NSSC Q1 Earnings Call: Recurring Service Revenue Growth Offsets Equipment Sales Decline

Security systems manufacturer Napco (NASDAQ: NSSC) reported Q1 CY2025 results beating Wall Street’s revenue expectations, but sales fell by 10.8% year on year to $43.96 million. Its non-GAAP profit of $0.30 per share was 11.7% above analysts’ consensus estimates.

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StockStory’s Take

Napco’s first quarter results were shaped by continued expansion in its recurring service revenue, which now accounts for nearly half of total sales. Management highlighted the resilience of its business model, noting that recurring revenue from products such as StarLink radios and cloud-based access control platforms helped offset a notable decline in equipment sales. CEO Dick Soloway described ongoing macroeconomic headwinds, including distributor inventory reductions and project timing, as key factors impacting hardware sales.

Looking ahead, management emphasized its focus on product innovation and market expansion, particularly in cloud-based solutions and school security. Soloway stated that new offerings introduced at the ISC West Expo have already seen early adoption and should contribute to future growth. The company remains watchful of external pressures, such as tariffs and broader economic uncertainty, but maintains confidence in its ability to grow recurring revenue and leverage its cost advantages.

Key Insights from Management’s Remarks

Napco’s leadership identified several forces influencing the quarter’s results and outlined strategic priorities for the near term.

• Recurring Revenue Expansion: The company’s recurring service revenue rose 10.6% year-over-year, driven by continued deployment of StarLink radio devices and new cloud-based offerings. Management sees this as a foundational strength, supporting high margins and cash flow.
• Equipment Sales Pressures: Hardware sales fell due to inventory reduction decisions among several large distributors, project timing differences, and general economic uncertainty. These trends were described as temporary, with management citing strong underlying demand as measured by dealer sell-through statistics.
• Product Pipeline Developments: Napco introduced new remote access control platforms (MVP Access and MVPEZ) and updated fire and burglary radio lines at the ISC West Expo. Dealer feedback was positive, and management expects these products to enhance recurring revenue growth in coming quarters.
• Tariff and Supply Chain Positioning: The company’s manufacturing presence in the Dominican Republic and the U.S. provides a cost and tariff advantage versus competitors sourcing from higher-tariff regions. Management believes this will be particularly important as tariff policies evolve.
• Operating Expense Trends: Increased research and development spending, legal expenses, and personnel additions—including internal audit and compliance staff—drove higher operating costs. Management expects these elevated expense levels to persist but is focused on maintaining disciplined cost control.

Drivers of Future Performance

Management anticipates that ongoing innovation in recurring revenue products, pricing strategies to address tariffs, and distributor inventory normalization will drive future results.

• Cloud-Based Product Growth: New cloud-enabled solutions, such as MVP Access and upgraded StarLink radios, are expected to increase recurring service revenue and deepen dealer engagement.
• Tariff and Pricing Responses: The company is implementing tariff-related surcharges and annual price increases to protect margins, with expectations that commercial customers will absorb these adjustments due to the mission-critical nature of security products.
• Distribution Channel Recovery: Dealer sell-through statistics suggest end-market demand remains healthy, and management expects distributor inventory levels to normalize, potentially supporting a rebound in equipment sales.

Top Analyst Questions

• Matt Summerville (D.A. Davidson): Asked when new cloud-based offerings would materially contribute to service revenue. Management indicated that recent product launches should drive incremental growth as adoption scales, especially for StarLink and MVP platforms.
• Jim Ricchiuti (Needham & Company): Inquired about the impact of tariffs and competitive pricing dynamics. Leadership highlighted its lower tariff exposure due to Dominican Republic manufacturing and suggested competitors may face greater pricing pressure as tariffs rise.
• Jaeson Schmidt (Lake Street): Asked about the timing and magnitude of price increases. CFO Kevin Buchel noted an 8.5% surcharge was implemented to offset tariffs, with an additional annual increase likely forthcoming, typically around 3–4%, but potentially higher this year.
• Lance Vitanza (TD Cowen): Queried the recession-resilience of security demand and use of cash for share buybacks. Management characterized security as "recession-resistant" and will consider further buybacks based on cash flow and market conditions.
• Jeremy Hamblin (Craig-Hallum): Sought clarity on seasonality and service revenue momentum given recent equipment sales softness. Management expects Q4 to benefit from seasonal factors and strong sell-through, with any delays in hardware sales having only temporary effects on service revenue growth.

Catalysts in Upcoming Quarters

In the coming quarters, the StockStory team will be watching (1) whether new cloud-based product launches accelerate recurring service revenue growth, (2) signs of distributor inventory normalization and a rebound in hardware sales, and (3) the company’s ability to sustain margin levels amid ongoing tariff and operating cost pressures. The impact of annual price increases and dealer adoption rates for new solutions will also be key markers of execution.

Napco currently trades at a forward P/E ratio of 23.8×. In the wake of earnings, is it a buy or sell? See for yourself in our free research report.

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