NAPCO Security Technologies Inc (NSSC) 2015 Q1 法說會逐字稿

Greetings and welcome to the NAPCO Security Technologies first-quarter fiscal 2015 results conference call. At this time, all participants will be in listen-only mode. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Todd Fromer, Managing Partner of KCSA. Thank you, sir. You may begin.

Good morning and thank you all for joining us for today's conference call to discuss NAPCO's financial results for the first quarter ended September 30, 2014. By now all of you should have had the opportunity to review the press release discussing the results. If you have not, please contact KCSA at 212-682-6300 and we will immediately send it to you by either fax or email.

On the call today is Richard Soloway, President and Chairman of NAPCO Security Technologies, and Kevin Buchel, Senior Vice President of Operations and Finance.

Before we begin, 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 may differ materially from those anticipated in such forward-looking statement as a result of certain factors, including those set forth in the Company's filings with the SEC.

With that out of the way, let me turn the call over to Richard Soloway, President and Chairman of NAPCO Security Technologies. Dick, the floor is yours.

Thank you, Todd. Good morning, everyone, and thank you for joining us. This morning NAPCO reported results for the first fiscal quarter of 2015. As those of you have been following the Company already know, the first quarter has historically been our weakest quarter from a sales perspective. While topline growth for the quarter came in relatively flat, it is important to note that the comparable quarter last year included a large custom order from a university customer for our access control products, which positively impacted last year's results that made it tougher to deliver a more attractive year-over-year comparison.

With that in mind, we think the quarter was solid from an overall sales perspective and particularly encouraged with regard to the revenue mix and the effect it is having our gross margin. To better understand the impact of the revenue mix and where NAPCO is going, it is important to understand the strategy we have executed and how that will translate into greater earnings power in 2015 and beyond.

On previous calls I have talked about how we have been consistently investing in new product lines, their development, introductions, and subsequent sales and marketing. We have done this in order to bolster our market position and further build upon the strong NAPCO brand, which has become synonymous with professional grade quality and innovation among the tens of thousands of dealers that sell and install our products. These products have been launched across all of our divisions and are now gaining adoption.

In our door-locking divisions, our door-locking products including our new lockdown products grew 4% in the first quarter as compared to the same period a year ago representing the ninth consecutive quarter of growth of these products.

During the quarter, our access control division won a new large contract from a Midwestern University for our integrated access locking solution as part of the first phase of a campus-wide deployment. Shipments under this new contract will begin in the second quarter of fiscal 2015.

In our alarm division, our iBridge Connected Home product was just selected Best of 2014 by a leading security industry magazine and we are steadily signing up new dealers to our connected home dealer program, which we train and support these dealers with co-op marketing and training programs.

Furthermore, our alarm division is also seeing strong results from other new products. Alarm dealers are currently in a feverish process of replacing 2G GSM radios that communicate alarm signals to central stations as that network sunsets in the year of 2017. As a result, activations of our StarLink 3G and 4G Communicators have grown sequentially by 41% this past quarter. Each of these new products have higher margins or represent recurring revenue streams for NAPCO and while still relatively early in their life cycles, they are performing. For example in the first fiscal quarter, recurring revenue from our alarm segment, which includes new products like iBridge Connected Home and our new StarLink two-way radios increased 82% and grew sequentially by 13%.

While these new products are still in the early adoption stage, the market demand is undeniable and as the numbers suggest, the momentum has been consistently building. This gathering momentum has us excited about our ability to deliver greater shareholder value and we believe this first quarter is beginning to demonstrate the operating leverage in our business and how our strategy will translate into real earnings power going forward.

Since the introduction of our new product lines, we have steadily grown our gross margin. Even in this seasonally slow first quarter, we grew gross margin by 110 basis points to 30.3% from 29.2% a year ago. This increase in gross margin is a direct correlation to a shifting revenue mix where there is a greater contribution of high-margin products and new recovering revenue streams.

As we move into the seasonally stronger quarters of this fiscal year, the operating leverage in our business becomes further amplified as sales grow. This should enable us to further improve our gross margin and in turn drive stronger bottom-line results for our shareholders. We have managed our growth very carefully in order to bring the best quality products to the market, but it takes time for these products to bleed into the market and you are seeing the front-end of that right now.

However what is evident is that even at a relatively small level of contribution from the new product lines, we are seeing a significant increase in margin, which should equate to accelerating profitability this year. And as sales tractions for the new products builds up in 2016 and 2017, we have the potential for much more significant earnings power over the long term.

To some extent, we think the market is missing this trend and frankly that is why we continue to buy back our shares at what we believe is a very good price compared to the intrinsic value we have been creating. To that end, we bought back 107,000 shares of our outstanding common stock this quarter at a weighted average of $4.73 per share and we recently hired a new corporate communications firm, KCSA Strategic Communications, to implement a joint IR and PR campaign with a focus on raising awareness of our new products and introducing NAPCO's opportunity to institutional investors that focus on value as well as growth stocks like ours.

We continue to believe the best use of our excess cash is to buy back our stock because we feel it is undervalued. At this point, buying back our stock at these levels is more attractive than any of the strategies that we could potentially employ with our excess cash and we will continue to make opportunistic purchases in the market where we see fit.

When you consider that we continue to pay down our debt, which is now at its lowest level since our 2008 acquisition of Marks USA, we believe that we have created a compelling value proposition for our shareholders that should improve over time as the revenue mix continues to shift as it has been and we ultimately extinguish debt in the business altogether.

This is a very exciting time for NAPCO. We believe that we have reached an inflection point whereby we can unlock the value of our operational efficiencies and economies of scale. We have made successful product introductions in commercial fire, alarm, access control, and locking that meet unmet needs in the marketplace and we are benefiting from growing market trends in each of these areas.

With our strong national brand and more than 10,000 NAPCO dealers across the globe, we have a broad platform upon which to drive new product growth, which in turn will accelerate profitability and drive value for our shareholders.

I would like now to turn the call over to Kevin to review the quarterly results. Kevin?

Thank you, Dick, and good morning, everybody.

Revenues for the three months ended September 30, 2014 increased 1% to $17.3 million compared to $17.2 million in the same period year ago. The increase in sales in the three months was due primarily to increased sales of the Company's door locking products and intrusion products.

Gross profit for the three months ended September 30, 2014 increased 4.3% to $5.3 million or 30.3% of sales compared to $5 million of 29.2% of sales for the same period a year ago. The increase in gross profit for the three months was primarily due to a continued positive shift in product mix for the Company's door locking products, as well as increased recurring revenue.

Selling, general, and administrative expenses for the quarter were $5 million compared to $4.8 million for the same period last year. Selling, general, and administrative expenses as a percentage of net sales increased to 28.9% for the quarter from 27.8% in the same period a year ago. The increase in dollars for the three months was due primarily from the addition of selling personnel and increased media advertising.

Operating income for the quarter increased by $6000 or 2.5% to $246,000 as compared to an operating income of $240,000 for the same period a year ago. Interest expense for the quarter decreased by $44,000 or 44.4% to $55,000 as compared to $99,000 for the same period a year ago. The decrease in interest expense for the three months ended September 30, 2014 resulted from lower average outstanding debt and lower interest rates during the current period as compared to the same period a year ago.

Net income increased by $36,000 or 29.3% to $159,000 or $0.01 per diluted share as compared to net income of $123,000 or $0.01 per diluted share for the same period last year.

Adjusted EBITDA for the quarter as per the schedule included in today's press release remained relatively constant at $651,000 as compared to $656,000 last year.

At September 30, 2014, the Company had $3.7 million in cash and cash equivalents compared to $2.5 million at June 30, 2014. The Company also had working capital of $33 million at September 30, 2014 compared with working capital of $33.4 million at June 30, 2014.

Paying down our debt remains a top priority for NAPCO. For the quarter, debt net of cash was $7.7 million at September 30, 2014, a decrease of $1.6 million compared to $9.3 million as of June 30, 2014. And debt net of cash has now been reduced by $28.2 million from $35.9 million since we acquired Marks in August of 2008 and the net debt of $7.7 million is the lowest level in eight years.

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

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

(Operator Instructions). Rick Fetterman, Fetterman Investments.

Good morning, everyone. Dick, I wonder if you could comment first regarding the share repurchase that you initiated in this quarter, is there a number of shares or a dollar amount that you have in mind for the next 12 or 24 months?

We announced that we are going to buy up to 1 million shares of stock in a press release a few months ago.

Okay, is that --? Was there any time frame attached to that?

There wasn't, but as of now cash as I say, we bought over 153,000 --? 107,000 shares.

Thank you. My second question is as the residential construction market is picking up, has there been any change in your business mix? It has been around 80/20 I think for the last few years as housing was kind of in the tank. I wonder if there's been any change in that and is there a difference in the profit margins in residential versus commercial equipment?

Regarding profit margins, the commercial is more profitable than residential. But in the residential market we've changed our business model to develop products which have recurring revenue. A lot of the recurring revenue products that are going in go into aftermarket, not new construction. That is the largest part of our residential business. The new construction is usually less expensive systems and so we are focusing and our dealers focus on aftermarket for the most part. But some dealers do have models in the model houses to show what the security systems will do.

Okay, thank you very much. I appreciate it. Good luck and good work.

(Operator Instructions). Walter Ramsley, Walrus Partners.

Thank you. I've got a couple of questions. Pretty good quarter, all things considered. As far as some of the newer things are concerned, the relationship with Control4, is that generating any significant business?

It is the beginning of the relationship. We are the only approved security panel manufacturer with Control4, which has all of the bells and whistles they need to make their audio and video equipment work along with security. We just went to a large conference where we showed our products along with Control4. They have a different dealer base which is very interesting for us, their dealer base. They have thousands of home automation dealers. There's not that much lap to security dealers, overlap to security dealers, so we are in a marketing plan with them and we expect it to reward us well and get our products into these home automation dealers.

Okay, the university out in the Midwest that you referred to, can you describe how large of a deal that is and if there are additional universities above and beyond that that are in the pipeline?

We have a lot of bids out right now with a lot of schools, universities, colleges, that type of thing. So they usually do it in phases. So phase 1, what we're in now, is several hundred thousand dollars worth of product. But there will be additional phases and we expect to have more universities and schools join in on us.

As you know, not only do we do the lockdown products but we do mechanical hardware locks for K-12s and other schools that don't have the larger budgets. But we offer a very comprehensive school lockdown, electronic, digital, and mechanical and it seems to be making a big -- a lot of interest in school administrations.

Okay, the residential intrusion business, last quarter I think it was or maybe even before that one of your biggest customers began to dial back a little bit. Can you give us an update on that situation and how that whole segment is doing?

As we said, the segment is doing well as far as sequential growth of our radio products and of our connected home products. Our base business is holding its own and we are building upon it with connected home products and radios.

The sunset that is taking place in 2017 forces the dealers to have to have some communications device and our StarLink radio is a solution for them, so we expect that the runway is going to be long and very profitable for us as more and more of our radios are being put into these jobs.

Once the radios are put onto the jobs, the recurring revenue continues as long as a subscriber, homeowner, or business owner wants to communicate with the central station, which is for the life of their homes. And it's really the only methodology that is foolproof because copper lines are going away. They are not in very many houses. So the radio is the way to go.

On the connected home front, we want our dealers to add connected home products to a traditional alarm system, both aftermarket and for new jobs when they go out and canvas people. As I said, it's basically all aftermarket and it gives us a very, very nice leg up on more recurring revenue for each of the services that we offer the dealers -- video, locking, and lighting, etc.

So it looks like very, very positive things for us and it's going to go on for many years.

Okay, and the emphasis on the stock repurchases and the debt reduction? Does that indicate you are dialing back the acquisition outlook?

Well, right now we believe that the stock repurchase is the best road for us right now. We are generating a lot of cash. We are paying down our debt very quickly and we have access to additional monies and borrowings with the bank because we did a good job with managing the business through all the hard times that we went through since the great recession of 2008. They believe in us very strongly. So we think we'll use our money to buy back stock. We're going to use our money to reinvest in our business and grow it because there's a lot of growth and room to grow in our business.

Okay, just one last thing. The tax rate, it's on a pretty small amount but was 18.9% in the September quarter. Is that representative of what you expect for the whole year?

Walter, I think we expect for the full year is what it has been, somewhere between 10% and 15% when the smoke clears at the end of the year. So each quarter is a little different. Last year it had been up at about 13%, which is an excellent rate. You've got to figure it's going to end up somewhere between 10% and 15% again.

Sounds good. Thanks for taking the questions.

Thank you. If there are no further questions at this time, I would like to turn the floor back over to management for any further or closing comments.

Okay, thank you, everyone, for participating in today's conference call. As always, should you have any further questions, please feel free to call KCSA, Kevin, or myself. We thank you for your interest and support and we look forward to speaking to all of you again in a few months to discuss NAPCO's fiscal second-quarter 2015 results. Goodbye. Have a great day and a happy holiday season to everyone.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.