NAPCO: “SECURING” TOP PLACE IN THE SECURITY DEVICES INDUSTRY
![NAPCO: “Securing” Top Place in the Security Devices Industry](https://www.aviseanalytics.com/wp-content/uploads/2023/07/image-76.png)
NAPCO Security Technologies, Inc. (NASDAQ: NSSC) is one of the leading manufacturers and designers of high-tech electronic security devices, wireless recurring communication services for intrusion and fire alarm systems, and a leading provider of school safety solutions.
NAPCO Security Technologies, Inc. (NASDAQ: NSSC)
Market Cap: $1.34B; Current Share Price: $36.47
Data by YCharts
The Company and its Products
NAPCO offers a diversified array of security products, encompassing access control systems, door-locking products, intrusion, fire alarm systems, and video surveillance products. These products are used for commercial, residential, institutional, industrial, and governmental applications and are sold worldwide principally to independent distributors, dealers, and installers of security equipment.
Since 1969, NAPCO has established a heritage and proven record in the professional security community for reliably delivering both advanced technology and high-quality security solutions, building many of the industry’s widely recognized brands, such as NAPCO Security Systems, Alarm Lock, Continental Access, Marks USA, and other famous product lines: including Gemini and F64-Series hardwire/wireless intrusion systems and iSee Video internet video solutions. The Company is also developing innovative technology and producing the next generation of reliable security solutions that utilize remote communications and wireless networks, including StarLink, iBridge, and, more recently, the iSecure product lines.
![NAPCO: “Securing” Top Place in the Security Devices Industry](http://www.aviseanalytics.com/wp-content/uploads/2023/07/23067313-1690189595227623.png)
We’ll discuss critical factors that make NAPCO an exciting watch.
- Multiple Tailwinds Driving Growth
The Company caters to large and growing markets. As shown below, there are multi-billion dollar opportunities for retrofits and new installs across commercial security, school security, and residential security markets.
![NAPCO: “Securing” Top Place in the Security Devices Industry](http://www.aviseanalytics.com/wp-content/uploads/2023/07/23067313-16901896067612119.png)
Specifically, there is a significant need for increased security in schools and other public spaces. In the U.S., there are over 100,000 K-12 schools, over 5,000 colleges and universities, and over 350,000 houses of worship, and less than 10% of these institutions have adequate protection from an active shooter or intruder.
![NAPCO: “Securing” Top Place in the Security Devices Industry](http://www.aviseanalytics.com/wp-content/uploads/2023/07/23067313-16901896137614858.png)
As a result of increased “active shooter” incidents, several U.S. states and local governments have substantially increased school security budgets. Many colleges and universities have large endowments which are starting to be utilized to address this critical issue. Security equipment and services focused on education have reached over $3 billion in revenues. This segment is still in the early stages as many K-12 schools, colleges, and universities still need to address this issue.
NAPCO has developed products to address these security concerns. For example, depending on the needs of the school and their budget, the Company offers (i) Standalone LocDown locks that a teacher can operate, (ii) a series of Networx standalone wireless locks that communicate with central controls, or (iii) enterprise-class access control with cellular connectivity, which allows the head of security to lock down all or part of the campus, including dorm rooms, classrooms, and administrative offices, from a centralized office.
NAPCO is the only security company with locking and access control technologies that work on the same platform – hence its products are often preferred over those of competitors.
The second growth driver for the Company is copper phone line obsolescence. As copper landlines are phased out and more people switch to cellular phone service for their homes, NAPCO’s cellular communication services have become increasingly attractive in these installations, both new and existing.
![NAPCO: “Securing” Top Place in the Security Devices Industry](http://www.aviseanalytics.com/wp-content/uploads/2023/07/23067313-16901896273747275.png)
In 2012, NAPCO began to generate recurring revenue by developing cellular radio technology. Since then, it has continued introducing additional products generating recurring income, primarily in cellular communication devices such as StarLink, iBridge, and, more recently, the iSecure product lines. There is a significant market opportunity for these products and services because many commercial and residential customers prefer to purchase real-time security monitoring services to ensure continuous protection and swift responses to security breaches and fire alarms.
The Company also experienced accelerating growth in revenue from sales of fire radio products. In the past few years, it introduced several Starlink fire radio solutions, including a Starlink dual path radio that can utilize cellular or internet technologies for communication. Local fire codes require dual-path radios in specific areas such as New York City or L.A. County. A third fire radio was introduced during fiscal 2019 as a Firelink fire panel with a Starlink fire radio built into it.
To summarize, there is an increasing requirement for safety and security equipment installations. NAPCO is poised to meet the growing demand for these with its portfolio of award-winning products (shown below).
![NAPCO: “Securing” Top Place in the Security Devices Industry](http://www.aviseanalytics.com/wp-content/uploads/2023/07/23067313-1690189633725339.png)
- Practical Business Model Consisting of Diversified Distribution Strategy and Differentiated Portfolio of Services
NAPCO benefits from a substantial, diversified distribution strategy focusing on the professional. The Company’s staff of approximately 60 sales and marketing support employees located at the Company’s Amityville offices sells and markets products primarily to independent distributors, wholesalers, and dealers of security alarm and security hardware equipment.
The Company currently has approximately 9,000 customers made up of distributors, installing dealers, and wholesalers who purchase our products from distributors or directly from the Company. The Company’s sales representatives periodically contact existing and potential customers to introduce new products and create demand for those and other Company products.
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NAPCO is also highly attractive because of its differentiated portfolio of high-margin recurring services. As discussed earlier, due to paradigm changes in the security marketplace, the Company focuses on mandatory (non-elective) systems, such as fire systems with central station monitoring in commercial buildings and iOT-driven connectivity services in high growth and margin categories.
NAPCO has built a strong competitive position by developing a wide range of software capabilities from embedded micro-coding to enterprise system software, database design, mobile applications development, user portal design, mechanical and electronic mechanisms, and telecommunications, featuring its significant radio and cellular communications expertise.
![NAPCO: “Securing” Top Place in the Security Devices Industry](http://www.aviseanalytics.com/wp-content/uploads/2023/07/23067313-16901896475843792.png)
This has enabled NAPCO to create recurring revenue opportunities across product lines, and its goal is to expand such opportunities to generate recurring revenue that will account for over 50% of total revenue and to sustain profitability from recurring revenue margins of over 80%.
The Company is also focusing on security solutions for the healthcare industry, including anti-ligature lockets designed for life safety and liability reduction in hospitals, behavior health institutions, and correctional facilities, and such products are highly profitable while complying with applicable regulatory and health standards. NAPCO can design and produce these products and services due to its advanced in-house engineering technology capability from mechanical to electronic and electro-mechanical products, digital, microprocessor, and analog circuit design, networking products, and wireless and cellular communications electronics.
- Strong Financial Profile
Over the years, NAPCO has demonstrated significant growth and desirable profitability.
![NAPCO: “Securing” Top Place in the Security Devices Industry](http://www.aviseanalytics.com/wp-content/uploads/2023/07/23067313-16901896558514376.png)
Most recently, for Q3 FY23, NAPCO reported that net sales for the quarter increased 21% to a Q3 record of $43.5 million compared to $35.9 million for the same period last year. Recurring service revenue for the quarter increased 26% to $15.1 million compared to $12.0 million for the same period the previous year.
The gross margin for recurring service revenue for the quarter was 90% compared to 87% for the same period last year. Net income for the quarter was a record $10.8 million as compared to $3.3 million for the same period a year ago, a 231% increase.
Earnings per share (diluted) for the quarter was $0.29 as compared to $0.09 for the same period a year ago, a 222% increase.
For FY22, net sales increased 26% to a record $143.6 million as compared to $114.0 million for the same period a year ago. Net income for FY22 grew 27% to a record $19.6 million or $0.53 per diluted share compared to $15.4 million or $0.42 per diluted share in the same period last year.
NAPCO expects solid demand for its products to continue for the rest of FY23 and the next fiscal year. The Company’s fundamental strategy continues to be to provide seamless security solutions for our customers and to continue to grow recurring service revenue with both existing and new products. Given NAPCO’s outstanding performance so far, it seems that its best quarters are yet to come.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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Reference:
https://www.sec.gov/ix?doc=/Archives/edgar/data/69633/000155837022014041/nssc-20220630x10k.htm
https://www.sec.gov/ix?doc=/Archives/edgar/data/69633/000155837023008469/nssc-20230331x10q.htm
https://investor.napcosecurity.com/
https://investor.napcosecurity.com/2022-08-29-NAPCO-Announces-Fourth-Quarter-and-Fiscal-2022-Results