Napco Security Technologies' Q1 2026: Contradictions Emerge on Locking Product Mix, Service Margins, Tariff Price Increases, and OpEx Control

Date of Call: November 3, 2025

Financials Results

• Revenue: $49.2M, up 11.7% YOY (vs $44.0M prior year)
• EPS: $0.34 per diluted share, compared to $0.30 per diluted share a year ago
• Gross Margin: 56.6%, compared to 55.9% in the prior year

Business Commentary:

* Record Revenue and Profitability: - NAPCO Security Technologies reported record revenue of $49.2 million for Q1 Fiscal 2026, up 12% compared to the same period last year. - The growth was driven by equipment sales, especially door locking products, and increased recurring revenue services, which grew by 11% year-over-year.

• Equipment Sales and Pricing Strategy:
• Equipment sales reached $25.7 million, also up 12% year-over-year.

• The increase was supported by early effects of two price adjustments, one related to tariffs and another annual price increase, indicating strong pricing strategies.

• Recurring Revenue Growth and Diversification:

• Recurring revenue for Q1 was $23.5 million, growing 11% over the previous year.

• Despite a slight decline in service margin, the growth was attributed to the demand for StarLink Fire Radios and new recurring revenue products like MVP, although the full impact is expected to be realized later.

• Strong Financial Performance:

• Net income rose 9% to $12.2 million, representing 25% of revenue.
• Operating income increased 15% year-over-year, driven by higher gross margins and efficient cost control, contributing to a strong financial outlook.

Sentiment Analysis:

Overall Tone: Positive

• Management highlighted record Q1 revenue ($49.2M), recurring revenue growth (11.6%) with a 90.3% gross margin, net income of $12.2M, and growing cash of $105.8M. Remarks emphasized momentum, pricing actions, product launches (MVP), and confidence in continued execution and shareholder returns.

Q&A:

• Question from Matt Somerville (D.A. Davidson): Can you talk about what % of your locking mix today is represented by that networked product? Can you also discuss how your MVP technology differs from other major locking players in the space today?
  Response: Locking represents ~66% of equipment sales; MVP is early-stage and differentiates as an in-house integrated lock+radio+cloud subscription offering ($3/door), available as enterprise (MVP Access) and mobile-first (MVP EZ) versions.

• Question from Matt Somerville (D.A. Davidson): Can you parse out in the fiscal first quarter how much of the hardware revenue growth was price versus volume?
  Response: Management estimates roughly 60% of Q1 equipment revenue growth was volume-driven and ~40% was from pricing implemented in Q1.

• Question from Jim Ricchiuti (Needham): Can you give a sense as to what the overall growth was in the door locking products business and whether the early pricing benefits were seen in that part of the business versus the radio business?
  Response: Locking revenue was $17.083M in Q1 vs $13.854M prior year — a substantial increase driven by strong demand and some distributor orders placed ahead of price increases.

• Question from Jim Ricchiuti (Needham): Any color on overall tone of demand from channel partners and sell-through stats?
  Response: Q1 showed very good sell-through for both locking and intrusion across distributors; management remains cautiously optimistic given distributor behavior variability around year-end.

• Question from Peter Koester (Mizuho): That ~80bp year-over-year decline in service margins — what’s causing the pressure? Anything on underlying radio margins or MVP acceleration?
  Response: Margin pressure mainly from adding T‑Mobile to a triple‑carrier radio (minute costs) and price concessions to large consolidating dealers; management may modestly raise recurring fees to offset the added T‑Mobile cost.

• Question from Jeremy Hamblin (Craig Hallum Capital Group): Any impact from the hurricane on the Dominican Republic manufacturing facility, and how are tariffs affecting pricing plans for 2026?
  Response: Dominican facility was unaffected and is self-sufficient; tariffs are stable (10%) and were covered by the April price action and the July general price increase, with no additional tariff-driven increases expected this fiscal year.

• Question from Jeremy Hamblin (Craig Hallum Capital Group): When will recurring revenue from locking (MVP) start showing up meaningfully in service revenue growth?
  Response: MVP adoption will take time—management expects early adoption this fiscal year but meaningful contribution likely in FY2027 (roughly 18–24 months).

• Question from Jason Schmidt (Lake Street): Can you give an update on how ADI is progressing?
  Response: ADI is an excellent partner for intrusion distribution; opportunity to increase penetration of locking sales across ADI’s ~115 branches remains a focus.

• Question from Jason Schmidt (Lake Street): When will you implement the price increase to account for T‑Mobile compatibility?
  Response: Management is evaluating a modest, imminent increase to recurring fees to cover added T‑Mobile costs but has not finalized timing.

• Question from Lance Vitanza (TD Cowen): What’s the status of the Pasadena school contract and how do you view the broader school security opportunity?
  Response: Pasadena project completed successfully; school security remains a multi‑year, sizable opportunity with many installations underway (often non‑public) and broad demand for integrated locking/access/alarm solutions.

• Question from Lance Vitanza (TD Cowen): With cash at ~$106M, any plans for accelerated capital return or M&A in 2026?
  Response: Company is evaluating M&A opportunistically but is selective and wants accretive deals; will continue dividends and prioritize disciplined use of cash rather than overpaying for acquisitions.

Contradiction Point 1

Locking Product Mix and MVP Technology

It highlights differing perspectives on the proportion of locking products in the company's sales mix and the uniqueness of the MVP technology, which could impact market positioning and strategic focus.

What percentage of your locking mix is from the networked product? What differentiates your MVP technology from major competitors in the locking space? - Matt Somerville(D.A. Davidson)

2026Q1: The majority of our sales in locking are traditional products. MVP is just starting out but gaining traction. Our locking segment is strong, with significant growth this quarter, and we expect it to continue. MVP offers an integrated system with cloud-based support, enhancing functionality and recurring revenue potential. - Kevin Buchel(COO)

Could you provide details on the MVP and [indiscernible] launches, including channel adoption compared to your plan and your long-term outlook for this opportunity? - Peter Costa(Mizuho)

2025Q4: We're introducing in two basic models. One is enterprise class those large enterprises and also smaller buildings and smaller businesses. And we expect that there are so many doors out there, and so many people need access control, and the cloud operated requires no equipment in the building. Everything is up in the cloud. We make all the changes for the dealers. The dealers can get reports. Everybody can get instantaneous information about doors, openings where people are in a building [indiscernible] fire and emergency. So this is going to be quite an exciting product for us going forward. - Richard Soloway(CEO)

Contradiction Point 2

Service Margins and Recurring Revenue Impact

It involves differing explanations for the decline in service margins and the expected impact of recurring revenue from locking products, which are crucial financial indicators for investors.

What factors are driving the unexpected 80-basis-point decline in service margins year over year? - Peter Koester(Mizuho)

2026Q1: The decline in service margins is due to the addition of a third carrier radio (T-Mobile), requiring us to buy minutes, and the effects of larger dealer consolidation, which can sometimes lead to slightly lower pricing for recurring revenue. We are evaluating adjustments to cover these costs. - Kevin Buchel(COO)

Will service revenue growth catch up to the $5 million sequential ARR increase, and do you expect a significant Q-over-Q uptick in service revenues by early 2026? - Peter Costa(Mizuho)

2025Q4: Well, we grew, I think it was 10% year-over-year, and the expectation is that we can sustain that rate, maybe even do a little better than that, not go down. - Unknown Executive

Contradiction Point 3

Tariff-Related Price Increases and Impact on Sales

It involves differing perspectives on the impact of tariffs on pricing strategy and sales expectations, which are crucial for understanding the company's financial management and market positioning.

Can you break down for Q1 how much of the hardware revenue growth was due to price versus volume? - Matt Somerville(D.A. Davidson)

2026Q1: We announced a price increase to cover tariffs in May. The typical increase is 3% to 4%, this one could be more. - Kevin Buchel(CFO)

Can you discuss the magnitude of tariff-related price increases? - Jeremy Hamblin(Craig Hallum Capital Group)

2025Q3: We announced an 8.5% price increase to cover tariffs. Typically, we announce a price increase in May, which is expected to be more than the usual 3% to 4%. - Kevin Buchel(CFO)

Contradiction Point 4

Operational Expense Control and Strategic Expenses

It highlights differing expectations regarding operational expenses, which are important for understanding the company's financial discipline and growth strategy.

Can you provide details on OpEx levels excluding the ISC trade show expense? - Jim Ricchiuti(Needham)

2026Q1: OpEx for fiscal Q1 2026 was $22.0 million, up from $17.9 million in Q1 of 2025, primarily due to increased compensation expense and higher legal and professional fees. - Kevin Buchel(CFO)

Can you discuss your OpEx levels excluding the ISC trade show expense? - Jim Ricchiuti(Needham & Company)

2025Q3: OpEx is higher due to legal matters and increased personnel. SG&A levels will carry into fiscal 2026. Deloitte is auditing for SOX compliance. We are working to keep costs controlled. - Kevin Buchel(CFO)