Q3 2024 Napco Security Technologies Inc Earnings Call
Okay.
[music].
Good morning, ladies and gentlemen, and welcome to the NAPCO Security Technologies S Q3, 'twenty 'twenty four earnings conference call. At this time all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session.
Any time during this call you require immediate assistance. Please press star Zero 40, operator. This call is being recorded on May six.
Speaker Change: 24, I would now like to turn the conference over to Francis Oakley Norske VP Investor Relations. Please go ahead.
Thank you John and good morning, everyone. My name is Fran Okoniewski I'm, Vice President of Investor Relations for NAPCO Security technologies.
Francis J. Okoniewski: Thank you all for joining today's conference call to discuss financial results for our fiscal third quarter 2024.
Francis J. Okoniewski: By now all of you should have had the opportunity to review our earnings press release discussing our quarterly results.
Francis J. Okoniewski: If not a copy of the release is available in the Investor Relations section of our website Www Dot NAPCO security Dot com.
Francis J. Okoniewski: On the call today are <expletive> Soloway, our chairman and CEO of NAPCO security technologies and Kevin to show.
Kevin: Resident Chief operating officer, and Chief Financial Officer.
Before we begin let me take a moment to read the forward looking statement.
Kevin: Presentation contains forward looking statements.
Kevin: That are based on current expectations estimates forecasts and projections of future performance based on management's judgment beliefs current trends and anticipated product performance.
Kevin: These forward looking statements include without limitation statements relating to growth drivers of the company's business.
Kevin: Such as school security products.
Kevin: Recurring revenue services.
Kevin: Potential market opportunities the benefits of our reoccurring revenue products to customers and dealers.
Kevin: Our ability to control expenses and costs and expected annual run rate.
Kevin: Our reoccurring monthly revenue.
Kevin: Forward looking statements involve risks.
Kevin: And uncertainties that may cause actual results to differ materially from those contained in our forward looking statements.
These factors include.
Kevin: But are not limited to such risk factors described in our SEC filings, including our annual report on Form 10-K.
Kevin: 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.
Kevin: We cannot guarantee future results level of activity performance or achievements.
Kevin: You should not place undue reliance on these forward looking statements.
Kevin: All information provided in today's press release.
Kevin: This conference call are as of today's date.
Kevin: Unless otherwise stated.
Kevin: And we undertake no duty to update such information, except as required under applicable law.
Speaker Change: I'll turn the call over to <expletive> in a moment, but before I do I want to mention we're actively planning our investor relations calendar for more non deal roadshow.
Randy R and Congress attendance in the near future.
Speaker Change: Investor outreach is very important to NAPCO and I'd like to thank all of those folks that assist us in these types of events.
Speaker Change: Later this month, we will be attending needham's, 19th annual Tech media and consumer conference.
Speaker Change: In New York City.
The Bank of America Industrials Conference also in New York City.
Speaker Change: The 24th annual B Riley institutional Investor Conference in Beverly Hills, California.
Speaker Change: The Craig Hallum twenty-first annual institutional investment conference in Minneapolis, and TD Cowen 52nd annual Technology Media and Telecom Conference in New York City.
Speaker Change: We've also been invited to the Robert W. Baird Consumer Tech and services Conference. This June in New York City as well as the Wells Fargo Industrial conference in Chicago.
Speaker Change: We're also thrilled to have D. A davidson added to a prestigious list of brokerage firms providing research coverage on our company.
Speaker Change: With that out of the way, let me turn the call over to <expletive> Soloway Chair.
Soloway: Chairman and CEO of NAPCO security technologies, <expletive> the floor is yours.
Soloway: Thank you Fred and good morning, everyone.
Soloway: And welcome to our conference call.
Speaker Change: We appreciate your participation today.
Soloway: He will review our fiscal Q3, 'twenty 'twenty four performance.
Speaker Change: We are thrilled to announce record sales of $49.3 million for this quarter.
Speaker Change: Marking our 14th consecutive quarter of achieving record sales.
Speaker Change: Our recurring revenue subscription service continues to exhibit robust growth.
Speaker Change: With an annual perspective run rate, reaching $81 million based on April 2020 for recurring revenues.
Speaker Change: Our balance sheet remains strong with cash balances, reaching 80 $725 million.
Speaker Change: A 31% increase over the level recorded at June 32023.
Speaker Change: We have no debt.
Speaker Change: Our strategic focus continues to capitalize on key industry trends, including wireless fire and intrusion alarm.
Speaker Change: Driving recurring revenue services.
Speaker Change: School Security solutions.
Enterprise access control systems and architectural locking products.
Speaker Change: At NAPCO, our management team remains committed to prioritizing growth profitability and returns on equity.
While effectively managing costs.
Speaker Change: These metrics are critical to us and our shareholders.
Speaker Change: Selecting our dedication.
Speaker Change: Executing our business strategy and aligning our interests with those of our shareholders.
Speaker Change: Now I would like to hand, the call over to our newly appointed President.
Speaker Change: Chief operating officer, and Chief Financial Officer, Kevin Michelle.
Kevin S. Buchel: Who will provide an overview of our fiscal third quarter results.
Kevin S. Buchel: Following kevins remarks, I will return to delve deeper into our strategy and market outlook Kevin.
Kevin S. Buchel: Thank you Jake and good morning, everybody.
Kevin S. Buchel: Net sales for the three months ended March 31 2024.
Kevin S. Buchel: Increased 13% to a quarterly record $49 $2 million and that compares to $43 $5 billion.
Kevin S. Buchel: The same period, a year ago and net sales for the nine months ended March 31 2024.
Kevin S. Buchel: Increased 10% to a nine month record $138 $5 million as.
Kevin S. Buchel: As compared to $125 $3 million.
Kevin S. Buchel: At the same period a year ago.
Recurring monthly service revenue continued its strong growth increasing 29% in Q3 to $19 $5 million as compared to $15 $1 million for the same period last year.
And recurring monthly service revenue for the nine months ended.
Kevin S. Buchel: <unk> 31 2024.
Kevin S. Buchel: <unk> increased 26% to $55 $4 million as compared to $43 $8 million last year and how recurring service revenues now have a respected annual run rate of approximately $81 million based on April 2020 for recurring revenues and that compares.
Kevin S. Buchel: The $76 $5 million, which is based on January 22000, and for recurring service revenues, which we reported back in February.
Kevin S. Buchel: Equipment sales for the quarter increased 5% to $29 $7 million as.
Kevin S. Buchel: As compared to $28 million last year.
Kevin S. Buchel: Equipment sales for the nine months increased 2% to $83 $1 million as compared to $81 5 million.
Kevin S. Buchel: For the same period last year.
Kevin S. Buchel: These increases were primarily due to revenue increases and alarm lock brand door locking products and marks brand door locking products as partially offset by a decrease in intrusion and access to long products.
Kevin S. Buchel: Note is starlink radio sales sequentially increased over those sales in Q2 by 2% and was 66% higher than such sales in Q1.
Kevin S. Buchel: Yeah.
Kevin S. Buchel: Gross profit for the three months ended March 31, 2024 increased 24% to $26 $5 million with.
With a gross margin of 54%.
Kevin S. Buchel: And that compares to $21 $3 million with a gross margin of 49% since the same period last year.
Kevin S. Buchel: Gross profit for the nine months increased by 47% to $73 $9 million with a gross margin of 53% as.
Kevin S. Buchel: As compared to $50 2 million with a gross margin of 40% a year ago.
Kevin S. Buchel: Gross profit for recurring service revenues for the quarter.
Kevin S. Buchel: Increased 31% to $17 $9 million with a gross margin of 92%.
Kevin S. Buchel: And that compares to $13 $7 million.
Kevin S. Buchel: Gross margin of 90% last year.
Kevin S. Buchel: Gross profit for recurring service revenues for the nine months increased 28% to $50 1 million with a gross margin of 91% and that compares to $39 million with a gross margin of 89% last year.
Kevin S. Buchel: Gross profit for equipment revenues in Q3 increased by 12% to $8 $6 million with a gross margin of 29% as compared to $7 6 million with a gross margin of 27% last year.
Kevin S. Buchel: Gross profit for equipment revenues for the nine months increased by 113% to $23 $8 million with a gross margin of 29% and that compares to $11 $2 million with a gross margin of 14% for the same period last year.
Kevin S. Buchel: The increase in both gross profit dollars and gross margin for recurring revenue for the three and nine months ended March 31 2024.
Kevin S. Buchel: 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 others styling radios.
Kevin S. Buchel: The increase in both gross profit dollars and gross margin for equipment revenues for.
Kevin S. Buchel: Both the three and the nine months ended March 31 2024.
Kevin S. Buchel: Primarily resulted from the aforementioned increase in equipment revenues.
Kevin S. Buchel: As well as a favorable shift in product mix to locking products, which typically have higher gross margins than intrusion products and another factor in the increased gross profit and gross margin for equipment revenue is.
Kevin S. Buchel: As they were lower cost of certain components. This year as compared to last year. When we were still feeling the effects of the global supply chain crisis.
Kevin S. Buchel: Research and development costs for the quarter increased 19% to $2 $8 million or 6% of sales.
Kevin S. Buchel: As compared to $2 $3 million or 5% of sales for the same period, a year ago research and development costs for the nine months ended March 31, 2024 increased 11% to $7 $7 million or 6% of sales as.
Kevin S. Buchel: As compared to $7 million or 6% of sales for the same period a year ago. The.
Kevin S. Buchel: The increase for the three and the nine months, primarily resulted from compensation increases and additional staff.
Kevin S. Buchel: Selling general and administrative expenses for the quarter increased 10% to $9 $2 million or 19% of net sales.
Kevin S. Buchel: As compared to $8 4 million or 19% of net sales for the same period last year.
Kevin S. Buchel: Selling general and administrative expenses for the nine months ended March 31, 2024 increased 6% to $26 3 million or 19% of net sales as compared to $24 $7 million or 20% of sales for the same period last year.
Kevin S. Buchel: The increases in SG&A for the three months was primarily due to increases in legal expenses as well as additional expenses relating to the enhancing of our internal control systems and that was offset by decreases in advertising expenses.
Kevin S. Buchel: The increase for the nine months was primarily due to legal and accounting fees as well as costs associated with enhancing our internal control systems.
Kevin S. Buchel: The decrease in SG&A as a percentage of net sales for the nine months was due to the increase in net sales being proportionately larger than the increase in SG&A expenses.
Operating income for the quarter increased 38% to $14 5 million as compared to $10 $5 million for the same period last year.
Kevin S. Buchel: Operating income for the nine months ended March 31 2024.
Increased 115% to $39 $9 million as compared to $18 $5 million for the same period last year.
Kevin S. Buchel: Interest and other income for the three months increased 46% to $637000 as compared to $437000 last year.
And for the nine months interest and other income increased by 247% to $1 $8 million compared to $521000 last year.
Kevin S. Buchel: The increases for both the three and nine months ended March 31, 2024 was due to increased interest income from the certificates of deposits.
Kevin S. Buchel: The provision for income taxes for the three months increased by $507000 to $1 $9 million with an effective tax rate of 13% and that compares to $1 $4 million with an effective tax rate of 13% last year.
For the nine months the provision for income taxes increased by $2 $9 million to $5 $4 million with an effective tax rate of 13% and that compares to $2 $5 million with an effective tax rate of 13% last year.
Kevin S. Buchel: The increase in the provision for both the three and the nine months ended March 31, 2024 was due to increases in taxable income.
Kevin S. Buchel: Yeah.
Kevin S. Buchel: Net income for the quarter increased 38% to a quarterly record $13 2 million or <unk> 36 cents per diluted share and.
Kevin S. Buchel: And that compares to $9 5 million or <unk> 26 cents per diluted share for the same period last year and now represents 27% of net sales.
Kevin S. Buchel: Net income for the nine months ended March 31, 2024 increased 119% to a nine month record of $36 $3 million.
Or 98 cents per diluted share and that compares to $16 $6 million.
Kevin S. Buchel: <unk> 45 per diluted share for the same period last year and represents 26% of net sales.
Kevin S. Buchel: Adjusted EBITDA for the quarter increased 37% to a quarterly record $15 $6 million or 42 cents per diluted share and that compares to $11 $3 million 31 per diluted share for the same period, a year ago and equates to an adjusted.
Kevin S. Buchel: <unk> EBITDA margin of 32%.
Kevin S. Buchel: Adjusted EBITDA for the nine months ended March 31, 2024 increased 105% to a nine month record $43 $5 million.
Kevin S. Buchel: Or $1 18 per diluted share and that compares to $21 $3 million or <unk> 57 per diluted share for the same period last year and it equates to an adjusted EBITDA margin of 31%.
Now moving on to the balance sheet.
Kevin S. Buchel: As of March 31, 2024, the company had $87 $5 million in cash and cash equivalents other investments and marketable securities and that compared to <unk>.
Kevin S. Buchel: To $66 7 million as of June 32023, and that's a 31% increase.
Kevin S. Buchel: The company had no debt as of March 31, 2020 for cash.
Kevin S. Buchel: Cash provided by operating activities for the nine months ended March 31, 2024 was $31 million that compares to $12 $4 million for the same period last year.
Kevin S. Buchel: And working capital is defined as current assets less current liabilities was $138 $3 million on March 31, 2024, and that compared with working capital of $111 7 million at June 32023.
Kevin S. Buchel: Current ratio defined as current assets divided by current liabilities.
Kevin S. Buchel: Seven nine to one at March 31, 2024, and six seven to one at June 32023.
Kevin S. Buchel: And capex for the quarter was $361000 and that compared to $1 $7 million.
Kevin S. Buchel: Period.
Speaker Change: That concludes my formal remarks, and I would now like to return the call back to <expletive>.
Kevin S. Buchel: Kevin Thank you.
Speaker Change: Our fiscal year 2024 is going exceptionally well with.
With fiscal Q1, Q2, and now Q3, achieving record breaking results.
Kevin S. Buchel: By recurring revenues enabled by our hardware innovations.
Kevin S. Buchel: It's also worth noting all of our growth is organically driven.
Kevin S. Buchel: Recurring revenue continued its strong growth increasing by 29% for Q3.
Kevin S. Buchel: And representing 40% of total company revenues.
Kevin S. Buchel: And our net income of $13 2 million.
Kevin S. Buchel: And adjusted EBITDA of $15 $6 million.
We're all quarterly record breakers.
Kevin S. Buchel: Equipment revenue improved growing 5% over last year for the quarter was gross margins on such sales increasing to 29% from 27% last year.
Kevin S. Buchel: Radio sales in Q3 improved over Q2.
Kevin S. Buchel: Increasing by approximately 2% and 66% over the Q1 level.
Kevin S. Buchel: While such sales were still below the radio sales for Q3 last year when the three G. Verizon Sun said was upon us the increase over the last two quarters is a good sign.
Kevin S. Buchel: We expect radio sales to continue to be a key contributor to our hardware sales and continue to lead to the strong growth of our highly profitable recurring revenues.
Kevin S. Buchel: Gross margin for recurring revenues.
Kevin S. Buchel: Continue to get better now at 92%.
Kevin S. Buchel: So 40% of our revenue generated a gross margin of 92%.
Speaker Change: That's an amazing stat, and we are very proud of it.
Speaker Change: We are also very pleased with the increase in the recurring revenue annual run rate, which increased to $81 million based on April 2020 for recurring revenues.
Speaker Change: <unk> to an annual run rate of $76 $5 million based on January 2020 for recurring revenues.
Speaker Change: Our alarm lock and marks locking hardware lines continue to see growth in schools and class a classroom security.
Speaker Change: Scare and a retail loss prevention.
Speaker Change: As well as multifamily dwellings, commercial and residential applications.
Speaker Change: Growing approximately 16% compared to last year, and approximately 10% compared to Q2.
Speaker Change: Locking sales once again represented over 60% of hardware sales in Q3.
Speaker Change: We continue to remain focused on further penetrating each of these markets.
Speaker Change: Net income of $13 $2 million, besides being a Q3 record breaker rep.
Speaker Change: It represents 27% of net sales.
Speaker Change: Adjusted EBITDA of $15 6 million also a Q3 record rep represents an adjusted EBITDA margin of 32%.
Speaker Change: 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 'twenty 'twenty six.
Speaker Change: As our targeted equipment sales reached $150 million and our recurring revenue service level reaches $150 million.
Speaker Change: Our balance sheet continues to get stronger with cash and cash equivalents other investments and marketable securities increasing 31% to $87 $5 million as compared to $66 $7 million at <unk>.
Speaker Change: June 32023.
Speaker Change: We have no debt.
Speaker Change: And the net cash provided by operating activities for the nine months ending March 31, 2024 was also strong amounting to $31 million.
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.
Speaker Change: Our Starlink line of radios have the widest coverage range of both AT&T and Verizon with rich feature sets, which are deal is really loves.
As we have previously stated the constraints of the supply chain have abated and we believe in the coming months and quarters that combined with new distribution sources. We have developed will begin to invigorate, our equipment sales and association margins.
Speaker Change: To even higher levels than any time before.
Speaker Change: As we have stated previously the higher the hardware sales the more overhead absorption a code occurs in our Dominican Republic factory and.
Speaker Change: This expands our gross margins.
Speaker Change: And as indicated in this mornings earnings release, the company will be issuing a quarterly dividend of 10 cents per share to be paid on June 24, 2024 to shareholders of record on June 3rd 2024.
Speaker Change: We are proud of this program as a NAPCO team has created such tremendous shareholder value over the years that this is another way for us to distribute profitable growth to our investors.
Speaker Change: Now some comments about the recent ISC West trade show. We attended last month. It allows vegas, which attracted over 30000 security professionals. These are dealers and installers and integrators that buy security products.
Speaker Change: NAPCO made a significant impact with a prominently positioned new booth designed.
Speaker Change: And shown at the show entrance.
Speaker Change: The event was attended by key distributors dealers integrators.
Competitors alike net.
NAPCO is management sales leadership and Tech team left the conference with a positive outlook on our competitive position in the domestic security space.
Speaker Change: A favorable impression was reinforced by Nab goes innovative culture ongoing new product development strong brand identity, and the industry's steady growth trajectory.
Speaker Change: Customer interest levels peaked and NAPCO received a record number of sales leads.
Speaker Change: And in part by the successful launch of several highly distinctive products, including NAPCO is popular.
Speaker Change: When I say panic exit hardware line.
Expanded to include locked down models the brand new NFC solution I E. R locks built in access control readers for use with secure mobile credentials stored in the wallet utility of users small.
Speaker Change: I phones, and one that got the most attention.
Speaker Change: The Starlink fire Max to the next generation of our RMR recurring monthly revenue producing five G commercial fire series alarm communicators.
Speaker Change: This solution addresses the transition away from vanishing pots lines.
Speaker Change: Well, a millions of commercial fire alarm panels.
Speaker Change: Aspire Max too with its dual Sim technology.
Speaker Change: Leveraging Verizon or AT&T signal strengths.
Speaker Change: Allows dealers to streamline their inventory.
Speaker Change: Next to boast a true end to end USD 864 listed solution featuring a U L. H 64 listed Triple protected network operating center headquartered in the U S for optimal response times.
Speaker Change: Also NAPCO is premium all in one system.
Speaker Change: Launched late last year continues to gain traction and excitement.
Standing the traditional.
Speaker Change: Traditional NAPCO dealer base.
Speaker Change: Premier now features more emergency condition detection, and all where the cameras at a competitively priced a price point enhancing both equipment capabilities and our M. Our potential.
Speaker Change: In the last nine months of fiscal 2024, we have generated strong sales and profitability.
Speaker Change: We believe we can continue this growth well into the future as we work toward our fiscal 2026 goals and beyond.
I'd like to thank everyone for their support and for joining us in this exciting future we have.
Speaker Change: Our formal remarks are now concluded and we'd like to open the call for the Q&A session.
Speaker Change: Operator. Please proceed.
Speaker Change: Thank you we will now begin the question and answer session should you have a question. Please press star followed by one on your Touchtone phone you'll hear problems that you had has been raised should you wish to decline from the polling process. Please press star followed by the two if you're using a speaker phone. Please please.
Speaker Change: Your handset before pressing anarchy.
Your first question comes from the line of Matt Summerville from D. A Davidson your line is open.
Matthew Charles Pfau: Morning, Matt.
Maybe first if we can talk about hardware gross margins nice improvement year on year, no doubt about it but they've been kind of flattish for the last three quarters can you maybe talk about what the catalysts are as we look ahead outside of just overhead absorption to get that margin kind of marching.
Speaker Change: More prominently towards your longer term projection there and then I have a follow up okay Matt.
Matt: Well the overhead absorption is a big factor.
Matt:
Matt: I don't want to diminish it because in the past it has led to our margins going from low to mid thirties.
Speaker Change: Hi, <unk> low 40, so it's significant when we put good numbers strong hardware numbers on the board.
Speaker Change: But absent of that.
Speaker Change: The locking products.
Speaker Change: Now.
Speaker Change: The 66%.
Speaker Change: Of the hardware sales.
Speaker Change: That brings better margins.
Then the.
Speaker Change: Some of the intrusion products like the radio products now granted the radio products.
Speaker Change: Lead to the recurring revenue.
Speaker Change: Which is the best of them, all but on a pure hardware basis.
Speaker Change: Locking does better.
Speaker Change: And so we expect the locking products to continue to get stronger.
Speaker Change: <expletive> mentioned in his remarks, some of the reasons why locking strong.
Speaker Change: School security.
Speaker Change: As airport infrastructure upgrades.
Speaker Change: <unk> that are going on in in buildings and hotel renovations.
Speaker Change: There's a lot of things going on that are contributing to locking we have two locking companies. They are both opt.
Speaker Change: Operating really well hitting on all cylinders both of them at the same time.
Speaker Change: And so locking which has been good we expect it to get even stronger.
Speaker Change: And that should help margins even further.
Speaker Change: Those are probably the main the main reasons the mix more lacking.
Speaker Change: But don't diminish the.
Speaker Change: Overhead absorption is a big factor.
Speaker Change: Got it.
That's helpful color Kevin Thank you.
Speaker Change: Can you maybe talk a little bit more quantitatively or even just qualitatively around the.
Speaker Change: The excitement or initial uptake you expect on fire Max to I don't know if you can sort of talk about maybe how this product launch is faring versus the prior gen product launch and then similarly, if you can talk about maybe some initial feedback you've had now that premium has been in the market for the.
Speaker Change: The last couple of quarters, how youre feeling about uptake there and when maybe we start to see.
Speaker Change: Some of them non.
Some of the other businesses outside of fire really starting to drive that recurring revenue. Thank you.
Speaker Change: The Max to as a product.
Speaker Change: When you fire alarm was installed and are building the fire marshals and commercial buildings.
Speaker Change: One.
Dual functionality of communications so the way the radios that have been out there working as the deal will select the AT&T or Verizon signal.
Speaker Change: It will also run a wire to connect to the Internet for the second communications link.
Speaker Change: The next two is very very different because in a lot of cases.
Speaker Change: It's harder for the deal is to run a wire and get into the internet because these alarm systems could be in a basement.
Speaker Change: Area, which is where there's no.
Speaker Change: No internet close by.
Speaker Change: But we have this new U L a dual AT&T and Verizon.
Speaker Change: And one.
Speaker Change: Does not require any wire.
Speaker Change: Once which every signal is stronger.
Speaker Change: That's the way the system will transmit these fire emergency or to check into the central station and uses only radio so it's going to be a faster install for dealers.
Speaker Change: It's really unique and special.
And we want to have the one and only radio that the deal is we use for all applications and the Max two will be it. They don't have to add any other models that could use that and that's a very very profitable model great recurring revenue to it.
Speaker Change: So we expect that that will continue making us the leader.
Speaker Change: 92%.
Speaker Change: Margins are.
Speaker Change: You can see the deal is like our product line. So.
We expect to try to keep the margins high as possible with that product line and sell more and more of them.
Speaker Change: When it comes to the <unk>.
Speaker Change: Premium product more and more adoption is going on and it's starting to contribute.
Speaker Change: It is a unique product its a different type of product for us because our typical alarm products off for more customization.
Our residential and commercial.
This product is for mass.
Speaker Change: Product that goes in very quickly.
Speaker Change: A salesman themselves the alarm job both commercially small commercial legal residential he can actually install of himself he doesn't need a crew. So we can sell the the alarm system to the end user customer and put it in right away and start getting recurring revenue from it and we get our recurring revenue from that.
Speaker Change: Installation, so the conversion prices, where there are thousands and thousands of companies that are using this type of mass.
Speaker Change: <unk> system, and we're picking up more share and we saw a lot of interest you were at the show you saw it was right upfront you saw that.
Speaker Change: There are many times during the day I couldnt, even see the carpathia with so many people standing on it looking at this a long system that's been out.
Speaker Change: Now for a little while but it takes time for deal has to get used to it to talk amongst themselves.
Speaker Change: And start converting over to it and it looks very very good at this.
Speaker Change: Is the ongoing process.
Speaker Change: Perfect. Thanks, Mike.
Speaker Change: Your next question comes from the line of Jimmy <unk> from Needham <unk> Company. Your line is open.
Jimmy: Alright. Thank you good morning, I Wonder if you would.
Jimmy: Talk to us a little bit about how much of a contribution.
Jimmy: You saw from the new distributor.
Jimmy: In the quarter and maybe how you how you're seeing this business scale over the next couple of quarters.
Jimmy: And I have a follow up.
So adi the new distributor.
Jimmy:
Jimmy: Is doing well with us.
Jimmy: <unk> has the potential.
Jimmy: To be doing a lot more.
Jimmy: They are the largest distributor of security products in the industry.
Jimmy: There are companies that have more volume.
Nobody has more.
Jimmy: Security sales than them.
Jimmy: So the potential is big.
Jimmy: We've seen nice growth, we're only dealing with them a few a few quarters.
Jimmy: Each quarters better than than the preceding one.
Jimmy: And they've made introductions. This is a very important point.
Jimmy: They've made introductions.
Jimmy: To several large dealers.
Jimmy: That exclusively deal with them.
Jimmy: But we've been trying to.
Jimmy: Have a relationship with.
Jimmy: And.
Jimmy: One of them is secure tests.
Jimmy: The big name.
Jimmy: Maybe number maybe the second largest dealer.
Jimmy: Dealer out there right.
Speaker Change: Yeah. Thanks, Thanks to Adi.
We have a relationship now secure tests.
Speaker Change: So not only does Adi help us.
Speaker Change: With <unk>.
Speaker Change: Our sales numbers.
Speaker Change: But making intros to dealers is a key part.
Speaker Change: And we expect the business to keep going up it's just the beginning.
Speaker Change: It's not a situation, where we loaded up all 115 branches.
Speaker Change: To make a big splash.
Did it systematically slowly.
Speaker Change: We expect it to keep growing.
Speaker Change: As each quarter progresses.
Speaker Change: Okay.
Speaker Change: Got it Kevin.
Some of this new potential business that youre seeing out there can you talk to us about the type of business.
Yes.
Speaker Change: Sure.
Speaker Change: Some of the areas that you guys are historically very strong in for instance in the fire radio business, maybe just some sense as to where you see inroads with some of these new dealers potentially large ones yeah. So the watch.
Speaker Change: We've talked before about some of the large deals that we've.
Speaker Change: Picked up.
Speaker Change: Over the last several quarters.
Speaker Change: And.
Speaker Change: Fire radios.
Speaker Change: Is the biggest one that they're all interested in.
Speaker Change: We actually took one of our top sales guys.
Speaker Change: And made him the head of National accounts.
Speaker Change: We're picking up more and more of these large dealers.
<unk>.
This this gentleman submission with us.
Is to nurture these relationships.
Speaker Change: We wanted to sell not only more fire radios.
Speaker Change: We have a whole line of products.
Speaker Change: We want to sell them all of our products.
Speaker Change: So its starting out with fire radios the.
Speaker Change: The expectation, it's going to expand to other things.
Speaker Change: And we've actually added another sales person to assist this guy so now there's two of them.
Whose job and whose mission is manage and nurture.
Speaker Change: And expand these very large dealers that we now have a relationship with.
Speaker Change: Got it thanks for that and Kevin over to Dirk just wanted to follow up with you.
Dirk: Organizational changes that were announced last week and I guess you had.
The question is do you foresee the need at some point to add additional resources to senior management with Kevin and the fact that you're now assuming dual roles as president CEO and your ongoing CFO role.
Dirk: Okay.
Dirk: Okay.
Dirk: What's going to happen with us is that.
Dirk: As we said were keep looking for additional people to help grow our business, Kevin and I have been working together for 30 years.
Dirk: Okay, great team.
Dirk: We have additional people in the senior management with our company debut with the company for 25 years that I know the business.
Dirk: And we.
Dirk: We have a bench to a lot of bench strength.
Dirk: 10.
Dirk: He has been with the company people like the <unk>.
Dirk: Like working at NAPCO, we have very little turnover, we get the right person.
Dirk: That person stays with us.
Or is his career, we like to promote from within rather than going to the outside.
Dirk: Just like when we grow our business, we like to grow our business through organic means.
Dirk: It's the most efficient way.
Dirk: And.
You bring people up within the organization, it's the most efficient way they know the culture. They know the other players in the company. So we have a nice bench strength.
At least eight managers that no all of the different divisions products.
Dirk: All work together in a team we do meetings on a regular basis.
Dirk: Every week.
Dirk: So we have a very very strong structure for growth.
Dirk: The way, we're moving along now you can tell the numbers compared to the competition doing.
Dirk: Much better than growth and ratio of profitability. So I think we've got the right combination of doing things.
Speaker Change: Well, Kevin congratulations on the appointment and add to the team.
Speaker Change: On the on the quarter.
Kevin S. Buchel: Thanks, Jim.
Kevin S. Buchel: Okay.
Speaker Change: Your next question comes from the line of Jason Smith from Lake Street Capital Markets. Your line is open.
Jaeson Allen Min Schmidt: Hey, guys. Thanks for taking my questions. Kevin just curious if you could share with us some of the sell through metrics.
Jaeson Allen Min Schmidt: Distributors, and I guess relatedly sort of that high cost inventory issue that impacted previous quarters do you think that's completely worked through now.
Kevin S. Buchel: I'll start with the second part first.
Kevin S. Buchel: No.
Kevin S. Buchel: <unk>.
Kevin S. Buchel: High cost inventory.
Kevin S. Buchel: At the distributors because its two fold its at the distributors.
And also we have some we napped up.
Kevin S. Buchel: At the distributors, it's mostly solved we.
Kevin S. Buchel: We have talked about how there are two distributors with too much radio inventory.
Kevin S. Buchel: One completely solved.
Kevin S. Buchel: The other mostly solved but not 100% probably a few hundred thousand dollars left.
What they consider excess radio inventory.
Kevin S. Buchel: We will keep trying to help them work through it.
Kevin S. Buchel: And it'll be done probably by the end of the fiscal year.
Kevin S. Buchel: It's our belief.
Kevin S. Buchel: Then you have the situation, where we have some.
Kevin S. Buchel: Excess radio inventory.
Kevin S. Buchel: Remember, we built a lot of inventory in anticipation of.
Kevin S. Buchel: <unk>.
Kevin S. Buchel: Sunset Sunset came in when we had some extra.
Kevin S. Buchel: We're working through a lot of that too.
Kevin S. Buchel: The radio demand is as big especially on fire radios.
So we expect that.
Kevin S. Buchel: It would be a non issue.
Over the next let's say six months.
We want to reduce our inventory, we haven't talked a lot about it.
Kevin S. Buchel: Inventory has been coming down our cash flow is great, but we still want to ring out.
Kevin S. Buchel: Probably another $10 million from our inventory and it'll come from different areas, but radios is one of them, we expect to sell a lot more radios.
In the next six months, we've been doing great.
Kevin S. Buchel: Expect to sell even more demand is huge we have all these big accounts now that have become customers.
That's part of why we think we're going to move a lot of the radio inventory.
Kevin S. Buchel: And.
Kevin S. Buchel: That's going to lead to the continuation of the recurring grew by 29%, which was nice it's been growing by 25 now it grew by 29.
Kevin S. Buchel: A lot of it is fire and fire and has the great margins and that's why it was up to 92%.
Kevin S. Buchel: On sell through stats.
Speaker Change: We don't really.
Disclose a lot of that but I can share with you that.
Speaker Change: On a sequential basis.
Speaker Change: Then the intrusion sell through stats.
Speaker Change: An increase of 13%.
That's very important.
Speaker Change: So that's the that's the division that sells among other things the radios.
Speaker Change: And <unk>.
Speaker Change: Having a sequential increase of 13%.
Speaker Change: Seems to me that that will bode well for that division as we head into our.
Speaker Change: Best quarter, historically, our fourth quarter.
Speaker Change: Typically our fourth quarter has always been the best so if that pattern continues.
Speaker Change: The one we're in now would be the best and it's important that we're seeing not only the locking which we've talked a lot about how great. It is doing but I like seeing a sequential increase on the intrusion side of 13%.
Speaker Change: Okay, great appreciate that color I'll jump back into queue. Thanks, a lot guys.
Speaker Change: Thanks, Jason.
Speaker Change: Your next question comes from the line of Lance Vitanza from TD Cowen Your line is open.
Lance Vitanza: Thanks, Thanks, guys for taking my questions congratulations on the nice quarter.
Lance Vitanza: Most of my questions have been answered, but I guess on the balance sheet.
Lance Vitanza: You know this clean balance sheet that you have it looks a little bit like an underutilized asset provides a lot of optionality I'm not sure investors are giving you much credit for that.
Lance Vitanza: The question is are there opportunities to perhaps add a little leverage maybe $50 million or so for some sort of a strategic transaction or or is that anathema to to sort of your.
Lance Vitanza: Your sort of strategy for for maintaining the operational flexibility going forward. Thanks.
Lance Vitanza: There are there are possibilities that are in acquisition.
Lance Vitanza:
Lance Vitanza: A product that can be tucked into our product line.
Lance Vitanza: Each of which it has to have a nice volume towards dealers use all the time.
Lance Vitanza: We don't want to do anything thats outside of our wheelhouse.
Lance Vitanza: So there is there is some possibility of that it's not a front burner situation.
But it is a possibility.
We continue to build cash because we like to have.
Lance Vitanza: Cash you never know what.
What the opportunities are going to be like we like to also issued the dividends as payback to the investors that have been supporting us.
Lance Vitanza: So that's basically the way, we're going right now but.
It's a high class problem that we are addressing.
Speaker Change: Thanks very much.
Speaker Change: Thanks Lance.
Speaker Change: Your next question comes from the line of Raj Sharma from B Riley Your line is open.
Rajiv Sharma: Hi, Thank you for taking my questions. Congratulations on the excellent continued growth.
Rajiv Sharma: And also on the on.
Rajiv Sharma: The recurring side.
On the equipment side I had a question for.
Rajiv Sharma: Kevin Kevin object, the alarms picked up sequentially, 2%.
The year on year was was down 12% for the intrusion and access alarms. It is great to hear that the sell through the dealers is up sequentially, 13% I just wanted to understand going forward.
Rajiv Sharma: You are saying you see growth pick up from the farmer Mac's two and from picking up share with the new dealers when should we see this pick up.
Rajiv Sharma: In the first half of fiscal 'twenty, five or second half full.
Speaker Change: Well, our hope and expectation Raj as we could start seeing it.
Speaker Change: Potentially in this Q4 that were in now.
Speaker Change: Fact is two factors one the comp are much easier.
Speaker Change: Q4 last year.
It wasn't a difficult comp.
That combined with.
Speaker Change: The sell through stats that I referred to earlier.
Speaker Change: Could bode well.
Speaker Change: For an increase in the intrusion segment.
Speaker Change: As we enter next fiscal year.
Speaker Change: More things should kick in.
Speaker Change: You should have.
Speaker Change: Contributions from the large dealers.
You should have contributions from Max next to you should have contributions from prima.
Speaker Change: These are all things that we.
Speaker Change: <unk> is going to help.
Speaker Change: That division.
Speaker Change: Too much better than it's been doing and it's been doing well, it's like the unsung hero.
Speaker Change: Because the radios that it's contributing while not at the same level as what they were in the high.
Speaker Change: Of the Sunset.
They are bringing in those those are the radios that are giving us this phenomenal recurring and the 92% margin. So it's doing great.
Speaker Change: I'm going to do even better.
Speaker Change: At the show.
Speaker Change: What we saw was a lot of activity.
Round fire panels, because we also make a fire alarm system a couple of them for a commercial jobs, which have the radio is built in a lot of interest in that.
Speaker Change: So.
Speaker Change: <unk> business is very important and as we've been talking about the fire business is a legislated in business. It's a very stable growing business the fire Marshal make sure that all the commercial buildings in their territories.
Speaker Change: All around the United States have working fire alarm systems that communicate regularly to the central station Intel essential that they are working so it's legislated in business no matter, what's going on in the economy.
Speaker Change: If the business. If the building is open you have to have a working fire alarm system and we have millions of these buildings that either needs to have an upgrade to their communications, which is away from copper or new construction and there are lots of cranes all over the USA, putting up new buildings and.
Speaker Change: They need fire alarm systems complete.
Speaker Change: Paddle and the smoke detector, the carbon monoxide detector and we have a fantastic fantastic offerings for the dealers to do new work. So it's all the replacement work for copper and the new work and it was very exciting.
Speaker Change: So our goal long term.
Speaker Change: Over the next few years is to get recurring revenue.
Speaker Change: From all of our other hardware products.
Speaker Change: Because we want the locksmiths and door specialty companies to be in the same mode as alarm dealers, where they get recurring revenue accounts Locksmiths, just do a job and they move on but there are ways that we are working on products with them so that they get recurring revenue.
Speaker Change: And because we're a technology company compared to other hardware manufacturers.
Speaker Change: There is a lot of other hardware guys and it's been a business strategy is but they don't know about recurring revenue and network operating centers in UL 864 approvals. We know all that so that's going to be very important for the future.
Speaker Change: It's going to continue our growth.
Speaker Change: We've now had Kevin it was 13 consecutive quarters of growth 14.
Speaker Change: <unk> right and prior to Covid, we had that many 'twenty.
Speaker Change: I lost track I know, we were on our way to Joe Dimaggio story, but I don't remember.
Speaker Change: <unk> 3000.
Speaker Change: The three so our goal is to keep the street got hit that was 22006 numbers.
Speaker Change: And have that EBITDA.
Speaker Change: 45%.
Speaker Change: And.
Speaker Change: That's it we love to grow this business organically.
Speaker Change: But as I said, if an acquisition came around which would be something that dealers would use regularly every day like they put it in our other products that would be a nice tuck in with bringing this to our Dominican Republic, which has capacity to do $300 million.
Speaker Change: Millions per shift and we have room for another building alongside of it to do another $300 million.
Speaker Change: It's a great place to manufacture.
And we're very very integrated as you know when we do all our engineering in house, we don't farm it out our own manufacturing in house and have capacity. So the future is very bright for us.
Speaker Change: Great well. Thank you that's very helpful. Thank you I'll go offline.
Speaker Change: Thanks Raj.
Speaker Change: Again, if you have questions at this time. Please press star followed by one on your Touchtone filing should you wish to decline from the polling process. Please press star followed by the two.
Speaker Change: Yes.
There are no further questions at this time I will turn the call back to Mr. Sullivan.
Mr. Sullivan: Thank you everyone for participating in today's conference call as always should you have any further questions. Please feel free to call friend, Kevin or myself for further information. We thank you for your interest and support and we look forward.
Mr. Sullivan: To speaking to you all again in a few months to discuss <unk> fiscal Q4, and full year results have a wonderful day bye bye.
Speaker Change: Ladies and gentlemen. This concludes today's conference you may now disconnect.
Speaker Change: Okay.
Speaker Change: Okay.
Okay.
Speaker Change: Okay.
Speaker Change: Okay.
Okay.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Thanks.
Speaker Change: Okay.
Okay.
Speaker Change: Yes.
Speaker Change: Okay.
In the center please hold for the next available operator.
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One woman.
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No.
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Hello.
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