NAPCO SECURITY TECHNOLOGIES, INC Q3 FY2025 earnings call

• Navigated Q3 with resilience despite macroeconomic headwinds, achieving 30% adjusted EBITDA margin and 91% gross margin on service revenues. - Recurring service revenue accounts for 49% of total revenue, with an annualized run rate of ~$89 million. - Strong balance sheet: debt-free, substantial cash reserves, and strong cash flow. - Accelerating innovation with new product pipeline, including offerings introduced at ISC West like cloud-based MVP remote access control platforms and next-gen fire/burglary radios. - Manufacturing facility in Dominican Republic provides competitive advantage with favorable cost structure, logistics, currency stability, and low tariff exposure. - Focus on penetrating markets for LWLocks and Marks locking hardware, and driving growth through new dealers, integrators, and locksmiths.

For the three months ended March 31, 2025, net sales decreased 10.8% to $44 million compared to $49.3 million in the same period last year. Recurring monthly service revenue grew 10.6% in Q3 to $21.6 million, with a 9 months ended March 31, 2025, increase of 15.4% to $63.9 million. Prospective annual run rate of recurring service revenues was approximately $89 million as of April 2025, up from $86 million in January. Equipment sales for the quarter decreased 24.8% to $22.4 million, and 9 months decreased 19.4% to $67 million. Gross profit for Q3 2025 was $25.1 million with a 57.2% margin, down from $26.5 million and 53.8% y/y. Recurring service revenue gross profit for Q3 was $19.6 million with a 91% margin, down from $17.9 million and 92% y/y. Equipment revenue gross profit for Q3 was $5.5 million with a 24.6% margin, down from $8.6 million and 28.8% y/y. R&D expenses for Q3 increased 15.5% to $3.2 million. SG&A expenses for Q3 increased 16.9% to $10.8 million. Operating income for Q3 decreased 23.1% to $11.1 million. Interest and other income for Q3 increased 35.3% to $862,000. Net income for Q3 decreased 23.3% to $10.1 million. Adjusted EBITDA for Q3 was $13.2 million with a 30% margin, down 15.4% y/y. Balance sheet as of March 31, 2025, had $89.3 million in cash and equivalents, no debt, cash from ops $38.9 million for 9 months (up 25.4% y/y), working capital $130 million, current ratio 6.7:1, CapEx $65,000 for Q3, dividends $4.6 million for Q3, stock buybacks $18.8 million for Q3.

• Anticipate continued growth in recurring revenue from StarLink line and new cloud-based offerings. - New products introduced at ISC West expected to contribute to service revenue growth in coming quarters. - Confidence in long-term strategy and business fundamentals despite external challenges, with emphasis on organic growth and innovation.

• Macroeconomic headwinds affecting distributor inventory levels and purchasing behavior. - Uncertainty regarding tariffs and their impact on costs and distribution. - Competition in the security technology market, particularly in residential segments. - Potential impact of economic downturns on end-user demand for security systems.

Q: Talk about the mix of hardware generating recurring services revenue and how new products evolve.

A: Recurring revenue mostly comes from StarLink radios. New products like MVP line and next-gen fire/burglary radios introduced at ISC West are expected to drive service revenue growth.

Q: Discuss sell-through stats and distributor inventory.

A: Sell-through stats for intrusion, alarm lock, and Marks locking are up sequentially. Distributors are cautious but sell-through is good, indicating the need for distributors to maintain inventory to retain dealer business.

Q: Address equipment business weakness and tariffs.

A: Equipment sales down due to distributor inventory and tariff concerns. Napco has an advantage over competitors with Dominican manufacturing and low tariffs.

Q: Comment on OpEx levels and trade show expense.

A: OpEx is elevated due to legal, personnel, and trade show expenses, but expected to remain manageable.

Q: Talk about price increases and ADI relationship.

A: An 8.5% price increase was implemented in April; ADI relationship is progressing well, introducing Napco to large dealers.

Q: Discuss demand sensitivity to economy and cash flow.

A: Security demand is recession-resistant; cash flow is strong, and share repurchases may continue based on market conditions.

Q: Talk about price increase magnitude and seasonality.

A: An 8.5% surcharge was announced in April; Q4 is typically the strongest quarter, expecting normal seasonality.

Q: Address school funding and PRIMA product.

A: School security funding is available; PRIMA product is in development, improving but not yet at expected levels.