NAPCO Security Technologies, Inc.

Q3 2021 Earnings Conference Call

5/10/2021

spk03: Greetings and welcome to the NAPCO Security Technologies Fiscal Third Quarter 2021 Earnings Release Conference Call. At this time, all participants are in a listen-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 will now turn the conference over to our host, Patrick McKillop, Director of Investment Relations. Thank you. You may begin.
spk06: Good morning. I'm Patrick McKillop, Director of Investor Relations for NAPCO Security Technologies. Thank you all for joining us for today's conference call to discuss our financial results for our fiscal third quarter 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 Solway, President and CEO of NAPCO Security Technologies, and Ken 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 judgment, 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 our recurring revenue products to customers and dealers, our ability to control expenses and costs, and expected annual run rate for SAS recurring monthly revenues. 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 in our annual report and Form 10-K. 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 expectations 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 is as of today's date unless otherwise stated. and we undertake no duty to update such information except as required under applicable law. I will turn the call over to Dick in a moment, but before I do, I just wanted to mention a few things on the IR Fund. On May 17th, we will be presenting and hosting one-on-one meetings at the Needham Conference virtually and look forward to a great conference. We are planning for more virtual road shows throughout the remainder of the year and look forward to when we can meet in person again. 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 conferences and marketing trips. With that out of the way, let me turn the call over to Richard Talloway, President and CEO of NAPCO Security Technologies. Dick, the floor is yours.
spk04: Thank you, Patrick. Good morning, everyone, and welcome to our conference call. Thank you for joining us today to discuss our results. We are very pleased to report our record Q3 sales results of $28.2 million and our record Q3 net income results of $4.4 million, both of which meet street consensus estimates. Our EPS and EBITDA figures also came in above street consensus estimates. Our recurring revenues continue to grow at an even higher rate than recent quarters, 43% in Q3, and now we have an annual run rate of $36.7 million based on March 2021 recurring revenues. Our focus on targeting the professional installation and mostly commercial end markets is driving this continuous growth. Our balance sheet remains strong with our cash position continuing to grow. We remain focused on capitalizing on key industry trends, which include wireless fire and intrusion alarms, full security solutions, plus enterprise access control systems and architectural locking products. The management team here at NAPCO continues to focus on the key metrics of growth, profits, and returns on equity and controlling costs. These metrics are important for 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 Bichelle. He will provide an overview of our fiscal third quarter results, and then I'll be back with more of our strategies and outlook. Kevin?
spk02: Thank you, Dick, and good morning, everybody. For the third quarter, net sales were a third quarter record of $28.2 million as compared to $26.2 million for the same period last year, an 8% increase. Net sales for the nine months ended March 31, 2021, increased 0.3% to $78.6 million as compared to $78.4 million for the same period a year ago. The increase in sales for the quarter were primarily related to increases in recurring services revenue, as well as intrusion in access products. Recurring monthly revenue continued its strong growth, increasing 43% for the quarter and 40% for the nine months. This strong growth is primarily attributable to the continued strength of our commercial business, which has not been affected by the COVID pandemic as buildings must remain secure. Recurring revenue now has an annual run rate of $36.7 million based on March 2021 recurring revenue. The sales increase for the nine months was also primarily due to increases in recurring services revenue, as well as intrusion in access products. Gross profit for the three months ended March 31, 2021, increased 8% to $12.9 million, with a gross margin of 46%, as compared to $11.9 million, with a gross margin of 46% for the same period a year ago. Gross profit for the nine months ended March 31, 2021, decreased 2%, to $35 million, with a gross margin of 45%, as compared to $35.6 million, with a gross margin of 45%, for the same period a year ago. Gross margins for recurring revenue in the third quarter continued to improve, coming in at 86% compared to 84% for the same period a year ago, a 200 basis point improvement, which also beat the street consensus estimate of 83% by 300 basis points. For the nine months, the gross margin for recurring revenue was 85%, as compared to 81% last year, a 400 basis point improvement. The increase in gross profit for the three months was primarily due to increased sales of recurring revenue products. The decrease in gross profit for the nine months was primarily due to an unfavorable shift in product mix, as well as lower overhead absorption, which resulted from the company's lower purchasing and production levels. The lower purchasing and production levels were primarily due to our continued effort to reduce inventory levels, which now has been reduced by $5.7 million since June 30, 2020. Research and development expenses for the three months ended March 31, 2021 increased 5% to $1.9 million or 7% of sales as compared to $1.8 million or 7% of sales for the same period. period a year ago. Research and development expenses for the nine months ended March 31, 2021 increased 5 percent to $5.7 million, or 7 percent of sales, as compared to $5.4 million, or 7 percent of sales, for the same period a year ago. These increases were primarily due to increased payroll. Selling general and administrative expenses for the three months ended March 31, 2021 decreased 2% to $6 million or 21% of sales as compared to $6.1 million or 23% of sales for the same period a year ago. Selling general and administrative expenses for the nine months ended March 31, 2021 decreased 3% to $18 million or 23% of sales as compared to $18.6 million, or 24% of sales, for the same period a year ago. The decreases in selling general and administrative expenses and as a percentage of sales for the three and nine months was primarily due to decreased travel and trade show expenses, as well as increased sales levels for the three months ended March 31, 2021. Operating income for the quarter was $5 million as compared to $4 million for the same period a year ago, a 24% increase. Operating income for the nine months ended March 31, 2021 was $11.4 million as compared to $11.6 million for the same period a year ago, a 3% decrease. The company's provision for income taxes for the three months ended March 31, 2021 increased by $199,000 to $624,000, as compared to $425,000 for the same period a year ago. The company's provision for income taxes for the nine months ended March 31, 2021, increased by $197,000 to $1.4 million, as compared to $1.2 million for the same period a year ago. The company's effective rate for income tax was 13%, and 11% for the three months and nine months ended March 31, 2021, and 2020, respectively. Net income for the quarter was $4.4 million or 15% of sales as compared to $3.6 million or 14% of sales for the same period a year ago, representing a 21% increase. Earnings per share diluted for the quarter was 24 cents as compared to 20 cents per diluted share for the same period a year ago. Net income for the nine months ended March 31, 2021, decreased by 5% to 9.9 million or 13% of sales as compared to 10.4 million or 13% of sales for the same period a year ago. Earnings per share diluted for the nine months was 54 cents as compared to 56 cents for the same period last year. Adjusted EBITDA for the three months ended March 31, 2021 increased 13% to $5.5 million or 30 cents per diluted share as compared to $4.9 million or 26 cents per diluted share for the same period last year. Adjusted EBITDA for the nine months ended March 31, 2021 was relatively constant at $12.9 million or $0.70 per diluted share as compared to $13 million, or $0.70 per diluted share for the same period last year. Moving on to the balance sheet. At March 31, 2021, the company had $34.1 million in cash, cash equivalents, and marketable securities as compared to $18.2 million as of June 30, 2020. Working capital, defined as current assets less current liabilities, was $70 million at March 31, 2021, as compared with working capital of $61 million at June 30, 2020. Current ratio, defined as current assets divided by current liabilities, was 5.5 to 1 at March 31, 2021, and it was 4.5 to 1 at June 30, 2020. Cash provided by operating activities for the quarter increased 314% to $7.5 million as compared to $1.8 million last year. For the nine months increased 148% to $16.4 million as compared to $6.6 million last year. Inventories at March 31, 2021 decreased by $5.7 million from June 30, 2020. This decreased primarily the result of the company utilizing some of the additional inventory it had built up during the COVID-19 pandemic, as well as a company-wide effort to reduce inventories to more appropriate levels. That concludes my formal remarks, and I would now like to return the call back to Dick.
spk04: Kevin, thank you. Our third quarter was a record breaker, and we delivered the highest sales and net income for a Q3 in the company's history. We are witnessing more and more opportunities for our dealers to get access to the residential and commercial buildings where they install our products and thus driving sales to record levels. As the country continues to vaccinate more people, and we recover from the harshest days of the COVID pandemic, NAPCO is positioned to capitalize on new business opportunities. Every recurring revenue product that we sell is the beginning of a new relationship, not the end. The recurring revenue annual run rate is now $36.7 million as of March 2021. And we believe we are on the cusp of achieving our previously discussed goal of exiting fiscal 2021 with a run rate of approximately 40 million. Also, we continue to see positive signs from several of our key distributors that sell-through rates continue to increase by healthy double-digit percentages. The communication paradigm is now shifting away from legacy copper lines and aging 3G infrastructure, which creates opportunity for our Starlink line of universal fire, intrusion, and IoT communicators. They are playing a vital role in the need for the upgrade of older 3G AT&T communicators and legacy copper lines. Integrators and dealers need to complete the upgrades for their customers as AT&T and Verizon have both announced the sunset of their 3G networks in the calendar year 2022. Our Starlink communicators offer the widest coverage in the U.S. to dealers with both AT&T and Verizon LTE service. The school security market continues to be a significant opportunity. The availability of grants for schools to fund these security projects has never been better. Options for funding are available from the U.S. federal government and state governments. The total funding available for schools is in the billions of dollars. We remain focused on providing schools the products and solutions they need to protect their students and faculty. While we have seen some delays in planned security upgrades, there have not been significant cancellations. In the U.S., many students are back to school full-time already, and it is expected that by this September, it will be the beginning of a more normal school year. Sadly, we have already witnessed a handful of school shootings this year, so we believe that these projects that have been delayed will move forward. We look forward to sharing more news about project wins in the future. Press releases regarding school and university security projects are issued when the opportunity is allowed, as we must receive approval from these institutions prior to release. Over the last 18 months, we have launched several new products, and I would like to highlight the two most recent, which are the iSecure Commercial and Residential AD Zone alarm system and our latest product offering called Air Access. These products are designed to be recurring revenue generators for NAPCO and our dealers. Importantly, Air Access will bring recurring revenue to the locking and access control divisions of our company, which have not had recurring monthly revenue products until now. Air Access is the industry's first cellular access control system which we believe is a billion-dollar market opportunity. The benefits of air access 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. The iSecure line 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 that many residential and small midsize businesses are looking for today. Plus, it offers the most cost-effective functionality in the industry. We will begin our Q&A session portion of this call in a moment. Our third quarter, 2021, was a very successful one. Before the COVID-19 pandemic began to significantly impact our country back in March of 2020, NAFCA had achieved 23 consecutive quarters of year-over-year record 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 would like to thank everyone for their support and for joining us in this exciting future we have. Our formal remarks have now concluded. We would now like to open the call for the Q&A session. Operator, please proceed.
spk03: Thank you. And ladies and gentlemen, at this time, we will be conducting our question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press the star key followed by the number 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from Mike Walkley with Canaccord Genuity. Please state your question.
spk01: Great, thanks. Kevin and Dick, congratulations on the results, and it's great to see the recurring revenue goal you set quite a while ago of $40 million annually by the end of fiscal 21. It seems like it's on track to reach those levels despite this unexpected year of COVID. The question in that area is coming off this good growth One, can it even reaccelerate as more things reopen? Or given, you know, the law of large numbers, should we think about the growth rates kind of maintaining high 30s going forward? Thank you.
spk04: I think that the opportunities are great for us because of the 3G network going down, copper being eliminated. But I would be conservative in thinking and follow the path that we have been following. Kevin, you have the stat on that, right? Yeah.
spk02: So obviously you've seen the growth go up to 43% this quarter on recurring, and it was 42 last quarter. We were in the 30s last year. I hope we hit 50% as we go forward. But as Dick mentioned, it's good to be conservative high 30s, because as the numbers get larger, it's harder and harder to have these big percentage increases. We've managed, and we'll hopefully keep doing that. But, you know, healthy high 30s is pretty good even by itself. And if we could be in the 40s, even better.
spk04: Let me just explain. The two products that I mentioned earlier in my conversation, which are ice secure and air access, those have long legs. And those should continue to add recurring revenue, especially in the access control and locking area, which we don't have recurring monthly revenue. So it's a build out because we're looking forward to many, many years of increases. But as we said, be conservative because These products have to be adopted by the dealers. The focus groups that we put together show that the dealers love the concept. It's perfect for them. They can build out their businesses, make it easy for them to get more sales. So we're really paving a lot of roads going forward.
spk01: Great. That's helpful. It sounds like lots of good tailwinds, but we'll maintain some cautiousness and modeling. Just Just a follow-up question for me, and I'll pass along to the other people on it. You know, it's great to see that you hit your goals of lowering inventory levels and generate really strong cash flow this quarter. Just can you provide maybe some additional color on trends, you know, one, from your distribution partners, and then two, just the overall supply chain dynamics? You know, there's a lot of shortage of components, so you feel like you have enough components, you know, should you're distributors start to ramp demand back quicker than expected given their sell-through trends? And do you think your distributors, knowing there's industry shortages, might be willing to take on a little extra inventory given the signs of reopening that you mentioned in your script? Thank you.
spk02: So the sell-through stats, which I've been talking about for several quarters in a row, are still very good. Some of our key really had significant increased sell-through stats in March, March of 2021, and that's compared to March of 2020. One distributor was up 79%. Another one was up 68%. Another one was up 54%. Another one was up 35%. These are healthy increases. What I believe is still going on is the cautiousness of carrying inventory levels below where they used to be. And I understand it. They're cautious. It's COVID times. But now we're coming out of it and things are going to pick up. And you're right, Mike. They should bump up those inventory levels because they're going to be caught short if they don't increase inventories. And when demand starts to really pick up and it looks like it's happening already, They don't want to be caught short. But right now, they've been acting conservative. And that's why I think we've seen the sell-through stats exceed what we're seeing on the factory sales. There are component shortages out there. The supply chain is a big mess. We all read about it. We've been very lucky. We had extra inventory. preparing before COVID even started. And we've kept the extra inventory on those certain important items, like chips that you need to build these key products. We watch this like a hawk. We are the squeaky wheel with any supplier who has any issues. We've been doing pretty well. We've expanded our night shift in the Dominican Republic. because they can't keep up. The radio business is just so strong, which is a great thing. And we expect that we're not going to have any supply chain issues. But we do watch it. We're not taking anything for granted. It's important that we don't run out of any key components.
spk01: Great. That's great to hear. It sounds like you guys are managing it better than a lot in the industry. I'll pass the line.
spk03: Thank you, Mike. Our next question comes from Jason Schmidt with Lake Street. Please state your question.
spk00: Hey, guys. Thanks for taking my questions. Just following up on those comments, if there is a pretty sizable replenishment cycle coupled with the tightness of the supply chain and maybe the school market perking back up, would you be able to meet any potential upside demand?
spk04: Yeah, I believe that we put all the building blocks in place where we have the factory, both in the Dominican and New York, building whatever we need. We have enough personnel to do that. Our people have come back to work, and we can keep the production lines going. And then the components that we use, we have duplicate vendors. and we're important customers of those vendors, so we get our share of what we need. We're on a computer-based purchasing system, which gives enough lead time to the vendors so that they can get parts for us. Some of the larger vendors, we're small compared to the car companies that have So we get what we need where the large car companies may not get what they need to run their production lines. But we get what we need because it's small quantities in the big picture. But plenty for us and plenty for getting the products out to the distributors, which resell them to the dealers. So we're right now – watching it, we're vigilant, but things seem to be working well for us.
spk00: Okay, that's helpful. And then just as a follow-up, it sounds like the commercial business continues to see some nice momentum, but curious if you could discuss what you're seeing on the residential side.
spk04: Well, the residential side, which is only a portion of our burglar alarm and fire alarm division. There are concerns on the residential side because of the fact that consumers don't have the amount of cash to spend on systems as they had. Many people are still at home and they don't want outsiders coming in. THERE'S SOME IMPACT ON THAT. BUT IN THE COMMERCIAL SIDE WHERE WE ARE, THE BUILDINGS ALL HAVE TO BE PROTECTED. THEY HAVE LOTS OF MATERIALS AND COMPUTERS AND ALL KINDS OF EQUIPMENT THERE. AND MANY OF THE BUILDINGS HAVE FIRE ALARMS. ALL THE BUILDINGS HAVE TO HAVE FIRE ALARMS. SO THOSE SYSTEMS HAVE TO BE KEPT WORKING. THEY HAVE TO BE UPGRADED TO MEET THE LATEST SPECS BY THE FIRE MARSHALS. Our original goal was to be a commercial security supplier, and that's what we do. We do like the residential business, and we do have nice residential business, but all of our business is in the commercial side. And now that we've introduced recurring monthly revenue products to the commercial side for locking and access control, that gives us the vision that we've always wanted to have. and that vision is to have recurring monthly revenue on all of our product line divisions. And over the next years going forward, as I said, we're laying a lot of pipe to make sure that we keep the recurring revenue to a new high level, and we're going to be setting a lot of goals for the industry where you'll be able to get recurring revenue if you're a locking dealer. You'll be able to get recurring revenue if you're an access control dealer. Just like we've done in the commercial and residential alarm business, we're bringing in the opportunity for these dealers to build equity in their business, which locking people and access people don't really do that the way an alarm company does. So we're using that footprint and that direction to help get recurring revenue for them and for us.
spk00: Okay. Thanks a lot, guys.
spk03: Thank you, Jason. Our next question comes from Raj Sharma with B. Riley. Please say your question.
spk07: Hi. Good morning, guys. Congratulations on another good quarter. I just wanted to follow up on the comments around the sell-through and dealers and the um how are their inventories are they still low and also any sort of color around any specific products that contributed to really good results last quarter you had very good results on fire alarms um any sort of breakdown on on what worked this time and
spk04: We usually don't break it down that fine, but all we said was that the commercial business is growing nicely, and then all the commercial buildings additionally need fire alarms, and fire alarms have to be maintained. And even if the people aren't in the buildings, they have to maintain the fire. They have to have good intrusion burglar alarms to keep people from coming in and doing destruction or taking property. These people need money, and there's a lot of criminality where they have to take equipment and resell it. So these buildings have to be protected. It's big investments in all kinds of computers and equipment in these commercial buildings. So look at it as across the board. It's not just one area.
spk07: Right. On equipment sales, I know that in the last few quarters, a lot of the establishments had not been open. Is that sort of improving? Do you have more access to sell more equipment? And also, around seasonality, would seasonality trends sort of fall similarly as the last few years, the June being One of the highest quarters.
spk04: Evan, you want to do that?
spk02: So seasonality is still a factor, at least on the hardware side. Doesn't matter on the recurring side. Right, and things are starting to open up, so I wouldn't say at least if I was projecting and trying to be conservative, I wouldn't say it's business as usual like it was in a in a traditional Q4. But I would say with the country opening up again, and there is a certain factor in Q4 being better than the rest of the year, it is the end of the year, it's the selling season, the weather's better, et cetera, et cetera, that we're very optimistic about Q4. If I'm projecting, I'm cautious, but I'm cautiously optimistic that things are going to be better. and also because I see those sell-through stats. I don't think a distributor can carry, you know, he can't continue to carry low levels. It's going to burst. You keep having a 79% year-over-year sell-through month. It's got to lead to something very positive. So that's what we think is going to happen.
spk04: The way we look at it is we have multiple distributors in multiple markets, and the dealers... don't necessarily go to the distributor's locations and pick up merchandise and products for each job like they used to do in the olden days. They order online, a lot of them, and if a distributor doesn't have the merchandise that the dealer wants, he goes to the second distributor that's on his list and he gets it from them. So the distributors have to have enough inventory of all the different models of equipment when they put together a system, commercial system or a residential system, to supply the dealer with that merchandise. And if they don't have it, the dealer will move on and has multiple accounts, multiple distributors. So the distributors, they need to watch what they're doing and make sure they have enough inventory of all the different products and keep it to a point where the dealers aren't disappointed. So there's a lot of pressure on them to do that. Occasionally, you have a distributor that, for some reason, can't do it. Maybe the company was being sold like we had the annex their thing a while ago. But that's abnormal. The normal thing is for them to supply these dealers integrators, locksmiths with merchandise, have everything in stock, and if they don't have it, the dealer will move on to another distributor, and that's what we find. So it's good to have multiple distributors just in case a distributor doesn't watch his P's and Q's for his inventory levels.
spk07: Right. Thank you for that. And then on the schools and universities side, I know that – I guess part of the seasonality in the past has, you know, June being a better quarter, a higher quarter, was because of schools and universities or, you know, are you seeing anything on the locks and the access control? Any indications that I know you've said in the past that it's tough to kind of tell where the business is coming from, but do you see a pickup in schools and universities?
spk02: There's a lot of quoting activity, more than ever. You've got to realize that these schools were preoccupied with whether or not students should come back, or should they not come back, or should it be hybrid, a combination? They really weren't focused on school security. And a lot of these school jobs, they didn't want the integrators on the campus. If the students aren't there, they didn't want anybody there. And I think that impacted the ability to get more jobs these last six, nine months. But that's starting to change. Kids are coming back. We're in a lot of discussions with a lot of schools. Okay, now that they're coming back, when do you think we could do this job? That kind of thing. So school security hasn't gone away. As we mentioned in our comments, there's been shootings even since the small amount of time that the kids did return. There's one in Tennessee. There's been several. That issue is not going away. We're there to supply the solutions that these schools need, and I think you'll start to see that happen, at least where we'll be able to announce it over these next several quarters.
spk07: Got it. Thank you. Thank you. You answered my questions. I'll get back in the queue. Thanks, Raj. Congratulations again. Yep.
spk03: And just a reminder, to ask a question, press star 1 on your phone. To remove your question from queue, press star 2. Our next question comes from Jeff Kessler with Imperial Capital. Please state your question.
spk08: Thank you, and it's great talking with you guys again. In terms of the, let's call it the timing of when quoting and talking turns into revenue for you, In talking to the large installers and monitoring companies and also the integrators who I either cover publicly or privately, they are seeing and they have been seeing record amounts of let's say pipeline and backlogs on some which are at record levels, some which are just at increasing increasingly high levels. They're hoping that these discussions turn into new revenue for them later on this year. Later on is a kind of nebulous term, but let's hope for the fourth quarter. Can you talk a little bit about when the people who are installing in whether it's access control or whether it's intrusion, et cetera. When the installers get in, about how long a period of time were you in that cycle in terms of you being able to get paid and book revenues?
spk04: Hi, Jeff. Hi. Well, we sell to three different types of dealer groups. We sell to alarm dealers. which do fire and burglar alarms. We sell to access control dealers, which put in larger jobs, and we sell to locksmiths. So typically what happens is the customer of any of those companies wants to get more protected or he needs to expand his building or or he needs to renew his certificate of occupancy for the building. So the dealers will come in, especially on the commercial side, and quote on those jobs. A lot of people, a lot of these companies in these buildings get two or three different quotes, and the system really has to go in because of the fact that it's – It's a crazy world today, and those dealers in NAPCO are in the right industry at the right time. So those jobs go in. Larger jobs may take a little bit longer because there's some funds that have to be granted from the company and approvals from the board of the company and the building. So there's no particular one answer here. We have a lot of irons in the fire. Remember, we have more than 10,000 of these companies, these installing type of companies, out there canvassing the streets and doing jobs. So there's no one answer. But you can see that we're putting together a continuous growth pattern of recurring revenue, which means that a lot of our alarms with radios and our star links with radios and now our air access will generate the recurring revenue. Because remember, with us, a sale of a recurring revenue product is just the beginning of a relationship. A relationship goes on for many, many years because the building has to be protected for many, many years. So once we make that sale, it's not the end. It's a new beginning with a new relationship. So this whole thing keeps building. It's like a And we're the leader in recurring radios with great performance working in all the networks. So that's what's driving growth in addition to supplying the locking, which will have recurring revenue soon, and the access control, the same thing, will have recurring revenue soon. So everything is moving forward, Jeff.
spk08: Okay. One of the questions related actually to what you just said, and that is one of the things about recurring revenue product, I mean, one of the great things is that it's recurring, obviously, and that the margins on it can be high, and you can plan your budget more easily with this company going, you know, with your clients going out. One of the challenges of recurring revenue of recurring revenue is that over a period of time, not at the beginning, but certainly getting into it after two or three years, you have to prove yourself over and over again to sometimes different regimes that come into the companies, or for that matter, if you work in the state, different secretaries of state or whoever is giving out the contracts that you still provide the best service for, in some cases, the best price. It doesn't always have to be the best price, but you know what I'm getting at is that you have to prove yourself over time because it is not easy, but there are incumbents who do get knocked out of recurring revenue projects from time to time. Again, it's probably not going to happen with you, but the question is what are you folks doing in advance to make sure that you remain the value proposition for them so that they don't ever think of having to leave you for somebody who says, we can provide the same thing as NAPCO for a lower price, which probably will happen in two or three years.
spk04: We don't see it that way because of the fact that we give – the best radio coverage that can be gotten with unique circuitry, a unique product at a very, very good price, very valued price. So if a new regime comes in, a new installation company that wants to knock out the old installation company, our units can be reprogrammed to go into the new installation company's network. And it's been very reliable. And why would somebody want to rip out all kinds of equipment? We haven't had that experience. They keep it. They reprogram it with our blessing to get them what they need to get code-wise. And they use our backend network. We have multiple backend networks now, clouds. We keep adding more and more capacity to our systems. and now we're going to be adding the capacity. We've already added the capacity for our access control. So we have very little churn. This is not a residential thing, you know, where people are leaving. Residential is more of a flaky type of business. People stop paying. But in commercial, they've got to keep the systems going as long as they work well. they keep upgrading them. So we don't see much of a churn compared to the residential companies.
spk08: Okay. If I could sneak in one final real quick question. As you know, there's been a lot of, if you want to call it crazy valuations, a lot of hype on access control of late. And I'm not going to mention the companies, but valuations on some of these SPACs that have been combined have at over several billions of dollars for companies that are generating less than a million or just a couple of million dollars. And it appears that for several reasons, access control is going to become is being recognized for what it's always been but probably never valued that way, which is absolutely key to not just getting in and out of a premises but also visitor management and things like that. Can you discuss a little bit more of what your plans are in access control when you talk about going beyond locks into recurring revenue?
spk04: Well, access control is really two different industries. NAPCO is the only company that is in both of those industries. Access Control is the network in which locks go on to. So the locking companies make locks, but they don't make the actual access equipment. We make both. So we make an access control system, enterprise class, And now we have a cellular version, which puts all of the equipment up in the cloud for midsize jobs, which is a very important part of the business. The enterprise class, we manufacture a fantastic enterprise class system where you have world-renowned companies using our access control across the world, where it's a network. But our locks hook onto our access control and give functionality that you can't get when you put in a brand of lock that you may know of, Jeff, and you attach it to an access control system. It doesn't have the same functionality. We're totally integrated, and we're the only company doing that. So as you say, the billions of dollars of evaluation today is of the access control business, people are really recognizing that. And we're the only guys that make both sides of it. So the opportunities for us are great. And now that we introduced the recurring revenue for the dealers to build equity in their business, rather than just selling a service contract, but they can build equity in their business, that's a very exciting future for us. I expect the years going forward, as we laid this pipe with the access control, And the radio communications is going to be an exciting business for us and for our team.
spk08: Great. Thank you very much. I appreciate it.
spk03: Thank you. Take care, Jeff. Thank you. Our next question comes from Abba Horvitz with OSP. Please state your question.
spk05: Hey, guys. Congratulations on another great quarter. No surprises there. Two questions. One is the cash. That keeps building every quarter, and I think last time you said it's a good problem to have, and I agree, and certainly we both remember the days when you had $35 million of debt. But still, at the same time, are there any uses in the near term for that cash?
spk02: Do you want to take that one? Yeah, the best options for us, which is what we're studying, is cash dividends, investing, acquisitions. All those are on the table. Right now, our focus is so away from any of that because we're trying to finish the year on a strong note, very strong note. After year end, we'll have meetings. We'll figure out which way to go. You know, there's a lot of bankers who knock on our door, and we always say, if you bring us the right deal, we're interested. We'll hear what you have to say. So we don't rule out acquisitions, but we're very specific. We want something accreted from day one. It's got to be the right multiple. We want it to be a product we can make in the DR. We want it to be able to give us more recurring revenue. All those things, we're all ears. You know, we did an acquisition when we When created the $35 million of debt years ago, like you mentioned, why wouldn't we be interested now? It'll help us get to where we want to go that much faster. Right now, nobody's brought anything of interest. And again, our focus is on finishing this year on a very strong note. And the same thing really goes with dividends, because that's come up also. We're studying that. And eventually we might see something in that area.
spk05: Okay.
spk04: It's not bad to have a little bit of dry powder waiting in the wings.
spk05: Certainly. I agree with you.
spk04: We don't consider ourselves spending wildly. It's got to be the right type of deal. So we love it when the dry powder keeps building up, and eventually we'll come to a conclusion and utilize it in a conservative way.
spk05: Okay. I mean, just to point out that with the debt and now the cash position, that really is a reversal of almost $4 a share in terms of cash. That means the generation of cash on your balance sheet is pretty strong over that period of time, reducing the debt and increasing the cash. Very impressive. My second question is actually about I wanted to understand what's the lag time between installation and then turning on the recurring revenue?
spk04: Products that have recurring revenue get turned on immediately as part of the installation.
spk05: Okay, so there's no lag time. Right.
spk02: Yeah, the only lag time is we sell it to a distributor, potentially, right? The distributor then has to sell it to the dealer. Once the dealer has it, it gets activated.
spk05: Okay, and what would you say that time frame is?
spk02: Well, the way they're carrying such tight inventory levels, it's not as long as it used to be. It might be a month or so, a month and a half, something like that.
spk05: So when we look at those levels, we can actually, meaning the minute you sell to the distributor, it's about a month time frame until you actually activate the recurring revenue.
spk02: I would say on average something like that.
spk05: Wow, okay. And just finally, the Dominican Republic, What was your utilization for the quarter?
spk02: We've been at about 80% utilization. The misleading part of that is the radio part of the equation. We can't keep up with that. We can't keep up with that demand. We started a night shift for radio business about six months ago, maybe a little more. We just hired a lot more people because the demand for the radios is stronger than ever. So while it's 80% capacity in total, we're over capacity for one shift anyway for radios, and now we're in that second shift mode big time.
spk05: So shouldn't that increase the gross margin already or soon as you get closer and closer to 100% utilization?
spk02: Yeah, it will. We have to get back to the levels of hardware that we had before. You'll see that margin expansion.
spk05: Okay. So in theory, you could have where these two things come together, the recurring revenue becoming much more a significant part of your business and also the expansion of the gross margin on the hardware part as the utilization gets closer to 100%.
spk02: Yeah, one of the things we've talked about, now we mentioned that we hit our goal of $40 million run rate on recurring revenue. We talked about it years ago. People looked at us cross-eyed. What are these guys talking about? They only have $10 million of recurring. They're going to be at $40 million by 2021? Yeah, we're on the cusp of doing that. One of the other goals we talk about is five years out, we want to get to $150 million. But we also want to get to $150 million of hardware. When we get to that $150 million of hardware, the margins will be tremendous. It will be over 50% gross margin on the hardware part. We want both. We know the recurring is fantastic. The margins are in the 80s. We want the other side also to be into the 50s. So that's our long-term goal, and we think we'll get there.
spk05: Beautiful. Thank you, guys, again.
spk03: Thanks, Abba. There are no further questions at this time. I'll turn it back to management for closing remarks. Thank you.
spk04: Thank you, everyone, for participating in today's conference call. As always, should 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. We look forward to speaking to you all again in a few months to discuss NAPCO's fiscal Q4 21, and fiscal year 2021 results. Bye-bye. Have a wonderful day.
spk03: Thank you. This concludes today's conference. All parties may disconnect. Have a good day.
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