NAPCO Security Technologies(NSSC) - 2025 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Recurring revenue increased by 15%, generating a gross margin of 91% and leading to a 400 basis-point improvement in total gross margin to 57% [11] - Net sales for the quarter decreased 9.7% to $42.9 million compared to$47.5 million for the same period last year [15] - Net income for the quarter decreased 17% to $10.5 million, representing 24$0.28 per diluted share [27] - Adjusted EBITDA for the quarter decreased 19% to $12.2 million, equating to an EBITDA margin of 28$21.2 million compared to $18.5 million for the same period last year [16] - Equipment sales for the quarter decreased 25$21.7 million compared to $29 million last year [17] - Gross profit for recurring service revenue increased 16$19.4 million with a gross margin of 91% [20] Market Data and Key Metrics Changes - The decrease in equipment sales was primarily due to reduced sales from two larger distributors, one of which eliminated all quarter-end purchases to reduce inventory levels [18] - The company has no debt and had $99.2 million in cash and cash equivalents as of December 31, 2024, a 2$97.7 million as of June 30, 2024 [28][29] Company Strategy and Development Direction - The strategic focus is on capitalizing on key industry trends, including the expansion of wireless fire and intrusion alarms and advancements in school security solutions [13] - The company aims to drive sustainable growth and deliver lasting value to shareholders while maintaining disciplined cost management [13][41] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the ability to drive sustainable growth despite challenges, citing strong demand for products and services [12][32] - The company anticipates growth opportunities from government-funded infrastructure projects and increased security funding at state and federal levels [33] Other Important Information - Research and development costs for the quarter increased 22% to $3.1 million, reflecting annual compensation increases and hiring of additional engineers [22] - Selling, general and administrative expenses for the quarter increased 18$10.2 million, primarily due to compensation increases and hiring of additional staff [23] Q&A Session Summary Question: Can you comment on the number of device activations this quarter? - The number of activations was greater by about 1,000 in December compared to previous months, indicating a positive trend despite lower hardware volume [45][46] Question: What is the expected growth rate for recurring service revenue? - The growth rate is expected to dip to around 12% to 12.5% in Q3 but is anticipated to rebound in Q4 due to strong radio sales [49][50] Question: How are tariffs affecting the business? - The company benefits from tariffs affecting competitors who source products from China, as all products are assembled in the Dominican Republic [55][56] Question: What is the breakdown of equipment revenue? - Equipment revenue for the quarter included $7.6 million from intrusion and access and$14.2 million from locking products [67] Question: Are there any adjustments to operating expenses due to slower demand? - Operating expenses will remain unchanged as the company believes it has the right levels of salespeople and engineers [73][74] Question: What are the expectations for equipment revenue in Q3? - Equipment revenue may face challenges due to a large project last year, making year-on-year comparisons difficult [102][103] Question: Will there be more aggressive share repurchases? - The company is considering opportunistic buybacks but also wants to maintain cash for potential acquisitions [106][107]