Q2 2024 Napco Security Technologies Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the NAPCO Security technologies fiscal second quarter of 'twenty 'twenty four earnings conference call. At this time all lines are in a listen only mode. Following the presentation, we'll conduct a question and I'm sorry.
Operator: Good morning, ladies and gentlemen, and welcome to the NAPCO Security Technologies fiscal second quarter of 2024 earnings conference call. At this time, all lines are in a listen-only mode.
Operator: Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Monday, February 5th, 2024. I would now like to turn the conference over to Frances Okineski, Vice President of Investor Relations. Please go ahead.
If at any time changes called you require immediate assistance. Please press star zero.
Later.
This call is being courted on Monday February fished 'twenty 'twenty four I would now like turn the conference over to Francis will can escape Vice President Investor Relations. Please go ahead.
Thank you Julie and good morning, everyone My.
Frances Okineski: Thank you, Jillian. Good morning, everyone. My name is Fran Okineski, Vice President, Investor Relations for NAPCO Security Technologies. I want to thank you all for joining us today on our conference call to discuss our financial results for our fiscal second quarter 2024. By now, all of you should have had the opportunity to review our earnings press release discussing the results of our quarter. If not, a copy of the release is available in the Investor Relations section of our website, www.napcosecurity.com. On the call today are Richard Soloway, our president and chief executive officer of NAPCO Security Technologies. Kevin Buchel, our Executive Vice President of NAPCO.
My name is Fran Okoniewski, Vice President of Investor Relations for NAPCO Security technologies.
I just want to thank you all for joining us today on our conference call to discuss our financial results for our fiscal second quarter 2024.
By now all of you should have had the opportunity to review our earnings press release.
Discussing the results of our quarter.
A copy of the release is available in the Investor Relations section of our website Www NAPCO security Dot com.
On the call today are Richard Soloway, President and Chief Executive Officer of NAPCO Security technologies, and Kevin boost shell, our executive Vice President and CFO.
Before we begin let me take a moment to read the forward looking statement.
Frances Okineski: Before we begin, let me take a moment to read the forward-looking statement, as this presentation contains forward-looking statements that are based on current expectations. Estimates, forecasts, and projections of future performance, based on management's judgment, including Coaching, and Anticipated Product Performance.
This presentation contains forward looking statements that are based on current expectations.
Estimates forecasts and projections of future performance based.
Based on management's judgment.
Beliefs.
Current trends and anticipated product performance.
Frances Okineski: 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, and 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 Software as a Service recurring monthly revenue. Forward-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 limited to, those risk factors described in our SEC filings, including our annual report on Form 10-K. Other unknown or unpredictable factors or underlying assumptions, which could prove to be incorrect, could cause actual results to differ materially from those in the forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance, or achievement. You should not place undue reliance on these forward-looking statements.
These forward looking statements include without limitation statements.
Statements relating to growth drivers of the company's business.
Such as school security products.
Current revenue services.
Potential market opportunities the.
The benefits of our reoccurring revenue products to customers and dealers.
Our ability to control expenses and cost.
And expected annual run rate.
For software as a service recurring monthly revenue.
Forward looking statements involve risks and uncertainties.
It may cause actual results to differ materially from those contained in the forward looking statements.
These factors include but are not limited to such risk factors described in our SEC filings.
Including our annual report on Form 10-K.
Other unknown or unpredictable factors were underlying assumptions subsequently proving to be incorrect could cause actual results to differ materially from those in the forward looking statements.
Although we believe that the expectations reflected in the forward looking statements are reasonable we.
We cannot guarantee future results.
Level of activity performance or achievements.
You should not place undue reliance on these forward looking statements.
Frances Okineski: All information provided in today's press release and this conference call is as of today's date, unless otherwise stated, and we undertake no duty to update such information except as required under applicable law. I will turn the call over to Dick in a moment, but before I do, I want to mention we are actively planning our investor relations calendar for more non-deal roadshows and conferences in the near future, as investor outreach is very important to NAPCO. And I would like to thank all those folks that assist us at these conferences and non-deal roadshows. Also, we invite you to come and visit our booth at the upcoming ISC West. It's a great show.
All information provided in today's press release and this conference call is as of today's date unless otherwise stated.
And we undertake no duty to update such information, except as required under applicable law.
I will turn the call over to <expletive> in a moment, but before I do I want to mentioned, we are actively planning our investor relations calendar.
For more non deal Roadshows and conferences in the near future.
Investor outreach is very important to NAPCO.
I would like to thank all of those folks that assist us.
And these conferences and non deal road shows.
Also we invite you to come and visit our booth at the upcoming ISC West.
Trade show.
Frances Okineski: April 9th through the 11th in Las Vegas. ISC West is the industry's largest trade show with over 30,000 attendees. So, if anyone is interested in attending, please contact me, and I will arrange to get you a pass.
April 9th through the 11th in Las Vegas.
ISC west as the industry's largest trade show with over 30000 attendees.
So if anyone is interested in attending please contact me and I will arrange to get you a pass.
Richard Soloway: With that out of the way, let me turn the call over to Richard Soloway, President and CEO of NAPCO Security Technologies Inc. Dick, the floor is yours. Thank you, Fran. Good morning, everyone, and welcome to our conference call. Thank you for joining us today to discuss our results. We are pleased to report fiscal Q2 2024 record sales of $47.5 million. This is the 13th consecutive quarter we've achieved record sales for the quarterly period. Recurring Revenue Subscription Service continues to grow at a very strong rate, and the annual prospective run rate is now $76.5 million based on January 2024 recurring revenue. Our balance sheet remains strong, with our cash balances at $79 million, an 18% increase over the June 30, 2023 level. We have no debt.
With that out of the way, let me turn the call over to Richard Soloway.
President and CEO of NAPCO security technologies.
<expletive> the floor is yours.
Thank you Frank.
Good morning, everyone and welcome to our conference call.
Thank you for joining us today to discuss our results.
We are pleased to report our fiscal Q2 2020 for record sales of $47 5 million.
This is the 13th consecutive quarter, we've achieved record sales.
Quarterly period.
Recurring revenue subscription service continues to grow at a very strong rate.
And the annual perspective run rate is now $76 5 billion based on January 2024 recurring revenues.
Our balance sheet remains strong with our cash.
Cash balances at $79 million, an 18% increase over the June 32023 level.
We have no debt.
Richard Soloway: We continue to focus on capitalizing on key industry trends, which include wireless fire and intrusion alarms and Related Recurring Service Revenues. 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, as well as 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 of NAPCO owns approximately 10% of the equity. Before I go into greater detail, I will now turn the call over to our CFO, Kevin Buschel. He will provide an overview of our fiscal second quarter results, and then I will be back with more on our strategies and view of our market. Kevin, the floor is yours. Thank you, Dick.
We continue to focus on capitalizing on key industry trends, which include wireless fire and intrusion alarms.
And the related recurring service revenues 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.
Fit and returns on equity as well as 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 of 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 will.
We will provide an overview of our fiscal second quarter results and then I will be back with more on our strategies and view of our markets.
Kevin the floor is yours.
Thank you Jack good morning, everyone.
Kevin Buchel: Good morning, everyone. Net sales for the quarter increased 12% to $47.5 million, and that's the highest quarterly sales in the company's history, and that compares to $42.3 million for the same period one year ago. Net sales for the six months ended December 31, 2023, increased 9% to a six-month record of $89.2 million, and that compares to $81.8 million for the same period one year ago. Recurring monthly service revenue continued its strong growth, increasing 25% in Q2 to $18.5 million as compared to $14.9 million for the same period last year. Recurring monthly service revenue for the six months ended December 31, 2023, increased 25% to $35.8 million, as compared to $28.7 million last year. Recurring service revenue now has a prospective annual run rate of approximately $76.5 million based on January 2024 recurring revenues, and that compares to $72.5 million based on October 2023 recurring service revenues, which we reported back in November.
Net sales for the quarter increased 12% to.
To $47 5 million and Thats, the highest quarterly sales in the company's history.
And that compares to $42 $3 million, but at the same period one year ago.
Net sales for the six months ended December 31 2023.
Increased 9% to a six month record of $89 $2 million in.
And that compares to $81 8 million for the same period, one year ago.
Recurring monthly service revenue continued its strong growth.
Increasing 25% in Q2 to $18 $5 million as compared to $14 $9 million.
Same period last year.
<unk> monthly service revenue for the six months ended December 31 2023.
Increased 25% to $35 $8 million as compared to $28 7 million last year.
Recurring service revenues now have a prospective annual run rate of.
Of approximately $76 $5 billion based on January 2020 for recurring revenues and that compares to $72 $5 million based on October 2023 recurring service revenues.
Which we reported back in November.
Equipment sales for the quarter increased 6% to $29 million as compared to $27 $4 million last year.
Kevin Buchel: Equipment sales for the quarter increased 6% to $29 million as compared to $27.4 million last year. This increase was due primarily to revenue increases in both Alarm Lock and Mark's brand door locking products, as well as increased sales of NAPCO brand intrusion products. Of note is that Starlink radio sales in Q2 sequentially increased over those sales in Q1. Equipment sales for the six months increased 1% to $53.4 million, as compared to $53.1 million for the same period last year. This increase was primarily due to increases in both Alarm Lock and Marks Locking sales, as offset by a decrease in NAPCO intrusion sales due to the previously discussed decline in Starlink radios.
This increase was due primarily to revenue increases in both alarm lock and marks brand door locking products.
As well as increased sales of NAPCO brand intrusion products.
Of note is that the Starlink radio sales in Q2 sequentially increased over those sales in Q1 by.
By 63%.
Equipment sales for the six months.
<unk>, 1% to $53 $4 million as.
As compared to $53 $1 million for the same period last year.
This increase was primarily due to increases in both alarm lock and marks locking sales as offset by a decrease in NAPCO intrusion sales.
Due to the previously discussed decline installed radios.
Gross profit for the three months ended December 31, 2023 <unk>.
Kevin Buchel: Gross profit for the three months ended December 31, 2023, increased 74 percent. $25 million with a gross margin of 53%, as compared to $14.4 million with a gross margin of 34% for the same period last year. And gross profit for the six months increased 64% to $47.4 million with a gross margin of 53% as compared to $28.9 million with a gross margin of 35% a year ago. Gross profit for recurring service revenue for the quarter increased 21%.
Increased 74%.
$25 million with a gross margin of 53%.
As compared to $14 $4 million with a gross margin of 34%.
For the same period last year and the gross profit for the six months increased 64% to $47 $4 million with a gross margin of 53% as compared to $28 $9 million with a gross margin of 35% a year ago.
Yeah.
Gross profit for recurring service revenue for the quarter increased 21% to $16 $7 million with a gross margin of 90%.
Kevin Buchel: $16.7 million with a gross margin of 90%, and that compares to $13.2 million with a gross margin of 89% last year, and Gross Profit for Recurring Service Revenue for the six months increased 21% to $32.2 million with a gross margin of 90%, as compared to $25.4 million with a gross margin of 88% last year.
And that compares to $13 $2 million with a gross margin of 89% last year.
And gross profit for recurring service revenue for the six months increased 21% to $32 $2 million with a gross margin of 90%.
As compared to $25 $4 million with a gross margin of 88% last year.
Kevin Buchel: Gross profit for equipment revenues in Q2 increased 633% to $8.4 million with a gross margin of 29%, as compared to $1.1 million with a gross margin of 4% last year, and Gross Profit for Equipment Revenues for the six months increased 328% to $15.2 million with a gross margin of 29%, as compared to $3.6 million with a gross margin of 7% for the same period last year. The increase in both gross profit dollars and gross margin for recurring revenue for the three and six months ended December 31, 2023 is primarily the result of the previously mentioned increase in recurring revenues, as well as a greater proportion of those revenues being generated by our Starlink FireRadio, which generates higher monthly service charges than the other Starlink radios.
Gross profit for equipment revenues in Q2.
Increased 633% to $8 $4 million with a gross margin of 29%.
As compared to $1 1 million with a gross margin of 4% last year.
And gross profit for equipment revenues for the six months.
<unk> increased 328% to $15 $2 million with a gross margin of 29%.
As compared to $3 $6 million with a gross margin of 7% for the same period last year.
The increase in both gross profit dollars and gross margin for recurring revenue for the three and six months ended December 31 2023.
It was primarily the result of the previously mentioned increase in recurring revenues.
As well as a greater proportion of those revenues being generated by our Starlink fire radios.
Which generate higher monthly service charges than the other starlink radios.
Kevin Buchel: The increase in both gross profit dollars and gross margin for equipment revenues for both the three and the six months ended December 31, 2023, primarily resulted from lower costs for certain components as compared to the same period last year when we were still feeling the effects of the global supply chain shortage. In addition, the aforementioned increase in equipment sales was also a factor in the increase in gross profit and gross margin. Research and development costs for the quarter increased 14% to $2.5 million, or 5% of sales.
The increase in both gross profit dollars and gross margin for equipment revenues for both the three and six months ended December 31 2023.
Primarily resulted from lower cost of certain components as compared to the same period.
Last year, when we were still feeling the effects of the global supply chain shortage.
In addition, the aforementioned increase in equipment sales was also a factor in the increase in gross profit and gross margin.
Research and development costs for the quarter increased 14% to <unk>.
$2 $5 million or 5% of sales.
Kevin Buchel: And that compares to $2.2 million, or 5% of sales, for the same period a year ago, and Research and Development Costs for the six months ended December 31, 2023, increased 7% to $5 million, or 6% of sales, and that compares to $4.7 million, or 6% of sales, for the same period a year ago. The increase for the three and the six months primarily resulted from compensation increases and additional staff. Selling, general, and administrative expenses for the quarter increased 11%.
And that compares to $2 2 million or 5% of sales.
At the same period a year ago.
And research and development costs for the six months ended December 31 2023.
Increased 7% to $5 million or 6% of sales and that compares to $4 $7 million or 6% of sales for the same period a year ago.
The increase for the three and six months, primarily resulted from compensation increases and additional staff.
Selling general and administrative expenses for the quarter.
<unk> increased 11%.
Kevin Buchel: $8.7 million, or 18% of net sales, and that compares to $7.8 million, or 18% of net sales for the same period last year. Selling general and administrative expenses for the six months ended December 31, 2023, increased five percent. $17.1 million or 19% of net sales, and that compares to $16.3 million or 20% of sales for the same period last year. The increase in SGNA for the three months is primarily due to increases in legal and advertising expenses, as well as additional expenses relating to the enhancement of our internal control system. The increase for the six months was primarily due to legal and accounting fees, as well as the aforementioned enhancement of our internal control system. The decrease in SG&A as a percentage of net sales for both the three and the six months was due to the increase in net sales being proportionately larger than the increase in SG&A expenses.
The $8 7 million or 18% of net sales and that compares to $7 $8 million or 18% of net sales for the same period last year.
Selling general and administrative expenses for the six months ended December 31 2023.
Increased 5% to $17 1 million or 19% of net sales and that compares to $16 3 million.
20% of sales for the same period last year.
The increase in SG&A for the three months.
It was primarily due to increases in legal and advertising expenses.
As well as additional expenses relating to the enhancing of our internal control systems.
The increase for the six months was primarily due to legal and accounting fees.
As well as the aforementioned enhancing of our internal control systems.
The decrease in SG&A as a percentage of net sales for both the three and six months.
Due to the increase in net sales being proportionately larger than the increase in SG&A expenses.
Kevin Buchel: Operating income for the quarter increased 219%, to $13.8 million as compared to $4.3 million for the same period last year. Operating income for the six-month end of December 31, 2023 increased 218 percent to $25.4 million as compared to $8 million for the same period. Interest and other income for the three months increased 290%.
Operating income for the quarter increased 219% to $13 $8 million as compared to $4 $3 billion for.
But at the same period last year.
Operating income for the six months ended December 31, 2023 increased 218%.
The $25 $4 million as compared to $8 million for the same period last year.
Yeah.
Interest and other income for the three months.
Increased 290% to.
Kevin Buchel: $729,000 as compared to $187,000 last year. And for the six months, interest and other income increased by $1.1 million to $1.2 million, compared to $84,000 last year. The increase for both the three and the six months ended December 31, 2023, was due to increased interest income from certificates of deposit. The provision for income taxes for the three months increased by $1.3 million, to $1.9 million with an effective tax rate of 13 percent, as compared to $586,000 with an effective tax rate of 13% last year.
$729000 as compared to $187000 last year.
And for the six months interest and other income increased by $1 $1 million to.
The $1 $2 million compared to $84000 last year.
The increase for both the three and six months ended December 31, 2023 was due to increased interest income from certificates of deposits.
The provision for income taxes for the three months increased by $1 3 million to $1 9 million with an effective tax rate of 13%.
As compared to $586000 with an effective tax rate of 13% last year.
Kevin Buchel: And for the six months, the provision for income tax was increased by $2.4 million, to $3.4 million with an effective tax rate of 13%, as compared to $1.047 million with an effective tax rate of 13% last year. The increase in the provision for both the three and the six months ended December 31, 2023, was due to increases in taxable income. Net income for the quarter increased 221% to a quarterly record of $12.6 million, or $0.34 per diluted share. And that compares to $3.9 million, or $0.11, for Diluted Shares for the same period last year, and that represents 27% of net sales. Income for the six months ended December 31, 2023, increased 229%, to a six-month record of $23.1 million, or $0.62 per diluted share, and that compares to $7 million, or $0.19, per diluted share for the same period last year, and that represents 26% of net
And for the six months the provision for income taxes increased by $2 $4 million.
The $3 $4 million with an effective tax rate of 13%.
As compared to 1.0, $4 7 million with an effective tax rate of 13% last year.
The increase in the provision for both the three and six months ended December 31, 2023 was due to increases in taxable income.
Net income for the quarter increased 221% to a quarterly record.
$12 $6 billion.
With 34 cents per diluted share.
And that compares to $3 9 million or 11 cents per diluted share for the same period last year.
And that represents 27% net sales.
Net income for the six months ended December 31 2023.
<unk> increased 229%.
Two a six month record of $23 $1 million.
Or <unk> 62 per diluted share.
And that compares to $7 million or 19.
Per diluted share for the same period last year.
And that represents 26% of net sales.
Adjusted EBITDA for the quarter increased 191%.
Kevin Buchel: Adjusted EBITDA for the quarter increased 191%, to a quarterly record $15.1 million, or $0.41 per diluted share, and that compares to 5.2 million dollars, or 14 cents per diluted share, for the same period a year ago, and that equates to an adjusted EBITDA margin of 32%. Adjusted EBITDA for the six months ended December 31, 2023, increased 182%, to a six-month And that compares to $9.9 million or $0.27 per diluted share for the same period last year and equates to an adjusted EBITDA margin of 31%. Moving on to the balance sheet. As of December 31, 2023, the company had $79 million in cash and cash equivalents, other investments, and Marketable Securities and That Compares.
To a quarterly record.
<unk> dollars $1 million.
A 41 cents.
Per diluted share.
And that compares to $5 $2 million of 14th.
Per diluted share for the same period, a year ago and.
And that equates to an adjusted EBITDA margin of 32%.
Adjusted EBITDA for the six months ended December 31 2023.
Increased 182% to a six month record $28 million.
Or <unk> 76 per diluted share.
And that compares to $9 $9 million or 27 cents per diluted share.
The same period last year and equates to an adjusted EBITDA margin of 31%.
Moving on to the balance sheet.
As of December 31, 2023, the company had $79 million in cash and cash equivalents other investments and marketable securities and that compares to $66 7 million at June 32023, that's an 18% increase.
Kevin Buchel: $66.7 million at June 30, 2023; that's an 18% increase. The company had no debt as of December 31, 2023. Cash provided by operating activities for the six months ended December 31, 2023 was $18.7 million, and that compares to $1.1 million for the same period last year. Working capital, defined as current assets with current liabilities, was $128.5 million on December 31, 2023, and that compares with working capital of $111.7 million on June
Company had no debt as of December 31, 2023.
Cash provided by operating activities for the six months ended December 31, 2023 was $18 $7 million.
And that compares to $1 1 million.
For the same period last year.
Working capital is defined as current assets less current liabilities.
It was $128 $5 million.
At December 31, 2023 and.
And that compares with working capital of $111 $7 million.
At June 32023.
Kevin Buchel: The current ratio is defined as current assets divided by current liabilities, with 7.1 to 1 at December 31, 2023 and 6.7 to one at June 30, 2020. CapEx for the quarter was $426,000, and that compares to $444,000. Gary Coxe, That concludes my formal remarks, and I would now like to return the call to Dick.
The current ratio defined as current assets divided by current liabilities.
With seven 1% to one at December 31, 2023 and.
Six seven.
To one at June 32023.
Capex for the quarter was $426000.
And that compares to $444000 in the prior year period.
That concludes my formal remarks, and I would now like to return the call back to <expletive>.
Thank you Kevin.
Richard Soloway: Thank you, Kevin. The first half of fiscal 2024 is off to a great start. Fiscal Q1 and Fiscal Q2 results, achieving record sales and profit, driven by hardware-enabled recurring revenue growth of 25%, which represents approximately 40% of total company revenue. Our net income of $12.6 million, and Adjusted EBITDA of $15.1 million were quarterly record breaks. Equipment revenue improved, growing 6% for the quarter, with gross margins on such sales sequentially increasing to 29% from 28% last quarter. Radio sales in Q2 improved over Q1, increasing by approximately 63 percent. While such sales were still 13% below the radio sales of Q2 last year when the impending 3G Verizon sunset was rapidly approaching.
The first half of fiscal 2024 is off to a great start with fiscal Q1 and fiscal Q2 results achieving record sales and profits driven by hardware enabled recurring revenue growth of 25%.
And which represents approximately 40% of total company revenues.
Our net income of $12 6 million.
And adjusted EBITDA of $15 1 million.
The record breakers.
Equipment revenue improved growing 6% for the quarter.
Gross margins on such sales sequentially, increasing to 29% from 28% last quarter.
Radio sales in Q2 improved over Q1.
Increasing by approximately 63%.
While such sales were still 13% below the radio sales Q2 last year when the impending <unk> Verizon Sunset was rapidly approaching <unk>.
Richard Soloway: The increase over the last quarter was significant. We expect radio sales to continue to be a key contributor to our hardware sales and continue to lead to the continued growth of our highly profitable recurring revenue. Gross margin for recurring service revenues was once again strong at 90%, and when combined with gross margin on equipment revenues of 29%, the total gross margin for Q2 amounted to 53%, which compares to 34% for last year's Q2.
The increase over last quarter was significant.
We expect radio sales to continue to be a key contributor to our hardware sales.
To lead to the continued growth of our highly profitable recurring revenues.
Yes.
Gross margin for recurring service revenues was once again strong at 90%.
And when combined with gross margin on equipment revenues of 29%. The total gross margin for Q2 amounted to 53%, which compares to 34%.
Last year's Q2.
Richard Soloway: We are particularly pleased to see the growth in equipment revenues, which was primarily attributable to the continued strength of locking revenue in addition to the improvement in intrusion sales. We also saw and are pleased with the increase in the recurring revenues annual run rate, which increased to 76.5 million based on January 2024 recurring revenues, compared to an annual run rate of $72.5 million based on October 2023 recurring revenues. Our alarm lock and marks-locking hardware lines continue to see growth in school and classroom security, health care, and Retail Loss Prevention, as well as multi-dwelling commercial and residential applications, growing approximately 10% compared to last year and approximately 18% compared to Q1. Locking sales, once again, represented 61% of hardware sales in Q2.
We are particularly pleased to see the growth in equipment revenues.
Which was primarily attributable to the continued strength of locking revenue in addition to the improvement and intrusion sales.
We also saw we also.
While I'm pleased with the increase in the recurring revenues annual run rate, which increased to $76 5 million based on January 2020 for recurring revenues.
Compared to an annual run rate of $72 5 million based on October 2023 recurring revenues.
Our alarm lock marks locking hardware lines continue to see growth in school and classroom security.
Care.
And retail loss prevention, as well as multi dwelling commercial and residential applications growing approximately 10% compared to last year.
Approximately 18% compared to Q1.
Locking sales once again represented 61% of hardware sales in Q2.
We continue to remain focused on further.
Richard Soloway: We continue to remain focused on further penetrating each of these markets. Net income of $12.6 million, besides being a Q2 record breaker, represents 27% of net sales. Adjusted EBITDA of $15.1 million, also a Q2 record, represents an adjusted EBITDA margin of 32%. We believe we are well on our way to achieving our adjusted EBITDA margin target of approximately 45% on or about the end of fiscal 2026, as our targeted equipment sales reach $150 million and our recurring revenue service level reaches $150 million. Our balance sheet continues to get stronger, with cash and cash equivalents, other investments, and marketable securities increasing 18% to $79 million as compared to $66.7 million at June 30, 2023. We have no debt, and the net cash provided by operating activities for the six months ending December 31, 2023 was also strong, amounting to $18.7 million.
Each of these markets.
Net income of $12 6 million.
Besides being a Q2 record breaker.
Represents 27% of net sales.
Adjusted EBITDA of $15 1 million also a Q2 record represents an adjusted EBITDA margin of 32%.
We believe we are well on our way to achieving our adjusted EBITDA margin target of approximately 45% on or about the end of fiscal 2026.
As our targeted equipment sales reached $150 million and our recurring revenue service level reaches $150 million.
Our balance sheet continues to get stronger with cash and cash equivalents other investments.
And marketable securities, increasing 18% to $79 million as compared to $66 7 million at June 32023.
We have no debt and the net cash provided by operating activities for the six months ending December 31 2023.
Was also strong amounting to $18 7 million.
Richard Soloway: We recently announced the introduction of Prima by NAPCO, a new all-in-one alarm for security, fire, video, and connected homes. We anticipate that PRIMA will address an important mass segment of the security market, including residential and small business systems. With built-in Wi-Fi and cellular radio communication, customer alert notifications, and video and smart home subscription options for each installed system, the security dealer, as well as NAPCO, can add more recurring There are millions of commercial buildings of all types, such as offices, hospitals, schools, coffee shops, restaurants, as well as residences that still require upgrades from legacy copper phone lines. Our Starlink line of radios has the widest coverage range of both AT&T and Verizon with rich feature sets, which our dealers really love.
We recently announced the introduction of prima by NAPCO, our new all in one alarm security.
Security via video and connected home.
We anticipate that prima will address an important mass segments of the security market.
<unk> residential and small business system.
With built in Wifi and cellular radio communications.
Customer alert notifications and video and smart home subscription options for each installed system, the security dealer as well as NAPCO can add more recurring revenue generating accounts.
There are millions of commercial buildings of all types, such as offices hospitals schools coffee shops restaurants, as well as residences that still require upgrades from legacy copper phone lines.
Our Starlink line of radios have the widest coverage range of both ATT.
And Verizon with rich feature sets, which are deal is really low.
As we have previously stated the constraints of the supply chain have abated and we believe in the coming months that combined with new distributors sources, we have developed.
Richard Soloway: As we have previously stated, the constraints of the supply chain have abated, and we believe in the coming months, combined with new distribution sources we have developed, we will begin to invigorate our equipment sales and associated margins to even higher levels than any time before. As we've stated previously, the higher the hardware sales, the more overhead absorption occurs in our Dominican Republic factory. And finally, as indicated in this morning's earnings release, the company will be issuing a quarterly dividend of $0.10 per share to be paid on March 22, 2024, to shareholders of record on March 1, 2024. This represents a 25% increase over the previous dividend of $0.08 paid on December 22, 2023.
We will begin to invigorate, our equipment sales and associated margins to even higher levels than any time before.
As we've stated previously the higher hardware sales the more overhead absorption occurs in our Dominican Republic factory.
This expands our gross margin.
And finally as indicated in this mornings earnings release, the company will be issuing a quarterly dividend of <unk> per share to be paid on March 22, 2024 to shareholders of record on March one 2024.
This represents a 25% increase over the previous dividend up eight paid on December 22, 2023, we are proud of this program as the NAPCO team has created such tremendous shareholder value over the years and this is another way for us this year.
Richard Soloway: We are proud of this program as the NAPCO team has created such tremendous shareholder value over the years, and this is another way for us to distribute profitable growth to our investors. The first six months of fiscal 2024 have generated strong sales and profitability. We believe we can continue to scale well into the future as we work toward our fiscal 2026 goals and targets and beyond.
So good profitable growth.
To our investors.
The first six months of fiscal 2024 have generated strong sales and profitability. We believe we can continue this growth well into the future as we work toward our fiscal 2026 goals and targets.
And beyond.
Operator: I'd 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 like to open the call for the Q&A session. Operator, please proceed. Thank you. Ladies and gentlemen, should you have a question, please press the star followed by the number on your touchtone phone. If you'd like to withdraw your question, please press the star followed by the two. If you're using a speakerphone, please leave the handset before pressing any key.
I'd 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 like to open the call for the Q&A session. Operator, operator. Please proceed.
Thank you ladies and gentlemen should you have a question. Please press the star followed by the one on your Touchtone phone. If you would like to withdraw your question. Please press the star followed by the two if youre using a speakerphone. Please proceed handset before pressing any keys one moment. Please for your first question.
Operator: One moment, please, for your first question. Your first question comes from Chad Bennett on behalf of Craig Helm. Please go ahead.
Your first question comes from Chad Bennett from Craig Hallum. Please go ahead.
Great. Thanks, Great job guys on the quarter, great to see the rebound in the equipment business.
Chad Bennett: Great, thanks. Great job guys on the quarter. Great to see the rebound in the equipment, um, So I guess maybe the first question is, I know you touched on it in the formal remarks, just on the radio inventory issue. It seems like it's largely behind us and probably even faster than maybe we thought. Just trying to get an idea, do we still expect some headwind in the March quarter or potentially even in the June quarter from that inventory issue, or how should we think about that? I think, Chad, that we thought it was going to take a couple of quarters to get it behind us. We thought that this quarter would be affected similarly as it was in Q1. We saw a lot of progress in Q2, and hence you saw the big increase in radio sales in this quarter versus last. We're not done yet. We're not 100% there yet. We still have some work to do, but I think at the end of Q3, it will be all behind us. The fact of what happened in Q2 did a lot to get this issue behind us, and, you know, we're going to continue to work hard.
So I guess, maybe first question is I know you touched on it in the formal remarks, just on the the rate at radio inventory.
Issue. It seems like were large it's largely behind us and probably even faster than maybe we thought just just trying to get a idea do we.
Still expect some headwind in the march quarter or potentially even in the June quarter from from though that inventory issue or how should we think about that.
I think Chad that we we thought it was going to take a couple of quarters to get it behind us we thought that this quarter would.
It would be affected similarly.
It was in Q1.
You saw a lot of progress in Q2.
And hence you saw.
The big increase in radio sales in this quarter versus last or.
We're not done yet.
As a percent there we still have some work to do.
I think at the end of Q3, it'll be all behind us.
But the fact of what occurred in Q2.
A lot to getting this issue behind us.
And yes, we're going to continue to work hard to.
To make sure Theres no issue left by the end of Q3.
Right got it and then just shifting to the locking side of the business. I think you you talked about locking growth of roughly 10% year over year, just in terms of of kind of sell through there and demand there were there any changes in demand in that business and and then.
And I think you highlighted the verticals that you're seeing strength in.
Should we think about that business differently from a growth rate relative to what you did this quarter or was this quarter kind of anomaly there.
Locking has done well for.
Several quarters in a row, maybe last even couple of years in a row.
So nothing unusual that gave us the strength.
What's great is we have to locking companies, we have alarm lock in we have marks.
And both of them.
Fearing on all cylinders.
And that's why we're seeing the success in locking so.
We expect that to continue.
For many quarters to come.
Got it and then maybe last one for me.
EBITDA margins looked phenomenal continue to improve in the low Thirty's I think again at least ahead of what I was thinking.
I know, we had some some finance and accounting costs that rolled in this quarter.
You know potentially you know maybe incrementally more rolling in in the next quarter, but it seems to me like EBIT margins.
Or are likely going from the low <unk> to the mid thirties and.
The short period of time is that a fair assessment Kevin.
Yeah well.
We're at <unk>, we're well on our way to the 45.
Can take more time, we won't get to the 45, obviously by the end of this fiscal year.
But when you have 40% of your revenue.
Generating 90% gross margins.
What we have that recurring now being roughly 40% of total revenues.
That takes you a long way to getting the way we want to go and we're going to keep adding obviously to that recurring and we think the margins will get better on the hardware as we progress.
Through the rest of the fiscal year.
Between those two events. There is no reason why we shouldnt see the EBITDA margin go even higher in this fiscal year.
Got it thanks nice job on the quarter.
Thanks, Chad.
Okay.
Your next question comes from Jason Smith from Lake Street. Please go ahead.
Hey, guys. Thanks for taking my questions. Kevin just curious if you could share with us some of the sell through metrics you saw your distributors in the December quarter.
We saw on.
The intrusion size.
A big improvement.
From two to two distributors.
So we've been referring to.
As being the ones that had the excess.
Radio inventory.
So that's that was.
We expected that to occur it expect it occurred faster than we thought.
One in particular.
Just they just did a phenomenal job.
Working their way through so their sell through stats with great.
And the sell through stats for most of the intrusion.
Is much better than it's been.
Not back to where it was.
We're not we're not 100% to where we were say a year ago.
But we are much better.
Then where we were a quarter ago.
And we expect that to continue as.
As we continue to help.
Our distributors promote product helped them move radios.
We're coming out with additional radios that are going to give us recurring.
So we're doing a lot of things, they're going to help the sell through and the sell through stats with locking continue to do well.
Watch all these stats.
Every week every month.
We watch the inventory levels for all of our distributors.
We're pretty pleased the way things have been going right now.
We watch it understood.
We want you to understand that.
Our radios, which generate recurring subscription revenue.
Has tremendous opportunities because you have millions of commercial buildings that are still operating on the old legacy copper.
And our radios are the best choice for the dealers. They have a lot of features that the deal is like so it's really.
Supercharging the fire radios. Additionally.
Many many small business residential jobs that need our radios also so we'll make a light of those radios millions of millions of jobs.
Out there that operating a copper that has to be converted over.
Next few years.
And then you have all of our products with the radio is built in the fire panels, it's built in.
The new Prima it's built in.
And those jobs for new work, so there's a lot of opportunities for us.
And it's a very very exciting future.
Can hear what's going on by taking a look at our numbers and we expect this to continue through 2026 goal.
<unk>.
$150 million of recurring.
So thats the future growth.
Okay. That's really helpful and I know you mentioned that you think their radio inventory issue will be behind you. After Q3, but just curious if your own higher cost inventory should largely be chewed through by then as well.
Yes.
The higher costs should be behind us.
Besides working on inventory.
Distributors.
We're working on getting the inventory that we possess getting through that as well.
And so.
If it's not gone by Q3.
I think most of it will be maybe there'll be some in Q4, but most of our inventory now is more normally cost it.
Days of the Crazy high.
Costs caused by the supply chain.
<unk> behind us.
Gotcha.
That's it for me Thanks, a lot guys.
Thanks JJ.
Your next question comes from Jim Ricchiuti from Needham.
Please go ahead.
Hi, Thank you.
Question.
I wanted to go back again to the.
The sequential growth in radios.
Admittedly this is somewhat of an easy comparison, but to what extent are you seeing any benefit.
On the radio side from the addition of the new distributor or is it also just.
Combination.
With the improved sell through in general.
Yeah.
It's all it's both Jim.
So, adding the new distributor has certainly helped.
But it's not like we loaded up this new distributor and it gave us a one time.
Hit improvement.
So radio sales.
We didn't we didn't do that.
We sold this new distributor normal amounts.
Enough inventory where.
Somebody goes into that distribution center.
They have the inventory.
Not too little not too much.
It's a contributor.
But besides that pie.
It is the contribution we saw is.
It's helping the other distributors moved through.
Their inventory and they move it through and it creates new demand with the dealers. That's what this is all about these distributors are just shelves.
The bottom line is we have to create demand at.
At the dealer level.
Having the new distributor with 115 new branches.
Certainly helps.
But also pushing.
A lot of this inventory through to deal is at all of the branches have all the distributors.
The biggest factor.
We expect.
Demand to be strong going forward.
Okay.
Okay.
One other thing I'm sorry.
This is gonna be 30000 security installation dealers visiting us in Las Vegas, which is the biggest show and Fran can set people up to come and see the dealers as they come by our booth, it's going to be upfront.
It's going to have the widest range of radios of the entire industry right. There all of our new products will be right. There. So we're going to get a lot of leads and as I said, there's millions of jobs that has to be upgraded legacy copper, they're huge numbers of jobs of new work.
The installed when you're putting up a building you must have a fire alarm burglar alarm today residential alarm just because of what's going on in society. So we're going to get a lot of dealers a lot of new leads and we have a great sales group of guys I've got a follow up on those leads so.
We expect to get even more pope's groups between our existing distributor base that we are plus a new distributor, which is the largest in the security industry.
That will generate additional continuous growth of radio sales.
What kind of traction are you seeing from pre but I know it's early days yet.
But what's the initial read on how the product is doing.
I think that the product has tremendous legs to it the.
The product is beyond anything else in the security industry.
With its functionality ease of installation goes in and 10 minutes with what's going on in society.
You need the alarm system for your business and you need a lot of system for the year.
At home and the premium is designed so that the actual salesman that sells the job to the end user customer and install it in less than 15 minutes.
Very very quick or we can leave it behind for the consumer to DIY.
Yes.
He wants to do that so I think the opportunities are tremendous as we said it takes a year or so for a new product and this was only developed that was already sent to the market.
A few months ago.
<unk>.
To become.
Our success so.
We expect that considering the fact that along or is it being put in and they are a little old fashioned that the competitors have and this is very very modern and install so quickly. This will become a standard in the security industry and every alarm that goes in.
Its prima has a recurring revenue tail to it so it's going to generate a lot more recurring revenue part of it.
2026 go didn't even include it.
It was just the existing products, but this will add more.
To the whole mix of what we're doing.
Got it and final question from me, Kevin just looking at the.
The expense side, how much of the higher costs were the stepped up financial controls were in the quarter or is this more going to be more fully reflected.
In the March quarter, and lastly, just on tax rate should we assume the similar tax rate.
Sure.
So on the first part of your question Jim.
Some of the additional costs went into the SG&A in this quarter.
We started with Deloitte Deloitte is now our auditors. So obviously that has that extra cost has started.
We've only done one quarter with that in Q2.
We have our consulting firm so that's filtered into the numbers.
What you haven't seen yet or the additional employees.
The internal auditor.
And the additional cost accountants, we're in the process of doing those hires.
I expect that will be acute that will start in Q3 quarter that we're in now.
We will see that.
Going forward and you know those are recurring expenses no additional employees.
As is the Deloitte piece the consulting.
Thanks.
Our tax rate.
It has been 13%.
Every every quarter.
Full year.
When I model I use 15.
But we've been running at 13.
So unless.
The laws change I continue to use 15 for modeling.
Okay.
Thanks.
Thanks, Jim.
Your next question comes from Matt Pfau from William Blair. Please go ahead.
Hey, great. Thanks for taking my questions and nice quarter guys.
Wanted to first ask on the new distributor that you added it sounds like there was some impact there to hardware and in the second quarter. How should we think about that going forward is there going to be an inflection or is this more of a slow ramp.
Yeah, our distributor has been around a long time this new distributor with 115 branches.
We dealt with them in the past they are new to us now.
This wasn't a case of.
Loading up load up all 115 branches.
A big hit.
And then things slow down.
This is a more normalized ramp up.
Whatever impact they had.
In Q Qs, one and two.
We expect it to improve dramatically.
They are the biggest.
Security distributor out there.
And we've only been dealing with them.
Or a little bit of Q1 and all of Q2.
No.
The potential is much more than what we've seen.
We didn't load them up its natural business, which is the way we want it we don't want to get in a situation, where we load them up and then they want to return it in.
Not like that we want sales status stick and that's how it's going to be with these guys.
Yes.
Got it and I know, it's early but are you seeing new installers start to use NAPCO products and are you getting inbounds are developing relationships with new installers as a result of the new distributor agreement.
Yes, we are seeing.
New larger new larger customers.
Due to this arrangement because certain large customers use this distributed there as their main distributor.
With introductions and the fact that the products are superior to what's on the marketplace.
Is is great for us.
Are these new customers, who have said Wow I didn't realize the functionality, we get and the ease of installation we get.
For our crews that are out in the field.
And and that they.
Once they see this.
<unk> become adopters of the product. So it's a great relationship because there are certain dealers that want to use this particular distributor.
That only uses distributed so that open those doors in a big way.
Great. Thanks for taking my questions guys I appreciate it thanks, Matt.
Ladies and gentlemen, as a reminder, should you have a question. Please press the star followed by the one.
Your next question comes from Raj Sharma from B Riley. Please go ahead.
Yes. Thank you congratulations on a nice quarter guys.
My question is on the growth rate for the next few quarters.
Over the next few years alarm and inclusion this quarter were about flat.
And locking locking was up 10% should we expect what kind of growth rate should we expect for the next.
A few quarters sort of inline or ramping up.
Yes.
One was actually up this quarter.
It wasn't flat it was up.
It's up by about 5% actually.
So.
We expect.
All in all all in.
We want to be 10% or greater.
And.
This 6% that we were up for this quarter.
It was very encouraging.
As we as we get back.
2% to 10% or greater.
Growth rates for hardware in order to do that we need all of the.
All the players.
A part of it.
That means the intrusion side.
The locking and the access.
Locking has been doing great two companies.
Our market Mark.
Firing on all cylinders.
NAPCO was hurt by the radio decline came back.
Up 5% this quarter.
We expect more.
More because of prima more because of the new distributor.
And more because radio sales.
Come back.
No.
As we go forward, 10% or greater is what we're looking for.
Great and locking has been similar sort of a growth rate or higher locking has been higher.
Modestly being conservative modestly, 10%, but they can do a lot more than it had been.
Right and just.
Next question in recurring revenues the retention rates must be.
Pretty high is there any sort of number on the retention rate.
While the number of devices that are alive.
The retention rate is very high.
Churn is a big word that's used when you are in the residential space.
Wherever it mostly commercial churn is insignificant.
Now when we have.
Framework being.
A bigger part of our sales.
There may be a churn rate in its residential.
Incidental people change their minds, they decide they want a system than they do.
So we'll look at that when we get to that point, but for right now where we are.
Churn is inconsequential.
And roughly.
Roughly 750000.
Radios.
That are generating.
The run rate.
Of $76 5 million.
So to get to our.
$150 million goal.
By 2026, the way we look at it.
Essentially.
We got to add another 750000 radios got.
Got it.
And that's not a lot when.
When you consider.
The millions of millions of opportunities that are out there, we're not saying we have to get every one of them we love it.
Got to get our fair share 750000 out of millions not EBITDA a high percentage so.
That's what gives us confidence about hitting the goal.
Got it and the growth in our recurring revenues, which products are contributing the most which are.
Which are consummating the least.
Any sort.
Color on that.
Fire radios are the biggest contributor.
Right.
Why are you seeing the gross margin of 90%.
Fire radios gets the most on a monthly basis compared to the others. The others are great too.
Fire leads to 90% the others, maybe they lead to 80 80, 283%.
So bad all good but fire is number one.
Got it and then.
The sell through last question for me sell through of dealers you said is picking up.
And I know because of the excess inventory issue for a couple of dealers. It was lagging the year on year.
Overall ended up 5% sell through you think dealers are.
Up 10% now.
I'd have to look at that Raj, what I do know.
<unk> was much more in Q2 than one.
But I'll have to look at to see where are we year to date prep probably up given what I saw in Q2.
Overall, it's up it's up.
After then.
What your quarterly year on year as is.
Good morning.
It would be fair to say I think it's fair to say that it's up.
Compared to what we expected it's happening faster.
And on.
Unlocking it is very good and an intrusion.
Definitely.
Sequentially.
Versus a year ago I'd have to look.
Got it up and that's it for me. Thank you for answering my questions again.
Congratulations on a good quarter. Thanks.
Okay.
And there are no further questions at this time I will turn the call back over to the CEO Richard Soloway for closing remarks.
Okay.
Thank you everyone for participating in today's conference call as always should you have any further questions. Please feel free to call brand, Kevin or me.
Myself for further information.
Thank you for your rich Port and we look forward to speaking to you all again in a few months to discuss net flows fiscal Q3 results have a great day, everybody Bye bye.
Ladies and gentlemen, this concludes your conference call for today, we thank you for joining and you may now disconnect your lines. Thank you.
Yeah.
Yes.
Okay.
Okay.
Yes.
Yes.