Napco's 2026Q1: Contradictions Emerge on Channel Inventory, Recurring Revenue, Tariff Impact, and RSR Growth Rates

Date of Call: November 3, 2025

Financials Results

• Revenue: $49.2M, up 12% YOY (Q1 fiscal 2026 vs Q1 fiscal 2025)
• EPS: $0.34 per diluted share, compared to $0.30 per diluted share for the same period last year (net income $12.2M vs $11.2M)
• Gross Margin: 56.6% overall, compared to 55.9% prior year; recurring revenue gross margin 90.3% vs 91.1% prior year; equipment gross margin 25.7% vs 23.6% prior year
• Operating Margin: Approximately 27.6% (operating income $13.6M), operating income up 15.1% YOY from $11.9M

Business Commentary:

* Revenue Growth and Margin Expansion: - NAPCO Security Technologies reported record Q1 revenue of $49.2 million, which is a 12% increase compared to the same period last year. - The company's equipment sales contributed to this growth, reaching $25.7 million, also up 12% year-over-year. - The growth was driven by increased volume in door locking products and the impact of price adjustments for tariffs and regular annual price increases.

• Strong Recurring Revenue Performance:
• Recurring monthly service revenue for Q1 increased by 11% to $23.5 million.
• The recurring revenue service now has a prospective annual run rate of approximately $95 million.

• The growth was driven by continued demand for the company's StarLink radios and the integration of new recurring revenue services like the MVP platform.

• Operational Efficiency and Financial Stability:

• Cash grew to $106 million by the end of September 2025.
• The company declared a quarterly dividend of $0.14 per share, representing a continuation of its dividend program.

• This financial stability is attributed to strong cash generation, effective cost control, and a debt-free balance sheet, which supports potential strategic acquisitions and shareholder returns.

• Importance of the Dominican Republic Manufacturing Facility:

• The manufacturing facility in the Dominican Republic provides cost efficiency and stable logistics, contributing to the company's competitive advantage.
• The plant offers lower tariff exposure compared to manufacturing in higher-tariff regions.
• This facility allows NAPCO to maintain competitive pricing and manage risk in the face of external market and regulatory uncertainties.

Sentiment Analysis:

Overall Tone: Positive

• Management described a 'record Q1 revenue' of $49.2M (up 12% YOY), recurring revenue run rate of ~$95M, net income $12.2M (25% of revenue), adjusted EBITDA margin 30.4%, cash $105.8M and no debt; commentary emphasized momentum, product launches (MVP) and optimism on margins and growth.

Q&A:

• Question from Matt Summerville (D.A. Davidson & Co., Research Division): What percent of your locking mix is networked today and how does MVP differ from other major locking players?
  Response: Locking represents 66% of equipment sales; MVP is an in‑house integrated hardware+cloud solution (two SKUs: MVP EZ and full enterprise), $3/door subscription, designed to create recurring revenue for locksmiths/integrators and expected to gain traction.

• Question from Matt Summerville (D.A. Davidson & Co., Research Division): In Q1, how much of hardware revenue growth was price versus volume, and how should the remaining pricing benefit cadence out?
  Response: Preliminary analysis: ~60% of the ~12% equipment revenue increase was volume, ~40% pricing; management expects greater realization of pricing benefits as the fiscal year progresses.

• Question from James Ricchiuti (Needham & Company, LLC, Research Division): What was overall growth in door locking products and did early pricing benefits show more in locking than radio?
  Response: Locking revenue Q1 was $17.083M vs $13.854M prior year (substantial increase); some orders were pre-buy to beat price increases, but much of the growth reflected genuine demand.

• Question from James Ricchiuti (Needham & Company, LLC, Research Division): What is the tone of demand and sell‑through from channel partners?
  Response: Sell‑through through Q1 was very strong across locking partners (both locking companies) and intrusion; inventory and sell‑through metrics look healthy though distributor behavior around year‑end can vary.

• Question from Peter Costa (Mizuho Securities USA LLC, Research Division): What caused the ~80bp YOY decline in service margins — underlying radio margins or MVP acceleration?
  Response: Recurring margin slipped to 90.3% from 91.1% due to two factors: added cost for triple‑carrier (T‑Mobile) minutes and pricing concessions to large consolidating dealers; management may modestly raise recurring charges to offset the minutes cost.

• Question from Peter Costa (Mizuho Securities USA LLC, Research Division): Would the price change for triple‑carrier radios apply to the entire installed base or only new sales?
  Response: If implemented, a modest recurring price increase would likely apply broadly across the installed base to cover triple‑carrier costs; decision is under review and expected to be imminent.

• Question from Jeremy Hamblin (Craig‑Hallum Capital Group LLC, Research Division): Any impact from the DR hurricane on manufacturing and thinking on tariffs/pricing into calendar 2026?
  Response: DR facility sustained no hurricane issues (Category‑5 concrete facility, self‑sufficient); tariffs are stable at ~10% for DR, company took tariff‑related and general price increases (April and July) and does not expect additional increases this fiscal year; full pricing benefit to be realized over coming quarters.

• Question from Jeremy Hamblin (Craig‑Hallum Capital Group LLC, Research Division): When will recurring revenue from locking (MVP) show up meaningfully in service revenue growth?
  Response: Management expects MVP adoption to take ~18–24 months; meaningful contribution likely in fiscal 2027, though some incremental impact may appear earlier.

• Question from Jeremy Hamblin (Craig‑Hallum Capital Group LLC, Research Division): By FY‑27, what portion of service revenues could be tied to locking vs alarm?
  Response: Too early to provide a percentage; management expects locking‑related recurring revenue could be meaningful but declined to quantify.

• Question from Jaeson Schmidt (Lake Street Capital Markets, LLC, Research Division): Update on ADI relationship — progress?
  Response: Relationship with ADI is excellent for intrusion sales; management sees an opportunity to expand locking sales across ADI's ~115 branches and is pursuing that.

• Question from Jaeson Schmidt (Lake Street Capital Markets, LLC, Research Division): When will the recurring price increase for T‑Mobile compatibility go into effect?
  Response: Under active study; management is cautious but acknowledges added cost and described the increase as imminent though not yet decided.

• Question from Lance Vitanza (TD Cowen, Research Division): Status of the Pasadena school contract and implications for school security opportunity?
  Response: Pasadena project completed; management views the school security market as large and early‑inning with continued opportunity—NAPCO positioned as a one‑stop solution (locks, access, alarms) for schools and campuses.

• Question from Lance Vitanza (TD Cowen, Research Division): With cash at ~$106M, any plans for accelerated return of capital or M&A?
  Response: Company has $105.8M cash and no debt; open to disciplined, accretive M&A that fits strategic criteria but will be selective; will continue dividends; no commitment to accelerated buybacks announced.

Contradiction Point 1

Channel Inventory Levels and Sell-Through Statistics

It involves differing perspectives on the status of channel inventory levels and sell-through statistics, which are critical for understanding the company's demand and market positioning.

Are channel inventories a concern now due to the tariff-driven price increases mentioned? - Unknown Executive

2026Q1: The inventory that was bought pre-tariff price increase was done in April pretty much. So that's 4 or 5 months before the end of this quarter that we're in now. We expect distributors to buy more. The sell-through stats are good, the tariff chaos has kind of cleared up. - Unknown Executive

Can you quantify the pull forward in equipment sales? Could you elaborate on the strong sell-through stats? - Unknown Executive

2025Q4: The sell-through stats that I have talked about is usually relates to the quarter that we just reported on. And so our sell-through stats for the June quarter were good. - Unknown Executive

Contradiction Point 2

Recurring Revenue Growth Expectations

It involves differing expectations regarding the growth of recurring revenue, which is a key financial metric for the company.

How much of the Q1 hardware revenue growth was due to price versus volume? - Matt Summerville(D.A. Davidson & Co., Research Division)

2026Q1: Approximately 60% of the 12% increase in equipment revenue was due to volume, and 40% was due to pricing increases. - Andrew Vuono(CFO, CAO)

Do you expect similar sequential increases in RSR for the next few quarters based on historical fire radio activations? Given the recent price increases on equipment, why isn’t the equipment business expected to grow double digits in fiscal 2026? - Matt Summerville(D.A. Davidson)

2025Q4: We have to keep having strong radio quarters for that to happen. And that's our intention. We're coming out with a lot more recurring revenue radio products, not just the ones that are out there now. We're not standing still. We're aggressively marketing what we have. It all comes together when you have radio sales. - Unknown Executive

Contradiction Point 3

Locking Product Mix and Recurring Revenue

It involves the expectations for the growth and impact of networked locking products on recurring revenue, which are crucial factors for strategic planning and investor expectations.

Can you break down the hardware revenue growth for Q1 into price versus volume contributions? - Matt Summerville(D.A. Davidson & Co., Research Division)

2026Q1: Most of the sales in locking are traditional products. The networked product, MVP, is just starting out and gaining traction. It's expected to become more prominent as upgrades are showcased. - Kevin Buchel(COO)

What is the current mix of hardware generating recurring services revenue, and how will the new offering launched at ISC West evolve over the next few years? - Matt Summerville(D.A. Davidson)

2025Q3: Recurring revenue mainly comes from StarLink radios, which are fire radios and burglary radios. New products introduced at ISC include advanced fire radios and remote access control platforms, expanding our capabilities. - Dick Soloway(CEO)

Contradiction Point 4

Tariff Impact and Pricing Strategy

It involves the company's approach to covering tariff costs and pricing adjustments, which directly impact financial performance and operational strategy.

Will you consider raising pricing in 2026 in light of the tariff impact? - Jeremy Hamblin(Craig-Hallum Capital Group LLC)

2026Q1: The tariffs in the Dominican Republic are stable at 10%. The company implemented a price increase to cover tariffs and expects no further action until the end of the fiscal year, focusing on the full impact of existing price adjustments. - Kevin Buchel(COO)

Have you implemented any price increases across your portfolio due to tariffs? - Jaeson Schmidt(Lake Street Capital Markets)

2025Q3: We announced an 8.5% price increase to cover tariffs in April, with a separate annual price increase expected in July. We expect to cover tariff costs through pricing. - Kevin Buchel(COO)

Contradiction Point 5

Recurring Service Revenue (RSR) Growth Rates

It involves expectations and projections for recurring service revenue growth rates, which are crucial for understanding the company's financial health and strategic direction.

Can you break down how much of the Q1 hardware revenue growth was due to price versus volume? - Matt Summerville(D.A. Davidson & Co., Research Division)

2026Q1: The growth is a combination of price and volume... Approximately 60% of the 12% increase in equipment revenue was due to volume, and 40% was due to pricing increases. - Andrew Vuono(CFO)

What is the more steady-state growth rate for RSR? When do you expect the growth rate to accelerate? - Matt Summerville(D.A. Davidson)

2025Q2: The growth rate in Q3 is expected to drop slightly to about 12%-12.5%, but it is anticipated to increase again in Q4 due to strong radio sales in Q1 last quarter. The goal is to achieve at least 20% growth without considering new products like Prima or MVP. - Kevin Buchel(COO, CFO)