NAPCO Security Technologies, Inc.

Greetings. Welcome to NAPCO Security Technologies Incorporated Fiscal Third Quarter 2023 Earnings 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 Vice President of Investor Relations. Thank you. You may begin.

Thank you. Good morning. I'm Patrick McKillop, Vice President of Investor Relations for NAPCO Security. Thank you all for joining us today for today's conference call to discuss our financial results for our fiscal third quarter 2023. 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 on 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 growth drivers of the company's business, such as school security products and recurring revenue services, potential market opportunities, the benefits of recurring revenue products to customers and dealers, our ability to control expenses and costs, and expected annual run rate for SAS recurring monthly revenue. Forward-looking statements involve risks and uncertainties that may cause actual results to differ 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 underlying assumptions Subsequently, proving to be incorrect could cause accurate results to different material notes in the forward-looking statements. Although we believe that expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results of activity performance estimates. We should not place under-reliance on these forward-looking statements. All information provided in today's press release and this conference call is as of today's date unless otherwise stated. and we undertake no duty to update such information except as required under applicable law. We're trying to call over to Dick in a moment. If I do, I just want to mention some upcoming IR calendar events that we have, which are first the Needham Technology Media Conference on Wednesday, May 17th in New York City, followed by the B. Reilly Conference May 24th through the 25th in Los Angeles. Then we'll be at the William Blair Growth Conference, June 6th through the 8th in Chicago. And finally, we'll be attending the Wells Fargo Industrials Conference, June 13th through the 15th, also in Chicago. Investor outreach is crucial, especially for a small cap company such as NAPCO. And I would like to thank all 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 pleased to report our fiscal Q3 2023 record sales of $43.5 million. This is our 10th consecutive year order of sales growth. Recurring revenue continued to grow at a very strong rate and the annual run rate is now approximately $63 million based on April 2023 recurring revenues. Our balance sheet remains strong with our cash balances at $56.9 million and we have no debt. We continue to focus on capitalizing on key industry trends, which include wireless fire and intrusion alarms, school security solutions, plus enterprise access to 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 our costs. These metrics are important to us as well as our shareholders. We continue to execute our business strategy and our interests are aligned with our shareholders as senior management of NAPCO owns approximately 10% of the equity. Before I go into greater detail, I will now turn the call over to our CFO, Kevin Buschel, 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?

Thank you, Dick, and good morning, everybody. Net sales for the three months ended March 31, 2023, increased by 21% to a quarterly record $43.5 million. as compared to $35.9 million for the same period a year ago. Sales for the nine months ended March 31, 2023, increased by 25% to $125.3 million as compared to $100.4 million for the same period a year ago. Recurring revenue for the quarter increased 26% to $15.1 million as compared to $12 million for the same period last year. And recurring revenue for the nine months ended March 31, 2023 increased 32% to $43.8 million compared to $33.3 million for the same period a year ago. Our recurring service revenues now have a prospective annual run rate of approximately $63 million based on April 2023 recurring service revenues, and that compares to a $59 million run rate based on January 2023 recurring service revenues, which we reported back in February. The increase in equipment sales for the quarter were primarily due to increases in both our alarm lock and marks door locking products, as well as increased sales in our continental access control products. The increase in equipment sales for the nine months was primarily due to increased sales of NAPCO intrusion products, which includes Starlink products, alarm lock and marks door locking products, and continental access control products. The strong growth of our recurring revenue for both the three and the nine months ended March 31, 2023, was primarily attributable to the continued strength of our Starlink cellular radio products driven by increases in the commercial intrusion and fire alarm business. Gross profit for the three months ended March 31, 2023, increased 51% to $22.7 million with a gross margin of 52%. As compared to $15 million with a gross margin of 42%, for the same period a year ago. Gross profit for the nine months ended March 31, 2023 increased by 51% to $60.3 million with a gross margin of 48% as compared to $39.9 million with a gross margin of 40% for the same period a year ago. Gross profit for equipment sales for the three months ended March 31, 2023 increased 98% to $9 million, with a gross margin of 32%, as compared to $4.5 million, with a gross margin of 19% for the same period a year ago. Gross profit on equipment sales for the nine months ended March 31, 2023, increased 93% to $21.3 million, with a gross margin of 26%, as compared to $11 million with a gross margin of 16% for the same period a year ago. Gross profit for recurring revenue for the three months ended March 31, 2023 increased 30% to $13.7 million with a gross margin of 90%, as compared to $10.5 million with a gross margin of 87%, for the same period a year ago. Gross profit on recurring revenues for the nine months ended March 31, 2023 increased 35% to $39 million with a gross margin of 89% as compared to $28.9 million with a gross margin of 87% for the same period a year ago. The significant increase in gross profit dollars, as well as gross margin for equipment sales for both the three and the nine months ended March 31, 2023, is primarily due to the resulting the aforementioned increases in equipment revenues, which also improved overhead absorption rates. Also, the increased availability and lower costs of certain components, lower transportation expenses, as well as a favorable shift in product mix, all of this as compared to the same period last year. The increase in gross profit dollars for recurring service revenues for both the three and the nine months ended March 31, 2023, was due to the continued strong sales of the company's Starlink radios. The continued increase in the gross margin for recurring revenue for both the three and the nine months is primarily due to increased service revenues relating to the company's fire radios, which have higher monthly selling prices than the company's intrusion radios. Research and development expenses for the three months ended March 31, 2023. increased 15% to $2.3 million or 5% of net sales as compared to $2 million or 6% of net sales for the same period a year ago. Research and development expenses for the nine months ended March 31, 2023 increased 18% to $7 million or 6% of sales as compared to $5.9 million or 6% of net sales for the same period a year ago. The increase in dollars was due primarily to salary increases and some additional staff. Selling general and administrative expenses for the three months ended March 31, 2023, remain relatively constant at $8.4 million as compared to $8.4 million for the same period a year ago. SG&A expenses as a percentage of net sales decreased to 19% for the three months ended March 31, 2023, as compared to 24% for the same period a year ago. The decrease as a percentage of net sales was due primarily to the increase in net sales without the need to increase SG&A expenses. SG&A expenses for the nine months ended March 31, 2023, increased by 3%, to $24.7 million from $24 million for the same period a year ago. SG&A expenses as a percentage of net sales decreased to 20% for the nine months ended March 31, 2023, as compared to 24% for the same period a year ago. The increase in dollars resulted primarily from increases in legal expenses, as well as credit card processing fees related to our monthly recurring service revenues. The decrease as a percentage of net sales was due primarily to the increase in net sales as partially offset by these aforementioned increases in expense dollars. Operating income for the quarter increased 160% to $11.9 million as compared to $4.6 million for the same period last year. Operating income for the nine months ended March 31, 2023, increased 185% to $28.6 million as compared to $10 million for the same period last year. The company's provision for income taxes for the three months ended March 31, 2023, increased by $397,000 to $1.5 million with an effective tax rate of 12%. as compared to $1.1 million with an effective tax rate of 26% for the same period a year ago. The increase in the provision for income taxes for the three months was primarily due to higher taxable income. The company's provision for income taxes for the nine months ended March 31, 2023, increased by $1.7 million to $3.5 million with an effective tax rate of 12%, as compared to $1.8 million, with an effective tax rate of 13% for the same period a year ago. The increase in the provision for income taxes for the nine months was also primarily due to higher taxable income. Net income for the quarter was a quarterly record, $10.8 million, or 29 cents per diluted share, as compared to $3.3 million, or 9 cents, per diluted share for the same period last year, a 231% increase. Net income for the nine months was $25.7 million, or 69 cents per diluted share, as compared to $12.1 million, or 33 cents per diluted share, for the same period last year, a 113% increase. In addition, net income for the quarter was 25% of net sales as compared to 9% for the same period last year. And for the nine months ended March 31, 2023, was 20% of net sales as compared to 12% for the same period last year. Adjusted EBITDA for the quarter was a quarterly record, $12.7 million, or $0.34 per diluted share. as compared to $5.7 million or 15 cents per diluted share for the same period last year, a 123% increase. Adjusted EBITDA for the nine months was $31.4 million or 85 cents per diluted share, as compared to $13.5 million or 37 cents per diluted share for the same period last year, and that's 132% increase. The adjusted EBITDA margin for the quarter was 29%, as compared to 16% for the same period last year, and was 25% for the nine months ended March 31, 2023, as compared to 13% for the same period last year. Then income and earnings per share for last year's nine-month period reflected other income of $3.9 million, which resulted from the extinguishment of debt during the quarter ended September 30, 2021. And without such benefit last year, net income and earnings per share for the nine months ended March 31, 2021 would have been $8.2 million and 22 cents respectively. Moving on to the balance sheet, at March 31, 2023, the company had $56.9 million in cash and cash equivalents, other investments, and marketable securities. And that compared to $46.8 million as of June 30, 2022, and that's a 22% increase. Working capital, defined as current assets, less current liabilities, was $112.9 million at March 31, 2023, and that compared with working capital of $93.1 million at June 30, 2022. And the current ratio, which is defined as current assets divided by current liabilities, was 7.3 to 1 at March 31, 2023, and 4.5 to 1 at June 30, 2022. Cash provided by operating activities for the nine months ended March 31, 2023, was $12.4 million. And that compared to $8.4 million for the same period last year. And that's an 48% increase. And CapEx for the quarter was $1.7 million versus $418,000 in the year-ago period. And for the nine months ended March 31, 2023, it was $2.5 million compared to $1.2 million in the prior year period. And as Dick mentioned earlier, We have no debt. That concludes my formal remarks, and I would now like to return the call back to Dick.

Kevin, thank you. Our third quarter was a sales and profits record breaker, continuing our sales growth streak, which is now our 10th consecutive quarter of year-over-year sales growth. Prior to COVID, We had 23 consecutive quarters of growth, and we look forward to surpassing that streak in the future. We are particularly pleased to see the strong growth in the gross margin on equipment revenues, which increased 1,300 basis points to 32% as compared to 19% in last year's Q3. and 900 basis points when compared to the gross margin of 23% last quarter. This was primarily attributable to lower freight costs, increased overhead absorption from our Dominican Republic factory, which occurred as a result of the large equipment sales increase, and more favorable sales mix. One key area of our success continues to come from our commercial fire and intrusion alarm business. A potential recession driven by higher interest rates from the US Federal Reserve continues to dominate stock market headlines. And I'd like to remind you that our company is highly recession resistant as 80% of our business is commercial. The commercial fire alarm business is a mandatory non-discretionary item. 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. Our equipment and recurring revenue both generated strong growth this quarter, increasing 19% and 26% respectively. The annual run rate for recurring revenue is now $63 million as of April 2023. The quarterly increase in recurring revenue was affected by the Verizon 3G sunset, which occurred this past January. There are still many thousands of 3G radios that need to be replaced and we anticipate that many of these will be replaced with NAPCO's newer generation radios because alarm dealers must have new functioning and recurring revenue producing radios to monitor alarm conditions. This would result in both additional hardware revenue and increasing recurring revenue for the company. We believe we are still on track to reach our previously mentioned goals of $150 million run rate in recurring revenue and $150 million of equipment revenue by the end of fiscal 2026. Achievement of those goals, as well as our gross margin goals of 80% for recurring revenue, and it was 90% in Q3, and 50% for equipment revenue could generate EBITDA margins in excess of 45%. We estimate that there are millions of commercial buildings of all types, such as offices, hospitals, schools, coffee shops, fast food restaurants, and others that still require upgrades from old-fashioned copper phone lines. Our Starlink radio has the widest coverage of both AT&T and Verizon service and rich feature sets, which our dealers love. Margins for recurring revenue also improved by 200 basis points to 90% for this quarter versus 88% in the same period a year ago. The constraints of the supply chain have largely abated for us, and we believe that in the next three months, the new supplier sources we have developed will begin to invigorate our equipment margins even further and bring them to even higher levels than what we generated prior to the supply chain crisis. The backlog for the company is getting closer to more normalized levels, from the extremely high levels we had experienced in the last few quarters. Inventory was down by 3.4 million from the last quarter, and we remain encouraged by the continued strength of the sell-through statistics that we are seeing from several of our largest distributors. School administrators are focused on the need for security solutions as more school shootings continue to happen. We continue to see more funding initiatives, as evidenced by recent announcements from Ohio, where 624 schools received $42 million in security upgrades, and in Missouri, where 169 schools received $20 million. The governor of Missouri has proposed an additional $50 million for their fiscal 2024 year pending approval. Our fully integrated solutions for the school security generate healthy margins for our business, and now more than ever, we are laser-focused on further penetration of the school security market, which is comprised of approximately 130,000 K-12s and 5,000 colleges and universities across our country. Fully integrated technologies for the school security market continues to remain a top priority for NAPCO. Offering seamless security solutions which allow for our dealers and us to generate recurring revenue streams is central to our strategy. The recently launched Air Access product will enable us to generate recurring revenue from all divisions of the company. Air Access will generate recurring revenue from locking, access control, which has never been done before. Air Access is the industry's first cellular-based access control system, which we believe is a billion dollar market opportunity. The product continues to make strides in the market, and we expect more momentum in the future as the sales teams are actively educating the locking and access control dealers about this new exciting opportunity for them with air access. At the recent ISC West trade show back in March, we unveiled a new product called Prima, which we are very excited about. Prima is a revolutionary 7-inch superpanel for security, fire, video, and automation, featuring intuitive use and setup, smart and self-healing Wi-Fi, video, and doorbells that prevent dealer truck rolls, and an all-new powerful backend. Prima was also named among security sales and integration magazines as the most valuable products for 2023. We expect to have this available to the dealers in early fiscal 2024. Our R&D team remains hard at work developing even more products for the future which will help us grow our recurring revenue business. We have experienced tremendous success over the last several years growing our recurring revenue and believe the best is yet to come. Lastly, as indicated in this morning's press release, we're excited to announce the initiation of our first-ever dividend program as the company evolves and continues its strong growth patterns. NAPCO has created tremendous shareholder value over the years, and this dividend program is another way for us to continue to do so in the future. We believe it is important to balance our capital allocation priorities, including investing in growth opportunities, maintaining a strong balance sheet, and returning capital to shareholders. We will begin our Q&A session portion of this call in a moment. Our fiscal third quarter 2023 was a record-breaking successful one. We have a pristine balance sheet, no debt, and continue to generate strong sales and healthy profits. We believe we can continue this growth streak well beyond the 10 consecutive quarterly streak we are now on. I'd like to thank everyone for their support and for joining us in this 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.

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 Matt Sal with William Blair. Please proceed.

Hey, thanks for taking my questions. First, wanted to start off with the improvement in the equipment gross margins, which is good to see. How should we think about the rate we saw in the third quarter in terms of a go forward rate? There's a bunch of moving parts within there, so just want to understand how durable that is going forward. And then specifically on the mixed component, maybe just some comments clarifying what you mean on the mixed side. What was strong, what was weak that drove that benefit?

So Matt, the components that helped us get to 32% on the margins, several of them. Let's start with freight. So the freight costs have come down. I think they've come down for everybody. So we benefit from that too. We also did not have to fly components as much as we have been doing in the past during the supply chain problems. Because during the supply chain crisis, if we could get our hands on parts, we would buy them, we'd buy a lot of them, and we'd fly them. We don't want to run out. You don't have to do that anymore. So that's very sustainable going forward. We believe the days of having to fly like crazy because of shortages all over the place are over. Supply chain's not totally over. There are pockets of parts that you have to work hard to get still. Crisis is still a little bit upon us, nowhere near what it used to be. So that's sustainable. Overhead absorption, which comes from the Dominican Republic facility, that's very sustainable as the volume of hardware continues to grow. This quarter, the volume was 28.4 million of hardware sales. The more goods that we pack into the Dominican facility, the more overhead absorption we're going to see, and the more the margins are going to expand. But that's sustainable. The other part is the mix. Mix is unpredictable. The mix in this quarter, alarm lock sales were very strong, and they dominated the quarter. The other groups did well, but alarm lock did particularly well. And alarm lock has very strong margins. So those margins compared to margins on radios, as example, Radios don't have the greatest gross margin. Of course, they lead to recurring revenue, which has 90% gross margin. But from a hardware point of view, locking is better. So the mix was better from that point of view. Is that sustainable? We think it is, but mix is hard to predict. We want all pieces of the puzzle to contribute. And in this particular quarter, they pretty much all did. And that's why we were able to get to 32%. We have not seen the benefit yet of a lot of raw material benefit. Remember, we bought a lot of components at very high costs. And we had to do that to keep the recurring revenue going. Now we have solutions to get away from that. We don't have to buy parts from brokers. But we have to work through that inventory. That inventory is still high. We cut our inventory level by $3.4 million this quarter, but we have a lot more work to do in further cutting of inventory. And as we cut that inventory, we're going to work through those higher-costed components, and that will lead to more normalized, lower costs. Remember, we talked about some of those micros that are normally $5 or $6 being 10 times the amount. we're going to start to see the benefit of that $5 or $6 component cost more in the fiscal 24 period. So that's a benefit for the margins of equipment that are soon to come. They're not there yet.

Very helpful.

Just one more for me on the recurring revenue side. What did you see in the quarterly absent the impact of the Verizon 3G shutdown, how did the business perform excluding that impact versus your expectations? And then with the radios that went dark, how many of those did you turn on versus your expectations? And what gives you confidence that you can go back out there and get some of the ones that are still shut off turned back on?

What we saw with

recurring revenue this quarter, besides the 3G sunset effect, is we saw the margins continue to go up, which was nice to see. You know, now it's 90%. Last quarter was 89%. That's primarily attributable to the fact that fire radios continue to be very strong. And they become a larger and larger part of the mix. The sunset, a lot of these radios have to be replaced. The dealers would be crazy not to replace them. That's their livelihood. That's how they get recurring revenue. It's a slow process, slower at least than I would have thought. First of all, you would have thought they would have never let it go dark. They weren't prepared. They thought Like the AT&T sunset, it was going to keep getting delayed and delayed. It wasn't delayed. On January 3rd, boom, it happened, and they were caught short. There's thousands and thousands of radios, a good 30,000-plus radios that affected us. That's the difference between being at 35% increase year over year versus 26%. I modeled out just to see what's the impact on our 2026 goal if 26% is the new norm of growth rate. And what it showed was instead of getting to our goal by the end of fiscal 2026, we get there six months later. However, my goal also used 80% as the gross margin for that. And we're at 90%. That more than makes up for it. Not to say that we think we're going to stay at 26. We think a lot of these radios are going to be replaced and that rate's going to go up. But you know what? Even at 26%, we're going to hit our goal anyway. And our hardware goal, which was $150 million by 2026, we're way ahead of that. We need 10% growth to get to that. And if you look at our financials, we've been growing by 20%. This year, it's up 22% for nine months. Last year, 22%. So that's why we're not worried about the overall goal of 150, 150, and 46% goal of EBITDA margin. We'll get there. A few months early, a few months late, big picture, doesn't matter.

Okay, great. Thank you. Very helpful. Appreciate it. You're welcome, Matt.

Our next question is from Jason Schmidt with Lake Street Capital Markets. Please proceed.

Hey, guys. Thanks for taking my questions. Dick, I know you mentioned strong sell-through data in March. Just curious if you think March benefited from any sort of pull-in orders and how we should think about the seasonally strong June quarter for you guys.

Sell-through comes from the fact that the dealers are very, very busy. and going to these distributors of ours. We have 200 locations and taking product from the distributors so they can do the installations. And I would expect with what we're seeing and reading in the newspapers every single day that the dealers are going to be super, super busy. Also, the dealers are so busy that they've neglected some of the radios that we've been talking about not upgrading them because they say, well, you know, we were caught like a deer in headlights. We didn't realize that the system would go down, but we're very busy doing new work, and we will get to all those radios and upgrade them. The Starlink radios are the best radio for performance on the market, rated number one across the board for range. You can use it. in all kinds of cities and country, and you get tremendous range compared to our competitors. And it has a lot of other features in there that the deal is like, where it syncs with every control panel that's out there. It's a universal product, not a product that's only dedicated for one brand. So there's a lot of advantages. And additionally, realize that the dealer is very busy putting in the control panels and other products and Starlink radios. And every one of our control panels now has a radio built in. So we're getting recurring revenue from our control panels and our fire systems like never before. And at the ISC show that I was at, the dealers were astounded the performance of our fire panels where they can program them from their smartphone instead of going to the keypad on the wall and programming them, made it really easy for them to adjust the fire product's performance. So they were very excited about it. The show was a tremendous success. I have to say that we had a big, beautiful booth at that show, and it was right on the main entrance. The dealers that came in, and there were thousands and thousands, 30,000 dealers came in, saw a totally integrated company like nothing else on the marketplace. And it bodes well for the future for NAPCO, for recurring revenue, for hardware sales. It was a very, very exciting, the most exciting show since I started the company that we've ever had. So I expect things to keep along at a very high rate, and I expect that this new Prima product that we showed which is a residential small business product, will become a universal success, and every one of those premiums gets us recurring revenue. So it was a very, very exciting show, and it was a great stage for us to show our entire company's product line.

Okay, that's helpful. And then just as a follow-up, curious if you guys implemented any sort of price increases,

in the march quarter and just given some of it sounds like some of the supply chain dynamics have eased a bit how are you thinking about any future potential price increases this year we always take a price increase jason so we didn't do one in march typically we take it in the july period we have done some earlier during supply chain where we put two or three price increases in effect within a fiscal year. I think we're kind of beyond that. So I think the next one will be July 1.

Jason, one other thing I'd like to say is being in the commercial business, we're 80% commercial. We don't really have pricing issues. Commercial dealers are not as price sensitive as residential dealers. So it's not really an issue with us. It's nothing to be concerned about. If we need a price increase, we can get it, and the dealers will pass it along because, as we said, a lot of those increases go into commercial properties, fire properties, where you have to have a working fire alarm system, even if half the employees only show up. If any employees show up in a building, the fire marshal says, You must have a working fire alarm system. This is different than the residential business.

Okay, perfect. Thanks a lot, guys. Thanks, Jason.

Our next question is from Brian Ruttenberg with Imperial Capital. Please proceed.

Yes, thank you very much. I was wondering if you could dig down a little bit about school security, give us an update. Maybe tell us how much of your revenue right now is generated from school security directly or indirectly and what the pipeline looks like.

School security remains strong. We can't tell you exactly what percent of our revenue comes from school security because a lot of times it comes through distribution. But we know Two things. One, there's been a bunch of wins that we recently got. We haven't announced it. We always have to work to see if we're able to announce it. So we're working on that. If it's announceable, we'll do it. But one stat I always look at is, what's the locking percentage of hardware sales? Because I know when the locking sales goes up as a percentage, That means schools are doing well. It's a key part of it. And locking is 59% of our hardware sales. That's a key stat. We were in that range before COVID hit. I think we were lower, but it was similar. It was in that range. And then when COVID hit and the kids were out of school, that stat dropped. When kids went back to school, of course, we all know shootings came back with a vengeance, and school security jobs have come back also. There's more money available for the K-12s. Dick mentioned a couple of them earlier. There's lots of money. We try to help the schools figure out how to get at that money. That's probably... what seems to take the longest in terms of getting more jobs, but the money's there. And of course, the universities have the money, they have big endowments. And the other thing that's helping locking sales, I know you asked about schools, but infrastructure changes, airport upgrades, those are very, very important and helpful to our locking sales. Here in New York, Both LaGuardia and JFK airports are both going through upgrades, renovations. And if you go walking into those airports, you'll see our trilogy locks everywhere. And the same thing holds true in other airports throughout the country. We've seen it everywhere. So those are good signs. Those help our locking sales, besides the schools, which is a key part.

Great. And just as a follow-up real quick on that, in terms of the locking market, have your biggest competitors started getting product out on time? I know there's been lots of things from ISC West and even last year talking about some of the largest lock producers, if you will, that have had a tough time delivery.

A lot of our competitors make their parts in Asia, make their locks. We make our locks. in the Dominican Republic. So we get delivery in six weeks. We don't have a lot of interruptions. We don't have port problems, shipping problems. So we have a big advantage. The competitors are still having trouble getting their production. And it helps us because it introduces our line of lock products to the locksmiths, integrators, and dealers. And once they start to use it, it sells itself. It's an amazing line of products. We go from the basic door locks to very sophisticated network-operated locks. So we're really a one-stop shop for the dealers, and they get to see that. So the COVID was helpful from that point of view for us because of our

uh setup our manufacturing uh and engineering setup all in this hemisphere so that worked out well thank you thanks brian as a reminder to star one on your telephone keypad if you would like to ask a question our next question is from raj sharma with b riley securities please proceed

Hello. Thank you for taking my questions. Congratulations on the quarter. Can you talk a little bit, any color on the dealer sell-throughs? Is the mix changing? You had alluded to bigger VARs in the last call that you're switching. Are you getting more of your business from them? And are they experiencing similar growth rates? relative to the last few quarters, is there any slowdown at all that they are seeing economic factors?

The big accounts that we've talked about, which are ADT, Johnson Control, those are direct sales. And we're just getting started with all three of them. So they're not major impact customers yet. We hope they will be. We believe they can be. We actually, as we've talked about in the past, took one of our top sales guys and made him the vice president of sales for national accounts. So we want him to develop those three accounts and get more of them. And there are more out there. It's not just those three. But those are just getting started. The distributors, that's where most of the sales continue to come from. And they've been doing well. Sell-through stats are very good, especially this past quarter on locking was very strong, which we've talked about. Margins are great on locking, so we love to see that. But the distributors are doing really well with us. They have been for a while. And the ordering pattern is good, too, now. It used to be in the old days that the orders would come in at the very end of the quarters from these distributors. And we'd be sitting here waiting for orders to come in at the end of March, at the end of June, at the end of September, at the end of December. That's changed. They order more regularly. Better for us. It's better for them. More efficient. That's one of the reasons why we don't have to fly as much. It's also a contributor to the lower freight cost. It's more of a steady ordering process. And so we're very happy with the way things are going with our distributors.

I'd like to add one additional thing, and that is that the... Makeup of our customer base is very diversified. The company built itself with security dealers of all different types. They could be alarm dealers, locksmiths, and system integrators that do the access control jobs. These dealers have between one and three vans on the road. They're small dealers. But they're community-oriented dealers. They're everywhere. And that's how NAPCO built its business. The new dealers that we're talking about, the Johnson Controls ADTs, these are brand-new dealers that we're adding to the smaller dealers. And we've taken, as Kevin said, one of our top sales guys who made it, the head of national accounts. Now we've added another person along with him because you have – other dealers which we don't have which which they call super regional dealers besides other national dealers and um it bodes well for the future for us because as the big guys start using it becomes more and more volume and we have a very efficient factory to build it for them so um that's our growth our growth is diversified dealers as well as the larger dealers, the largest ones in the business. So we also have our own engineering department in-house in Amityville in our headquarters. So some of the dealers requested certain features, could be software or hardware features. We're able to move very quickly compared to our competitors, which may have their things made in Asia, and it's very slow as far as getting product upgrades, new feature sets added to products. We don't have that issue. We have an engineering department in headquarters right in our marketing and sales group. So we get great service for the large national accounts that have certain needs.

Got it. Very helpful, Dick. Thank you. And then the recurring revenues came in a little lighter than expected. Margins still exceeded. And you have confidence that the sun setting and the radio is going dark. You should pick them up. How should we look at sort of the equipment sales and the recurring revenue growth in the next few quarters, do you continue to see momentum and could you kind of comment on the expected growth rates and the margins for the next few quarters?

Well, we grew the hardware by 22% last year. So far, it's 22% this year. We have... Q4 very very high comp that we did here and You know we think for a full fiscal year We're now in the double-digit range for hardware We go back a number of years before that it wasn't the case but that's the case of where we are now and We don't see any reason that that's going to switch when it comes to recurring revenue We were growing in the mid-30s lately. This one dropped to 26. That's about why it dropped. We think it'll come back. Will it come all the way back? It's hard to say. We'll see over the next couple of quarters. Regardless of whether it comes back to the 35% or it stays in the mid-20s, the picture is still very, very strong. As I said earlier, if we grow by 26%, for the next few years on the recurring side, we will hit our $150 million goal of 2027, six months after the timeframe that we set. We would, however, pick up the 10% on the margins, because our goal was 80%, and it's 90%. That's huge, because our recurring revenue at that point in time be $150 million, 10% differential. It's $15 million. So in the big picture, whether it's 26 or 30 or 35, it doesn't matter. We're on the right track. We're doing the right things. And as far as the margins go, margins will only get better. As we've talked about, the margins used to be in the low to mid-30s. And then in the fourth quarter, they would jump up because of the overhead absorption. There were a couple of years where the margins suffered because of buy chain. Quarter that we just finished was 32%. There's no reason to believe we can't get stronger on those quarters going forward. It may not happen all at once, but hey, when we have a $28 to $33 million hardware quarter, you're going to get that overhead absorption. When we work through the high inventory on those micros that we've talked about and start using $5 or $6 micros, it's going to get the benefit of that. So hardware margins will only get better, and we think they'll be in the 40s, and then ultimately our goal is 50% by 2026.

Lastly, I know inventory levels have come down and that's good. The non-current inventory levels are still relatively unchanged. How should we expect that to change the next few quarters?

As we work through the very high level of inventory we have that we bought, if they were hard to get, that should come down Internally, we want to reduce inventory by at least another $10 million, and obviously that will help our cash be even more. Our cash has been growing dramatically, and when it gets the help of reduction in inventory, it just adds to the picture. So our goal is to at least get another $10 million of inventory reduction. over the next 12 months. And we're working hard towards that. Just to make our balance sheet, which looks great, look that much better.

Got it. That's it for me and the questions. Thank you. I'll take it offline.

Thanks, Raj.

Our next question is from Jim Rashudi with Needham & Company. Please proceed.

All right. Thanks for getting me in. A little technical problem getting into the queue. If we... Kevin, just on that inventory question, at what point do you think we cycle through some of this higher cost inventory? Are we one, two quarters away from that? How do we think about that?

Two quarters, I would say. I would say by the time we get to Q2 of fiscal 24, we would have gone through a lot of those higher costed components.

Got it. And most of my other questions were answered, but this is going to be in the queue, and maybe you could just help us, Kevin. What was the year-over-year growth rate in intrusion and alarm versus door locking products, if you can? Thank you.

Well, door locking products, this will be in the queue, which should be out tonight. Door locking products was...

$16.8 million for the quarter.

And it was $11.2 million for the prior year's quarter. And it's $45 million for the nine months compared to $34 million for the prior year period. The intrusion is lumped with access control products together. That's the way it's disclosed in the queue. But it was 11.5 million for the quarter versus 12.6 for the prior year's quarter. And it was 36.4 million for the nine months versus 33.2 million in the prior year's period.

And that decline in the current quarter, how much of that would you say is just related to what you're seeing as far as the delays in some of that 3G replacement radio business?

I think the decline is due to that factor. And it's also due to the fact that, you know, a lot of guys... at this time a year ago, wanted to make sure they were not caught short. And so you have an extreme. You have a lot of dealers who made sure that they did something about it last March, and you're comparing it to this year, but you still have thousands of dealers who haven't upgraded yet. So we think that'll straighten itself out. We were very encouraged that the run rate went up by $4 million in this past quarter. So we disclosed last time that the recurring run rate was $59 million as of January, end of January. And now, at the end of April, it's $63 million. That's $4 million. Historically, it's usually grown by about $1 million per month. The fact that this grew by $4 million is encouraging. We're very encouraged by the overall recurring. There's little twist turns with the 3G sunset and trying to get these dealers back in business, but that'll work itself out.

Got it. Thanks very much. Got it, Jim.

We have reached the end of our question and answer session. I would like to turn the floor back over to management for closing comments.

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 have a wonderful day.

Thank you. This will conclude today's conference. You may disconnect at this time, and thank you for your participation.