NSSC Q4 2024: Eyes 40% Margins by FY26 After 27% Recurring Rev Growth
- Robust recurring revenue growth: Executives highlighted that despite challenges in certain radio segments, fire radios remain strong and are generating higher recurring monthly revenues. This resilient growth supports a buoyant recurring revenue business moving forward.
- Gaining market share in locking products: Management noted that locking sales have been strong over several quarters, with improved margins from an expanding hardware mix. Their ability to effectively capture market share amid supply challenges is viewed as a positive long‐term driver.
- Strategic distributor partnerships and product innovation: The call emphasized that new distributor relationships, notably with ADI, are expanding market reach and supporting increased sales, while investments in enhanced product features (e.g., Prima and advanced radio technology) are expected to drive further growth.
- Ongoing distributor inventory issues: Uncertainty remains regarding a key distributor with excess inventory, which could delay new orders and impact near-term revenue growth.
- Weakness in the lower-end radio segment: While fire radios are performing well, nonfire radios have declined by around 10%, potentially dragging overall recurring revenue and hardware sales.
- Rising SG&A and R&D expenses: The significant increases in SG&A (up 22%) and R&D spend (up 28% in the quarter) could pressure margins if these cost increases do not translate into proportional revenue growth.
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Margin Outlook
Q: Can margins hit 40% by FY26?
A: Management explained that with an improved mix and higher volumes—especially from locking sales and better overhead absorption—they’re targeting close to 40% margins by FY26, with current trends supporting this optimism. -
Recurring Revenue
Q: Will service revenues sustain 27% growth?
A: They highlighted strong recurring revenue growth of 27% in Q4 and expect to maintain mid-20s percentage growth as Prima and enhanced locking systems further boost their run rate. -
Locking Growth
Q: How fast is the locking market expanding?
A: Management noted that locking sales grew over 20% this quarter, capturing additional market share due to supply chain disruptions among competitors, with potential for sustained double-digit increases year-over-year. -
Radio Business
Q: Will radio sales recover quickly?
A: Despite lower-end radio sales declining, improvements in fire radio performance and new feature enhancements signal a robust recovery for the overall radio segment. -
Prima Launch
Q: How is the Prima product performing?
A: Prima is seen as a strategic entry into the residential market, with management noting ongoing product enhancements and dedicated sales efforts that are expected to gradually increase recurring revenue. -
Cost Discipline
Q: What are SG&A and R&D trends?
A: They indicated that SG&A should stabilize around $10 million per quarter (outside trade show spikes) while R&D spending at about $3 million reflects key hires to drive innovation. -
ADI Partnership
Q: How is the ADI relationship tracking?
A: Management described the ADI partnership as very positive, with the distributor leveraging its focused security expertise to introduce new large dealer relationships, promising increased hardware revenue. -
Inventory Levels
Q: Will excess inventory issues be resolved soon?
A: There’s cautious optimism as improved distributor performance is addressing inventory buildups, though seasonality and timing leave the exact resolution uncertain. -
Intrusion Performance
Q: What about nonfire intrusion radio sales?
A: They explained that nonfire intrusion radio sales have been down due to normalizing supply issues and lower recurring margins, with expectations for gradual improvement as inventory levels adjust.
Research analysts covering NAPCO SECURITY TECHNOLOGIES.