Earnings Call Transcript - NSSC Q4 2020

Operator, Operator

Greetings and welcome to the NAPCO Security Technologies Incorporated Fiscal Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note that this conference is being recorded. I will now turn the conference over to your host, Patrick McKillop, Director of Investor Relations.

Patrick McKillop, Director of Investor Relations

Thank you, and good morning. I’m Patrick McKillop, Director of Investor Relations here at NAPCO Security. Thank you all for joining us for today’s conference call to discuss our financial results for our fiscal fourth quarter and fiscal year 2020. By now all of you should have had the opportunity to review the press release discussing the 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 is Richard Soloway, President and CEO of NAPCO Security Technologies, and Kevin Buchel, Senior Vice President and CFO. Before we begin, let me take a moment to read the forward-looking statement. This presentation contains forward-looking statements that are based on current expectations, estimates, forecasts and projections of future performance based on management’s judgement, beliefs, current trends and anticipated product performance. These forward-looking statements include, without limitations, statements relating to growth drivers of the company’s business such as school security products and recurring 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 SaaS recurring monthly revenue. Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those contained in the 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 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 in this conference call is as of today's date, unless otherwise stated, and we undertake no duty to update such information except as required under applicable law. I will turn the call over to Dick in a moment. But before I do, I just want to mention a few things on the IR front. In terms of upcoming investor outreach, we will be virtually attending and hosting one-on-one meetings at the CL King Conference on September 16, and the Lake Street BIG4 Conference on September 17. They're also planning for more virtual roadshows throughout the fall. Investor relations is crucial, especially for small-cap companies such as NAPCO. And I'd like to thank all those who assist us in these conferences and marketing trips. With that out of the way, let me turn the call over to Richard Soloway, President and CEO of NAPCO Security Technologies. Dick, the floor is yours.

Richard Soloway, President and CEO

Thank you, Patrick. Good morning, everyone. And welcome to our conference call. Thank you for joining us today to discuss our results. The fourth quarter and fiscal year 2020 equipment sales were impacted by the ongoing COVID-19 pandemic. But we are now beginning to see a pickup in our business because buildings are reopening and our installing dealers are gaining more and more access to install equipment at their end-user customers, which consists of businesses of all types as well as homeowners. We are pleased to emphasize that despite the pandemic, our recurring revenues continue to grow at a rapid rate. Our recurring revenues increased 35% in Q4, with a gross margin of 83% and now have an annual run rate of $27.5 million as of June. Our focus on targeting the professional installation and mostly commercial end markets is driving this continuous growth. Our balance sheet remains strong with zero debt as of this report, and our cash balances continue to grow. We remain focused on capitalizing on key industry trends, which include school security solutions, wireless, fire and intrusion alarms, plus enterprise access control systems, and architectural locking products. The management team here at NAPCO continues to focus on the key metrics of growth, profits, and returns on equity and controlling costs, especially during these difficult times. These metrics are important to us, as well as to our shareholders. We continue to execute our business strategy and our interests are aligned with our shareholders as senior management at NAPCO own 38% of the equity. Before I go into greater detail, I will now turn the call over to our CFO, Kevin Buchel. He will provide an overview of our fiscal fourth quarter and fiscal year financial results. And then I'll be back with more on our strategies and outlook. Kevin?

Kevin Buchel, Senior Vice President and CFO

Thank you, Dick, and good morning, everybody. For the fourth quarter, net sales decreased 22% to $23 million as compared to $29.6 million for the same period a year ago. For fiscal 2020, net sales decreased 2% to $101.4 million as compared to $102.9 million a year ago. The decrease in sales for the quarter and the fiscal year were primarily related to decreased equipment sales, which were caused by the COVID-19 pandemic, which caused difficulties for the security equipment professionals getting access to both commercial and residential installation sites. We believe this access issue is an industry-wide issue, and it's not reflective of the loss of any market share unique to the company or any long-term negative reflection of the post-pandemic vibrancy of the security industry as a whole. Recurring monthly revenue continued its strong growth, increasing 35% for the quarter and 38% for the fiscal year. Recurring revenue now has an annual run rate of $27.5 million, based on June 2020 recurring revenue. The majority of the company's factoring costs are fixed costs. As we've discussed in the past, when equipment sales for a quarter increase above the $20 million mark, overhead absorption increases and gross margins expand. Conversely, when equipment sales are below $20 million, the opposite occurs. Thus as a result of the lower equipment sales, gross profit for the fourth quarter decreased 38% to $8 million, with a gross margin of 35% as compared to $12.9 million, with a gross margin of 44% last year. Gross profit for the fiscal year 2020 decreased slightly to $43.6 million, with a gross margin of 43% as compared to $43.9 million, with a gross margin of 43% last year. Gross margins for recurring revenue continued to be very strong, increasing by 500 basis points for the quarter to 83% as compared to 78% last year, and for the year increased by 400 basis points to 82% as compared to 78% last year. The increase in gross margin for recurring revenue was primarily due to the increased sales of our StarLink commercial fire radios, which generate higher margins and continue to become a larger part of the overall recurring revenue mix. Research and development costs for the quarter were $1.9 million, for both the quarters ended June 30, 2020, and 2019, and were 8% of sales for the quarters ended June 30, 2020, and 6% of sales for the quarters ended June 30, 2019, respectively. Research and development costs for fiscal year 2020 remain relatively constant at $7.3 million or 7% of sales compared to $7.2 million or 7% of sales last year. Selling, general and administrative expenses for the quarter decreased 19% to $5.1 million with 22% of sales as compared with $6.3 million or 21% of sales for the same period last year. Selling general and administrative expenses for the fiscal year ended June 30, 2020 increased 2% to $23.7 million, or 23% of sales, as compared to $23.2 million, or 23% of sales for the same period last year. The SG&A decrease for the quarter was primarily due to strong cost containment measures that were implemented, as well as reduced tradeshow and travel expenses related to the COVID-19 pandemic. During the year ended June 30, 2020, the company experienced a decline in revenue related to a trade name intangible asset that was capitalized back in 2008, as compared to such revenue in the prior year. While this decline was primarily attributable to the COVID-19 pandemic, it was determined that such declines in revenue constituted an impairment of the aforementioned intangible assets. And as a result, we recognized a one-time impairment charge of $1,852,000 in the fourth quarter. Operating income for the fourth quarter before the impairment of the intangible asset was $1 million as compared to $4.8 million for the same period a year ago. Operating income for the fiscal year before the impairment charge was $12.7 million, compared to $13.5 million for the same period a year ago. The operating loss for the quarter after the impairment charge was $835,000, and operating income for the fiscal year after the impairment charge was $10.8 million. In July 2019, the Company received the proposed adjustment from the IRS for approximately $1.8 million relating to the 2016 tax year. While we strongly disagreed with this assessment and we felt we would ultimately prevail to avoid legal costs, including the cost of litigation, we came to a settlement with the IRS for approximately 40% of the proposed adjustment. The Company is also under audit with the IRS for 2017 for the same tax issue. While we have not received any assessment yet, and we strongly disagree with the IRS regarding the issue at hand, we have provided an additional tax reserve that is consistent with the 2016 settlement. As a result, income tax expense for the quarter increased by $1,024,000 to $1,059,000, as compared to $35,000 last year. Income tax expense for fiscal 2020 increased $1.1 million to $2.3 million as compared to $1.2 billion for the same period last year. As a result of these one-time charges and COVID-19 impact, net income for the fourth quarter decreased to a total loss of $1.9 million, or negative $0.10 per diluted share, as compared to $4.7 million or $0.26 per share for the same quarter last year. Net income for the fiscal year was $8.5 million or $0.46 per diluted share, as compared to $12.2 million or $0.66 for the same period last year. Adjusted EBITDA for the quarter as outlined in the schedule included in today's press release was $1.5 million or $0.08 per diluted share, compared to $5.2 million and $0.28 per diluted share last year. And for the year, adjusted EBITDA was $14.7 million or $0.80 per diluted share as compared to $15 million or $0.81 per diluted share. Now onto the balance sheet. The cash balance at June 30, 2020 was $18.2 million as compared to $8 million at June 30, 2019. Our working capital as of June 30, 2020 was $62.8 million as compared to $51.1 million at June 30, 2019. Our current ratio was 5.0:1 at June 30, 2020 as compared to 4.6:1 at June 30, 2019. And debt remains at zero at June 30, 2020. CapEx was $291,000 during the quarter versus $388,000 in the year-ago period and was $1,615,000 for the year versus $1,988,000 in the year-ago period. That concludes my formal remarks, and I would now like to return the call back to Dick.

Richard Soloway, President and CEO

Thanks, Kevin. Our fourth quarter and fiscal year sales were impacted by the COVID-19 pandemic. However, as a result of the continued strong recurring revenue with 83% gross margins, combined with a seasoned executive team here at NAPCO, who performs well by managing costs we were able to generate adjusted EBITDA of $1.5 million for the quarter and $14.7 million for the year. We recently have seen positive signs from some of our distributors that their sell-through rates have increased in the month of July and August and also the trend of more home sales in non-urban areas is picking up. We continue to believe that we are well positioned to rebound with the economic recovery. Our business is composed of 80% commercial, and many of our products are deemed essential, such as non-discretionary commercial fire alarm communicators. NAPCO also plays a vital role in the health care vertical with our locking and access control divisions, which, for example, include entry/exit devices and push/pull locks with anti-microbial finishes. We continue to witness violence erupting in many cities throughout the country, and these events are driving a need for more security. The need for security is now greater than ever for many businesses such as stores, restaurants, and offices. We are pleased with the growth of recurring revenue which is, in part, being driven by the commercial StarLink fire radios. The fire radios in particular are also helping recurring revenue gross margin expansion, as evidenced by the 500 basis point improvement compared to last year. The school security market remains a very significant market opportunity. The availability of grants for schools to fund these security projects has never been better with options from the U.S. federal government and state governments being plentiful. We have highlighted these different types of legislation and have been approved during our past earnings conference calls. We remain focused on providing schools with the products and solutions they need to protect their students and faculty. While many schools have students returning this fall, some are doing remote learning. It varies from state to state. But it's important to note that we are witnessing schools and universities using this time to upgrade and/or implement systems during this time as they continue to plan for the future. Press releases regarding school and university security projects are issued when the opportunity is allowed, as we must receive approval from these institutions prior to release. A few quarters ago, we launched the AT&T LTE StarLink line of universal fire, intrusion, and IoT communicators, which are playing a vital role in the need for the upgrade of older 3G AT&T communicators. Our StarLink communicators offer the widest range and coverage in the U.S. to dealers with both AT&T and Verizon LTE service. This market is large and growing, and we believe we have a very strong product line that will ultimately add to our recurring revenue stream. NAPCO’s latest recurring revenue product innovation, the iSecure commercial and residential 80 zone alarm system, continues its rollout during Q4. While we are still in the early stages of the product launch, we continue to receive favorable feedback from our dealers. The iSecure offers the most cost-effective functionality in the industry and has solid communicated technology inside, which will generate recurring revenue with every sale and installation. This product is designed for the new breed of professional installers and savvy consumers. iSecure has installation times of one hour and offers feature-rich functionality for smart home capabilities that many residential and small-to-midsize businesses are looking for today. As we look into the future, expanding our cellular communications technology to other areas in the security industry is a focal point of our strategy. During the late fall early winter months, we plan to introduce a cellular based locking and access control product line using our StarLink technology. This new product, called Air Access, allows dealers and NAPCO to generate recurring revenue. A few of the benefits that highlight the end-users will enjoy include no need for upfront investment in hardware or additional IT personnel, no onsite database, and no backups or software updates. In conclusion, our fiscal year 2020 was a challenging but successful year. Before the COVID-19 pandemic began to significantly impact our country back in March, NAPCO had achieved 23 consecutive quarters of year-over-year record sales. I am confident we will emerge well positioned for the economic recovery to come and will soon start another record sales streak. NAPCO is in a strong position for the future and will continue to add products and services that will enhance our rapidly growing recurring revenues. We are excited about fiscal 2021 and beyond. I would like to thank everyone for their support, and for joining us in this exciting future we have. We appreciate your time today, and we're ready for any questions. Operator, please proceed.

Operator, Operator

Thank you. The first question comes from Matt Pfau with William Blair. Please go ahead with your question.

Matt Pfau, Analyst

Hey guys, thanks for taking my questions. Wanted to start up on the comments you made, Dick, about seeing some improvements in sell-through and metrics post the close of the fourth quarter over July and August. Maybe you can just provide some more detail there. So as you look through sell-through, you know, activity demand, where are we at versus where you would sort of expect to be in a more normalized first quarter?

Richard Soloway, President and CEO

Hello there. We're seeing sell-through, which is checkout at our distributors. And when that happens, it means that the dealers are doing more installations, both commercially and residentially. They've been blocked from getting into commercial buildings, and people didn't want them in the homes during the COVID times. So we're seeing a nice increase. And, Kevin, you have the stats on some of that one, why don’t you describe it.

Kevin Buchel, Senior Vice President and CFO

Yes. So I look at our big distributors. And without mentioning any names, a lot of you guys know who our biggest distributor is. And I saw they were up 41% in July. That was very encouraging. I looked in August, it wasn't quite 41%. And it's very strong also. I wanted to see if it was just one distributor. So I looked at another one, a pretty large one, not as large as the number one guy. It was up 25% in July. I looked at August, same type of thing. So it's not a guarantee that we're going to get big orders at the end of September. But if their sell-through is as strong as that, it may be crazy not to be placing orders for equipment because they're going to run dry.

Matt Pfau, Analyst

Got it. And then wanted to touch on iSecure; it seems like you're encouraged by what you've seen early on there. When would you expect this to become a more material contributor to the recurring revenue line or is it already?

Richard Soloway, President and CEO

It's going to be adding, I believe, a lot of recurring revenue to our company. It's a kind of an irresistible alarm system, which is good both commercially and residentially with this one product they can carry; the dealer can carry one product on their van and it can do all kinds of commercial and residential jobs with exclusive 80 zones. It's priced at a kind of an irresistible price to the dealers compared to anything else on the market. So it's got more functionality, and its price is much better. The dealers can build more equity in a business by buying this because they're not laying as much cash for equipment as they've been doing in the past with the competitors. So typically, prior to COVID times, it typically takes nine months to 12 months for a product to get an okay from the dealers. They talk to each other, they meet each other at distributor counters, they talk to each other, get together. Now they're emailing and talking, and they're buying, but it slowed it up a little bit. But the potential is tremendous; it is an anchor for the industry this product. And I figure in another nine months or so it should be coming into stride. It's got tremendous upside. It does all types of businesses and homes as I said. So everyone that is bought by a dealer and installed is rolled on our backend, and every one of these then generates recurring revenue, somewhere between $7 and $13 a month for us from the dealer, and he pays us on a credit card. The dealer then will mark it up to whatever type of job he's doing with the other accessories he's adding, how many zones do it, smoke detectors, he's enabling IoT, but we get our $7 to $13, and then he marks it up whenever the market will bear. So it's a very exciting product life that laid a lot of volume to our recurring revenue as well as our equipment sales.

Matt Pfau, Analyst

Perfect. And last one for me, just wanted to ask about the new Air Access product and talk about what the market for this product is, who is it targeted for? And then I'm sure you've been talking to your dealers with this and getting some feedback what are the early indications of interest from your installer base for the Air Access product?

Richard Soloway, President and CEO

The big picture here, the vision is to get all of our equipment to generate recurring revenue and therefore, it's more than a one-time sale. The locking and access control is a one-time sale and the sales department is selling them to enterprises of all sizes. So they have the locks for hospitals, businesses of all types, high-rise buildings and office buildings. So we, while we enjoy building the product and getting nice sales out of the product, we want to get recurring revenue for the product. So we've developed Air Access, which is going to be using our communications cloud, our NOC. Up to this point, access control products typically utilize the IT departments' network. That network is something the IT group of people doesn't want to have infected by any possibility of hacking. So there's always a political situation in the building. You want to get access control, but you don't want to affect the network. So we've now eliminated all that. Air Access is the first cellular access control system that has recurring revenue for us and for the dealers. By using the cloud, the dealer no longer has to buy thousands of dollars’ worth of equipment and keep it on-site. All that equipment is in our cloud. So it's as simple as installing it on doors with radios, and it goes up to the cloud. The equipment is all in the cloud, the dealers have to pay for it. He just pays us a fee for utilizing our system. We think this is going to be a major home run for the company.

Matt Pfau, Analyst

Great. Thanks a lot, guys. Appreciate it.

Operator, Operator

Thank you. Our next question comes from Mike Walkley with Canaccord Genuity. Please state your question.

Mike Walkley, Analyst

Great. Thanks for taking my question. Kevin or Dick just wanted to follow up on the improving sell-to transit some of the larger distributor customers; can you give any additional color just on maybe inventory levels from your distribution or dealer partner channels? Were there any kind of pre-buying with COVID worries, kind of overstocking inventory that they're working through, or any kind of direction you can give us on just the channel inventory would be helpful?

Kevin Buchel, Senior Vice President and CFO

Yes, Mike, none of our distributors seem to load up on inventory so that their supply chain would not be interrupted, which is something we did. We loaded up on inventory so that our supply chain wouldn’t be interrupted. They didn't. So we see the good, strong sell-through stats that we've seen for July and August. To us, that means they're going to have to buy. They didn't load up. Nothing out of the norm. And I guess, I understand that they weren't sure what was going to be, what the sales were going to be until they had more clarity on what was going to happen with COVID. But now that the country seems to be opened up more than it was versus last quarter, I think they're seeing by the sell-through stat that they're going to have to step up and place some nice orders come the end of this quarter. That's our hope, that's our expectation. When you're dealing with distributors, you never know, but always the best sign is when you see strong sell-through.

Mike Walkley, Analyst

That's helpful, Kevin. This is good to know that sell-through could lead to better sales. And just leading to sales trends, I know heavy fixed costs that you highlighted in the script with the Dominican Republic facility. Can you just help investors on the call if equipment sales rebound to say $18 million, what would gross margins jump to and if they just go up $4 million more over $20 million, would they go all the way back to the 30% range?

Kevin Buchel, Senior Vice President and CFO

Right, so fixed costs are a great thing, especially when the hardware sales, when the equipment sales are growing. $20 million is a magic number; get to $20 million margins, typically it's 33%. Get above that; they go above to 33%. When we get to $24 million, $25 million in equipment sales, it doesn't take that much, and your gross margin could get to 40%. We project that when we get to $100 million of equipment sales, which is an average of $25 million per quarter, that the gross margins would be 40%. At $18 million, that'd be lower than the bar, the margins would probably be in the high 20s. At $20 million, we'll be back to the 30%, 32% range. So we're working hard. Recurring revenue is the name of the game around here. That's what we care the most about with 83% or so margin. We don't forget about the hardware sales because that gives you nice margins also, the larger it grows. And we're working hard to restore it to the $20 million and beyond. Our goal is still, we still want to be $100 million of hardware revenue by next year and beyond. Going out five years beyond that, our long-term goals are to have $150 million of recurring revenue and $150 million of hardware sales, worth a 50:50 split. Today our recurring revenue is 25% of sales, not bad for five years. But we wanted to get to 50% five years out.

Mike Walkley, Analyst

Right. And just building on that, Kevin, very strong gross margin on recurring revenue again at 83, I think corrected for the company. Sounds like fire radios are a big driver of that. As things like iSecure and the new Air Access products grow in the mix, how might that impact gross margin percentage? Obviously, it's going to be positive to gross margin dollars. But how should we think about recurring revenue gross margins as these other products scale on the model?

Kevin Buchel, Senior Vice President and CFO

You know, if fire radios were the only thing we were selling, the recurring revenues gross margin on recurring revenue would probably be in the 90s, right? But not everything is fire. So the mix today is 83%, 84% as we introduce these other factors, whether it's iSecure or Air Access, they're not going to be as strong as fire radios margins. But fire radios haven't hit their potential either. They were introduced after all the other radios, so they're still not the lion's share of radios that we sell. At the same time, their impact is to get the gross margin into the 83% range. These other ones are going to help us get to the 50:50 split by 2026. They're not going to be as 90% type as fire radios. But all in all, the whole mix should be in the 80% range when it all gets added up in the end.

Mike Walkley, Analyst

Great. Thanks. Last question, and I'll pass the line. You know, obviously, difficult times your schools opening and closing, can you just talk about maybe the pipeline for school projects with all the federal and state money set aside? Are these starting to pick up again here into the fall? Or are they slowing down just because students are starting to come back?

Kevin Buchel, Senior Vice President and CFO

We're seeing a lot of universities that have been awarded jobs to integrators, and the integrators are ready to give us the purchase order. The only thing that's holding us back is the integrator doesn’t know exactly when they're getting into the school. We say to the integrator, 'Let us give you the PO now, we'll ship it now. You know, whenever you get in, you get in' and they go, 'No, I want to time it right. I don't want to be sitting with this equipment.' And we say, 'We'll give you extra time.' They say to us, 'Don't worry, you got the job. It's just let us figure out where we could get in there.' So there's a certain amount of uncertainty when the integrator can get in there. But we've been awarded a bunch of jobs, a bunch of school jobs. And they are just trying to time it right. I understand that. They don't want to place the order and then have it say that they can't get into the schools. But they want to do these jobs now, because the schools, even though they're back, it's hybrid, it's not being active on campus that it usually is. It's a perfect time for the job to get installed. So we're working with the integrator. Our expectation is we're going to win a bunch of jobs soon. We hope by the end of September, if not, it'll be shortly thereafter. They've committed that they want to do this work. And on the K-12 front, what we've seen there is any money that had been awarded by the states to the K-12 schools, that money has to be used for schools security. Schools today with the COVID, they have tremendous budget problems. They can't touch that money unless it's for school security. So that's a good thing. Otherwise, they would use that money because they have tremendous deficits all over the country. But school security money that's been funded for security, that's what it's going to be for, and nothing else. And that's a good thing too.

Mike Walkley, Analyst

Thanks for taking my questions. Hopefully your partner improved sell-through comes back here in the future quarters for you guys.

Kevin Buchel, Senior Vice President and CFO

Thanks, Mike.

Richard Soloway, President and CEO

Thank you.

Operator, Operator

Our next question comes from Jason Schmidt with Lake Street. Please state your question.

Jason Schmidt, Analyst

Hey, guys, thanks for taking my questions. Just following up on that last question, what you guys may be seeing some pent-up demand across your businesses and then the ability maybe to get back into schools and do so installs on these less populated campuses. Do you think all these forces will impact sort of the seasonality you typically see in this year? Meaning could seasonality for fiscal 21 be different than historical patterns?

Richard Soloway, President and CEO

Historically, schools preferred to do installations only during the summer months when students are completely out of school or during winter breaks when students are also away. However, the situation has changed. They didn't conduct installations this past summer, but now they want to proceed, and campuses are not as busy as they typically are. Now that school has resumed, it's not as crowded, so they are eager to move forward, and we are as well. Once the universities give the integrators the go-ahead, many projects will ramp up again. Therefore, I believe the traditional seasonality may not apply anymore. There's a strong motivation to complete these projects since many schools are behind schedule. It's worth noting that most schools lack security; perhaps only 10% have any security measures in place, leaving about 90% without any protections. This is hard to imagine considering the numerous incidents that have occurred, which presents a significant opportunity. It’s essential for us to collaborate with the integrators and universities. In the K-12 sector, there are over 100,000 schools and more than 10,000 universities. Opportunities extend beyond schools to any places where people gather, such as houses of worship or restaurant chains, which are all vulnerable to potential chaos. Thus, we are diligently working to get our products into these locations. There is a demographic shift taking place. The population is facing increasing chaos in public spaces, and the police are being marginalized, which creates significant tension in schools and places of worship due to uncertainties about safety. Even the restaurant industry is affected by incidents of break-ins while patrons are present. As a result, there is a growing need for enhanced security measures. We anticipate that our dealers will be busier than ever in the future, as the products they install will generate recurring revenue. Businesses and homes will require more protection, which will motivate dealers to take on more projects to meet the rising demand for security equipment. We expect this to lead to a significant transformation moving forward. We are continually investing in engineering and maintaining our budgets while developing more efficient products. A wealth of new innovations is on the horizon, and every new product we create will include a recurring revenue component.

Jason Schmidt, Analyst

Okay, that's helpful. And that actually leads me to my next question; it might be hard to pinpoint exactly. But do you think you've noticed a significant uptick in inbound interest in coding activity due to the civil unrest this year?

Richard Soloway, President and CEO

I think it's natural. You pick up any newspaper, you listen to any TV reports, you see that the police are marginalized. You see what's going on in many of the cities. And that bodes for more security. Our dealer base is 12,000 security dealers. They're all over the country. So they're very entrepreneurial type guys; they go out and they market well. As soon as they're going to be able to get into buildings 100% residential is 100%. They're going to be pushing very hard to put in more security equipment. Since we make very reliable equipment, priced right, offering recurring revenue services to the dealers in a very easy way for them to install it, which also allows the end-users, whether it's sold to the jobs into the IoT, to control videos on your smartphone, lighting control, and thermostat control remotely, it becomes a great marketing opportunity for the dealers. More security for the population and more security work for the dealers. So that's how we see it going forward. We expect the level to be ramping up.

Jason Schmidt, Analyst

Okay, and the last one for me and I'll jump back in the queue. Did you repurchase any shares in the quarter and relatedly? How should we think about capital allocation going forward?

Richard Soloway, President and CEO

We did not repurchase any shares in the quarter. We're always looking at the potential and we might do it. As you can see, our cash is growing. It's a nice problem to have. We haven't exactly decided how to use that cash. It's a good problem to have; buyback has been one of the things we've done in the past. We'll see what happens. It could always be done in the future.

Jason Schmidt, Analyst

Okay, thanks a lot, guys.

Richard Soloway, President and CEO

Thank you, Jay.

Operator, Operator

Thank you. Our next question comes from Raj Sharma with B. Riley FBR. Please state your question.

Raj Sharma, Analyst

Hello, good morning everyone. I understand you mentioned that the decrease in gross margins for hardware was primarily due to lower sales volume below $20 million. Could you tell me if there was any pricing power in hardware sales last year that had an impact on the overall margins?

Kevin Buchel, Senior Vice President and CFO

We did not have any pricing issues this quarter; it was strictly volume. Our expectation is when the hardware sales are restored, pricing will be as it was. Once again, we go over that $20 million magic number mark, margins will come back as strong as ever.

Raj Sharma, Analyst

Right?

Kevin Buchel, Senior Vice President and CFO

What we hear from the dealers gives you a flavor of what this is about. So the dealers are telling us, we want to get back in, but we’re shut out. So we're going to level up our recurring revenue, and then we're going to push very hard to get in and do more jobs to build up that recurring revenue base. We hear that a lot. That will only happen for a certain period of time, and then it'll be coming back. As we read and hear about places opening up now starting to open up. Therefore, that sell-through that Kevin was talking about before as the distributors bode for growth going forward because the distributor must have all the products on his shelf in order to satisfy those 12,000 dealers. So a dealer is doing a commercial job, residential job, all the SKUs to do those jobs have to be at the distributor. So as it should be the rungs lien, he has to backfill with more products. If he doesn't backfill with more products, he's going to lose the sales; the dealers can shop at other distributors. We have more than 200 different distributors. Some are networks, the large ones in that work groups, and some are independent. They may have one or two or three locations. But a dealer wants to do jobs; it's his lifeblood. If he can't get it from one distributor, he can get it from another. We look at distributors as wonderful shelves for us, but the dealers are tenacious guys, wanting to put jobs in and build a recurring revenue base. That plays well into Air Access. We want to give the integrators, which are different types of installation companies, a product line where they can start building recurring revenue, like alarm dealers do. That's going to be coming up in the fall of winter. That's going to be a very popular product because we're going to show the integrators how they can make money like the alarm dealers do on a recurring revenue basis. There's a lot of wonderful things going on. Unfortunately, COVID hit us and closed down a lot of facilities, so the mechanics can't get into the homes and do the jobs or into the businesses. But that will change. It’s a temporary bump in the road, as we talked about before; we’ve had 23 consecutive quarters of growth and we want to get back into that trend of growing again. We have more wind in our sails with better products that offer recurring revenue than ever before. Should be a nice voyage going forward for the investors that can appreciate and understand what's going on.

Raj Sharma, Analyst

Right. And then on the iSecure sales in this quarter. Are these both hardware and recurring sales, or they are only recurring sales?

Richard Soloway, President and CEO

No, what happens is the jobs to go in with every iSecure. There's a recurring revenue part of it. Recurring revenue, if it uses a basic communicating alarm system to the central station, it's roughly $7 a month to us. If it's enabled through our system, to the IoT, Internet of Things, video, cameras, thermostats, lighting, that goes up to $13 a month to us. We don't want to make a product that doesn't have a recurring revenue component to it.

Raj Sharma, Analyst

Great. And any indication how big this business is this quarter, and what you expect it to be for the year or is it too early?

Richard Soloway, President and CEO

Well, we don't make predictions. But if you've got a product that's feature-rich, beyond anything that's on the market, that's priced at a price point because it was automated, and it's built in our Dominican factory half the price as the NAPCO reputation for reliability, it's got to be a winner. If I was a dealer, I wouldn't even want to use anything else because it's less equipment costs for me, and I get more functionality out of it. I don't have to go back and really service it because of the fact that it's NAPCO reliability, which is a step beyond all the other product brands on the market.

Raj Sharma, Analyst

Right. So any is it a still immaterial piece of the business this quarter has just sort of started to ramp up?

Richard Soloway, President and CEO

It's in the beginning stages of growth. We put it out in December. We sold all the production in January, February, March quarter. We want to put it out kind of slowly, so that we can monitor its performance and get feedback from the dealers. And then the COVID aspect that came into play. But it's a wonderful product.

Raj Sharma, Analyst

Great. That makes sense. So and just, and then my last question just following up on the schools, it continued to seem like a great opportunity here. What percentage of the total business do you do in schools and how's that split between hardware and recurring, and what kind of growth are you seeing in schools? Or do you expect to see for this year? Can you give some indication there?

Richard Soloway, President and CEO

We don't break out how much school security is of total sales because we don't know. Because a lot of times we will sell our products to a locking distributor. The locking distributor will sell it to schools so we don't even know. But what we do know is that since school security came onto the scene, which is to say, call it five years ago, locking became a bigger and bigger part of our business. It's the largest part of the hardware business. It's 60% of the equipment business. That’s not an accident; that’s because of the various school jobs that we've done over the years. The potential is tremendous. The fact that it's 60% tells you a lot, but I can't tell you specifically how much it is.

Raj Sharma, Analyst

Got it. Well, thank you guys.

Richard Soloway, President and CEO

You’re welcome. Thank you.

Operator, Operator

Thank you. There are no further questions at this time. I'll turn it back to management for closing remarks. Thank you.

Richard Soloway, President and CEO

Thank you, everyone for participating in today's conference call. As always, if you have any further questions, please feel free to call Patrick, Kevin, or myself for further information. We thank you for your interest and support. We look forward to speaking to you all again in a few months to discuss NAPCO's fiscal Q1 2021 results. Bye bye.

Operator, Operator

Thank you. All parties may disconnect. Have a good day.