Napco Security Technologies, Inc. (NSSC) Q2 2013 Earnings Report, Transcript and Summary

Greetings, ladies and gentlemen, and welcome to the NAPCO Security Technologies Incorporated Second Quarter Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce James Carbonara with Hayden IR. Thank you, Mr. Carbonara, you may now begin.

Good morning, and thank you all for joining us for today's conference call to discuss NAPCO's financial results for the second quarter ended December 31, 2012. By now, all of you should have had the opportunity to review the press release discussing the results. If you have not, please call Hayden IR at (646) 419-4300, and we will immediately send it to you either by fax or email. On the call today is Richard Soloway, Chairman and Chief Executive Officer at NAPCO Security Technologies; and Kevin Buchel, Senior VP of Operations and Finance. Before I ask our host, Dick Soloway, CEO of NAPCO, to discuss the particulars of this morning's news, please let me take a moment to read the forward-looking statement. This conference call may contain certain forward-looking statements that involve numerous risks and uncertainties. Actual results, performance or achievements could 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 Securities and Exchange Commission. With that out of the way, let me turn the discussion over to Rich Soloway, President and Chief Executive Officer of NAPCO Security Technologies. Dick, please proceed.

Thanks, James. Good morning, everyone. Thank you for joining NAPCO's quarterly conference call to discuss the financial results for the 3 months ending December 31, 2012. This was a challenging quarter for many in the Northeastern United States, facing once in a lifetime storm Superstorm Sandy. Like many of our neighbors, we faced some challenges this quarter, which were beyond our control, though thankfully not direct from the storm damage. However, important initiatives that are key to our future are progressing ahead of schedule. We are pleased with some underlying metrics we achieved during the quarter, especially the contribution from new products and growth in our recurring revenue, but we are not satisfied with the revenue and profitability. Recurring revenues are up, orders for new products are up, particularly in our market-leading segments. Our Marks division turned the corner in Q1. Today, it has found its stride and is expanding and exceeding our expectations. Meanwhile, we have substantially ramped up R&D to fast track the development of the fastest-growing and most profitable product segments in the market. Also during the quarter, we launched the new high-margin, recurring-revenue product. This is huge for us as it addresses a new $50 million market. That said, due to a couple of exceptional events like Sandy on the East Coast, total sales were down 2% to $17.2 million compared to $17.6 million in the prior year quarter. That event, along with some distribution consolidation during the period, led to lower orders in what otherwise should have been at least an $18 million quarter. While we were not directly affected by Superstorm Sandy at our location here, many of our dealers and customers were directly affected and it showed in our orders during the period. However, now as the region recovers, we expect revenue to be positively impacted. Beyond the storm, a couple of other intrusion distributors that lowered inventory last quarter actually consolidated and combined into one entity. This led to lower sales to them, but in reality, it's the dealers that dictate our end sales. So whether the distributor consolidates or not, we don't lose the end dealer. We expect this impact to be short lived as the fundamentals for long-term profitability, sustainable growth saw a market improvement this quarter. Sales for our Marks division continues to grow and our order pipeline continues to expand, particularly with our LocDown product group. Since the unfortunate incident in Newtown, Connecticut, schools around the country are pursuing better locking devices on all of their doors. Our Marks division has the most effective products on the market for this and it's starting to show in our numbers. Bookings are up. Sales are up. We are confident that Marks will continue to grow this fiscal year after 2 improved quarters in a row. Beyond the improvements in Marks, our recurring revenue was very strong, led by our StarLink2 radio, which had a 22% increase in radio installations as compared to the prior quarter. While we have several recurring revenue products, StarLink2 is our marquee product and is leading the way for us. Gross margins for the 6 months are even -- through total sales were lower. And this was primarily due to the expansion of our higher-margin recurring revenue. Also, we benefited from the sales of high-margin commercial locking products and from improved efficiencies in our low-cost manufacturing operations in the Dominican Republic. Offsetting this at the operating line, we had higher R&D expenditures to get new products to the market more quickly, such as our new touch screen keypad and our iBridge remote control services platform, which will also generate recurring revenue. The reality is, as we know, it takes money to make money, and along with the increase in R&D, we also have to increase the SG&A, which led to lower net income. We believe that these additional expenditures will lead to gaining new market -- new products to the market faster and improving our overall revenue. With regard to SG&A, the increase was primarily due to additional sales personnel. We hired a new product manager for our commercial fire segment, as well as a specification specialist for our commercial access control division. Both hires should generate substantial returns for us going forward. Another positive is continue -- as we continue to lower interest rate due to the increased debt and lower interest rates, we had predicted that we would save $500,000 to $600,000 in interest expense this year. Halfway through the fiscal year, we've saved almost $300,000. So we're confident that we are well on the pace to be close to the $600,000 savings by year end. To reiterate the positives, our recurring revenue is doing well, even better than we expected, and Marks is even doing well, better than we expected. Our cash flow is solid. We have made the right investments in R&D and personnel. We are confident that we will see these investments pay off in top and bottom line. We see several other products that should help drive top line such as iSee Video. And last quarter, these sales were impacted by Superstorm Sandy, as alarm installations essentially stopped for home repair in the Northeast. However, dealers like the product because they can get recurring revenue from it as we do. So Video is being offered by dealers as a sweetener during contract renewals and it helps them close the deal versus another dealer who doesn't offer it. GEM-C, our commercial fire product, can be a big contributor to revenue and earnings growth. As I mentioned, we hired a product manager to help its sales by identifying the exact needs of dealers, assist with their training, provide additional support through manuals and enhance their experience with this sophisticated product line. Our Networx product also should help increase revenue. It has 2 products for schools. It is based on radio control locking so you can install new locking in a building without tearing up the walls and laying new cables. The product is incorporated into our Fusion 2.9 software and is offered by our sales force direct to schools. We already have a solid base of schools and universities as customers and we expect it to grow rapidly with the current interest we see in this segment of our LocDown products. Networx for the school allows the superintendent, the principal, teachers, the security officer a lock down with a push of a button. We see Fusion 2.9 as a solid driver to revenue growth and we expect to expand our access control, radio control, locking and commercial intrusion divisions. Fusion fuses together our product lines and thus allows cross-selling of all the different parts of our business. That said, this is a new approach to our industry, and it takes time to train and we've been doing this since January. We are the market leader for this approach. In fact, nobody has this technology. It takes NAPCO -- it makes us a one-stop shop for security. With Fusion, our products can talk to each other. This aligns perfectly with our customers who believe in fully integrated systems, not standalone lines. Our competitors have individual intrusion, access control and locking brands. They cannot integrate together. But with Fusion, we can. Finally, there is iBridge. This product has been in the field for beta and have added new several features based on field feedback. iBridge is the most flexible product-rich, home automation and security system on the market. iBridge works with Wi-Fi, as well as 4-wire tablets. It is centralized control for alarm systems, controlling your alarm system, video, electronic locking, lighting and temperature, all remote controlled by a smartphone or tablet. Now I'd like to turn the call over to Kevin to review the financial details of the financial results. Kevin?

Thank you, Dick. Good morning, everybody. As Dick mentioned, the sales for the 3 months ended December 31, 2012 decreased by 2% to $17.2 million as compared to $17.6 million for the same period a year ago. Sales for the 6 months ended December 31, 2012 decreased by 4% to $32.4 million as compared to $33.8 million for the same period a year ago. The decrease in sales for the 3 and 6 months was primarily due to decreased sales in the company's intrusion products and partially offset by an increase in the company's door locking products. Gross profit for the 3 months ended December 31, 2012 decreased 5% to $4,641,000 or 27% of sales as compared to $4,895,000 or 27.8% of sales for the same period a year ago. Gross profit for the 6 months ended December 31, 2012 decreased 3% to $8,777,000 or 27.1% of sales as compared to $9,051,000 or 26.8% of sales for the same period a year ago. The decrease in gross profit for the 3 months was primarily due to the decrease in sales, as well as increased expenditures in research and development. The increase in gross margin for the 6 months was primarily due to the impact of recurring revenue products, as well as improved efficiencies in our low-cost Dominican Republic manufacturing facility Selling, general and administrative expenses for the 3 months ended December 31, 2012 increased by $287,000 or 7% to $4,287,000 or 24.9% of sales as compared to $4 million or 22.7% of sales a year ago. Selling, general and administrative expenses for the 6 months ended December 31, 2012 increased by $524,000 or 6% to $8,822,000 or 27.2% of sales as compared to $8,298,000 or 24.5% of sales a year ago. The increase in selling, general and administrative expenses for the 3 and 6 months was due primarily to additional sales personnel and increased advertising and trade show expenditures. Operating income for the 3 months ended December 31, 2012 decreased by $541,000 or 60% to $354,000 as compared to $895,000 for the same period a year ago. Operating income for the 6 months ended December 31, 2012 decreased by $798,000 to a loss of $45,000 as compared to income of $753,000 for the same period a year ago. Interest expense for the 3 months ended December 31, 2012 decreased by $157,000 or 53% to $141,000 as compared to $298,000 for the same period a year ago. Interest expense for the 6 months ended December 31, 2012 decreased by $284,000 or 47% to $318,000 as compared to $602,000 for the same period a year ago. The decrease in interest expense for the 3 and 6 months ended December 31, 2012 resulted from lower interest rates charged by the company's bank, as well as lower outstanding debt in the current period. Net income decreased by $174,000 or 56% to $135,000 or $0.01 per diluted share for the 3 months ended December 31, 2012 as compared to $309,000 or $0.02 per diluted share the same period a year ago. Net income decreased by $441,000 to a loss of $299,000 or $0.02 -- negative $0.02 per diluted share for the 6 months ended December 31, 2012, as compared to $142,000 or $0.01 per diluted share for the same period a year ago. The changes for the 3 and 6 months ended December 31, 2012 were primarily due to the items previously discussed. Adjusted EBITDA, as per the schedule included in this morning's release, for the 3 months ended December 31, 2012 decreased $594,000 or 41% to $843,000 as compared to $1,437,000 for the same period a year ago. Adjusted EBITDA for the 6 months ended December 31, 2012 decreased $913,000 or 50% to $928,000 as compared to $1,841,000 for the same period a year ago. Cash generated by operating activities increased 215% to $1.4 million for the 3 months ended December 31, 2012 as compared to $450,000 for the same period a year ago. Cash generated by operating activities increased 155% to $3 million for the 6 months ended December 31, 2012 compared to $1.2 million for the same 6-month period last year. Debt, net of cash, has now been reduced by $21.1 million from $35.9 million to $14.8 million since acquiring Marks in August of '08. $2.5 million of this reduction occurred in the past 6 months. That concludes my formal remarks. I'd now like to return the call back to Dick.

Thanks, Kevin. While we experienced a few challenges this quarter outside of our control, we continue to work to grow our business. Our fundamentals are strong. We have a leading technology base and we have so many new products in our product portfolio such as combination fire, GEM-C, radios upgradable from 2G to 3G to 4G, iBridge, Networx, Fusion 2.9 software, and I would note that these products were only introduced a short while ago. We are confident that we are focused on the needs of our market and continue to add new feature sets and enhancements to adapt as necessary. To close, our fundamentals are strong. Sandy slowed us down, it clearly pulled us down. Without Sandy, I believe we would have had revenue in excess of $18 million this quarter, which certainly would have made a big difference in our earnings. As the Sandy recovery continues and the economy improves, we are well positioned to take advantages of the opportunities ahead. That concludes our formal remarks. Kevin and I would now would like to open the call for any questions. Operator, please proceed.

[Operator Instructions] Our first question is from the line of Peter Enderlin with MAZ Partners.

Dick, you mentioned that you would have had revenues of over $18 million except for Superstorm Sandy. Can you give us a sense of what percentage of your business is in the areas that were affected directly by Superstorm Sandy?

Well Superstorm Sandy affected mid-Atlantic, Northeast, Southeast, Midwestern, Eastern Canada.

You name it, huh?

And that is like a heavy duty security corridor for us, and it's always been that way.

Okay. So would it have been well over $1 million impact in the quarter in terms of revenues?

I would say, the best to our knowledge. It's hard to predict exactly with the future, but we believe it would have been over $18 million.

But that could be a difference of $800,000 or something, so that's -- I mean, I'm trying to get a little better sense of whether it was almost like noise level or was it a really a significant impact?

It slowed down our dealers, which typically are out there marketing security systems in the intrusion area, residentially, a lot of residential sales. So the reorders to the distributors were much, much lower because many of these people were not functioning doing that. In fact, some of the dealers spent most of their time for months doing heating installations rather than even doing any security installations. They put the securities installations on ice, I would say, while they were doing heating installations. So there was not a lot of movement of product that way. And then we have an impact that's taking a while to come back. Like Katrina, down in New Orleans, took a while for everything to get back on track, and we're experiencing the same thing. This is a very devastating, wide-ranging storm.

True. And for that broad area that you mentioned, from the mid-Atlantic all the way to Canada, let's say, what's the geographical concentration that you have as opposed to the rest of the country? Is it 1/2 or 3/4 in that corridor?

We always call the mid-Atlantic up through the Northeast into Canada as a security corridor where you have intense security installations in this area. So I can't tell you exactly. The numbers haven't been compiled because we sell our products through distribution mostly, and our distributors have branches all over this area. But it's well known throughout the industry that this corridor is the heaviest security corridor in the country.

Okay. I mean, but are we talking half roughly or is it not that much?

I would say 40% to 60% in that area.

Okay. And on the millions of NAPCO panels that are out there already, what's the geographical distribution of those? Is that pretty similar to that 40% to 60%, would you say?

I would say so, yes.

Okay. And then you include R&D in cost of goods. It's not really a cost of goods, of course. So are you thinking about breaking that out as a line item to give you a more representative figure for your gross margins at some point?

Peter, this is Kevin. We have included R&D in cost of sales for a lot of years, for 20, 30 years. I once did a study to see what the competitors did, and I actually saw that Honeywell, who's one of our competitors, they had it done the same way as us. We could break it out. We could have it as a separate line item. It does make you lose the comp to compare to prior periods, you have to restate all of that. We could do it. We do a pretty good job stating how much it is.

So you spell it out.

We spell it out. So I figured we should just leave it for the time being. Eventually, maybe we'll change it. I've been asked that question on and off for years.

Okay. And you made the comment that spending will get to normalized level by year end. Does that mean back to, let's say, $1 million a quarter or will it be more than that?

I think we've been spending a little more than $1 million a quarter. But I would say based on a $4.5 million annualized rate, something like that.

Our next question is from the line of Walter Ramsley with Walrus Partners.

Two follow-ups. The -- I don't watch that much TV, but as little as I do, I've been seeing some ads by Comcast and also ADT about the digital home security products. So I gather they're pushing that a little bit. Have you begun to see any evidence of success in stimulating that market in general?

Well the products, Walter, is called iBridge. And iBridge is kind of what you're seeing as the new change to the security industry. You have traditional security dealers that install alarm only with keypads. Then you have the new integrated dealers that want to give home automation like you're seeing with ADT Pulse and Comcast, those type of products. Today, households are such that the younger generation that's buying new or old, they want to have everything using a smartphone. So our iBridge product is aimed directly for them. It allows you to upgrade existing alarms or to add a new alarm system with temperature control and locking control of your doors and lighting controls for lighting scenes. You can do everything remotely. And also it's unique because you can use your app on your smartphone or you could use our Wi-Fi or 4-wire tablets as your control center. So we see this as a very, very strong future and direction of the industry because dealers want to make more recurring revenue than just monitoring alarms and fire conditions. They also want to make recurring revenue on video and other services they can give to the consumer. So we have the latest, state-of-the-art device on the market. It just came out in January. We're putting additional touches to it as we learn more, as we ship more, but we think it's going to be a fabulous addition to our intrusion line.

I can see the general potential. I'm just kind of wondering if there's any indication yet whether the end customers are buying the story. Or are they still kind of skeptical or how -- what's the initial response look like?

The dealers are seeing more and more need for it. And the initial responses, you have early adopters that are chomping at the bit to install more and more of it, redoing their -- retooling their sales departments to sell more of this because they make recurring revenue on it. So as I always said, it's 24-, 36-month gestation period. By the time they all talk to each other, they try the device out. It really is a very exciting new development for the industry, and we believe it's going to be a lot broader and bigger in volume than the burglar alarm business has been up to now as a standalone business.

Okay. And then that product would pull through iSee Video and the StarLink products, too? Or how do you look at that?

The -- all the extra recurring revenue that you get by selling these services to the consumer, these devices could either work with dial-up, which as we know is going away, or it can work with the StarLink radio. The StarLink radio is an excellent communications device, so you can work all of our iBridge and Starlink radio and temperature and light scenes altogether or they can use dial-up. We believe that along with home automation and smart service like we're talking about, also radio StarLink is going to be a key, an important factor as the years go by because phone lines are disappearing. So we're doing both. This is a lot of R&D for us. We have a big program going on here. We want to make sure that we spend money and get it out in a beautiful form that the dealers can understand and use, and that's why we want to make these expenditures. We could have made more money without doing it, but it's kind of selling the future short and we don't want to do that.

No, that makes perfect sense to me. So in the digital home security products or, I guess, commercial too, I mean who's the primary competition at this point and what do their products look like?

Well you mentioned 2 of them. ADT has one and Comcast has a device, and those devices will make the public and the dealers more aware that these type of products are out there. And then we have many, many dealers in every city that are also going to be marketing alongside these guys. Just to point out how the big guys do versus the small guys in the population of security installation dealers, the big guys in our field, which are the ADTs or Brinks, ADT bought Brinks in the last year or so, those guys did about 30% of the business. The small dealers, 1 truck to 20 trucks, those guys did get 70% of the dealers. So we're going to get some marketing help from the big boys, which is going to help the smaller, mid-sized dealers and I believe it's going to continue that way. Also the dealers have a big advantage over the Comcast and people like that because not only do they do residential with these type of remote control services, but they also do commercial and they do customization rather than cookie-cutter jobs. So I believe they're going to keep their place as 70% contributors to the security dealer installation business.

So the products that they have available at this point, is it the same kind of form factor that your company has developed? Or they are, like, off in a completely different direction?

The idea is to offer remote services, easy plug-and-play type of products to the dealer and with more sophistication, more apps, more ability to do things than cookie-cutter and customization for the end user. So when there's a sitdown of large company and the regional in the area or the dealer and their township, the product outpaces the competition, both video quality, functionality and performance.

Okay. And the pricing is in the ballpark? Or how does that look?

Pricing is in the ballpark and the ability to mark it up, depending on the neighborhood they go into, is in the ballpark. So it's the cookie-cutter approach. If you're doing a large home, you do a mid-sized home, a small home, they can tailor the system for those different applications rather than cookie-cutter.

So switching gears. You mention also the school market kind of picked up after the shooting. Do you think that's just kind of a, I don't want to say the wrong phrase, but a, like a temporary increase? Or do you see that some sort of becoming a sustainable increasing business for you in the future?

Well we offer both, with our Marks line, offers a mechanical-type of lock that can be installed reasonably inexpensively on doors where you don't have a passage lock out from the hallway into the classrooms. So we have that market. Then you have our 2.9 software, which knits together our wireless locks and our Continental, that way you can do lock down remotely without trenching out walls and ruining the finishes within the building. So it's -- we have many, many jobs that have been installed by this now and we expect it to keep going. I think the whole public is very sensitive to what goes on in schools. And we're very nervous about how do you protect the children and which are all related to insurance, in addition. So we have been in this market and now we have fine-tuned it for schools and we actually own the brand LocDown. So we're going to market it to make sure every school knows about it. You can go with the technology way with full wireless or you can go into individual locking way with the mechanical devices. So we believe that this is going to be a good market for us going forward. And it works in commercial buildings, not just schools, all types of applications. So it's going to be a very important product for us going forward, and it's going to give us a lot of additional volume to amortize our overheads, which are in the DR. And we all know we get an accelerator effect as we pump more of this volume through our factory, either being locks, access control, new products, all of these things contribute to amortizing our overheads.

Yes. Well that brings me to my final question, I guess. In the past the company has kind of intimated that $20 million a quarter is really the point where you hit the inflection point and the margins take off. How much longer until you get to the $20 million per quarter run rate?

Well, it's -- all we can do is to have the most exciting products that work the best and train the dealers until they understand it, and we believe we will get to that point. Exact timing on that, I can't tell you, but we are working our damnedest to get it done.

Our next question is from the line of Del Warmington from Delwar Capital.

Yes. If I may, the question is about your recurring revenue. I'm not sure exactly, you said that it increased like 22% sequentially. What's it now and where do you think it can go?

Well, we -- it was a sequential increase of installations. And we have millions of NAPCO systems that are out there, and a portion of those will be converted over to radio from dial-up going forward over the years because, as we've always said, dial-up is going away. So we believe that, that portion of our business used in the radios is going to grow nicely and the iBridge portion of our business is going to grow nicely because of the fact that this has to do with new services that we were talking about with the last caller. So all these services and recurring revenue increases are going to be added together, making a substantial and important contribution to our profitability.

So long term, I mean, like, say, in 24 months, where do you think, as a percent, recurring revenue could be as a percent of revenue?

We don't disclose the percent of recurring revenue, except we will as we get closer to it being a more meaningful number. If we keep having quarters like this, where the radio installations are up 20%, 22% versus the preceding quarter, then we'll get there faster than even I anticipated. But we're not disclosing it yet. Huge opportunity out there given all the NAPCO panels that are out there, given that the dial-up is going away. So let's just keep hoping for us. If we keep having 20%, 30% increases in each quarter and before you know it, we'll be disclosing it.

By the way, the radio is kind of unique because of the fact that it does upload and download to the millions of NAPCO systems that are out there. So as an integral part of the technology, if a dealer wants to put the radio on to replace dial-up, he can do everything with the radio that he can do with dial-up. He can upload user codes, he can cut off what they call swingers, which are false alarm causing, like things blowing in the wind. He can do everything without driving to the site and making the adjustments manually. And that's the big advantage of Starlink. So the dealers are going to be prone to using it more and more because get the same performance out of dial-up. And that's why we believe we're going to put on more and more dealers, and that's what's causing the sequential growth.

One last question. What percent of the revenue of this -- the last quarter was from your Dominican Republic facilities?

What we do is we do start ups here in Amityville of the new products and then we do them in mass down to the Dominican Republic. So Dominican Republic does 95% of the mass volume for us.

Our next question is from the line of Brian Kubel [ph] of [indiscernible]

So I'm curious if there's a metric outside of sales because that would give a good lead indicator for us, something you maybe look at internally that allows you to see through the numbers a little bit, whether that's increased demand or new orders, new end customers possibly, new shipments in increasing your inventory that you think will be flushed out over the next 2 quarters?

Well, the way we have to look at it, we have 4 businesses here. They're in different segments of the security industry. They each have -- they have some common metrics and they have individual metrics. The commonality is everybody wants to protect more of their property and person than ever before with all the craziness that's going on in this world. Then you have the situation where people want, for instance in intrusion, they want to be able to protect their home and they want also want to be able to do services like we're talking about with iBridge, and that's the new demographics for a lot of the younger households. So you have that going on. How many new households? How many people are buying houses? How many people want to control their lighting, heating and locking automatically? That's a new market and we believe it's taking off and you can see that the ADTs and Comcasts and people like that are getting into it because they believe that also. Then you have the commercial fire as part of our intrusion fire division. That's a legislative end thing. Buildings either have to upgrade their fire systems that they already have because they're getting old and not working well. Or as new construction takes place, our combo firewall products are in demand by the dealers because it's one of the very few lines that are sold through security distribution. So dealers are doing that type of work. When it comes to locking, it has to do with commercial locking. People want to protect their employees. Companies want to protect their employees. They want to protect their students in schools. It's media-driven. There's lots of causes why people put locking in to protect themselves. So it's all different variable things. In addition to that, we also look at housing starts. We look at commercial building permits. We know that we have to offer products which a dealer can get more recurring revenue from because that's what turns them on to go out and drive the sales. So we try to come up with a recurring revenue component in every one of our products. A lot of them that are coming out now have that. It has to be marketed. It's new and unique to dealers. But they really want it because it's money that they get, not just for an installation, but it's money they get on a regular basis. So those are kind of the factors that we look at.

Got you. And relative to the storm Sandy, should we view this as pent-up demand? And since the second half you're stronger than you first half, is it going to be exponentially more now? So should we view this as sort of orders that were pushed to Q3, Q4? Should we view this as orders lost?

I would say that the orders were pushed. I mean there's some orders that were lost due to the houses that were totally devastated and will never be rebuilt. But a lot of it is pushed forward because, more than ever, people are going to want to protect their property. A lot of the alarms and things got washed away, so they're going to have to put things there from scratch, not just repair what they got. So I would say that over the quarters going forward, we'll have more and more of these installations going in. It's kind of like Katrina. That took a long time for Katrina to get -- now that was Louisiana, that whole area, to get back in shape. But it came back strong. You can start seeing their advertising a lot of commercials on TV, we're back, come visit us in New Orleans and our whole panhandle, that whole area there. And that's been many, many quarters. So we believe the same thing is going to happen in New York. New York is, like a lot of places, is a dangerous place. So people don't want to leave their possessions unprotected. So there's going to be a lot more alarms, security systems going in. And we're pushing very hard that the dealers install the smart systems like iBridge because it gives the consumer much more ability to do control of his home in the home automation market.

For the iBridge specifically, obviously you're kind of referencing the idea of tracking new home builds and things of that nature in the commercial, more of, I guess, licensing, you can call it, for pent-up or for future demand. But for the current homeowner, is there an ROI of any sort? If you redo your kitchen, every dollar equates to $1.50 sold later. Is there a way to look at that market separately?

Well, we do know that the insurance companies give a discount of 20% off your insurance if you have a security system. So that's been the driver in the industry. There's no direct ROI formula that we know about. All we know is that dealers want more recurring revenue. They want to do installations. They -- it's their lifeblood and they are out there beating the bushes. If we get more and better products that they can install in a plug-and-play mode, this is going to be really, really happy scenario because you've got tens of thousands of dealers out there.

Right. And then not to harp on the recurring revenue, but the StarLink installations increased 22%. Is there a way to view the correlation there, all right? So if the installation increases 22%, does that -- one, does the recurring revenue start immediately? And then secondarily, would that represent an uptick of 22% recurring revenue? Or is it sort of a mix? Is it lower or higher, et cetera?

Right. Well the dealers, when they install a recurring revenue product start paying immediately, they can take -- they have to pay for that service. And Kevin has put together with our software a consoled, a building system, which they now -- they don't have to do it manually with our customer service department. Now it's done all automatically over the Internet.

So when they pay with their credit card, the radio is activated. That means that when the radio installation is active, the recurring revenue is active. It starts immediately. So there's a direct correlation between installations and recurring revenue.

Thank you. There are no further questions at this time. I would now like to turn the floor back over to management for closing comments.

Thank you, all, for participating in today's conference call. If you have any additional questions, please feel free to call Hayden IR, Kevin or myself. We thank you for your interest and support, and we look forward to speaking to all of you again in a few months to discuss NAPCO's third quarter results for fiscal 2013. Thank you, and bye-bye.

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