NAPCO Security Technologies, Inc.

Greetings and welcome to NAPCO Security Technologies, Inc. Fiscal Fourth Quarter and Full Year 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Patrick McKillop, Director of Investor Relations. Thank you. You may begin.

Hello, good morning. I'm Patrick McKillop, Director of Investor Relations for NAPCO Security. Good morning and thank you all for joining us for today's conference call to discuss our financial results for our fiscal fourth quarter and fiscal year 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 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 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 proving to be incorrect could cause actual results to differ materially from those in the forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, 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 front. Tomorrow, September 14th, we will be presenting and hosting one-on-one meetings at the CL King Conference, which is being held virtually. and we're looking forward to another great conference. We're planning for more virtual roadshows throughout the remainder of the year and look forward to when we can meet in person again. Investor outreach is crucial, especially for a small-cap company 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 Soloway, President and CEO of NAPCO Security Technologies. Dick, the floor is yours.

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 excited to report our record sales and profits for our fiscal Q4 21 and fiscal year 21. Our results beat street consensus estimates for Q4 and for FY21 on sales, EPS, net income, and EBITDA metrics by significant amounts. EBITDA per share for fiscal 2021 was over $1 per share at $1.06. We are excited to report that we have achieved our goal, which we set several years ago, of $40 million in RMR, that's reoccurring monthly revenue. The annual run rate is now $40.1 million based on July 2021 recurring revenues. Our balance sheet remains strong with our cash balances continuing to grow. We continue to focus 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 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'll now turn the call over to our CFO, Kevin Bichelle, who'll provide an overview of our fiscal fourth quarter and fiscal 21 results, and then I'll be back with more on our strategies and outlook. Kevin?

Thank you, Dick, and good morning, everybody. For the fourth quarter, net sales increased 54% to a fourth quarter record of $35.4 million, as compared to $23 million for the same period last year. Net sales for the fiscal year ended June 30, 2021, increased 13% to a record $114 million last year. as compared to $101.4 million for the same period a year ago. The increase in sales for the quarter and the fiscal year were primarily related to increases in recurring services revenue, as well as intrusion products and Mark's brand door locking products. Recurring monthly revenue continued its strong growth, increasing 43% for the quarter and 41% for the fiscal year. This strong growth is primarily attributable to the continued strength of our commercial intrusion and fire alarm business, which has not been significantly affected by the COVID pandemic, as buildings must remain secure. Recurring revenue now has an annual run rate of $40.1 million, based on July 2021 recurring revenue. And as Dick mentioned before, we are excited to report that we have achieved our $40 million goal that was set several years ago when we had very little recurring revenue. Gross profit for the three months ended June 30, 2021 increased 90% to $15.1 million with a gross margin of 43% as compared to $8 million with a gross margin of 35% for the same period a year ago. Gross profit for the fiscal year ended June 30, 2021, increased 15% to $50.2 million, with a gross margin of 44%, as compared to $43.6 million, with a gross margin of 43% for the same period a year ago. Gross margins for recurring revenue in the fourth quarter continued to improve, coming in at 87% compared to 83% for the same period a year ago. a 400 basis point improvement. And for the fiscal year, the gross margin for recurring revenue was 86%, as compared to 82% last year, also a 400 basis point improvement. The increase in gross profit for the three months and fiscal year was primarily due to the aforementioned increased recurring revenue as partially offset by lower margins from equipment sales. Gross margins on equipment sales was primarily affected by the shift in sales to Starlink radio products, which typically have lower margins, but they do result in the recurring service revenues, and away from school security locking products, which typically have much higher gross margins. The decrease in sales of school security products was primarily due to school districts and other institutions postponing their capital projects throughout fiscal 2021. While we have seen delays in school security projects during the COVID pandemic, we have not seen significant cancellations, and we expect projects to restart as schools are reopening. And this, we believe, will have a positive effect on equipment sales margins in the future. Gross margins on equipment sales were also affected by a lower overhead absorption rate. which occurred as the result of the effective and strategic $9.3 million reduction in inventories during fiscal 2021. Research and development expenses for the three months ended June 30, 2021 were relatively constant at $1.9 million or 5% of sales as compared to $1.9 million or 8% of sales for the same period a year ago. Research and development expenses for the fiscal year, June 30, 2021, increased 5% to $7.6 million, or 7% of sales, as compared to $7.3 million, or 7% 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 June 30, 2021, increased 41%. to $7.2 million, or 20% of sales, as compared to $5.1 million, or 22% of sales for the same period a year ago. Selling general and administrative expenses for the fiscal year ended June 30, 2021, increased 6% to $25.2 million, or 22% of sales, as compared to $23.7 million, or 23% of sales, for the same period a year ago. The increase in selling general and administrative expenses for the three months and the fiscal year was primarily due to increases in payroll and commissions, as well as some increases in travel and trade show expenses, as our sales team is now out and about, and they weren't last year. Operating income for the quarter was $6 million as compared to an operating loss of $835,000 for the same period a year ago. Operating income for the fiscal year ended June 30, 2021, increased 60% to $17.3 million as compared to $10.8 million for the same period a year ago. The company's provision for income taxes for the three months ended June 30, 2021, decreased by $52,000 to $1,007,000 as compared to $1,059,000, for the same period a year ago. The company's provision for income taxes for the fiscal year ended June 30, 2021, increased by $145,000 to $2.4 million, as compared to $2.2 million for the same period a year ago. The company's effective rate for income taxes was 14% for the fiscal year ended June 30, 2021, and it was 21% for the fiscal year ended June 30, 2020. The decrease in the effective tax rate for fiscal 2021 is a direct result of an additional tax expense recorded in fiscal 2020 for a now settled IRS audit of fiscal 2016. Net income for the quarter was a fourth quarter record $5 million, or 14% of sales, as compared to a net loss of $1.9 million for the same period a year ago. Earnings per share diluted for the quarter was $0.27, as compared to a net loss per diluted share of $0.10 for the same period a year ago. Net income for the fiscal year ended June 30, 2021, increased by 75% to a record $14.9 million, or 13% of sales, as compared to $8.5 million, or 8% of sales, for the same period a year ago. and earnings per share diluted for the fiscal year increased 76% to 81 cents per share, as compared to 46 cents a share for the same period last year. Adjusted EBITDA for the three months ended June 30, 2021, increased 344% to $6.6 million, or 36 cents per diluted share, as compared to $1.5 million, or $0.08 per diluted share for the same period last year. An adjusted EBITDA for the fiscal year ended June 30, 2021, increased 32% to $19.5 million, or $1.06 per diluted share, as compared to $14.7 million, or $0.80 per diluted share for the same period last year. Moving on to the balance sheet, At June 30, 2021, the company had $40.2 million in cash and 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 $75.8 million at June 30, 2021, as compared with working capital of $61 million at June 30, 2020. Current ratio, defined as current assets divided by current liabilities, was 4.8 to 1 at June 30, 2021, and 4.5 to 1 at June 30, 2020. Cash provided by operating activities for the quarter increased 78% to $6.6 million as compared to $3.7 million last year. Cash provided by operating activities for the fiscal year increased 123% to $23 million as compared to $10.3 million last year. Inventories at June 30, 2021 decreased by $9.3 million from June 30, 2020. This decrease is 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. CapEx was $441,000 during the quarter versus $290,000 in the year-ago period and was $1 million for the fiscal 2021 period versus $1.6 million last year. That concludes my formal remarks, and I would now like to return the call back to Dick.

Kevin, thank you. Our fiscal year was a record breaker as we delivered the highest sales and net income for a Q4 and fiscal year in the company's history, which is an incredible achievement during this ongoing COVID pandemic. Our success continues to be primarily attributable to the commercial intrusion and fire alarm business. Importantly, the fire alarm business is a mandated, non-discretionary item, which means that a commercial building must have and maintain a fire alarm system in order to receive a certificate of occupancy. We continue to focus on this segment of the business given its high profitability and essential nature. Recurring revenue products that we sell are the beginning of a new relationship, not the end. They are a sale that keeps on going. The recurring revenue annual run rate is now $40.1 million as of July 2021, and we are proud to have achieved the $40 million RMR goal that we set for ourselves several years ago. The alarm communications paradigm is shifting away from legacy copper lines and aging 3G infrastructure. The conversion of these older legacy technologies are still in the early part of the conversion cycle, with millions of buildings still requiring upgrades, which creates opportunity for our Starlink line of universal fire, intrusion, and IoT communicators. Our Starlink communicators offer the widest coverage in the U.S. to dealers with both AT&T and Verizon LTE service. Also, 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 calendar year 2022. This creates great opportunities for the company. The school security continues to be a significant opportunity. Our fully integrated solutions for this market remain a top priority given the healthy margins those products generate. During the COVID pandemic, we've experienced delays but not significant cancellations in school security projects. As schools are reopening this fall, we are reminded that the need for these solutions is still clear with a few active shooter events already happening this year, such as New Mexico and North Carolina. Also, recently, authorities in Florida were able to stop a planned mass shooting at a middle school. 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, which in total are in the billions of dollars. We remain focused on providing schools with products and solutions they need to protect their students and faculty. 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 for us, as we must receive approval from these institutions prior to release. During 2021, our latest product offering called Air Access was launched. Importantly, Air Access will bring recurring revenue to the locking and access control divisions of our company, which have not had recurring revenue until now. Air Access is the industry's first cellular-based 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 on-site database backups or software updates. While we are in the early stages of this launch, we've received positive feedback from dealers while at the ISC West trade show a few months ago and from dealers in the field recently. The launch of Air Access means that NAPCO now generates recurring revenue from each division of our company, e.g., alarms, locking, and access controls. We will begin our Q&A session portion of this call in a moment. Our fourth fiscal quarter 2021 and fiscal year was a very successful one. Before the COVID-19 pandemic began to significantly impact our country back in March of 2020, NAPCO 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 fiscal year 2022 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 the 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.

Thank you.

Ladies and gentlemen, at this time we will be conducting a question and answer session. If you'd like to ask a question, you may press star one on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star two 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 key. Our first question comes from the line of Mike Walkley with Canaccord Genuity. Please proceed with your question.

Great. Thank you, Kevin and Dick. Congratulations on the strong results in achieving the $40 million target you set quite a long time ago. My first question is just on the recurring revenue. It's growing over 40% now off of larger numbers. How should we think about the growth at scale of recurring revenue over time? And then built into that question on air access, with good feedback from the channel, when do you think that starts to materially contribute to recurring revenue?

Well, there's a great opportunity for us, and I thank you for your support these years. The opportunity is we have 5 million commercial buildings that use old technology copper, and those buildings have to be converted. The Starlink radios, which we have, are a direct replacement for the copper, and they will be the communications link between the building and the central station. So we're very excited about that. We also have the mothballing of the old cellular networks, which had radios on it. Those radios were not necessarily primary radios, they were backup radios, but there's hundreds and hundreds of thousands of those radios that are out there, they have to be upgraded and they'll be done by next year before it's lights out for that network. So that's another wind in our back to help us create additional sales. So I can't tell you exactly what it looks like except for the fact that the opportunities are great I think we can keep on going because the conversions were just in the first inning of a lot of these conversions. And we have an exciting future to do more conversions. And then we wanted always to have recurring revenue in each division. It's been very successful since we predicted that the RMR for the fire and intrusion business was going to get to the $40 million number. We predicted this years ago where we could see the changeover starting to happen. And now we wanted to get recurring revenue for locking, which is unheard of, and also for access control, which also we didn't get. Nobody gets this. Recurring revenue is not something that the installation companies get for those two product lines. But the new invention of air access is very exciting to the dealers, and they can do jobs very, very quickly. The equipment will be up in the cloud. The updates will be up in the cloud. It will be professionally managed by us, and it gives a great opportunity for those installation locking dealers and access dealers to make recurring revenue like alarm dealers do and fire dealers do. So I figure it's going to be a year and a half. It's a new creation, but it builds equity in these dealers' businesses. So it's going to be very exciting for them. And we have a great sales team that's going to get the word out. And people are already asking for it. Send one of those over right away. I want to check it out. I was dealing with the IT department. in a company and they give me a lot of grief about putting in an access control system because they're afraid of hacking going through their wiring. So your product will separate from that and allow us to do a lot more work and a lot more jobs. So we're excited about the future of air access.

Great, thanks. And Kevin, maybe a follow-up question for you. You know, I understand the radio business has lower margin, but it drives that strong recurring revenue. What's the feedback maybe from the channel on the school pipeline? And how should we think about just gross margin and product mix over the next several quarters and then maybe longer term?

Okay, Mike. Thanks for your support and for the question. So what we see with the school security system There are lots of jobs out there. We talk to our integrators and our sales team all the time about lots of jobs that are kind of on hold. And what I'm hearing from them is we're not concentrating on it now. We're concentrating on getting the kids back, getting them back in person. The whole battle over masks and vaccines, that's the focus. But as soon as the kids are back, and now they're basically back, we're going to start focusing on the school security jobs because they tell us we've won these jobs. It's just a question of when the schools want to start. So our expectation is kids are coming back. It started in August. It's happening now. We're going to start, we believe, to see school security jobs in the next, Couple of quarters. You know, certainly I think by Q2, maybe even some this quarter. But, you know, we'll announce what we can announce. But this is here to stay, school security. This isn't going anywhere. This has been a temporary delay because of COVID. But you saw once the kids started to come back already, there was a couple of shootings. It's crazy. The world is crazy when it comes to school shootings. This will be back. When it comes back, the margins will shift back. Right now, the radios dominate the margins, and that's because we're selling so many of them, and we're dealing with a lot of big players, and it's phenomenal. And yes, we're selling a lot of product at lower margins, but you know it leads to that recurring, and recurring had the margin of 87%. this past quarter. So we'll take that every day of the week. But when the school jobs come back into the mix, then the gross margins for hardware, I believe, will be back into the 30s. And again, the higher we go on the hardware number, the higher that margin will go. So to us, it's a temporary situation.

And one last question to me on the gross margin. I'll pass it on. Just as you think about kind of the September quarter, usually it's seasonally down on revenue off the June quarter, but you probably won't have, you know, the inventory reduction like you've had, and congrats on getting that where you want it in the cash generation. So should we think kind of stable-ish gross margin in the short term with similar mix, or are there any other puts and takes you would guide us to on sequential gross margin changes? Thank you.

Yeah, Mike, I would say in Q1, We're not going to see the inventory decline like we saw throughout the year. One of the things we're doing, just talking about inventory, we made a conscious effort to reduce it, but now we're making a conscious effort to make sure we don't run out of any of those hard-to-get components. We all read about the supply chain mess and the difficulty in getting parts We spend, I spend a lot of time making sure that doesn't happen to us. And if we have to buy extra inventory on those key parts, so be it. I'd rather have that than run out. We've got plenty of cash. It's not an issue. So I don't expect inventory to drop in the short term the way it has been. And I also expect the margins to be similar in these next couple of quarters to what we just saw. Maybe a little better, but certainly I don't think it'll be less.

Great. That's helpful and makes sense to use a strong balance sheet to get those tough-to-get components. I'll pass the line, and best wishes for another strong fiscal year.

Thank you, Mike.

Our next question comes from the line of Jim Rashidi with Needham & Company. Please proceed with your question.

Hi, thank you. So it sounds like if we think about gross margins and the sequential decline from Q3 to Q4, it's still a function, fair to say, of just mix, just higher level of radio revenue in the mix. Again, I'm just going back to you know, the overall concerns people have about some of the things you just alluded to, Kevin, on the component side. Was that all a headwind at all as it related to your overall hardware growth margin?

Well, the first thing I'll say, Jim, is that the margin mix that we saw is twofold. One is the strong... sales we're seeing from radios. It's even beyond what we projected. And that's going to lead to future recurring revenue that's phenomenal. We're dealing with some big, big players, as well as our typical customers. And that makes for a tremendous shift. Even when the school jobs come back, You know, the radio part of the business is huge now. And so I believe margins will come back into the 30s in the foreseeable future. Maybe not next quarter, maybe not the one after, but maybe by our fiscal Q3. But it's a good thing in the end. We're happy with where it's going. Schools will come back. Margins will come back. and recurring is here to stay, and then some. With regard to those hard-to-get components, we are very, very vigilant on making sure that we don't run out. I think we see this with a lot of automakers, and we see this with a lot of our competitors. We're not going to go down that road. We're going to make sure that we have And if we have to have extra inventory, like we were saying before, utilize our balance sheet to make sure we don't run out, we're going to do that. But I think supply chain issues are here to stay, and we'll do everything in our power to make sure it doesn't affect us.

Got it. And, Dick, just a follow-up question. It looks like you're getting back to what's a more normalized level supply of operating expense, you know, particularly on the SG&A side and the sales and marketing side. Is this the way we should be thinking? I mean, it sounds like, you know, the trade show expense is coming back in. You've got folks that are traveling, presumably, more now. So I'm wondering, and maybe this is a question for you, Kevin, how should we think about OPEX going forward? Is it more normalized now?

Yeah, I would say... The SG&A was particularly high also because commissions were higher in this quarter. But with the other things coming back, I think an SG&A level in the 6.5, 6.6, 6.7, that range is more normalized. Hopefully, we don't have any more travel bans and COVID doesn't come back and For us, for our team, our sales guys are traveling. It's business as usual. We had our ISC West trade show in July in Las Vegas. There's nothing like being in Las Vegas in July, but they had the show. Shows are back. Traveling is back. The SG&A, maybe not as high as we just saw, but more normalized. R&D, you know, that's pretty normal as well. We might, if we have special projects and we need to move things faster, we'll add a few engineers here and there. But for right now, our level that you see is what it's going to be, you know, where it grows 5%, 6%, 7%. If anything changes, you know, we'll let you guys know.

Thank you. Congratulations on the year, by the way. Thanks so much. Our next question comes from the line of Matt Fu with William Blair. Please proceed with your question.

Hey, guys. Thanks for taking my question and congrats on the good results. Wanted to ask on the hardware result in the quarter, how much of that was driven by pent-up demand? And then what are you seeing in terms of demand levels relative to where they are or where they were pre-COVID? Thanks.

Thanks, Matt. So one of the things that I look at, I like to look at the distributors' sell-through stats. That's how I can tell what the demand is. As I've mentioned on prior calls, distributors are much more conservative in what they keep on hand, and they're still in this wait-and-see mode. But with strong sell-through stats, they have no choice but to buy. As I look at our intrusion customers, our top customers, the sell-through stat of our number one guy was up 34% year over year for the full year. It was up 54% for the quarter year over year. So I said, maybe, you know, it's COVID. The COVID year 2020 was low. Let me look at 2019. It was even better compared to 2019. Again, looking at our number one customer. It was up 51% for the year. And for the quarter, it was up 55%. So it looked really good. But then I said, that was an intrusion customer. I said, let me look at locking. And locking hasn't done as well as the intrusion, right, radios versus at least the schools holding down some of the locking sales. But I was impressed. So our number one locking customer was up 31% for the year, sell-through, year over year. Then I looked versus 19, it was 22%, still pretty good. Then I looked for the quarter, it was up 46%. Then I looked at the number two guy, I saw it was up 17% year over year. Then I went back to 2019, it was 48%. It was even better. So all the sell-through stats are still very strong, which means these numbers should stay strong, these sales. Maybe they're not going to carry three months' supply anymore. They have no choice. With sell-through stats like this, they don't want to lose the sales. So we believe hardware sales will keep getting stronger. My hope is that the locking side holds up its end of the bargain so that the margins do better. That's what I think will ultimately happen. But we're going in the right direction, and all the stats, all the metrics are strong.

Got it. Great to hear. And then just wanted to ask on iSecure and what sort of traction or update that there is with that product. Thanks.

iSecure has a unique place in our product line. It allows us to sell to the dealers a full complement, not only fire, but also the intrusion aspect of it. And it's a quick install. So it's building volume. And it adds to our recurring revenue. It's part of the reason we got to the $40 million number that we've hit. We made the prediction years ago. And I expect it to continue to keep growing in the future. So you have a combination of the Starlinks. You have FIRE. control panels with Starlinks built in. You have iSecure, which has a Starlink built in. And now we have the Air Access, which is for locking and access control, which integrates our locking and access control business with Starlink technology in it. So all of this keeps building for our future goals, and we expect great success going forward. So in addition to that, of course, there's always new products that we will invent and add to our product line that'll even contribute to more and more recurring revenue. The goal, of course, is to have recurring revenue be 50% of our volume by 2026, and also the hardware to be also 50% of our volume which is we expect we're trying to be a $300 million company 50-50 by that time. And that is our goal, and that creates great profitability for our company because it's amortization of our overhead and our factory and also the great margins you get on the recurring monthly revenue. So it really contributes a lot to an exciting future for us.

Great. Thanks a lot, guys, for taking my questions. Appreciate it.

Thank you.

Our next question comes from the line of Jason Smith with Lake Street. Please proceed with your question.

Hey, guys. Thanks for taking my questions. Just want to follow up on your comments on the school projects. You mentioned there were some delays. Just curious if these have been rescheduled for specific timetables or the rollouts of these remain up in the air?

Jason, some have been scheduled and some are not. Typically, if it's a K through 12, they don't care about a certain time of year. They can do these projects when the kids are in school or not. So we don't necessarily hear, okay, it's going to happen, it's been rescheduled. We just expect it to happen. Kids don't have to be out of the school. in a K-12 setup. In a university, it's different. University, typically, they don't want the kids there. What we've been hearing is they want to start up soon anyway, with some of these schools. They want to start up soon. Once they settle, the kids are in, they know it's in person, it's not going to be virtual anymore. They want to get these things started. They've been waiting. They've been approved. That's why we feel pretty good about the latter part of this calendar year, which we're almost at, that these jobs are going to start up. I can't be more specific than that. I will tell you we'll announce whatever wins we get, and we get approval on, we will announce, and you guys will know.

Okay, that's helpful. And then congrats on achieving that $40 million annual runner rate this past year. Just curious if you'd be willing to throw out sort of a new goal going forward that we can look for.

Well, the goal we have that we set is by 2026, we want to be 150 in recurring and 150 in hardware. That's our new goal. And with the products that we have in the marketplace now, and the new products that have been launched, and we expect to reap very strong benefits from, and the products that are in development. We believe that it's a very doable goal. And I say stay tuned and keep an eye on us, and we're in a great business. And as we've said, A big part of our business is mandated. Got to have it. So we have all those conversions of buildings, commercial buildings, residential buildings that have to get off copper because copper is going lights out. It's over. So since Starlink is considered the best radio in the business and it works in all areas of the country because we have it... We work the AT&T network as well as the Verizon network. The dealers are utilizing it as a competitive substitute for the copper, which is going away. And it's a lot of copper work and a lot of dealers out there. They're going to make money, whereas in the past, building owners paid AT&T and Verizon for the copper wires, to use those copper wires. Now these carriers won't be involved, so the dealers can make money instead of those carriers. So that's very exciting for the dealers. That's why they're out beating the bushes, getting conversions over. And as light to going out around the country with the copper, they've got a competitive substitute on their truck, which is the Starlink. They can do any type of job, any type of control panel that's been installed in the last 25 years. It's a very, very unique technology, and it makes their life more profitable and easier for them to get business. So we're excited about the offerings that we're giving to our dealers.

All right.

Thanks a lot, guys. Thanks, Jason. Thank you.

Our next question comes from the line of Brian Ruttenberg with Imperial Capital. Please proceed with your question.

Great. Thank you very much. Great quarter and year. First question, let's start with a macro one that hasn't been addressed yet, is Asa Abloy acquiring Spectrum Brands. How did that impact you? You're obviously... involved in that sector. Can you talk about that and the impact to Asa and Allegiant now getting into a knife fight at the lock level?

Well, we like it when the big guys fight it out. We make a lot of customized hardware and our customized hardware, the dealers use it when they're doing all kinds of jobs, whereas The big guys don't do the customized hardware. They have more or less turnkey, run-of-the-mill type of hardware. In addition to that, the big guys are not into RMR, recurring monthly revenue. They don't know about the technology of radios. It's foreign to them. They stay in their lane of hardware manufacturing, of door locks, commercial buildings. kind of like catalog items. And now that the acquisition that you were referring to has come about, that's kind of like a retail business. There's a lot of retail in that. We're not in the retail business. We don't make grade two, grade three, which are lower quality locks. We only make grade one locks, unique, customized, architectural grade one locks, which network with or standalone, but network. We're into technology. We're a technology company. And they are more or less a commodity company. A lot of commodities and big, because these companies have been around for 100 years. But they're not into the unique technology that we have. And it's very hard to get into this technology. This technology took us many years to generate. It started out, our company started out as an electronics company. and then went into mechanical products. But we're a primary electronics and software company, and that's what we understand. So for us, we're not going to see much in the way of any interference in our business model at all.

Great. And then as a follow-up, a separate line, can you talk a little bit about school funding at the federal level? If there's anything coming down from these big budgets coming down from the federal government that you guys would benefit from at the school level.

Patrick, would you like to address that one?

Yeah, I would just say that the federal government, after the shooting in Florida 2018, committed to $100 million per year for the next 10 years. So we're only three years into that program. And there has been talk of adding more schools for funding into these infrastructure bills, but we haven't seen any details on that as of yet. But nonetheless, as we stated earlier in the call, between the federal government and the state governments stepping up on their own, we know states like Florida, for example, have committed $500 million in funding. States like Maryland have committed $120 million. $5 million for a number of years going out. There really is more options for funding than there ever was before. So if you do want to get a system installed and you need money to do so, there's plenty of it available in terms of getting the school security jobs completed.

Great. Thank you very much. Our next question comes from the line of Raj Sharma. with B. Riley. Please proceed with your question.

Hi. Thank you. Congratulations on a solid quarter, solid year. Thank you, Ryan. I just wanted to recap on the hardware margins were impacted mostly by inventory reductions, but also by a greater number of alarm systems sold. And should you continue to see this Going forward, you've already commented that the distributor sell-through is really good, so I just wanted to get a sense of that.

I think the mix of selling more radios, the mix has shifted to more radios, less school jobs. School jobs will come back. The radios are here to stay and then some. So, again, The margins on the radios, 20%, 25%, whatever it is, it's lower. But do we enjoy the recurring revenue that comes thereafter? The inventory reduction was just a part of the margins. That, to me, that's not going to last. That had an impact. I don't expect the inventory to drop at least in the next couple of quarters for the reasons I said earlier. So I don't think that's going to have an impact on margins. But that mixed shift, that will have an impact, at least for the next couple of quarters. Maybe less. School jobs come back strong now. The margins on school jobs are tremendous. And so when these performance, we miss it. We love having those higher margin jobs. But believe me, we're not complaining with all the radios we're selling at more than makes up for it.

Right, and then on the schools, talking about the schools, the schools picking up should help the gross margins on the equipment side. But on any change in gross margins for the air access relative to the existing recurring revenues?

Are you talking about the margins from the recurring revenue?

that gets contributed from air access?

Yes, yes. Is that profile going to be any different from the existing recurring revenue stream?

It's great recurring revenue also, and again, we don't have any of it, or we never did, and now we're starting to see it. But nothing is like the fire, fire radio recurring. Nothing is as good as that. It's all good. You know, when we... We get $7, $8 a month for a residential radio. We're thrilled with that. When you get up to $15 a month if it's a fire radio, even better. Air access, probably not going to be as strong as a fire radio, but think about all the locks that are out there. It could make up for it in volume. The pure recurring revenue per dorm may not be the same, but with a lot of doors, it'll still be a very, very profitable situation.

Right, and then just lastly, when do you expect the schools to come back? Should we assume that would be sort of first half of this fiscal year or second half?

I would think the latter half of this calendar year and into next year. Got it. Thank you again for a solid quarter. I think I'll take my questions offline. Thank you, Raj.

If there are no further questions in the queue, I'd like to hand the call back to management for closing remarks.

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, and we look forward to speaking to you all again in a few months to discuss NAPCO's fiscal Q1 22 results. Bye-bye.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.