NAPCO Security Tech (NASDAQ: NSSC) reported Q1 EPS of $0.13, $0.03 better than the analyst estimate of $0.10. Revenue for the quarter came in at $23.17 million versus the consensus estimate of $24.12 million.

Financial Highlights:

• First Quarter recurring service revenue, gross margin, net income and adjusted EBITDA* exceeded analysts' expectations.
• The COVID-19 pandemic has presented challenges for security equipment professionals to obtain access to both commercial and residential installation sites. The Company believes this access issue is an industry-wide trend related to COVID-19 and not reflective of the loss of any market share specific to the Company or any long-term negative reflection of the post-pandemic vibrancy of the security industry as a whole. We believe that the COVID-19 pandemic negatively impacted equipment sales, which was the principal reason for the decline in total revenue.
• Net sales for the quarter was $23.2 million as compared to $23.0 million in the 4th quarter of fiscal 2020, and $26.3 million for the same period last year.
• Recurring service revenue for the quarter increased 36% to $7.3 million as compared to $5.4 million for the same period last year. Recurring service revenue now has a prospective annual run rate of $29.7 million based on September 2020 recurring revenues.
• Gross Margin for recurring service revenue for the quarter was 84% as compared to 79% for the same period last year.
• Net income for the quarter was $2.3 million, as compared to net income (before one-time charges) of $1.5 million in the 4th quarter of fiscal 2020 and net income of $3.2 million for the same period a year ago. Earnings per share (diluted) for the quarter was $0.13 as compared to earnings per share (before one-time charges) of $0.08 in the 4th quarter of fiscal 2020 and earnings per share of $0.17 for the same period a year ago.
• Adjusted EBITDA* for the quarter was $3.2 million as compared to $1.5 million in the 4th quarter of fiscal 2020, representing an increase of 115%, and $4.0 million for the same period a year ago. Adjusted EBITDA* earnings per share for the quarter was $0.17 as compared to $0.08 in the 4th quarter of fiscal 2020 and $0.22 for the same period a year ago.
• Cash and cash equivalents were $21.9 million at September 30, 2020 as compared to $18.2 million at June 30, 2020.
• Cash Provided by Operating Activities increased 29% to $3.8 million as compares to $2.9 million for the same period last year.

Richard Soloway, Chairman and President, commented, "Despite the ongoing COVID-19 pandemic, I am pleased to report that because of our efforts and a strong business model, we have generated significantly improved results compared to the fourth quarter of fiscal 2020. Our recurring service revenues have remained strong, achieving 36% growth for the first quarter as compared to the same period a year ago and now have a prospective annual run rate of $29.7 million based on September 2020 recurring revenues. Gross margin for recurring service revenue also continued to be very strong, increasing to 84% for the quarter. The robust growth in recurring service revenue and the associated gross margin is primarily attributable to the fire alarm business, which has not been significantly affected by COVID-19. The fire alarm business is a "mandated business" which means, to receive a certificate of occupancy for a building, a fire alarm system is mandatory and must always function in compliance with fire codes. Because of the essential nature and high profitability of this sector, the commercial fire alarm business continues to be one of the key areas that we focus our resources on.

As the communication paradigm continues to "sunset" away from legacy copper and 3G infrastructure, it creates a significant opportunity for our proprietary Starlink radios and alarm systems for fire and burglary to generate additional, steady streams of recurring service revenue growth.

Before COVID-19, we had 23 consecutive quarters of sales growth. When COVID-19 hit, many dealers experienced limited or no access to buildings and homes to perform commercial or residential security installations. We sell our products primarily through distribution to dealers and we are seeing improved sell-through statistics from several of our largest distributors. Increased sell-through of our products from our distributors to the alarm and locking dealers during the quarter as compared to the previous quarter indicates that security equipment professionals are getting increased access to both commercial and residential installation sites.

Expanding our fully integrated technologies into the education market remains another top priority. The COVID-19 pandemic caused some delay in spending at certain K-12 schools, colleges, and universities. While we have seen postponements of planned security upgrades, we have not seen a significant number of cancellations. On the positive side, it has also presented extended windows for system installations due to the absence of students and teachers. As a result, we are seeing encouraging levels of quotation activity.

As previously mentioned, by the end of the calendar year we plan to introduce access control and locking products with recurring service revenue. Known as Air Access®, our new cellular, cloud-hosted access control product line will allow access control integrators and locking professionals to build a recurring revenue business for themselves, just like our burglar and fire alarm dealers do. As a result, our Company will be generating recurring service revenue from each of our divisions: alarms & connectivity, locking and access control."

Mr. Soloway concluded, "We continue to execute in several key areas: (a) driving sales growth in recurring service revenue while increasing gross margins, (b) investing in exciting new technologies that will expand our recurring service revenue into all segments of the Company, (c) strengthening our balance sheet, which now shows $22 million in Cash, (d) tightly managing our costs and (e) increasing Cash from Operations, which increased 29% to $3.8 million vs. last year's Q1. Despite challenges posed by COVID-19, we remain highly focused on the successful execution of each of these areas and we are confident that these strategies will enable us to deliver strong financial performance in the future."

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