NAPCO Security Technologies: Navigating the Shift to Recurring Revenue in a Competitive Landscape

In the rapidly evolving security technology sector, companies that adapt to recurring revenue models (RSR) are outpacing peers reliant on traditional equipment sales. NAPCO Security Technologies (NASDAQ: NSSC) has emerged as a standout, leveraging its RSR strategy to deliver a Q4 2024 revenue beat of 13% year-over-year, despite macroeconomic headwinds. This performance, coupled with a 27% growth in RSR to $20.3 million in Q4 2024, underscores NAPCO's strategic pivot toward high-margin, scalable solutions. But how sustainable is this growth, and what does it mean for investors in 2025?

A Q4 2024 Beat: The Power of Recurring Revenue

NAPCO's Q4 2024 results defied expectations. While equipment sales—historically a core segment—declined 10% due to 3G sunset adjustments, the company's RSR segment surged 27%, accounting for 40% of total revenue. This shift was not accidental. NAPCO's focus on cloud-based platforms like MVP Access and IoT-enabled systems such as StarLink Fire Max2 has created a flywheel effect: higher customer retention, predictable cash flows, and margins exceeding 90%.

The beat was stark: $50.3 million in Q4 2024 revenue (up from $44.6 million in Q4 2023) exceeded the $44 million consensus estimate, with EPS of $0.30 surpassing the $0.27 forecast. This outperformance was driven by RSR's scalability and NAPCO's ability to maintain gross margins at 55.3%, up from 52% in Q4 2023.

Industry Trends: RSR as the New Benchmark

The security tech sector is undergoing a structural shift. Traditional hardware-centric models are giving way to RSR-driven ecosystems, where companies like NAPCO are redefining value. For context, NAPCO's RSR now accounts for 48% of total revenue in 2025, up from 40% in 2024, with a prospective annual run rate of $94 million. This aligns with broader industry trends, as institutions prioritize scalable, subscription-based solutions for school safety, healthcare, and retail security.

Competitors like ESCO Technologies (ESE) and Gorman-Rupp (GRC) still rely heavily on equipment sales, but NAPCO's RSR model offers a key advantage: predictability. With RSR margins at 91%, NAPCO generates cash flow that rivals like ESCO, which trades at a higher P/E ratio (22.5x vs. NAPCO's 14.5x), cannot match. Institutional investors have taken notice, with ownership at 85.07% and a 1.4% dividend yield—nearly five times ESCO's 0.3%.

Challenges and the Path to 2026

Despite its RSR success, NAPCO faces headwinds. Equipment sales in 2025 declined 16% year-over-year, hurt by distributor destocking and delayed projects in the door-locking segment. Q4 2025 revenue of $50.7 million (up 0.8% YoY) masked a 5% annual decline in equipment sales, while full-year adjusted EBITDA fell 11.6% to $52.1 million.

However, management remains optimistic. The MVP Access platform, launched in Q3 2025, is designed to offset these declines by generating monthly recurring revenue. Sequential equipment sales grew 27% in Q4 2025, and NAPCO expects normalization in 2026 as project timelines stabilize. The company's balance sheet—$83.1 million in cash and $53.5 million in operating cash flow—provides flexibility to weather near-term challenges.

Investment Implications

NAPCO's dual strategy—bolstering RSR while innovating in hardware—positions it as a long-term winner in the security tech sector. For investors, the key metrics to monitor are:
1. RSR growth rates: A sustained 10–15% annual increase would validate NAPCO's shift to a software-as-a-service (SaaS) model.
2. Equipment sales recovery: A return to growth in 2026, driven by MVP Access adoption, could reaccelerate revenue.
3. Margin resilience: Maintaining RSR margins above 90% is critical to sustaining profitability.

While the stock has underperformed in 2025 (down 11.2% in full-year EPS), its 22.51% potential upside, as per analyst estimates, suggests undervaluation. The recent dividend hike to $0.14 per share and $36.8 million in share repurchases further signal management's confidence.

Conclusion: A Buy for the Long-Term

NAPCO's Q4 2024 beat and RSR momentum highlight its ability to thrive in a subscription-driven market. While equipment sales remain a near-term drag, the company's product pipeline and financial strength position it for a rebound in 2026. For investors seeking exposure to the security tech sector's next phase, NAPCO offers a compelling mix of innovation, margin discipline, and institutional backing.

Investment Thesis: Buy for long-term growth, with a focus on RSR expansion and product innovation. Monitor equipment sales recovery in 2026 for a potential catalyst.