Napco Security Technologies (Nasdaq: NSSC) reported record fiscal first-quarter 2027 revenue of $50 million as growth in recurring services offset declining equipment sales.

For the quarter ended Sept. 30, recurring service revenue increased 11.5% to $26.1 million, representing 52% of total revenue. Equipment revenue fell 7.3% to $23.9 million.

During the company’s Nov. 2 earnings call, President and CEO Kevin Buchel attributed the equipment decline primarily to reduced purchases by two locking distributors and a comparison with prior-year sales that benefited from backlog orders ahead of tariff-related price increases.

Net income increased 6.9% to a first-quarter record of $13 million, or 36 cents per diluted share, compared with 34 cents a year earlier. Adjusted EBITDA rose 3.8% to a first-quarter record of $15.5 million.

Results also included a $1 million benefit related to the litigation settlement, while the effective tax rate declined to 15.2% from 16.9% a year earlier.

Distributor purchases lag dealer demand

Buchel drew a distinction between distributors’ purchases from Napco and their sales of Napco products to dealers. The two locking distributors that reduced purchases recorded combined sell-through growth of about 5% year over year and double-digit growth sequentially, he said.

“Distributor purchasing patterns can affect quarterly revenue, but strong sell-through remains our best indicator of end customer demand,” Buchel said.

The distributors carry both Alarm Lock and Marks products. One delayed purchases while preparing to open a large branch, according to Buchel. He said orders from one of the two distributors arrived Oct. 1, immediately after the quarter ended, and expected purchasing from both to recover during the second fiscal quarter.

Buchel also said distributors generally are carrying less inventory, with some maintaining approximately two months of stock rather than the three months Napco has encouraged. He did not characterize current channel inventories as excessive.

Overall locking revenue declined 10.1%. Access control product sales fell 13.8%, while intrusion product sales, which include StarLink radios, increased 1.7%.

School security remains a major focus, while Buchel also cited business in healthcare, retail, multifamily housing and airport infrastructure upgrades. He cautioned that sales through distribution limit Napco’s ability to identify individual projects or separate new construction from replacement work.

Fire communicator activations support recurring growth

StarLink radio fire communicator activations continued to drive recurring service revenue, which generated a gross margin of 90.1%. Napco’s prospective annual recurring service revenue run rate reached approximately $106 million based on October revenue, up about $3 million from the level reported in August.

Buchel emphasized that the run rate reflects equipment already in service.

“It reflects radios already installed and activated, and the revenue we expect them to generate month after month,” he said. “Each StarLink activation adds to this growing base.”

CFO Andrew Vuono said fire radio activations increased more than 8% year over year and almost 3.5% sequentially.

Napco also is pursuing OEM relationships involving its radio communicators. Buchel said those engagements are underway and could provide the most immediate financial contribution among the company’s growth initiatives. He expects the partnerships to generate increasing measurable recurring revenue in upcoming quarters.

MVP expansion depends on dealer training

Napco signed a new national dealer during the quarter to offer MVP, its cloud-based access control platform that integrates with its locking hardware. The company is training the dealer’s sales organizations across multiple locations and supporting the rollout with promotional programs.

Buchel acknowledged that MVP adoption has progressed more slowly than management wanted. However, he cited the national dealer agreement and support from distributors with multiple branches as encouraging developments. Management did not quantify the agreement’s expected revenue contribution.

Asked what stands between dealer interest and paying installations, Buchel identified training as the principal obstacle, particularly for locking and access control dealers learning how the platform and its recurring revenue model work.

Napco has directed its team to work closely with dealers until they understand the platform.

“Do not leave until they understand how it works, because if they understand how it works, they are going to buy in,” Buchel said.

The company already has completed most of the necessary MVP research and development work and added sales personnel to support the platform, he said. He does not expect significant additional development or sales staffing costs for MVP, although successful sales would increase commission expenses.

Buchel described MVP as potentially the largest recurring revenue opportunity among the initiatives discussed, while cautioning that its contribution might develop more slowly than OEM partnerships or Canadian expansion.

Canadian expansion and specification plans

Buchel said Napco recently received the certification required to sell its radios in Canada, opening a market the company previously could not serve with those products.

He said the primary investment needed to develop the Canadian business is dedicated sales personnel. Napco already has representatives covering Canada, but Buchel argued that employees focused exclusively on the company would help build demand.

The company also is developing an architecture and engineering program intended to get its products specified before projects reach the bidding stage. Napco has identified 40 product-specific offerings it expects to complete by the end of the calendar year, with availability to design firms through a new A&E portal beginning in April 2027.

“Having NAPCO products specified at the design stage positions us on projects before bidding begins, one of the most durable ways to win business,” Buchel said.

Napco plans to use a new showroom for demonstrations of its integrated portfolio and in-person and remote product training for architects, engineers, dealers and end users.

Research and development spending increased 25.1% to $4.1 million, partly because of additional engineering staff. Buchel said the company’s goal is to develop more products, including offerings with recurring revenue potential.

Napco ended September with $134.6 million in cash and marketable securities and no debt. Free cash flow fell 79.8% to $2.3 million, reflecting a $15 million litigation settlement payment during the quarter.

Tariffs and product mix pressure equipment margins

Equipment gross margin declined to 24.3% from 26% a year earlier. Vuono attributed the pressure to locking product mix, higher Section 301 tariff costs and technical services costs.

Overall gross margin nevertheless expanded to 58.7% from 56.6%, reflecting the growing contribution from recurring services.

Management expects full-year equipment gross margin of 26% to 27%, primarily through higher sales volume and a greater contribution from higher-margin electronic locking products. Vuono said that outlook does not include potential price increases.

Executives are reviewing pricing, particularly for mechanical locking products and project work. Vuono said Napco also is weighing competitive conditions in radio pricing and monitoring component costs.

“We are going to take a look at our locking, specifically around our pricing on mechanical locking and some of our project work,” Vuono said.

He said a tariff-related price increase remains under consideration, but management had not decided whether to implement one.

(Editor’s note: This article was produced with the assistance of generative AI using Alarm.com’s publicly available earnings call transcript as source material. The content was reviewed, edited and verified by the SecurityInfoWatch editorial team to ensure accuracy, context and adherence to our editorial standards.)