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spk00: Greetings and welcome to NACO Security Technologies fiscal second quarter 2021 earnings release conference call. At this time, all participants are in a listed only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I would now like to turn the conference over to Patrick Patrick McKillop, Director of Investor Relations. Thank you. You may begin.
spk06: Thank you. Good morning. I'm Patrick McKillop, Director of Investor Relations here at NAPCO. Thank you for joining us today for today's conference call to discuss our financial results for our fiscal second quarter of 2021. By now, all of you should have had the opportunity to review the press release discussing the results. If you have not, a copy of the release is available in the investor relations section of our website, www.napcosecurity.com. On the call today is Richard Soloway, President and CEO of NAPCO Security Technologies, and Kevin Buchel, Senior Vice President and CFO. Before we begin, let me take a moment to read the forward-looking statement. This presentation contains forward-looking statements that are based on current expectations, estimates, forecasts, and projections of future performance based on management's judgments, beliefs, current trends, and anticipated product performance. These forward-looking statements include, without limitation, statements relating to growth drivers of the company's business, such as school security products and recurring revenue services, potential market opportunities, the benefits of recurring revenue products to customers and dealers, Our ability to control expenses and costs and expected annual run rate for SAS recurring monthly revenue. Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those contained in the forward-looking statements. These factors include but are not limited to such risk factors described in our SEC filings, including our annual report on Form 10-K. Other unknown or unpredictable factors or underlining assumptions subsequently provided to be incorrect could cause actual results to differ materially from those in the forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance, or achievements. We should not place undue reliance on these forward-looking statements. All information provided in today's press release and this conference call is as of today's date unless otherwise stated, and we undertake no duty to update such information except as required under applicable law. We'll turn the call over to Dick in a moment. Before I do, I just wanted to mention a few things on the IR Fund. We are planning for more virtual roadshows throughout the remainder of the year and look forward to when we can meet in person again. Also, we recently gained new research coverage from B. Riley and Needham analysts, and we're excited to have them help increase awareness of the exciting NAPCO story. Investor outreach is crucial, especially for small-cap companies such as NAPCO, and I would like to thank all of those folks that assist us in these conference and marketing trips. With that out of the way, let me turn the call over to Richard Soloway, President and CEO of NAPCO Security Technologies. Dick, the floor is yours.
spk08: Thank you, Patrick. Good morning, everyone. Welcome to our conference call. Thank you for joining us today to discuss our results. We are very pleased to report our record Q2 sales results of 27.2 million. Our recurring revenues continue to grow at an even higher rate than recent quarters, 42% in Q2. And now we have an annual run rate of 33.8 million as of December. Our focus on targeting the professional installation and mostly commercial end markets is driving this continuous growth, especially in the fire alarm sector. Our balance sheet remains strong with our cash balances continuing to grow. We remain focused on capitalizing on key industry trends, which include wireless fire and intrusion alarms, school security solutions, plus enterprise access control systems and architectural locking products. The management team here at NAPCO continues to focus on key metrics of growth, profits, and return on equity and controlling costs, especially during these difficult times. These metrics are important to us as well as our shareholders. We continue to execute our business strategy and our interests are aligned with our shareholders as senior management at NAPCO owns approximately 22% of the equity. Before I go into greater detail, I will now turn the call over to our CFO, Kevin Buchel. He will provide an overview of our fiscal second quarter results, and then I'll be back with more on our strategies and outlook. Kevin?
spk04: Thank you, Dick. Good morning, everybody. For the second quarter, net sales were a second-quarter record of $27.2 million, as compared to $23.2 million last quarter, which represents a 17% increase, and $25.8 million for the same period last year, which is a 5% increase. Debt sales for the six months ended December 31, 2020 decreased 3% to $50.4 million, as compared to $52.1 million for the same period one year ago. The increase in sales for the quarter were primarily related to increases in recurring services revenue, as well as intrusion and access products. Recurring monthly revenue continued its strong growth, increasing 42% for the quarter and 39% for the six months. This strong growth is primarily attributable to the continued strength of fire radios, which are becoming a larger part of the recurring revenue mix. Recurring revenue now has an annual run rate of $33.8 million, based on December 2020 recurring revenue. The sales decrease for the six months was due primarily to decreased sales of door-locking products, which were impacted by the COVID-19 pandemic. As partially offset, by increased sales of intrusion products and the associated recurring revenue. Equipment sales, it should be pointed out, did, however, increase by 20% in Q2 versus Q1. Gross profit for the three months ended December 31, 2020, increased 6% to $11.4 million, with a gross margin of 42%, as compared to $12.1 million, with a gross margin of 47% for the same period a year ago. Gross profit for the six months end of December 31, 2020 decreased 7%, $22.1 million, with a gross margin of 44%, as compared to $23.6 million, with a gross margin of 45%, the same period a year ago. Gross margins for recurring revenue in the second quarter continued to improve, coming in at 85% of 400 basis point improvement versus the year-ago period, while also beating the street consensus estimate of 81% by 400 basis points. For the six months, the gross margin for recurring revenue was also 85%, as compared to 80% last year, of 500 basis point improvement. The increase in gross margin for recurring revenue was primarily due to the increased sales of our Starlink commercial fire radios, which generate higher margins and, as I previously mentioned, continue to become a larger part of the overall recurring revenue mix. The decrease in gross profit and gross margin for the three and six months was due to lower gross margins from equipment revenues. primarily due to an unfavorable shift in product mix from door-locking products to intrusion products, especially our line of Starlink cellular radios, which are still very strong, and which, while generating lower gross margins on the equipment than door-locking products, leads to the phenomenal gross margins from the associated recurring revenues. An additional factor affecting gross margins from equipment was lower overhead cost absorption, which resulted from lower purchasing and production levels in Q2 versus a year ago, and that led to an inventory decline of $4.4 million from last quarter, so we're very happy about that. Research and development costs for the quarter increased 3% to $1.9 million, as compared to $1.8 million for the same quarter a year ago, and were 7% of sales for each of the quarters ending December 31, 2020 and 2019. Research and development costs for the six months ended December 31, 2020 increased 6% to $3.8 million, as compared to $3.6 million for the same period a year ago, and were also 7% of sales the six months ended December 31, 2020 and 2019. Selling general and administrative expenses for the quarter decreased 7% to $5.9 million, or 22% of sales, as compared to $6.3 million, or 24% of sales, for the same period last year. Selling general and administrative expenses for the six months ended December 31, 2020, decreased 4% to $12 million, or 24% of sales as compared to $12.5 million, or 24% of sales for the same period last year. The decreases in SG&A for the three and the six months were primarily due to decreased travel and trade show expenses. Operating income for the quarter was $3.7 million. As compared to $2.7 million last quarter, a 38% increase, and $4 million for the same period a year ago, an 8% decrease. Operating income for the six months ended December 31, 2020 was $6.3 million as compared to $7.6 million for the same period a year ago, a 17% decrease. The company's provision for income taxes for the three months ended December 31, 2020 increased by $38,000 to $469,000, as compared to $431,000 same period a year ago. The company's provision for income taxes six months ended December 31, 2020 remained relatively constant at $798,000 compared to $800,000 last year. The company's effective rate for income taxes was 13% and 11% for the three months and the six months ended for both December 31, 2020 and 2019. Net income for the quarter was $3.2 million as compared to net income of $2.3 million last quarter. That's a 38% increase. And net income of $3.6 million for the same period a year ago, a 10% increase. Earnings per share diluted for the quarter was 17 cents as compared to earnings per share of 13 cents last quarter. and earnings per share of 19 cents for the same period a year ago. Net income for the six months ended December 31, 2020 decreased 19%, 5.5 million or 30 cents per dilution share as compared to 6.8 million or 37 cents per share for the same period last year. Just the EBITDA for the quarter was 4.2 million as compared to 3.2 million last quarter That's a 31% increase. And $4.7 million for the same period a year ago, an 11% decrease. Adjusted EBITDA per share for the quarter was 23 cents as compared to 17 cents last quarter, 25 cents for the same period a year ago. And adjusted EBITDA for the six months ended December 31, 2020, decreased 15% to 7.4 million or 40 cents per share, per diluted share, as compared to 8.7 million 47 cents per diluted share for the same period last year. Now, moving on to the balance sheet. At December 31, 2020, the company had $26.8 million in cash and cash equivalents. That compares to 18.2 million as of June 30, 2020. Working capital defined as current assets less current liabilities was $65.8 million at December 31, 2020. That compared with working capital of $61 million at June 30, 2020. Current ratio defined as current assets divided by current liabilities was 5.9 to 1 at December 31, 2020, and that compared to 4.5 to 1 at June 30, 2020. Cash provided by operating activity for the quarter increased 174% to $5.2 million as compared to $1.9 million last year, and for the six months increased 86% to $8.9 million as compared to $4.8 million for the same period last year. And inventories at December 31, 2020 decreased by $3.7 million from June 30, 2020, and decreased by $4.4 million from September 30, 2020. These decreases were primarily due to the company utilizing some of the additional inventory it had built up during the COVID-19 pandemic, and as a result of the aforementioned 20% increase in equipment sales versus last quarter, that led to the drop in inventory. That concludes my formal remarks. And I would now like to return the call back to Dick.
spk08: Thank you, Kevin. Our second quarter sales were a record, driven by the increased ability of security equipment professionals to gain access to commercial and residential job sites during the quarter. The recurring revenue annual run rate is now 33.8 million, as of December 2020. And we believe that we are on track to achieve our previously discussed goal of exiting fiscal 2021 with a run rate of 40 million. Also, we continue to see positive signs in several of our largest distributors that sell through rates continue to increase by healthy double-digit percentages. We continue to believe that we are well positioned to rebound for the economic recovery. The fire alarm business continues to be strong, and it is a mandated business. In order for buildings of all types to have a certificate of occupancy, they must comply with fire code. The FIRE radios in particular are helping recurring revenue gross margin expansion as evidenced by the 400-point basis improvement for the quarter versus the year-ago period and a 500 basis point improvement for the six months. The school security market remains a significant opportunity. The availability of grants for schools to fund these security projects has never been better with options from the U.S. federal government and the state governments being plentiful. While we have seen some delays at planned security upgrades, there have not been significant cancellations. We remain focused on providing schools the products and solutions they need to protect their students and faculty. We recently issued a press release about a project at Montana State Northern in Opera, Montana. And we look forward to sharing more news about these project wins in the future. Press releases regarding school and university security products are issued when the opportunity is allowed for us as we must receive approval from these institutions prior to release. Our AT&T LTE version Starlink line of universal fire intrusion and IoT communicators are playing a vital role in the need for the upgrade of older 3G AT&T communicators. AT&T and Verizon have both announced the sunset of their 3G networks, which will happen during the calendar 2022 year. The clock is now ticking for integrators and dealers to complete the upgrades for their customers. Our Starlink communicators offer the widest coverage in the U.S. to dealers with both AT&T and Verizon LTE service. Our iSecure commercial and residential 80-zone alarm system, NAPCO's latest recurring revenue product innovation, is continuing its launch, and we continue to receive positive feedback from the dealers. iSecure is designed for the new breed of professional installers and savvy consumers. iSecure has installation times of one hour and offers the feature-rich sets of functions that many residential and small and mid-sized businesses are looking for today. Plus, it offers the most cost-effective functionality in the industry. Looking into the future, expanding our cellular communicator technology to other areas in the security industry is a focal point for our strategy. we have started to introduce a cellular-based locking and access control product line called Air Access, which uses Starlink technology. This new product will allow dealers in NAPCO to generate recurring revenue. The benefit to highlight that end users will enjoy include no need for upfront investment in expensive hardware, no need to interfere with corporate IT networks, which can be a major problem for installers, and no onsite database backups or software updates. We'll begin our Q&A session portion of this call in a moment. Our second quarter, fiscal 2021, was very successful. Before the COVID-19 pandemic began, to significantly impact our country back in March of 2020, NAPCO had achieved 23 consecutive quarters of growth year over year of sales, and we have now started a new sales growth streak. We remain excited about the fiscal year 2021 and beyond. NAPCO senior management maintains a high level of ownership in our equity, approximately 22%, and I'd like to thank everyone for their support and for joining us in the exciting future we have. Our formal remarks have now concluded. We will now be open to calls and the question and answer session. Operator, please proceed.
spk00: Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your hands before pressing the star keys. Our first question is from Rich Valera with Needham and Company. Please proceed.
spk09: Thank you, and congratulations on the strong results, gentlemen. First, just encouraging commentary with respect to the sell-through trends that your large distributors are providing for you. Can you just clarify if the double-digit percent you were talking about, Dick, was that year-over-year growth that you were referring to in the sell-through comments?
spk04: Yeah, I can do this one, Rich. Okay. So, yes. I'm looking right now at it just to give you some flavor. So year over year, I'm looking at our top guy. He was up 15%. I'm looking at our second guy. He was up 31%. This is year over year. I'm looking at another one up 50%. Another one up 37%. This is all year over year. So it bodes well. I could predict and say everything's going to be great in the March quarter because of this. What I don't know is inventory levels. I was happy. The distributors, they have no choice. When the sell-through is that strong, they have to buy. So we don't know what kind of inventory levels they're going to want to keep. But when you have those kind of year-over-year type growths, they have to buy. So we're optimistic. We'll know a lot as the quarter comes to an end. A lot of them buy a lot at the very end. More and more of them are buying throughout the quarter. But obviously with a 20% increase in equipment sales versus last quarter, we think we're back on track.
spk08: Yeah, Rich, most of the sales, when we talk about sell-through, Those are, that's equipment going into jobs. More and more opportunities for the dealers to get into buildings and they do the installation. Most dealers don't carry a lot of inventory. So they're being pulled, the inventory is being pulled through and installed. So that's a very good sign.
spk09: Yeah, it seems like a great leading indicator of future service revenue growth. And then just on the product side, Dick, it sounds like you continue to make progress with iSecure. Is there anything more you can say about that in terms of just kind of the revenue trends or revenue contribution from iSecure? Sounds like you have good momentum there.
spk08: Well, iSecure is a very future-rich product. And a dealer putting it in, you can do it in an hour. And it takes a little bit of time to – make it really a powerful mainstream product. But it has all the legs to be a very powerful mainstream product. So as more and more dealers use it, they want to continue with it and make it their prime control panel alarm system for commercial residential. So the hopes are such that from what we see and what we hear, it's going to have great legs to it. We have added some functionality to it to make it even better as we get feedback from the dealers. So that's going to make it even more powerful. Then the dealers talk to each other. They do some installations. They sit on it for a while, make sure it works just the way they expect it to work, and then starts to pick up a lot of speed. A lot of the competition has, products which are in the category, but they don't have the feature itself that this does. They don't have the efficiency, the way this works with all kinds of control powers all across the country, and it has very good sensitivity, so it works virtually in every job they want to put it into. It's very, very unique, and its price point is fabulous. We designed it. so that it's very cost-effective. The dealer can grow his business without spending as much for equipment and get a fabulous product, which is top of the market in functionality. So we have very strong hopes that this is going to be a major hit for our company.
spk09: Great. Thanks for that, Dick. With that, I'll pass it on. Thank you.
spk00: Our next question is from Mike Walkley with Ken Accords Annuity. Please proceed.
spk02: Great. Thanks, and congrats on the strong results. Just wanted to ask a question. It sounds like the radio business has been quite strong, which is great to see the reacceleration of recurring revenue. But just looking at some of the other hardware businesses, you can talk maybe about how the pipeline is coming together for the locking side of the house. You know, assume with economies hopefully reopening into the summer and students back in full school hopefully by this fall with vaccinations. It seems like there's got to be some pent-up demand in that area. Can you talk at all about the pipeline on that side of the business?
spk08: Kevin, you want to take that?
spk04: Sure. So, Mike, the hardware sales on radios are doing phenomenal. We haven't missed a beat. It's better than ever. That's why you saw the growth leads to the recurring revenue, which is why you saw 42%. We couldn't be happier with that. The hardware sales as it relates to, say, school security has slowed down. A lot of the schools are not operational, as we all know. If you don't have a lot of school jobs, those stats are going to suffer. A lot of jobs are in motion for a job that we got from Montana. Now, Montana, to me, as a guy who lives in New York, is in the middle of nowhere. But they're operating like business as usual. And we got this job from this school in Montana, and it's part of a group of 16 other schools. And our hope is we're going to get all 16 of them. There are other school jobs throughout the country Some are moving along because it depends on where they are. And some are on pause, waiting for schools to open. Schools will be opening soon. We know it. Vaccines are here. Things are going to get better. And when we see that part of the business pick up, then you're going to see the hardware pick up even better. Hardware was up 20% this quarter versus last quarter. That was very encouraging. We're not where we want to be yet. We want to be over that $20 million threshold. When we get over $20 million, that's when you start to see the margins expand. But we're getting close. And so we think as these next couple of quarters come about, we're going to start to see tremendous improvement even on the locking side of the business.
spk02: Mike? Mike?
spk08: Let me just add something to it. So, this is traditional hardware for schools and businesses. And as more and more of the installers get into these places, more and more of this traditional hardware will be installed. And we can see that the software is picking up. But the long-term vision for all of this is to have recurring revenue versions of these products done in a new way and be the leader in recurring revenue of hardware, which means access control and locking, which generates recurring revenue for both the dealer and for NAPCO. And that's what air access is all about. So the sale of the unit into a building a school will generate a monthly stream of recurring revenue, just like we do in the alarm business. Since we understand the cellular networks, we build our own radios, we don't farm this stuff out, we do everything in-house for experts in cellular, we're able to bring this new technology concept into the locking and access control area. And that's the vision. So imagine where we're going to be a couple of years from now. It's going to create a recurring revenue stream for dealers. We don't get recurring revenue streams right now. Only alarm dealers get that. But integrators and locking people want that same recurring revenue stream. And we were able to do this concept with our knowledge of the alarm business and how we do it in the alarm business and the fire business and the burglar alarm business. and how the IoT portion of that business generates recurring revenue, that's going to be done with Air Access. So that's the vision of the future. All businesses that we have, all of our sister companies generating recurring revenue.
spk02: Great. No, thanks, Dick. I understand the vision and congrats on the Air Access product. And that just leads to my follow-up question, you know, kind of for both you and Kevin. Just In terms of more recurring revenue hardware projects, are you willing to give up any hardware gross margin to drive a recurring revenue? Or should we expect that the business scales, you know, usually that June quarter seasonally strong? I know it's tough with COVID to predict quarterly results, but, you know, assuming equipment revenue gets above $20 million, you know, should we see gross margins start to get back above 30% on the hardware side, or are you willing to trade off a little lower gross margins to accelerate that recurring revenue growth that's been at such strong margin? Thank you.
spk04: Mike, we don't need to give up any margin in radio business. We're aggressive as it is, and being aggressive you know, being in a 20% gross margin, let's say, on radio business, that's good enough because obviously it leads to the 85% we get on the back end with the recurring revenue. I don't think we have to be more aggressive. I think the hardware sales are going to come. They're going to come because business is coming back. And just by getting over that $20 million hump, margins will go up. will go up into the 30s, the higher we go over the 20 million, the higher those margins will get to. It's just a matter of how fast it happens. We're encouraged because of that growth we saw this quarter versus last, that it'll happen sooner rather than later. But I don't think we need to adjust our game plan at all as we go forward. Great, thanks.
spk02: That's very helpful. I'll pass it on.
spk00: Our next question is from Jason Schmidt with Lake Street. Please proceed.
spk01: Hey, guys. Thanks for taking my questions. I just want to follow up on your comments on air access. When should we start to think of that product potentially impacting the P&L?
spk08: You have to give that product 9 to 12 months. It's just coming out now. It's a new concept for integrators and locking people because they're used to doing a job and then they finish the job and that's it for them. But now the idea of them getting a recurring revenue stream to build equity in their business is new for them. Along dealers have learned that's the magic trick to making a very strong business. So 9 to 12, I would say, would be where we should be thinking right now. And, you know, we think out a couple of years from what we do. That's our vision. That's our plan. So we know that this is going to be very exciting for dealers because it's a new revenue stream. They don't have to keep banging down and doing jobs and doing another job. Once they start building their equity with recurring revenue, It keeps coming in and then they can grow their businesses more strongly because they're going to throw off a lot more profitability. And that's the future for us. We're very unique in the fact that we're the only company in the security industry that has sister companies in all three key legs of security. We have access control. We have two locking companies, and we have an alarm manufacturer, Bayern Burger Alarm, with IoT. So we're able now to be able to bring the same technology to our whole product line, and the locking and access, which was install it once and then get another job, that type of business will change in a figure of 9 to 12 months.
spk01: Okay, that's helpful. And then, Kevin, looking at the OpEx line, understanding that it's probably a little muted here just given the lack of trade shows, traveling, et cetera, related COVID, but how should we think about OpEx ramping the remainder of this calendar year?
spk04: Well, I think with COVID still being somewhat prevalent and conferences and trade shows being virtual, That's gonna keep these expenses lower than they were used to. Now, if you're talking about the calendar year, maybe by the summer, things start to change. As soon as we're able to go to these conferences in person, which we like better, whether it's an investor conference or a trade show, we'll do it, we'll go, and then you'll see those expenses return to more normal levels. If not, we operate like everybody else zoom type calls and the costs are kept down and which is fine eventually we'll get back to uh more normal times okay perfect i'll jump back into queue thanks a lot guys thanks jason thank you our next question is from david robinson with william blair please proceed
spk10: Hi, guys. Thanks for taking my question. I just had a quick one related to the kind of commentary about the 3G sunsetting. I was just curious, do you anticipate any acceleration, I guess, in sales in the radio business as we kind of approach closer to the calendar 2022 and the anticipated sunsetting of 3G? Or have you heard kind of any feedback from dealers in anticipation of the sunsetting?
spk08: The sunsetting is extra wind at our back. All the old radios have to be upgraded, so there's a lot of fire alarm radios as well as verbal alarm radios that have to be upgraded. So between that, wind at our back, and the wind of the fact that copper is dead as a communication link for alarm systems, it's lights out for copper all around the country in different sectors of the country. That's happening also simultaneously. And that the dealers are very motivated to convert lots of fire alarm and burglar alarm jobs from the copper because they have to, to cellular and the 3G sunset, that's the wind in our back. So that's helping to drive the business. And the sunset is two years on the 3G and the copper, I would say that's going to be over the next five years or longer as more and more of the country is phased out of copper. The phone carriers don't want to support copper anymore. So the dealers are using Starlink. And Starlink has such a wide footprint. It goes everywhere throughout the country and it has the best sensitivity of any radio on the marketplace. So a dealer knows When he puts a Starlink in, he gets communication, which is similar to copper. Okay. Thanks, guys.
spk04: Thanks, David.
spk00: Our next question is from Raj Sharma with B. Riley. Please proceed.
spk05: Hello. Good morning, guys. Congratulations on a solid quarter. I wanted to follow up on equipment sales. Again, you mentioned sell-through technology. improving a distributor's double digits. Can you address again the pricing power and equipment sales? I know you mentioned that the lower gross margins, Kevin, you mentioned lower gross margins with locking doors versus the intrusion. So, with the current sell-through up double digits year on year, can you sense how that impacts gross margins going forward in the next few quarters or, you know, how should we kind of look at that? All right, Raj.
spk04: So, when the locking sales improved, and they started to in this past quarter, their margins are much, much better than the margin on the radio. So a radio margin will be 20%. Margin on a door-locking device will be 40%. It could go as high as 50% if it's in a school on a lockdown system combining with our access control products. So when you get more of those 40% to 50% margin products, obviously you're going to start seeing hardware margins go up. That's what we always have experienced. It's on a temporary halt sort of thing, with schools being slower than we'd like. But as that comes back, margins will go right back up and then some. The thing that we're very happy about is that throughout this pandemic, we haven't seen – any decline at all on the radio business. And that's great. So while they're not the highest gross margin items from a hardware point of view, boy, are they great for the recurring revenue side. So that's the good news in all of this. And the rest of the hardware will come back.
spk05: Right. So the radio, of course, the radio sales, of course, generate the recurring revenues, and that's incredible news. So in addition to the product mix change with locking doors, you're also going to get the scale as, you know, the double-digit sort of sell-through is pushing up the equipment sales. You're going to get an improvement there as well. Yes.
spk04: So as we go over that $20 million per quarter, then you get into the Dominican Republic manufacturing leverage, where the higher it goes, over the $20 million mark, the higher the margins go because you don't have to add any real cost. Your structure is in place. You can do $100 million of annual revenue per shift in the Dominican Republic. It's a low-cost facility. A factory worker earns, you know, $2,500 a year. And if that's the only thing we're going to add to the equation because we have space We have the supervisors in place. We have the machinery. Then you're going to get overhead absorption, gross margin expansion, which is what we like to happen every quarter. And, you know, as we approach the fourth quarter this year, hopefully we'll be back getting that strong leverage again.
spk05: Got it. And then on the recurring side, you know, the rise in the fire and the burglary alarms, were they spread across any sort of broad segments, any particular segments that perform better than the others?
spk04: You mean within recurring revenue?
spk05: Yeah, within recurring revenues in the fire, logs, burglaries, in the commercial, different commercial segments that you cater to.
spk04: Yeah, when I look at it, I see fire radios as the main thing. I don't have it broken down within fire radios. Fire radios, just as a segment, is very strong. It's become... As I've mentioned before, it was the last or the late comer for the radio business. It's only a few years old, and it's becoming a more and more larger part of the mix. That's why you're seeing the kind of growth we're seeing in the margin expansion. I don't really have anything within fire radios. I will say we are talking to some large players. in the industry. Some well-known names that I can't mention at this point, but as that becomes more and more of a reality, then the fire business can get even better. So that's what our hope is, that as strong as it is now, it'll get even better. Got it. Well, thank you again. Great results, and I'll take this offline.
spk05: Thank you. Thanks, Raj. Thank you.
spk00: Our next question is from Abba Horowitz with OSP, please proceed.
spk07: Hi, Rich. Hi, Kevin. I don't remember ever seeing so much cash on your balance sheet. Remind me when the last time you guys carried so much cash.
spk04: You know, I'll bet it was 12 years ago we had $40 million of debt. Now here we are 12 years later, we're approaching $40 million of cash on the balance sheet.
spk07: That's right. Any plans with that cash, what you're going to do?
spk08: We're talking about utilization of the cash. It's a high-class problem, and we'll work through this. But a lot of opportunities when you have cash. But also during hard times, we like to have cash, keep our cash a little bit dry so that... You never know what could happen with the economy. But there's a lot of opportunities that have been shown to us.
spk07: Okay. Okay. Now, just one other question is you said that in the next two quarters, essentially, that your recurring revenue will get to $40 million, correct?
spk04: Run rate, yes.
spk07: Okay, run rate.
spk04: We predicted this years ago. I don't know if people thought we were nuts, but here we are. With six months to go, I think we're right there.
spk07: Okay. So are you going to give us fiscal 2022 projections for recurring revenue?
spk04: We probably should. Yeah, we probably should. We have 2026, which I know is five years further out. They will get to 150. But, yeah, we should probably do that.
spk08: Okay. We're turning the company into a recurring revenue service business where the five-year plan, our goal is to be 50-50. We'll be about 300 million and 150 million of that will be recurring revenue. That's our goal. That's what we're striving to do. So with the new products being recurring revenue generators plus the existing products, keep growing market share.
spk07: That's our plan. Okay. Now, on the $40 million, you're going to support, what, an 85 gross margin, approximately?
spk04: We don't know what it's going to be. When I model, I use 80%. It's been 85. Fire is so strong. You know, we have a lot of radio products. The mix could shift a little. If you're modeling, I would say 80 and be happy when we come in at 85.
spk07: Okay. But essentially, okay, in two quarters, and this is my final point. So in two quarters, essentially, you're going to be generating around $1.75 to $1.90 a share on the recurring revenue, just on the recurring revenue side of the business. I understand there's all the corporate costs and all that you have to cover. But essentially, that recurring revenue business is approaching almost $2 a share on its own. Is that correct?
spk04: Yes, which is why we're getting this business to be more and more recurring coming out. Okay. It's the beauty of recurring.
spk07: Yeah, beautiful. And by the way, I was one of those guys there that heard your projections years ago, and you know I was there. So I just want to say congratulations to you guys, really. You took care of the shareholders. Thank you.
spk04: Thanks, Abba.
spk07: Thank you so much.
spk00: Our next question is from Christopher Hillary with Robux Capital. Please proceed.
spk11: Hi. Good morning. Happy New Year. Hi. Can you hear me? Sorry. Yeah. Yeah. Thanks for taking my call. I just wanted to ask, can you remind us, as you have this growing recurring revenue business, is there a typical price increase that goes in each year, you know, for both the company and for your dealer network?
spk08: We want to keep our prices competitive and we'll adjust to the market as necessary. but we're really not seeing any pressure right now. The offering is very, very unique, and the performance of the equipment is very, very unique. There's nothing quite like it on the marketplace, so it's not a pressure that we're feeling at this point.
spk11: Okay. Do prices go up each year, or do they tend to just stay stable in terms of the monthly fees?
spk08: Stability.
spk04: We haven't had to change anything at all. It's a service that speaks for itself, and the dealers are thrilled to get it. It just drives itself. We don't have to do any.
spk11: Okay. One more maybe. Obviously, school budgets, it's been a pretty disruptive year. It seems like a lot of districts have down budgets going into next year. At the same time, perhaps there's going to be some national spending support. Is there anything that you're aware of that would shape your perspective on the outlook for spending as you head into the next school year in the fall?
spk04: We've seen more and more advancement of bills in Congress in certain states. I know it's not top of mind school security because a lot of the kids are out of school or people are just worrying about how to get out of the whole remote learning fiasco. But we are seeing a lot of activity. And again, depending upon what part of the country, there's still a lot of school jobs going in. We know also of a few jobs that are going to happen towards the end of the calendar year. I think as the kids get back in, this will become more and more of a topic that we'll be talking about. The beauty of it is... Yes.
spk06: Hi, it's Patrick. Hey, Chris, I just want to jump in and, you know, just add in terms of you talk about, you know, the school budgets. What's important to remember is that there's a lot of grant money that's available. And so, you know, we've talked about this in the past, but just as an example, in December of 2020, at the end of last year, the Virginia Department of Ed allotted $12 million in grants for the 490 schools they have in the state. So in terms of the budgets, the schools can get the money. They just need to fill out the grant application, and the money is available. And the federal government has committed $100 million per year. It started in 2018 for the next 10 years, so we've got a little less than 10 years to go. But there's plenty of funding in terms of helping these schools get the money they need.
spk03: Okay, thank you very much.
spk00: As a reminder, it is star 1 on your telephone keypad. If you would like to ask a question, we will just pause for a brief moment to pull for any final questions. Okay, there don't appear to be any more questions. Do we have any closing remarks?
spk08: I do. So I want to thank everyone for participating in today's conference call. As always, if you have any further questions, please feel free to call Patrick, 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 NAPCO's fiscal Q3 21 results. Bye-bye, and have a great day, everybody.
spk00: Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.
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