NAPCO Security Technologies Inc (NSSC) 2020 Q4 法說會逐字稿

Greetings, and welcome to the NAPCO Security Technologies, Inc. Fiscal Fourth Quarter 2020 Earnings Conference Call. (Operator Instructions) Please note that this conference is being recorded.

I will now turn the conference over to your host, Patrick McKillop, Director of Investor Relations. Thank you. You may begin.

Thank you. Good morning. I'm Patrick McKillop, Director of Investor Relations here at NAPCO Security. Thank you all for joining us for today's conference call to discuss our financial results for our fiscal fourth quarter and fiscal year 2020. 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 presentation contains forward-looking statements that are based on current expectations, estimates, forecasts and projections of future performance-based on management's judgment, beliefs, current trends and anticipated product performance. These forward-looking statements include, without limitation, statements relating to growth drivers of the company's business, such as school security products and recurring revenue services, potential market opportunities, the benefits of our recurring revenue products to customers and dealers, our ability to control expenses and costs and expected annual run rate for SaaS recurring monthly revenue.

Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those contained in the forward-looking statements. These factors include, but are not limited to, such risk factors described in our SEC filings. Including our annual report on Form 10-K. Other unknown or unpredictable factors or underlying assumptions, subsequently proving to be incorrect could cause actual results to differ materially from those forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. You should not place undue reliance on these forward-looking statements. All information provided in today's press release and this conference call is as of today's date, unless otherwise stated. And we undertake no duty to update such information, except as required under applicable law.

I will 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 upcoming investor outreach, we will be virtually attending and hosting one-on-one meetings at the CL King conference on September 16 and the Lake Street BIG4 conference on September 17. We are also planning for more virtual roadshows throughout the fall. Investor outreach is crucial, especially for a small-cap company such in 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. The fourth quarter and fiscal year 2020 equipment sales were impacted by the ongoing COVID-19 pandemic. But we are now beginning to see a pickup of our business because buildings are reopening and our installing dealers are gaining more and more access to install equipment at their end user customers, which consist of businesses of all types as well as homeowners. We are pleased to emphasize that despite the pandemic, our recurring revenues continue to grow at a rapid rate. Our recurring revenues increased 35% in Q4 with a gross margin of 83% and now has an annual run rate of $27.5 million as of June. Our focus on targeting the professional installation and mostly commercial end markets is driving this continuous growth. 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, which include school security solutions, wireless fire and intrusion alarms plus enterprise access control systems and architectural locking products.

The management team here at NAPCO continues to focus on the key metrics of growth, profits and returns on equity and controlling costs, especially during these difficult times. These metrics are important to us as well as to our shareholders. We continue to execute our business strategy 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'll now turn the call over to our CFO, Kevin Buchel. He will provide an overview of our fiscal fourth quarter and fiscal year 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 fourth quarter, net sales decreased 22% to $23 million as compared to $29.6 million for the same period a year ago. For fiscal 2020, net sales decreased 2% to $101.4 million as compared to $102.9 million a year ago. The decrease in sales for the quarter and the fiscal year were primarily related to decreased equipment sales, which were caused by the COVID-19 pandemic, which caused difficulties for the security equipment professionals getting access to both commercial and residential installation site. We believe this access issue is an industry wide issue, and it's not reflective of the loss of any market share unique to the company or any long-term negative reflection of the post-pandemic vibrancy of the security industry as a whole. Recurring monthly revenue continued its strong growth, increasing 35% for the quarter and 38% for the fiscal year.

Recurring revenue now has an annual run rate of $27.5 million based on June 2020 recurring revenue. The majority of the company's factory costs are fixed costs. As we've discussed in the past, when equipment sales for a quarter increase above the $20 million mark, overhead absorption increases and gross margins expand. Conversely, when equipment sales are below $20 million, the opposite occurs. Thus, as a result of the lower equipment sales, gross profit for the fourth quarter decreased 38% to $8 million with a gross margin of 35% as compared to $12.9 million with a gross margin of 44% last year. Gross profit for the fiscal year 2020 decreased slightly to $43.6 million with a gross margin of 43% as compared to $43.9 million with a gross margin of 43% last year.

Gross margins for recurring revenue continued to be very strong, increasing by 500 basis points for the quarter to 83% as compared to 78% last year and for the year increased by 400 basis points to 82% as compared to 78% last year. The increase in gross margin for recurring revenue was primarily due to the increased sales of our Starlink Commercial Fire Radios, which generate higher margins and continued to become a larger part of the overall recurring revenue mix.

Research and development costs for the quarter were $1.9 million for each of the quarters ended June 30, 2020 and 2019, and were 8% of sales and 6% of sales for the quarters ended June 30, 2020 and 2019, respectively. Research and development costs for fiscal year 2020 remain relatively constant at $7.3 million or 7% of sales as compared to $7.2 million or 7% of sales last year. Selling, general and administrative expenses for the quarter decreased 19% to $5.1 million or 22% of sales as compared to $6.3 million or 21% of sales for the same period last year. Selling, general and administrative expenses for the fiscal year ended June 30, 2020, increased 2% to $23.7 million or 23% of sales as compared to $23.2 million or 23% of sales for the same period last year. The SG&A decrease for the quarter was primarily due to strong cost containment measures that were implemented as well as reduced trade show and travel expenses related to the COVID-19 pandemic.

During the year ended June 30, 2020, the company experienced a decline in revenue related to a trade name intangible asset that was capitalized back in 2008. As compared to such revenue in the prior year. While this decline was primarily attributable to the COVID-19 pandemic, it was determined that such declines in revenue constituted an impairment of the aforementioned intangible asset. And as a result, we recognized a onetime impairment charge of $1.852 million in the fourth quarter. Operating income for the fourth quarter before the impairment of the intangible asset was $1 million as compared to $4.8 million for the same period a year ago. Operating income for the fiscal year before the impairment charge was $12.7 million as compared to $13.5 million for the same period a year ago. The operating loss for the quarter after the impairment charge was $835,000 and operating income for the fiscal year after the impairment charge was $10.8 million.

In July 2019, the company received a proposed adjustment from the IRS for approximately $1.8 million relating to the 2016 tax year. While we strongly disagreed with this assessment, and we felt we would ultimately prevail. To avoid legal costs, including the cost of litigation, we came to a settlement with the IRS for approximately 40% of the proposed adjustment. The company is also under audit with the IRS for 2017 for the same tax issue. While we have not received any assessment yet, and we strongly disagree with the IRS regarding the issue at hand, we've provided an additional tax reserve that is consistent with the 2016 settlement. As a result, income tax expense for the quarter increased by $1.024 million to $1.059 million as compared to $35,000 last year. Income tax expense for fiscal 2020 increased $1.1 million to $2.3 million, as compared to $1.2 million for the same period a year ago.

As a result of these onetime charges and COVID-19 impact, net income for the fourth quarter decreased to a total loss of $1.9 million or negative $0.10 per diluted share as compared to $4.7 million or $0.26 per share for the same quarter last year. Net income for the fiscal year was $8.5 million or $0.46 per diluted share as compared to $12.2 million or $0.66 for the same period last year.

Adjusted EBITDA for the quarter as outlined in the schedule included in today's press release, was $1.5 million or $0.08 per diluted share compared to $5.2 million or $0.28 per diluted share last year. And for the year, adjusted EBITDA was $14.7 million or $0.80 per diluted share as compared to $15 million or $0.81 per diluted share. On to the balance sheet. The cash balance at June 30, 2020, was $18.2 million, as compared to $8 million at June 30, 2019. Our working capital as of June 30, 2020, was $62.8 million as compared to $51.1 million at June 30, 2019. Our current ratio was 5.0:1 at June 30, 2020, as compared to 4.6:1 at June 30, 2019. And debt remained at 0 at June 30, 2020. CapEx was $291,000 during the quarter versus $388,000 in the year ago period. And was $1.615 million for the year versus $1.988 million in the year ago period.

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

Thanks, Kevin. Our fourth quarter and fiscal year sales were impacted by the COVID-19 pandemic. However, as a result of the continued strong recurring revenue with 83% gross margins, combined with a seasoned executive team here at NAPCO, who performed well by managing costs. We are able to generate adjusted EBITDA of $1.5 million in the quarter and $14.7 million for the year. We recently have seen positive signs from some of our distributors that their sell-through rates have increased in the months of July and August and also the trend of more home sales in nonurban areas are picking up. We continue to believe that we are well positioned to rebound for the economic recovery. Our business is composed of 80% commercial and many of our products are deemed essential, such as nondiscretionary commercial fire alarm communicators.

NAPCO also plays a vital role in the healthcare vertical with our locking and access control divisions, which, for example, provide entry/exit devices and push/pull locks with antimicrobial finishes. We continue to witness violence erupting in many cities throughout the country, and these events are driving the need for more security. The need for security is now greater than ever for many businesses, such as stores, restaurants and offices. We are pleased with the growth of recurring revenue, which is in part being driven by the Commercial Starlink Fire Radios. The Fire Radios, in particular, also helping recurring revenue gross margin expansion as evidenced by the 500 basis point improvement versus year -- last year. The school security market remains a very significant market opportunity. The availability of grants for schools to fund these security projects has never been better with options from the U.S. Federal Government and the state governments being plentiful. We have highlighted these different types of legislations and have been approved during our past earnings conference calls. We remain focused on providing schools, the products and solutions they need to protect their students and faculty. While many schools have students return this fall, some are doing remote learning. It varies from state to state but it's important to note that we are witnessing schools and universities using this time to upgrade and/or implement systems during this time as they continue to plan for the future. Press releases regarding school and university security projects are issued when the opportunity is allowed as we must receive approval from these institutions prior to release.

A few quarters ago, we launched the AT&T LTE Starlink Line of universal fire, intrusion and IoT communicators, which are playing a vital role in the need for the upgrade of older 3G AT&T Communicators. Our Starlink Communicators offer the widest range and coverage in the U.S. to dealers with both AT&T and Verizon LTE service. This market is large and growing, and we believe we have a very strong product line that will ultimately add to our recurring revenue stream. NAPCO's latest recurring revenue product innovation, the iSecure commercial and residential 80 zones alarm system continued its roll out during Q4. While we are still in the early stages of the product launch, we continue to receive favorable feedback from our dealers. The iSecure offers the most cost-effective functionality in the industry and has the Starlink communicated technology inside, which will generate recurring revenue with every sale and installation. This product is designed for the new breed of professional installers and savvy consumers. iSecure has installation times of 1 hour and offers a feature-rich functionality for smart home capabilities that many residential and small to midsized businesses are looking for today.

As we look into the future, expanding our cellular communication technology to other areas in the security industry is a focal point of our strategy. During the late fall, early winter months, we plan to introduce a cellular based locking and access control product line using our Starlink Technology. This new product called Air Access will allow dealers and NAPCO to generate recurring revenue. A few of the benefits to highlight that end users will enjoy include no need for upfront investment in hardware or additional IT personnel, no on-site database, no backups or software updates.

In conclusion, our fiscal year 2020 was a challenging and successful year. Before the COVID-19 pandemic began to significantly impact our country back in March, NAPCO achieved 23 consecutive quarters of year-over-year record sales. I am confident we will emerge well-positioned for the economic recovery to come, and we'll soon start another record sales streak. NAPCO is in a strong position in the future, and we continue to add products and services that will enhance our rapid growing recurring revenues. We're excited about fiscal 2021 and beyond.

I would like to thank everyone for their support and for joining us in this exciting future we have. We appreciate your time today, and we're ready for any questions. Operator, please proceed.

(Operator Instructions) Our first question comes from Matt Pfau with William Blair.

You wanted to start off on the comments you made I about seeing some improvements in sell-through and metrics post the close of the fourth quarter over July and August. Maybe you can just provide some more detail there. So as you look through sell-through activity, demand, where are we at versus where you would sort of expect to be in a more normalized first quarter?

Hello there. We're seeing sell-through, which is checkout at our distributors' counters. And when that happens, it means that the dealers are doing more installations, both commercially and residentially. They've been blocked from getting into commercial buildings and people didn't want them in the homes during the COVID times. So we're seeing a nice increase and Kevin, you have the stats on some of that. Why don't you describe those?

Yes. So I look at our big distributors. And without mentioning any name, who you guys know who our biggest distributor is, and I saw that they were up 41% in July. So that was very encouraging. I looked in August, it wasn't quite 41% and very strong also. I wanted to see if it was just 1 distributor, so I looked at another one, a pretty large one, not as large as our #1 guy, who was up 25% in July. I looked at August, same type of thing. So it's not a guarantee that we're going to get big orders in September. But if their sell-through is as strong as that, they'd be crazy not to be ordering equipment because they're going to run dry. So those are the things we look at to be encouraged that we're going to get some nice orders coming into this month, end of this quarter, and that business is starting to come back.

Got it. And then I want to touch on iSecure, seems like you're encouraged by what you've seen early on there. When would you expect this to become a more material contributor to the recurring revenue line or is it already?

It's going to be adding, I believe, a lot of recurring revenue to our company. It's a kind of an irresistible alarm system, which is good both commercially, residentially. With this swing product, they can carry -- the deal can carry 1 product on their van, and it can do all kinds of commercial and residential jobs exclusives, 80 zones. It has IoT built into it, has cellular built into it and it's priced have kind of an irresistible price to the dealers compared to anything else in the market. So it's got more functionality and its price is much, much better. The dealers can build more equity in their business by buying this because they're not laying out as much cash for equipment as they've been doing in the past with the competitors. So typically, for what some of the COVID times, it would typically take 9 months to 12 months for a product to get an okay by the dealers. They talk to each other, they made each other at distributor counters, they talk to each other at get-togethers. Now they're e-mailing and talking, and they're buying, but it slowed it up a little bit, but the potential is tremendous. It is an anchor for the industry of this product. And I figure in another 9 months or so, it should be coming in to stride. It's got a tremendous upside. It does all types of businesses and homes, as I said.

So everyone that is bought by a dealer and installed is enrolled on our back-end knock and every one of these then generates recurring revenue somewhere between $7 and $13 a month for us from the dealer, and he pays us on a credit card. The dealer then will mark it up to whatever type of job he's doing with the other accessories. He's adding how many zones to it, smoke detectors, he's enabling IoT, but we get our $7 to $13, and then he marks it up whenever the market will bear. So it's a very exciting product line, laying a lot of volume to our recurring revenue as well as our equipment sales.

Perfect. And last one for me. I just wanted to ask about the new Air Access product. And can you talk about what the market for this product is, who is it targeted for? And then I'm sure you've been talking to your dealers with this and getting some feedback. What are the early indications of interest from your installer base for the year access product?

The big picture here, the vision is to get all of our equipment to generate recurring revenue. And therefore, it's more than a onetime sale. The locking and access control is a onetime sale and the sales department is selling them to enterprises of all sizes. So they have the locks, the hospitals, businesses of all types, high rise buildings, office buildings. So we -- while we enjoy building the product, and getting nice sales out of the product, we want to get recurring revenue for the product. So we've developed Air Access, which is going to be using as a communications our cloud, our NOC.

Up to this point, access control products utilize typically the IT department's network. That network is something the IT group of people doesn't want to have infected by any possibility of hacking. So there's always a political situation in the building you want to get access control, but you don't want to affect the network. So we've now eliminated all of that. Air Access is the first cellular access control system that has recurring revenue for us and for the dealers. By using the cloud, the dealer no longer has to buy thousands of dollars worth of equipment and keeping it on the site. All that equipment is in our cloud. So it's as simple as installing it on doors with radios and goes up to the cloud, the equipment is all in the cloud. The dealer doesn't have to pay for it. It just pays us a fee to utilizing our system, and we think this is going to be a major home run for the company.

Our next question comes from Mike Walkley with Canaccord Genuity.

Great. Kevin or Dick, just wanted to follow-up on the improving sell-through trends at some of your larger distributor customers. Can you give us any additional color just on maybe inventory levels from your distribution or dealer partner channels? Were there any kind of pre-buying with COVID worries kind of overstocking inventory that they're working through? Or any kind of direction you can give us on just channel inventory would be helpful.

Yes, Mike, none of our distributors seem to load up on inventory so that their supply chains would not be interrupted, which is something we did, we loaded up on inventory so that our supply chain would not be interrupted. They didn't. So when we see the good, strong sell-through stats that we've seen for July and August. To what, that means they're going to have to buy because they didn't load up, nothing out of the norm. And I guess I understand it, they weren't sure what was going to be, what the sales were going to be until they had more clarity what was going to happen with COVID. But now that the country seems to be opened up more than it was versus last quarter. I think they're seeing by these sell-through stats that they're going to have to step-up and place some nice orders come the end of this quarter. That's our expectation. When you're dealing with distributors, you never know, but always the best sign is when you see strong sell-through.

Great. That's helpful, Kevin. It's good to know that sell-through could lead to better sales. And just leading to sales trends. I know heavy fixed costs that you highlighted in the script with the Dominican Republic facility. Can you just help investors on the call, if equipment sales rebound is, say, $18 million, where could gross margins jump to? And if they just go up $4 million more to over $20 million, would they go all the way back to the 30% range.

Right. So fixed costs are a great thing, especially when the hardware sale when the equipment sales are growing. $20 million is a magic number, get to $20 million, margins typically are 33%. Get above that, they go above the 33% when we get to $24 million, $25 million of equipment sales, doesn't take that much. Then your gross margins get to 40%. We project that when we get to $100 million of equipment sales, which is an average of $25 million per quarter, but the gross margins would be 40%. At $18 million, that would be lower than the bar, the margins would probably be in the high 20s, at $20 million, will be back to the 33%, 32% range. So we're working hard. Recurring revenue is the name of the game around you. That's what we care the most about with 80-some-odd percent, 83%, 84% margin. But we don't forget about the hardware sales because that gives you nice margins also the larger grows. And we're working hard to restore it to the $20 million and beyond. Our goal is still -- we still want to be $100 million of hardware revenue by next year and beyond, go out 5 years beyond that, our long-term goals. We want to have $150 million of recurring revenue at $150 million of hardware sales, where it's 50-50 split. Today, our recurring revenue is 25% of sales, not bad for 5 years, but we wanted to get to 50% 5 years out. So those are the long-term goals.

Great. And just building on that, Kevin, very strong gross margin on recurring revenue, again, 83%, I think it's a record for the company. It sounds like Fire Radios are a big driver of that. As things like iSecure and the new Air Access products grow in the mix. How might that impact gross margin percentage? Obviously, it's going to be positive to gross margin dollars, but how is -- should we think about recurring revenue gross margins as these other products scale in the model?

You know if Fire Radios was the only thing we were selling, the recurring revenue -- the gross margin on recurring revenue would probably be in the 90s, right? But not everything is fire. So the mix today is 83%, 84%. As we introduce these other factors, whether it's iSecure or Air Access, they're not going to be as strong as Fire Radios margins. But Fire Radios haven't hit their potential either. They were introduced after all the other radios. So there's still not the lion share of radios that we sell and yet still their impact as we get the gross margin into the 83% range. These other ones are going to help us get to the 50-50 split by 2026. They're not going to be a 90% type as Fire Radios. But overall, the whole mix, we should be in the 80% range, when it all gets ended up in the end.

Last question for me, I'll pass the line. Obviously, difficult time, schools opening and closing. Can you just talk about maybe the pipeline for school projects with all the federal and state money set aside. Are these starting to pick up again here into the fall? Or are they slowing down just because students are starting to come back?

We're seeing a lot of universities that have been awarded that have awarded jobs to integrators. And the integrators are ready to give us the purchase order. And the only thing that's holding us back is the integrator doesn't know exactly when they're getting into the school. And we say to the integrator and let us give us the PO now, we'll ship it now. Whenever you get in, you get in and they go, no, I want to time it right. I don't want to be sitting with this equipment, we say we'll give you extra time until they say to us, don't worry. You got the job. It's just -- let us figure out when we can get in there. So there's a certain amount of uncertainty when the integrator can get in there, but we -- we've been awarded a bunch of -- or we will be awarded a bunch of jobs, a bunch of school jobs, and they're just trying to time it right. And I understand that they don't want to place the order and then having to say that they can't get into the schools. But they want to do these jobs now because the schools, even though they're back, it's hybrid, it's not -- it's not being activity on a campus that usually it's a perfect time for the job to get installed. So we're working with the integrator, and our expectation is we're going to win a bunch of jobs soon. We hope by the end of September, if not, it will be shortly thereafter. They've committed that they want to do this work.

And on the K-12 front, what we've seen there is any money that have been awarded by the states to the schools to K-12. That money has to be used for school security. Schools today with the COVID, they have tremendous budget problems. They can't touch that money unless it's for school security. So that's a good thing. Otherwise, they would use that money because they have tremendous deficits all over the country. But school security money that's been funded for security. That's what it's going to be for and nothing else. And that's a good thing, too.

Our next question comes from Jaeson Schmidt with Lake Street.

Just following up on that last question. With you guys maybe seeing some pent-up demand across your businesses and then the ability maybe to get back into schools and do some installs on these less-populated campuses. Do you think all these forces will impact sort of the seasonality you typically see in this year? Meaning could seasonality for fiscal '21 be different than historical patterns?

Probably, Jaeson, because historically, schools only want us -- they only want to do the installs in the summer months, and the kids are completely out of school or even in the winter months when there's like an intersection or the kids are at a school. It's different now. I think they didn't do it during the summer months, and they want to do it now. And the campuses are not that busy. Even though school is returned, it's not like it normally is. And so they want to forge ahead. And we do also and as soon as the universities give the integrators the go ahead, a lot of this is going to start-up again. So I don't think the whole seasonality is going to hold true anymore. They want to get this thing done now they're behind. And remember, most schools have no security, maybe 10% have security in the schools. And it's a big open area, probably 90% of schools have nothing. Hard to believe despite all the shootings and events that have gone on. So still a big opportunity. It's up to us to push forward with the integrators and with the universities and with K-12, there's many schools out there, over 100,000 K-12, over 10,000 universities. And I'll add, it's not just schools any place where people gather is an opportunity. Whether it's a house of worship, whether it's a restaurant chain, anywhere, they were all subject to the same chaos that could happen. So we're working hard to get our products into all these places.

Yes, there's a demographic change here. The population is -- there's more chaos in the streets. The police are, as we know, our being marginalized and that incites a lot of tension in schools and places of worship because you never know what can happen, even restaurant business. People come breaking into restarts or the people are there. So there's definitely an ongoing change that's taking place where more security is going to be necessary. And our dealers are going to -- we predict they're going to be busier than ever going forward. And then the products that we have them install will have recurring revenue component to them.

So there'll be more protection for the businesses, more protection for the homes. Dealers will be motivated to put more jobs in because there's a bigger demand for this type of equipment, and they will make a recurring revenue for themselves, and we get the recurring revenue from these jobs for ourselves. So we predict that this is going to be a big sea change going forward. And we're constantly putting money into engineering. We keep our engineering budgets in line. But we come out with more efficient products, efficiency of developing products. And there's a lot of new things on the horizon. Everything will have recurring revenue component to it that we're developing now.

Okay. That's helpful. And that actually leads me to my next question. It might be hard to pinpoint exactly. But do you think you've noticed a inbound -- a significant uptick in inbound interest in quoting activity due to the civil unrest this year?

I think it's natural, you pick up any newspaper, listen to any TV reports. You see that the police are marginalized. You see what's going on in many of the cities. And that bodes for more security, and we have -- our dealer base is 12,000 security dealers. They're all over the country. So they're very entrepreneurial type guys. They go out and they market well. As soon as they're going to be able to get into buildings 100% -- residence is 100%, they're going to be pushing very hard to put in more security equipment. Since we make very reliable equipment, priced right, offer the recurring revenue services to the dealers in a very easy way for them to install it, which also allows the end-user where they've installed the jobs into the IoT, control of video on your smartphone and lighting control and the service back control or remotely, it becomes a great marketing opportunity for the dealers. More security for the population and more security work for the dealers. So that's how we see it going forward, and we expect the level to be ramping up.

Okay. And the last one for me, and I'll jump back into queue. Did you repurchase any shares in the quarter? And relatedly, how should we think about capital allocation going forward?

We did not repurchase any shares in the quarter. We're always looking as a potential that we might do it. As you can see, our cash is growing. It's a nice problem to have. We haven't exactly decided how to use that cash. It's a good problem to have. Buyback has been one of the things we've done in the past, and we'll see what happens. It could always be done in the future.

(Operator Instructions) Next question comes from Raj Sharma with B. Riley FBR.

Kevin. I had -- so I know you enumerated how the decline in gross margins in hardware was due to just lower sales volume below $20 million. Is there any pricing power lost here in hardware sales that are contributing to lower gross margins?

We did not have any pricing issues this quarter, it was strictly volume, and our expectation is when the hardware sales are restored, the pricing will be as it was. And once again, we go over that $20 million magic number mark, margins will come back as strong as ever.

That's great. That's good. That's great. And so what ...

We hear from the dealers, just give you a flavor of what this is about. So the dealers are telling us, we want to get back in, but we're shut out. So we're going to live off our recurring revenue, and then we're going to push very hard to get in and do more jobs to build up that recurring revenue base. We hear that a lot. And that will only happen for a certain period of time, and then it will be coming back. As we read and hear about, places are opening up now, starting to open up. And therefore, that sell-through that Kevin was talking about before at the distributors bodes for growth coming forward because the distributor must have all the products on the shelf in order to satisfy those 12,000 dealers. So a dealer is doing a commercial job, residential job, all the SKUs to do those jobs have to be at the distributor. So as the distributor runs lean, he has to backfill with more products. If he doesn't backfill with more product, he's going to lose the sales, the dealers can shop at other distributors. We have more than 200 different distributors, some are networks, the large ones, the network groups and some are independent. They may have 1 or 2 or 3 locations. But a dealer wants to do jobs, it's his lifeblood. If he can't get it from one distributor or get it from another. And we look at distributors as wonderful shelves for us, but the dealers are tenacious guys wanting to put jobs in and build a recurring revenue base.

That plays well into Air Access. We want to give the integrators, which are a different type of installation company, a product line where they can start building recurring revenue like alarm dealers do. And that's going to be coming out in the fall winter, and that's going to be a very popular product because we're going to show the integrators how they can make money like the alarm dealers do on a recurring revenue basis. So there's a lot of wonderful things going on. Unfortunately, COVID hit us and closed down a lot of facilities. So the mechanics can't get into the homes and do the jobs or into the businesses. But that will change. Temporary bump in the road, as we talked about before, we've had 23 consecutive quarters of growth, and we want to get back into that trend of growing again, and we have more wind in our sails with better products that offer recurring revenue than ever before. So it should be a nice voyage going forward for the investors that can appreciate and understand what's going on.

Right. And then on the iSecure sales in this quarter, are these both hardware and recurring sales or are they only recurring sales?

So what happens is the jobs that go in with every iSecure, there's a recurring revenue part of it. Recurring revenue, if it uses a basic communicating alarm system to the central station. It's roughly $7 a month to us. It's enabled through our system to the IoT, Internet of Things, video, cameras, thermostats, lighting, that goes up to $13 a month to us. So we don't want to make a product that doesn't have a recurring revenue component to it.

Great. And any indication how big this business is this quarter? And what you expect it to be for the year or is it too early?

Well, we don't make predictions. But if you've got a product that's feature-rich beyond anything that's on the market, that's priced at a price point because it was automated, and it's built in our Dominican factory, that's half the price as the NAPCO reputation for reliability, it's got to be a winner. So if I was a dealer, I wouldn't want to use anything else because it's less equipment cost for me, and I get more functionality out of it. And I don't have to go back and really service it because of the fact that it's NAPCO reliability, which is a step beyond all the other product brands on the market.

Right. So any -- is it a still immaterial piece of the business this quarter as just sort of started to ramp up?

It's in the beginning stages of the growth. We put it out in December. We sold out all the production, the January, February and March quarter. We saw we sold all the products. We want to put it out kind of slowly so that we can monitor its performance and get feedback from the dealers. And then the COVID aspect came into play but it's a wonderful product.

Clear, makes sense. So just -- and then I'll let -- my last question, just following up on the schools seen continue to seem like a great opportunity here. What percentage of the total business do you do with schools? And how is that split between hardware and recurring and what kind of growth are you seeing in schools? Or do you expect to see for this year? Can you give some indication there?

We don't break out how much school security is of total sales because we don't know. Because a lot of times, we will sell our products to a, let's call it, a locking distributor and a locking distributor will sell it to school. So we don't even know. But what we do know is that since school security came on to the scene, which, I'll say, 4, 5 years ago. Locking became a bigger and bigger part of our business, it's the largest part of the hardware business, it's 60% of the equipment business. So that's not an accident. That's because of the various school jobs that we've done over the years. The potential is tremendous and the fact that it's 60% tells you a lot, but I can't tell you specifically how much it is.

Thank you. There are no further questions at this time. I'll turn it back to management for closing remarks. Thank you.

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 Q1 '21 results. Bye-bye.

Thank you all for participation, you may disconnect. Have a good day.