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spk01: Greetings. Welcome to NAPCO Security Technologies Incorporated Fiscal Third Quarter 2022 Results 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 Patrick McKillop, Director of Investor Relations. Thank you. You may begin.
spk06: Thank you. Good morning. I'm Patrick McKillop, Director of Investor Relations for NAPCO Security Technologies. Thank you for joining us today for today's conference call to discuss our financial results for our fiscal third 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.napcosecurity.com. On the call today is Richard Soloway, President and CEO of NAPCO Security Technologies, and Kevin Buchel, Executive 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 the 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, unpredictable factors or underlying assumptions subsequently proving to be incorrect could cause actual results to differ materially from those in the forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance, or achievements. We should not place undue reliance on these forward-looking statements. All information provided in today's press release and this conference call is as of today's date unless otherwise stated, and we undertake no duty to update such information except as required under applicable law. 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 will be attending the Needham Technology and Media Conference in New York on May the 17th. Also, we'll be attending the 22nd Annual B. Reilly Securities Conference Institutional Investor Conference in LA on May 25th and 26th, and then followed by Stifel's Cross-Sector Insights Conference in Boston on June 7th through the 9th. And finally, on August 10th through 11th, we will be attending the Canaccord Genuity Growth Conference, also in Boston. 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.
spk02: Thank you, Patrick. Good morning, everyone, and welcome to our conference call. Thank you for joining us today to discuss our results. We are pleased to report a fiscal Q3 2022 record sales of $35.9 million Our results reflect our sixth consecutive quarter of sales growth. Recurring revenue continued to grow at a very strong rate, and the annual run rate is now approximately $50 million based on April 2022 recurring revenues. Our balance sheet remains strong with our cash balances in excess of $47 million, and we have no debt. We continue to focus 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 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 Bichelle. He will provide an overview of our fiscal third quarter results, and then I'll be back with more on our strategies and outlook. Kevin, the floor is yours.
spk07: Thank you, Dick, and good morning, everybody. For the third quarter, net sales for the quarter increased 27%. to a quarterly record of $35.9 million, as compared to $28.2 million for the same period one year ago. Net sales for the nine months ended March 31, 2022, increased 28% to $100.4 million, as compared to $78.6 million for the same period a year ago. This strong growth for both the three and the nine months is primarily attributable to the continued strength of our commercial intrusion and fire alarm business, as well as access control and door locking products. Recurring revenue for the quarter increased 35% to $12 million as compared to $8.9 million last year, and now has an annual run rate of $49.9 million based on April 2022 recurring revenue. Recurring revenue for the nine months ended March 31, 2022 increased 37% to $33.3 million as compared to $24.3 million for the same period last year. In addition, our equipment sales increased 23% for the quarter to $23.9 million from $19.3 million in the prior year period. And for the nine months, increased 24% to $67 million from $54.2 million for the same period last year. Gross profit for the three months ended March 31, 2022, increased 13% to $14.6 million with a gross margin of 41%, as compared to $12.9 million with a gross margin of 46% for the same period a year ago. Gross profit for the nine months ended March 31, 2022 increased 13% to $39.4 million with a gross margin of 39% as compared to $35 million with a gross margin of 45% of sales for the same period a year ago. Gross profit on recurring revenue for the three months ended March 31, 2022 increased 37% to $10.5 million with a gross margin of 87%, as compared to $7.6 million, with a gross margin of 86% for the same period a year ago. Gross profit on recurring revenue for the nine months ended March 31, 2022, increased 40% to $28.9 million, with a gross margin of 87%, as compared to $20.7 million, with a gross margin of 85%, for the same period a year ago. The increase in gross profit was due primarily to the 35% and 37% increases in sales in these services for the three and nine months ended March 31, 2022, respectively, as compared to the same periods a year ago. The increase in gross margin for the three and nine months ended was primarily due to the continued shift in mix to the company's fire radio services, which typically have a higher margin than those for intrusion radio services. Gross profit on equipment sales for the three months ended March 31, 2022, decreased 23% to $4.1 million with a gross margin of 17% as compared to $5.3 million or 27% of equipment sales for the same period a year ago. Gross profit on equipment sales for the nine months ended March 31, 2022 decreased 26% to $10.5 million with a gross margin of 16% as compared to $14.3 million with a gross margin of 26% for the same period a year ago. The decrease in gross profit and gross margin on equipment sales for the three and nine months was primarily due to the continued inflation of freight and component part costs relating to the current worldwide supply chain problems and the continued shift in product mix to the company's Starlink radio products, products which lead to the more profitable recurring service revenues. And the aforementioned 17% gross margin on equipment sales for the quarter was more than doubled last quarter's hardware margin of 8%. This 900 basis point improvement is primarily due to the continuous stronger equipment sales revenue, the development of alternative and lower cost supply sources and delivery methods, and the implementation of strategic price increases. Research and development costs for the quarter increased 5% to $2 million or 6% of sales as compared to $1.9 million, or 7% of sales, for the same quarter a year ago. Research and development costs for the nine months ended March 31, 2022 increased 4% to $5.9 million, or 6% of sales, as compared to $5.7 million, or 7% of sales, for the same period last year. The increase was due primarily to increased payroll, while the decrease as a percentage of net sales was due primarily to the increase in net sales. Selling general and administrative expenses for the quarter increased 40% to $8.4 million or 23% of net sales as compared to $6 million or 21% of sales for the same period last year. Selling general and administrative expenses for the nine months ended March 31, 2022 increased 33% to $24 million or 24% of net sales as compared to $18 million or 23% of net sales for the same period last year. The increase in selling general and administrative expenses was due primarily to increased sales incentive compensation relating to the increase in net sales, as well as an increase in legal and trade show expenses. Operating income for the quarter was $4.1 million as compared to $5 million for the same period last year, an 18% decrease. Operating income for the nine months ended March 31, 2022 was $9.6 million as compared to $11.4 million for the same period last year, a 16% decrease. The company's provision for income taxes for the three months ended March 31, 2022 increased by $427,000 to $1.1 million, as compared to $624,000 for the same period a year ago. And the company's provision for income taxes for the nine months ended March 31, 2022 increased by $268,000 to $1.7 million, as compared to $1.4 million for the same period a year ago. The company's effective rate for income tax was 13% for both the nine months ended March 31, 2022 as well as the nine months ended March 31, 2021. Net income for the quarter was $2.9 million, or $0.08 per diluted share, as compared to $4.4 million, or $0.12 per diluted share, for the same period last year, a 34% decrease. Net income for the nine months ended March 31, 2022 increased 18%. to $11.7 million or 32 cents per diluted share as compared to $9.9 million or 27 cents per diluted share for the same period last year. Adjusted EBITDA for the quarter was $5.2 million or 14 cents per diluted share as compared to $5.5 million or 15 cents per diluted share for the same period last year, a 5% decrease. Adjusted EBITDA for the nine months ended March 31, 2022, increased 1% to $13 million or 35 cents per diluted share, as compared to $12.9 million or 35 cents per diluted share in the same period last year. Moving on to the balance sheet, at March 31, 2022, the company had $47.4 million in cash, cash equivalents, and marketable securities. as compared to $40.2 million as of June 30, 2021, an 18% increase. Working capital, defined as current assets less current liabilities, was $87.1 million at March 31, 2022, as compared with working capital of $75.8 million at June 30, 2021. Current ratio, defined as current assets divided by current liabilities, was 4.8 to 1 at March 31, 2022, and 4.8 to 1 at June 30, 2021. Cash provided by operating activities for the nine months was $8.4 million as compared to $16.4 million for the same period last year. This decrease was primarily due to inventories increasing by $11.3 million as compared to a decrease of $5.7 million in the same period a year ago. The increase in inventories is primarily the result of the company level loading production output throughout the year, as the company's equipment sales are historically highest in the upcoming fourth quarter ending June 30th, as well as the continued increase in component unit cost and increased volume of purchases of certain components that have become difficult to source. during the worldwide supply chain problems. CapEx was $418,000 during the quarter, and we have no debt. That concludes my formal remarks, and I would now like to return the call back to Dick.
spk02: Thank you, Kevin. A fiscal Q3 2022 was a sales record breaker. In fact, it was the highest sales for any quarter in the company's history. We are happy to see they were able to beat street consensus on revenue, EPS, net income, and adjusted EBITDA metrics. The quarter also marked our sixth consecutive quarter of the year-over-year sales growth. and we look forward to surpassing the previous streak of 23 quarters that was disrupted in 2020 by COVID-19. One key area of our success continues to come from the commercial fire and intrusion alarm business. While the news headlines are dominated by talk of interest rate hikes and the potential for a recession in the U.S., I'd like to remind you that we are highly recession resistant in one of our primary growth drivers, the commercial fire alarm business, which is a mandatory non-discretionary item for building owners. Commercial buildings must have and maintain a fire alarm system in order to receive a certificate of occupancy. Given the high profitability and essential nature of this business, we focus on this as a key area of our resources. The recurring revenue annual run rate is now at approximately 50 million as of April 2022. Our Starlink radios have seen an encouraging trend in activations in Q3 by growing 41% sequentially and 91% versus the same quarter a year ago. We are optimistic that we could reach our previously mentioned goal of $150 million in recurring revenue earlier than 2026. Dealers are racing to complete commercial fire alarm system upgrades before the 3G sunset at the end of calendar 2022. and we believe that we are in a strong position to benefit from this, as well as the continued need to upgrade legacy systems of old-fashioned copper wire phone lines. There are still millions of buildings that need to upgrade from copper or replace an older 3G cellular radio, and our product line, the Starlink radios, has the widest coverage with both AT&T and Verizon service and rich feature sets, which our dealers love. The constraints of the supply chain continue to be challenging, but clearly our strategy to temporarily sacrifice hardware gross margins by purchasing components at higher prices so that we can continue to manufacture radios, which leads to continued high margin recurring revenue for each radio installed and operating is working. Radio sales and activations continue to be strong. And while we are pleased that the equipment margins improved by 900 basis points to 17% in this quarter versus Q2, we continue to aggressively manage supply chain issues by developing alternative supply and sources and delivery methods while also re-engineering products where necessary. We believe in the next six to nine months, our new supplier sources we are developing will begin to reinvigorate our equipment margins and return them to the levels we generated prior to the supply chain crisis. Our backlogs are at historically high levels due to the supply chain issues, and could remain high for the remainder of 2022. But we remain encouraged by the continued strength of our sell-through statistics we are seeing from several of our largest distributors. And with activations from our Starlink radios remaining strong, we believe we are taking market share from our competition based on this and customers telling us that they can't get product from the competition, but they can get it from NAPCO. School security projects continue to ramp up, and as mentioned earlier today in today's press release, our products were just selected for use in a school security project at the very large school district in the U.S., which has a student population of over 300,000. The project includes the upgrade of current security systems in over 750 school district buildings to the NAPCO Gemini X255 security control panels, providing the very best protection for students and faculty. The upgrade also includes replacing the existing telephone line-based communications with a NAPCO ultra high-speed IP communication system, providing near instantaneous communications of events to the school security office, allowing the fastest possible response to emergencies. We believe that this market remains a significant opportunity. School administrators have started to turn their attention back to the need for security solutions as more incidences happen and that they are not spending all their day dealing with COVID protocols and policies. Our fully integrated solutions for the school security market remains a top priority given the healthy margins those products generate. The availability of grants for schools to fund these projects has never been better. As we mentioned during the last quarter's call, the DOJ awarded more than $125 million in school security grants to hundreds of schools and universities across the nation. Many states continue to pass funding initiatives as well. We remain focused on providing schools the products and solutions they need to protect their students and faculty. Our strategy is to offer seamless security solutions which allow for our dealers and us to generate recurring revenue streams. We have experienced tremendous success over the last five years growing our recurring revenue and believe that best is yet to come. We will now be able to generate recurring revenue from all divisions of the company. with the latest product addition called Air Access, which will get us recurring revenue from locking and access control, which has never been done in our industry before. 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 the corporate IT networks, which could be a major problem for installers, and no on-site database backups or software updates. Our R&D team remains hard at work, developing even more products for the future, which will help grow our recurring revenue business. We will begin our Q&A session portion of this call in a moment. Our third fiscal quarter, 2022, despite the continued supply chain challenges, was a successful one as we now have continued our sales growth streak with fiscal Q3 2022 being the sixth consecutive quarter of sales growth. We have a strong balance sheet, no debt, and have made the business decision to use the cash we have and spend more on raw materials and logistics in order to maintain our sales growth trends. We believe it's important to continue to grow our business, and we are balancing the need for growth and profits. Our seasoned management team has experience from previous supply chain disruptions which is helping us navigate the current supply chain disruptions in the current environment. We are now in our fourth fiscal quarter, historically our strongest in terms of equipment sales, and we remain confident in our ability to deliver strong growth in both equipment and recurring revenue for the balance of fiscal year 2022 and beyond. 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.
spk01: Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Mike Walkley with Canaccord Genuity. Please proceed.
spk03: Great. Thanks for taking my question. Congratulations on the strong results in the challenging environment. Thank you. Kevin, I guess first question for you. Strong balance sheet seems to be a competitive advantage. If inventory were at more historical levels, then you'd probably even have closer to $60 million in net cash. Can you talk about your strong balance sheet and how building inventory is maybe helping you gain market share relative to the competition?
spk07: Yes, good question, Mike. So a lot of our competition doesn't have the balance sheet that we have. So we have $47 million in cash, no debt. Would have been, like you said, closer to $60 million if we didn't grow the inventory. So why are we growing the inventory? Well, we're growing it in part because it's very important. to maintain our shipments of our cellular radios. Our radios bring the beautiful recurring revenue that follows, which has up to 87% gross margin, as we've seen. So if we have to pay more to get these components so that we could ship out radios and not have any disruptions, we're going to do it. If we could get our hands on the difficult-to-get components and buy a one-year or two-year supply of them, because we don't want to have to keep going back and searching and searching, we're going to do it. It pays off. We have the money to do it. And we also have the money to kind of break into the line of getting an advantage with some of our vendors. These are hard-to-get components. If we could convince our that, A, we can pay fast, we have solid cash flow, they don't have to worry about us, move us to the front of the line, so to speak. We tell them we're an essential business, which we are. We're dealing with life and safety, fire. Get us those components, and we're happy to pay, pay fast, and buy as many of these components that we can get our hands on. So if the inventory has to grow, So be it. We don't care at this moment. The year before, we spent a lot of time reducing the inventory. We reduced it by about $10 million, but we're in a different environment now. Now the size of the inventory doesn't matter as much. What matters is the continuance of getting those products shipped out as fast as we can because that leads to the profitable growth situation that we're seeing and that we will continue to see.
spk03: Okay, thank you. That's helpful. And for my follow-up question, just given all that backdrop and taking advantage of the balance sheet, I know Q4 is your seasonally strong quarter and you built inventory ahead of that. But how should we think of gross margin just given, you know, one, the product mix, and two, just the ongoing supply issues? Gross margin, I think you said, should improve six to nine months out, but how about just the short term on your seasonally strong fourth quarter on the equipment side? Thanks.
spk07: We believe that the fourth quarter will be helped by our volume of hardware increasing over where it was in this quarter. So, as you said, our fourth quarter seasonally strongest. We expect hardware sales to be greater than what it was in Q3 and And that helps because then you start to get leverage from our Dominican factory. The more sales that we can push through that factory, the more leverage we're going to get, the more overhead absorption we're going to get. When you get overhead absorption, the margins expand. Now, we're conservative. We're not going to return to the glory days of much higher margins in Q4 because But you saw a 900 basis point improvement in Q3 over Q2, and we believe that the margins can continue to improve in Q4. By the time we get to calendar 23, when our new supply sources are in place, then we could start to see the return to the margins that we used to see, and we believe It's six to nine months away, maybe a little sooner, but in the meantime, we'll do everything we can to improve margins that you've seen now that was 900 basis points better. We want to do even better than that, and we're constantly working to do things better than that, working with our engineers who are on site, coming up with new ways to help get lower-cost components, better logistics methods, better methods to ship less by air, more by ocean. All these things help margins. A couple of quarters back, we did tremendous amount of sales promotions, which affected margins. We haven't had to do that. We're already gaining share. We're selling our radio products, as an example, to some of the biggest players in the industry. And we continue to win market share. We don't have to do big sales promotions. These customers are all coming to us naturally. That helps margin. And also winning school jobs. That helps margins. We announced one today. We had one last quarter. There are other wins. We only announced the big ones. But as you win more and more school jobs, that has better gross margins, and that helps improve the overall gross margin.
spk03: Right. Well, congrats to everybody on the execution of the quarter, and I'll jump back in the queue.
spk05: Thanks, Mike.
spk01: Our next question is from Jim Ricciuti with Needham & Company. Please proceed.
spk04: Hi, thank you. Good morning. Just related to that last point that you made about the school security order that you highlighted today, this is separate from the one that you mentioned in the last earnings call?
spk07: It is. It is. It's very similar in a lot of ways. It's a very large school district, just like the last one. The last one we got and we announced it with the Q2 earnings release and we shipped that in Q3. This one we just got and it's different and it's big and Our expectation is we'll ship a lot of it, maybe all of it, in Q4.
spk04: Thank you. And I wonder if you could talk a little bit about the inventory reserve issue that you referenced in the quarterly press release today and to what extent that may also result in some high professional expense in the near term as you work through that.
spk07: Right, so in the release, we talked about the possibility that as a result of our filing, that may be delayed up to five days. And it has to do with a reevaluation of our inventory reserve methodology. And why is this happening? Where is this coming from? Well, we are a large... a large accelerated filer. We're a victim of our success, so to speak. As a result of being a large accelerated filer, our audited results get audited by an organization called the PCAOB, the nonprofit organization the Congress established this years ago. What they do is they audit the auditors. So our audit was selected for being audited by Peekaboo. I call them Peekaboo. It's P-C-A-O-B. And what are they looking at? Everything looked great, but they're looking at our inventory reserve methodology. And we've been doing the same methodology for 30 years. We spend a lot of time getting into the details. We look at every item, very detailed, very thorough. That's our methodology. The PCAOB determined that they need something that's not as judgmental as that. Because there's a lot of judgment that goes in this. When you look at every last item, there are judgments. In the electronics industry, everything is different. Every item has a story. We go through it in detail. They wanted a more mechanical methodology to coming up with inventory reserves. They make this determination. We have to go along with it. This is a non-cash event. It's going to be very minor, but we have to reevaluate our methodology, and as a result of that, we are potentially, I'm not sure it's going to happen, delay the filing of the Q by a couple of days. But it'll have no effect on P&L, and it'll have very minor effect, if any, on the balance sheets.
spk04: And the last question, Dick, you alluded to shelter metrics that were positive. I wonder if you could expand on that a little bit.
spk05: Can you be a little clearer on what the question is?
spk04: Sure. You've provided it in the past. some commentary about sell-through with some of your larger. I wonder if you could, it sounds like you're seeing pretty good sell-through in the core business. So I wonder if you could just comment a little bit more about that specifics.
spk02: The large distributors, the largest distributors we have are, we monitor their sell-through. They're all doing really, really well. Kevin, you have the stats on a couple of those guys?
spk07: Yeah, I do, Dick. So our number one distributor, our largest distributor, was up 111% sell-through stats in Q3 versus Q3 a year ago. Our number two guy was up 74.2% sell-through stats, Q3. versus Q3 a year ago. There are other ones. I like to look at the top two. I went down to the third guy. He was up 37%. They're all good. The sell-through stats, which is a very good barometer, because that means the business is going well, and they're going to have to come back and buy more inventory, which they are doing, has been super, super strong. I mean, to have a sell-through stat That's over 100% increase. That's pretty powerful.
spk02: What you have to understand is that with the amount of production and the amount of shipping we're doing, and our backlog is still huge. We have a huge backlog, and it keeps growing. And it's growing because of the fact that our dealers are very, very busy. They're installing... fire panels, fire radios, burglar panels, all over the place because people are concerned about what's going on, and they need more protection. So as much as we ship, and you can see the results, the orders keep rolling in, and we expect this to continue. And then we are dealing with a lot of distributors all over the world to get our parts. And the factory is running six days a week. And it's a very unusual time to have that type of backlog. Because typically our backlog is a couple hundred thousand dollars. But we're talking about $10 million backlog. And we're talking about orders pouring in with the stats that Kevin is talking about. We make a very, very unique product line. best in the industry. The dealers that install it know it's the best in the industry. It works in all kinds of applications where the competition doesn't work. When you have weak signals or when a device is put into a lower basement in a commercial building, our products work and we make sure that they are the best. So people recognize that and I can see this continuing to continue to grow and continue to go. So We're fighting to get our parts. We're reengineering a lot of the products with additional hardware changes and software changes such that we can use other products which are less costly and more available in today's marketplace. So that's going to make our gross margins start to get back to where we were pre-supply chain, pre-COVID. And that's what we're talking about when we're talking about six, nine months out. It may happen faster, but we're doing all these things. The company's management has been through shortages of parts before, never as severe as this, and we know how to deal with it. So expect that our results should be continuing in a strong way for the next year and beyond.
spk04: I have a few other questions, but I'll jump back in the queue and join later again. Thank you.
spk05: Okay, Jim.
spk01: Our next question is from Raj Sharma with B Reilly. Please proceed. Hi.
spk08: Thank you for taking my questions.
spk01: Hi, Raj.
spk08: Congratulations. Congratulations on solid equipment margins. I had a couple questions on... You mentioned that because of the shortages in radios and alarms that you've been – because of supply chain issues, you couldn't meet the growing demand. Is there a number you can quantify, the amount of sales, alarm sales, that you kind of lost or you would have done had you not had these –
spk07: I wouldn't say lost, Raj. It's just backlogged. It's not lost. It's deferred. So Dick mentioned before backlog is $10 million. So that's a good guesstimate of if there was zero supply chain issues. Our Dominican facility, they can keep up. We can get all the Dominican workers we want. We can run machines longer. That is no issue, but getting the parts was an issue. So imagine if the sales in this past quarter was $10 million higher. I mean, that's what we'd be potentially looking at.
spk02: You know, a distributor, Raj, will say, ship me 1,000 of this and 500 of this and 1,000 of that. We get it out to them. The order comes piling in the next week. for even greater quantities than that quantity. So it's turning. It's just continuing to grow because dealers do appreciate the type of products we have that are very unique in how they perform. And the fact that we're a totally integrated system where our radios and our control panels and our access control all integrate together, it's a time where People recognize, dealers recognize that NAPCO is a one-stop shop. We can get everything from them. We can get all the technical answers for applications from them. Whereas our competition, some of them make locks, some of them make alarms, some of them make radios, but they don't have an integrated solution. So the dealers have recognized, you know, I need less aggravation in my life. Let me use all NAPCO and have everything... answered, and it's like when you get something built in your home, you have this mechanic blaming that mechanic that the plumbing doesn't work with the sink. And it's problems. With us, you don't have that issue because it's all integrated and designed to work together. No mixed brands. So while our products do work in an open architecture way, we have every product, 2,000 SQs that dealers need. So that's why the orders are piling in.
spk08: Thank you. So that's pretty substantial. 10 million U.S. equipment revenues would have been higher by 10 million than obviously the recurring revenues that follow from that.
spk02: Yeah, we wanted the recurring revenue radios being installed even during the supply chain. So therefore, something that would cost $1, we'd pay $1.50. just to have it because a radio once installed, a control panel with a radio inside of it, once installed, gets you years and years and years of sales. It's the beginning of a sale. And years and years of sales at high margins, so we don't want to have any issues with that. That's why we're willing to sacrifice a little bit of our margin so we can buy parts even if they're more expensive. But that will come back under control, as we say, with our reengineering and with our additional drive that we have going on.
spk08: Got it. Thank you. And then on the school projects, could you kind of – is there a way to estimate the amount of revenues that you would get from this new school project, the number of doors? Was the school project done in Q2? Was that similar in size? just wanted to get a sense of the equipment revenues and the recurring revenues that would go with it, if there are any.
spk07: Right, so the size of the two orders, they were similar. The one that we just got is larger than the one that we announced last quarter. I can't give you specifics. As a matter of fact, When we first wrote the release, we wanted to put the name of the school district and give you more specifics to the size, where they're located, all that. But we couldn't get approval in time for the release, so we had to make it more generic. Sometimes the school districts don't want you to announce it at all. These guys, they just didn't approve it yet. They may approve it, and then we'll be able to be more specific going forward. But it's hard to say how many more of these we're going to get. We just know there's 131,000 K-12s out there, and there's over 5,000 universities. And we know just from experience and of hearing the tragic events that happen every now and then with school shootings, that most of them don't have equipment in place. As a matter of fact, the one that we got last quarter, they went to a system where they could lock the classrooms from the inside. And the reason they wanted that is there's so many times where the shootings occur where the teacher has to go into the hallway looking for somebody to lock the door because the doors are locked from the outside. That's how these classrooms were built. And this... This particular school district is smart enough to make the move, so now all their classrooms can be locked from the inside. Most districts, most K-12s, most universities, I know we've been talking about this for years, most still don't have anything. They just go into lockdown. They announce, we're in lockdown, and it's just words, but there's no equipment. So this is a big area. It's hard for us to say, Raj, how many schools we're going to get, how many doors. We know that when the school security was stronger before the schools started to close because of COVID, that the locking part of our business was the largest segment of the hardware. And it's still the largest segment. but it's not as large as it once was. As it comes back, it'll become, we believe, a more significant portion of overall hardware sales. And school security jobs, they get us anywhere from 35, 50% gross margins. So that's a big difference than, say, a radio hardware margin. which is much lower, but of course the radios lead to recurring. And there will be a time when the school jobs will have recurring revenue as well. Right now they don't. But with air access, they might going forward.
spk05: We expect that they will. Got it. Thank you. Thank you for answering my questions. I'll take it offline. Thanks, Raj.
spk01: Our next question is from Jason Schmidt with Lake Street Capital Markets. Please proceed.
spk09: Hey guys, thanks for taking my questions. Just want to follow up on your commentary on equipment gross margin. So it's fair to say that you expect kind of equipment gross margin to get back above that 20% range, maybe in the second half of fiscal 23? Well,
spk07: Our equipment gross margins were in the 30s. That's where they were. Before any of this supply chain stuff, COVID started. Our hardware margins on a weak quarter would be high 20s. On a normal quarter would be low to mid 30s. And on a strong hardware quarter would be pushing 40%. Big difference, obviously, from where we are now. But our goal is to get back to those levels and beyond. Because as the hardware sales become larger and larger, then the margins will expand more. So pre-COVID days, we were having $20 million hardware quarters. And we just had, in a Q3... a hardware quarter that was over $23 million. We expect going forward, our goal, if you remember our goal, our goal is to get to $150 million of hardware by 2026. That's a $37.5 million on average hardware quarter. At those levels, our margins will be higher than they were pre-COVID because that's a big difference, $37.5 million. on average, versus a $20 million hardware quarter. So we just did 17%. We think we'll do better in Q4. We'll get some benefit from having higher sales levels because it's a Q4. But the bigger picture is to get back to restore to the days pre-COVID, pre-supply chain, and that would put us in the 30s. And it'll take time, but we see six to nine months out, we should start to see a bigger difference. We're very happy with the 900 basis point improvement, but obviously 17%, it's good compared to last quarter, but it's not good enough. So we want a lot more than that.
spk09: Okay, that's really helpful. And then just as a follow-up, looking at the school security market, obviously there's wins that you can announce, and the two most recent wins seem to be pretty sizable. But in aggregate, are you seeing the deal size in that market steadily increase?
spk07: What we're seeing is a lot of deals, a lot of jobs that have been on hold now starting to come off of hold. The jobs come in all sizes and shapes. So When you win a school district job, like this one was, and the one last quarter that we talked about, those are big jobs. When you win a university, those are big. They have lots of classrooms and lots of dorm rooms. Those are big jobs. We're seeing that starting to come back. We only announced the ones we could talk about, the ones that are sizable. There'll be more that we're going to be announcing. But there's a lot of wins that, you know, they're smaller ones. It could be a small school district. It could be a small university. They come in all sizes and shapes. But the key point I want to make is most don't have anything done, which means the opportunity is still there. It's huge. And I believe we'll start to pick up. As long as COVID doesn't get in our way again,
spk05: and there's no issues like that, this market will come back to where it was. Okay, perfect. Thanks a lot, guys. All right, Jason. Take care.
spk01: Our next question is from Brian Ruttenberg with Imperial Capital. Please proceed.
spk10: Great. Thank you very much. In terms of backlog levels, you talk about great visibility. For how long do you have that visibility? Are your backlogs, you know, three months, six months, two years. I'm just trying to get a level and how far out visibility you can see.
spk05: Our backlog is any orders that have been placed.
spk07: So in most cases, these are orders that are current shipments if you can do it. In a few cases, you know, we... We talked about 10 million before as a number. Not all 10 million is current backlog. A small portion of it, if I had to say maybe 10%, maybe 15%, is over time, not all at once. Most of it all at once, which means if you could ship it all, if you had the product, you could make that sale now. In terms of visibility, That backlog, we see it. It's based on orders that are placed. If we're talking about backlog of potential orders, that's different. So if we're talking about what's the potential backlog for school jobs, we know about a lot of them, but we don't know when they're going to hit. So, for example, the one that hit that we announced today, we've known about that one, and now they've finally pulled the trigger. and similar last quarter. But the backlog that we stated, that's real. Those are orders that have been placed.
spk02: And they're orders that are turning. So the SOFRU that Kevin was talking about before were over 100% up. So the backlog is such that it's being eliminated, and then it refills again. So you ship 500,000 to... particular distributor. Next week, another order comes in for $1 million, $400,000. The next order comes in for $600,000 the following week. So it's a turning backlog. And that means that, as we know, there's millions and millions of buildings and schools that need protection, and the dealers are out working very hard doing that. and we have a product, so they're getting it from us. Plus we give them all the technical support and sales support, and we do a lot of seminars with them so they understand the advantages of our product, and that whole thing is working. So the redesign of some of the things that we make, which are big sellers, we're doing it with a different type of component, than we've been using for years because it's available and because it does exactly the same job and it's less expensive. So we'll be able to get volume of those so we can get our backlog down to a couple hundred thousand, which should give a big shot in the arm to our sales and our profitability as we amortize the cost of our Dominican operation over more and more volume. So we'll be getting back to the type of numbers that Kevin was relating to you a couple of minutes ago.
spk10: Great. And just last question real quick. Long-term guidance on change, you don't see any issue at all with your kind of five-year goals?
spk07: I would say we don't call it guidance. We call it goals, right? What we believe is we might get there sooner. That's how we're feeling.
spk05: So we said by 2026, it might very well be sooner. Thank you. All right, Brian.
spk01: We have reached the end of our question and answer session. I would like to turn the conference back over to Richard for closing comments.
spk02: 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 NAPCA's fiscal 2022 and full year 2022 results. Bye-bye, and we wish you the best. Take care.
spk01: Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.
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