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Napco Security Equipment Sales Fall 7.3%: Rapid Earnings Reaction
Key Points
Recurring service revenue grew 11.5% with margins above 90%, and that mix shift, not hardware, drove the higher gross margin.
Excluding the litigation credit, operating income fell about 4% and EPS was flat at $0.34.
Napco Security Technologies (NASDAQ:NSSC) grew first-quarter revenue 1.7% to $50.0 million, and shares fell about 17% in Monday trading. Equipment sales dropped 7.3% as two locking distributors cut orders, and recurring service revenue filled the gap. Net income rose 6.9%, but a $1.0 million litigation credit more than explains the gain. Excluding it, earnings per share were flat at $0.34.
Key Numbers
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- Recurring service revenue: $26.1 million, up 11.5%.
- Equipment revenue: $23.9 million, down 7.3%.
- Gross margin: 58.7%, versus 56.6%.
- Free cash flow: $2.3 million, versus $11.4 million.
What It Means
Mix, not better hardware economics, lifted gross margin. Service revenue earns margins above 90% and grew to a larger share of sales, while equipment's own margin slipped.
Operating profit fell without the credit. Excluding it, operating income dropped about 4%, because research spending and overhead grew faster than sales.
The weak cash flow looks mostly like a one-time litigation payout. A $16.0 million accrued litigation balance at June 30 was gone by September 30.
What to Watch Next
Watch whether equipment revenue recovers next quarter as distributor orders catch up with sell-through, which is distributor sales to installers. Management says it grew, but the release gives no figures. Also track the recurring revenue run rate, now about $106 million.
David Kretzmann has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.