NAPCO Security Technologies(US:NSSC)2023-02-06 21:05Financial Data and Key Metrics Changes - The company reported record sales of $42.3 million for fiscal Q2 2023, a 27% increase compared to $33.4 million in the same period last year [12][26] - Recurring monthly revenue grew by 35% to $14.9 million, up from $11 million year-over-year [27] - Net income for Q2 reached $8.4 million or $0.23 per diluted share, a 714% increase from $1 million or $0.03 per diluted share in the prior year [34] - Adjusted EBITDA for the quarter was $10.3 million or $0.28 per diluted share, a 232% increase compared to $3.1 million or $0.08 per diluted share last year [35] Business Line Data and Key Metrics Changes - Equipment sales increased by 23% to $27.4 million in Q2, compared to $22.4 million in the same period last year [45] - Gross profit for equipment sales increased 245% to $6.2 million with a gross margin of 23%, compared to $1.8 million and 8% margin last year [29] - Gross profit for recurring revenues increased 37% to $13.2 million with a gross margin of 89%, compared to $9.6 million and 87% margin last year [30] Market Data and Key Metrics Changes - The company noted that 80% of its business is commercial, making it highly recession-resistant [40] - The backlog remains at a higher-than-normal level but is decreasing, indicating strong demand for products [62] Company Strategy and Development Direction - The company is focusing on capitalizing on key industry trends such as wireless, fire and intrusion alarms, and school security solutions [24] - Management aims to achieve $150 million in recurring revenue and $150 million in equipment revenue by the end of fiscal 2026 [60] - The introduction of Air Access is expected to generate recurring revenue across all divisions, marking a significant opportunity for growth [79][167] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the ability to replace old 3G radios with new 5G radios, anticipating increased sales and recurring revenue [41][61] - The supply chain constraints are easing, and the company expects improved equipment margins in the coming months [43] - The ongoing concerns about a potential recession are acknowledged, but the company remains optimistic about its recession-resistant business model [40] Other Important Information - The company has a strong balance sheet with $47.1 million in cash and no debt [13][38] - Research and development expenses increased by 12% to $2.2 million, reflecting ongoing investment in product development [16] Q&A Session Summary Question: Impact of Verizon 3G sunset on demand - Management noted that dealers who failed to act on the sunset are now scrambling to replace radios, which is expected to lead to increased sales and recurring revenue [82][88] Question: Redesign activities and gross margins - The company is working on redesigning its radio sourcing to improve gross margins, with expectations of noticeable improvements in Q3 and Q4 [70][85] Question: Backlog levels and visibility - Management confirmed that while backlog levels are decreasing, they remain historically high, and strong demand continues to drive new orders [108] Question: School security projects and equipment sales - The company highlighted that school security projects are contributing positively to equipment sales, with significant wins in large school districts [111][151]