• Net Sales: Decreased 9.7% to $42.9 million compared to $47.5 million in the same period last year.
• Recurring Monthly Service Revenue: Increased 15% to $21.2 million from $18.5 million last year.
• Equipment Sales: Decreased 25% to $21.7 million compared to $29 million last year.
• Gross Margin: Improved to 57% from 53% last year.
• Gross Profit for Recurring Service Revenue: Increased 16% to $19.4 million with a gross margin of 91%.
• Gross Profit for Equipment Revenues: Decreased 39% to $5.1 million with a gross margin of 24%.
• Research and Development Costs: Increased 22% to $3.1 million, representing 7% of sales.
• Selling, General, and Administrative Expenses: Increased 18% to $10.2 million, or 24% of net sales.
• Operating Income: Decreased 19% to $11.2 million.
• Net Income: Decreased 17% to $10.5 million, or $0.28 per diluted share.
• Adjusted EBITDA: Decreased 19% to $12.2 million, or $0.33 per share.
• Cash and Cash Equivalents: $99.2 million as of December 31, 2024.
• Cash Provided by Operating Activities: Increased 80% to $13.5 million.
• Capital Expenditures: $1.1 million for the quarter.

• Warning! GuruFocus has detected 7 Warning Sign with ARLP.

Release Date: February 03, 2025

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Recurring revenue increased by 15%, generating a gross margin of 91% and improving total gross margin by 400 basis points to 57%.
• The innovation pipeline is strong, with new offerings set to launch, expanding recurring revenue opportunities.
• NAPCO Security Technologies Inc (NASDAQ:NSSC) has no debt and a strong cash position, with $99.2 million in cash and cash equivalents.
• The company continues to experience strong growth in recurring monthly service revenue, which increased by 18% for the six months ended December 31, 2024.
• NAPCO Security Technologies Inc (NASDAQ:NSSC) is strategically positioned to benefit from key industry trends, including advancements in school security solutions and enterprise access control systems.

Negative Points

• Net sales for the quarter decreased by 9.7% to $42.9 million compared to the same period last year.
• Equipment sales for the quarter decreased by 25% due to reduced sales from two major distributors.
• Operating income for the quarter decreased by 19% compared to the same period last year.
• Research and development costs increased by 22% for the quarter, impacting overall expenses.
• The company experienced a decline in net income by 17% for the quarter, reflecting challenges in maintaining profitability.

Q & A Highlights

Q: Can you comment on the number of device activations this quarter relative to the prior quarter and year-over-year? A: We don't disclose exact numbers, but activations increased by about 1,000 in December compared to November, September, and June. We expect activations to strengthen as there's a delay from radio sales to activation due to distribution and dealer processes.

Q: With recurring service revenue decelerating for three quarters, what do you view as the steady-state growth rate for RSR, and when will it accelerate? A: In Q3, we expect the growth rate to drop to around 12-12.5%. By Q4, we anticipate an increase due to strong radio sales from Q1. We aim for a 20% growth rate, excluding new products like Prima or MVP.

Q: How do the fires in Los Angeles and Pasadena, and the ongoing tariff wars, impact your numbers? A: Tariffs benefit us as our products are assembled in the Dominican Republic, unlike competitors who manufacture in China and Mexico. This makes us more competitive. The fires will lead to rebuilding, primarily residential, but we expect increased demand for commercial fire alarm systems.

Q: Did you provide a breakdown of equipment revenue, and how much variability are you seeing among distributors? A: Intrusion and access revenue was $7.6 million, locking was $14.2 million, and recurring was $21.2 million. The shortfall was due to one distributor reducing inventory for year-end, not due to demand changes. They expect business as usual moving forward.

Q: Given slower demand, are you adjusting operating expenses? A: No adjustments are planned. We continue to invest in sales and engineering to bring products to market faster. Our profitability and cash flow support this strategy.

Q: Can you update us on the ADI relationship? A: The relationship is progressing well, introducing us to more dealers. We aim for ADI to become a 10% equipment sales customer, and their sell-through stats are promising.

Q: Should we expect normal seasonal patterns for equipment revenue in June? A: Historically, Q4 is the strongest quarter. We expect Q3 to improve over Q2, with Q4 being even better, barring unforeseen circumstances.

Q: Should equipment revenue grow year-over-year in Q3? A: Q3 last year included a large New York City project, making comparisons difficult. We expect distributor business to return, but hitting $30 million depends on special projects.

Q: Are you considering more aggressive stock repurchases given current stock performance? A: We approach buybacks opportunistically. We balance buybacks with maintaining cash for potential acquisitions and dividends. Stock buybacks remain part of our strategy.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.