NAPCO SECURITY TECHNOLOGIES, INC (NSSC)·Q2 2025 Earnings Summary

Executive Summary

• Mixed quarter: revenue fell 9.7% YoY to $42.9M while gross margin expanded 400 bps YoY to 57.0% as high‑margin recurring service revenue (RSR) reached 49% of sales; diluted EPS was $0.28 (vs. $0.34 LY) .
• Equipment sales were pressured by two large distributors (inventory reduction and management restructuring) and timing of a large NYC locking project; management framed this as timing, expecting improvement through FY25 .
• RSR grew 14.4% to $21.2M with 91% gross margin; run‑rate rose to ~$86M (Jan ’25) from ~$85M (Oct ’24) .
• Capital returns intact: $0.125 quarterly dividend declared for April 3, 2025; strong cash generation ($25.5M YTD CFO) despite buybacks and dividends .
• Near‑term narrative drivers: distributor normalization, RSR trajectory (mgmt sees Q3 growth ~12–12.5% then re‑accel; longer‑term ~20% “optimal”), tariff dynamics potentially aiding share gains and pricing power; no formal guidance issued .

What Went Well and What Went Wrong

• What Went Well

  • RSR expansion and profitability: RSR rose 14.4% YoY to $21.2M with 91% margin; RSR now 49% of revenue (structural mix tailwind) .
  • Gross margin resilience: Total GM up to 57.0% (+~400 bps YoY) despite lower equipment volume, driven by RSR mix .
  • Strategic wins and pipeline: Awarded Pasadena USD district‑wide classroom security locks and further Pepperdine dorm expansion; MVP Access (cloud, by‑door SaaS) and Prima all‑in‑one panel gaining traction, supporting future RSR .

• What Went Wrong

  • Equipment revenue decline: Hardware fell 25% YoY to $21.7M in Q2 and equipment GM compressed to ~24% on lower volume/overhead absorption .
  • Operating expense growth vs. sales: SG&A +18% and R&D +22% YoY as the company invested in headcount and marketing, pressuring operating income (down 19% YoY) .
  • Earnings down YoY: Net income decreased 17% to $10.5M; diluted EPS $0.28 vs $0.34 LY as lower hardware and higher OpEx outweighed RSR strength .

Financial Results

Headline metrics (oldest → newest)

YoY and sequential context for Q2 2025:

• Revenue: $42.93M, down 9.7% YoY vs $47.55M LY; down 2.4% seq vs $44.00M .
• EPS: $0.28, down 17.6% YoY vs $0.34 LY; down $0.02 seq .
• Gross margin: 57.0%, up ~440 bps YoY; +110 bps seq .

Segment breakdown (revenue)

Key performance indicators

Notes:

• Adjusted EBITDA includes stock‑based comp and non‑recurring legal items per recon tables .
• Equipment GM pressure in Q2/Q1 primarily from lower volume and overhead absorption; RSR GM remained ~91% .

Guidance Changes

No formal quantitative revenue/EPS guidance was issued.

Earnings Call Themes & Trends

Management Commentary

• “Our RSR increased 14.4% to $21.2 million and generated a gross margin of 91%... RSR represents 49% of total revenue in Q2… run rate of approximately $86 million based on our January 2025 recurring service revenue.”
• “The reduction in our equipment revenue was a result of lagging sales… primarily as a result of reduced sales to two of our larger distributors… and the timing of new project work for custom locking products… we attribute the decline to timing… anticipate improvement in equipment sales through the balance of Fiscal 2025.”
• “Prima… is gaining traction… MVP Access… cloud‑based… will generate monthly recurring revenue for both locking dealers and the Company…”
• “Our goal is to get the EBITDA margin in the mid‑40s… we need RSR to grow ~20% with ~90% GM and equipment to grow ~10% with margins in the 30s… ~$30M hardware is the bare minimum we want per quarter.”
• “Tariffs… should make us more competitive… many competitors source finished product from China/Mexico… our products are manufactured in the Dominican Republic and USA.”

Q&A Highlights

• Activations/RSR cadence: Device activations increased sequentially; management expects RSR growth to dip in Q3 (~12–12.5% YoY) then re‑accelerate in Q4 as Q1 radio sales flow through; longer‑term “optimal” ~20% growth excluding Prima/MVP .
• Distribution/timing: Largest customer’s inventory action “about them, not us”; expect “business as usual” going forward; another distributor impacted by restructuring; special projects drive tougher comps in Q3 .
• Hardware volume & margins: Target ~$30M/quarter hardware to lift equipment GM >30% via DR factory leverage; locking mix (35–40% GM) important; radios drive RSR even if hardware GM lower .
• Tariff backdrop: Potential share gains from tariffs on China/Mexico‑sourced competitors; company’s DR/US manufacturing positions it well; expects dealers to favor competitively priced solutions .
• Capital allocation: Buybacks opportunistic given cash (~$99M across cash/marketable securities at 12/31/24); M&A remains on table alongside dividends .

Estimates Context

• Wall Street consensus (S&P Global) for Q2 2025 EPS/revenue was unavailable due to an S&P Global API limit at the time of this analysis. As a result, we cannot benchmark reported results vs. consensus in this report. We will update the “vs. estimates” comparisons once S&P Global data is accessible.
• Values retrieved from S&P Global would be marked with an asterisk when provided.

Key Takeaways for Investors

• Mix shift remains favorable: RSR at 49% of revenue with ~91% gross margin supports structurally higher consolidated margins even as hardware fluctuates .
• Near‑term watch item: hardware normalization. A return toward ~$30M quarterly hardware is the key lever to lift equipment GM >30% and expand consolidated EBITDA margins toward mid‑40% long‑term target .
• Timing, not demand, drove Q2 hardware softness: two distributor issues and project timing; management expects improvement through FY25; monitor Q3/Q4 sell‑through and order patterns for confirmation .
• Product catalysts: MVP Access (cloud, by‑door RSR) and Prima (all‑in‑one panel) expand attachable RSR base; execution on channel adoption is a medium‑term growth driver .
• Tariff dynamics may be a tailwind: DR/US manufacturing vs. competitor China/Mexico sourcing could widen pricing advantage and accelerate share gains if tariffs persist .
• Cash generation supports capital returns and optionality: Robust YTD operating cash flow ($25.5M) and no debt underpin dividends and opportunistic buybacks while preserving M&A capacity .

Appendix: Additional Data Points

• Q2 income statement detail: Equipment revenue $21.73M; Service revenue $21.21M; Operating income $11.17M; Interest & other income $0.92M; Tax $1.63M .
• Q2 equipment sub‑segments: Intrusion & access $7.6M; Locking $14.2M .
• Balance sheet snapshot (12/31/24): Cash & equivalents $86.0M; Marketable securities $13.18M; No debt; Equity $174.23M .

Sources: Q2 FY25 8‑K/press release and exhibits ; Q2 FY25 earnings call transcript –; Q1 FY25 8‑K –; Q4 FY24 8‑K –.