February 7, 2023 | 11:39 AM by Jay Kunstman | jkunstman@jaguaranalytics.com

Behind The Numbers – Napco Security Technologies (NSSC)

Napco Security Technologies (NSSC) is a leading manufacturer of electronic security devices, cellular communication services, as well as school safety solutions. Their security products include access control systems, door-locking products, intrusion and fire alarm systems and video surveillance products. Meanwhile, their cellular communication services include the Starlink brand.

Shares closed higher on Monday by just over 10% after reporting its Q2 earnings. Here was the breakdown:

-EPS of $0.23 vs $0.14 estimate – Beat
-Revenue of $42.3M vs $39.14M estimate – Beat
-Net Sales increased 27% Y/Y
-Equipment Sales increased 23% Y/Y
-Equipment Margins increased 1500bps to 23% vs 8% Y/Y
-Recurring Service Revenues increased 35% Y/Y
-Recurring Revenue Margins increased 200 bps to 89% vs 87% Y/Y

According to management, the increase in equipment sales for the quarter was primarily due to increases in both their Alarm Lock and Marks store locking products, as well as increased sales in their Continental Access Control products. Meanwhile, the strong growth of their recurring revenue for both the three and six months ended December 31st was primarily attributable to the continued strength of their StarLink cellular radio products driven by increases in the commercial intrusion and fire alarm business. As I read over the conference call transcript, there were plenty of topics (i.e. growth drivers) discussed:

Fire Alarms – Management reiterated that one key area of success continues to come from the commercial fire and intrusion alarm business. “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 the certificate of occupancy.”

Schools – With administrators focused on the need for security solutions as more incidents continue to happen, the company is “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 the country.” The availability of grants to schools to fund these security projects has never been better. Management reported that they recently received another school security project for a large school district in the state of Massachusetts and the school will be using their Continental Access Control products in its 125 schools. CFO Kevin Buchel would comment, “We’re in the early innings, second and third inning, if you ask me, on school security. Big area.”

StarLink – As mentioned at the top, this is the cellular communication portion of the company. Management is optimistic that it can reach their previously mentioned goals of $150M in recurring revenue and $150M of equipment revenue by the end of fiscal 2026 or possibly sooner. These StarLink products have coverage with both AT&T and Verizon. The focal point here is when management highlighted how the 3G sunset was completed just a few weeks ago with the company believing that a portion of the active NAPCO’s StarLink radios that lost communications due to the Verizon 3G sunset have not yet been replaced. “Ultimately, the company anticipates that many or all these NAPCO 3G radios will be replaced with NAPCO’s newer-generation radios, because alarm dealers must have new functioning and revenue-producing radios to monitor alarm conditions, resulting in both additional hardware revenue and increasing recurring revenue for the company.”

During the Q&A, Needham would follow and ask if they are hearing from channel partners yet of the acceleration in demand that they might be anticipating as a result of this? CFO Kevin Buchel responded by saying, “So Jim, we know that the dealers who failed to take action sunset hit. A lot of these dealers didn’t think it was really going to happen, because when the AT&T sunset came about, they didn’t – they kept delaying it and delaying it. The dealers thought it was going to get delayed this time. Remember this with the dealers. If they don’t have an active radio, then they suffer. They are losing recurring revenue. Remember, they charge the end user recurring revenue, just like we charge the dealer. So the last thing they want is to lose their livelihood, that recurring revenue. So, we’re starting to see a lot of scrambling around as these radios that went dark at the end of January 3rd are being replaced. We’re pretty confident that they are all going to be replaced, and we’re pretty confident they’ll be replaced with our radios. They’ll go from a NAPCO 3G radio to a NAPCO StarLink 5G radio.

ISC West – Finally, taking place at the end of March, ISC West is described as the largest security industry trade show in the United Sates. As management explains, “We’ll get to see lots of dealers, which are great buyers and we’ll be able to pick up a lot of market share. We show a lot of new products at that show. We have a very large out, right in the main section. It’s very important to show our products. We’ll have our sales teams out there.”

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