NAPCO’s Buchel discusses paths to success at Needham Growth Conference

NEW YORK – At the 2023 25^th Annual Needham Growth Conference, NAPCO Security Technologies discussed some key components in the growth of their business.

For NAPCO, the manufacture of security products has been a staple for the company for many years, but their current growth can be attributed to a different source according to CFO Kevin Buchel “…About seven or eight years ago we came out with a product that gave us recurring revenue, and that was the game changer. These are cellular radios that hook on to an alarm system that allow us to get recurring revenue, and it takes the place oh a phone line. Typically we have an alarm system, the signal gets transmitted from the premise, the phone line, a hard copper phone line to the central station, but copper phone lines are going away. They’re not being supported anymore by the carriers. A lot of people don’t want hard line phones in their homes, or business everything is cellular,” he said. “So we came out with this cellular radio and we get recurring revenue. We’re now the vehicle that sends the signal to the central station.”

Acting as the hub for all incoming security traffic has allowed NAPCO to capture the fees associated with its management and has thrived as a result. Those fees have risen to a $58 million run rate with a gross margin of 88% of NAPCO’s revenue Buchel said, and is changing the way the company operates. From nothing a decade prior to a growth of 35% to 40% year over year per quarter, he predicts the company will reach $150 million in recurring revenue by 2026, or possibly sooner at current rates.

Another inflection point for the companies growth can be attributed to school security. Buchel describes schools as currently being a mess, and good at lockdown drills, but lacking in equipment, and security. While associated profit margins are good it’s still a fledgling market. “With all the shootings that have taken place over the years, we’re still in the early stages,” Buchel said addressing the point. “Most schools haven’t done anything, so I’d say that’s inflection point number 2.”

Addressing whether the cellular wave is building, or the tide is going out, Buchel said that evidence points to the former rather than the latter, and that the death of copper landlines combined with the growing call for security devices is pushing the trend onwards and upwards. They’ve also noticed a change in clientele. The company was built on deals with small companies and dealers. “Names you’ve never heard of: Joe and Harry’s Alarm Company,” Buchel said. “One truck, three trucks, five trucks. Now we’re talking to ADT, Johnson Controls, Siemens, these are the big boys. These are the guys that also tell us this wave is coming, and they want to be prepared, and they want to use our radios. So, the game has changed for us.”

That game includes 200 distributors around the United States, but it’s the dealers that NAPCO is trying to capture, which the company currently sells to about 10,000 of the 30,00 in the US. “We’ve got about a third of them, we’d like to expand that. There’s also what we call integrators. An integrator is a sophisticated installer,” Buchel adds. Taking on projects like installations for large buildings and companies, NAPCO currently sells to about 2000 integrators, and there are thousands more they’d like to reach. That’s where they’re currently at Buchel told moderator and Senior Analyst Jim Ricchiuti, capturing smaller installers and reaching out to larger companies like ADT.

Commercial is also a focus of NAPCO’s strategy. The market has better margins and is less competitive and volatile than residential Buchel said. When Ricchiuti inquired about how NAPCO has been impacted by supply chain issues Buchel discussed a micro component supplied by Texas Instruments that has been impacted. As covered by the company last year in their quarterly reports, NAPCO has opted to bypass the traditional supply chain and buy from brokers at higher costs. The result is a detriment to their product margins, but the ability to keep product running regardless of the supply chain. Buchel called it, a “Temporary hit”.

You can find the full presentation at wsw.com. Needham & Company is an independent investment bank and asset management firm specializing in advisory services and finance. For more information about them you can visit www.needhamco.com.