NAPCO Security Tech (NASDAQ: NSSC) reported Q2 EPS of $0.17, $0.06 better than the analyst estimate of $0.11. Revenue for the quarter came in at $27.2 million versus the consensus estimate of $24.17 million.

Financial Highlights:

• Net sales for the quarter were a second quarter record of $27.2 million as compared to $23.2 million last quarter, representing a 17% increase, and $25.8 million for the same period last year, a 5% increase.
• Recurring service revenue for the quarter increased 42% to $8.2 million as compared to $5.8 million for the same period last year. Recurring service revenue now has a prospective annual run rate of $33.8 million based on December 2020 recurring revenues.
• Gross Margin for recurring service revenue for the quarter was 85% as compared to 81% for the same period last year.
• Net income for the quarter was $3.2 million, as compared to net income of $2.3 million last quarter, representing a 38% increase and net income of $3.6 million for the same period a year ago, a 10% decrease. Earnings per share (diluted) for the quarter was $0.17 as compared to earnings per share of $0.13 last quarter and earnings per share of $0.19 for the same period a year ago.
• Adjusted EBITDA* for the quarter was $4.2 million as compared to $3.2 million last quarter, representing an increase of 31%, and $4.7 million for the same period a year ago, an 11% decrease. Adjusted EBITDA* per share for the quarter was $0.23 as compared to $0.17 last quarter and $0.25 for the same period a year ago.
• Cash and cash equivalents were $26.8 million at December 31, 2020 as compared to $18.2 million at June 30, 2020.
• Cash Provided by Operating Activities for the quarter increased 174% to $5.2 million as compared to $1.9 million last year and for the six months increased 86% to $8.9 million as compared to $4.8 million for the same period last year.

Richard Soloway, Chairman and President, commented, "We are very encouraged by our record Q2 sales of $27.2 million as well as the 38% and 31% sequential increases in net income and Adjusted EBITDA*, respectively. Our recurring service revenues have remained very strong, achieving 42% growth for the second quarter as compared to the same period a year ago and now have a prospective annual run rate of $33.8 million based on December 2020 recurring revenues. Gross margin for recurring service revenue also continued to be very strong, increasing to 85% for the quarter, which compared to 81% for the same period last year. The robust growth in recurring service revenue and the associated gross margin continues to be 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 continue to focus our resources on. As the communication paradigm continues to "sunset" away from legacy copper and 3G infrastructure, it continues to create a significant opportunity for our proprietary Starlink radios and alarm systems for both fire and burglary, to generate additional, steady streams of recurring service revenue growth.

Our balance sheet remains very strong with cash increasing to $26.8 million at December 31, 2020 and cash from operations increasing 86% to $8.9 million for the six months ended December 31, 2020 as compared to the same period a year ago.

Before COVID-19, we had 23 consecutive quarters of sales growth and we have now started a new streak. 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 strong 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 same quarter last year, which was pre COVID-19, indicates that security equipment professionals are getting increased access to both commercial and residential installation sites and using more and more of our products.

Our fully integrated technologies for the school security market remain another top priority. The COVID-19 pandemic has 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.

We have recently introduced Air Access®, our new cellular, cloud-hosted access control product line which 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. While still in the very early stages, we expect this product line to provide the Company the opportunity to generate recurring service revenue from each of our divisions: alarms & connectivity, locking and access control."

Mr. Soloway concluded, "As we enter the second half of fiscal 2021, we are well-positioned for the economic recovery we expect to occur. I am proud of our resiliency and ability to execute even during difficult and uncertain times. We remain focused on generating continued strong recurring revenue growth as well as increasing overall gross margins. We will continue our efforts to expand our recurring revenue product offerings into all segments of the Company. Our focus and discipline, paired with strong underlying business fundamentals and market-leading brands, position us well for the balance of fiscal 2021 and beyond."

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