Earnings Call Transcript - NSSC Q2 2020

Operator, Operator

Greetings and welcome to the NAPCO Security Technologies, Inc. Fiscal Second Quarter 2020 Earnings Call. At this moment, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please be aware that this conference is being recorded. I will now hand the conference over to your host, Director of Investor Relations, Patrick McKillop. Mr. McKillop, you may begin.

Patrick McKillop, Director of Investor Relations

Thank you, Daryl. Good morning. My name is Patrick McKillop. I am the Director of Investor Relations for NAPCO Security. Thank you for joining us for today's conference call to discuss our financial results for our fiscal second quarter 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 statements. This conference call may contain forward-looking statements that involve numerous risks and uncertainties. Actual results, performance or achievements may differ materially from those anticipated in such forward-looking statements as a result of certain factors, including those set forth in the company’s filings with the SEC. During the call, we may also present certain non-GAAP financial measures such as adjusted EBITDA and certain ratios that are used with these measures. In the press release and on the financial tables issued earlier today, you will find a definition of these non-GAAP financial measures. A reconciliation of these non-GAAP financial measures with the closest GAAP financial measure, as well as a discussion about why we think these non-GAAP financial measures are relevant to our results. These financial measures are included for the benefit of investors and should not be considered instead of GAAP measures. I will turn the call over to Dick in a moment, but I just wanted to mention a few things on the IR front. In terms of upcoming investor outreach, we will be marketing Boston on February 5th and are continuing to plan more events in other regions during the next few months. Also, on March 17th through the 19th we will be showcasing our product at the ISC West Trade Show at the Sands Expo Convention Center in Las Vegas, Nevada. If you would like to attend ISC West or are interested in having us visit with you for me to arrange more time with us post this earnings call, please contact me. Investor outreach is crucial, especially for small-cap companies such as NAPCO and I would like to thank all of those folks that 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 fiscal second quarter 2020 marked another record revenue and profitability performance for NAPCO. Our SaaS recurring revenues continue to grow at a rapid rate. Our recurring revenues annual run rate is now $24 million as of December. Our focus on targeting mostly commercial end markets and professional installation is driving this continuous growth. Our cash balance has continued to grow and our cash balance is clean with no debt. Capitalizing on key industry trends remains our focus. These trends include wireless, fire and intrusion alarm communicators, school security solutions, enterprise access control systems and architectural locking products. Management here at NAPCO continues to focus on key metrics of growth, profits and returns on equity. These metrics are important to us, as well as our shareholders. Our business strategy is executing well and our interests are aligned with our shareholders, as senior management at NAPCO owns 38% of the equity. Before I go into greater detail, I will now turn the call over to our CFO, Kevin Buchel, to provide an overview of our fiscal second quarter financial results and then I will 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 second quarter, net sales increased 4% to $25.8 million, which was a record second quarter performance and the 22nd consecutive quarter of year-over-year record sales, as compared to $24.8 million for the same period a year ago. For the six months ended December 31, 2019, net sales increased 8% to $52.1 million, as compared to $48.2 million last year. The increase in sales for the quarter and the six months were primarily related to increased sales of our alarm communication services and intrusion and access products, as partially offset by a decrease in sales of door locking products. Recurring monthly revenues from the alarm division increased 40% for the quarter and 41% for the six months, and now has an annual run rate of $24 million based on December 2019 recurring revenue. Sales of intrusion and door locking products were affected in the second quarter due to the company’s largest customer, a leading distributor of network and security solutions being in the process of being acquired. The sell-through of our products, i.e., sales of these products from this distributor to alarm and locking dealers who ultimately receive our products, was strong, increasing 15% in Q2 compared to last year and increasing 11% sequentially versus Q1 this year. As a result of this increased demand for our products, it is our belief that the aforementioned impact on sales is temporary. Gross profit for the second quarter increased 14% to $12.1 million with a gross margin of 47%, as compared to $10.7 million with a gross margin of 43% last year. For the six months, gross profit increased 17% to $23.6 million with a gross margin of 45%, as compared to $20.2 million with a gross margin of 42% last year. The 400-basis-point and 300-basis-point increases in gross margins for the quarter and six months, respectively, were primarily driven by the previously mentioned continued strong increases in recurring revenue where the gross margin increased to 81% for the quarter versus 77% last year and was 80% for the six months versus 78% last year. R&D expenses for the second quarter remained relatively constant at $1.8 million or 7% of sales, compared to $1.8 million or 7% of sales last year. For the six months, R&D expenses increased 2% to $3.6 million or 7% of sales, as compared to $3.5 million or 7% of sales last year. Selling, general and administrative expenses for Q2 increased 12% to $6.3 million or 24% of sales, as compared to $5.6 million or 23% of sales for the same period a year ago. And for the six months, SG&A expenses increased 7% to $12.5 million or 24% of sales, as compared to $11.7 million or 24% of sales last year. The increases for the three months and the six months were primarily due to increased media advertising, additional sales staff and salary increases, as well as increased stock option expenses resulting from the significant increase in the company’s common stock price, which is used in the valuation of the options granted during the three months ended December 31, 2019. Operating income for the second quarter increased 21% to $4 million, as compared to $3.3 million last year. For the six months, operating income increased 50% to $7.6 million as compared to $5.1 million a year ago. Income tax expense for the quarter increased by $12,000 to $431,000, as compared to $419,000 last year. For the six months, income tax expense increased 20% to $800,000, as compared to $667,000 last year. The increase in the provision for income taxes for the three months and the six months was caused primarily by an increase in income before provision for income taxes. The company’s effective rate for income taxes was 11% and 13% for the three months and six months ended December 31, 2019, and 2018, respectively. Net income for the second quarter increased 25% to a second quarter record of $3.6 million or $0.19 per diluted share, as compared to $2.9 million or $0.15 per diluted share last year. And for the six months, net income increased 56% to $6.8 million or $0.37 per diluted share, as compared to $4.4 million or $0.23 per diluted share last year. The change in net income for the three months and the six months ended December 31, 2019, was primarily due to the items previously mentioned. Adjusted EBITDA for the quarter, as outlined in the schedule included in today's press release, increased 24% to $4.7 million or $0.25 per diluted share, as compared to $3.8 million or $0.20 per diluted share last year. For the six months, adjusted EBITDA increased 48% to $8.7 million or $0.47 per diluted share, as compared to $5.9 million or $0.31 per diluted share last year. Moving on to the balance sheet, cash balance at December 31, 2019 was $11.8 million, as compared to $8 million at June 30, 2019. Our working capital as of December 31, 2019 was $56.2 million, as compared with $51.1 million at June 30, 2019. The current ratio was 4.7 to 1 at December 31, 2019, as compared with 4.6 to 1 to June 30, 2019. And debt remained at zero at December 31, 2019. Net cash provided by operating activities for the quarter was $1.9 million and for the six months ended December 31, 2019 was $4.8 million. Inventory levels remain higher than normal, as we continue to gear up for several new product launches that we have mentioned on previous calls, including iSecure, which started to ship at the end of Q2, our new Marks’ anti-ligature locks, several StarLink radios, including our new line of AT&T LTE StarLink Radio. Inventory levels are also impacted by the level loading of our production output throughout the year, whereas sales are historically highest in the fourth quarter. CapEx was $882,000 during the quarter versus $695,000 in the year-ago period and is $1.1 million for the six months versus $1.1 million in the comparable period last year. That concludes my formal remarks and I would now like to return the call back to Dick.

Richard Soloway, President and CEO

Kevin, thank you. We continue to believe that the growth we have witnessed in our business should continue in the future. Growth drivers for the business are coming from areas of alarm communications for fire intrusion and the smart home category, as evidenced by the growth of recurring revenue products. Fire radios, in particular, are what we call in-house on fire, as evidenced by the 81% gross margin for recurring revenue in Q2. Additionally, the school security market remains a contributor to our growth and there is a significant market opportunity here. There are positive tailwinds with our new funding over the past year or so coming down to schools, to pay for the upgrades they need. The State of Minnesota recently released $30 million to its schools for security upgrades, which is in addition to the $25 million that was released in 2018. Senator Carlson from Minnesota is currently sponsoring a bill for an additional $500 million in funding, and this type of activity is occurring throughout the U.S. Other pending legislation for school security includes the School Violence Protection and Mitigation Act of 2019, which was proposed by representatives Williams and Deutch in the U.S. House of Representatives in July 2019. This legislation would authorize $2 billion over 10 years to identify and address any shortfall in security at K-12 schools. NAPCO is dedicated to providing all schools with the solutions and products they need to help protect the students and faculty. The funding backdrop, plus the continued focus by parents, teachers and students for more school security should continue to have a positive impact on the growth of our business in this vertical. NAPCO announces project wins at schools and universities when the opportunity is allowed for us, as we must get approval to make these announcements. Our pipeline for school security projects remains robust. Active shooter incidents also continue to happen in public places like houses of worship and other meeting areas. Our SAVI audit system, which is currently used in schools, also has the ability to be used in these areas in order to help find security deficiencies that need to be addressed. The need for more security with our locking and access control products in these areas is clear. The recent launch of our new LTE StarLink line of universal fire intrusion alarm and IoT communicators continues to perform well. Our StarLink communicators now offer the widest LTE coverage in the U.S. to dealers in our network with both Verizon and AT&T service. FireLink, another recent product we launched, is an all-in-one fire alarm control panel with the cellular communicator inside. It has 8 to 32 zones capabilities, pre-configured and pre-activated, which saves a dealer's installation time and money, while replacing aging landline-connected systems. The FireLink continues to see sales growth and also is generating recurring revenue. Recently, we began our first shipments of our latest product introduction, the iSecure. The iSecure is designed for the new breed of professional installers and SAVI consumers. iSecure has installation times of one hour and offers a feature-rich set of functions for smart home capabilities that many residential and small mid-sized businesses are looking for. The iSecure won the MVP (most valuable product) award at the Home Controls category at the ISC West Trade Show in 2019 and attracted a lot of traffic from dealers into our trade show booth. Most importantly, every iSecure has a cellular radio built in. So every unit sold will generate additional recurring revenue. Our future plans to continue growing recurring revenues include bringing recurring revenues to all divisions of the NAPCO family of companies is our goal. During this summer, we expect to be launching cloud-based wireless electronic locks and enterprise access control with the use of StarLink cellular technology. These products will generate incremental recurring revenue from the large access control and door locking segments for us, while providing valuable new services to end users. We will begin our Q&A session portion of this call in a moment. Our fiscal Q2 2020 was a very successful, record-breaking quarter for us as we continue to grow the company and deliver strong profit. Our shareholders have been rewarded with very healthy returns and stock performance over the last few years. NAPCO is in a strong position to continue its growth in sales and profits going forward. We are excited about the remainder of fiscal year 2020 and beyond. NAPCO senior management maintains a high level of ownership in our equity, approximately 38%, and I would like to thank everyone for their support and for joining us in this exciting future we have. Operator, our formal remarks have now concluded. We would like now to open the call for the Q&A session.

Operator, Operator

Thank you. Our first question comes from Mike Walkley of Canaccord Genuity. Please go ahead with your question.

Mike Walkley, Analyst

Great. Thanks for taking my question. First question, just a little more clarity about your large customer going through a sale process. I mean, it sounds like sell-through was strong there. Do you have any indication of how low they want to get their inventory before the sale and any color on the end buyer if they still think your products are right to move through that channel?

Richard Soloway, President and CEO

Kevin?

Kevin Buchel, Senior Vice President and CFO

Yeah. I believe, Mike, that the sell-through, which is very strong. That’s the first thing we look at, with all of our customers, our distributors, because these distributors are shelf space for us. The main thing is how is sell-through doing. We saw in this particular case very strong sell-through, both versus a year ago and both versus last quarter Q1. So our expectation is, if they are lowering their inventory levels or whatever they are doing, I think this was more about, they are in the midst of being installed and they kind of like a deer in the headlights freezing, not sure what to do. They have to buy more inventory, but they are going to lose sales. When the sell-through was strong and the demand is there, they don’t want to lose sales. They are going to react maybe this coming quarter that we are in now, maybe it will take another quarter. Ultimately, they have to react, but they are going to lose sales to another distributor. Remember they are shelf, these ultimate customers, the alarm dealers, the locking dealers, those are our ultimate customers. And as long as that demand is there, whether we sell these products through this distributor or someone else, so be it. I believe the new owner is not going to want to lose sales. I think things will get back to normal in the near future. We think this is a temporary thing in the long run.

Mike Walkley, Analyst

Okay. No. That's helpful. And the mix this quarter, both for this recurring revenue and for the equipment sales. Gross margin came in much stronger than what we have seen for a lower revenue quarter, especially on the equipment side. Can you talk about the strong gross margin trends and maybe how we should think about them going forward?

Kevin Buchel, Senior Vice President and CFO

The recurring revenue margins have been impressive, typically around 77% to 78%, sometimes reaching up to 79%. As fire radios represent a larger share of the overall StarLink radios, we've noted that margins are increasing due to the higher monthly revenue from fire radios. This shift has contributed to our margins reaching 81%, and there is potential for further improvement. Regardless of whether the margins remain in the high 70s or low 80s, this is a positive trend. The recurring revenue itself also continued to grow, reaching a $24 million run rate, which we believe has significant potential for growth. As we move forward, we plan to introduce recurring revenue products in other areas like locking and access control, which are currently in development and may launch in fiscal 2021. Presently, the $24 million run rate is sourced from just one segment, highlighting the growth opportunity across other areas of the business. While margins may fluctuate, we are generally moving in a favorable direction. In terms of hardware margins, we encountered some disappointment this quarter with $20 million in sales, but we believe sales will improve in the next quarter. We did not achieve the expected manufacturing leverage from the Dominican Republic this time, which typically comes into play when sales exceed $20 million. However, we did benefit from a strong mix of high-margin products due to several wins in schools and access control projects, resulting in a solid 37% margin. Moving forward, margins may vary, but the overall trajectory is positive. Our goal remains to reach $100 million in hardware revenue by June 2021, though it might take a bit longer. We remain confident that margins will increase as we progress toward this target.

Mike Walkley, Analyst

Great. Thanks. And last question from me and I will pass it on. With the strong mix of margins this quarter, EBITDA came in line with our expectations with good EBITDA margins. As you look out of the model with recurring revenue growing faster than hardware. How should we think about kind of EBITDA margins in the back half of the year, fiscal year, and then longer term as you hit some of your goals and run rates, what’s a reasonable long-term adjusted EBITDA target?

Kevin Buchel, Senior Vice President and CFO

Well, EBITDA margin last year was 15%. It was $15 million on basically $100 million. This year the expectation is higher, because obviously, as recurring revenue grows in the 40% range and at such high margins, EBITDA margins are going to go even higher. In the next couple of years, we expect the EBITDA margins to be 25%. If we get to the point where recurring revenue is in all aspects of the business then down the road, five years from now, let’s say, we could be at 50-50 split between recurring revenue and hardware sales. That’s obviously the long-term goal for us in the next five years. At that kind of levels we get to that point, EBITDA margins are going to be 30%, 40% and that’s long-term vision. This year obviously if we could get to be above the 15% we were last year, more like 20%. I think that’s the reasonable short-term goal. Long-term, let’s get recurring revenue in all parts of the business, where it becomes the main part of the business. Today recurring revenue is, like 20% of the total. Let’s get it to the point where it’s 50%. That’s what we are working hard on long-term.

Mike Walkley, Analyst

Okay. Thank you. And we look forward to tracking some of the new products as they come into the market.

Richard Soloway, President and CEO

Great. Thank you.

Operator, Operator

Our next set of questions comes from the line of Jaeson Schmidt of Lake Street. Please proceed with your question.

Jaeson Schmidt, Analyst

Hey, guys. Thanks for taking my questions. Understanding, sort of the headwinds from this one large customer, can you just talk about what you are seeing from a competitive landscape and if you think you are still gaining share in the market?

Richard Soloway, President and CEO

Kevin, why don’t you discuss that.

Kevin Buchel, Senior Vice President and CFO

There is competition in various segments, including alarms, locking, and access control, with each competitor facing different challenges. In the intrusion alarm business, some competitors have encountered problems; for instance, one has exited the residential intrusion market due to a lack of recurring revenue, which is essential for growth. This presents a significant opportunity for us, particularly with our introduction of iSecure, which is well-priced and suitable for the residential and small business sectors, featuring a $99 price tag and a one-hour installation, plus the potential for recurring revenue. We face several competitors, including some that don't manufacture alarm systems, but we are confident about increasing our share in the alarm market. In the locking segment, which is our largest business area, sales were impacted this quarter by one distributor customer, but overall, locking sales remain strong. We are successfully winning various school contracts, which we will disclose when possible. Our locking and access products complement each other, especially in university settings, and this synergy has become a crucial part of our business. There is no reason to think this trend won't continue. If we can establish recurring revenue in this area, it could lead to substantial growth. While we face many formidable competitors, we believe we are taking the right steps to expand our market share.

Jaeson Schmidt, Analyst

Okay. That’s helpful. And then just following up on that last comment on adding recurring revenue to locking and access control, after imagine you have discussed this with your customers. Just curious, I know it’s not launching until the summer. But what has customer response to adding that to those two segments?

Richard Soloway, President and CEO

The customers that this project is aimed for don’t necessarily get recurring revenue now. They just do installations and they are paying for those jobs. So the excitement of recurring revenue is a new phenomenon for them. And we know that there are certain traits of service contracts that excite them in certain ways and with our radio communicator locks that we will be introducing, they will be able to tap into the exciting portions of recurring revenue and we will be able to sell those to their end user customers because it will offer a lot of advantages over non-reporting type of locking. And because of the fact that it utilizes cellular, it doesn’t utilize the computer departments in these firms that are going to be doing business in. So it gets instantaneous data directly from the locking products to the installing dealer and also it will be to the central station. So we have a very high confidence rate that it’s going to be a very successful exciting part of growth of our business and we are the major contributors to the 50% recurring revenue in five-year number that Kevin was discussing in this call. So we expect sometime during the summer months, we will be introducing the first versions of it, it will take a while, it will take a year or so for it to get to the point where lots of dealers will understand and be collaborating to use it, like any new product. But because it builds equity for these installing dealers, they are going to be very happy to get behind it and put equity in their business models. So we are excited about that.

Jaeson Schmidt, Analyst

Okay. That’s helpful. And then just lastly, I know you just mentioned kind of 50% recurring revenue target in five years. Do you still feel confident in that $40 million target exiting fiscal ’21?

Richard Soloway, President and CEO

Yes. We do.

Jaeson Schmidt, Analyst

Perfect. Thanks a lot guys.

Kevin Buchel, Senior Vice President and CFO

Thanks, Jaeson.

Richard Soloway, President and CEO

Thank you.

Operator, Operator

Our next set of questions comes from the line of Matt Pfau of William Blair. Please proceed with your question.

Matt Pfau, Analyst

Hey, guys. Thanks for taking my questions. I wanted to ask first on the iSecure product and does that contribute at all to the strength and the recurring revenue in the quarter or, and if not, when should we start to expect iSecure to become a more material contributor to that growth?

Richard Soloway, President and CEO

Kevin, do you want to explain that?

Kevin Buchel, Senior Vice President and CFO

This quarter, iSecure was shipped at the very end, which resulted in an 81% recurring revenue gross margin, but that wasn’t the sole reason. The dealers and customers received this product right at the close of the quarter. As this product gains traction, which typically takes around nine months to start making a significant impact, you’ll notice improved results. The statistics we shared this quarter primarily reflected fire radios. For our projection of a $40 million run rate by the end of 2021, we are not factoring in iSecure. We expect that the current offerings will achieve this without considering iSecure or the recurring revenue from the locking and access segment of the business, which will be an additional benefit to reach the $40 million run rate. So stay tuned; it could be more promising than what we've indicated. Also, while we expect to reach this goal by the end of June, it could happen earlier or take a bit longer, but we believe we are on course for that $40 million target.

Matt Pfau, Analyst

Got it. With the new recurring revenue locking and access control products, it's clear there is an incentive for the dealer base to sell these products. From the end customer's perspective, these are two areas where there hasn't been a recurring fee historically. How do you plan to communicate the value proposition to the end customer to encourage them to start paying a recurring fee for these unlocking and access control products?

Richard Soloway, President and CEO

The functionality that the dealer can provide to the end user customer is key. This functionality is very powerful in many applications and while the data or the end user customers may not yet be available, they see the value in having it because it would enhance their business management and strengthen their network of office employees. It provides them with essential information they need to operate effectively. I can't go into much detail, but it has enough value to be marketed at a competitive price to these end users. Some customers will adopt it right away while others may take time, but it will gain significant traction. Importantly, it won't impact the IT department or require their approval since it operates independently using our cellular radio cloud, making it easier to sell to these corporations.

Matt Pfau, Analyst

Great. And then last one from me just on the distributor that pulled back on their purchases because we are in an acquisition process. Have you ever seen a situation before in your business where there has been disconnect between distributors purchasing and the actual sell through and if so, what is the end result been previously and how long did those situations take to get normalized?

Richard Soloway, President and CEO

Kevin?

Kevin Buchel, Senior Vice President and CFO

We have seen this on guys trying to lower their inventory level, periodically that happens. They come into the end of the year. They want their inventory to be lower at the end of December. They want it to be virtual distributors, just-in-time distributors, which is crazy. But we have seen that. This one was different. I have to think back; I don’t remember any distributor being sold. This is a big transaction. They are a big customer for us. I don’t recall that. But I do know that anytime inventory levels are adjusted for whatever reason, as long as the sell-through is strong, it comes back, that’s the key. If we didn’t have that, we would be a lot more worried.

Matt Pfau, Analyst

Why did you describe the sell-through numbers again, so everybody understands? They have the products checking really well.

Kevin Buchel, Senior Vice President and CFO

Right. So just to reiterate what they worked the sell-through for Q2 was up 15% versus last year’s Q2 and the sell-through for Q2 was sequentially up 11%, meaning it was 11% better than it was in Q1. Those are the kind of stats we monitor, we monitor with all us distributors, not just this one, and when it’s that strong it usually means, got to mean that they will be buying in short orders or otherwise they will lose sales. They don’t want to lose sales, no matter who it is, whether it’s the existing owners or new owners.

Matt Pfau, Analyst

Right. Okay. That’s it from me guys. Thanks a lot for the additional detail.

Richard Soloway, President and CEO

Thank you.

Kevin Buchel, Senior Vice President and CFO

Thanks.

Operator, Operator

Our next set of questions comes from the line of Jeff Kessler of Imperial Capital. Please proceed with your question.

Jeff Kessler, Analyst

Thank you. Can you provide details on the recurring revenue product, specifically the portion that is being sold into the 20% of your business that is residential? Are there particular strengths or weaknesses based on the size or type of end user receiving it, or is it more influenced by the type of dealer selling to those end users?

Richard Soloway, President and CEO

Jeff, the question is, are we stronger in commercial or residential, we are 80% commercial. We feel much more...

Jeff Kessler, Analyst

All right.

Richard Soloway, President and CEO

... in the way we do residential.

Jeff Kessler, Analyst

No. What I am trying to say is okay.

Richard Soloway, President and CEO

I do really parse it out to you, because a lot of the people that are involved as competitors will listen in on what our strategy is. So we can just tell you that 80% of our RMR is on the commercial side and growing very rapidly and it’s complicated commercial, meaning it is commercial that needs a lot of codes and authorities of jurisdiction, fire marshals to agree to use it, and we have been asked at that stage. We are into blossoming out our business in self-contained radio cellular communicators and now we are incorporating and building into panels. So we can get both the aftermarket and we can get new business and as the phone companies become less in managing their copper, they don’t want to spend time in repairing copper lines installing copper lines. This will get stronger and stronger, and we feel our 2011 plan and our five-year plan of being 50-50. We believe will come into fruition.

Jeff Kessler, Analyst

Regarding LTE and 5G, while they are not exactly the same, they are emerging around the same time and each influences the other. When speaking with your larger commercial customers, what functionality are they seeking from you that will impact your perspective on which products are likely to sell better, given the new technologies being introduced?

Richard Soloway, President and CEO

It’s not the end user making the decisions; it’s our dealers. They are looking for reliable coverage in the areas where they install. In commercial business, high-speed data isn't necessary; typical machine-to-machine communication works well with the slower data provided by LTE for alarm and security applications. 5G is excessive. It’s like asking if you need a Ferrari to get to work when an SUV suffices. The Ferrari isn't necessary, but we have designed our products to accommodate it if that's what’s available. Chip manufacturers and service providers like Verizon and AT&T are committed to keeping LTE networks operational for a long time, making it the best option for coverage and range. Dealers sell this to their customers, who primarily seek service and monitoring contracts with teams ready to contact emergency services. The best dealers excel in this area, and we continue to have plenty of them.

Jeff Kessler, Analyst

As you expand your use of iSecure and potentially add cellular features to the existing products, are you experiencing demand from dealers to incorporate more than just the cellular add-on? Is there interest in involving you in their network in a way that could not only complicate your operations but also increase your revenue opportunities?

Richard Soloway, President and CEO

I don’t understand the question. Are you saying beyond locking and access control, beyond fire, beyond intrusion, beyond medical services, beyond all of that?

Jeff Kessler, Analyst

I am talking about within those verticals.

Richard Soloway, President and CEO

Yes.

Jeff Kessler, Analyst

Do you see any demands for more functionality with the products that you offer on top of what you are currently providing within those verticals?

Richard Soloway, President and CEO

Yes. We provide a wide range of services, and customers can choose from this range. In total, there will be 100 different items offered, which include features that contribute to our recurring revenue, such as cellular and cloud services. Our strategy encompasses everything I mentioned, and we aim to provide every feature available. If something new is developed in the future, whether by us or another party, and it can be integrated into our services, we will incorporate it into our offerings as well.

Jeff Kessler, Analyst

Okay. That’s kind of what I was asking about the new features that you are not offering yet but are currently being discussed. I understand that you have competitors in this area, but I am trying to get to some of the new features that you might be able to provide.

Richard Soloway, President and CEO

Why don’t I invite you to lunch and we can have a tech discussion about this and find exactly where each of us are?

Jeff Kessler, Analyst

Okay.

Richard Soloway, President and CEO

Okay.

Jeff Kessler, Analyst

That’s great. That was the question I wanted. And that’s the answer I received, and we will see each other soon.

Richard Soloway, President and CEO

Okay. Take care.

Operator, Operator

We have reached the end of the question-and-answer session. I will now turn the call back over to Richard Soloway for any closing remarks.

Richard Soloway, President and CEO

Thank you. Thank you everyone for participating in today’s conference call. As always should you have any further questions, please feel free to call Patrick, Kevin or myself for further information. Thank you for your interest and support, and we look forward to speaking to you all again in a few months to discuss NAPCO’s fiscal Q3 ‘20 result. Bye-bye.

Operator, Operator

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.