NAPCO SECURITY TECHNOLOGIES, INC Q2 FY2025 earnings call

• Mixed Q2 2025 results with recurring revenue up 15% and gross margin improving 400 basis points to 57%.
• Core growth drivers intact; innovation pipeline strong with new offerings launching soon.
• Strategic focus on capitalizing on industry trends like wireless fire/intrusion alarms, recurring revenue services, school security, enterprise access control, and architectural locking products.
• Investor outreach events lined up, including roadshows and trade shows like ISC West.
• Dick highlighted opportunities from governmental infrastructure projects, state/federal security programs, and new products like MVP hosted access system and Prima panel.
• Kevin discussed financial results, including net sales, recurring revenue growth, equipment sales decline, gross profit, R&D and SG&A expenses, and balance sheet details.

Net sales for the quarter decreased 9.7% to $42.9 million, compared to $47.5 million in the same period last year. For the six months ended December 31, 2024, net sales decreased 2.6% to $86.9 million vs. $89.2 million in the prior year. Recurring monthly service revenue increased 15% in Q2 2025 to $21.2 million (vs. $18.5 million prior year) and 18% for the six months to $42.3 million (vs. $35.8 million prior year). Recurring service revenues have a positive prospective annual run rate of approximately $86 million. Equipment sales decreased 25% to $21.7 million in Q2 2025 (vs. $29 million prior year) and 16% to $44.6 million for the six months (vs. $53.4 million prior year). Gross profit for the three months ended December 31, 2024 was $24.4 million with a 57% gross margin (vs. $25 million and 53% prior year). Recurring service revenue gross profit was $19.4 million with a 91% margin in Q2 2025 (vs. $16.7 million and 90% prior year). Equipment revenue gross profit decreased to $5.1 million with a 24% margin in Q2 2025 (vs. $8.4 million and 29% prior year).

• Q3 recurring service revenue growth rate expected to drop to 12%-12.5% from 15% in Q2, then increase in Q4 due to effects of strong radio sales. Anticipates recurring service revenue to grow at least 20% long-term.
• Goal to have adjusted EBITDA margin in the mid-40s; needs recurring revenue to continue growing, equipment revenue to increase by ~10%, and margins on equipment to improve.

• Tariff impact: NAPCO benefits as competitors face tariffs on products from China/Mexico, giving NAPCO competitive edge.
• California fires: Rebuilding slower, but potential for increased fire alarm system demand.
• Distribution uncertainty: Timing issues with distributors affecting equipment sales.

Q: Comment on device activations and impact of lower hardware volume on recurring service revenue growth.

A: Activations up ~1,000 despite lower hardware volume; recurring service revenue growth rate expected to dip in Q3 but rebound in Q4.

Q: Impact of California fires and tariffs on business.

A: Tariffs benefit NAPCO as competitors face costs; California fires may slow rebuilding but could increase fire system demand.

Q: Breakdown of equipment revenue and variability in distributor sell-through.

A: Equipment revenue breakdown: intrusion/access $7.6M, locking $14.2M, recurring $21.2M; distributor issue was a corporate decision, not related to product.

Q: Operating expense adjustments and trade show investment.

A: No immediate OpEx adjustments; will continue investing in trade shows like ISC West.

Q: Long-term goals for equipment vs. recurring revenue and EBITDA margins.

A: Goal to reach 50-50 split in equipment vs. recurring revenue and mid-40s EBITDA margin; needs recurring growth, equipment volume increase, and improved equipment margins.

Q: ADI relationship progress and seasonal patterns for equipment revenue.

A: ADI relationship progressing well, potential for 10% of equipment sales; expect normal seasonal patterns with Q4 typically strongest.

Q: Equipment revenue growth in Q3 and share repurchases.

A: Q3 equipment revenue comp tough due to large NYC project last year; share repurchases done opportunistically, considering cash for acquisitions and dividends.