Q2 2025 Napco Security Technologies Inc Earnings Call
The
Colin Flood: Colin Flood, John Muirly, Condoleezza Occupation Camp Pumpkin Divlight, Rob Jacked up with Kevin turbulent and Sarah Zalayan Actually I've been texting now, I need to be free to text Matt Phillips from Johnson defendant, Is he at the house? Is he in there? I mean what, I don't see him. I thought Matt Phillips was here The only thing I've got in pocket is a two in one Francian compote He must be in here
Speaker Change: Before we begin let me take a moment to read the forward looking statements. This presentation contains forward looking statements that are based on current expectations estimates forecasts and projections of future performance based on management's judgment beliefs courage.
Colin Flood: Trends and anticipated product performance.
Colin Flood: These forward looking statements include without limitation statements relating to growth drivers of the company's business such as school security products reoccurring revenue services potential market opportunities the benefits of our reoccurring revenue products to customers and dealers are.
Colin Flood: Ability to control expenses and costs and expected annual run rate for our software as a service reoccurring monthly revenue.
Colin Flood: Forward looking statements involve risks and uncertainties that may cause actual results to differ materially from those contained in the forward looking statements.
Colin Flood: These factors include but are not limited to such risk factors described in our SEC filings, including our annual report on Form 10-K.
Colin Flood: Other unknown or unpredictable factors or underlying assumptions subsequently proving to be incorrect could cause actual results to differ materially from those in the forward looking statements.
Colin Flood: Although we believe that the expectations reflected in the forward looking statements are reasonable we cannot guarantee future results level of activity performance or achievements you.
Colin Flood: You should not place undue reliance on these forward looking statements.
Colin Flood: All information provided in today's press release and this conference call are as of today's date unless otherwise stated.
Colin Flood: 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 the exciting schedule of investor outreach events lined up in the coming months.
Speaker Change: On February 12th we're set to participate in a virtual non deal road show with Seaport Global.
Speaker Change: Later in February we will attend the Citi Global industrial and mobility conference in Miami, Florida.
Speaker Change: In March our engagements include the Raymond James 46th annual institutional investors kind of breaks in Orlando, Florida.
Speaker Change: A virtual non deal Roadshow with Wells Fargo and other non deal Road show.
Speaker Change: Activity with.
Speaker Change: Robert W. Baird.
Speaker Change: Finally, well kept us busy period by attending our industry's largest trade show.
Speaker Change: Yes, the west at.
Speaker Change: At the Venetian Expo in Las Vegas for March 31st through April 4th.
Speaker Change: If anyone is interested in attending the show please reach out to me at all range to get you a pass.
Speaker Change: Investor outreach is a vital part of NAPCO strategy and I'd like to extend my gratitude to everyone who contributes to the success of these events.
Speaker Change: With that out of the way, let me turn the call over to <expletive> Soloway, Chairman and CEO of NAPCO security technologies.
Speaker Change: <expletive> the floor is yours.
Speaker Change: Thank you Fred good morning, everyone and welcome to our conference call.
Fred: We have you joining us as we review our fiscal second quarter 2025 performance.
Speaker Change: This quarter yielded mixed results.
Our recurring revenue increased by 15%, which generated a gross margin of 91%.
Speaker Change: And led to a 400 basis point improvement in total gross margin.
257%.
Speaker Change: The reduction of equipment revenue was the result of timing issues with some of our distributors.
Speaker Change: As well as the timing of certain large locking projects.
Speaker Change: Well certain revenue contributions shifted due to external dynamics.
Speaker Change: Our core growth drivers remain intact.
Speaker Change: As demand for our products and services.
Speaker Change: 10 years to build momentum.
Speaker Change: Importantly.
Speaker Change: Our innovation pipeline is stronger than ever.
Speaker Change: With new offerings set to launch in the coming months <unk>.
Speaker Change: Expanding our recurring revenue opportunities and reinforcing our long term trajectory.
Speaker Change: As we move forward, we remain confident in our ability to drive sustainable growth and deliver lasting value to our shareholders.
Speaker Change: At NAPCO, our strategic focus is centered on capitalizing on key industry trends, including the expansion of wireless fire and intrusion alarm.
Speaker Change: The growth of recurring revenue services.
Speaker Change: Vance Vince in school security solutions.
Speaker Change: Enhancements and enterprise access control systems.
Speaker Change: And continued innovation and architectural locking products.
Speaker Change: We remain committed to delivering.
Speaker Change: De novo growth.
Speaker Change: Maximizing profitability and driving strong results on equity.
Speaker Change: All while maintaining disciplined cost management.
Speaker Change: These priorities are fundamental to our strategy.
Speaker Change: In line with the best interest of our shareholders.
Kevin: I'll now turn the call over to our President Chief Operating Officer, Chief Financial Officer, Kevin really show, who will provide an overview of our fiscal second quarter 'twenty 25 results.
Speaker Change: After Kevin's remarks.
Speaker Change: I'll return to discuss our strategy and outlook in more detail Kevin the floor is yours.
Kevin: Thank you <expletive> good morning, everyone.
Kevin: Net sales for the quarter decreased nine 7% to $42 9 million.
Kevin: And that compares to 47 5 million for the same period, one year ago.
Kevin: Net sales for the six months ended December 31, 2024 decreased two 6% to $86 9 million and that compares to $89 $2 million with the same period one year ago.
Kevin: Recurring monthly service revenue continued its growth increasing 15% in Q2 to $21 2 million as compared to $18 5 million for the same period last year.
Kevin: Recurring monthly service revenue for the six months ended December 31, 2024 increased 18%.
The $42 $3 million as compared to $35 eight.
Kevin: $8 million.
Kevin: Last year.
Kevin: Our recurring service revenues now have a positive prospective annual run rate of approximately $86 million based on January 2025, recurring service revenues and that compares to $85 million based on October 24, recurring service revenues, which we reported.
Kevin: In November.
Kevin: The increase in net service revenues was due to an increase in Australia.
Kevin: Leo communication device Activations, particularly five radios.
Kevin: We expect radio sales to continue to be a key contributor to our equipment sales.
Kevin: To lead to the continued growth of our highly profitable recurring service revenues.
Kevin: Equipment sales for the quarter decreased 25% to $21 7 million as compared to $29 million last year the.
Kevin: The decrease in net equipment sales.
Kevin: Is primarily attributable to reduced sales from two of the companies larger distributors, one of which our largest customer.
Kevin: As both intrusion and locking products <unk>.
Kevin: Eliminated all quarter and purchases from all manufacturers.
Kevin: In order to reduce their inventory levels, but at December 31 year end.
Speaker Change: This distributor I spoke to personally and he said.
Speaker Change: It's like an old Seinfeld line. He said, it's not you. It's us so its a decision they made had nothing to do with that.
Speaker Change: Our product.
Speaker Change: Sell through was good.
Speaker Change: Corporate decision they made.
Speaker Change: And the other one.
Speaker Change: It was just there was another distributor.
Speaker Change: Who was going through a management restructuring.
Speaker Change: That resulted in a significant reduction in their purchase.
Speaker Change: And in addition to the timing of it.
Speaker Change: In addition, the timing of project work.
Speaker Change: Related to a significant New York City building renovation for custom locking products.
Speaker Change: Resulted in reduced sales.
Speaker Change: So in locking in our Q2 as this project began in fiscal 2024 and its winding down in fiscal 2025.
Speaker Change: Equipment sales for the six months decreased 16% to $44 6 million as compared to $53 4 million at the same period and the decrease was primarily due to the aforementioned reasons I just mentioned.
Speaker Change: Gross profit for the three months ended December 31 2024.
Speaker Change: Increased 2% to $24 4 million with a gross margin of 57%.
Speaker Change: As compared to 25 million with a gross margin of 53% for the same period last year.
Speaker Change: The gross profit for the six months increased 4% to $49 1 million with a gross margin of 57%.
Speaker Change: As compared to $47 4 million with a gross margin of 53% a year ago.
Speaker Change: Gross profit for recurring service revenue for the quarter.
Speaker Change: Priest, 16% to $19 4 million with a gross margin of 91%.
Speaker Change: And that compares to $16 7 million with a gross margin of 90% last year.
Speaker Change: Gross profit for recurring service revenues for the six months ended December 31 2024.
Speaker Change: Increased 20% to $38 6 billion.
Speaker Change: With a gross margin of 91%.
Speaker Change: And that compares to $32 2 million with a gross margin of 90% last year.
Speaker Change: Gross profit for equipment revenues in Q2 decreased by 39% to $5 1 million with a gross margin of 24% as compared to $8 $4 million with the gross margins, 29% last year.
Speaker Change: Gross profit for equipment revenues for the six months decreased 31% to $10 5 million with a gross margin of 24% as compared to $15 2 million with a gross margin of 29% for the same period last year.
Speaker Change: The 400 basis point increase in overall gross margin is due to the continued very profitable recurring revenue.
Speaker Change: The decrease in gross profit and gross margin from equipment sales.
Speaker Change: The three out of the six months ended December 31 2024.
Speaker Change: It's primarily the result of the aforementioned lower sales levels as well as lower overhead absorption of fixed costs fixed overhead costs.
Speaker Change: Of our Dominican Republic manufacturing facility.
Speaker Change: Research and development costs for the quarter increased 22% to $3 1 million or 7% of sales.
Speaker Change: And that compared to $2 5 million or 5% of sales for the same period a year ago.
Speaker Change: And research and development costs for the six months ended December 31, 2024 increased 24% to $6 2 million or seven 1% of sales and that compares to $5 million or 6% of sales.
Speaker Change: Same period a year ago.
Speaker Change: The increase in research and development for the three and six months resulted primarily from annual compensation increases and the hiring of additional engineers.
Speaker Change: Selling general and administrative expenses for the quarter increased 18% to $10 2 million or 24% of net sales and that compares to $8 7 million or 18% of net sales for the same period last year.
SG&A expenses for the six months ended December 31, 2024 increased 17% to $19 9 million or 23% of net sales and that compares to $17 1 million or 19% of sales, but at the same period last year.
Speaker Change: Okay.
Speaker Change: The increases in SG&A for the three and six months was primarily due to compensation increases the hiring of additional staff increases in advertising and insurance costs as partially offset by decreases in professional fees.
Speaker Change: Operating income for the quarter decreased 19% to $11 2 million as compared to $13 8 million for the same period last year.
Speaker Change: Operating income for the six months decreased 9% to $23 million as compared to $25 4 million for the same period last year.
Speaker Change: Interest and other income for the three months increased 26% to $921000.
Speaker Change: As compared to 729000 last year and for the six months increased 75% to $2 $1 million compared to $1 $2 million.
Speaker Change: Last year.
Speaker Change: The increases for both the three and six months ended.
Speaker Change: But 31 2024 was primarily due to increased interest and dividend income from the company's cash and short term short term investments as our net cash position continues to grow.
Speaker Change: The provision for income taxes for the three months decreased 16% or $299000 to $1 $6 billion with an effective tax rate of 13% and that compares to $1 9 million with an effective rate of 13% last year.
Speaker Change: Decrease in the provision for taxes for the three months was primarily due to lower taxable income.
Speaker Change: For the six months the provision remained relatively constant at $3 4 million for both periods. This year and last year. The company's effective rate for income tax was 14% and 13% for the six months ended December 31, 2024, and 2023, respectively.
Speaker Change: The company's effective tax rate for the six months ended December 31, 2024 increased as a result of higher non deductible stock based comp.
Speaker Change: Net income for the quarter decreased 17% to $10 5 million and Thats, 24% of net sales or 28 cents per diluted share and that compares to $12 6 million or 27% of net sales was <unk> 34 per diluted share for the same period.
Speaker Change: Last year and net income for the six months decreased 6% to $21 7 million or 25% of net sales or <unk> 59 per diluted share and that compares to $23 1 million or 26% of sales or 62 per diluted share.
Speaker Change: Same period last year.
And adjusted EBITDA for the quarter decreased 19% to $12 $2 million 33 per share and that compares to $15 1 million or <unk> 41 per diluted share for the same period last year and that equates to an EBITDA margin of 28% and that compares to 32%.
Speaker Change: Last year.
Speaker Change: Adjusted EBITDA for the six months.
Speaker Change: Increased 12% to $24 7 million or <unk> 67.
Speaker Change: <unk> per diluted share and that compares to $28 million or 76.
Speaker Change: Diluted share for the same period last year and that equates to an adjusted EBITDA margin of 28% this year compared to 31% last year.
Speaker Change: Now moving onto the balance sheet.
Speaker Change: At December 31, 2024, the company had $99 2 million.
Speaker Change: And cash and cash equivalents other investments marketable securities.
Speaker Change: And that compares to $97 7 million.
Speaker Change: As of June 32024, 2% increase and that's even after paying $22 6 million in dividends and stock repurchases. During this six month period.
Speaker Change: The company has no debt and no debt as of December 31, 2024 cash provided by operating activities for the three months increased 80%.
Speaker Change: $13 5 million compared to $7 5 million last year.
Speaker Change: For the six months increased 37% to $25 5 million and that compares to $18 7 million for the.
Speaker Change: Same period last year.
And working capital is defined as current assets less current liabilities was $143 million at December 31, 2024.
Speaker Change: And that compares with working capital of $146 5 million on June 32024, and the current ratio defined as current assets divided by current liabilities seven.
Speaker Change: Seven six to one at both December 31, 2024 and June 32024.
Speaker Change: And Capex for the quarter was $1 1 million compared to 426000 in the same period last year and for the six months amounted to $1 8 million compared to 682000 last year.
Speaker Change: This quarter's investment includes the addition of our second state of the art Panasonic CIT Sugar machine, which is aimed at further improving our production efficiencies.
That concludes my formal remarks, and I would like to turn the call back to <expletive>.
Speaker Change: Okay.
Kevin: Thank you Kevin.
Kevin: As we close out the first half of fiscal 2025, our performance has been a mix of challenges caused by timing issues.
Kevin: And stress.
Kevin: While we experienced a decline in revenue.
Kevin: <unk> continues to deliver solid profitability metrics and strong cash flow generation.
Kevin: Further enhancing our balance sheet, even after continuing our dividend program and opportunistic stock buyback.
Kevin: Demonstrating the resilience of our business and the effectiveness of our operational strategies.
Kevin: Despite the decline in locking hardware caused by timing, we haven't lost sight of the significant opportunity for continued growth from spending driven by funded funded governmental infrastructure projects as well as the billions of dollars going forward.
Federal level programs.
Kevin: Like Florida School hardening eggs.
Kevin: Indiana has secured school safety Grant program and many other states like Texas.
Kevin: Approved hundreds of millions of dollars in increased security funds.
Kevin: Security and the health care and retail loss prevention as well as in multi dwelling commercial and residential applications.
Kevin: We are also providing opportunities for growth.
Kevin: We continue to remain focused on further penetrating each of these markets.
Kevin: A new growth opportunity in commercial locking and access control is a long awaited and VP hosted access system, which could generate substantial hardware sales and reoccurring revenue for both the installing.
Kevin: [noise] locking dealer and for NAPCO.
Kevin: This new innovative IP technology system enables wireless cloud access for end users of the system.
Kevin: Introduced initially at the International Security Conference in New York City back in November.
Kevin: Once again be showcasing the new MVP system.
Along with many other new and exciting products.
Kevin: At the upcoming International Security Expo in Las Vegas March 31 through April 4th.
Kevin: At the Venetian Expo.
Kevin: With tens of thousands of security dealers will see it in action.
Kevin: We're excited about the potential of this technology for new installations, as well as retrofit or upgrade of existing lax with these.
Kevin: We would ultimately drive increased equipment sales.
Kevin: Recurring revenue from.
Kevin: From these products.
Kevin: Our recurring revenue growth today is driven by our starlink radios, which alarm dealers value for their extensive coverage across both Verizon and AT&T networks.
Kevin: With rich feature capabilities Starlink continues to be preferred the preferred choice among our dealers.
Kevin: Our R&D team is continually enhancing these high performance radios designed for a straightforward installation and compatibility with all five burglar alarm panels ours and our competitors alike.
Kevin: No other company can offer this level of versatility.
Kevin: Unlike our competitors our radios are also underwriting laboratory certified.
Kevin: Which is the gold standard in our industry.
Kevin: There are still millions of commercial buildings and residences from offices and hospitals to schools coffee shops, and restaurants that need to transition from legacy copper phone lines to cellular connectivity.
Kevin: With Starlink, we're ideally positioned for continued strong growth in this market.
Kevin: Our latest Starlink fire Max to communicated for commercial fire alarm systems includes dual Sim technology.
Kevin: Dynamically using either the Verizon or AT&T networks for optional signal strength.
Kevin: Yeah.
Kevin: The streamlined solution, which dealers love helps simplify their inventory, while providing a rich.
Kevin: Feature rich experience.
Kevin: Our recent introduction of premium by NAPCO, our new all in one panel for security installation and connected home with a 15 minute installation remains a very important focus for the company.
Our goal is to premium to address important mass segment of the security market, including residential and small business systems.
Kevin: With built in Wi Fi cellular radio communications cut.
Kevin: Customer alert notifications and video and smart home subscription options for each installed system.
Kevin: The security dealer as well as the company can add more recurring revenue service revenue generating accounts.
Kevin: <unk> now offers a full set of necessary peripherals to go along with the Premier kit.
Kevin: We believe this will help enhance previous sales in the future.
Kevin: While we were disappointed that our overall equipment sales, which we attribute to timing our strong net income and cash flow indicates.
Kevin: <unk> continued financial strength of our business as such we are pleased to continue our dividend program with a payout of 12 five cents per share.
This will be payable.
Kevin: Four 320 25 to shareholders of record on 312 2025.
Kevin: Also as you know also as announced last quarter. Our board has authorized a share repurchase program, allowing us to strategically buyback NAPCO stock as market conditions warrant.
Kevin: As always we will strive to accomplish our goal of continued financial strength product innovation.
Kevin: Technological superiority and strong profitability for fiscal 'twenty 'twenty five.
Kevin: 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 wed like to open the call for the Q&A session. Operator. Please proceed.
Thank you.
Speaker Change: Ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press the star followed by the one on your Touchtone phone.
Speaker Change: You will hear what prompts that you had has been raised.
Speaker Change: Should you wish to decline from the polling question. Please press star followed by the Q.
Speaker Change: And if you are using a speaker phone please lift the handset before pressing any case.
Speaker Change: Our first question comes from Matt Summerville at D. A Davidson. Please go ahead.
Speaker Change: Thanks.
Matt Summerville: Can you maybe comment on the number of device Activations you saw this quarter relative to the prior quarter and maybe on a year over year basis, just trying to get a feel for with the lower hardware volume this quarter, how that impacted the activations and then I have a phone.
Speaker Change: All up.
Speaker Change: Okay. So we don't disclose the pure numbers, Matt but.
Speaker Change: The number was greater by about 1000 Activations in December versus November.
Speaker Change: Was greater by about 1000 Activations in December versus September.
Speaker Change: And was greater by about a thousand.
Speaker Change: In December versus June.
Speaker Change: So the activation switch.
Speaker Change: We believe we're going to get stronger.
Speaker Change: As we've said.
Speaker Change: As a delay from the time you have strong radio sales.
Speaker Change: Way because it got being sold to distribution sitting on the distributor shelf then it gets activated by the dealer and there's rebase theres a delay.
Speaker Change: So we haven't seen the strength of last quarter Q1, yet.
Speaker Change: With all that the Activations were still up by about a thousand.
Speaker Change: That's the best the most I can tell you that.
Speaker Change: Well that's helpful. I appreciate that so with with the recurring service revenue we've seen deceleration now for three quarters in a row I assume that this quarter's equipment sales imply at least another quarter of deceleration.
Speaker Change: What do you view is the more steady state growth rate for RSR and when do we start to see that growth rate <unk>.
Speaker Change: Accelerate.
Speaker Change: So I think in Q3.
Speaker Change: Quarter that we're now and we.
Speaker Change: We will see it come down a little more.
Speaker Change: We were up about 15% this quarter year over year I think that.
That rate of increase will drop a little.
Speaker Change: Maybe in the <unk>.
Speaker Change: 12, 5% range.
Speaker Change: That in Q4, I think it goes up because by Q4 we.
Speaker Change: We will feel the effects of the strong radio sales that we saw in Q1 last quarter.
Speaker Change: And it will stay here for a bit.
Speaker Change: Depending upon what happens in the upcoming quarter with radio sales.
Speaker Change: Can stay up the optimal rate.
Speaker Change: Given that the number is much higher than it used to be.
Speaker Change: We think we should be able to grow this by 20%.
Speaker Change: At least.
Speaker Change: That is without regard.
Speaker Change: To prima.
Speaker Change: Or MVP that's separate extra.
Speaker Change: I don't want to count that they've got to prove itself. We think it will assist with our radios that we're currently selling.
Speaker Change: We think it will come back it will dip.
Speaker Change: And then I will come back 20% should be at optimal.
Speaker Change: Rate of increase.
Kevin: Thanks, Kevin.
Speaker Change: Thank you. The next question comes from Lance Vitanza at TD Cowen. Please go ahead.
Kevin: Thanks, guys.
Speaker Change: A couple more things I wanted to ask you about a couple of more things that are probably beyond your control that could impact the numbers in the third quarter and in the second half here and those two things would be the fires in Los Angeles in Pasadena number one and then the tariffs.
Kevin: More of the tariff wars that.
Kevin: It does seem to be going on right now I'm, just if you could discuss puts and takes from those two items that'd be great. Thanks.
Kevin: I can tell you on the tariff side.
Kevin: The.
Kevin: A lot of our competition gets products from China.
Kevin: They get finished product.
And all of our product comes from Dominican Republic.
Kevin: We don't fly any components into the U S that all goes from around the world into Dominican Republic Rich assembled when it comes out as a finished alarm locking products.
Kevin: Competition, though gets finished products they make everything in China most of them.
Kevin: Looking at all of Us.
Kevin: In the intrusion and access business.
Kevin: So I would expect that that 10% is going to make us more competitive in the mall.
Kevin: Market place and help us win more markets.
Kevin: Because.
Kevin: We have superior products.
Kevin: With the superior pricing the deal is a price sensitive that should really help us pick up a lot of share.
Kevin: There was some scuttlebutt about Mexico, and I understand they rolled it back this morning.
Kevin: For 30 days.
Kevin: Several of our major competitors.
Kevin: And the intrusion and fire alarm business make their products in Mexico, all the products in Mexico. So there'll be some settlement, but you can be sure that this is going to be tariffs to those Mexican products, which is going to give us.
Kevin: Ability to also pick up share with dealers because their cost sensitive.
Kevin: In Canada, we have.
Kevin: Some competition also that makes it a control panels up there so that's going to be kind of like the Mexican situation.
Kevin: We're just going to be tariffs so all in all.
Kevin: Should be a benefit for us the deal as has to keep their installers and sales were working so they are going to be going out of it and keep soliciting jobs.
Kevin: And they're going to need merchandise to that.
Kevin: And the owners of those companies are going to say you know lets try the NAPCO products inherited a lot of great things about it.
Kevin: Now that the prices so much less expensive.
Kevin: <unk> margins in my business, and that's going to be something that our salesmen are going to be.
Kevin: Looking to do bring in all kinds of new market share new customers.
All of our different divisions of locking access control and fire and burglar alarms.
Kevin: That's the situation of that when it comes to the California fires, there's going to be rebuilding its going to be slower.
Kevin: A lot of it was residential.
Kevin: As I said most of our business.
Kevin: The recurring revenue business is from commercial buildings.
Kevin: And.
Kevin: So we would expect that the deal is it going to be putting in more and more fire alarm systems more and more protection systems sprinkler systems with.
Kevin: Fire communicators, when the fire sprinkler head goes off the communicator will.
Qualifying apartment and I O, they're going to have plenty of water out there but.
Kevin: It's a terrible tragedy would happen so.
Kevin: That's how we look at the situation.
Kevin: And thanks very much.
Speaker Change: We did we did do Pasadena School district.
Speaker Change: And we also announced Pepperdine Pepperdine is right across the street from where.
Speaker Change: We're all as accurate as <unk>.
Speaker Change: Pepper diet is going to be doing a lot of storm work.
Speaker Change: And we what we had heard as the kids were added the school for a little bit I think they're back now we.
Speaker Change: We expect these projects to continue as we go forward.
Speaker Change: Very good thanks, guys.
Lance: Thanks Lance.
Speaker Change: Yeah.
Speaker Change: Thank you. The next question comes from Jim Ricchiuti at Needham <unk> Company. Please go ahead.
Speaker Change: Alright, Thank you I had to jump off momentarily. So apologies. If you gave this already Kevin and I missed it but did you provide the breakdown of equipment revenue and it's going to be in the 10-Q later, yes.
Speaker Change: Yes, I can provide it will be in the Q, which will be out shortly.
Speaker Change: But the intrusion and access for the quarter was.
Speaker Change: It was $7 6 million.
Speaker Change: The locking was $14 2 million.
Speaker Change: And the rest was the recurring which is $21 2 million.
Speaker Change: Got it thank you.
Speaker Change: It sounds like the shortfall was mainly due.
Speaker Change: To one distributor.
Speaker Change: To a lesser extent.
Speaker Change: Can distribute the question I have is how much variability are you seeing.
Speaker Change: The sell through.
Speaker Change: Your various distributors meeting.
Speaker Change: Is this.
Speaker Change: <unk> related to one distributor that you noted wants to bring down inventory levels or is there.
Speaker Change: Any signs that you are hearing from them about a change in demand whether it's.
Speaker Change: Just given the economic impact of some of the things we've been hearing about.
Speaker Change: Yes.
Speaker Change: This distributor.
Speaker Change: No.
Speaker Change: Nothing to do with us so if I look at their sell through stats their inventory levels.
Speaker Change: That's not why they decided not to buy this quarter.
Speaker Change: As I said earlier in the prepared remarks. This is about not about us.
Speaker Change: So and I've had conversations with them since now we're in the new quarter.
Speaker Change: They expect to be business as usual with us and with others.
Speaker Change: Whatever the reason debate conglomerate they made a corporate decision.
Speaker Change: Maybe they are doing an acquisition who knows why they made the decision they made.
Speaker Change: They're very happy with our products they buy all our products they buy the NAPCO intrusion as they buy the alarm lock box they buy the marks locks soup.
Super Happy with Us and the reason they are happy is because the demand from the locking and.
Speaker Change: The alarm dealers is strong.
Whereas the sales really ultimately come from.
Speaker Change: Pete.
Speaker Change: Demand is strong.
Speaker Change: Our sales have been strong.
Speaker Change: No.
Speaker Change: They had they made a decision today for their year end December 31.
Speaker Change: This happens every now and then with distribution.
Speaker Change: And then last question for me is just on the topic of operating expense just in light of the slower demand that you've seen are you, making any adjustments to opex I know you've got the big trade show coming up and obviously youre going to be.
Speaker Change: We are investing in that but just any thoughts around opex going forward.
Speaker Change: No Opex will be we will keep doing what were doing nothing that happened in this quarter.
Speaker Change: Affects our operation at slow like we've been saying timing so.
Speaker Change: We we forge ahead.
Speaker Change: We think we have the right levels of salespeople.
Speaker Change: And engineers, but if we need more we added we've added.
Speaker Change: Several engineers over the last.
Speaker Change: 12 months.
Speaker Change: We used to say we have.
50, 55 engineers, we have probably over 70 now what we're trying to do get products to market faster out of the products have recurred.
Speaker Change: We want to get them out in the marketplace sooner if that means adding some engineers here and there.
We can afford it.
Speaker Change: <unk> ability or cash flow, it's not an issue for us.
Speaker Change: Got it thank you.
Speaker Change: Thank you, ladies and gentlemen, as a reminder, should you have any questions. Please press star one.
Speaker Change: The next question comes from Jeremy Hamblin at Craig Hallum. Please go ahead.
Jeremy Hamblin: Thanks for taking the question then.
Jeremy Hamblin: Wanted to take a step back and ask more of a high level question, you've talked about kind of the push in 2026.
Jeremy Hamblin: Towards the goal to get to a 50 50 split.
Jeremy Hamblin: On your equipment versus your recurring service revenues.
Jeremy Hamblin: And in driving that business really to kind of 300 million total revenues.
Jeremy Hamblin: Which would imply 150 and the RSR.
Jeremy Hamblin: It seems like that's not likely a goal, but can it be achieved from kind of current levels, but wanted to get a sense for if you could maybe reframe for US you know where you think you could.
Jeremy Hamblin: Bounce back here and how we should be looking at the business given that this is a kind of a second straight quarter in which you've had adjusted EBITDA margins in the 28% range and kind of with that target that you had laid out before you had been talking about maybe getting adjusted EBITDA margins up two.
Jeremy Hamblin: 40%.
Jeremy Hamblin: And I know that's still I'm sure the long term goal, but wanted to sense for what's a bit more.
Jeremy Hamblin: <unk> kind of visibility on where you are with the business today.
Jeremy Hamblin: So our goal is to get the EBITDA margin.
Jeremy Hamblin: The mid Forty's.
Jeremy Hamblin: And when we were at 32.
Jeremy Hamblin: We were on our way to it so now we've taken a step back we're 28.
Jeremy Hamblin: Still.
Jeremy Hamblin: Very strong EBITDA margin, but not our goal.
Jeremy Hamblin: We'll hit our goal we need a few things to happen.
Jeremy Hamblin: We need the recurring to continue to grow I wanted to see a growth in the 20% range as I said earlier when.
Jeremy Hamblin: When we originally created the goal the 150, 150% to 45%.
Jeremy Hamblin: EBITDA target.
Jeremy Hamblin: The margin that we used with 80% because that's what it was at the beginning of this recurring revenue journey now it's 91%.
Jeremy Hamblin: Could it go higher yes, it could.
Jeremy Hamblin: But at 90% and grow it by 20% a year.
Jeremy Hamblin: Step one.
Jeremy Hamblin: Step two we need the equipment, 10% increase not what we saw this quarter that what we saw last quarter, we need about 10%, we don't need anything more dramatic than that but we had a 10.
And we don't need because originally we had.
Jeremy Hamblin: Margin is much higher on the equipment and they are running now they need to be in the <unk>, if we could get that.
Jeremy Hamblin: Grow by 10%.
Jeremy Hamblin: Margins in the thirties.
Jeremy Hamblin: Get the recurrent to grow 20%, 90% margin and key yes.
Jeremy Hamblin: Opex reasonable.
Jeremy Hamblin: Grow it by maybe 10% more per year.
Jeremy Hamblin: Then we will be in the <unk>. So I don't know if we'll get there exactly.
The original target was the end of 'twenty six call it a year and a half from now.
Jeremy Hamblin: So it will be we'll get there and we wanted to show that we're back well back to being on our way towards that goal.
Jeremy Hamblin: Next couple of quarters, I think we'll give that confidence.
Speaker Change: Well, let me ask a follow up question related to the equipment revenues. So.
Kind of reached these goals you had had.
Speaker Change: Kind of high Twenty's in terms of where your equipment revenue run rates had been and that was yielding nice growth on your service revenues.
Speaker Change:
Speaker Change: In terms of pushing forward to get those gross margins on your equipment revenues.
Speaker Change: Above 30%.
Speaker Change: And kind of visa B getting your total company EBITDA margins at least to the mid thirties, let's say as a starting point.
Speaker Change: What's the absolute dollar sales that you need or revenues that you need on an equipment perspective per quarter or on an annualized basis to think that those are reasonable targets to get those the gross margins for the equipment back up to 30% plus.
Speaker Change: Yeah.
Speaker Change: So that you can really push forward here on total company EBITDA margin.
Speaker Change: I would say it's $30 million.
Speaker Change: Yeah.
Speaker Change: Is the bare minimum of what we want it's.
Speaker Change: Not unreasonable last year to three out of the four quarters, that's kind of where we were a little below that.
Speaker Change: The.
Speaker Change: The margins really grow as you get more sales flowing through your offshore factory, our Dominican factory.
Speaker Change: The more volume we pushed through it.
Speaker Change: The better the margins or we've shown this in the past.
Speaker Change: Because when we get busy we just have to add more direct labor thats the lowest.
Speaker Change: Piece of the cost structure, we have a facility that can handle it.
Speaker Change: We have machinery that can handle it and we just bought another Panasonic chip shooter machine, which will give us even more efficiency.
Speaker Change: Yes, even better margins.
Speaker Change: So you need that volume and as long as the mix is reasonable.
Speaker Change: You get there locking has to be a key part of the mix it's been that way.
Speaker Change: Blocking has margins in the 35% to 40% range.
Speaker Change: We don't care so much about the radio.
Speaker Change: <unk> is the highest.
Speaker Change: So all of that the recurring.
Speaker Change: So as long as the mix is reasonable the volume is in the 30 plus.
Speaker Change: We could be in the Thirty's, we've proved it in the past.
Speaker Change: It just happens just add more direct labor and nothing else Laura overhead absorption margins expand so we got to have that.
Speaker Change: Right. Thanks for taking the question.
Speaker Change: Good luck.
Speaker Change: Thanks, Jeremy.
Speaker Change: Thank you. The next question comes from Jason Schmidt at Lake Street. Please go ahead.
Jason Schmidt: Hey, guys. Thanks for taking my questions. Just curious if you can update us on how the Adi relationship is progressing and if it's progressing to plan.
Speaker Change: Hi, Adi doing well.
Introducing us to more and more dealers as we talked about in the past.
Speaker Change: They made an intro for us to secure its us.
Speaker Change: Now buys up fire radios.
Speaker Change: We had said.
Speaker Change: Maybe it was the last call I'm not sure.
Speaker Change: We saw at Adi could be.
Speaker Change: 10% up equipment sales customer.
Speaker Change: That's our hope.
Speaker Change: They are sell through stats are good.
Speaker Change: That keeps up that.
Speaker Change: That could happen.
Speaker Change: So very happy with the relationship.
We have more work to do potentials is very good with these guys.
Speaker Change: Gotcha, and then just a follow up just given how December played out and kind of how Q3 here is tracking.
Speaker Change: Do you still expect sort of normal seasonal patterns for equipment revenue in June.
Speaker Change: I would.
Speaker Change: If you go back to the history books of this company.
Q4 is always the strongest.
Speaker Change: You never know with distribution you never know things that are unforeseen.
Speaker Change: But statistically I would expect it to be the best.
Speaker Change: Lot of our.
Speaker Change: Big customers Big distributors.
Speaker Change: Their year end is June is December.
Speaker Change: They don't usually make decisions like we just saw.
Speaker Change: In June quarter.
Speaker Change: And for US the June quarter is important we want to maximize our sales.
Speaker Change: So typically.
Speaker Change: It is the best we expect it to be the best we expect Q3 to be a comeback quarter versus what we just saw.
Speaker Change: And whatever it is we expect Q4 to be even better.
Speaker Change: And that.
Speaker Change: Okay perfect. Thanks, a lot guys.
Speaker Change: Thanks, Jason.
Speaker Change: Thank you, ladies and gentlemen, as a reminder, please press star one if you have any questions.
Speaker Change: Follow up from Matt Summerville with D. A Davidson. Please go ahead.
Matt Summerville: Thanks, I just wanted to be clear equipment revenue.
Speaker Change: We expect that to.
Speaker Change: Growth on a year on year basis in Q3, I mean logically. If this was a one time. This is thus not you type thing.
Speaker Change: Why wouldn't we start to see year on year growth in.
Speaker Change: In Q3 again in hardware.
Speaker Change: Q3.
Speaker Change: Like Q2 and Q1.
Speaker Change: Had a very large.
Speaker Change: Amount of sales last year.
Speaker Change: From this large New York City project that we've talked about.
Speaker Change: And so it's a special project.
Speaker Change: And.
Speaker Change: It's not going to be as large this year in Q3 as it was last year.
That's not to say.
There will be a special project or two in this quarter, but I cant say that as I sit here.
Speaker Change: Today.
Speaker Change: Without that.
Speaker Change: The comparison is difficult.
Speaker Change: So if we did close to $30 million last year.
Speaker Change: We will have a tough comp because of this special project that we saw last year, so even if.
Speaker Change: The distributor comes back and we're pretty sure he will.
Speaker Change: And we think the other distributor as well.
Speaker Change: It will significantly.
Speaker Change: Put us beyond what we just saw.
Speaker Change: Q2.
Speaker Change: But to hit $30 million.
Speaker Change: I can't say for sure.
Speaker Change: A lot depends on special projects, which we might get.
Speaker Change: But that's why there's a little hesitation.
Speaker Change: Okay.
Speaker Change: And then just.
Speaker Change: Okay.
Speaker Change: Share repurchases given what's happening with the stock today are you thinking about more aggressive repos, you're sitting on $100 million, what's the right way to kind of thinking about that.
Speaker Change: Well.
Speaker Change: We like to do this opportunistically this could be a nice opportunity.
Speaker Change: Just on what the stock is doing.
Speaker Change: We like having a lot of cash.
Speaker Change: And for moments like this where we could use some of it.
Speaker Change: We still are looking at acquisitions has to be the right one.
Speaker Change: But thats part of what we do we have a lot of banks.
Speaker Change: Trying to find the right deal for US we don't want to do a deal unless it's the right one and we're not going to rush into anything.
Speaker Change: We feel our business is strong just the way it is but.
Speaker Change: There could be a deal out there, we keep looking and it'd be nice to have cash for that too. So we try to balance it.
Speaker Change: Buybacks.
Speaker Change: The acquisition of.
Speaker Change: Dividends.
Speaker Change: Keeping cash on hand, all of the above.
Speaker Change: So.
Speaker Change: Stock buybacks as it is in the equation.
Speaker Change: Got it that's it for me thank you.
Speaker Change: Thanks Bennett.
Speaker Change: Thank you that concludes our Q&A I will turn the call back over to Richard Soloway for closing comments.
Speaker Change: Thank you everyone for participating in today's conference call as always should you have any further questions.
Speaker Change: Feel free to call friend, Kevin or myself for further information. We thank you for your interest and support and we look forward to speaking to you all again in a few months to discuss that goes fiscal Q3 results Bye bye have a great day everybody.
Speaker Change: Ladies and gentlemen, this concludes your conference call for today.
Speaker Change: Thank you for participating and we ask that you. Please disconnect your lines.
Speaker Change: Okay.
Speaker Change: Okay.