Napco Security Technologies, Inc. Price & Performance (NSSC)

Forward looking statements involve risks and uncertainties that may cause actual results [indiscernible] materially from those contained in the forward looking statements. These factors include, but are not limited to, such risk factors described in our SEC filings including our annual report on Form 10 ks. 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. Although we believe that the expectations reflected reflected in the forward looking statements are reasonable, we cannot guarantee future results level of activity, performance or achievements. You should not place undue reliance on these forward looking statements. All information provided in today's press release and this conference call are as of today's date unless otherwise stated, and we undertake no duty to update such information except as required under applicable law. I'll turn the call over to Dick in a moment, but before I do, I want to mention the exciting schedule of investor outreach events lined up in the coming months. On February '12, we're set to participate in a virtual non deal roadshow with Seaport Global Later in Feb. 0, we'll attend the City Global Industrial and Mobility Conference in Miami, Florida.

In March 0, our engagements include the Raymond James forty six Annual Institutional Investors Conference in Orlando, Florida a virtual non deal roadshow with Wells Fargo and other non deal roadshow, activity with Robert W. Baird, Finally, we'll cap his busy period by attending our industry's largest trade show ISC West, at the Venetian Expo in Las Vegas for March '31 through April '4. If anyone is interested in attending this show, please reach out to me and I'll arrange to get you a pass. Investor outreach is a vital part of NAPCO's NAPCO. And I'd like to extend my gratitude to everyone who contributes to the success of these events, With that out of the way, let me turn the call over to Dick Salloway, Chairman and CEO of NAPCO Security Technologies. Dick LaFleurgeurs Thank you, Fran.

Good morning, everyone, and welcome to our conference call.

We appreciate you joining us as we review our performance. This quarter yielded mixed results Our recurring revenue increased by 15%, which generated a gross margin of 91% and led to a 400 basis point improvement in total gross margin to 57%. The reduction of equipment revenue was a result of timing issues with some of our distributors as well as the timing of certain large locking projects. While certain revenue contributions [indiscernible] due to external dynamics our core growth drivers remain intact. And demand for our products and services continues to build momentum. Importantly, our innovation pipeline is stronger than ever. With new offerings set to launch in the coming months expanding our recurring revenue opportunities and reinforcing our long term trajectory. As we move forward, we remain confident in our ability to drive sustainable growth and deliver lasting value to our shareholders. At NAPCO, our strategic focus is centered on capitalizing on key industry trends Included the expansion of wireless fire and intrusion alarms, the growth of recurring revenue services advancements in school security solutions enhancements in enterprise access control systems, and continued innovation in architectural locking products. We remain committed to delivering sustainable growth maximizing profitability and driving strong results on equity all while maintaining disciplined cost management.

These priorities are fundamental to our strategy and align with the best interest of our shareholders. I'll now turn the call over to our President, Chief Operating Officer, Chief Financial Officer, Kevin Bouchel who will provide an overview of our fiscal results. After Kevin's remarks, I'll return to discuss our strategies and outlook in more detail. Kevin, the floor is yours. Thank you, Dick. Good morning, everyone. Net sales for the quarter decreased 9.7% to $4,290,000,0.0 and that compares to $4,750,000,0.0 for the same period one year ago. Net sales for the six months ended Dec. 31, 2024 decreased 2.6% to 8,690,000,0.0 and that compares to 8,920,000,0.0 for the same period one year ago. Recurring monthly service revenue continued its growth increasing 15% to 2,120,000,0.0 as compared to $1,850,000,0.0 for the same period last year. Recurring monthly service revenue for the six months ended Dec. 31, 2024 increased 18% to $4,230,000,0.0 as compared to $80,000,0.0 last year Our recurring service revenues now have a prospective annual run rate of approximately $86,000,000 based on January 2025 recurring service revenues and that compares to 85,000,000 based on October '24 recurring service revenues. Which we reported back in Nov. 0. The increase in net service revenues was due to an increase in our cellular [indiscernible] Device activations.

Particularly fiber radios. We expect radio sales to continue to be a key contributor to our equipment sales and to lead to the continued growth of our highly profitable recurring service revenues. Equipment sales for the quarter decreased 25% to 2,170,000,0.0 as compared to $29,000,000 last year. The decrease in net equipment sales was primarily attributable to reduced sales from 2 of the company's larger distributors, 1 of which our largest customer who purchases both intrusion and locking products eliminated all quarter end purchases from all manufacturers in order to reduce their inventory levels. But at December '31, Year end This distributor I spoke to personally and he said it's like an old Seinfeld line, he said, it's not you. It's us. So it's a decision they made had nothing to do with our our product itself through was good.

The corporate decision Day Maid, And the other 1 there was another who was going through a management restructuring and that resulted in a significant [indiscernible] in their purchase. And in addition to the timing of in addition to the timing of project work, related to a significant New York City building renovation for custom locking products resulted in reduced sales locking in our as this project began in and it's winding down in Equipment sales for the six months decreased 16% to $4,460,000,0.0 as compared to $5,340,000,0.0 for the same period and the decrease was primarily due to the aforementioned reasons I just mentioned Gross profit for the three months ended Dec. 31, 2024 decreased 2% to $2,440,000,0.0 dollars with a gross margin of 57% as compared to $25,000,000 with a gross margin of 53% for the same period last year. The gross profit for the six months increased 4% to $4,910,000,0.0 with a gross margin of 57% as compared to $4,740,000,0.0 with a gross margin of 53% a year ago. Gross profit for recurring service revenue for the quarter increased 16% to $1,940,000,0.0 with a gross margin of 91% and that compares to $1,670,000,0.0 with a gross margin of 90% last year and gross profit for recurring service revenues for the six months ended Dec. 31, 2024, increased 20% to $3,860,000,0.0 with a gross margin of 91% and that compares to $3,220,000,0.0 with a gross margin of 90% last year.

Gross profit for equipment revenues in decreased by 39% to $510,000,0.0 dollars with a gross margin of 24% as compared to $840,000,0.0 with the gross margins 29% last year and gross profit for equipment revenues for the six months decreased 31% to $1,050,000,0.0 with the gross margin of 24% as compared to $1,520,000,0.0 with a gross margin of 29% as the same period last year.

The 400 basis point increase in overall gross margin is due to the continued very profitable recurring [indiscernible] The decrease in gross profit and gross margin from equipment sales for both the 3 and the six months ended Dec. 31, 2024, is primarily the result of the aforementioned lower sales levels as well as lower overhead absorption of fixed costs, fixed overhead costs provide Dominican Republic manufacturing facility.

Research and development costs for the quarter increased 22% to $310,000,0.0 or 7% of sales and that compared to $250,000,0.0 or 5% of sales for the same period a year ago. And research and development costs for the six months ended Dec. 31, 2024 increased 24% to $620,000,0.0 or 7.1% of sales and that compares to $5,000,000 or 6% of sales for the same period a year ago. The increase in research and development for the three and to six months resulted primarily from annual compensation increases and the hiring of additional engineers. Selling, general and administrative expense for the quarter increased 18% to $1,020,000,0.0 or 24% of net sales and that compares to $870,000,0.0 or 18% of net sales for the same period last year.

SG and A expenses for the six months ended Dec. 31, 2024 increased 17% to $1,990,000,0.0 or 23% of net sales and that compares to $1,710,000,0.0 or 19% of sales for the same period last year. The increases in SG and A for the three and the 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. Operating income for the quarter decreased 19% to $1,120,000,0.0 dollars as compared to $1,380,000,0.0 for the same period Last year, operating income for the six months decreased 9% to $23,000,000 as compared to 2,540,000,0.0 for the same period last year. Interest and other income for the three months increased 26% to $921,000 as compared to $729,000 last year. And for the six months increased 75% to $210,000,0.0 compared to $120,000,0.0 last year. The increases for both the three and the six months ended Dec. 31, 2024 was primarily due to increased interest and dividend [indiscernible] From the company's cash and short term investments as our net cash position continues to grow. The provision for income taxes for the three months to or $299,000 to $160,000,0.0 with an effective tax rate of 13% and that compares to $190,000,0.0 with an effective rate of 13%.

Last year. The decrease in the provision for taxes for the three months was primarily due to lower taxable income. For the six months, the provisions remain relatively constant. Dollars 340,000,0.0 for both periods this year and last year. The company's effective rate for income tax was 1413% for the six months ended Dec. 31, 2024, and 2023, respectively. 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. Net income for the quarter decreased 17 to $1,050,000,0.0 and that's 24% of net sales.

Or $0,.28 per diluted share. And that compares to $1,260,000,0.0 or 27% of net sales or $0,.34 per diluted share for the same period last year And net income for the six months decreased 6% to $2,170,000,0.0 or 25% of net sales or $0,.59 per diluted share and that compares to 2,310,000,0.0 or 26% of sales or $0,.62 per diluted [indiscernible] For the same period last year. And adjusted EBITDA for the quarter decreased 19% to $1,220,000,0.0 $0,.33 per share and that compares to $1,510,000,0.0 or $0,.41 per diluted share for the same period last year and that equates to an EBITDA margin of 28% and that compares to 32% last year.

And the adjusted EBITDA for the six months decreased 12% to $2,470,000,0.0 or $0,.67 per diluted share and that compares to $28,000,000 or $0,.76 per 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. Now moving on to the balance sheet. At Dec. 31, 2024, the company had $9,920,000,0.0 in cash and cash equivalents other investments, marketable securities, and that compares to $9,770,000,0.0 as of June 30, 2024, it's a 2% increase and that's even after paying $2,260,000,0.0 in dividends and stock repurchases during this six month period. The company has no debt had no debt as of Dec. 31, 2024. Cash provided by operating activities for the three months increased 80% to 1,350,000,0.0 compared to $750,000,0.0 last year and for the six months increased 37% to $2,550,000,0.0 and that compares to $1,870,000,0.0 for the same period last year.

And working capital is defined as current assets plus current liabilities was $143,000,000 at Dec. 31, 2024, and that compares with working capital of 14,650,000,0.0 on June 30, 2024, And the current ratio defined as current assets divided by current liabilities 7.6:one at both Dec. 31, 2024 and June 30, 2024. And CapEx for the quarter was $110,000,0.0 compared to $426,000 in the same period last year.

And for the six months amounted to $180,000,0.0 compared to $682,000 last year This quarter's investment includes the addition of our second state of the art Panasonic chip shooter machine, which is aimed at further improving our Doctor production efficiencies. That concludes my formal remarks. And I would like to return the call back to Dick. Thank you, Kevin. As we close out the first half, of Our performance has been a mix of challenges caused by timing issues and strength. While we experienced a decline in revenue, NAPCO NAPCO to deliver solid profitability metrics and strong cash flow generation. Further enhancing our balance sheet even after continuing our dividend program and opportunistic stock buyback. Demonstrating the resilience of our business and the effectiveness of our operational strategies. 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 governmental infrastructure projects as well as the millions of dollars going forward state and federal level programs [indiscernible] [indiscernible] Indiana's secured school safety grant program and many other states like Texas approved hundreds of millions of dollars in increased security funds. Security in healthcare and retail loss prevention as well as in multi dwelling commercial and residential applications.

Are also providing opportunities for growth. We continue to remain focused on further penetrating each of these markets. A new growth opportunity in commercial locking and access control is our long awaited MVP hosted access system which could generate substantial hardware sales and reoccurring revenue for both the installing locking dealer and for NAPCO. This new innovative IP technology system enables wireless cloud access for end users of the system. Introduced initially at the International Security Conference in New York, City back in Nov. 0 we will once again be showcasing the new MVP system along with many other new and exciting products. At the upcoming International Security Expo in Las Vegas, March '31, through April '4, at the Venetian Expo With tens of thousands of security dealers, we'll see it in action. Excited about the potential of this technology for new installations as well as retrofit or upgrade of existing locks with ease. We would ultimately drive increased equipment sales and reoccurring revenue. From these products. Our recurring revenue growth today is driven by our Starlink radios, which Alarm dealers value for their extensive coverage across both Verizon and AT and T networks. With rich feature capabilities, Starlink continues to be [indiscernible] the preferred choice among our dealers.

Our R and D team is continually enhancing these high performance radios designed for a straightforward installation and compatibility with all fire and burglar alarm panels. Ours and our competitors alike. No other company can offer this level of versatility. Unlike our competitors, our radios are also underwriting laboratory certified. Which is the gold standard in our industry. There are still millions of commercial buildings and residences from offices and hospitals to schools, coffee shops, and restaurants, the need to transition from legacy copper phone lines to cellular connectivity. With StarLink we're ideally positioned for continued strong growth in this market. Our latest Starlink Fire Max 2 communicator for commercial fire and alarm systems includes dual SIM technology dynamically using either the Verizon or AT and T networks, for optional signal strength. The streamlined solution, which dealers love, helps simplify their inventory while providing a rich feature rich experience. Our recent introduction of Prima by NAPCO a new all in 1 panel security installation and Connected Home with a fifteen minute installation remains a very important focus for the company. Our goal is for Prima to address important mass segment of the security market including residential and small business systems.

With built in WiFi, cellular radio communications customer alert notifications and video and smart home subscription options for each installed system the security dealer as well as the company can add more recurring revenue service revenue generating accounts. Premium now offers a full set of necessary peripherals to go along with the Prima kit. We believe this will help enhance Prima sales in the future. While we would disappoint our overall equipment sales, which we attribute to timing, our strong net income and cash flow indicates the continued financial strength of our business. As such, we are pleased to continue our dividend program with a payout of $0.,125 per share This will be payable on to shareholders of record on Also as announced last quarter, our Board has authorized a share repurchase program allowing us to to strategically buy back NAPCO stock as market conditions warrant. As always, we will strive to accomplish our goal of continued financial strength product innovation technological superiority, and strong profitability for fiscal 2025 and beyond. I'd like to thank everyone for their support and for joining us in this exciting future we have. Our formal remarks are now concluded. We'd like to open the call for the Q and A session Operator, please proceed.

Thank you. Ladies and gentlemen, we will now begin the question and answer session.

The first question comes from Matt Summerville at G. A. Davidson.

Please go ahead.

Thanks. 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 activations? Then I have a follow-up.

Okay. So we don't disclose the pure number [indiscernible] [indiscernible] the number was greater by about 1000 activations in Dec. 0 versus Nov. 0 was greater by about 1000 activations in Dec. 0 versus Sept. 0 and was greater by about $1,000 in Dec. 0 versus [indiscernible] So the activation switch we believe are going to get stronger because as we've said, there's a delay from the time you have strong radio sales is a delay because of the book being sold to distribution sitting on the distributors shelf, then it gets activated by the dealer, then there's rebates, there's a delay. So we haven't seen the strength last quarter yet with all that, the activations were still by about 1000 That's the best and the most I could tell you. [indiscernible] Well, that's helpful. I appreciate that.

So with the recurring service revenue, we've seen deceleration now for 3 quarters in a row. I assume that this quarter's equipment sales imply at least another quarter of deceleration What do you view as the more steady state growth rate for RSR and when do we start to see that growth rate [indiscernible] So I think in quarter that we're now in, we'll see it come down a little more We were up about 15% this quarter year over year. I think that that rate of increase will drop a little maybe in the 12%, 12.5% Then in I think it goes up because by we'll feel the effects of the strong radio sales that we saw in And it will stay up for a bit. Depending upon what happens in the upcoming quarter, with radio sales it can stay up the optimal rate given that the number is much higher than it used to be, we think we should be able to grow this by 20%. At least that is without regard to PREMIER or MVP, that's separate, extra I don't want to count that. It's got to prove itself. Think it will. But just with our radios, that we're currently selling, We think it will come back.

It will dip and then it will come back. 20% should be at optimal rate of increase. Thanks, Scott. Thank you. The next question comes from Lance Vitanza at TD Cowen. Cowen. Please go ahead. Thanks guys.

A couple more things I wanted to ask you about, a couple more things that are probably beyond your control. That could impact the numbers in the and and the second half here? And those 2 things would be the fires in Los Angeles and Pasadena, number 1, and then the tariffs or the tariff wars that seem to be going on right now. Just if you could discuss puts and takes from those 2 items that would be great.

Thanks. I can tell you on the tariff side, lot of our competition gets product from China. And they get finished product. And all of our product comes from Dominican Republic. We don't fly any components into The U. S. That all goes from around the world into Dominican Republic, where it's assembled and it comes in as a finished lawnmower locking product. Competition though gets finished products. They make everything in China most of the both in the parking and also in the intrusion and access business.

So would expect that that 10% is going to make us more competitive in the marketplace and help us win more market because we have superior products and with a superior pricing, the deal is a price sensitive that should really help us pick up a lot of share. [indiscernible] And I understand they rolled that back this morning. For thirty days. Some of our major competitors in the intrusion and fire alarm business make their products in Mexico, all their products in Mexico So there'll be some settlement, but you can be sure that there's going to be tariffs to those Mexican products which is going to give us ability to also pick up share with the Eliska's there, cross section it. And in Canada, we have some competition also that makes their control panels up there. So that's going to be kind of like the Mexican situation where there's going to be tariffs. So all in all, it's Should be a benefit for us. The dealers have to keep their installers and salesmen working So they're going to be going out of and keep soliciting jobs, and they're going to need merchandise to that. And the owners of those companies are going to say, you know, let's try the NAPCO NAPCO.

I've heard a lot of great things about it. Less expensive it helps my margins in my business and that's going to be something that HEXIS control and fire and burglary laws. So that's the situation on that. When it comes to the California fires, there's going to be rebuilding. It's going to be slower. A lot of it was residential And as I said, most of our business in the recurring revenue business is from commercial buildings. And so we would expect that the dealers are going to be putting in more and more fire alarm systems more and more protection systems. Sprinkler systems, [indiscernible] fire communicators, when the fire when the sprinkler head goes off, the communicator will qualify a department [indiscernible] I hope they're gonna have plenty of water out there. But it's a terrible tragedy what happened. So that's how we look at the situation.