NAPCO Security Technologies Inc (NSSC) 2019 Q1 法說會逐字稿

Greetings, and welcome to the NAPCO Security Technologies Fiscal First Quarter 2019 Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Patrick McKillop. Thank you. You may begin.

Good morning. My name is Patrick McKillop. I'm the Director of Investor Relations here at NAPCO Security. Thank you all for joining us on today's conference call to discuss our financial results for our fiscal first quarter 2019. 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 statement. This conference call may contain forward-looking statements that involve numerous risks and uncertainties. Actually 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 with these measures. In the press release and on the financial tables earlier today, you'll find a definition of these non-GAAP financial measures, a reconciliation of those 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'll turn the call over to Dick in a moment. But before I do, I just wanted to mention a few things on the IR front. In terms of our upcoming investor outreach, we will be marketing in New York City this Wednesday, November 7. Also this later month, we will be attending the benchmark conference in Chicago. And in the first week of December, we will be attending the LD Micro conference in Los Angeles, California. Investor outreach is crucial especially for small-cap companies such as NAPCO, and I'd like to thank 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. The first quarter fiscal 2019 marked another record revenue and profitability performance for NAPCO. Our SaaS recurring revenue continues to grow at a rapid rate. Our recurring revenues annual rate is now $15.6 million as of September. The driver of the growth for recurring revenue continues to be all of our StarLink offerings, which include intrusion, fire and connect. In the first quarter, our R&D and selling and marketing expenses increased slightly versus the year-ago period. It is our belief that we have the appropriate levels of investment for R&D and SG&A currently. Our net income increased by 69% this quarter, thus showing returns on the investments we have made. Our balance sheet remains strong with 0 debt as of this report, and our cash balances continue to grow. We remain focused on capitalizing on key industry trends. These trends include the smart connected home, recurring revenue growth in cellular alarm communications and the creation of school security and safety products. All of these trends are having a positive impact on our results. The key metrics of growth, profits and returns on equity are equally important to us, as shareholders and the management team here at NAPCO. Our business strategy is executing well and our interests are aligned with our shareholders, as senior management at NAPCO owns 38% of the equity.

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

Thank you, Dick, and good morning, everybody. For the first quarter, net sales increased 10% to $23.4 million, which was a record first quarter performance and the 17th consecutive quarter of year-over-year record sales. The increase in sales for the quarter was primarily related to increased sales of our alarm communication products and services, intrusion products and door locking products. Recurring monthly revenue from the alarm division increased 46% for the quarter and recurring revenue now has an annual run rate of $15.6 million based on September 2018 recurring revenue. Gross profit for the first quarter increased 13% to $9.6 million, with a gross margin of 41% as compared to $8.5 million, with a gross margin of 40% last year. The increase in gross profit was primarily due to the increase in sales. I would like to remind you that the research and development expenses are now shown separately as part of our operating expenses and are no longer included in cost of goods sold. We believe this is a clearer presentation and we've made this reclassification for all prior periods as well. As Dick mentioned, our R&D and SG&A expenses for the year grew slightly versus the year-ago period. R&D expenses for the first quarter increased 9% to $1.7 million or 7.5% of sales compared to $1.6 million or 7.6% of sales last year. SG&A expenses for Q1 increased 4% year-over-year to $6.1 million or 26% of sales as compared to $5.8 million or 27% of sales last year. The increase in R&D was due to additional personnel and salary increases and SG&A increased primarily due to higher commissions and freight driven by higher sales levels. Operating income for the first quarter increased 66% to $1.8 million as compared to $1.1 million last year. Income tax expense for the quarter increased by $105,000 to $248,000 as compared to $143,000 last year. The company's effective tax rate was 14% for fiscal Q1 '19 as compared to 14% fiscal Q1 '18. Net income for the first quarter increased 69% to a first quarter record of $1.5 million or $0.08 per diluted share as compared to $890,000 or $0.05 per diluted share last year. The change in net income for the quarter 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 47% to $2.1 million or $0.11 per diluted share compared to $1.4 million or $0.08 per diluted share last year. Moving on to the balance sheet. The cash balance at September 30, 2018, was $7.5 million as compared to $5.3 million at June 30, 2018. Our working capital as of September 30, 2018, was $43.7 million as compared to -- with $44.3 million at June 30, 2018. And our current ratio was 5.5:1 at September 30, 2018, as compared with 5.7:1 at June 30, 2018. And as Dick mentioned, our debt remains at 0 at September 30, 2018. CapEx was $424,000 during the quarter and was $514,000 during the year-ago period. Our stock buyback remains open and we make purchases opportunistically as we have a strong belief that the future remains bright for NAPCO. We brought back 39,163 shares during the quarter ended September 30, 2018. That concludes my formal remarks, and I would now like to return the call back to Dick.

Kevin, thank you. We continue to be excited about the 2 paradigm shifts in our business, which are the addition of SaaS recurring revenue and school security. These 2 areas are contributing to the growth of our business, and we expect that trend to continue in the future. Earlier during the financial results portion of this call, we highlighted the strong growth of our recurring revenue line. We continue to see demand for recurring revenue products coming from alarm communications, including fire, the growth of the smart home category and the expansion of the Internet of Things theme. School security remains top of mind with many people, and we continue to believe that there is a significant opportunity in this vertical. Many schools do not have physical security in place despite all the continued violence we hear about on a regular basis. It is our estimation that this market is very large with over 100,000 K-12s and 10,000 colleges and universities in the U.S. We believe that spending on school security will increase as the legislative environment remains favorable with lots of action and funding being directed to this important topic. Our outlook remains strong for this business line as evidenced by the number of recent press releases we have issued. I will talk more about school security in a couple of minutes. We continue to expect the professional monitoring market to grow over the next few years as the demand for connected systems over traditional systems continues. Developing new innovative products that are attractive to end-users will help our dealers grow and succeed as part of our strategy. NAPCO has a top position in the market as evidenced by a survey in Security Sales & Integration magazine that was published a few months ago, which places us as one of the best intrusion brands among industry titans such as Bosch and Honeywell. We believe that we are positioned well to be part of the growth in this U.S. alarm market with legacy products and new products that our staff of engineers continues to develop. Currently, we have the most extensive line of alarm communication in the industry with the StarLink line. During fiscal Q4, we launched the StarLink LTE version fire and intrusion alarm communicators, which utilize the most advanced technology on the market. The StarLink communicators allow for the transmission of alarm signal over the cellular networks in lieu of the traditional phone lines that have been used for many years. About 18 months ago, we introduced the StarLink Connect, which is a great solution for the residential and small business market. The StarLink Connect won 2 prestigious awards at the ISC West Trade Show, which is the largest trade show in the security industry. The connect communicator is feature packed and gives the end user the ability to receive and upgrade their alarm system without the need to remove existing hardware that is already installed in their residence or small business. Demand for smart home systems continues to grow and our StarLink Connect is a perfect solution for end-users and dealers alike. Interactive services, such as the control of the alarm system, lighting, door locks, thermostats and seeing live video are the future of the security industry; and our iBridge smartphone, tablet app, which works in tandem with the connect communicator delivers all of those features to the end user. The StarLink Connect is compatible with many of the major competitive brands and installation type of the connect is a quick process, which our dealers love as they can schedule more jobs during the workday. Additionally, being able to troubleshoot remotely is a great feature as it removes the need to send a truck to the site, plus the dealers can still collect a service call fee. Also in this morning's press release, we announced the latest addition to our smart home offering, the video doorbell. Recently, the popularity of the video doorbell has grown rapidly, and now NAPCO is adding this to our offering, which is something dealers have been asking us for. Dealers will like the fact that it can be integrated with both NAPCO as well as other competitors' security systems. The video doorbell will also add to our recurring revenue, which as you know, has been growing at a very healthy rate. The market opportunity for the StarLink Connect and our newly introduced video doorbell is large, with approximately 133 million homes in the U.S. with just 22% of the market being penetrated. While we often hear about DIY products in the market, it's been our experience, they're not having a major effect on the professionally installed business and no impact at all in the commercial security segment. Our company is 80% commercial. Many homeowners that initially installed a DIY product end up tearing it out and replacing it with a professionally installed product. It is our belief that we are in the early innings of connected home growth and the best is yet to come. Next, I want to discuss some of the other products in our portfolio that are adding to our growth. Recently, we launched the innovative Firelink, all-in-one alarm control panel with a built-in cellular StarLink powered alarm communicator. The installation and cost savings dealers will get from this product will be a big attraction, and we believe the Firelink can become a strong contributor to our RMR as well. Other products I'd like to highlight, include the StarLink Dual Path-Fire communicator, CA4K Access Control software, ArchiTech and Networx wireless locks. As we continue to witness robust pace of new construction high-rise buildings in the U.S., we believe this bodes well for our business. Many of these new buildings are multiuse residential and commercial space and will require fire communications, alarm access control and modern wireless locks. Of course, there are many opportunities for these products to be used in retrofit projects as well. Our StarLink Dual Path Communicator is performing well, as we have uncovered many new dealers that are dedicated to the fire business and they are enthusiastic about this product. According to our internal research, there are millions of commercial buildings across the U.S., which will need to be upgraded from the existing plain old telephone lines they are currently using, as many of the major carriers are no longer supporting these lines. ArchiTech locks encompass wireless access control in the form of a architectural pleasing lock, which can be customized in a very variety of finishes and hardware options. Our Networx locks are a popular option for many commercial applications, including schools, airports and offices. These locks are wireless and have unique pin codes for each user, allowing for creation of auto reports, such as attendance or list created during emergencies. Our R&D team continues to work on the Access Control as a service solution. This solution would include the use of our CA4K software, will enable NAPCO and its integrators to offer cloud-based services to end users. These cloud-based services will be a great attraction to commercial building owners, as they will be able to outsource many of the in-house functions, creating cost savings to them. Services such as employee badge creation, attendance reports, the addition or deletion of employees from the database will now be handled through our solution. NAPCO and our integrators will share the recurring revenue that is generated by providing the outsourced services. SaaS recurring revenue has been a great contributor to our success during the last few years. Therefore, our R&D team of over 50 engineers are hard at work, developing more products that can bring more recurring revenue to us. Now I'd like to spend a few minutes on the very important topic of school security and safety. As you all know, earlier this year we witnessed 2 horrific tragedies at Marjory Stoneman Douglas High School in Florida and Santa Fe High School in Texas. The sadness from these tragedies is still with us today and constantly reminds of the importance of our work here at NAPCO. We remain dedicated to providing solutions and products that the schools so desperately need. The vast majority of schools in the U.S. have little or no security in place, thus they remain vulnerable to violent incidences. Going all the way back to 2012 with the Sandy Hook shooting, we, like many of you, would have expected more change to have taken place at this point. The good news is that change is starting to happen right now. During our last earnings call, we talked about the many examples of legislation that have been approved since the tragic events in Florida and Texas. As a reminder, in 2018, we have seen 26 states pass legislation directed at school security. Some examples include Florida, $500 million; Wisconsin, $100 million; Maryland, $125 million plus $50 million annually going forward. Also the Governor of Massachusetts has proposed $72 million in funding. In total, states have poured almost $1 billion into school security since February. It's our expectation that this trend of funding school security will continue with more states passing legislation in the near future. In fact, during the upcoming election tomorrow, voters in Arizona, Colorado, Idaho, Mississippi and Utah will be asked to provide funding for physical security upgrades in their schools. A couple of examples include, in Mississippi, the Harrison County School District requesting $55 million and the Balsz Elementary School District in Arizona requesting $35 million. The demand for upgrading school security is significantly increasing. I would note, for example, in the State of Michigan, hundreds of school districts have requested grants, and these funding requests are triple what the state has to offer. Our solutions include options for all schools whether a K-12 with a small budget or a large University with a large endowment fund that can afford the top-tier solution. We have issued a number of press releases recently about school security projects and have been completed using our products. These reinforce our outlook for growth to continue in this area. The pipeline for school security projects looks robust and we will continue to announce new wins when we can as we need to receive approval from the schools prior to doing so. Lastly, we continue to work on our cost-savings initiative for component sourcing. Earlier this year, myself and the team of NAPCO employees visited Asia and identified sources for these components. We have begun the process of qualify and quality control of these components, which will be phased into production at our Dominican Republic manufacturing facility. We expect to see significant cost savings from this initiative over time, which will help our bottom line for years to come. We will begin our question-and-answer session portion of this call in a few minutes. But first, I would like to give a brief summary. Our first fiscal quarter 2018 was a very successful record-breaking quarter for us and we continue to grow the company and deliver profits. Our shareholders have been rewarded with very healthy returns and stock performance this year. NAPCO is in a strong position of growth in sales and profits going forward. We believe that our investments in R&D sales and marketing are beginning to show returns and we are excited about the rest of fiscal 2019 and beyond. NAPCO's senior management retains 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 would like to open the call for a Q&A session. Operator, please proceed.

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

Want to start by asking about the building access products, I guess, specifically Continental Access and the related door locks that would sell with those systems. Just given the increased funding for school security that you just spoke about, Dick, have you guys seen any tangible evidence in increased RFP activity or more specifically backlog, can you share any metrics on that front?

We're bidding more and more jobs, this is gestation period on the jobs. It takes a while because you have to have administration and architecture and the integrator and us, but there are a lot of jobs. If you could take a look at the press releases we put out recently, they're more frequently -- more frequent than in the past because of the fact that we are winning more jobs. But there are a lot of jobs out there yet to be brought in-house, some of them we can talk about, some we can't. Because lots of schools don't want -- mention that they put in this type of equipment. But it's a very important and vibrant part of our business. It's going to grow for years and years. Since Florida, everything has started to really jump forward. And we're excited about the prospects, protecting the kids and the faculty.

Okay. I guess, what it stands out to me in the quarter that you just reported was the acceleration of product revenue. And it's nice to see that growing year-over-year and showing a little bit more seasonal strength in the first quarter. And related seasonality, if I'm not mistaken, the second quarter -- your second fiscal quarter on product revenue front generally trends similar to the absolute dollar amount in Q1. So should we think about that Q1 product revenue you generated $19.6 million as being the base of which the second quarter revenue can maybe trend flat from?

Gary, the second quarter usually is more than the first quarter. Usually, our quarters, Q1 is the weakest and $1.5 million net income not so weak, but that's how it used to be. Q1 the weakest, Q2 and Q3 are better, Q4 the best. So the hardware sales this quarter were up 5.4%. We believe we can get to high singles, whether we get there in Q2, whether it's 3, remains to be seen. But we're optimistic. We see more school jobs coming through, that helps the hardware sales. There are some other things we're doing in some of the other divisions. So we're upbeat we can be better in Q2 and Q3. And as the year goes by, eventually get to high singles and low doubles at some point. That's the goal, to utilize the Dominican factory, get more leverage out of it and overall have higher margins.

Okay. Just to focus on one negative, that is the inventory. It looks like it was up sequentially despite well, at least the inventory metrics deteriorated, the turns and days and inventory and what not. And so could you speak to that, what the sources were?

Right. So Q1 historically, traditionally is going to be more than Q4. Q4 is a big quarter. Q1, we start the new fiscal year and we level load the factory. That means we build evenly throughout the year. And that means the inventory levels are going to grow, and then by the time the fiscal year is over, it comes way down. And so it's similar level to last year's Q1 and that's important. But it will always be more than the Q4 level. So we keep that in mind.

Yes. We like to level load the factory because of the fact that it’s consistent production and it bodes well for good quality. And then as Kevin just said, they have to rebuild up this level by the fourth quarter. It all moves out -- it moves up aggressively in the fourth. It's out. We go back to rebuild again for the next first quarter. So that's how we run the business. And the deal is like the quality. They put the NAPCO branded products, Alarm Lock, Continental or Marks in and it stays and works on and on and on, better than almost everything on the market.

Okay. Last question for me and I'll hop in the queue. And RSR gross margin was improved. It looks like it improved about 400 basis points from where you concluded last fiscal year. Is that just noise in the number or you really seeing some pricing power as it relates to buying bulk data minutes?

The margins are helped a lot when you're selling more commercial radios -- fire radios. I always joke the fire radios are on fire. And they're doing really well and that helps the margins. And so as that trend continues, and we think it will, margins may tick up more as we go forward. But that's what I would attribute it to.

Our next question is from Mike Walkley from Canaccord Genuity.

Just building on from Gary's questions. With the revenue growth mid-single digits to maybe higher on hardware combined with your sourcing and cost-reduction programs, how do you guys thinking about product gross margin trends over the near term and longer term, where you think that can get to it the business scales and take some cost out of the model?

The margins will get stronger as our hardware sales grow. We see evidence of it in the fourth quarter, the strongest quarter. Now we're seeing some evidence even in the first quarter. It's a very important part of the equation as we've talked about it. So we get to the point where we're having $25 million hardware quarters every quarter, then you'll really see tremendous gross margin leverage. We're not quite there yet. This quarter was close to $20 million. But that's our goal to get there in a couple of few years to have $25 million hardware quarters. That gives us Dominican Republic factory leverage. On top of that, more school jobs we sell, a lot of them have very high margins. If they're putting in a sophisticated system at a University, those -- the margins on those jobs could be north of 40%, 45%, 50% depends on how deep they go to schools. But those are high-margin jobs for us. So for us, the outlook is very good. It will get stronger as our revenue goes up.

Okay. And just building on up that with a stronger year-over-year hardware growth and your goal to get to high single digits and double digits over time. Can you kind of rank order some of the growth drivers? Is it ongoing schools one of the bigger opportunities? Is it some new products layering on to the model like doorbell product, just if you could help us think about key things that are going to take the hardware revenue to a new level of growth than what it's been the last couple of years?

The locking business is the greatest part of our business. And we expect between schoolwork, retrofit construction, new construction and the innovations in locking business, both stand-alone and radio control locking and all the additional functionality, we're going to add to those product lines that, that is going to be -- it's strongest now, it's going to get stronger. We're also adding lots of capability to our CA4K Continental Access. We're going to make it an RMR generating product line in addition to selling hardware, and that should bring the dealers into buying more of the hardware. The alarm business, we've come out with all kinds of StarLinks and the fire StarLinks, and now we've introduced integrated fire radios in fire control panels, very profitable area and should be -- it bodes really well for growth, both in the hardware as well as the recurring. We like to have a lot of iron in the fire. We don't want to be a one trick pony. There are companies out there that maybe just specialize in residential, we like to be commercial and all the facets of the commercial business, fire, locking, access. And also we have our residential portion, which -- with StarLink connect, it's very good for getting recurring revenue and allowing the dealer to expand his recurring revenue base by offering the consumer more services than just monitoring the alarm. So there's a lot of good things going on over here.

Okay. Last question for me and I'll pass it on. Just building off that last answer, what's the feedback just from your distribution channel in terms of the competitiveness of your portfolio and what's the cadence of maybe some new products we should expect in the back half of the year?

Well, between our locking distributors, alarm distributors and the access distribution, we have more than 300 outlets. And we're -- we have the only integrated platform where all the products work together, locks and alarms and access all in the same network without mixing of the brands. And that bodes well for the distribution because they can sell more products and it's all NAPCO integrated products, rather than mixing brands that don't work well together, like, if you say a situation like that would be an Apple product and a Windows product, they don't work that well together. But with the NAPCO brands, the distributors can make more money and offer the dealers ability to go into larger jobs. They can go to hospitals and high-rise buildings and cities and military, they can do a lot of different things. We do have a 1,000 SKUs. It's a gigantic erector set of components that all plays well together, and they could do any job using NAPCO. So that's our strategy.

Our next question is from Joseph Osha from JMP Securities.

Following a little on the previous question, if I look at your home automation IoT slide and listen to your comments about the video doorbell there, I mean, there's some interesting opportunities here as your residential market flips to smart home. What outside of the video doorbell on the existing portfolio of services? What other types of products or services do you think you can plug into this franchise for the residential business? And then I have a follow up.

Okay. So right now we offer the dealer the following services they can sell to this end user: Live video on the smartphone; alarm, turning it on, turning it off; door locks, turning them on and turning them off on a smartphone; lighting, the same. Any type of product that has Z-Wave capability works on our iBridge. And more and more manufacturers like Leviton and Honeywell are offering more and more products, which are the accessories that operate on our iBridge. And we have apps and the dealer will set the consumer up depending on what consumer wants as functionality off of the smartphone, and the dealer will be able to bill higher rates than normal type of monitoring, which is $25 to $30 a month. The dealers can get much higher amounts of money from the consumer and we get our piece of the action because we have a menu of what these different functions will cost the dealer and he marks it up. So that's how it works. And it's also helped a lot by our StarLink Connect, which is the only device, where you can put it onto an existing alarm system of any brand and control the functionality of that alarm system. That's what the dealer will do. He can service other brands because you can upload and download through the StarLink Connect, and that StarLink Connect takes and modernizes existing alarms and makes it app functionable of the smartphone. So it's a one hour install to do that type of work. So the millions and millions, we think 25 million alarms can be upgraded for the people that want to be upgraded. And that's an exciting prospect for the company.

So it sounds to me like what you're saying then is given where Z-Wave is positioned and you mentioned Leviton and Honeywell, I guess, now to be -- soon to be Resideo that you don't feel like between yourself and the other hardware vendors there are any big product gaps at this point that your install partners can put their hands on what they need to?

Right, they can use any brand of service that's Z-Wave or lighting accessory that's Z-Wave because our StarLink -- our iBridge works with those products.

Okay. Great. And then shifting gears for a bit. You're all in the enviable position of having manufacturing in this hemisphere, there are a lot of other people trying to get that done. I'm curious as to whether your procurement people are telling you that there've been any challenges or any shifts in how your operations given how many people are trying to move production back to this hemisphere from China?

All right. We're experienced with Dominican operation. We do some of the manufacturing here in Amityville and our startup manufacturing. And then we do have mass manufacturing at Dominican factory, been down there for more than 20 years. So we understand the ropes and we have a nice group of workers down there that are excited to work on technology products. There are hundreds of American companies down there and it's a good place to be because we can go back and forth, we can get finished goods by water in a week. So that was our choice and it's working out well.

So you're not seeing any additional component tightness or any of that as everybody else comes stampeding back this direction?

What we're seeing is that it's a little bit more maintenance for us than in the past years because the manufacturers that make microchips and other parts discontinue those parts more frequently. You don't get a 10-year cycle. So it means we have to go back to the drawing board and design our products, and when we redesign the products using a new microchip, we add more functionality of what the dealers are telling us they would like to have and that makes it exciting to sell more hardware and more recurring revenue.

Our next question is from Josh Goldberg from G2.

So just a couple of questions for people like us who're little bit newer to the story. Can you just describe the SaaS service revenue in terms of what exactly does it mean by being SaaS, I know it's a service business, but do have some sort of technology, is it in your own infrastructure? And I think that you've made it clear that, although it's growing nicely at 46% a year and over 40% now for, I think, 6 quarters, your confidence is that this will be a $40 million run rate by 2021. And I just wanted to kind of help people understand what you have there that gives you such confidence that you can see north of 40% growth for the foreseeable future?

Well, what we did is we built a very large server room, which can handle $50 million worth of recurring revenue functionality, and we're coming out with a whole bunch of products that we've already released plus new products, which the dealers enroll onto this network operating center, it's like a giant server cloud and the dealers pay us every month to utilize this network operating center. With all the new products and the fact that the phone company is not servicing copper anymore and all the great home automation functionality you can get out of our iBridge products, we see the future very bright. And that's why we made the investment into building out this NOC to handle this type of volume. So the new products will give us hardware...

Just help people understand, if you don't mind, Rich, like, how much should people get that you're -- like what are you charging per month for this service from the dealers, and roughly like how many customers you're thinking of signed up, what's the opportunity in front of you?

Well, we charge depending on the type of device that's enrolled, anywhere from $5 to $25 a month on these devices. We don't break this down...

This is the StarLink Connect, right?

No, this is -- we have Connect, we have iBridge and we have the fire control panels and we have -- and video service. All these different things that the dealers select to sell to their end user customers, we have this menu of fees, and depending how deep the customer wants to get in on the app, if he wants everything controlled, locks, alarm and see live video and turn his lights on or off, have a path of light into the house when you come home or you could turn it on from the car, we supply all those services with this menu. And those -- that's how we get $5 to $25 on the cellular communication that the alarm dealer will use for his central station. We also charge money for each app that the dealer engages for the consumer. So it's a combination of all those things. And that's how we get all of this. So the future is all about the cellphone, we know that, more and more about the cellphone, and we have engineers that develop all kinds of products using the cellphone and that's why we've made the investment into this NOC.

So if you're doing around $15 million, $16 million now, and let's say your average is around $10, $12 a month, which is about $120 a year, you only have about 10,000 or 15,000 customers so far of this service, right?

Well, if you do the math that way, yes. And remember, as we've said, we're in the early innings in this. So it's very exciting...

Just want to make sure, I'm in the right point, it's around 10,000 and you're talking about an addressable market of $25 million?

Yes. We don't break it out, but your math is reasonable.

Okay. And the confidence that you have about getting to this 40% run rate is because your dealers have embraced this product and instead of having a competitive product with other dealers, they're really going to use you to drive this product going forward?

We have more than one product and the dealers are clamoring to get more recurring revenue for themselves, and the way they're doing it is by offering all the functionality that consumers want today, and we have that functionality. So as they upsell their customers or they sell a new customer they offer this, and we give seamless functionality of high quality to the dealers. And they now can monitor and allow the consumer to use the apps to control the functions of the -- inside their home.

So who else competes with you on this, like, who you think are the biggest disrupters in this space? Obviously, you got to believe that ADT and others have products building or might have them going forward?

Well, ADT is a dealer. They're a large dealer. We sell ADT. So you have many dealers. You have -- we have about 10,000 dealers that use our products either exclusively or they cherry pick the line. And the universe of dealers is 30,000. So we want to pick up more and more dealers, which we are doing with new products. And we don't have one SaaS product, we have more than a dozen SaaS products, I mean...

Sure. My question is like a company like ADT, that's a dealer, do they offer these types of products with competing, recurring service revenue products as well, do you compete at ADT with other products?

ADT has some of the products that we have and we have products that ADT doesn't have, especially...

So who else does ADT sell is what I'm saying. If you -- they're not selling you for this service, who else would they be selling as a dealer?

ADT sells -- ADT is a dealer and they sell consumers, that's their job. They're like the other 30,000 dealers. They're just a larger version.

All right. So ADT is a dealer and they have a choice of 5 or 6 different products to sell to their consumer, and one of them is NAPCO. Do they sell other services to consumers besides NAPCO of this type?

Yes, they do, they sell...

All right. So who are those products?

Those are private labeled. I think you'd have to ask them.

Okay, but you're not seeing one specific company become a big competitor to you in this space?

We have a lot of irons in the fire. We're 80% commercial. ADT is mostly residential. It's a different thing. We sell commercial dealers, we sell residential dealers, we sell dealers that do both. We sell fire dealers now with our new fire panels, which just came out. They have integrated communicators built into them as well as the fire panel. So there's a lot of activity, there's a lot of descent products.

Just 2 or 3 other questions. Continental Access, how big of a business is that for you? And does that add any service revenue in that space in that product line?

We don't break it out for competitive purposes, but we're adding RMR to it into that line. Because we built this NOC, we're going to be adding RMR to all our lines. That's our future. That's what we plan to do.

So just the Continental side of it, 5% or 10% of your business or so?

I don't break it out.

Two other questions for me, if it's helpful. Obviously, with all the news the last few weeks, it would seem that there's a big opportunity in houses of worship to do a lock down and that will be something that I think government and states, federal and local governments would spend a tremendous amount of money on security for houses of worship. What products have you had, and has there been any interest from some of these big groups to go after your product after what happened in this group?

Here is how it goes. The dealers are out in the field. We have 1,000 SKUs that we make for the dealers. These dealers go and canvas where there -- areas where there are burglaries, people moved newly into their homes, people are -- any situations whether a tragedy, the dealers are there to bolster up physical security using NAPCO products. So we don't sell directly to the churches and to the synagogues and to the schools. We go and jointly with these people when requested, and they do the installation. We do all kinds of lock down products and safety products for any public space. So the dealers are installing these products in these public spaces. But we don't call on the end users. We are a B2B company.

Okay, I just thought what you're doing on the university side, there might be an opportunity to do that as well in these bigger religious offices?

There's opportunities in every area we enable our security, which is everyplace. So the dealers are our marketing arm, banging the street, they're street smart guys, experienced business guys out there and getting jobs. And the more those dealers have pushed NAPCO, the better it is because we're the only company with an integrated solution and it's becoming more apparent to the dealers. That's the way they want to go. They want to do large jobs, they just don't want to do a residential job or a small business job. So with NAPCO, you can do it all.

Okay. Great. Just my last question is, as you pencil out the math, if you can get to $40 million of incremental -- of recurring service revenue exiting fiscal 2021, and assuming you can maintain single digit equivalent revenue growth through that time, not even double digit, which it sounds like you can do, but just single digit, you're looking at a company that's close to $130 million of revenue in 2021 with a margin profile that's very exciting because as much as your margin has helped you the last few years, obviously the service margin being much higher, can really lead to a huge EBITDA margin. And again, I'm just calculating it just through incremental revenue profit on the revenue, on the service side, if you're going to do $40 million of service revenue, it would seem to me with your 80% gross margins, that you will be able to contribute around $18 million in fiscal '21 or said differently, around $1 more of earnings per share from where you are currently per year because of the service opportunity regardless of what's going out with universities and regardless what's going on with some of your other new products. Is that an accurate way to look at your company right now?

I would say it's our goal, so it's a very accurate way to look at it. The only thing that's in question, how fast are we going to be there by '21? Maybe it will be '22, we can't tell exactly. What we do know is we're growing in the 40s. Last year, it was even more, but 46% for this quarter, and we're introducing more products that you guys don't even know about that are going to give us recurring. And the world is changing to wanting to control devices remotely. So there's millions and millions of systems out there. They haven't changed yet. So that's why we have this tremendous confidence that more people are going to change and go to cellular radios, more fire radio opportunities and more products that haven't even come out yet, that will give us recurring. So yes, that's -- it's very exciting. It's those kind of numbers, it's just the question of how fast we get there -- '21, '22, we'll see. It's a great journey to be on.

(Operator Instructions) As there are no further questions, I'd like to turn the floor back to management for any closing comments.

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. We look forward to speaking to you all again in a few months to discuss NAPCO's fiscal Q2 '19 results. Bye-bye.

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