NAPCO Security Tech (NASDAQ: NSSC) reported Q3 EPS of $0.24, $0.07 better than the analyst estimate of $0.17. Revenue for the quarter came in at $28.2 million versus the consensus estimate of $27.68 million.

Financial Highlights:

• Net sales for the quarter was a third quarter record of $28.2 million as compared to $26.2 million for the same period last year, an 8% increase.
• Recurring service revenue for the quarter increased 43% to $8.9 million as compared to $6.2 million for the same period last year. Recurring service revenue now has a prospective annual run rate of $36.7 million based on March 2021 recurring revenues.
• Gross margin for recurring service revenue for the quarter was 86% as compared to 84% for the same period last year.
• Net income for the quarter was a third quarter record of $4.4 million, as compared to net income of $3.6 million for the same period a year ago, a 21% increase. Earnings per share (diluted) for the quarter was $0.24 as compared to earnings per share of $0.20 for the same period a year ago, a 21% increase.
• Adjusted EBITDA* for the quarter was $5.5 million as compared to $4.9 million for the same period a year ago, a 13% increase. Adjusted EBITDA* per share for the quarter was $0.30 as compared to $0.26 for the same period a year ago, a 14% increase.
• Cash and cash equivalents and marketable securities were $34.1 million at March 31, 2021 as compared to $18.2 million at June 30, 2020.
• Cash Provided by Operating Activities for the quarter increased 314% to $7.5 million as compared to $1.8 million last year and for the nine months increased 148% to $16.4 million as compared to $6.6 million last year.

Richard Soloway, Chairman and President, commented, "NAPCO delivered a record-setting performance in Q3 as we generated the highest sales and net income for a Q3 in our Company's history. Our recurring service revenues have remained very strong, achieving 43% growth for the third quarter as compared to the same period a year ago and now have a prospective annual run rate of $36.7 million based on March 2021 recurring revenues. Gross margin for recurring service revenue also continued to be very strong, increasing to 86% for the quarter, which compared to 84% for the same period last year. The robust growth in recurring service revenue and the associated gross margin continues to be primarily attributable to our commercial business, which has not been significantly affected by COVID-19 as commercial buildings must be kept secure. Additionally, 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 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 continues to be very strong with cash and cash equivalents and marketable securities increasing to $34.1 million at March 31, 2021 and cash from operating activities increasing 314% to $7.5 million for the quarter and 148% to $16.4 million the nine months ended March 31, 2021.

When COVID-19 hit, many dealers experienced limited or no access to buildings and homes to perform commercial or residential security installations. We are now seeing promising signs of a recovery and we are poised to capitalize on new business opportunities as they arise. We sell our products primarily through distribution to dealers and we continue to see strong sell-through statistics from several of our largest distributors. While some of our distributors are keeping lower inventory levels than they have in the past, which is a function of the pandemic, 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, indicates that security equipment professionals are getting increased access to both commercial and residential installation sites.

Our fully integrated technologies for the school security market continues to remain a top priority. The COVID-19 pandemic has caused some delay in spending at certain K-12 schools, colleges, and universities, but with the country starting to open up again, including schools at all levels, we are beginning to see more activity. While we have seen postponements of planned security upgrades, we have not seen a significant number of cancellations.

With our country now reopening at an accelerated pace, the results of our investments in R&D should become more evident. In the last eighteen months we have launched several new major products and solutions, including (1) iSecure, our all-inclusive cellular alarm system which offers the dealer the lowest upfront equipment cost in the industry, easy installation, fast programming and a quick return on investment, and (2) 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 both of these products 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, "Our record-setting revenue and profitability in Q3, along with continued strong recurring revenue margins, gives us tremendous momentum as we head into Q4, historically our strongest quarter. I am proud of how the NAPCO team responded to the challenges brought on by COVID-19 and of our resiliency and ability to execute even during difficult and uncertain times. We remain focused on generating continued strong revenue growth as well as increased profitability. We will continue our efforts to expand our recurring revenue product offerings into all segments of the Company. As we look to the balance of fiscal 2021 and beyond, NAPCO is well positioned for long-term growth and profitability expansion."

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