NSSC - NASDAQ

Good morning, ladies and gentlemen, and welcome to the NAPCO Security Technologies Fiscal Q4 and Fiscal 2024 Earnings Conference Call. [Operator Instructions] This call is being recorded on Monday, August 26, 2024. I would now like to turn the conference over to Francis Okoniewski, VP, Investor Relations. Please go ahead.

Thank you, Joan, and good morning, everyone. This is Francis Okoniewski, Vice President of Investor Relations for NAPCO Security Technologies. Thank you all for joining today's conference call to discuss financial results for our fiscal fourth quarter and fiscal year 2024. By now, all of you should have had the opportunity to review our earnings press release discussing our quarterly results. If you have not, a copy of the release is available in the Investor Relations section of our website, www.napcosecurity.com. On the call today are Dick Soloway, Chairman, CEO of NAPCO Security Technologies; and Kevin Buchel, President, Chief Operating Officer and Chief Financial Officer. Before we begin, let me take a moment to read the forward-looking statements. As this presentation contains forward-looking statements that are based on current expectations, estimates, forecasts and projections of future performance based on management's judgment, beliefs, current trends and anticipated product performance. These forward-looking statements include, without limitation, statements relating to growth drivers of the company's business, such as school security products, reoccurring revenue services, potential market opportunities, the benefits of our recurring revenue products to customers and dealers, our ability to control expenses and costs and expected annual run rate for our recurring monthly revenue. Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those contained in forward-looking statements. These factors include, but are not limited to, such risk factors described in our SEC filings, including our annual report on Form 10-K. Other unknown or unpredictable factors or underlying assumptions subsequently proving to be incorrect could cause actual results to differ materially from those in the forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. You should not place undue reliance on these forward-looking statements. All information provided in today's press release and this conference call are as of today's date unless otherwise stated, and we undertake no duty to update such information except as required under applicable law. I'll turn the call over to Dick in a moment, but before I do, I want to mention, we're actively planning our Investor Relations calendar for non-deal roadshow and conference attendance in the near future. Investor outreach is very important to NAPCO, and I'd like to thank all those folks who assist us in these types of events. In the coming weeks, we will be attending the Lake Street Best Ideas Conference in New York City on September 12, and the D.A. Davidson 23rd Annual Diversified Industrials & Services Conference in Nashville, Tennessee on September 18 and 19. We will also be participating in a number of non-deal road shows with firms such as Mizuho, Stephens, JPMorgan, Wells Fargo, TD Cowen, Morgan Stanley, KeyBanc and Bank of America. With that out of the way, let me turn the call over to Dick Soloway, Chairman and CEO of NAPCO Security Technologies. Dick, the floor is yours.

Thank you, Francis. Good morning, everyone, and welcome to our conference call. We appreciate your participation today, and we review our fiscal Q4 and fiscal 2024 performance. We are thrilled to announce record sales of $50.3 million for this quarter, making our 15th consecutive quarter of achieving record quarterly sales. Our recurring revenue subscription service continues to exhibit robust growth, increasing 27% in Q4 and now has an annual perspective, run rate of $84 million based on July 2024 recurring revenues. Our balance sheet remains strong with cash balances reaching $97.7 million, a 46% increase over the level recorded on June 30, 2023. We have no debt. Our strategic focus continues to capitalize on key industry trends, including wireless fire and intrusion alarms, driving recurring service revenues, school security solutions, enterprise access control systems and architectural locking products. At NAPCO, our management team remains committed to prioritizing growth, profitability and returns on equity while effectively managing costs. These metrics are critical to us and our shareholders, reflecting our dedication to executing our business strategy and aligning our interest with those of our shareholders. Now I'd like to hand the call over to our President, Chief Operating Officer and Chief Financial Officer, Kevin Buchel, will provide an overview of our fiscal fourth quarter and fiscal 2024 results. Following Kevin's remarks, I will return to dug deeper into our strategies and market outlook. Kevin?

Thank you, Dick. Good morning, everybody. Net sales for the 3 months ended June 30, 2024, increased 13% and to a quarterly record $50.3 million, and that compares to $44.6 million for the same period a year ago, and net sales for the 12 months ended June 30, 2024, increased 11% to a record $188.8 million as compared to $170 million for the same period a year ago. Recurring monthly service revenue continued its strong growth, increasing 27% in Q4 to $20.3 million as compared to $16.1 million for the same period last year. Recurring monthly service revenues for the 12 months ended June 30, 2024, increased 26% to $75.7 million as compared to $59.9 million last year. These increases are due to the continued strength of our line of StarLink radios. Equipment sales for the quarter increased 5% to $29.9 million as compared to $28.6 million last year. Equipment sales for the year ended June 30, 2024, increased 3% to $113 million as compared to $110 million for the same period last year. These increases were primarily due to revenue increases in the Alarm Lock and Marks brands door locking products, as partially offset by a decrease in intrusion and access along products. Locking sales grew 21% and 18%, respectively, as compared to Q4 and the 12 months ended June 30, 2023. Radio sales for the quarter were down 10% as compared to Q4 of last year due to the continued effect of the sun setting of 3G technology as well as the inventory levels of radios at that time at some of our distributors. Radio sales represent 59% of intrusion and access alarm product sales, and we expect inventory levels in distribution, which have decreased significantly over the past few quarters to continue to reduce, and that will lead to increased radio sales. As such, we expect radio sales to continue to be a key contributor to our hardware sales and lead to the continued growth of our highly profitable recurring service revenues. Gross profit for the 3 months ended June 30, 2024, increased 21% to $27.8 million, with a gross margin of 55% as compared to $23 million with a gross margin of 52% for the same period last year. And gross profit for the 12 months ended June 30, 2024, increased by 39% to $101.8 million with a gross margin of 54% and that compared to $73.2 million with a gross margin of 43% a year ago. Gross profit for recurring service revenue for the quarter increased 29% to $18.4 million with a gross margin of 90% as compared to $14.3 million with a gross margin of 89% last year. Gross profit for recurring service revenues for the 12 months ended June 30, 2024, increased 28% to $68.5 million with a gross margin of 90% as compared to $53.4 million with a gross margin of 89% last year. Gross profit for equipment revenues in Q4 increased by 8% to $9.4 million, with a gross margin of 31% as compared to $8.7 million with a gross margin of 30% last year. Gross profit for equipment revenues for the 12 months ended June 30, 2024, increased by 67% to $33.2 million with a gross margin of 29% as compared to $19.9 million with a gross margin of 18% for the same period last year. The increase in both gross profit dollars and gross margin for recurring revenue for the 3 and the 12 months ended June 30, 2024, was primarily the result of the previously mentioned increase in recurring revenues as well as a greater proportion of those revenues, being generated by our StarLink Fire radios, which generate higher monthly service charges than the other StarLink radios. The increase in both gross profit and gross margin for equipment revenues, for both the 3 and 12 months ended June 30, 2024, primarily resulted from the aforementioned increase in equipment revenues as well as a favorable shift in product mix for locking products, which typically have a higher gross margin than intrusion products. Another factor in the increased profit and gross margin for equipment revenue is increased overhead absorption from our Dominican Republic manufacturing facility, as well as the stabilization of component costs from the effects of the global supply chain crisis. Research and development costs for the quarter increased 28% to $3 million or 6% of sales, and that compares to $2.4 million or 5% of sales for the same period a year ago. Research and development costs for the 12 months ended June 30, 2024, increased 15% to $10.8 million or 6% of sales as compared to $9.3 million or 5% of sales for the same period a year ago. The increase for the 3 and the 12 months primarily resulted from salary increases and additional staff. Selling, general and administrative expenses for the quarter increased 22% to $10.9 million or 22% of net sales and that compares to $8.9 million or 20% of net sales for the same period last year. Selling, general and administrative expenses for the 12 months ended June 30, 2024, increased 11% to $37.1 million or 20% of net sales and that compares to $33.6 million or 20% of net sales for the same period last year. The increases in SG&A for the 3 months was primarily due to increases in trade show expenses as the ISC West show occurred in Q4 this year versus Q3 last year. In addition, increased stock-based compensation expenses and increased legal and accounting expenses relating to the enhancing of our internal control systems also contributed to the increase. The increase for the 12 months was primarily due to the aforementioned items with the exception of trade show expenses, which were fairly constant during fiscal 2024 versus fiscal 2023. Operating income for the quarter increased 18% to $14 million as compared to $11.8 million for the same period last year. And operating income for the 12 months ended June 30, 2024, increased 77% to $53.8 million as compared to $30.3 million for the same period last year. Interest and other income for the 3 months increased 99% to $762,000 and that compared to $382,000 last year. And for the 12 months ended June 30, 2024, interest and other income increased by 184% to $2.6 million compared to $903,000 last year. The increases for both the 3 and the 12 months ended June 30, 2024, was primarily due to increased interest and dividend income from the company's cash and short-term investments. The provision for income taxes for the 3 months decreased by 27% or $434,000 to $1.2 million, with an effective tax rate of 8%, as compared to $1.6 million with an effective tax rate of 13% last year. For the 12 months ended June 30, 2024, the provision for income taxes increased by 60% or $2.5 million to $6.6 million with an effective tax rate of 12%, and that compares to $4.1 million with an effective tax rate of 13% last year. The decrease in the provision for the 3 months is due to NAPCO accruing at a higher rate through Q3 and the increase for the 12 months ended June 30, 2024, was due to increases in taxable income. The decrease in the company's effective tax rate for fiscal 2024 was the result of a larger portion of our taxable income being attributable to foreign operations. Net income for the quarter increased 28% to a quarterly record $13.5 million or $0.36 per diluted share as compared to $10.6 million or $0.28 per diluted share for the same period last year, and that represents 27% of net sales. Net income for the 12 months ended June 30, 2024, increased 84% to a 12-month record of $49.8 million or $1.34 per diluted share, and that compares to $27.1 million or $0.73 per diluted share for the same period last year and represents 26% of net sales. Adjusted EBITDA for the quarter increased 18% to $15.4 million or $0.41 per diluted share as compared to $13 million or $0.35 per diluted share for the same period a year ago. And that equates to an adjusted EBITDA margin of 31%. Adjusted EBITDA for the 12 months ended June 30, 2024, increased 72% to a 12-month record $58.9 million or $1.59 per diluted share and that compares to $34.3 million or $0.93 per diluted share for the same period last year and equates to an adjusted EBITDA margin of 31%. Moving on to the balance sheet. As of June 30, 2024, the company had $97.7 million in cash and cash equivalents, other investments and marketable securities, and that compares to $66.7 million as of June 30, 2023, and that's a 46% increase. The company has no debt. Cash provided by operating activities for the 12 months ended June 30, 2024, was $45.4 million, and that compared to $24.7 million for the same period last year, and that's an 84% increase. Working capital, as defined as current assets less current liabilities, was $146.5 million on June 30, 2024, and that compared with working capital of $111.7 million at June 30, 2023. Current ratio, defined as current assets divided by current liabilities, was 7.6:1 at June 30, 2024, and 6.7:1 at June 30, 2023. And CapEx for the quarter was $551,000, and that compared to $415,000 in the prior year period. And for the full fiscal year, CapEx was $1.6 million, and that compared to $3 million last year. That concludes my formal remarks, and I would now like to return the call back to Dick.

Thank you, Kevin. Fiscal 2024 concluded with record revenue and net income for both the fourth quarter and the full fiscal 2024 year ending June 30, 2024. The fourth quarter sales of $50.3 million was the 15th consecutive quarter of record sales for a quarterly reporting period. Our record quarterly net income of $13.5 million represents 27% of sales. Adjusted EBITDA was $15.4 million for Q4 and $58.9 million for the full fiscal year and equates to a 31% EBITDA margin. Equipment revenue grew at 5% for the quarter with gross margins on such sales sequentially increasing to 31% as compared to 29% in each of the last 2 quarters. Recurring service revenues, which increased 27% in Q4 is a major contributor to the year-over-year overall sales and earnings growth and represents 40% of total revenue. Gross margin for recurring service revenues remained strong at 90%. Our balance sheet continues to get stronger with cash and cash equivalents and other investments and marketable securities, increasing 46% to $97.7 million. We have no debt and the net cash provided by operating activities was also very strong, growing 84% over last year. Our Alarm market marks locking hardware lines continue to see growth in school and classroom security, health care and retail loss prevention as well as in multifamily commercial and residential applications. We continue to remain focused on further penetrating each of these markets. Our StarLink line of radios have the widest coverage range of both Verizon and AT&T with rich feature sets, which our dealers love. We continue to enhance these rich feature sets, which makes the product easy to install, work on all fire and burglar panels, ours as well as our competitors. No other company can say that. And unlike a lot of our competition is approved by Underwriters Laboratory, the gold standard of the security industry. There are millions of commercial buildings of all types such as offices, hospitals, schools, coffee shops, restaurants, as well as residences that still require upgrades from legacy copper phone lines. We are well positioned to see continued strong growth with our StarLink line of radios. Our recent introduction of Prima by NAPCO, a new All-in-One Panel for Security, Fire, Video and Connected Home with a 5-minute installation, remains a very important focus for the company. Our goal is to Prima to address an important mass segment of the security market, including residential and small business. With its built-in WiFi and cellular/radio indications, customer alert notifications and video and smart home subscription options for each installed system, the security dealer as well as NAPCO can add more recurring service revenue generating accounts. Fiscal 2024 was an amazing record-breaking year where we generated a net income of $49.8 million, adjusted EBITDA of $58.9 million and an adjusted EBITDA margin of 31%. But as I've said before, there is more work to be done. While we continue to be encouraged with the gross margin for hardware sales of 31.4%, we believe this should improve further in fiscal 2025 and beyond. Our strong net income, adjusted EBITDA and growing cash indicate the financial strength of our business. As such, we are pleased to continue our dividend program and we'll be increasing the dividend -- quarterly dividend to $0.125 per share, a 25% increase over the $0.10, we paid last quarter. This will be payable on October 3, 2024 to shareholders of record on September 12, 2024. As always, we will strive to accomplish our goal of the continued financial strength, product innovation, technical superiority and strong profitability for fiscal 2025 and beyond. And we believe we can continue this growth well into the future as we work towards our fiscal 2026 goals. I'd like to thank everyone for their support and for joining us in this exciting future we have. Our formal remarks are now concluded, and we'd like to open the call for a Q&A session. Operator, please proceed.

[Operator Instructions] First question comes from Matt Summerville at D.A. Davidson.

A couple of questions. First, just on the Locking side of the business, obviously growing north of 20% in the quarter. How fast do you think the market is actually growing? And what are you guys doing to drive the share capture you're seeing in that market? And then I have a follow-up.

The Locking sales have been strong for several quarters in a row now. We have 2 Locking companies. They're both doing well. We've picked up market share, we believe, during the times of supply chain as our competitors couldn't deliver. Our Dominican factory kept delivering, and we picked up share, we believe. We're very diverse. We're into schools, which is a big need still, all the shootings that still go on, many schools still having -- have not done anything. There's a tremendous need in airport renovations, which are going on throughout the country, there's a tremendous need in hospitals. These needs continue. Our products are also different. We make electrified locks, not just plain old hardware locks, puts us in a different category. And so having these 2 companies, both performing well at the same time, has created this rise, which was up 18% for the year versus a year ago, and it's 65% of our total hardware sales, equipment sales. Can we keep this pace up? I don't know, but I think double digits is certainly a possibility to continue. We don't see any slowing down. We travel along the country. We see a lot of construction still going on despite what you might read in the papers. So activities for the Locking is very good.

And then just on the Radio side of the business. You had this recent product launch that you sort of referenced in the prepared remarks. Any sort of early read on the success you're having there? You mentioned the Radio business was down this quarter. It sounds like it's probably going to be down in the fiscal first quarter. Do you see that business reaccelerating to a high single to double-digit growth rate as you move through the year?

The Radio business despite the stats that tell you it was down, and it was down, as we've said, 5% sequentially, 10% compared to last year's Q4. It's down in the -- on the radios that produce the lowest recurring. And we are fighting like crazy to get it back, coming out with new features on our radios, which has been well received. But the interesting thing, which I don't know if everybody picks up on, is that the recurring revenue continues to grow because the fire radios continues to do well. And as we've talked over and over about, fire radios, bring in more money than the other radios. So I was very impressed and happy that despite those stats that we talked about, that recurring was up 27% and up 26% for the year. Fire is doing really well. Doing well with our new distributor. It's doing well with our big accounts that we've added that we've talked about, some of the big names. That, we believe, is going to just keep getting better, and we'll get the lower end radios to do better as well. And then we'll have both sides contributing and then you'll see the growth of the overall growth on the hardware side of the radios. And we're working hard also to get through all the distribution issues. We've talked about that before. Some of our distributors had too much. We have one distributor left that has a little too much working hard to reduce that, that will help as well.

Next question comes from Jim Ricchiuti at Needham.

Maybe as a follow-up to the previous question. As we think about fiscal '25, is it -- is one way to think about it, Kevin, some normalization of demand in the fire radio business, which I assume you're getting some benefit from having the new distributor coming on stream and scaling and maybe this other distributor where it's possible they're still over inventoried with the lower-end radio. So is that one way to think about the business as it over the next several quarters?

Well, normalization would be good, but we want more than normalization we want enhancement, I'll call it. We've got relationships with some big names, which we've talked about. We want to start to see those translate into much higher radio sales. And we think they will. We're spending a lot of time with these big names and they have the potential to do a lot more. So between the big names...

So if you were suggesting -- yes, go ahead, I'm sorry.

I was just going to say so between the big names and the normalization of what has been occurring in the past, we should see nice growth in the overall Radio segment, not just Fire.

Got it. So it sounds like you anticipate continued strength in the fire radio side of the business. But also...

Yes. We haven't seen that slow down at all, ever.

Is there any color you can provide? I know it's a bit of a mixed picture with respect to the distributors. But is there any color you could provide on some of the sell-through metrics in terms of what you're seeing out there?

Well, we added the new distributor. There's no issues with them. They're doing great. They may become a 10% hardware customer in the near future, we hope. They're doing really well. We've only had them for a year. Then you have 2 or 3 other big ones. And the other one, who's our biggest one, Anixter, Wesco, no issue. They worked through their inventory. We have another one. We got to do more work with that one. And then once we get through that one, then I think it's all good. The sell-through stats are good, but when they have too much inventory, even though they're selling, we need new orders, more orders. So sell-through great, but let's get their inventory in shape so they can place another round. That's kind of what it is.

Got it. And one final question, just on Prima. How do you view the launch of the product? How satisfied are you with the way the business is starting to develop? I know it's a small part of the revenue right now.

Well, Prima is an important area for us. It's a big market that we don't do a lot in, right? The resi market, residential market, it's a huge market, and a lot of people still have to get away from copper. And why wouldn't they love a 15-minute install. The salesman could actually install it, could be in and out in no time. So the markets there, the opportunity is there, we would get $5, $6 of recurring for everyone that gets put in. So we can't turn our back on this market. It's a big area. So we're working hard. We introduced it, I don't know, I'm going to say a year ago, roughly. Like any product, it takes time to take hold. We're more optimistic now than we were when we first introduced it. We've done a lot of things, a lot of enhancements, added accessories, added some salespeople whose focus, whose main mission in life is to just work on this. We think it's going to all translate into success. That's the hope. Big area. It's all incremental recurring whatever we get out of this.

Congrats on the quarter.

Next question comes from Jaeson Schmidt at Lake Street.

Kevin, I know you noted that ADI is going well. Just curious, if you could provide some additional color on that relationship, if it's tracking to your expectations and how we should expect that ramp in fiscal '25?

It's only been a year, very happy, so far, so good. You got to keep working. Stats look good, opportunities there. They are the largest distributor of security products in the industry. They're larger than Wesco, because Wesco distributes other things. ADI distributes security only. So for one year in, and we got to work it. It's doing really well. One of the things they've done, they've made introductions for us to large dealers that we didn't have an opportunity to meet. There's 30,000 dealers out there. We don't have them all. We have 12,000 of them. There is another 18,000 we'd love to do business with. Well, ADI has relationships with some of the big names out there. And they made an introduction for us to a couple of those big names. And now we have a relationship in selling fire radios to some of those big names. So there's more of that and we just want to keep growing the business with them. So far, so good. It could be much better than it is. Like I said earlier, they could be at 10% of our hardware customer, if it keeps up.

Okay. That's helpful. And then just as a follow-up, going back to that one distributor that still has excess inventory just based on sort of order patterns you've seen through the September quarter so far, do you expect the inventory to be worked down and that issue to be over after this quarter?

It's hard to say, Jaeson, because a lot of the business, especially with the big distributors, comes in at the end. So even though we're sitting here on August 26, there's a lot of time left to see what's going to happen in this quarter. So the hope is, yes, but we don't know yet.

The next question comes from Jeremy Hamblin of Craig-Hallum Capital.

Congrats on a strong year. I want to come back to your equipment gross margins, which continue to make really strong progress. In terms of thinking about the progression that you're likely to make in FY '25, and then as you move forward from there because I think over time or maybe over the next couple of years, you expect that to get to 40% plus. But just wanted to get a sense for -- with noting that you have at least one distributor with a little bit of excess inventory, how do you expect that progression to play out here in 2025 and then beyond?

Well, the margins will get helped a lot by 2 things: the mix and the volume. And the margins were helped this quarter, this past quarter, by both things, the mix and the volume. So the mix, having 65% of your sales being hardware sales of locking -- 65% being locking of the hardware sales, that has great margins. That helps a lot. I love radios. They don't have the best margins. Of course, they have the best margins in the recurring but we love locking on the hardware side. So we need both, but what we saw this quarter was strong locking, which brings strong margin. And the volume, the volume going up helps. Because in our factory, in the Dominican Republic, we get leverage from pushing more volume through our factory because it's a labor-intensive factory. You need labor, a lot of labor. It's low-cost labor. You don't need much of anything else. So if you get busy, you add more labor. And if you add nothing else, you get overhead absorption. The margins expand and the money drops to the bottom line. We feel strongly that the volume is going to keep going, and it gets better and better. We recently bought our second Panasonic chip shooter machine. It's a $1 million machine. What it does? Inserts the components rapidly, more rapidly than anything we've ever had, the iPhones use this machine, and it gives you flexibility so you could change from one product to another product line without disruption. It's our second one. If we didn't believe that our hardware sales were going to be growing nicely, we wouldn't have bought a second machine. But that's our belief. And higher volume will lead to higher margins.

Just as a quick follow-up in terms of making that progression here over the next couple of years. So getting to 40% plus by FY '26, would be over 1,000 basis points of improved gross margins in your equipment piece of your business. Does that feel like an achievable target here over that time frame?

I guess we'll see how this year goes, but we want to see the progression to close to 40% this year. And I think if we see that, then I'll feel good about our 2026 target. But we have to grow that top line hardware more than it's grown. We have to continue to see the strength from the locking, which we've seen now for several years in a row. And then the margins will go up. And historically, we've seen a tremendous amount of margin increase when the volume goes up. If you go back to our history, in 2018 and 2019, you'll see when the volume kicks up, the margins fly up. Back then, this was pre-COVID, our margins were pushing high 30s, low 40s. There's no reason we can't get back to that. Now considering all the steps we've taken and that locking is a bigger piece of the pie, this is what we're pushing for. So look for the margins to keep going up during fiscal 2025, and then we'll be able to assess whether our goal for 2026 is achievable. What I will say is our goal for recurring revenue margin, which was 80%, is more than achievable. As you can see, it's 90%.

I'd like to point out also that our engineering has expanded because they're coming out with new products, the hardware side with recurring revenue, which has never been done in the industry. So our locking lines will generate recurring revenue for the locksmiths and the door specialty installers. And that's a major driver for us. So that's going to keep piling on additional hardware sales and recurring revenue. Those products we showed at the ISC show in their basic form, we've got very good feedback on that. And we're continuing to develop them, and we expect those to carry us to recurring revenue and equipment sales for many, many years. It's something that a lot dealers have gotten. They sell a job and they also get a recurring revenue tail to it. The locksmiths and the door guys don't get that. But with this new product line that we showed, they will get that. So we're very optimistic about the future, and it's very exciting. We also introduced some new radios with additional coverage to them, which have greater coverage and wider variations throughout the whole country. So those will be generating a lot of additional recurring revenue and hardware sales along with them. And everything that we do is underwriters laboratory approved, which is the gold standard. A lot of our competitors, use secondary level of approvals. And that's good for the smaller companies, but the larger companies, that Kevin was referring to, which are coming to us, want the high level of security with Underwriters Laboratory approval. They know that, that's the best way to get their signals and the most reliable equipment out there. So we're proud of that. That's one of our major goals.

Next question comes from Lance Vitanza at TD Cowen.

I'm going to try to get 2 in, if I can, one on revenue and one on cost. The revenue question is, could you talk about the pricing trends that you're seeing on the services revenue side, fire radios in particular? I'm wondering to what extent, if any, you have had to rely on promotional pricing? And do you expect that to potentially be a headwind on gross margins on the service side going forward?

We promote as necessary. We've tried not to mess with the formula. The formula has worked since we started this cycle. And so we only adjust or promote as needed, and we'll continue to do that. Fire doesn't need a lot of help. But if it's needed, we'll do it. Listen, we had 90% margins to play with. So it's not a big deal. But so far, the formula has been good. On the non-fire radios, I'd say we've been more aggressive in promoting that, and it might be more of that. But again, I try not to mess with the formula. But we got to keep our eye on the market as needed, we'll adjust. But I think we've been doing pretty well so far in the way we've been handling it.

And I hope you realize that we get our recurring revenue and our radio sales 2 different ways. One is the retrofit to the copper jobs that are out in the field now, which are starting to go bad, dead because the Verizon, AT&T do not have to install or repair copper anymore according to government regulations. So you have about 5 million fire jobs that still need to be converted over. And we have a fabulous radio that the dealers love And as I said, it's the gold standard of the business. So we have that work coming in. Then we have all the new control panels with built-in radios. So our new work for new buildings, refurbs of buildings, those radios are built into the control panel, which gets us hardware sales of smoke detectors and carbon oxide detectors and all the other peripherals that go along with the fire systems. So we get it 2 ways. We figure we have about another 5 to 7 years of retrofit to those 5 million jobs that need to be upgraded. The dealer typically doesn't pull out the system. It just puts a new communication link in like StarLink and since our radios work on all the different panels that are out there in brands, the opportunity is tremendous for us.

Dick, that's super helpful. If I can just squeeze in the cost question. You mentioned on the call that both R&D and SG&A were up quite a bit, and you called out a few of the items that drove that on the SG&A side. I might have missed it, but I didn't hear so much about the R&D side. Could you talk about what's going on there and how we should model both of those line items going forward? I mean is -- on the SG&A side, is $10 million kind of a good quarterly run rate from here?

Yes, it will be lower than what you just saw and it will spike during ISC, which this coming year, fiscal '25 will also be in Q4. But absent of that, that's a good level. And we continue to watch it. If we could reduce it, we're going to reduce it. But as we've grown we've had to make steps, which we all -- you guys all know about, made certain steps, changing accounting firms, adding an internal auditor, things like that we've had to do. We're happy that we have done it. On the R&D side, everybody always says is, why don't you hire a whole bunch of engineers? Well, we don't want to be like alarm.com who has 100s of engineers, but we do have the ability to hire more. And when our Head of Engineering comes to us and says, hey, if you can get me these 2 or 3 guys, I could get XY

[Operator Instructions] Next question comes from Raj Sharma of B. Riley.

Congratulations on the solid financials and the good quarter, again. So with the sell-through stats getting better inventories and hoping to get worked out from your comments. The inclusion in the Access Alarm's segment was down, I think, 21% year-on-year. So the radios that are 59% of the mix, they were down 10%, when you're saying fire alarms were up significantly with a higher monthly recurring revenues? Can you help breakdown -- I'm sorry?

Yes. I was just going to say, yes, fire was up. We don't break out, how much is fire? How much is nonfire? We do say fire is more than half.

Right, right. So can you help break down the portion of the intrusion access alarm that didn't do too well, I guess? And does that portion of the mix not have recurring revenues?

Yes, the part that has recurring other radios, nothing else. And we don't break it out, Raj, the way you might want. I gave you what I could tell you and -- most of the increase is due to fire and the overall decrease is a large chunk of nonfire radios that were doing tremendous during the supply chain issue with the 3G Sunset, us being the only company who could deliver when nobody else could and everybody loading up. You've got to work through that. The comps are easier now. So I think as we head into fiscal 2025, it will be an easier road for us compared to some of the difficult comps we had in 2024.

Got it. And then -- so how should we model this Access Alarm side growing in the next few quarters you think, Kevin?

Well, I think you're going to see improvement in the radio sales. We've done a lot. We've reduced -- we've helped to work to reduce the inventory levels at the distributors. We have an easy comp going forward for the next few quarters. I expect it to be up. I don't want to -- on this call, put out percentage increases. I think it's going to be doing better. It has to.

Got it. And then on the service revenue side, do you -- I mean, in the recent past and it's had stellar growth rates. And do you still expect service revenues to grow greater than 25%, greater than 30% year-on-year going forward?

Working hard on it, 27% was pretty impressive this quarter. I would like to keep it in the -- in that range. We're doing a lot of things to enhance what we're already doing. We have Prima. Prima will add more recurring revenue that we don't have in a market that we don't do a lot in, the residential market. As Dick mentioned earlier, we're working on recurring revenue from locking with Air Access. These are things that are going to get that percentage potentially to go even higher. But for right now, I was super happy with 27%. I'd like to keep it at the mid-20s for now, that would be great. And as these other things kick in, it will go higher.

[Operator Instructions] Thank you, ladies and gentlemen, this concludes our question-and-answer session today. I will turn the call back over to Richard Soloway, CEO, for closing comments.

Thank you, everyone, for participating in today's conference call. As always, should you have any further questions, feel free to call Francis, Kevin or myself for further information. We thank you for your interest and support and look forward to speaking to you all again in a few months to discuss NAPCO's fiscal Q1 results. Bye-bye. Have a great day.