Napco Security Technologies, Inc. (NSSC) Earnings

Management highlights

Leadership Transition - After 5 decades of founder-led growth, Kevin S. Buchel assumed the role of Chief Executive Officer and President, bringing over 25 years of experience with the company - Founder Richard L. Soloway transitioned to the role of Founder and Executive Chairman, remaining closely involved in strategic direction while supporting day-to-day operations. The transition maintains continuity of the company's long-held core values Profitability and Financial Position - Fourth quarter GAAP net income increased 52.7% YoY to $17.8 million ($0.50 diluted EPS), with adjusted EBITDA growing 44.3% to $20.6 million (36.8% adjusted EBITDA margin) - Full year non-GAAP net income increased 32% to a record $57.3 million ($1.60 diluted non-GAAP EPS), adjusted EBITDA reached $66.7 million (33% adjusted EBITDA margin), and free cash flow grew 15.2% to $59.2 million (29.3% free cash flow margin) - The company ended fiscal 2026 with $138 million in cash, cash equivalents and marketable securities, zero debt, and a strong balance sheet providing financial flexibility - The company announced a 13.3% increase in quarterly dividend to $0.17 per share, while continuing to fund all growth initiatives Key Strategic Initiatives - StarLink radio fire communicators have become an industry standard for commercial fire communications, with strong sales growth driving future recurring revenue. Management expects to capture a large share of the remaining conversion of over 2 million buildings from copper phone lines through the end of the decade - School security is a high-priority vertical market. NAPCO received the 2026 Dean's List Award recognizing it as a premier security provider for private higher education, and serves K-12 and college campuses across the U.S. with a unified, interoperable platform of locking, access control, and alarm technology - MVP, the next-generation cloud-based access control platform that integrates with existing locking hardware, is expected to start generating meaningful recurring revenue by the end of calendar 2026, creating a new high-margin recurring revenue stream - Management is actively pursuing strategic acquisitions that will enhance margins, with cash and available factory capacity to support suitable targets

Guidance

Management did not provide explicit numerical full-year guidance for fiscal 2027, but outlined the following forward-looking expectations: - Recurring revenue growth is expected to accelerate in the back half of fiscal 2027, driven by the 5-7 month lag between StarLink radio hardware sales and activation of recurring revenue, following the very strong 40% YoY growth in fourth quarter radio sales - If MVP launches successfully as expected by the end of calendar 2026, it will add incremental upside to recurring revenue growth - The aggregate project pipeline across large opportunities in schools, healthcare, airports, multi-family housing, and government is larger than it has been in the past couple of years, though projects are lumpy and recognition will occur over multiple quarters once orders are received - Management expects to continue improving equipment gross margins in fiscal 2027 through ongoing pricing and discount discipline, following a 670 basis point expansion in full year 2026 - R&D spending will increase moderately to support continued development of new recurring revenue products including the next generation of StarLink, with no expected extreme increases in spending

Segment performance

For the fiscal fourth quarter 2026: - Total net sales: $55.8 million, up 10% year-over-year - Recurring service revenue: $25.3 million, up 12.9% YoY, contributing 45.3% of total quarterly revenue, with a 90.1% gross margin - Equipment revenue: $30.5 million, up 7.7% YoY, contributing 54.7% of total quarterly revenue, with a 37.4% gross margin - Intrusion and access control products: +20.9% YoY, led by a 35.8% increase in intrusion product sales (including StarLink radio units, which grew 40% YoY and nearly 30% sequentially), partially offset by a 13.8% decrease in access control product sales - Door locking revenue: +2.2% YoY, with an 18.4% increase in Marks USA lock sales partially offset by a 5.6% decrease in AlarmLock sales For full fiscal year 2026: - Total net revenue: $202 million, up 11.4% YoY (first time exceeding $200 million in company history) - Recurring service revenue: $97.5 million, up 13% YoY, contributing 48.3% of total annual revenue, with a 90.3% gross margin. The annualized recurring revenue run rate as of July 2026 reached $103 million - Equipment revenue: $105 million, up 10% YoY, contributing 51.7% of total annual revenue, with a 30.3% gross margin - Intrusion and access control products: +7.8% YoY, led by a 14.3% increase in intrusion product sales, partially offset by an 11% decrease in access control product sales - Door locking revenue: +11.1% YoY, with a 19.7% increase in AlarmLock product sales partially offset by a 3.3% decrease in Marks USA sales

Risks & headwinds

- Data center expansion is creating supply chain challenges that are putting upward pressure on electronic component costs. While the company has not yet experienced shipment disruptions, cost pressure is expected to continue into fiscal 2027 - Existing Section 301 tariff costs continue to put pressure on equipment margins, offsetting some benefits from AIIPA tariff refunds - Large institutional and government projects are inherently lumpy and may extend across multiple years, creating variability in quarterly revenue recognition - Cyber security risks require incremental investment in internal IT talent to address emerging threats - Forward-looking statements are subject to additional uncertainties described in the company's SEC filings that could cause actual results to differ materially from expectations

Analyst Q&A

• Q: What impact are current supply chain challenges having on operations, and what mitigation plans are in place? /

  A: NAPCO has not yet experienced any impact to product shipments, but has noted upward pricing pressure on electronic components related to data center expansion. Management is proactively engaging directly with suppliers, leveraging past experience from COVID-era supply chain disruptions to enforce agreed-upon pricing and secure scheduled shipments, and is confident in its ability to manage the ongoing pressure.

• Q: When will MVP start generating meaningful recurring revenue, and how does the current large project pipeline compare to past periods? /

  A: Management expects MVP to begin producing meaningful recurring revenue by the end of calendar 2026 (back half of fiscal 2027), and does not plan to provide updates until that milestone is reached. The aggregate large project pipeline across government, education and other end markets is meaningfully larger than it has been in the past 2 years, though management does not comment on projects until orders are received and customers allow public disclosure.

• Q: Why were equipment margins lower than expected excluding tariff refunds this quarter, and how should we expect this dynamic to shift? /

  A: The quarter saw extremely strong growth in StarLink radio sales, which carry lower equipment gross margins (~20%) than door locking products, pulling down aggregate equipment margins. Management views this tradeoff as favorable, because radio hardware sales generate high-margin recurring revenue after a 5-7 month activation lag, so near-term margin compression will lead to higher total company margins in future quarters.

• Q: Will recurring revenue quarterly growth accelerate from the current $2 million per quarter pace in fiscal 2027? /

  A: Due to the 6-month activation lag for recurring revenue from the strong fourth quarter radio sales, growth should accelerate in the back half of fiscal 2027. If MVP contributes as expected by the end of the calendar year, it will add further upside to the quarterly growth pace.