NAPCO Security Technologies Inc (NSSC) 2020 Q2 法說會逐字稿

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

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

Thank you, Darryl. Good morning. My name is Patrick McKillop, I'm the Director of Investor Relations for NAPCO Security. Thank you for joining us for today's conference call to discuss our financial results of our fiscal second quarter 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 in 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. 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 with these measures. In the press release and on the financial tables issued earlier today, you'll find a 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'll turn the call over to Dick in a moment before I do, but I just wanted to mention a few things on the IR front.

In terms of upcoming investor outreach, we will be marketing in Boston on February 5 and are continuing to plan more events in other regions during the next few months.

Also on March 17 through the 19, we will be showcasing our products at the ISC West Trade Show at the Sands Expo Convention Center in Las Vegas, Nevada. If you'd like to attend ISC West, if you are interested in having us visit with you or need to average more time with us post this earnings call, please contact me. Investor outreach is crucial especially for small-cap companies such as NAPCO. Now I would 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 fiscal second quarter 2020 marked another record revenue and profitability performance for NAPCO. Our SaaS recurring revenues continue to grow at a rapid rate. Our recurring revenues annual run rate is now $24 million as of December. Our focus on targeting mostly commercial end markets and professional installation is driving this continuous growth.

Our cash balances continue to grow, and our cash balance is clean with no debt. Capitalizing on key industry trends remains our focus. These trends include wireless fire and intrusion alarm communicators, school security solutions, enterprise access control systems and architectural locking products.

Management here at NAPCO continues to focus on key metrics of growth, profits and returns on equity. These metrics are important to us as well as our shareholders. 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'll now turn the call over to our CFO, Kevin Buchel, to provide an overview of our fiscal second quarter 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 4% to $25.8 million, which was a record second quarter performance and the 22nd consecutive quarter of year-over-year record sales as compared to $24.8 million for the same period a year ago. For the 6 months ended December 31, 2019, net sales increased 8% to $52.1 million as compared to $48.2 million last year. The increase in sales for the quarter and the 6 months were primarily related to increased sales of our alarm communication services and intrusion and access products as partially offset by a decrease in sales of door locking products.

Recurring monthly revenues from the Alarm division increased 40% for the quarter and 41% for the 6 months, and now has an annual run rate of $24 million based on December 2019 recurring revenue.

Sales of intrusion and door locking products were affected in the second quarter, due to the company's largest customer, a leading distributor of network and security solutions. Being in the process of being acquired, the sell-through of our products, i.e., sales of these products from this distributor to alarm and locking dealers, who ultimately receive our products, were strong, increasing 15% in Q2 compared to last year, and increasing 11% sequentially versus Q1 this year. As a result of this increased demand of our products, it is our belief that the aforementioned impact on sales is temporary.

Gross profit for the second quarter increased 14% to $12.1 million with a gross margin of 47% as compared to $10.7 million with a gross margin of 43% last year. For the 6 months, gross profit increased 17% to $23.6 million with a gross margin of 45% as compared to $20.2 million with a gross margin of 42% last year. The 400 and 300 basis point increases in gross margins for the quarter and 6 months, respectively, was primarily driven by the previously mentioned continued strong increases in recurring revenue, where the gross margin increased to 81% for the quarter versus 77% last year and was 80% for the 6 months versus 78% last year.

R&D expenses for the second quarter remained relatively constant at $1.8 million or 7% of sales compared to $1.8 million or 7% of sales last year. And for the 6 months, R&D expenses increased 2% to $3.6 million or 7% of sales as compared to $3.5 million or 7% of sales last year.

Selling, general and administrative expenses for Q2 increased 12% to $6.3 million or 24% of sales as compared to $5.6 million or 23% of sales for the same period a year ago. And for the 6 months, SG&A expenses increased 7% to $12.5 million or 24% of sales as compared to $11.7 million or 24% of sales last year. The increases for the 3 and the 6 months was primarily due to increased media advertising, additional sales staff and salary increases as well as increased stock option expenses, resulting from the significant increase in the company's common stock price, which is used in the valuation of the options granted during the 3 months ended December 31, 2019.

Operating income for the second quarter increased 21% to $4 million as compared to $3.3 million last year. For the 6 months, operating income increased 50% to $7.6 million as compared to $5.1 million a year ago.

Income tax expense for the quarter increased by $12,000 to $431,000 as compared to $419,000 last year. For the 6 months, income tax expense increased 20% to $800,000 as compared to $667,000 last year. The increase in the provision for income taxes for the 3 and the 6 months was caused primarily by an increase in income before provision for income taxes. The company's effective rate for income taxes was 11% and 13% for the 3 and 6 months ended December 31, 2019 and 2018, respectively.

Net income for the second quarter increased 25% to a second quarter record of $3.6 million or $0.19 per diluted share as compared to $2.9 million or $0.15 per diluted share last year. And for the 6 months, net income increased 56% to $6.8 million or $0.37 per diluted share as compared to $4.4 million or $0.23 per diluted share last year. The change in net income for the 3 and the 6 months ended December 31, 2019, 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 24% to $4.7 million or $0.25 per diluted share as compared to $3.8 million or $0.20 per diluted share last year. For the 6 months, adjusted EBITDA increased 48% to $8.7 million or $0.47 per diluted share as compared to $5.9 million or $0.31 per diluted share last year.

Moving on to the balance sheet. Cash balance at December 31, 2019, was $11.8 million as compared to $8 million at June 30, 2019. Our working capital as of December 31, 2019, was $56.2 million as compared with $51.1 million at June 30, 2019. The current ratio was 4.7:1 at December 31, 2019, as compared with 4.6:1 at June 30, 2019. And debt remained at 0 at December 31, 2019.

Net cash provided by operating activities for the quarter was $1.9 million and for the 6 months ended December 31, 2019, was $4.8 million. Inventory levels remain higher than normal as we continue to gear up for several new product launches that we have mentioned on previous calls, including iSecure, which started to ship at the end of Q2. Our new Marks' Anti-ligature lock, several StarLink radio, including our new line of AT&T LTE StarLink radio. Inventory levels are also impacted by the level loading of our production output throughout the year, whereas sales are historically highest in the fourth quarter.

CapEx was $882,000 during the quarter versus $695,000 in the year ago period and is $1.1 million for the 6 months versus $1.1 million in the comparable period last year.

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

Kevin, thank you. We continue to believe that growth we have witnessed in our business should continue in the future. Growth drivers for the business are coming from areas of alarm communications for fire, intrusion, and the Smart Home category, as evidenced by the growth of the recurring revenue products. Fire radios, in particular, are what we call in-house on fire, as evidenced by the 81% gross margin for recurring revenue in Q2.

Additionally, the school security market remains a contributor to our growth, and there is a significant market opportunity here. There are positive tailwinds with our new funding -- with new funding over the past year or so coming to help the schools paying for the upgrades they need.

The state of Minnesota recently released $30 million to its schools for security upgrades, which is in addition to the $25 million that was released in 2018. Senator Carlson from Minnesota is currently sponsoring a bill for an additional $500 million in funding and this type of activity is occurring throughout the U.S. Other pending legislation for the school security includes the School Violence Protection and Mitigation Act of 2019 (sic) [School Violence Prevention and Mitigation Act of 2019], which is proposed by Representatives Williams and Deutch in the U.S. House of Representatives in July 2019. This legislation would authorize $2 billion over 10 years to identify and address any shortfall in security at K-12 schools.

NAPCO is dedicated to providing all schools with the solutions and products they need to help protect the students and faculty. The funding backdrop plus the continued focus by parents, teachers and students for more school security should continue to have a positive impact on the growth of our business in this vertical.

NAPCO announces project wins at schools and universities, when the opportunity is allowed for us as we must get approval to make these announcements. Our pipeline for school security projects remains robust.

Active shooter incidents also continue to happen in public places like house of worship and other meeting areas. Our SAVI audit system, which is currently used in schools, also has the ability to be used in these areas in order to help find security deficiency. That need to be addressed. The need for more security with our locking and access control products in these areas is clear.

The recent launch of our new LTE StarLink line of universal fire, intrusion alarm and IoT communicators continues to perform well. Our StarLink communicators now offer the widest LTE coverage in the U.S. to dealers in our network with both the Verizon and AT&T service.

FireLink, another recent product we launched is an all-in-one fire alarm control panel with a cellular communicator inside. It has 8 to 32 zones capabilities. It's preconfigured and preactivated, which saves the dealer's installation time and money while replacing agent -- aging landline connected systems. The FireLink continues to see sales growth and also is generating recurring revenue.

Recently, we began our first shipments of our latest product introduction, the iSecure. The iSecure is designed for the new breed of professional installers and savvy consumers. iSecure has installation times of 1 hour and offers a feature-rich sets of functions for Smart Home capabilities that many residential and small and mid-size businesses are looking for. The iSecure won the MVP, Most Valuable Product, award at the home controls category at the ISC West Trade Show in 2019 and drew lots of traffic from dealers into our trade show booth. Most importantly, every iSecure has a cellular radio built in. So every unit sold will generate additional recurring revenue.

Our future plans to continue growing recurring revenues, including bringing recurring revenues to all divisions of the NAPCO family of companies is our goal. During this summer, we expect to be launching cloud-based wireless electronic locks and enterprise access control with the use of StarLink cellular technology. These products will generate incremental recurring revenue from the large access control and door locking segments for us while providing valuable new services to end users.

We will begin our Q&A session portion of this call in a moment. Our fiscal Q2 2020 was a very successful record-breaking quarter for us as we continue to grow the company and deliver strong profits. Our shareholders have been rewarded with very healthy returns and stock performance over the last few years.

NAPCO is in a strong position to continue its growth in sales and profits going forward. We are excited about the remainder of fiscal year 2020 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.

Operator, our formal remarks have now concluded. We would like now to open the call for the Q&A session.

(Operator Instructions) Our first question comes from the line of Mike Walkley of Canaccord Genuity.

Great. First question, just a little more clarity in about your large customer going through a sale process. I mean, it sounds like sell-through was strong there. Do you have any indication of how low they want to get their inventory before the sale? And any color on the end buyer, if they still think your products are right to move to that channel?

Kevin?

Yes. I believe, Mike, that, a, the sell-through, which is very strong. That's the first thing we look at with all of our customers are distributed, that's -- because these distributors, they're shelfs, they're shelf space for us. The main thing is how is sell-through doing. We saw in this particular case, very strong sell-through, both versus a year ago and versus last quarter, Q1. So our expectation is if they're lowering their inventory levels or whatever they're doing, I think it's -- this was more about -- they're in the midst of being sold, and they kind of like a deer in the headlights freezing. Not sure what to do. They have to buy more inventory, but they're going to lose sales. When the sell-through is strong and the demand is there, they don't want to lose sales, they're going to react maybe this coming quarter that we're in now, maybe it will take another quarter. Ultimately, they have to react. But they're going to lose sales to another distributor. Remember, they're shelves, these ultimate customers, the alarm dealers, the lock blocking dealers, those that are ultimate customers. And as long as that demand is there, whether we sell these products through this distributor or someone else, so be it. I believe the new owner is not going to want to lose sales. I think things will get back to normal in the near future. We think this is a temporary thing in the long run.

Great. No, that's helpful. And the mix this quarter, both for this recurring revenue and for the equipment sales, gross margin came in much stronger than what we've seen for a lower revenue quarter, especially on the equipment side. Can you talk about the strong gross margin trends? And maybe how we should think about them going forward?

So the recurring revenue margins, we've been talking -- we always talk about how great they are. It was in the 77% range, 78%, sometimes, it even went up to 79%. We've said that as the fire radios become a larger and larger portion of the mix of overall StarLink radios, the margins are going to go up because fire radios get more money per month than the other radios, and that has begun to happen. And that's why we got up to 81%. And going forward, listen, it might even get better than that. It's a good thing, whether it's at 80%, 81%, no matter where it is in that range, it's very powerful. And of course, we need the recurring revenue itself to keep growing, and it did, and it's at $40 million -- at 40% and a $24 million run rate, and that's all important. We think the best is yet to come.

As Dick mentioned in his comments, we're going to be putting recurring revenue products out in the other areas of the company, the locking and the access control. That's a project that we're working on. And it's a fiscal '21 probably event, but that's going to be very, very important for us because, remember, the $24 million that we're getting now, the run rate now really only comes from one segment of the business. You just imagine in the rest of the business, how powerful this could get. So we think 81%, maybe that was higher than it will be next quarter. But whether it's high 70s or low 80s, it's all a good thing.

And then on the margins on the hardware, that was very good too, because this quarter, obviously, we were disappointed in the hardware level. We hit $20 million. We've talked about why it wasn't higher, and we believe it will be higher in the upcoming quarters. So we didn't get Dominican Republic manufacturing leverage that we always talk about. We get that when it goes nicely above the $20 million. But what we did get is a nice mix of high-margin products, a bunch of school wins, a bunch of access control projects, high-margin sales are just as important as the Dominican leverage part of the story. So 37% was very, very good. And going forward, listen, the margins could jump around. Big picture, we're going in the right direction. And as we head towards our goal, which is still to get to $100 million of hardware revenue we'd say by June of '21, maybe it will be a little longer than that, maybe it will take another quarter, we'll see. But the big picture, that's where we're going. And we still feel very confident that those margins will go up as that happens.

Great. And the last question for me, and I'll pass it on. With a strong mix of margins this quarter, your EBITDA came in line with your expectations with good EBITDA margins. As you look out on the model with recurring revenue growing faster than hardware, how should we think about kind of EBITDA margins in the back half of the year, fiscal year? And then longer term, as you hit some of your goals and run rates, what's a reasonable long-term adjusted EBITDA target?

Well, EBITDA margin last year was 15% and it was $15 million on basically $100 million. This year, the expectation is higher because, obviously, as recurring revenue grows 40% range and at such high margins, EBITDA margins are going to go even higher. In the next couple of years, we expect the EBITDA margins to be 25%. If we get to the point where recurring revenue is in all aspects of the business, then down the road, 5 years from now, let's say, we could be at a 50-50 split between recurring revenue and hardware sales. That's obviously the long-term goal for us for the next 5 years. At that -- at those kind of levels, if we get to that point, EBITDA margins are going to be 30%, 40%. And that long-term vision. This year, obviously, if we could get to be above the 15% we were last year, more like 20%, I think that's the reasonable short-term goal. Long term, let's get recurring revenue in all parts of the business where it becomes the main part of the business. Today, recurring revenues are 20% of the total, let's get it to the point where it's 50%. That's what we're working hard on long term.

Okay. And we look forward to tracking some of the new products as they come into the market.

Great.

Our next set of questions come from the line of Jaeson Schmidt of Lake Street.

Understanding sort of the headwinds from this one large customer, can you just talk about what you're seeing from a competitive landscape? And if you think you're still gaining share in the market?

Kevin, why don't you discuss that?

Okay. So obviously, there's a lot of competition in the different segments. Remember, we're in both the alarms, we're in locking, we're in access control and each competitor within those areas has its own set of issues. So what we've seen in the intrusion, the alarm side of the business, is we've seen our competitors having issues. We have 1 competitor who has pulled out of the residential intrusion part of the business because they weren't getting any recurring revenue. And recurring revenue is the name of the game. So they pulled out of the segment of their market, which is a great opportunity for us, especially with us coming out with iSecure, that could be very good for us because we have an offering that will be great for the residential, adds more business market, priced really well. We've talked about it. $99, 1-hour install and has recurring. So we're going up against a lot of competitors. We go up against some competitors that don't even make alarm system. We feel very good about taking market share in the Alarm segment.

In the locking segment, locking is the biggest part of our business. It's between our 2 companies, the #1 part of the business. They'll be fooled by the fact that locking sales were down this quarter because it is 1 customer distributor. Overall locking sales are strong. We continue to gain share, winning a bunch of school jobs, which, again, we'll announce when we can. We have a couple more that we're -- that we won that we're trying to get approval on. The locking part and the access, they work together because on the university side, you need both. That has become the strongest part of our business. And there's no reason to believe that's not going to continue also. And if we get to the point where we have recurring revenue in this, look out, that could be phenomenal. So we're not there yet, but we think we're doing all the right things to keep winning more market share. There's a lot of strong, big competitors out there, but we're doing what we can to gain that share.

Okay. That's helpful. And then just following up on that last comment on adding recurring revenue to locking and access control. I have to imagine you've discussed this with your customers. Just curious I know it's not launching until this summer. But what has customer response been to adding that to those 2 segments?

The customers that this project is aimed for don't necessarily get recurring revenue now. They just do installations and they're paid for those jobs. So the excitement of recurring revenue is a new phenomenon for them. We know that there are certain traces of service contracts that excite them in certain ways and with our radio communicator locks that we'll be introducing, they'll be able to get and tap into the exciting portions of recurring revenue and be able to sell those to their end-user customers because it will offer a lot of advantages over non-reporting type of locking. And because of the fact that it utilizes our cellular, it doesn't utilize the computer departments in these firms that they're going to be doing business in. So it gets instantaneous data directly from the locking product to the installing dealer and also it will be to central station. So we have a very high confidence rate that it's going to be a very successful, exciting part of growth of our business. And one of the major contributors to the 15% of recurring revenue in 5-year number that Kevin was discussing in this call. So we expect some time during the summer months, we'll be introducing the first versions of it. It will take a while. It will take a year or so forward to get to the point where lots of dealers will understand it and be collaborating to use it like any new product, but because it builds the equity for these installing dealers, they're going to be very happy to get behind it and put equity in their business models. So we're excited about that.

Okay, that's helpful. And then just lastly, I know you just mentioned the kind of 50% recurring revenue target in 5 years, do you still feel confident in that $40 million target exiting fiscal '21?

Yes, we do.

Our next set of questions is coming from the line of Matt Pfau of William Blair.

Wanted to ask first on the iSecure product, and does that contribute at all to the strength in the recurring revenue in the quarter? Or if not, when should we start to expect iSecure to become a more material contributor to that growth?

Kevin, do you want to explain that?

So this quarter, Matt, iSecure shipped the very end -- very end of the quarter. So we hit 81% recurring revenue gross margin, not because of that, the dealers, the customers just got a taste of this product at the very end of the quarter. As this becomes a bigger and bigger seller, as we've said, new products take a few quarters, let's call it, 9 months to really have an impact. Then you'll start to see stats even better. Really the stats that you saw this quarter was more about fire radios. When we have our projection of $40 million run rate by the end of '21, we're not even counting iSecure. We think just what we have that's out there now and not counting iSecure, not counting getting recurring revenue out of the locking and the access sides of the business. We're not counting on that. That's going to be even gravy on what we're calling the $40 million run rate by the end of '21. So stay tuned. It could be even more exciting than what we're saying. And one thing I'd like to point out, we say, it's by the end of June. Could it be earlier? Yes. Could it take a little longer? Yes, but it's in that range. That's -- right now, we feel we're on target to that $40 million.

Yes. Got it. And then with the new recurring revenue, locking and access control products. I think the -- it's clear what the incentive is for the dealer base to go out and sell these products. From the end customer perspective, these are 2 areas where there historically has not been a sort of recurring fee associated with them. So how do you go about, I guess, selling the value proposition to the end customer to get them to transition to start paying a recurring fee for some of these locking and access control products?

It will come from the functionality that the dealer can offer the end-user customer. That functionality in a lot of applications is very powerful, does not exist, that data does not exist, the end-user customers to get, but they would like to have it because it would help him manage his business better. It would help him build a stronger network of employee that work in the office, gives them additional information that they need to work with. So I can't get into any more specifics than that, but it's powerful enough to pull itself over and sell it for a price point to those end-user customers. And certain customers will use it, certain might not at the beginning, but it's going to pick up a lot of momentum. And it won't affect the IT department or need IT approval because of the fact it doesn't get on to the network of the company, it's direct using our cellular radio cloud and that makes it very exciting and much easier to sell into these corporations.

Great. And then last one for me. Just on the distributor that pulled back on their purchases because they're in an acquisition process. Have you ever seen a situation before in your business where there's been this disconnect between distributors purchasing and the actual sell-through? And if so, what has the end result been previously? And how long did those situations take to get normalized?

Kevin?

We've seen this on guys trying to lower their inventory levels. Periodically, that happens. They come into the end of the year, they want their inventory to be lower at the end of December. They wanted to be virtual distributors, just-in-time distributors, which is crazy, but we've seen that. This one was different. I have to think back, I don't remember where a distributor was being sold. This is a big transaction. They're a big customer for us. I don't recall that, but I do know that any time, inventory levels were adjusted for whatever reason. As long as the sell-through is strong, it comes back. That's the key. We didn't have that. We'd be a lot more worried.

Why don't you describe the sell-through numbers again, so everybody understands that the products are checking really well.

Right. So just to reiterate what they worked, the sell-through for Q2 was up 15% versus last year's Q2. And the sell-through for Q2 was sequentially up 11%, meaning it was 11% better than it was in Q1. Those are the kind of stats that we monitor. We monitor with all our distributors, not just this one. And when it's that strong, it usually mean -- got to mean that they'll be buying in short orders or otherwise they will lose sales. They don't want to sell, no matter who it is, whether it's the existing owners and new owners.

Our next set of questions come from the line of Jeff Kessler of Imperial Capital.

Could you parse -- can you parse out on your recurring revenue product, the part that's going into -- that being sold into 20% of your business that is residential? Are there areas of strength and areas of weakness depending on either the size or the type of end user that ultimately getting that? Or is it more dependent on the type of dealer who is selling to those end users?

Jeff, the question is, are we stronger in commercial or residential, we're 80% commercial. We see much more in the way of -- we do residential. I do really push it out for you because a lot of the people that are involved as competitors will listen in on what our strategy is. But we can just tell you that 80% of our RMR is on the commercial side and growing very rapidly, and it's complicated commercial, meaning it’s commercial that needs a lot of codes and authorities of jurisdiction by our marshals to agree to use it. And we've been at that stage, we are into blossoming out our business in self-contained radio cellular communicators. And now we're incorporating and building it into panels. So we can get both the aftermarket and we can get new business. And as the phone companies become less in managing their copper, they don't want to spend time in repairing copper lines, installing copper lines, this will get stronger and stronger and stronger. Hence, we feel our 2011 plan and our 5-year plan of being 50-50, we believe will come into fruition.

Okay. With regard to LTE and 5G, two are not exactly the same, but they are coming about -- at about the same time and each affect -- each kind of affect each other. Are you -- when you were looking -- talking to your larger -- your commercial customers, what functionality do they want from you? That would -- what functionality do they want from you, that is going to affect your view as to what type of product you think is going to sell-through better to them depending on the new technology that is being introduced out there now?

It's not really the end user that makes the decision with its -- our dealers. Our dealers want coverage, reliable coverage in the areas where they do the installations. And also in the commercial business, you don't need a lot of fast data. Typical -- it's typical machine to machine. So slow data, the type of data you get LTE works just fine for all alarm and security applications. 5G is overkill. It's like, do you need a Ferrari to go to work in the morning? Or were your SUV work just fine? The Ferrari is not needed. But we have made our products such that you can put a Ferrari engine in them, if that's the only thing available. The manufacturers that make the chips, the service providers like Verizon and AT&T are agreeing to keep the LTE networks going on for years and years and years and, therefore, right now, it's the best choice as the greatest coverage, the greatest range, and that's what the dealers sell to their end-user customer. The end-user customer just want service, he wants a monitoring contract with people that can call the fire and police and medical and the best dealers do that type of work and we sell tons of them.

Okay. One other question. As you increase your penetration into adding iSecure, and also, if you want to call it, in the generic sense, adding cellular on top of the products that are already out there. Do you see demand from the dealers for essentially for adding more than just your cellular add-on or getting, in fact, ultimately, getting you involved in -- on their network in some way or shape that would either present either more obviously, complication for you, but also could present more revenue for you as well?

I don't understand the question. Are you saying beyond locking and access control, beyond fire, beyond intrusion, beyond medical, services beyond all of that?

I'm talking about within those verticals?

Yes.

Within those verticals, do you see any demands for more functionality with the products that you offer -- on top of the products you're offering now?

Yes. We offer a whole menu of services. And they pick and choose that menu services, the menu to get it from all these things, not including the locking and access, which will be coming on board, will be a 100 different items that are offered, which are features that are added to our recurring revenue cellular service, cloud service. So that's our plan. Everything under our umbrella that we -- that I just enumerated, we'll offer every single feature. And if something new comes up over the years that we invent or somebody else comes up with something and they need it, made it cellularized into a way where it becomes part of our menu, we will do that also.

Okay. That's kind of what I was asking, getting out to some of the new features that you're not offering yet that you might -- that are actually being talked about now? Are you able to -- I realize you have competitors on this line, but I'm trying to get to some of the new features that you might be able to offer?

Why don't I invite you to lunch and we can have a tech discussion about this and find out exactly where each of us are.

Okay. Okay. That's great. That's the question that I wanted. And that's the answer that I got, and we'll see each other soon.

(Operator Instructions) We have reached the end of the question-and-answer session. I will now turn the call back over to Richard Soloway for any 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. 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 '20 results. Bye-bye.

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