Napco Security (NSSC) Q1 2027 Earnings Call Transcript

DATE

Mon, Nov. 2, 2026

CALL PARTICIPANTS

• Vice President, Investor Relations - Francis John Okoniewski
• Founder and Executive Chairman - Richard L. Soloway
• Chief Executive Officer and President - Kevin S. Buchel
• Chief Financial Officer - Andrew J. Vuono

TAKEAWAYS

• Net Revenue -- 50 million, increasing 1.7% year over year and establishing a first-quarter record.
• Recurring Monthly Service Revenue -- 26.1 million, representing 11.5% growth driven by ongoing activations of StarLink radio communicators.
• Annualized Recurring Revenue Run Rate -- 106 million, reflecting a 3 million increase since August 2026.
• Equipment Revenue -- 23.9 million, a decrease of 7.3% primarily due to inventory management at two large locking distributors.
• Gross Margin -- 58.7%, expanding from 56.6% in the prior year period as recurring service revenue became a larger portion of the total mix.
• Service Gross Margin -- 90.1%, remaining consistent with the previous year and reflecting the high-profit nature of wireless communication services.
• Equipment Gross Margin -- 24.3%, decreasing from 26% last year due to product mix shifts, higher Section 301 tariff costs, and technical services expenses.
• Net Income -- 13 million, a 6.9% increase year over year and a record for the first quarter.
• Non-GAAP Adjusted EBITDA -- 15.5 million, representing a 3.8% increase and an adjusted EBITDA margin of 31%.
• Free Cash Flow -- 2.3 million, decreasing 79.8% from last year following a 15 million litigation settlement payment made during the quarter.
• Cash and Marketable Securities -- 134.6 million, maintaining a substantial liquidity position with zero debt as of Sept. 30, 2026.
• Research and Development Expenses -- 4.1 million, an increase of 25.1% driven by the hiring of additional engineering staff and higher salary costs.
• Selling, General, and Administrative Expenses -- 12.1 million, rising 11.1% primarily due to elevated legal and professional fees.
• Intrusion Product Sales -- 1.7% growth, supported by steady demand for StarLink radio units.
• Access Control Product Sales -- 13.8% decrease, contributing to a slight overall decline in the broader Intrusion and Access Control category.
• Door Locking Revenue -- 10.1% decrease, reflecting inventory adjustments at key distributors and a comparison against high backlog demand in the prior year.
• Working Capital -- 175.2 million, representing an increase of 5.9% compared to the previous fiscal year end.
• Capital Expenditures -- $433,000, up from $193,000 in the prior year period.
• Effective Tax Rate -- 15.2%, down from 16.9% due to the remeasurement of certain tax liabilities.
• StarLink Fire Radio Base -- 75% of the total installed radio base, generating the company's most profitable recurring revenue mandated in commercial buildings.

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RISKS

• Andrew Vuono stated, "Equipment margins were affected by product mix within our Locking segment, higher Section 301 tariff costs, and technical services costs," noting pressure on the profitability of physical hardware sales.
• Kevin Buchel reported that "2 of our larger locking distributors reduced purchases as they worked through existing inventories," impacting equipment revenue for the fiscal quarter.

SUMMARY

Napco Security Technologies, Inc. (NASDAQ:NSSC) reported its first-quarter financial results, noting record revenue for the period. Management stated that growth was supported by steady expansion in recurring service revenue, which now comprises 52% of the total business. The company highlighted strategic initiatives including the launch of a new showroom, expanded architectural specifications, and entrance into the Canadian market following new product certifications. Management also noted that underlying demand remains positive despite temporary shifts in distributor purchasing patterns during the quarter.

• Management achieved UL certification for its radios in Canada, allowing the company to begin offering communication solutions to Canadian security dealers.
• CEO Kevin Buchel highlighted the potential of the Canadian expansion, stating, "We view Canada as a sizable growth market that complements our U.S. business."
• The company is advancing an OEM strategy for its radio communicators, which management expects to generate increasing recurring revenue in upcoming quarters.
• A new national dealer signed on to include the MVP cloud-based access control platform in its offerings, supported by training programs across multiple locations.
• The A&E program has identified 40 product-specific offerings for architectural and engineering firms, with a new portal scheduled to launch in April 2027.
• Management is opening a new showroom to serve as a hub for dealer training and to demonstrate the integrated portfolio of locking, access control, and intrusion technologies.
• The board of directors declared a quarterly dividend of $0.17 per share to be paid on Jan. 4, 2027.

INDUSTRY GLOSSARY

• StarLink: Universal wireless alarm communicators that provide cellular reporting for security and fire alarm systems.
• MVP: A cloud-based access control platform that integrates with locking hardware to generate recurring service revenue.
• A&E Program: A strategic initiative aimed at architects and engineers to have products specified during the design phase of construction projects.
• RSR: Recurring service revenue, which refers to the monthly fees paid for wireless communication and cloud-based security services.
• UL Certification: A safety and performance standard from Underwriters Laboratories required for security products to be sold in specific international markets like Canada.
• Section 301 Tariffs: United States import duties applied to products manufactured in China, impacting hardware production costs.

Full Conference Call Transcript

Operator: Good morning, ladies and gentlemen, and welcome to the NAPCO Security Technologies Fiscal Q1 27 Earnings Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press 0 for the operator. This call is being recorded on Monday, November 2, 2026. I would now like to turn the conference over to Mr. Francis John Okoniewski, Vice President, investor relations. Please go ahead, sir.

Francis John Okoniewski: Thank you, Anast, and good morning, everyone. This is Francis John Okoniewski, Vice President of Investor Relations for NAPCO Security Technologies. Thank you all for joining today's conference call to discuss financial results for our fiscal first quarter 27. By now, all of you should have had the opportunity to review our earnings press release discussing our quarterly 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 are Richard L. Soloway, Founder and Executive Chairman of NAPCO Security Technologies Kevin S. Buchel, Chief Executive Officer and President, and Andrew J. Vuono, Chief Financial Officer.

Before we begin, I would like to review our forward-looking statement. This presentation contains forward-looking statements based on current expectations estimates, forecasts, and projections of future performance as well as management's judgment, beliefs, current trends, and anticipated product performance. These statements include, without limitation, comments regarding growth drivers of the company's business, including school security products, 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 software, as a service recurring monthly revenue. Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those expressed or implied in those statements.

These risks include, but are not limited to, the factors described in our SEC filings, including our annual report on Form 10 k. Other unknown or unpredictable factors or underlying assumptions that later prove to be incorrect. Could also cause actual results to differ materially from those discussed in the forward looking statements. Although we believe the expectations reflected in these statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. You should not place undue reliance on forward looking statements. All information provided in today's press release and on 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.

Throughout the presentation, management will discuss certain non GAAP financial results. We encourage you to refer to the reconciliation between our GAAP and non GAAP results included in our press release. Before turning the call over to Dick, I want to note that we will be attending the International Security Conference trade show later this week, November 4th and 5th, in New York City's Javits Center. We will be showcasing an array of exciting innovative products. And if anyone is interested in attending, please contact me. And I will arrange to provide you a guest pass. In addition, we are actively planning our investor relations calendar for non-deal roadshows and conference attendance in the near future.

Investor outreach is important to NAPCO, and I would like to thank all those who assist us in these types of events. In the coming weeks, we will be attending the Robert Baird Global Industrial Conference in Chicago on November 12 the Stevens Annual Investment Conference in Nashville on November 19, the UBS Global Industrials and Transportation Conference in Palm Beach, Florida, on December 3 the Oppenheimer Virtual Winter Industrial Summit on December 9 the Raymond James 20 third Annual Security Investors Conference in New York City on December 16th and 17th and Needham's 20 eighth Annual Growth Conference also in New York City on January 13th and 14th. With that, let me turn the call over to Richard L.

Soloway, our Founder and Executive Chairman. Dick, the floor is yours.

Richard L. Soloway: Thank you, Francis. Good morning, everyone. And welcome to our conference call. We appreciate you joining us as we review our fiscal first quarter 27 performance. We began fiscal 27 with record first quarter revenue. Supported by continued growth in recurring revenue services. Our emphasis remains on expanding our recurring revenue base and advancing product innovation, and creating long term shareholder value. As founder and Chief Executive Chairman, I remain focused on that long-term strategic direction and opportunities ahead in commercial fire communications, access control, and locking solutions. I will now turn the call over to our Chief Executive Officer and President Kevin S. Buchel. for an overview of the quarter. Kevin, the floor is yours.

Kevin S. Buchel: Thank you, Dick. Good morning, everyone, and thank you for joining us. We began fiscal 27 with solid performance. Continued growth in recurring service revenue, strong profitability, and record first quarter results across several key financial measures. These results underscore the strength of NAPCO's business model, and the opportunities ahead of us. I will focus on the principal drivers of our performance, current market trends, and our priorities for continued growth. Let's start with recurring service revenue. Recurring service revenue remains a major driver of NAPCO's success. We delivered another quarter of double digit growth, maintained gross margins above 90%.

And increased our annualized recurring revenue run rate to approximately $106 million which is a $3 million increase over the level we reported back in August. The value of this business extends beyond growth it is predictable, high margin revenue. It provides greater visibility into future performance, generates significant cash flow and it supports continued investment in innovation and expansion. StarLink remains central to this strategy. Expanding its adoption across the security and commercial fire markets and growing our recurring revenue base continues to be 1 of our highest priorities. Now, let's talk about the equipment business. Equipment revenue was softer during the quarter. Primarily because of purchasing patterns at 2 locking distributors.

Importantly, this reflected the timing of distributor purchases rather than weaker end customer demand. Although these distributors purchased less from NAPCO, their combined sales to end customers increased both year over year and sequentially an encouraging indication that underlying demand remains healthy. Distributor inventory levels and purchasing decisions can affect quarterly revenue. The customer sell through provides a more meaningful view of the underlying business. We remain focused on strengthening our locking intrusion and access control businesses through innovation, close customer relationships, and expanded market opportunities. Now, let's talk about our business model. NAPCO's differentiated business model combines equipment sales with a growing recurring revenue stream.

Our products expand our market presence while our services deepen customer relationships and generate ongoing revenue. As recurring service revenue becomes a larger share of the business, it continues to enhance overall profitability. At the same time, maintaining a healthy growing equipment business remains an important management priority. Together, these complementary businesses provide a strong platform for sustainable, profitable growth. Our strategic priorities Looking ahead, our priorities are clear. Grow recurring revenue. Expand adoption of our communication products and services strengthen equipment businesses, develop innovative products, support dealers, and distributors and pursue opportunities to gain market share. Maintain operating discipline, protect strong margins and earnings potential, while pursuing additional growth.

Expand strategically evaluate disciplined organic investments and potential acquisitions that complement our businesses. Strengthen our competitive position and create long term shareholder value. As we move further into fiscal 27, I am encouraged by the strength of our recurring revenue business. Healthy underlying demand, and the opportunities across our markets. With a strong financial foundation and experienced management team, and a portfolio addressing critical security and life safety needs we are well positioned to execute our strategy deliver consistent profitable growth and build long-term shareholder value. I want to thank our employees for their hard work and dedication and our dealers, distributors and vendors for their continued support. With that, I will turn the call over to Andrew J.

Vuono, our CFO for a detailed review of our financial results after which I will return to discuss strategy, outlook, and some closing comments. Andy?

Andrew J. Vuono: Thank you, Kevin, and good morning, everyone. I will walk through our revenue, margins operating expenses, profitability and cash position for the quarter. Net revenue increased 1.7% to a first-quarter record of $50 million Recurring monthly service revenue continued to grow steadily, increasing 11.5% to $26.1 million driven by ongoing activations of our StarLink radio-fly communicators. Based on our October 2026 recurring service revenue, our estimated prospective annual run rate is now approximately $106 million Equipment revenue decreased 7.3% to $23.9 million The Intrusion and Access Control category decreased 1.8% overall, Within that category, intrusion product sales which include our StarLink radios, increased 1.7% offset by a 13.8% decrease in access control product sales.

Door locking revenue decreased 10.1% The comparison reflects the backlog demand that flowed into the first quarter of fiscal 26, as a result of tariff related price increases. In addition, 2 of our larger lodging distributors reduced purchases as they work through existing inventory. Which is partially offset by increased sales from project work during the quarter. Gross profit increased 5.4% to $29.4 million and gross margin expanded to 58.7% from 56.6% in the prior year period. Recurring service revenue continued to deliver strong profitability. Service gross profit increased 11.3% to $23.5 million with a gross margin of 90.1%. Remaining above 90% and consistent with the comparable quarter of fiscal 26.

Equipment gross profit decreased 13.2% to $5.8 million with a gross margin of 24.3% compared with $6.7 million and a 26% gross margin in the prior year period. Equipment margins were affected by product mix within our Locking segment, higher Section 301 tariff costs, and technical services costs. We continue to monitor supply chain conditions affecting the availability and cost of electronic components and other materials used in our products. Moving on to operating expenses. R&D expenses increased 25.1% to $4.1 million or 8.1% of net revenue compared with 6.6% in the prior year period. The increase was primarily driven by annual salary increases, the hiring of additional engineering staff higher stock-based comp, and benefits and engineering supplies.

SG&A expenses increased 11.1% to $12.1 million or 24.4% of net revenue compared with 22.3% in the prior year period. The increase was predominantly driven by higher legal and professional fees. Also during the quarter, we recognized a $1 million benefit representing the difference between the accrued litigation settlement cost and the amount we ultimately paid. This benefit reflects the difference between estimated insurance coverage and the amount paid by the carriers which reduced the company's portion of the settlement payment by $1 million This matter also indirectly contributed to the higher legal fees reported in the quarter. Moving on to profitability.

Operating income increased 3.5% to $14.1 million reflecting 11.5% growth in service revenue partially offset by lower equipment revenue and margins. Our effective tax rate was 15.2% compared with 16.9% in the prior year, The lower rate was primarily due to remeasurement of certain tax liabilities resulting from the prior year's -- the tax reform. Offset by a larger portion of taxable income attributed to The US operations in the current period. Net income increased 6.9% to a first-quarter record of $13 million or $0.36 per diluted share, compared with $0.34 per diluted share in the prior year, net income represented 26% of net revenue.

Adjusted EBITDA increased 3.8% to a first-quarter record of $15.5 million or $0.43 per diluted share compared with $0.42 per diluted share in the prior year. And our adjusted EBITDA margin was 31%. Moving on to cash flow and the balance sheet. Our free cash flow decreased 79.8% to $2.3 million representing a free cash flow margin of 4.6% as a result of the $15 million litigation settlement paid during the quarter. We ended the quarter with substantial liquidity and no debt.

As of September 30, we had $134.6 million in cash equivalents, and marketable securities Working capital increased 5.9% to $175.2 million as compared to which and as of September 30, capital expenditures were $433 thousand compared with $193 thousand in the prior year. This concludes my formal remarks.

Kevin S. Buchel: I will now turn the call back to Kevin. Andy, thank you, Andy. Before we open the line for questions, I want to put this quarter's results in context. And discuss where we are headed. Although revenue, net income, and adjusted EBITDA reached first-quarter records, all 3 of those records, overall revenue growth was more modest than investors are accustomed to seeing from NAPCO. 2 factors drove the decline in equipment sales. And neither reflects a weaker market or softer demand for our products. First, last year's first quarter benefited from backlog orders ahead of tariff related price increases. And second, 2 of our larger locking distributors reduced purchases as they worked through existing inventories.

To assess underlying demand, we closely monitor sell through statistics of the distributors' sales of our products to the dealers who use them. Those same 2 distributors I previously mentioned increased their sell through of NAPCO products both year over year and sequentially, Distributor purchasing patterns can affect quarterly revenue. But strong sell through remains our best indicator of end customer demand. We also continue to convert more dealers to NAPCO products. And that is a key driver of demand through distribution and we believe demand remains broad based. School security remains a major focus for NAPCO. Our integrated solutions bring locking access control and intrusion technologies together on a unified platform to protect students and staff every day.

Beyond education, our hardware continues to gain traction in healthcare, retail, multifamily housing, and airport infrastructure upgrades. The core of our business model continued to perform as designed. Recurring service revenue grew 11.5% with gross margins above 90% and now represents 52% of total revenue. And our prospective annual run rate, as I mentioned earlier, is approximately $106 million That run rate is an important leading indicator for our most profitable business. It reflects radios already installed and activated and the revenue we expect them to generate month after month.

Each StarLink activation adds to this growing base, Approximately 75% of our installed base is comprised of our Starlink fire radios, which are mandated in commercial buildings and it generates our most profitable recurring revenue. This steady high margin revenue generates consistent cash flow to fund innovation and growth We continue to enhance the StarLink platform to accelerate growth and protect margins. The strength of this model was evident in our results. Overall gross margin expanded more than 2 percentage points to 58.7%, which contributed to the record first-quarter net income and adjusted EBITDA. Our manufacturing facility in The Dominican Republic remains a key competitive advantage. Providing cost efficiencies stable and efficient logistics, and lower tariff exposure.

Even after paying the previously discussed litigation settlement during the quarter, We ended September with $134.6 million in cash and marketable securities. And of course, no debt. This financial strength gives us the flexibility to invest organically and pursue potential strategic acquisitions while continuing to return capital to shareholders. We continue to invest in the business and pay dividends while maintaining a debt free balance sheet. And as announced this morning, we are continuing our dividend program with a payment of $0.17 per share on January 4, 2027, to shareholders of record on December 14, 2026. A softer equipment quarter has not slowed our investment in growth. R&D spending rose 25% this quarter. Largely reflecting the addition of engineering talent.

Our goal is to develop more new products than ever before, many with recurring revenue potential. And bring them to market ahead of the competition. We are advancing 5 initiatives to broaden our channels, deepen customer relationships and expand into new markets. First, our OEM strategy continues to evolve around our radio communicators. We expect these engagements to generate increasing measurable recurring revenue in the upcoming quarters. OEM partnerships extend the reach of our communications business and offer the same recurring revenue potential that has made Starlink a cornerstone of our model. Second, MVP. Our cloud based access control platform. Which integrates seamlessly with our locking hardware and creates recurring revenue opportunities for NAPCO and our dealers.

During the quarter, we are happy to report a new national dealer. Signed on to include MVP in its customer offerings. We are training its sales organizations across multiple locations and supporting the rollout with promotional programs to accelerate adoption. National dealer partnerships provide scale, and we expect them to become an increasingly important channel. We believe MVP can extend our leadership into hosted access control reinforcing our strategy of pairing innovative hardware with cloud based services to generate high margin recurring revenue. We look forward to discussing MVP in more detail in the coming months. Having NAPCO products specified at the design stage positions us on projects before bidding begins. 1 of the most durable ways to win business.

Specifications often precede orders by months. As our presence in the architecture and engineering community grows, we believe it will be it will improve visibility into future revenue and help build a more predictable project pipeline and backlog. Our A and E program remains on schedule. We have identified 40 product-specific offerings. That we expect to complete by the end of this calendar year These will be available to design firms through our new A and E portal beginning in April 2027. Our new showroom opens with a ribbon cutting ceremony this Wednesday, November 3rd. We expect more -- actually, the ribbon cutting is tomorrow, not November 3rd. November 3rd is ISC.

Tomorrow, we expect more than 25 dealers national accounts, and distributors to attend. Architects, engineers, dealers, and end users will be able to see the full NAPCO portfolio working together. The showroom will also serve as a hub for in person and remote training access for all of our products. Better trained dealers can sell more effectively improve installations, and help us expand our dealer base. We also recently received UL certification for our radios. Which is a requirement for selling into Canada. That we had not previously met With this certification, we can offer Canadian dealers and their customers the same communications solutions that have driven our success in The United States.

We view Canada as a sizable growth market that complements our U. S. Business. A dedicated NAPCO team is focused on generating customer demand and building our presence with an opportunity to grow meaningfully over the coming years. We are excited about all these opportunities that lie ahead for us. And the rest of fiscal 27 and beyond. And we remain focused on delivering lasting value to our shareholders. Customers, partners, We thank you for your continued support and confidence in NAPCO. And that concludes our formal remarks. We will now turn the call open to the operator for questions. Operator, please proceed.

Operator: Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. If you would like to ask a question, please press star followed by the number 1 on your telephone keypad. Question has been answered and would like to withdraw from the queue, please press star followed by the number 2. And if you are using a speakerphone, please lift your handset before pressing any keys. 1 moment, please. I will compile the roster. Your first question comes from Matt Summerville with DA Davidson. Please go ahead.

Matt Summerville: Thanks. Excuse me. A couple of questions. OpEx obviously ran a bit hot relative to last year in Q1. You talked about that a bit, but I am curious how we should be thinking about OpEx cadence for both SG&A and R&D for the rest of the year. That being number 1. And then at the same time, can you articulate a reasonable go forward cadence for equipment gross margins with some of the moving pieces you talked about?

Kevin S. Buchel: Andy, do you want to take that 1?

Andrew J. Vuono: Sure. Let me start with R and D. So I think the R&D levels we are at now in Q1 I would not expect significant expansion of where we are. I think that level is appropriate moving forward. G and A expense, again, my comments, the bulk of the increases is related to legal fees. We are still working through and trying to settle some litigation that is been disclosed in our filings. I hope this will work with those towards the end of the year, but that will continue to result in an increase during the year. But other G and A expenses should be pretty flat year over year. So the main driver is SG and A.

As far as equipment margins, again, my remarks, they were challenged in the current period because of tariff increases that we saw. And it is always driven by our volume. But I would expect our equipment margins to increase during the period. And for the full year, we expect us to be in the 26%-27%. Lance, you know, conservatively.

Matt Summerville: Great. And then as a follow-up, Kevin, the 3 or 4 or 5 things you talked about, towards the end of your final prepared remarks. Which has the ability to drive the most financial impact the soonest. And if you can maybe kinda rank order them a little bit, that would be helpful. And I guess, is there a way for you to frame up or put some bookend numbers around what this new the dealer relationship could look like for MVP? Thanks.

Kevin S. Buchel: Okay. So this. Just going back to what they were. The first 1 was relationships with OEMs. With our radios. We are doing that now. We have relationships with some of the largest companies out there. We talked about them. We are going to expand on what that is. As we head into these next 4 or 5 years, of radios taking the place of copper phone lines. We expect whatever you have been seeing over the last 10 years to be even better going forward over the next 5 Because now we have some very large players. That we are dealing with. So to me, that 1 is in motion already.

That 1 has the most immediate that 1 could be the most immediate impact. The Canadian market we have been working hard to get the ULC approval. Canada is a big market. there is a lot of big players. We have it now. That could be another immediate help to our numbers. We are working on it already, Just working to get people to recognize. They know our radios. They were always waiting for the ULC Now they have the ULC. So that is gonna be a big, I think, a big deal. Big market. Canada's a big country. Lots of radio potential. Now the 1 everybody wants to hear about is MVP.

And admittedly, we wished this would move faster than it has. I am encouraged by what I have seen lately. Getting this large dealer to get behind it a large dealer with multiple locations. that is a big deal. If we remember how the StarLink radios worked, when we got 1 big dealer, it led to another big dealer and another 1 and another 1. They see that it is working. They say, hey, if ADT is using it, it must be good. And then more guys use it. We are hoping that is the case with this because remember, MVP is something that really never been done. There are other companies out there that try to do it.

They have a portion of it. They have the access, but they do not have the cloud, or they have the cloud with no locks. We have it all. And I am very encouraged now by seeing that And also seeing that some of our distributors have gotten behind MVP also with multiple locations. Training all their branches. So if I had to put that 1 -- that 1 has the most potential. In terms of recurring revenue dollars I do not know if it is gonna be as immediate as what we are seeing with the first 2 things I mentioned. But it could be the biggest of all of them. The specification market, I would put that next.

The spec market, it is a big opportunity. We have been missing out You know, we see. We listen to the calls of our competitors. They are all big players in the spec market. When we added Joe Pichinski as our Chief Revenue Officer, he is got a background. In the spec market. He said, you know, why are not you guys doing it? You should do it. he is working hard on getting that done. I do not know if we will see anything until April-ish, but we will see it. it is a big market. Most of you are familiar that there is lots of things that go out to bid.

If you are not listed, if you are not specified, you are not getting it. We are gonna be listed. And then the showroom is the fifth 1. The showroom, we invite all of you guys to come visit it. it is brand new. it is a real showpiece. And we are gonna invite dealers distributors. We are inviting them. They are gonna be here tomorrow, many of them. And it is a great way to train dealers and distributors going forward. It shows all of our products, and it is very exciting. We worked hard to get it ready for ISC week, which is this week. it is ready.

And it should be a very complementary event to everything else we are doing. I hope that answers you, Matt.

Matt Summerville: Yes. Thanks, guys.

Operator: Thank you. Your next question comes from Jim Ricchiuti with Needham and Co. Please go ahead.

James Ricchiuti: Hi. Good morning. A question I have is just on sell-through, I believe. Kevin, if you could, can you put. Give us a little bit more detail on the 2 distributors on the door locking side, what kind of increases they saw year over year and sequentially And then just more broadly, what are you seeing in terms of sell through in the rest of the channel?

Kevin S. Buchel: So, the 2 distributors, they were locking distributors. They are locking distributors. They buy both our AlarmLock products and our Marks products. They buy both. And I, of course, look at the sell-through stats. What I saw was sequentially, the increase was double digits. That I was very impressed with. Because that is the latest and greatest info. And it was double digits. The year over year was about 5%. Not as impressive as the sequential, but sequential to me, more important. So they both were very positive stats. You know, there is lots of factors that go into why distributors, they buy, they do not buy. 1 of our.

1 of these 2 distributors is opening up a brand new large branch And they wanted a time when they do the buying. For that branch and for their buy as a whole when the branch is ready. Well, the branch is ready now this quarter, Q2, for us. October, November, December. So they held back but now they are buying already. I think when the whistle blows, December 31, both of these distributors will be back and this will just be considered a timing difference. It happens. it is happened before. And, you know, it will happen again.

As we get more and more recurring, and we get more and more predictable business, through you know, the things I have spoken about. It will offset our dependency, if you will, on the distributors coming through.

James Ricchiuti: Yeah. I do not wanna put words in your mouth. In terms of the 1 distributor that you alluded to coming back, but as that business started did you see a pickup in October? And if there is any color you could provide on that as well as the second distributor. Have you seen signs of that recovery in October? And then 1 final question. Just with respect to Canada, intriguing news on that front. What kind of investments do you need to make to us?

Kevin S. Buchel: So with regard to your second question, Canada, we really just have to invest in sales personnel. We have reps that cover Canada. But I have. You know, reps are great. But they have lots of different lines they are concentrating on. I have always found you have your own people. I know it is more expensive than just having a rep that you pay just a commission. But if you really wanna make a difference, you gotta have people who are dedicated to the company. So we have to add personnel. that is to me, the biggest investment. The first question, we have seen business.

I cannot get too deep because it is this quarter, and we do not really like to talk about the quarter we are in. But just to give you a little flavor, we actually got orders from 1 of these 2 distributors on October 1st, the next day. The quarter is over. The next day, orders are coming in. it is just the way things work. You know, your reaction is, well, why did not you give it to me yesterday? it is just not the way it works. We are happy we got it. It will be part of this quarter. And hopefully, a lot more to come.

James Ricchiuti: Thank you. Thanks, Jim.

Operator: Thank you. Your next question comes from James Schmidt with Lake Street Capital Markets. Please go ahead.

Jaeson Schmidt: Hey, guys. Thanks for taking my questions. Kevin, just curious if you could comment on what you are seeing in overall channel inventory. And I guess, related to the locking distributors as well, what do you see from a channel inventory perspective there?

Kevin S. Buchel: Yes. The it is not bloated. You know, we have had. We have gone through periods where the channel gets bloated. The last 1 that I remember is when we had the 3G sunset. It was not locking. It was radios. But the channel got bloated because everybody loaded up because they were afraid they it was very hard to get inventory 3G radios were going away. We were 1 of the only guys, if not the only company, who could deliver radios. Back then. And so everybody loaded up. And when it was all said and done, the channel was full. It was bloated, as I like to refer to it. that is not the case here.

The only thing I would say here is locking distributors and maybe distribution in general. They do not carry as much as they used to. Years ago, 3 months, we encouraged 3 months. A lot of them do not wanna do that. They carry 2 months. If it gets too low, we point it out. Sometimes when we point it out, they react. Sometimes they do not. But you know, 2 months, I think, is still safe. 3 is better. You always want that dealer when he comes into your place you have the product. And remember, these 2 months, 3 months, they are averages. You have to have what I believe is 3 months across the board.

You never know who is coming in. You do not want them going across the street to the competition. They do not do that as much. Everybody plays it a little tighter. 2 months, nothing more drastic, I do not see. Than that. And I do not see you know, any large volumes of inventory choking any of these distributors.

Jaeson Schmidt: Okay. that is really helpful. I will jump back in queue. Thanks, guys. Thanks. Thanks, Jaeson.

Operator: Thank you. Ladies and gentlemen, as a reminder, if you have any questions, please press star 1. Your next question comes from Jeremy Hamblin with Craig Hallum. Please go ahead.

Jeremy Hamblin: Thanks for taking the questions. So I wanted to come back to the MVP rollout. Just in terms of the support, you talked a little bit about rolling out in Canada. But as you look at MVP, and the support for that new product line, what do you need to invest in rolling that business out? I know that you are expecting to have a bit of traction that comes in this quarter and hopefully into 2027. Can you get into the details around this specific cost to support? I mean, what is the incremental to your, you know, SG&A? On a quarterly basis or on an annualized basis?

Kevin S. Buchel: Yeah. We have been investing already. So we put in a lot of the R&D already. That work is essentially done. Little tweaking here and there. Does not mean we need to do any large investing on the r and d side as it pertains to MVP. Our sales team is in place We have added people. To cover MVP. it is there. Now it is just the question of execution. So again, I do not anticipate any real impact in the SG and A. The only thing that could happen, and I hope it does happen, is we will have more commissions to pay because MVP will be successful We will be happy to pay that.

We will be happy to spend more SG&A dollars as it pertains to that. But from a foundational point of view, nothing really additional.

Jeremy Hamblin: Got it. And then a follow-up question on product pricing. So last year, with the tariffs you guys obviously had a couple of price increases that you took. You know, I am not sure what you are anticipating on a go-forward you know, whether it is the radios or the locking side of your business, But I think you mentioned that the tariffs impacted gross margin by about 100 basis points. In the quarter Just wondering where you are at in terms of, you know, the business itself. You know, obviously, equipment sales were a little bit light in the quarter. Are you thinking about you know, taking price increase?

If so, when And, you know, how do you feel about the overall environment, like, competitive environment on price, you know, given that you took a couple of increases last year and you know, this year, maybe not as much.

Kevin S. Buchel: Yeah. I will let Andy handle this 1, but I just. What I would wanna mention is pricing is very tricky. So we have the tariff rate that we were not paying 10%. You know, nobody likes to pay extra. We took a price increase to cover it. Then it went up. Unexpectedly. It went up. to 12.5%. So that is an additional 2.5%. We could have raised the price again, say, hey, tariffs are up. You. We are putting another price increase. that is on the heels of tariff refunds. So that does not look so great. So we did not do anything. It does not mean we will not. Does not mean we cannot.

But we did not do anything yet. Still an open issue. Andy, I do not know if you want to add any more color. To this.

Andrew J. Vuono: Yeah. So, Jeremy, you know, we are constantly looking at, our cost structure and where our current pricing is. I would say we are going to revisit the impact of the tariffs. I think on the intrusion side, it is very competitive as far as the radio pricing. So we are gonna be cognizant of that, and we do not wanna do anything that is going to upset our position in the market around that. We are gonna take a look in. At our locking specifically around our pricing on mechanical locking. Some of our project work. So that is that is in discussions. And we are I am continuously monitoring what the component costs are.

I made a comment that to date, we have not seen a tremendous increase, but we are we are constantly watching that. So that could also drive some pricing decisions So I would think in the near term, in this quarter, I am not sure we can do anything specific around tariffs, but we are looking at that through the rest of the rest of the calendar year or the rest of the fiscal year. And we need to make a decision, you know, what we are gonna do on pricing. But we are we are cognizant of it, and we may we may do a pricing increase as a result in tariffs.

But to Kevin's point, we are coming off the refunds. We had a. We had an 8.5% increase at the end of last year. You know, the covered tariffs. So we are trying to be cognizant of what the what the market is. We are definitely looking at it on the locking side.

Jeremy Hamblin: Got it. Thank you so much. Best wishes. Thanks, Jeremy.

Operator: Thank you. Your next question comes from Andrew Sherman with DA Davidson. Please go ahead.

Andrew Sherman: Great. Thanks, guys. For both Kevin and Andy, would be great to dig into the StarLink quarter and growth drivers there. How did growth compare with last quarter? How much of the growth you have seen is from replacement of existing versus new installations? And is there any reason why the strong unit growth you have seen should not translate into accelerating RSR growth in the next few quarters? Thanks.

Kevin S. Buchel: Andy, you could take it.

Andrew J. Vuono: So like I mentioned, my comments, and you will see in the Q, so intrusion sales on a stand alone basis increased 1.7% So as far as radio units being sold in the quarter, it was a good quarter. You know, we are coming off a record Q4. We were not at that level. But we look at activations. So year over year, activations of fire radios was up over 8%. And quarter to quarter, we are up almost 3.5%. So our leading indicator is activations. Which drives demand. We think from a. And you saw it from the run rate growing. That we continue to see, you know, growth in the in the radio sector and double digit growth.

So we are confident that will continue moving into the next quarter.

Andrew Sherman: Okay. Great. And then on the schools -- Maybe, Kevin, on the schools and university market, it would be great to hear what you are seeing there. Have you seen increased demand from schools, you know, given the focus on security incidents and maybe touch on the other markets too, like health care and retail. Thanks.

Kevin S. Buchel: Yeah. The school segment airports, high rise buildings, hospitals, they are all doing well. I cannot break it out for you, especially schools. Schools is the 1 I would really like to break out. Because it is top of mind. Everybody understands it. School shootings go on. Almost on a daily basis. Sometimes there is multiple ones per day. Insane what is going on. We are a player in that. A lot of times, it goes through distribution. And we do not even know Sometimes it comes to us direct and we wanna announce it because we wanna tell you the investors, what is going on. And the schools do not allow it.

They do not want it for whatever reason. You know, in my mind, they should be shouting it from the rooftops, Rooftops, but in many ways, they like to stay off the radar screen. So we cannot announce it. We cannot tell you. But we know it is a strong area. When locking sales are strong, and they are typically strong, and I know this quarter was a little different, because of the distributors. it is a function of each of these areas. Doing well. But we cannot tell you what it is. And I know you asked earlier how much is new construction, how much is replacements. Again, remember how we sell. We sell to distribution.

So we do not know if it is for new work or for replacement. But we know that these are all very successful markets for us, and we will continue to be so.

Andrew Sherman: Great. Thanks, guys. You are welcome.

Operator: Thank you. Next question comes from Ryan Gilchrist with Mizuho. Please go ahead.

Ryan Gilchrist: Hey. Thanks, guys. Andy, quick 1, maybe just on the 26% to 27% equipment gross margin target or outlook for the year. Can you just help us understand what is embedded in that target? Maybe how much improvement comes from distributor volumes versus pricing and cost initiatives? And how we should be thinking about that and how it unfolds? Throughout the year?

Andrew J. Vuono: Sure. So the bulk of it is increased volume. So coming off of, you know, a somewhat soft Q1. Our expectation is volume will increase. Volume is a big driver of increased expansion in margins as absorbs additional overhead. And the other is mix. Again, in this quarter, even the locking sales, it was more mechanical locking sales, and electronics have higher margins. Expectation is between product mix and locking. And overall increase in volume. Those margins should expand between those 2 items. So I am just. I am not even taking into account potential pricing increases into that number. So my expectation is with volume increase and mix changes, we will improve our margins.

Ryan Gilchrist: Got it. Super helpful. And then, Kevin, maybe just 1 for you on the MVP follow-up there. With the investment now in place, can you help us understand kind of the biggest obstacle there to turning dealer interest into paying installations and kind of how you guys are thinking about the strategy there?

Kevin S. Buchel: Yeah. The biggest thing. And it is been this way for the last I will say, several months, is training. Training dealers how the product works. These are locking access dealers. They are not used to this type of setup. Alarm dealers who get recurring revenue all day long they were not used to it either 20, 25 years Now it is an everyday event for them. We gotta teach the locking dealers how this works. How the product works, and we have made it much easier than it used to be Many of you will remember we had a different product years ago called AirAccess that was very complicated. This is much simpler. it is just a training thing.

We told our team get out, get with the dealers. Train them. Hold their hands. Whatever you gotta do, do not leave until they understand how it works. Because if they understand how it works, they are gonna buy in. So it is training. that is the bottom line.

Ryan Gilchrist: Awesome. Thank you, guys. Thank you.

Operator: Thank you. There are no further questions at this time. I will turn it back to Mr. Buchel for some closing remarks.

Kevin S. Buchel: Thank you, and thank you, everyone, for participating in today's conference call. As always, should you have any further questions, feel free to call Dick, Fran, Andy, 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 Q2 results. Have a great day, everybody.

Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.

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