NAPCO Security Technologies Inc (NSSC) 2012 Q2 法說會逐字稿

Greetings ladies and gentlemen, and welcome to the NAPCO Security Technologies Incorporated second-quarter financial results conference call.

At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Don Weinberger of Wolfe Axelrod Weinberger Associates. Thank you, Mr. Weinberger, you may begin.

Thank you Rob. Good morning and thank you all for joining us for today's conference call to discuss Napco's financial results for the second quarter and six months ended December 31, 2011.

By now, all of you should have had the opportunity to review the press release discussing the results, but if you have not, please call my office, Wolfe Axelrod Weinberger Associates, at 212-370-4500 and we will immediately send it to you either by fax or e-mail.

On the call with me today is Mr. Richard Soloway, Chairman and Chief Executive Officer of NAPCO Security Technologies, and Mr. Kevin Buchel, Senior VP of Operations and Finance.

Before I ask our host, Dick Soloway, to discuss the particulars of this morning's news, let me take a moment to read the forward-looking statement. This conference call may contain forward-looking statements that involve numerous risks and uncertainties. Actual results, performance, or achievements could differ materially from those anticipated in such forward-looking statements as a result of certain factors, including those set forth in the Company's filings with the Securities and Exchange Commission.

With that out of the way, let me turn the discussion over to Richard Soloway, President and Chief Executive Officer of NAPCO Security Technologies. Dick, please proceed.

Thank you Don. Good morning everyone. Thank you for joining Napco's quarterly conference call to discuss the financial results for the three and six months ending December 31, 2011.

Our second quarter concluded with sales holding steady from last year, while we reduced overhead expenses, increasing our profitability even as we sustained ongoing investment in research and development. Adjusted EBITDA for the second quarter increased 25%, by $290,000 to $1.4 million, as compared to $1.1 million for the same period a year ago. We continue to reduce our outstanding debt, paying down $1.8 million in the first six months of this fiscal year, resulting in reduced interest expense.

Operationally, we continue to make excellent progress. At the moment, Napco is on the verge of reaping the benefits of the last three years of consistent R&D. We don't need additional monies, infrastructure or investments to grow. That is all built in. As we previously expressed, our fixed costs are structured as such so, as the topline grows, our margins expand significantly.

Currently, the stage we are at is to launch the products that are going to drive the topline growth. It is important to understand how the process of launching new products works. We are not in the business of selling impulse items like batteries at the checkout register, but are in the business of selling security products which require a longer selling process.

The new products are very technologically advanced and are not just replacements and updates of previous offerings. We have to educate our dealers through trade shows, multiple sales calls, Internet e-mails, lunch and learns, distributor calendar days; we have to do trainings, get trial and subsequent adoption. This process is now underway with our new products, including the all-in-one GEM-C combo panel which achieves commercial fire and burglary protection in one device.

Our fully wireless networks locking system and our trendsetting products, the Starlink 2 radio and the iSee Video, both of which affords our Company recurring monthly revenue. The response from the many thousands of dealers and distributors in our sales channels on all of the products has been extremely positive.

To sum it up, we have a stable line of legacy products that the dealers will continue to buy to use in their installations, and the new products will be additive to this core business. We believe that it will be worth the long-term efforts that our Company is going through in order to develop and market revolutionary products that will drive our volume logarithmically into the $100 million goal over the next few years.

I would now like to turn this call over to Kevin to review the details of the financial results. Kevin?

Thank you Dick. Good morning everybody.

Sales for the three months ended December 31, 2011 remained relatively constant at $17.617 million as compared to $17.608 million for the same period a year ago. Sales for the six months ended December 31, 2011 increased 3% to $33.820 million as compared to $32.935 million for the same period a year ago. the increase in sales for the six months was primarily due to increased sales in the Company's intrusion products and access control products.

Gross profit for the three months ended December 31, 2011 increased 4% to $4.895 million, or 27.8% of sales, as compared to $4.690 million, or 26.6% of sales, for the same period a year ago. Gross profit for the six months ended December 31, 2011 increased 12% to $9.051 million or 26.8% of sales, as compared to $8.113 million, or 24.6% of sales for the same period a year ago. The increase in gross profit in dollars and as a percentage of sales for the three and six months was primarily due to the Company reducing overhead expenses.

Selling, general and administrative expenses for the three months ended December 31, 2011 decreased by $159,000 to $4 million, or 22.7% of sales, as compared to $4.159 million or 23.6% of sales a year ago. Selling general administrative expenses for the six months ended December 31, 2011 remained constant at $8.298 million, or 24.5% of sales, as compared to $8.299 million or 25.2% of sales a year ago. The decrease in selling, general, and administrative expenses for the three months was due primarily to a major security tradeshow that occurred in the first quarter of fiscal 2012 versus occurring in the second quarter of fiscal 2011.

Operating income for the three months ended December 31, 2011 increased by $364,000, or 69%, to $895,000 as compared to $531,000 for the same quarter a year ago. Operating income for the six months ended December 31, 2011 [increased] by $939,000 to $753,000 as compared to an operating loss of $186,000 for the same period a year ago.

Interest expense net for the three months ended December 31, 2011 decreased by $113,000, or 27%, to $298,000, as compared to $411,000 for the same period a year ago. Interest expense net for the six months ended December 31, 2011 decreased by $403,000, or 40%, to $602,000 as compared to $1.005 million for the same period a year ago. The decrease in interest expense for the three and six months ended December 31, 2011 resulted from lower interest rates charged by the Company's banks as well as the lower outstanding debt in the current period.

Net income increased by $152,000, or 97%, to $309,000, or $0.02 per diluted share, for the three months ended December 31, 2011, as compared to $157,000 or $0.01 per diluted share for the same period a year ago. Net income increased by $1.119 million to $142,000 or $0.01 per diluted share for the six months ended December 31, 2011 as compared to a net loss of $977,000, or a loss of $0.05 per diluted share for the same period a year ago.

With a lot of non-cash and one-time expenses as well as our interest expense, it's important to point out that our adjusted EBITDA as per the schedule included in this morning's release increased in the second quarter by $290,000 or 25% to $1.437 million as compared to adjusted EBITDA of $1.147 million for the same period a year ago. For the six months ended December 31, 2011, adjusted EBITDA increased by $576,000 or 46% to $1.841 million from $1.265 million for the same period a year ago.

Napco's balance sheet remains strong. Cash at the end of the first quarter amounted to approximately $2.3 million. Inventories at December 31 increased by $1.426 million and $25.613 million as compared to $24.187 million at June 30. The increase in inventory is primarily the result of the Company level-loading its production facility in anticipation of the Company's historical sales cycle where more sales occur in the latter quarters relative to the early quarters. Inventories were, however, reduced by $638,000 from the September 30, 2011 level of $26.251 million.

Cash generated by operating activities was approximately $0.4 million for the second quarter of fiscal 2012 as compared to $1 million for the same period a year ago, and it was $1.2 million for the first six months of December 31, 2011 as compared to $1.2 million for the prior year.

Debt net of cash has now been reduced by $16.2 million from $35.9 million to $19.7 million since acquiring Marks USA in August of 2008.

One last note -- our existing revolving line of credit expires in August of 2012. Accordingly, we have classified its balance, which is $8.6 million, as a current liability as of December 31, 2011. As I mentioned last quarter, we plan to refinance or extend this line prior to its expiration date. As a result of the significant amount of debt that we've paid back in the last three years, as well as our increased margins and profits in the last few quarters, we've received a lot of attention from many different banks. We are in the middle of negotiating with several of them, including our present bank, HSBC. We have been with HSBC since 1997. We will initiate the best deal we can for our Company, and it is our belief that such negotiations will be concluded in the very near future.

That concludes my formal remarks. I would now like to return the call back to Dick.

Thanks Kevin. The past few years have been very challenging for all companies. Napco has risen to this challenge and we are stronger, more streamlined and a better company as a reward for our efforts. We saw renewed positive trends during the first half of 2012, specifically in sales, gross profits, adjusted EBITDA, net income, as compared to recent years.

In addition, we have reduced expenses while still bringing new and exciting products to the security marketplace. With continued vigilance, we see a strong upside to the Company's future as economic conditions improve and new revenue sources from the aforementioned new products will have recently begun to introduce -- which we have recently been introduced to security dealers in the marketplace.

As we look ahead, we remain confident in our ability of building Napco into a company that develops the most technologically advanced security solutions for the vast security marketplace. Given the instability and danger in the world today, we can be sure that more security will be in greater demand now and going forward. Our business model is sound, and we believe that Napco's core of products, along with our recently launched lineup of new products, positions us very well for future growth.

This concludes our formal remarks. Kevin and I would like to open the call for questions. Operator, please proceed.

(Operator Instructions). Mark Jordan, Noble Financial.

Good morning gentlemen. First, a question for Kevin. Given it's always good to have competition for banks for your new line, I was wondering if you could -- do you have a sense of what the potential rate savings you might be able to garner as you renegotiate your term loan?

There's a lot of bankers listening into this call. I will say it's going to be better. We are paying right now LIBOR plus 4.5. I know whichever bank we go with it's going to be better than that. We already have proposals that indicate that. I really don't want to disclose it on this call what it is, and we are in the middle of the negotiation. But basically, for every basis point that we improve, that's worth $200,000 to us. So if we improve by one basis, $200,000, two basis points, $400,000, etc. We will improve it and everybody will know it in the near future. I can't tell you exactly when it's going to be done. There is a lot of competition for our business. As I said in my formal remarks, we've done a good job paying down a lot of debt, and because of that, the banks are knocking on the door.

You clearly as a corporation have been investing a lot of time and money in both the Gemini networks, Starlink 2 and iSee Video. I wonder, with each of those four products, could you just say -- give an overview of what you think be addressable market is in terms of size and what's the competition out there in each -- for each of those four products and kind of how do you stack up competitively?

Well, The GEM-C commercial product is very, very unique. It meets the new UL requirement that is out in the field, and many of our dealers want to get into the commercial fire business. We developed the product such that it met the new UL standards and went beyond the new UL standards such that all of the features are integrated into the product and it allows dealers to do commercial fire, to many dealers that have never done commercial fire before. They have been looking to Napco to come out with a big scale commercial fire panel that can do most types of buildings.

Up to this point, Napco has done residential fire and small retail fire, retail stores or strip malls. But this gives the dealers the ability to do all types of fire jobs.

The sale of a GEM-C control panel compared to the typical control panels we sell is about 10 times. So if equipment is worth $250 on a small retail or residential, this is going to be $2500. The reason that is is because this has carbon monoxide, has strobe lights, has giant power supplies so that the device runs on any type of blackout or loss of power, has the new ADA, American Disability Act, strobe light specifications, and a lot of other things. So, it has great potential, and our dealers have been clamoring for it. It took about three years to develop. It took more than a 1.5 year to be in underwriter's laboratory, so it's a major and important product. It's a segment of the security business which, from what we can tell, is for us could amount to a $20 million segment over the next few years of additional business for us because of the need and demand for it. So that's GEM-C.

The radio product that we've introduced, Starlink 2, is a unique product that uses our digital servers that we've built here at Napco. Also in development over the last three years, we did not stop developing these products. We wanted to have a blueprint for growth going forward. As I say, we don't sell impulse items. These are items which dealers have to be trained on. They have to get familiar with, and it takes a little bit of time. But the radio is a very important product today because of the fact that dial-up phone lines, which traditionally were what made alarms communicate to the central office, are going away. Also, households of people are younger today. Most younger households, people under 35 years old, don't even have a dial-up line. Everybody is using a cell phone. So in order to get an alarm to communicate, either you have to install a dial-up line which is dedicated to the alarm system, or you have to use a radio. So, it's the right type of product now. Ours is very, very unique in the fact that it's priced at a point where it becomes a competitive substitute for dial-up, which traditionally was built into all control panels. It has a very far range to it, which means, even in fringe areas everywhere in the country, and you have people that want to protect their property in all different areas, this radio is something you can standardize on; you can remote it away from the control panel, which could be down in a basement or lower area. You know what happens when you try to use a cell phone in these areas, you don't get any service. Our radio could be remoted so you can. This radio is fully uploadable and downloadable, and there are millions of Napco control panels that haven't been installed with our radios that are going to need -- a portion are going to need an upgrade to some type of radio as the dial-up disappears or as they don't want to add -- they don't want to keep paying phone bills.

Also, if you have VoIP service on the site, dial-up doesn't work well, so you need a radio. Then you have the situation where burglars are smarter today. Before they break into a building, they cut the wires so that your alarm is disabled. With the radio you don't have that problem.

So we believe that there are a large number of installations that are going to need our radio, and over the next couple of years, I wouldn't be surprised if we have 100,000 radios in service. We get roughly $5.95 a month to use our server, which picks up the signal over the Internet and sends it to central stations. If you're a retail operation and you need your alarm system to check in for insurance purposes, it will check in the radio for every day, and we charge about $9 for that. So it's an economical radio; we get recurring revenue; the dealers have a new way to send signals to a central station. So that's very exciting, and a great market for us. It's going to add, we believe, a lot of recurring revenue besides making money on selling the radios, and it should be a pretty exciting ride going forward.

Then, on top of that, we have the iSee Video that you mentioned. iSee Video was a dream of the security industry a few years ago but the technology was very, very hard to develop because there's a lot of video technology. We developed a video server which we rent space to our dealers, which allows the consumer to be able to see what's going on in their premise remotely from anywhere in the world on their smartphone. We charge roughly $3 a system for multiple cameras on a site. So you can call into your cameras with a special encrypted code that only you know, and you can get live action, full color video on cameras. It's installed by our dealers. Our dealers are learning about the video. Up to this point dealers, for the last 25 years have been selling burglar alarm monitoring or fire alarm monitoring. The new vertical now, the new world, is video. So they are going to be able to see your home and protect your home with the alarm system and the video. So, it's going to be a large market, we believe. So I think I gave you a little bit of background.

Okay. Just one last one. The networks, the wireless locking?

The networks product is very, very advanced for the locking industry. The locking industry up to this point has been locks which are on doors, and some of those locks are programmed for instance in a school what you have the dormitory doors. You have locks which are program every semester depending on who is going to be in the dorm and who is leaving, or when people change rooms. We have been selling our Trilogy lock line to lots of schools, universities, hospitals. But now the security people are saying, look, we have a lot of your locks. We want to expand the service so we don't have to go through the door and reprogram all of the functions of the lock. We want to change the codes remotely.

So, the network is a wireless system where nodes are put throughout a building. Those nodes talk to locks which are special radio locks that we have developed. Now everything can be done from the security office, the principal's office, anywhere over the Internet. You can change entire lock codes, functionality of the locks, all remotely without going to the door. We have tied that into our access control system, and will be introducing in the next month or so a totally integrated system with access control, burglar fire alarm. We call it Fusion 2. You'll be able to do everything over the network without having to go to the sites.

So it's reinventing the locking industry like it's never been done before, and it's reinventing the access control industry. This product has been in the works for three years also. So during this whole downturn of business, while we rebalanced our Company and made it profitable at lower levels because of the pullback in construction, both residentially and commercially, we look forward to the vision where we could grow the Company with big profitability and new lines of products that nobody has seen before. Now, it's coming to fruition.

Okay. Final question if I may, just for Kevin. Do you have a goal for -- or a range of expected debt reduction that you'll be able to achieve in the second half of the fiscal year?

I think a few calls back, we said we wanted to eliminate all the debt in two years. I don't know if we can do that. We're going to pay down as much debt as we can as the year goes by. We did $1.8 million. I think, by scheduled, we're supposed to do another $1.8 million.

When we have the bigger quarters, which comes in the latter part of this fiscal year, and we are in that now, we generate more cash. As we get that cash, our use of that cash is going to be to pay down debt. I can't tell you how much. We're going to try to do as good a job as we have done over the last three years.

Thank you very much.

Doug Christopher, Crowell, Weedon & Co.

Good morning. Thank you very much. I have a question regarding just a mix of business. If you could discuss a little bit about -- you talked about the four new products, four new lines on the left in a question and answer. But can you talk about the mix, and just kind of what's driving, how the mix contributed to sales this quarter? That's first.

Then second, with regard to what you're seeing on the customer end, are there any new products selling better than others? Any geographies selling better than others, or any types of real estate, buildings or customers that are selling better or kind of ramping up more than others? Just show a little flavor or granularity on the mix of business.

This is Dick. Okay, so we have four different legs to our chair. We are in the burglary and fire alarm manufacturing leg; we are in the locking leg; we are in the access control leg; into the radio controlled security leg now where we believe that the future is radio controlled security, and that's what we're doing. We're developing a lot of radio controlled products.

Some of the products that we discussed, for instance iSee Video, which is basically -- it's a residential and commercial product so that people can view video of their premises, is a new area because video over smartphones hasn't been available. So, it's a pioneering effort that seems to be taking off a lot because some of the super-regionals and nationals are now selling video as part of their security package.

We believe that it has a national appeal. Anybody that wants to see what's going on in their premise is going to be a candidate to buy this product from dealers. We sell it only to the professional alarm dealers, and these dealers are probably monitoring 25 million-plus businesses and residences. They're always looking for ways to make more money. Now that this has matured into a product line that can be sold, it's plug-and-play for the dealers; they can be in and out of a premise in a half-hour. There's no extensive port forwarding on the equipment on a premise. If somebody has WiFi, has the ability onto cable, the video works very, very well. So it has a great potential across the board.

The radio product is a necessity today. It's no longer a product that is an exotic product. We made Starlink 1; it was an exotic product. It was for people that had fancy art collections and museums where they were worried about the lines being cut, but it was high-priced like other radios that are out on the marketplace, and we wanted to make a mainstream product which developed from the tip of it, the start of it to the end of it, from the input terminals to the antenna. We developed a complete radio, and this radio is $99 to the dealer. It's much less than anything else out there. Plus, it uploads and downloads so dealers don't have to drive to a premise to turn off the alarm. If an alarm rings off, change the exit/entrance delay, and it's got a lot of other features reporting exactly where the intrusion or the fire has taken place, and following the criminal around so the central station can report where the criminal is secreted within the building, or the fire has broken out. It's very, very unique from that point of view.

Also, it's not something that is optional today. Most homes, as I said, under 35, you need a radio. If you put VoIP in on your phone system or magicJack, later on after an alarm is put in, the alarm will not communicate properly, traditional alarms and traditional control panel. You need a radio. So it's a necessity as across the board needs. We believe that it's going to be very large for us. It stands out as a unique product.

Our fire panel also, same thing. Dealers, it's for the commercial sector, if you want to get a CO for a building, we see construction picking up a little bit. If you look around some of the cities, you see more cranes up there now, and there's a little more construction. It's helping to pull through fire and it's helping to pull through our locking line. With a little cooperation from the economy on more construction, it is going to help us. But we are not relying just on new construction. The innovations which are a necessity to communicate security situations are products that we've developed over the last three years. So that may give you a little bit of a background on what's going on.

Okay, yes. Then so with regard to that, are you seeing, of the revenues reported this quarter, are you seeing the recurring revenues start to contribute? Is that something that is kind of in that revenue mix versus last year? I guess that's kind of a sense -- I'm trying to get a feel for the numbers.

As the radio came out in December, and it's still in trial, we are seeing a lot of excitement because it does what the dealers want. We have -- we are getting reorders on the radio. So of course it's contributing.

The video also, there's a lot of excitement that is contributing somewhat. This is kind of a ramp up time for us. So we have to have a little bit of patience. Everybody has to understand the amount of training, handholding. You have to make three, four meetings with security dealers to explain to them what it is because people are -- they may be creatures of habit. They are busy during the day; they don't have time. So it's a lot of handholding.

I think that, logarithmically, over the next couple of years, we are going to start to see a very strong growth. I can see it picking up. We're getting a lot of excitement out in the field. We have more excitement than I have seen in many, many years because the last three years we've been selling more or less our core traditional products. But now we are layering on these new technology products, so I think it bodes for a very good future.

So you'd say maybe the newer technologies are still like less than let's say 10% of revenues?

I don't break it down. If you introduce something in December, and this is February, it takes more than three months to do it, but I can tell you that all of these things are starting to contribute to our business. So logarithmically speaking, you start to get the accelerator, multiplier effect as we stretch out six months, one year, two years. I believe that everything should be pretty strong because it's all into the demand and needs of the dealers.

Okay, so we could -- if I just summarize, I'd say the Company is still in an early stage of rollout, and that the newer products, although we've been aware of them, will be really starting to contribute to the mix over the next 6 to 12, 18 months.

Right. It'll ramp -- it's ramping now and there's more hand-to-hand combat. We have about 6000 security dealers that use our products. We've got to get to all these people and we have to get to them multiple times. They need these products because they have issues of not having products like this, or because of what's going on in the phone business, or what people see from others that have started to use it, other dealers are installing it. There are commercials that are out there on video, and items like that. So, it helps make awareness for the dealers so we can drive that awareness into training and then adoption. That's what we are doing right now.

Okay. Thank you.

Brian Gagnon, Gagnon Securities.

Good morning gentlemen. It's Brian and Neil. A couple of questions. If you would step back from the fray and tell us about the attitude of your dealers, how they are thinking about the economy.

The dealers are trying to grow their business. The business was a pullback first in the residential as we know, and then the commercial construction slowed down to a crawl. But the way we're looking at it, we're trying to find products which are not dependent on the construction business, products which are legislated in, into buildings, to get COs, products which are unique to us that we've never had vertical. So the fire panel system is like that.

The radio is important because you have to communicate security signals, and the radio is the way to do it. With economical radio, full reporting is very important. Then video allows the dealer to have some excitement to talk about something new to their customer. I would say if you have the lowest cost alarm system customer probably is not for the video. But the middle level and higher, it's a very exciting, interesting thing. You go to the movies and be able to watch what's going on in your home, you go on vacation, go see what's going on in your home. You want to look at your summer place, you have a summer place, and see that the house keeper is coming in --

I understand the need and nature of the products, but I'm more interested at the moment in how are the dealers feeling? Are they feeling obliant is are they've still feeling very conservative? How are they viewing the economy as they see it from their customers?

Everybody is viewing the economy as kind of apprehensively. But the excitement in our business from these products, as I said, is they are seeing it as exciting, new, and I believe we're going to sell a lot of these products to the dealers because that's their business. They want to grow their business. They are all entrepreneurial type of guys. The average dealer has between one truck and 12 trucks on the road. They've got to feed these families. They are in a good field. It's better than selling jewelry or large yachts. These guys have to go out and get business, so we are giving them new weapons to fight against crime and they are excited about it.

Okay. Can you give us a sense of the dealer inventory levels? What's your sense of where they are so far as inventory is concerned?

Everybody is very inventory conscious today. So Kevin and his team are building according to history and then adding an accelerator depending on the feedback from the distributors.

Most of our products are sold through distributors. So, we are getting our products on the shelves with the distributors. We are getting reorders on the products, and we want to keep the momentum up while we do lunch and learns and counter days with the distributors. There isn't any of these products that we are getting any pushback on. All the products we've introduced are very, very exciting to the dealers.

Okay. I guess what I was looking for is that you have a sense of dealer inventory in general. Is it high? Is it low? Where are they in their overall inventory of your products?

We get inventory reports from some distributors, not all of. With dealers, we don't -- we're selling, again, mostly to distributors. So when it comes to distributors, some guys share their inventory. They'll give us a report. We'll see what they have by product, by branch. A lot of guys don't give it to you. The guys that do give it to us, the inventory is much better, higher, than it was during the worst of the crisis. During the worst of the crisis, guys basically cut their inventory down to nothing, and they wanted us to be a just-in-time manufacturer, which is why sales suffered in the last few years ago. Now it's better. Their levels are increasing. They can afford to carry more; we want them to carry more. To me it's been improving, but we only have a glimpse of certain distributors, not all of them.

On this training that you (inaudible) training and adoption, where do you think you are in that process and how long will it take you to get your dealer distributor network fully trained?

You have the -- we have 6000-plus dealers and you have the early adopters, which are buying now. Then it gets into getting more into the meat of the dealer base. So it's going to be a constant thing, a constant training, and it's going to go on and it's going to accelerate our sales. So I would say our life is training, and counter days and classroom that we have here at Napco, bringing people in. These are technologically advanced products. So you have to learn how to program them, you've got to get accustomed to them, and it's an ongoing thing. It's going to take, as I said, over the next couple of years, ramping up, we are going to get more and more dealers because this is in the sweet spot of what the dealers need as far as product offerings.

Okay, so it's going to take a couple years to get your dealer network fully trained and educated.

That's right, you get some, you ramp up.

As you're introducing these new products, are you seeing any of the competitors bringing on products with features like these?

We haven't seen products like this. A lot of the products take a long time to be through UL. There are products somewhere in the area of what we are doing. But for instance, in our radios that upload and download, we hold the source code of our control panels. So, even if somebody came out with a competitive device, it would have to be a dumb device which doesn't upload and download, because we don't give out our source code on how our panels upload and download. So therefore our radio becomes almost like a monopolistic-type of device. We've priced it right. We make it upload and download. Anything else that's designed by anybody else or comes out by anybody else will not upload and download, will not point out where the location of the fire is, and a lot of the other advanced features of our products. Plus, we have patents that we have filed on a number of these products over the last couple of years that will help us carve out a very nice niche for ourselves.

Kevin, a question for you. Inventory, you have an item on the balance sheet called noncurrent inventories net. What is that?

Many years ago, when our accounting firm was a different firm, they viewed that any inventory that is not scheduled to be used in the next year, in the next 12 months, be shown as long-term. We have lots of different items that potentially won't be used in the next year. A lot of our products have been manufactured for a lot of years. I think we've told you some of our products have the designation magnum, magnum

Yes, right.

Remember that discussion? Magnum PI. That's a show from the '80s. We still make that stuff. So a lot of times, to get the parts for that type of product, you have to buy last time buys because the manufacturer is not going to build it forever. So you get stuff like that that is on the books that we are going to use over the next several years. Because it's not going to be used in the current year, it was designated as long-term. The current accounting firm just goes along with it. I don't think most (multiple speakers)

So this is a base load of older product which occasionally there is demand for now and then and you have to have a product on the shelf.

There's always demand for it. It's we have to buy the raw parts because guys aren't making them anymore. So you got to take a (multiple speakers). As an example, I'll give you an example. Today, in today's world, people are manufacturers. Intel and these other companies are changing their microprocessors. They are obsoleting them not in 10 years, but maybe they obsolete them in five years. So, we develop a lot of software which operates with these microprocessors. The software development to develop an equivalent software package to run a new micro takes six to nine months to do.

So, as a hygiene factor, for us to develop new software to work on a new micro is -- we have to do it. We've decided what we would rather do is work on the future growth of our company and have our engineering spent on new technology rather than rewriting the software just to use a different microprocessor. We're postponing doing that because we want to launch all of these new products, so the engineers have been working on a new designs, and we bought a ton of different micros and other components that will carry us for a couple of years, so we don't have to put our engineers onto the hygiene; they can be working on new products. That's a bunch of this inventory.

Good, thanks very much gentlemen. Thank you.

(Operator Instructions). There are no further questions at this time. I'd like to turn the floor back over to you for closing comments.

Thank you, everyone, for participating in today's call. Questions were enlightening to everybody, and we thank you for making those questions, asking those questions. As always, if you have any other questions, please feel free to call Don, Kevin or myself. We thank you for your interest and support, and look forward to speaking with all of you again in a few months to discuss Napco's third-quarter results of fiscal 2012. Thank you and good-bye.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.