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spk07: Greetings and welcome to NAPCO Security Technologies, Inc. Fiscal First Quarter 2022 Earnings Release Conference Call. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during a 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.
spk09: Good morning. My name is Patrick McKillop. I'm the Director of Investor Relations for NAPCO Security. Thank you all for joining us for today's conference call to discuss our financial results for our fiscal first quarter 2022. 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.napgosecurity.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 expense and costs, and expected annual run rate for SAS returning 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'll 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. We're planning more virtual NDRs into the end of calendar 2021, and we will be presenting at the Needham Growth Conference in January 2022. 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 Soloway, President and CEO of NAPCO Security Technologies. Dick, the floor is yours.
spk10: Thank you, Patrick. Good morning, everyone. Welcome to our conference call. Thank you for joining us today to discuss our results. We are very excited to report our fiscal results. Q1 2022 record sales of $31.1 million and record net income of $7.8 million. Our results reflect another strong performance by NAPCO. Recurring revenue continued to grow at a very strong rate, and the annual run rate is now $42.6 million. based on October 2021 recurring revenues. Our balance sheet remains strong with our cash balances continuing to grow, now in excess of $43 million. 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 21% of the equity. Before I go into greater detail, I will now turn the call over to our CFO, Kevin Bushell, who will provide an overview of our fiscal first quarter results, and then I'll be back with more on our strategies and outlook. Kevin, the floor is yours.
spk06: Thank you, Dick, and good morning, everybody. For the first quarter, net sales increased 34% to a first quarter record $31.1 million, as compared to $23.2 million for the same period last year. The increase in sales for the quarter was primarily related to increases in recurring service revenue, intrusion and access products, and alarm lock and marks brand door locking products. Recurring monthly revenue continued strong growth. increasing 41% for the quarter. 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 $42.6 million based on October 2021 recurring revenue. Also, our equipment sales continue to rebound, up 31% from the same period last year. Gross profit for the three months ended September 30, 2021, increased 26% to $13.4 million, with a gross margin of 43%, as compared to $10.7 million, with a gross margin of 46% for the same period a year ago. Gross margins for recurring revenue in the first quarter continued to be strong, coming in at 86% compared to 84% for the same period a year ago. While the overall gross profit increased by $2.8 million, or 26%, gross margin for equipment revenues was 22% as compared to 29% last year. This decrease was primarily due to increased freight and component part costs relating to the current worldwide supply chain problems, as well as a shift in product mix to more of the company's Starlink radio products, which generate a lower gross margin than the company's locking or access products, but leads to the more profitable recurring service revenues. The increase in gross profit for the three months was primarily due to the aforementioned increased recurring revenue, increased sales of intrusion and access products, as well as increased sales of door locking products. Research and development expenses for the three months ended September 30, 2021 were relatively constant at $1.9 million or 6% of sales as compared to $1.9 million or 8% of sales for the same period a year ago. Selling general and administrative expenses for the three months ended September 30, 2021 increased 19% to $7.3 million or 24% of sales as compared to $6.1 million or 27% of sales for the same period a year ago. The increase in selling general and administrative expenses was primarily due to trade show and advertising expenses, which were curtailed during the COVID-19 pandemic last year, as well as increased sales commissions related to the 34% increase in sales. The decrease in SG&A expenses as a percentage of sales, from 27% to 24%, was primarily due to the aforementioned increased sales. And speaking of trade shows, We will be attending the upcoming International Security Conference at the Javits Center in New York City on November 17th and 18th. And if anyone is interested in attending, please reach out to Patrick. Operating income for the quarter increased 56% to $4.2 million as compared to $2.7 million for the same period last year. Other income for the quarter increased by $3.9 million and was related to the gain on the extinguishment of debt with such extinguishment occurring during the three months ended September 30, 2021. The company's provision for income taxes for the three months ended September 30, 2021 increased by $19,000 to $348,000 as compared to $329,000 for the same period a year ago. The company's effective rate for income tax was 4%, and 12% for the three months ended September 30, 2021 and 2020, respectively. The decrease in the company's effective rate for the three months ended September 30, 2021 was due primarily to the income recognized as a result of the aforementioned extinguishment of debt being non-taxable. Net income for the quarter increased 234% to a quarterly record of $7.8 million, as compared to $2.3 million for the same period last year. Earnings per share diluted for the quarter increased 223% to 42 cents, as compared to 13 cents for the same period a year ago. Adjusted EBITDA for the quarter increased 170% to $8.6 million, as compared to $3.2 million for the same period a year ago. Adjusted EBITDA per share diluted for the quarter increased 176% to 47 cents as compared to 17 cents for the same period a year ago. Net income, earnings per share, adjusted EBITDA, and adjusted EBITDA per share for the quarter ended September 30, 2021. All reflected other income of $3.9 million. which resulted from the previously mentioned extinguishment of debt. Without such benefit, net income, earnings per share, adjusted EBITDA, and adjusted EBITDA per share would have been $3.8 million, $0.21, $4.7 million, and $0.26, respectively. All record results for any first fiscal quarter in the company's history. Moving on to the balance sheet. At September 30, 2021, the company had $43.2 million in cash and cash equivalents and marketable securities, as compared to $40.2 million at June 30, 2020. Working capital, defined as current assets less current liabilities, was $81.8 million at September 30, 2021, as compared with working capital of $75.8 million at June 30, 2021. Current ratio, defined as current assets divided by current liabilities, was 6.2 to 1 at September 30, 2021, and was 4.8 to 1 at June 30, 2021. Cash provided by operating activities for the quarter decreased by 8% to $3.5 million as compared to $3.8 million last year. The decrease was primarily due to inventory increasing by $1.8 million at September 30, 2021, compared to June 30, 2021 levels, and decreasing by $700,000 at September 30, 2020, compared to June 30, 2020 levels. This increase is primarily the result of the company significantly increasing purchases of certain components that have become difficult to source during the worldwide supply chain problems. CapEx was $522,000 during the quarter, versus $143,000 in the year-ago period. That concludes my formal remarks, and I would now like to return the call back to Dick. Thank you, Kevin.
spk10: A fiscal Q1 2022 was a record breaker, and I am proud of the NAPCO team for executing through the challenges that have been brought by the COVID pandemic. The quarter also marked our fourth consecutive quarter of year-over-year sales growth and our goal is to surpass the previous streak of 23 quarters that was disrupted in 2020 by COVID-19. The primary driver of our success comes from the commercial fire and intrusion alarm business. Commercial buildings must have and maintain a fire alarm system in order to receive a certificate of occupancy, and this is a mandatory non-discretionary item. We continue to focus on this segment of the business, given its high profitability and essential nature. The recurring revenue annual run rate is now at $42.6 million as of October 2021, and as a reminder, Last quarter, we surpassed the goal of $40 million in annualized recurring revenue that we had set several years ago. The constraints of the supply chain have impacted us as well as our competitors, but NAPCO's delivery performance has been far better. We are aggressively managing these issues by developing alternative supply sources and delivery methods while also reengineering products where necessary. We continue to remain focused on aggressively managing these logistical challenges to ensure that we remain well-positioned to meet the needs of our clients. The conversion of older legacy copper phone line technology is still in the early part of the replacement cycle, with millions of buildings still requiring upgrades which create opportunities 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. Additionally, integrators and dealers will need to complete upgrades for their customers as AT&T and Verizon have both announced the sunset of their older 3G cell networks in calendar year 2022. A fully integrated solutions for the school security market remains a top priority given the healthy margins from those products that are generated. We believe this market remains a significant opportunity. The number of incidences of gunfire at school grounds have nearly doubled the previous high in 2019 as students returned in school learning from remote learning last year. School administrators, we believe, will start to turn their attention back to the need for school solutions and security solutions as more incidents happen and they are not spending all day dealing with the COVID protocols and policies. Recently, we announced a school security project in Tatum, Texas, Independent School District, and we are optimistic about more projects being announced during our fiscal 2022 year. 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 the products and solutions they need to protect their students and faculty. Air Access, our latest product innovation, was launched during our fiscal 2021, and as you may recall, this product will bring recurring revenue to the locking and access control divisions of the company, which have not had recurring revenue products 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 the launch, we've received positive feedback from dealers. The launch of Air Access means that NAPCO now generates recurring revenue from each division of the company, e.g., alarms, and connectivity, locking, and access control. Lastly, as Kevin previously mentioned, the ISE East Trade Show is November 17th and 18th in New York City at the Javits Center. We will be showcasing air access as well as many of our other new products and strategically important products. We invite you to come by and see our booth displaying all of our products. We'll begin our Q&A session portion of this call in a moment. Our first fiscal quarter 2022 was a very successful one, and we have now started a new sales growth streak with fiscal Q1 2022 being the fourth consecutive quarter of sales growth. We remain excited about the fiscal 2022 and beyond year. NAPCO senior management maintains a high level of ownership in our equity, approximately 21%, and I would like to thank everyone for their support and for joining us in the exciting future we have. Our formal remarks are now concluded. We would now like to open the call for the Q&A session. Operator, please proceed.
spk07: 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 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. 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.
spk02: Great. Thanks for taking my questions. Congratulations on the results. It seems NAPCO is navigating the supply chain better than a lot of your competitors. Can you maybe walk through what you're seeing in terms of competitiveness and getting components and how maybe you building at the Dominican Republic is helping you outperform the industry in terms of supplying your distribution channel?
spk10: Thanks, Mike. We've been through part shortages over the years, in the 80s, in the 90s, and now with this. And this is very severe, but we have certain techniques that we've developed over the years to overcome a lot of the issues. And that's why we are delivering Starlink radios and control panels and other equipment whereas our competitors are not able to deliver. That doesn't mean it's 100% perfect, but it's much better than the industry. And we also have a backlog. I mean, if we could ship the backlog, the numbers would even be better. But we expect that we're going to be catching up with more of the backlog in the current quarter. The products are doing really well with the dealers. and the installation, so the orders are piling in. But we're very busy, and our factory is able to handle it. And as we said, we can do $100 million per shift, and we can run three shifts. And the Dominican Republic, there's a lot of labor, and it's priced right, and people want to work on assembling electronic circuit boards and making housings and all these type of things we do. So it's a great place. Plus, we also get our deliveries from Dominican in six days compared to our competitors. It takes six weeks if they could even get a boat into the USA. So there's a lot of advantages to the way we're set up, and we're happy about the way things are going.
spk02: Great. Thanks. That's helpful. And my follow-up question, just on the visibility into the school security systems, you mentioned that you know, a contract when, you know, clearly as these ramp, that should help the mix in gross margins. Can you maybe talk about the pipeline there now that everybody's back in school and how that business might come back and then maybe as a follow-up for Kevin, how that could impact product gross margins longer term?
spk06: Yeah, so, Mike, we're seeing more activity because now the schools are back, the kids are back, the incidents, unfortunately, are back. We saw there was a shooting in Texas at a high school a few weeks ago. And we saw chairs barricaded against the doors just like five years ago. So in many places, nothing's changed. And we know that the need is as great as it was back then. And now I think focus will change. We've seen it start to change for us. And we'll announce the wins that we get where we're allowed to. And the one in Texas recently, they allowed us to announce it. We'll see more of it, we believe. We believe this is something that's not going away. It does help the margins. The margins on school security products, either through locking or access or both, are very high margin products typically. And that's where you'll see a shift back in the margin mix. You know, right now you're seeing radios dominate, which we love. We love the radios. Not a high gross margin product, but boy, does it lead to profitability with recurring revenue. But we want both. We want both the recurring, but we also want the higher margin hardware. And we think we'll get it as this fiscal year continues. and not only this year and beyond. It's a big area for us. And we think we'll start to get recurring revenue from the schools, which we never get as part of the whole air access solution.
spk02: Right. That makes a lot of sense. And last question for me, I'll pass it on. I know December quarter can be a little tricky with year-end inventory management from your distribution partners. Can you Help us just think about levels of inventory through distribution partners and then also with supply constraints, your ability maybe to meet demand in the December quarter. Should we think kind of a similar mix also that relates to hardware and gross margin for December quarter? Thank you.
spk06: Yeah, so Mike, the December quarter historically is always challenging, but just way before we had any COVID issues because of the holidays. A lot of times, you know, the The shipping slows down that last week of December. But what we're seeing with the distributors is tremendous sell-through. That hasn't changed. The sell-through stats are as good or better than ever. And what we're starting to see is they're buying more. I don't think they're being as tight on their supply on their shelves. We always like when there's three-month supply. And during COVID, they kind of slowed down. and maybe it was more like a month, a month and a half. They were trying to become just-in-time distributors. But I think they realized that you want to be online for product. You don't want to be left short. So they're placing their orders, it seems to me, at a more aggressive level than they have been, maybe not quite returning to a three-month supply, but better than the one, one-and-a-half-month supply. We believe we could meet the demand. We work hard at making sure our customers get their product. A Q2 is typically like a Q1 in terms of volume. We're hoping we'll be even better. And we do have a head start because we have a decent sized backlog heading into Q2. So that could help. But Q2 brings the same kind of levels that Q1 does. But You know, recurring keeps growing, and that helps the sales grow. You know, we want to keep our four-game streak alive and hit the fifth quarter in a row of sales over sales growth.
spk08: Great. That's helpful.
spk02: Thanks for taking my question.
spk08: Take care, Mike.
spk07: Our next question comes from the line of Jim Machudi with Needham & Company. Please proceed with your question.
spk08: Hi, thanks. Good morning.
spk01: Kevin, I'm wondering if there's a way for you to help us with sequential decline and in terms of getting a better sense on how much of it was mixed, how much of it was just the supply chain issues that we're hearing about from everyone.
spk06: Yeah, so we haven't broken that out. The mix is a key part of this. You saw the gross margin on hardware drop even last quarter as a result of the mix, and that was close to a $27 million hardware quarter, and yet the margin suffered a bit because the radios are the predominant hardware item, at least it was in that quarter and in this quarter as well. If I'm going to say... How much of each? I would say the mix represents more than 50% of the reason for the decline in hardware margin. But that's not to say that the other parts are not important also. And of the freight and materials, freight is the bigger issue for us. You guys probably read a lot about the supply chain mess with freight. We're lucky. that we have the ability to fly product because the Dominican Republic is not that far away. We could fly finished goods if we have to. And if we have to fly from Asia, we only have to fly components. So that's a lot easier than if we were flying a complete finished goods item. But it's expensive to fly. But we do it. We want to make sure that, A, our sales don't suffer, And B, we take advantage of the problems that our competitors are having. So it's a real issue. I'm going to say it's not the primary issue, the primary issue being the mix. But it's there. It's real. And I think it's going to continue for a while. And we don't know if it's another year, another six months. But remember, we're doing pretty well We have our engineers here on site with us. We could re-engineer as solutions for this. These are all things we're doing that the competitors are not doing. But it's a factor. It's real. But it'll change, A, as the supply chain clears up, and B, as we get more locking sales from schools and things like that, as the world gets more back to normal. And we have that feeling that it's getting back to normal. All our sales guys are out flying around the country. Trade shows are back. Things are getting normal. And then for 2026, we still have our goal to hit $150 million of recurring revenue and $150 million of hardware with very strong margins on both sides. We haven't changed that goal. That goal is still with us.
spk01: But it sounds like from the standpoint of some of the supply chain challenges, there's a reason to think that's going to necessarily improve in the next three to six months. It sounds like this is just the environment we're in, and you guys are doing as good a job as you possibly can in terms of navigating that.
spk10: I would say that's a good summary of it. I think we're doing better than the competitors in what we hear. We're able to supply the dealers our products. And remember this, that a recurring revenue product is like planting a seed. You put that seed in the ground, and it keeps giving fruit for years and years and years. So we want to make sure we've got a lot of seeds out there that we're planting so that we keep getting lots of fruit through our forward years. And as Kevin says, the 2026 year, we still feel comfortable that we can hit those goals. So working very hard at it, and it's paying off.
spk01: And just last question, just on the revenues in the quarter. Would you, given some of the constructs, would your revenues have been higher in the quarter? And if so... How much of that possibly slipped into Q2 or possibly beyond, just given these kind of supply chain challenges?
spk06: Our backlog was very high at the end of the quarter. Several million, just roughly. I mean, just to show you how things went, we actually flew product in from the DR. It got to JFK. We thought, great, we have this, we're going to make these sales. And the JFK workers, there were only two workers working all day to unload not only our cargo but anyone else's. And the cargo didn't arrive on time. You know, it's kind of messy out there. There's a lot of issues like that. So we actually flew it, we got it to JFK, and it never made it here. The good news is it's here for this quarter. Anything that was backlogged heading into Q2 will go out by Q2. It won't linger beyond. So that's the good news. We had a nice head start as we headed into Q2.
spk08: Thanks a lot. Our next question comes from the line of Jason Smith with Lake Street.
spk07: Please proceed with your question.
spk03: Hey, guys. Thanks for taking my questions. Kevin, just curious if, like in the past, you'd be willing to share some of the distributor sell-through data that you saw in the quarter.
spk06: Yeah, I can give you a little taste. Let me just get my sheet out. You know, it tasted really good is what I'll tell you. Our number one distributor was up 107% on its sell-through stats. in September compared to the prior year. Another one of our distributors was up 27%. Another one was up 54%, 37%, 36%, 51%. They were all up. Not one was down. And that bodes well for us for the future. We've got to watch that stat. isn't positive, that's indicative that sales are going to drop. We've seen nothing but strength, and that's a very good sign for us. I think it's not only attributable to our products and the fact that they love our products, but I think a lot of them can't get delivery from the competitors. And so whatever they're doing with us, they're turning to us in a greater way than they were before. We can deliver. Our competitors, not so much.
spk10: So we're picking up share in addition to selling to our existing base. We're picking up share. And people have said you guys have the best radios on the market, the best controls with radios built in. Now you have air access. Wow, we want to try that out because that's going to solve a lot of problems for us. And it's going to allow us to get recurring revenue. We don't want to deal with the IT departments and companies where they don't want access control to go through their network because they're afraid of hacking. And now with Air Access, it's totally isolated from the network on the premise of the company. So it has so many advantages. We also make upgrades to it in the cloud. Don't have to do it to the hardware. There's no hardware on the site of the company. So it's all in the cloud, and then there's a lot of data you can get on your smartphone from Air Access. So it looks like it's going to be a win-win, and it's create a new marketplace. And as we said, it's a billion-dollar opportunity. Access control is a very big business. So we'll have recurring revenue from the alarms of the connectivity, fire, burglary. Now locking and access, because the locking is tied into the access control, air access. It's an integrated locking access control cellular product. And we'd like people to come. We'd love to have the analysts and investors to come to the ISE show at the Javits Center. We'll be happy to demonstrate it. And you're going to see the prowess of NAPCO at that show. And this is a very important market for us. It's going to be great to introduce it to new people and to get more share. That's our goal.
spk03: Okay. No, that's really helpful. And then just as a follow-up, just given the supply chain backdrop and some of the dynamics in the school security market, do you think fiscal 22 is going to follow any sort of seasonal pattern like in the past, or is that sort of out the window just given all the dynamics out there?
spk06: No, I think seasonality is still part of it. Obviously, recurring, which is a bigger and bigger part of our sales, is not affected by seasonality. But I think our fourth quarter, which is the April, May, June quarter, I believe that still will be the strongest quarter. School security tends to be somewhat affected by seasonality. They like to put product in on the university side of things when the kids are out of school, which is really a December-January type installment on campus. And then for the summer months, usually we see sales in May and June because the kids are out of college by then. So K-12 can really occur any time of year. To universities, that's more seasonal. But if we're targeting what our sales are going to look like this year as a whole, we expect the sales each quarter to be greater than the prior quarter.
spk08: Okay, perfect. Thanks a lot, guys. Take care, Jason.
spk07: Our next question comes from the line of Brian Ruttenberg with Imperial Capital. Please proceed with your question.
spk04: Yes, thank you very much. First question, congratulations on the quarter. But the first question is about, it's really related to gross margins, but price increases. As I understand it, you've gone up about 3% on prices. Asa has gone up roughly 15%. Allegiant, depending on their product lines, has gone up 20%. It's all over the place. But can you talk a little bit about potential price increases? You're getting all this demand, a ton of demand, and it seems like you're a little slower on the price increases than some of your competitors.
spk06: Brian, I don't know who told you 3%, but we're not doing three. We're not disclosing what it is, but it's not three. Okay. And each division is different. So the NAPCO division will have a certain level of price increases versus the alarm lock versus Marks versus Continental. Believe me, there are price increases, and each one is different. We don't really want to comment on the specifics beyond that, but we're able to do it just like others are able to do it. This is the environment we're in, and we're not going to sit back and do nothing.
spk10: One thing I'd like to say is that we like to pick up share. We have great electromechanical products. and now all the products have recurring monthly revenue, and we want to plant those seeds and pick up more share so the company gets stronger and stronger over the years going forward. And we don't want to be the highest price out there, but we want to get increases to cover our costs, and that's what we're doing. But picking up share bodes for great sales in the future, and we have strategy to do that.
spk04: Okay. Can you talk about, since you won't give me the number of increase that you've had, can you talk about how many price increases you've had this year? Is it one? Is it two? Help me out a little bit on that.
spk08: I think we would call that proprietary information.
spk10: And we don't really want to talk about that. But we raise our prices regularly. according to the way we think, which will not destroy our growth, but it will also cover our costs. And it's not 3% like you were talking about in the beginning.
spk04: Okay, fair enough. And then in terms of switching subjects to SG&A, can you talk a little bit about the SG&A level? You're talking about higher commissions, lots of trade shows, lots of things happening. Can you talk a little bit about this first quarter versus the second quarter, what you anticipate? Should it be at these levels? Should it be something higher, something lower from first quarter to second quarter fiscal 2022?
spk06: Yeah, I would use a similar level in Q2 as the Q1. Q1, Q2 last year, there was nothing going on, trade show-wise, travel-wise. Everybody is working remotely. That game is over. We're out and about. And so trade shows is expensive. Flying and traveling is expensive. But it's great to have the guys doing all that. So if I'm modeling this thing out, I'm using SG&A similar level in Q2 as to Q1.
spk04: And then final question, just back to a little bit on gross margin on the equipment side. You know, this is kind of the base number of 22%. We don't anticipate any – the question is, do you anticipate any more drop in gross margin, or can you maintain this kind of low 20s gross margin level?
spk06: Well, if I'm modeling, I'm using something similar, and I'm hoping to beat it. Okay. We're doing a lot of things to try to improve it. But being conservative, I think at least for Q2, I would model on the same level as where we've been.
spk08: Great. Thank you very much. Congratulations on the quarter. Thank you.
spk07: Our next question comes from the line of Raj Sharma with B. Riley. Please proceed with your question.
spk05: Hi, good morning again. Congratulations on solid results. I had a question on your school security wins and the recent win in Tayden, Texas, four schools, 400 doors. What kind of revenues would 400 doors translate into? Would that be more of 1,000 a door or something in that? And is there any air access sort of win? How do we look at each one of these wins sort of? Is there a, you know, are you, now that schools are reopened, are these things looking to be a quarter, a win a quarter or two wins a quarter in school districts?
spk06: Well, first off, Raj, I don't know if we should announce what this was worth, but it was, For a little school district, it was worth a lot, several hundred thousand. I'll give you that much. And just imagine these little school districts, how many of them there are. It really adds up real quick once the activity starts. We only announce the ones we're allowed to. If we don't announce, it doesn't mean there are wins. There are other wins. We want to get to the point where we're announcing a lot of them. And they help a lot on the margin side, overall hardware side. We expect a lot of them. How fast we're going to get them is hard to say, but we feel the activity has picked up already. And as we said earlier, schools aren't concentrating so much on protocol. Now they're starting to think about safety. This problem in the country is here to stay, and we have the solutions to help a lot of these schools. And this little school district in Texas, I commend them for doing something about it. School district not that far away from them did nothing and had a shooting where they had to barricade chairs against the door.
spk08: Right.
spk05: Thank you. And then, you know, on the equipment margin side, I don't want to beat a dead horse. It's been covered quite a bit here. But if I look at Q3, around 19 million of equipment revenues, the margins are around 27%. And I know that you've talked about, so it just seems like there is a 500 basis points impact. Is that all? I know you've talked about the higher costs from the supply chain constraints and the other part is a mix. How long do these impacts on supply chains you think exist? Is that another quarter? And then really the freight issue on the gross margins, once that fades, once that comes back to normal, do you think that the current product mix of greater alarms is more representative going forward?
spk06: Well, I think the supply chain issues are going to last. For six more months, maybe a year, it's hard to know exactly. I don't think it's going away next quarter, as an example. It's here for a while, and I think we're doing a great job dealing with it. I think at $19.5 million level last year, if that's what it was, The margins were higher. It was a different time. The radios have become a larger percentage of total hardware. That's a big reason for the margin differential. But when school security comes back and even other areas that help the locking and access parts of the business, then that evens it out somewhat. The playing field becomes more level. We're not quite there yet. It's getting better. That part's getting better, but we're not quite there yet. And then the radios won't be as dominant a part of the overall hardware. Although they're doing so well, it's hard to say for sure. We sell radios to a lot of big players now, and the demand is unbelievable. So that's partly why also that radios are such a big chunk of the total percentage of hardware sales. But I think it'll even out a little more as the year progresses. I don't think it'll be what you see now. It may take a couple of quarters to get to that point. But we were really happy that even at a level where the margins on hardware were 22%, which we weren't happy about either, look at the numbers that we put on the board. Even with that, that's... We were happy that our sales grew 34% and that recurring was as strong as ever and the margins were as strong as ever. That carried us. We did really well even with the 22%. Imagine once the 22% goes back to what it used to be.
spk05: Right, and the more radios you sell, that's a good thing that translates into higher recurring revenues. Are all of these radios have attach rates on recurring revenues for you, or are some of these sort of... They all have recurring revenue stream with them.
spk10: They're all enrolled on our cloud. We built a cloud, a NOC, Network Operating Center, and they all get... and then the dealer pays us to utilize our NOC service. And it goes on and on and on for year after year. That's why I call it planting the seeds. The more of these radios that are installed and enrolled, the runway of getting continuous recurring monthly revenue out of them is ahead. So that's why we're pushing very hard to get lots of radios out there. You have about 5 million commercial buildings that have to be retooled, get off the copper because copper is not being supported by the carriers. So we have a lot of commercial buildings. We have millions of residential jobs where people want their alarm to work, but the carriers don't want to support dial-up, which was copper. So that will go to radio also. Then you have the access control system. And the locking, which now with air access, is the better path for dealers to get service and to win more jobs. And the side benefit to them is they get recurring revenue instead of just a service agreement to replace broken parts. Now they can supply service to their end user account. So it's all part of the vision that we have. to convert the company by 2026 to $150 million worth of recurring revenue. And remember, years ago, we predicted $40 million by the end of last year. And a lot of people looked at us cross-eyed, and we did it. And now we have a lot of momentum. So the 2026 year, we're very comfortable with getting the recurring revenue with the new products, with the conversions. of copper with the fact that 3G is coming down. The carrier is not going to be supplying 3G service, so those radios that are out there that have been 3G have to be converted over to the new technology, which we have. And so there's a lot of good things, a lot of wind at our back.
spk05: Got it. Thank you for answering the questions again. Congratulations, and I'll take this offline. Thanks.
spk08: Thanks, Raj.
spk07: Our next question is a follow-up question from the line of Jim Rusciutti. Please proceed with your question.
spk01: Hi, thanks. The other question I had is just with respect to new product pipeline, I wonder if you could talk a little bit about, again, I don't expect you to pre-announce and new products ahead of their release. But in terms of what you're doing and working with some of the larger players in the market, how active is the new product pipeline? And can you give us a sense as to whether some of this may begin contributing later in the fiscal year or is this looking out to fiscal 23?
spk10: Well, we have a lot of new products in the pipeline. in each of our divisions, the alarms and connectivity division, the access control division, the locking division, and now the products are being integrated so that the dealers can get all the answers that they need on customization on commercial buildings for access control locking and radio, Starlink radio. So there's a lot of new development going on all the time, and a lot of the big companies that are the major names in the industry are coming to us to get products because the fact that technically they perform better, they have more functionality, we're able to customize them as required by the large companies, and we can deliver. So a lot of good things. As I said, why don't you come to the ISC show in November and see what we've got. You'll hear and feel the pulse of what the dealers are talking about. And you'll see that we are on track to pick up a lot of share. We have a lot of happy dealers because they're making recurring revenue. where they never made it before in the past, and we get the recurring revenue. But every product that gets enrolled in our back-end NOC, we get a recurring revenue stream that's paid to us by the dealer. And the dealer makes a large recurring revenue amount, and we get a portion of it. So we want lots of dealers out there closing more deals and getting more work because then they enroll the products on the cloud. So come on to the show.
spk01: Okay, thanks for the invite. Last question. Kevin, sounds like you gave us some nice color in terms of how to think about OpEx. You seem to be pretty well insulated in terms of cost and the DR. But I'm wondering, apart from higher costs, trade show expense and travel expense. Any other cost pressures that you're feeling in the business that might change some of that OpEx assumptions looking out a couple of quarters?
spk06: No, I think the big ones is trade show commissions. We give salary increases every year. We're doing more advertising than we did a year ago. Things like that. That's that's the main thing. There's nothing unusual on the horizon that would change the picture. As you probably know, we manage both SG&A and R&D really tightly, make sure that just because sales grow, we don't have the expenses grow dramatically along with it. We take pride that the percentage of SG&A is a percentage of sales and R&D as a percentage of sales is dropping as our sales grow.
spk08: So I don't expect anything unusual. Thank you. Okay.
spk07: If there are no further questions in the queue, I'd like to hand the call back to management for closing remarks.
spk10: Okay. 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 Q2 22 results. Bye-bye.
spk07: 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.
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