollywood of recycle, we would've gone through a lot of those higher cost components.
Got it.
Most of my other questions were answered, but this is going to be in the queue and maybe you could just help us what was the year over year growth rate and intrusion alarm versus door locking products. If you can thank you.
Yeah, well door locking products.
This will be in the Q.
It should be out Tonight.
Door locking products.
Does.
$16.8 million for the quarter.
And.
It was $11 $2 million.
So the prior prior year's quarter.
And it's $45 million.
For the nine months.
<unk> to $34 million.
For the.
Prior year period.
The intrusion is lumped with access control products.
Together.
That's the way it's disclosed in the Q, but it was 11 5 million for the quarter versus 12.6.
The prior year's quarter.
And it was $36 4 million for the nine months.
Versus 33 million point to.
In the prior year's period.
And that decline in the current quarter, how much of that would you say is just related to what you're seeing as far as yeah.
And some of that's <unk> replacement radio business.
I think the the.
Client is due to that that factor.
And it's also due to the fact that.
You know a lot of guys.
At this at this time a year ago.
Wanted to make sure they were not caught short.
And so you have you have an extreme you have a lot of dealers, who made sure that they did something about it.
Last March and you're comparing it to this year.
You still have.
You know thousands of dealers, who have an upgraded yet.
So.
We think that'll straighten itself out we were very encouraged that the run rate.
Went up by $4 million.
In this past quarter.
So we disclosed last time that the recurring run rate was $59 million as January end of January .
Now at the end of April at $63 million, that's 4 million historically, it's usually grown by about $1 million.
Fact that this grew by $4 million.
Encourage it.
Joe.
We're very encouraged by overall recurring.
There's little twist.
With the <unk> Sunset and try to get these dealers back.
Back end business.
But that'll work itself out.
Yeah.
Got it thanks, very much better chip.
We have reached the end of our question answer session I would like to turn the floor back over to management 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.
Further information we thank you for your interest and support and have a wonderful day.
Thank you. This will conclude today's conference you may disconnect at this time and thank you for your participation.
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