NAPCO Security Technologies Inc (NSSC) 2018 Q2 法說會逐字稿

Greetings, and welcome to NAPCO Security Technologies, Inc. Second Quarter 2018 Earnings Conference Call. (Operator Instructions) I would now like to turn the conference over to your host, Patrick McKillop. Thank you, you may begin.

Thank you. Hello, my name is Patrick McKillop. I'm the Director of Investor Relations for NAPCO Security. Good morning, and thank you all for joining us for today's conference call to discuss our financial results for our fiscal second quarter 2018.

By now, all of you should have had the opportunity to review the press release discussing the results. If you have not, a copy of the release is available on the Investor Relations section of our website, www.napcosecurity.com.

On the call today is Richard Soloway, President and CEO of NAPCO Security Technologies; and Kevin Buchel, Senior Vice President and CFO.

Before we begin, let me take a moment to read the forward-looking statements. 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 statements as a result of certain factors, including those set forth in the company's filings with the SEC.

During the call, we may also present certain non-GAAP financial measures, such as adjusted EBITDA and certain ratios that are used within these measures. In the press release and on the financial tables issued earlier today, you'll find the definition of these non-GAAP financial measures, a reconciliation of these non-GAAP financial measures with the closest GAAP financial measure as well as a discussion about why we think these non-GAAP financial measures are relevant to our results. These financial measures are included for the benefit of investors and should not be considered instead of GAAP measures.

I will turn the call over to Dick in a moment, but before I do, I just want to mention a few things on the IR front. In terms of upcoming investor outreach, we are marketing in Dallas and New York this week. If either -- if you are in either of those cities and would like to meet, please contact me to arrange a meeting. We expect to meet lots of new investors during this trip and share the bright future we see ahead with us.

Investor outreach is crucial, especially for a small-cap company such as NAPCO, and I'd like to thank all of those folks that assist us in these conferences and marketing trips.

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

Thank you, Patrick. Good morning, everyone, and welcome to our conference call. Thank you for joining us today to discuss our results. Second quarter of fiscal 2018 marked another record revenue performance for NAPCO. This quarter marks the 14th consecutive quarter of increased sales growth for the company.

Our SaaS reoccurring revenues continue to grow at a rapid rate. The annual run rate is now $11.7 million as of December. StarLink Connect, our latest addition to the Communicator series, started its commercial launch in April 2017 and is performing well thus far in the approximate 9 months since the launch.

Our investments in R&D, selling and marketing expenses did not increase significantly during the quarter versus the year ago period. As we have previously mentioned, we believe the current levels of investment are now appropriate and will have a positive impact on future sales growth.

Our balance sheet remains strong with net debt of 0 and healthy cash balances. We are capitalizing on the key industry trends that are impacting our results favorably, such as recurring revenue growth in cellular alarm communication, the smart connected home and the creation of school security and safety products.

Our business strategies are executing well within the aforementioned trends. Driving growth, profits and returns on equity are important to us and our shareholders. Our interests are aligned with our shareholders as senior management of NAPCO owns 38% of the equity.

Before I go into greater detail, I'll now turn the call over to our CFO, Kevin Buchel. He will provide an overview of our financial results, and then I'll be back with more on our strategies and outlook. Kevin?

Thank you, Dick, and good morning, everybody. For the second quarter, net sales increased 2% to $21.1 million, which was a record second quarter performance.

For the 6 months ended December 31, 2017, net sales increased 3% to $42.3 million. The increase in sales for the 3 and 6 months ended December 31, 2017, was due primarily to increased intrusion sales driven by a 52% and 54% increase in SaaS recurring revenues for the quarter and 6 months, respectively, as well as an increase in sales of products from the Access Control division.

As Dick stated before, SaaS recurring revenue now has an annual run rate of $11.7 million based on December 2017 recurring revenue. Gross margin for the second quarter was 32.4% of sales, which was a 50 basis point increase versus the second quarter last year. Gross margin for the 6 months was also 32.4% of sales, which is a 40 basis point increase versus the 6 months last year. The increase in margin for the quarter and 6 months versus a year ago was primarily due to the aforementioned increase in sales.

As Dick mentioned, our R&D and SG&A spend levels did not increase significantly versus the year ago period, and we now believe that we are at the appropriate levels. SG&A cost for Q2 increased $121,000 or 2% year-over-year to $5.7 million and as a percentage of sales remained relatively constant to 26.9% versus 26.8% last year. For the 6 months, SG&A cost increased $205,000 or 1.8% to $11.5 million and as a percentage of sales decreased to 27.2% from 27.6% last year.

Operating income for the second quarter increased 10% to $1.2 million as compared to $1.1 million last year. For the 6 months, operating income increased 25% to $2.2 million as compared to $1.8 million last year.

Income before income taxes for the quarter increased 9% to $1.1 million compared to $1 million for the comparable period last year. For the 6 months, income before income taxes increased 25% to $2.2 million as compared to $1.7 million last year. Income tax expense for the quarter decreased by $278,000 to an income tax benefit of $89,000 compared to an income tax provision of $189,000 last year. Income tax expense for the 6 months decreased by $259,000 to $54,000 as compared to $313,000 for the same period a year ago. The decrease in income tax expense for the 3 and 6 months was primarily due to recent changes in the federal tax code. As a result, the company's effective tax rate was negative 8% for the 3 months ended December 31, 2017, and 2% for the 6 months ended December 31, 2017. This compares to an 18% effective tax rate for the 3 and 6 months ended December 31, 2016.

During the second quarter, net income increased 44% to $1.2 million or $0.07 per diluted share as compared to $857,000 or $0.05 per diluted share last year. And for the 6 months, net income increased 49% to $2.1 million or $0.11 per diluted share as compared to $1.4 million or $0.08 per diluted share last year. The increases in net income for the 3 and 6 months was primarily due to the items previously mentioned.

Adjusted EBITDA for the quarter, as outlined in the schedule included in today's press release, increased 7% to $1.6 million or $0.09 per diluted share to $1.5 million -- compared to $1.5 million or $0.08 per diluted share last year. For the 6 months, adjusted EBITDA increased 20% to $3 million or $0.16 per diluted share as compared to $2.5 million or $0.13 per diluted share last year.

Moving on to the balance sheet. The cash balance at December 31, 2017, was $3.9 million as compared to $3.5 million at June 30, 2017. Our working capital as of December 31, 2017, was $39.6 million as compared with $40.8 million at June 30, 2017. Our current ratio is 5.2:1 at December 31, 2017, as compared with 4.9:1 at June 30, 2017.

And as we previously mentioned, debt net of cash was 0 at December 31, 2017. CapEx was $137,000 during the quarter and for the 6 months was $651,000.

And finally, as we have mentioned previously, we opportunistically buy back our stock, and we reactivated the company stock buyback program at the end of December 2017. And for the quarter, we repurchased 22,600 shares at a weighted average purchase price of $8.53 per share.

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

Kevin, thank you. NAPCO's business has 2 paradigm shifts, which are continuing to have a positive impact. The first being SaaS reoccurring revenue growth and the second is school safety and security.

As Kevin just highlighted during his commentary, the growth of SaaS reoccurring revenue for the company continues at a very strong rate. The drivers for growth of our SaaS reoccurring revenue are coming from demand for alarm communications, which include the connected home category as well as the Internet of Things.

We continue to see significant opportunity in school safety and security market. The total addressable market is very large with 100,000 K-12 and 10,000 colleges and universities in the U.S. needing products to combat the constant threat of violent incidences. It is our expectation that the new spending for schools on security and safety products will continue at a strong rate for the foreseeable future.

Our channel partner relationships are very important to us, and we hold them in the highest regard. Thus, we have our R&D staff working very hard to develop new products that will help them grow and succeed. When we design new products, our goal is for overall appeal and being feature packed for a great end-user experience.

Additionally, we continue to host dealer training throughout the U.S. and participation continues to grow, thus, indicating more interest in NAPCO products from the dealers.

The U.S. alarm market is a multibillion-dollar industry, and we have a long history and a great reputation in the security industry. Recently, we were voted one of the best intrusion brands alongside industry titans, such as Honeywell and Bosch according to a survey from Security Sales & Integration magazine, a top industry publication. It is a great honor and testament for NAPCO as it highlights our ability to compete with the industry giants.

As traditional phone lines continue to disappear, our dealers are looking for solutions to get the alarm signal from the resident to the central station, and we believe the StarLink Connect is the perfect answer for them. Our iBridge smartphone, tablet app, which works in tandem with the Connect Communicator, is the end-user customer interactive services, such as control of the alarm system, lighting, door locks, thermostats and seeing live video all on the end user's smartphone.

Our StarLink Connect Communicator was launched in the spring of 2017 and is doing well in the connected home products and services vertical. This product is used for new alarm jobs as well as upgrading large quantities of existing alarms for new smartphone connected home experience.

The connected home smart home vertical continues to grow, and some homeowners may view the DIY products that we often hear about as a solution. However, according to a recent survey from customer product experience 360, it states that more than 1 in 3 adults experience difficulty setting up or operating a DIY-connected alarm device. Consumers have to take an average of 8 steps to resolve the technical problem and spend as much as 1.5 hours doing so. Professional security dealers such as the ones we have in our network are able to install NAPCO security systems and offer the interactive services to the homeowners while providing the comfort and ease-of-use we all desire.

The unique features of the StarLink Connect are a big attraction for our dealers. It is compatible with many of our competitors' alarm systems and saves time and money while doing installations. Remote troubleshooting is also a great feature, which can help dealers avoid having to send a truck to the resident or small business all while still collecting a service call fee. The market opportunity of a StarLink Connect, we believe, is very large and is applicable for both new installs and retrofits.

Currently, there are approximately 133 million households in the U.S., and only 22 million have alarm systems installed. The potential opportunities are enormous. Beyond the StarLink Connect, we also have other products that are in the early stages of their launch. Specifically, these include the StarLink Dual Path-Fire Communicator, the CA4K access control software and the ArchiTech Series Networx Locks. We continue to believe that the future outlook for these products is very positive.

Currently, in the U.S., we are witnessing the construction of many new high-rise buildings, which includes both residential and commercial tenants. Our ArchiTech Networx Series Locks are being used in these types of buildings, and they are ideal access control solutions. The ArchiTech locks blend advanced wireless access control convenience with any decor and the choice of trims and finishes. The locks have the capability to control one door at a time or across a wireless network, and the battery life is also the highest quality with many, many years even in high traffic areas.

In addition, the use of ArchiTech Networx Series creates cross-selling opportunities, as with use of every ArchiTech on the front door drives the need for matching interior hardware. Recently, we announced that the University of California, Berkeley will be installing the StarLink Dual Path-Fire Communicators around their campus. The university is undertaking this project to replace older copper phone lines, improve fire and life safety first response communications as well as become CA code compliant and overall cost savings. The project is a great example of the potential that the StarLink Dual-Path has going forward. It's a new product and already is -- and will be a great contributor to the growth of our recurring revenue line, which, as you know, continues to grow at a healthy rate for us.

According to our internal research, there are millions of commercial buildings across the U.S., which need to be upgraded from existing plain old telephone lines that they are currently using as many of these major carriers are no longer supporting these lines. A great opportunity exists for the StarLink Dual Path with these buildings, and it gives our dealers an easy solution to the problem.

We are focused on bringing more SaaS reoccurring revenue as it has been a great contributor to the success in the last few years. Our R&D staff is working on new products, which will bring more recurring revenue to our sales. To that end, we are expanding into Access Control as a service with the use of our recently launched CA4K software. CA4K enables NAPCO and its integrators the ability to offer cloud-based services, which will enable end users to eliminate the need for in-house staff to perform many tasks. Many of these tasks can now be outsourced, such as badge creation, attendance report, deleting of former employees in the system. NAPCO and the integrators will be able to share in recurring revenue that is generated from these services.

Now I'd like to spend a moment discussing the other paradigm shift here in NAPCO, which is developing and supplying school security and safety products. As many of you are aware, the violent incidences at many of our nation's schools continue to happen on a regular basis. Recently, there was a shooting incident at a high school in Kentucky, where there were 2 fatalities and 18 injured, a truly tragic event. And also a few days ago, there was a shooting at a middle school in L.A. area. We here at NAPCO are focused on doing our part to help prevent more of these incidences. NAPCO offer solutions that can fit every school budget needs from K-12 all the way to colleges and universities.

During the last few years' conference calls, we have mentioned the potential for this school security funding to be included in the pending U.S. infrastructure bill, which is being driven by the President -- by a letter to the President from the nonprofit organizations, such as PASS. The future of this bill is uncertain, but we'll be watching closely to see what happens. If and when the infrastructure bill passes, our school security wins are continuing to happen and our pipeline continues to build. We announce the wins as we're able to with the school's approval.

Finally, there is one additional item that I would like to share and we think will be beneficial to our business. At the end of 2017, the U.S. tax reform bill was signed by President Trump, and included in the new law is an expansion of tax credits allowable under Section 179 of the tax code. Section 179 of the tax code allows businesses that purchase qualifying equipment, such as fire protection, alarm and security systems, to deduct the full purchase price in the current tax year. Previously, the deductions were required to be depreciated over the 39-year life of the building in which the equipment was installed. The new tax law, we believe, will have a beneficial impact on our non-SaaS recurring revenue business going forward as more commercial building owners decide to take advantage.

We will begin our Q&A session portion of this call in a few minutes. But first, I'd like to give a brief summary.

NAPCO is in a strong position to continue its growth in sales and profits going forward. We believe that our investments in R&D, sales and marketing are beginning to show returns, which will increase throughout the fiscal year 2018 and beyond. NAPCO's senior management maintains a high level of ownership in our equity, approximately 38%, and I would like to thank everyone for their support and for joining us in this exciting future we have.

Our formal remarks are now concluded. We now like to open the call for the Q&A session. Operator, please proceed.

(Operator Instructions) Our first question is from Gary Mobley with The Benchmark Company.

So I had a question about seasonal patterns for the March quarter. If I look back at your past 4 years, in some instances, the March quarter was down sequentially; in some cases, it was up. And just based on your visibility today, how would you call the March quarter product revenue on a seasonal basis?

Gary, the weather typically has an impact. We haven't had a lot of snow this -- so far, January, February. That's a good thing. Cold doesn't usually impact our sales. So we're only 1/3 of the way in, in this quarter. It's a nice mild winter snow-wise, and we'll be okay. That's usually what drives the sales down in a Q3 versus 2. Usually, our sales go up quarter-after-quarter, the 1 being the lowest, the fourth being the best. So we expect the year to get stronger. We're heading into the better months coming up, starting March, April, May, June.

Got you. Okay. Understood. And so I had a question about -- a couple questions about capital allocation. And so you mentioned the share buyback in the quarter. Curious to know how much is authorized under the current plan. And then as well as it relates to the use of cash, could you give us an update on the M&A outlook, whether the M&A pipeline is hot, cold, mild; and related to that, what your borrowing capacity could be under your current lines of credit and whatnot?

Okay. So on the stock buyback, as we say, we watch it opportunistically. We get in there and we buy back. So as of December 31, we had 331,585 more shares to go under the 1 million share buyback that we announced a few years back. In the new period, in the January period, we bought some more back. We'll see how it goes. Again, it's opportunistically. We have the cash to do it, the cash build. We use some for that. And if we're going to do an acquisition, and I'll let Dick talk about the market of acquisition, we would -- we have a lot of banks that are out there dying for us to do a deal. They are hungry for us to do business with them. We did that last time using bank debt. If the deal is big enough, we might do a combination of bank debt and stock. But right now, the market is not that hot, but I'll let Dick talk about what's out there.

All right. Gary, what we see is that -- we're very specific at what we want to fit into the NAPCO group of companies. It has to be a company that makes products for our industry, something that is high volume and repetitive and something that we can build in our Dominican factory and save on the cost structure we have there. It could be in any field of security product that our dealers will use in their pipeline of installation. We don't have any particular drive to do this. We do have lots of products that we're launching and developing, which are maturing as far as sales and profitability. So it's not a top drive for us. But if we find these companies that could fit, and there aren't that many that are -- would fit into that category, but if we find them, we'd like to bring them into our family of companies. We'll figure out the financing later on. The companies should be in the range of more than $20 million in revenue because you get a mature company which has some systems at that time, so -- during this transition period if we take them. But it's not a main drive with us.

Okay. Last question for me, and I'll hop in the queue. Recent Tax Reform Act, could you talk about the impact that will have on your overall tax rate looking forward, the repatriation of cash that you may have overseas, if any, and other considerations as well?

Okay. So it's a very complex bill, as some of you know. Overall, the new tax legislation is helpful to us. There are 2 tax rates. One is based on cash, one is based on profits that you've accumulated over the years. For us, we don't have a lot of cash offshore, so that really had a minor impact on us. For profits that were offshore, you get taxed at a fairly low rate, 8%. You also get a number of years to pay it. On our financials, we had that all accrued. And as a matter of fact, we had more than enough accrued, which is why we have a little bit of a benefit. Going forward, our tax rate last couple -- last year at this time was 18% in the 3 months and 6 months. As I look for the full fiscal year, I'm going to say it will be somewhere like 12% for this year when it's all said and done. And for next year, I'd probably go back to the 18%. We're studying it. There's a lot there. Unlike many companies that are out there, this new tax plan is not bad for us. It's actually pretty good.

(Operator Instructions) Our next question is from Mike Walkley with Canaccord Genuity.

Just wanted to go back to some of your comments about particular -- potential for an infrastructure bill to be a catalyst for school security spending. Can you elaborate a little more on that opportunity? And also, can you talk about the pipeline there? Are there schools kind of waiting for this bill and delaying near-term spending? Or is the overall pipeline quite strong with or without the potential infrastructure bill?

The bill is being supplemented, we believe, with some extra school security equipment, which hopefully will be made mandatory on the bill. You can read about that. It's very complicated, but it's a very necessary thing considering what's going on in the country. And the President and the Congress understands that. The way it works with us is we have integrators all over the country that are trained in our products, and a lot of them are supplying security services, be it fire alarms or burglar alarms or locking to schools already. As the schools get more nervous about what's going on and the frequency is becoming more frequent, they are calling these security dealers and integrators that we have and telling them, "What can you do for us to prevent these problems?" So we have a very wide range of products, and these integrator/dealers recommend different systems depending on the budget. If it's K-12, it's the lower budget item; and colleges and universities can go for the whole enchilada, which is a very sophisticated radio control system. You'll be able to control the incoming active shooters from coming into the buildings or people that should not be in these buildings. So we have 4 product lines and they're at every price point. So the schools that do install them, roughly we publish some of the school names. A lot of schools want it to be private. They don't want people to know, the public to know exactly what they're doing. So a lot of it is not published. But rest assured that we have constant sales through the integrators and the installations in schools, and we publish as many as we can. We see that only a small portion of the schools have had systems put in. So the infrastructure bill is going to be a big boost to protecting students in the schools. And lots of colleges and universities have big endowment, so it would be great if they loosen up the money because we can give lots of protection. And we have the best line of products for that purpose.

Great. And then just on the Dual Path-Fire alarm, very high recurring revenue relative to the StarLink Connect radios. Can you talk maybe about some of the standards, changes in New York and Los Angeles driving business? And do you see other cities adopting these code changes in terms of just driving a faster even uptake rate of the recurring revenue for the Dual Path-Fire radio?

Typically, when we introduce a new product, it takes 9 months to a year for the dealers to adopt it. They have to get used to installing it. They have to get comfortable with it. It's being accelerated. The adoption of this by the phone companies, which really don't want to supply leased lines and telephone service for hardwire and all the systems that are out there that have been installed over the last 50 years, they use, for the most part, the oldest systems, and there's millions of them, the leased lines and phone lines. So because the phone companies don't want to support it, they really want the cellular network to be the main workhorse of communications. The dealers are installing these fire systems that we have, the new dual path. Dual path meaning that there's 2 different methodologies for the way the signal gets from the premises being protected to the central station in a dual path mode. L.A. and New York are very strict and have more code compliance than a lot of other counties around the country. So we made sure that we have all the features that those counties want, so that the adoption rate would be as quick as possible. But what we're doing is a great competitive substitute at a reasonable price for the dealers. The dealers can now get a piece of the action of the monthly that the building owners were paying to Verizon. They'll will be paying some to us and some to the installing company, and still the building owner will save half of what he's been paying. So it's a win-win situation for everybody. And it has many, many years to go, and there's millions of buildings to be re-equipped with communications, which is modern.

Okay. And just building off of that question, with StarLink Connect consumer radio now hitting that kind of 9 months at your dealer channel, when you start to see greater uptake, can you give us any color or any evidence that maybe that accelerating uptake is about to happen? Any kind of data points on how the acceptance and how this has been driving recurring revenue growth?

Well, it's a new product. It's a very exciting product because it retrofits to millions and millions of existing alarms in houses and businesses that are there now and gives the connected home experience of video and control thermostat, et cetera, et cetera. Up to this point, if you wanted to get a modern smartphone-operated alarm and you had an alarm in your home or your business, the dealer would have to rip it out, leave all kinds of holes, make a mess and take days to do it. Now with the StarLink Connect, it goes in, in less than an hour. And now it gives app control to the homeowner or business owner of that alarm system just by installing this radio. The radio is 2 units in 1 small package. The package is about 7 inches by 5 inches by 1 inch. And this package gives connected home connectivity to the consumer smartphone and also cellular connectivity to the central station of the dealer, all within an hour of installation. So now the consumers can be free of problems with the phone lines being broken and not working or not being able to get it serviced and also get the smartphone connectivity that you'd have to install with a new alarm, all in 1 box, very reasonably priced. We have a menu of services that we offer the dealers to sell to the end users. And it's going to be very, very -- it is successful, and it's going to be more successful going forward and just keep adding to our SaaS reoccurring revenue line.

Okay. Last question for me. I'll hand it back to the queue. Kevin, how should we think about the product mix impacting gross margin in the March quarter? And you talked about March through June being better months. So absent of the scale, can you just maybe talk about mix and how we should think about your product gross margin trends for the first half of calendar 2018?

Okay. Mike, so as the sales go up -- many of you have seen our infamous hockey stick slides. As we get into the 20s, the gross margins are going to go up. So we have seen growth so far in the first quarter, the sales were both over $21 million. We expect the sales to go beyond that in Q3. And in Q4 last year, we were $25.8 million. So we really saw the growth on the gross margin. It was close to 40%. Our expectation is once again in Q4 we'll see a dramatic increase above whatever the first 3 quarters are, and that will drive the margins up. And on top of that, we expect the recurring revenue by June 30 to have close, if not better, than a $15 million run rate. And that has close to a 90% gross margin. If you add that on top of the leverage we're going to get from the manufacturing side, and that, we believe, puts us in a pretty good position by June 30. Eventually, the quarters will be much more even than they are. But for those of you that follow us, you know the quarters get stronger, recurring is evening that out somewhat. School security is somewhat evening it out. That's become jobs that are done in the summer, which is our first quarter. It's also jobs done when the kids are out of school, which is December, January. That tends to even things out. But for us now, we still have kind of that seasonality. And the expectation, margins will grow more in Q3 and dramatically more in Q4.

Our next question is from Christopher Hillary with Roubaix Capital.

I just wanted to ask you on the product sales, you had a number of good kind of drivers in place, and then you talked about some aspects of the tax reform being a benefit. Can you give us some more color on how you might see your sales growth accelerate with that in mind? And while you're at it, could you also address if there tends to be some concern out there related to commercial real estate and how that may or may not come into play for your results going forward?

Well, as far as the real estate part of the question, at least where we are in this part of -- we're in the Northeast. We see a lot of construction. We see the real estate being strong. We're commercial 80%, so we don't really get that much affected by residential sales, home sales. It's great when it's working well. But commercial real estate is where we do the best because of 80-20 rule, and we're seeing a lot of growth still. Every city we visit, including the city that we live in, there are cranes going wild here. There's a lot of action here, and we depend on that. So we think the best is still yet to come on the commercial end of our business. We're not seeing weakness in that, and hopefully that won't occur. And the more that, that occurs, you're going to see our locking sales go even higher, our access control sales go higher. So we have a bunch of things going for us. We have that part. And then on the home side, we have the SaaS revenue because a lot of it is driven from the alarm sales, the home alarm sales. That's small business. So for us, the signs are all still moving in the right direction. It's early in the game, and we're not seeing weakness. The only thing we're seeing is with school security, it's slower than we would have liked. We would have liked that that move as rapidly as the need is. But the schools tend to move slow, spend their money slow. But eventually, if there's a bill that drives them, they're going to move quicker. And with the new tax legislation, that should drive a lot of businesses to spend money quicker. Now there's a big tax benefit. You don't have to write off the investment over a lot of years. You can get an immediate deduction. That's going to drive businesses to spend money faster than they've been doing it.

From our point of view, we have a lot of irons in the fire here. So we're not dependent on just one vertical. We do residential alarms, and lots of the alarms out there don't have the connected home experience. And we invented this StarLink Connect, which can upgrade them. So that's a vertical that is going to get stronger as the years go forward. We invented the new fire cellular communicator. That's going to continue to pick up and accelerate in our business, especially in commercial buildings because of the fact that they rely on expensive phone lines. The average phone line system in a commercial building costs hundreds of dollars per month. The StarLink is a more reliable product. And of course, half of that amount to the building owner and other half can be shared between the dealer and NAPCO. And that has -- there's lots of buildings that have to be retrofitted that way. And then school security is going to become more so. We're going to need more and more school security products. And then we have our line of architectural locking products, which is sold for retrofits of office buildings, where they're redoing the office buildings or for new construction in office buildings. So we have that also. So there's a lot of things going on here. And the world always needs more security. And if things get bad, typically, more security is being put in. And if things continue to get better, people want to protect what they've got. So there's a lot of positives to our business, and we're very excited about it.

Okay. And then maybe a quick question on the recurring revenues. Are there any highlights you might share with us about what you expect to be driving the growth there going forward? Is it the same kind of product and just building up the number of endpoints that you have? Or are there other things that you might discuss?

Well, we have -- as I said, 9 months to 12 months it takes for a product to kind of reach to a point where the dealers get very comfortable with it. And a lot of these products that we're talking about, dual fire unit, the StarLink Connect, they haven't reached that point yet, but they have great growth potential from what we've seen. In addition to that, we spend the R&D money on new products, which will have some of the functionality that we're talking about now, which generates recurring revenue, more school lockdown. And we'll see more and more of those products coming out. We're at a certain role right now of developing a lot of those products with the engineers. And we're getting lots of calls from people who have special applications. And we're doing that also with our new CA4K software, which has lots of functionality for entry and exit in buildings and also has the ability to add more recurring revenue from a whole new leg of recurring revenue that we don't have with the alarm business. It's Access Control recurring revenue, and that's going to be very exciting for the future. So we have all those things going on.

(Operator Instructions) Our next question is from Abba Horovitz with OSP capital.

I was wondering, on the recurring revenue side of the business, would it be fair to say that about $1 million per quarter is adding somewhere between $0.02 to $0.03 to your EPS per quarter from where we stand today?

$1 million a quarter...

$1 million extra per quarter will add another -- somewhere between $0.02 to $0.03 -- probably closer to $0.03 per quarter on every incremental $1 million that you capture per quarter.

Yes. I think that's very fair to say based on the gross margin of recurring revenue. There's very, very little cost associated with it. The only cost that we have is buying (inaudible). So yes, that's fair.

So would it be fair to say that as we get through the year -- you had said that you're expecting that we'll be around $15 million of run rate come June. So would it not be fair to say that, at that point, you will actually be -- have an incremental $0.12 EPS per year per share from that point on?

All other things being equal, yes.

(Operator Instructions) Ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing remarks.

Thank you, everyone, for participating in today's conference call. As always, should you have any further questions, please feel free to call Patrick, Kevin or myself for further information. We thank you for your interest and support, and we look forward to speaking to you all again in a few months to discuss NAPCO's fiscal Q3 '18 result. Bye-bye.

Thank you. This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.