Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the NAPCO Security Technologies Inc. Fiscal First Quarter 2014 Earnings Conference Call. [Operator Instructions] I will now turn the presentation over to Peter Seltzberg, Hayden IR. Please go ahead, sir.

Good morning. Thank you all for joining us for today's conference call to discuss NAPCO's financial results for the first quarter ended September 30, 2013. By now, all of you should have had the opportunity to review the press release discussing the results. If you have not, please call our office, Hayden IR, at (646) 419-4300, we'll be glad to immediately send it to you by either fax or e-mail of your choice. On the call today is Richard Soloway, President and Chairman of NAPCO Security Technologies; and Kevin Buchel, Senior VP of Operations and Finance. Before we begin, let me take a moment to read the forward-looking statement. 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. With that out of the way, let me turn the call over now to Richard Soloway, President and Chairman of NAPCO Security Technologies. Dick, congratulations on the strong start to fiscal 2014. Please go ahead.

Thanks, Peter. Before we get into the details, I'd like to first acknowledge that today's Veterans Day and we appreciate and respect the service men and women of our country who protected and are protecting our country and people in their -- in our lives. Good morning, everyone. Thank you for joining NAPCO's quarterly conference call to discuss the financial results for the 3 months ending September 30, 2013. We delivered excellent results for our fiscal 2014 first quarter, a quarter which has historically been the slowest of our quarters due to seasonality. We generated our highest first quarter revenue level in 5 years with 13% growth year-over-year. In addition, this growth was broad-based with improvements coming from all 4 major business divisions: NAPCO Security & Fire, Alarm Lock Electronic Access Control Locking, Marks USA Architectural Locking and Hardware and Continental Enterprise-Class Access Control. We're pleased with the revenue growth we had, while down sequentially from our seasonally strongest fourth quarter which ended on June 30, as we said in the press release issued earlier today, it was our highest level in a Q1 in 5 years. We believe this momentum reflects the depth and breadth of our product lines and strong and accelerating demand for our newest products, including those which generate recurring monthly revenues. Developing these products has been a strategic focus for us over the last 18 months. Our efforts are gaining traction, and we expect that as recurring monthly revenues accelerate and become a larger part of our revenue stream, the seasonality of our quarterly results will mitigate over time. In addition to our positive result -- revenue results for the quarter, gross margin improved 200 basis points to 29.2% for the quarter from the same period a year ago. Our top line results contributed favorably…

Thank you, Dick, and good morning, everybody. Revenues for the 3 months ended September 30, 2013, increased $2 million or 13% to $17.2 million, compared to $15.2 million in the same period a year ago. The increase in sales for the 3 months came from each of 4 major business divisions, including increased sales of the NAPCO StarLink product, Marks brand door-locking products, Continental Access Control products and Alarm Lock brand door-locking products. As Dick mentioned, this was the highest first quarter revenue result in 5 years. Gross profit for the 3 months ended September 30, 2013, increased 21.8% to $5 million or 29.2% of sales compared to $4.1 million or 27.2% of sales for the same period a year ago. The increase in gross profit was primarily due to the increase in net sales, a shift in product mix to the company's door-locking products, increased recurring revenue and a reduction in research and development costs, as a result of the completion of development of the company's iBridge product line. Selling, general and administrative expenses for the quarter were $4.8 million compared to $4.5 million for the same period last year, a 5% increase. This increase was due primarily to increased commissions on the higher sales level, as well as additional sales personnel. As Dick mentioned, SG&A as a percentage of sales, decreased to 27.7% from 29.8% in the same period last year. Operating income for the quarter increased by $661,000 to $262,000 as compared to an operating loss of $399,000 for the same period a year ago. Interest expense for the quarter decreased by $56,000 or 31.6% to $121,000 as compared to $177,000 for the same period a year ago. The decrease in interest expense for the 3 months of fiscal 2014 resulted from lower interest rates charged by the company's bank, as well as lower outstanding debt in the current period. And net income increased by $557,000 to $123,000 or $0.01 per diluted share, as compared to a net loss of $434,000 or negative $0.02 per diluted share for the same period last year. Adjusted EBITDA for the quarter as per the schedule included in today's press release, increased approximately 753% to $725,000 as compared to $85,000 last year. This was the highest first quarter EBITDA in the last 5 years. At September 30, 2013, the company had $3.7 million in cash and cash equivalents compared to $3.2 million at June 30, 2013. The company also had working capital of $30.5 million at September 30, 2013, compared with working capital of $33.2 million at June 30, 2013. As Dick mentioned, debt net of cash was $9.8 million at September 30, 2013, a decrease of $3.4 million compared to the $13.2 million as of June 30, 2013. And debt, net of cash, has now been reduced by $26.1 million from $35.9 million since we acquired Marks in August of 2008. That concludes my formal remarks, and I would now like to return the call back to Dick.

Okay, thanks, Kevin. A solid start in the first fiscal quarter 2014 positions us well to achieve increased revenue and profitability for this fiscal year, as historically our quarters get stronger as the fiscal year progresses. We're optimistic for 2014 and beyond, and we'll continue to pursue our strategy of expanding our suite of products and services, which will add incremental recurring revenue as well as expanding gross margins. We are gaining traction with our more diversified sophisticated product platform, encompassing end-to-end solutions to meet changing and heightened demand for security products. Our primary objective for fiscal 2014 and beyond is to continue to work aggressively to gain market penetration and increase market share throughout each of our divisions. Our strong balance sheet and cash flows allows us the flexibility to continue to bring innovative state-of-the-art security products to the market at a rapid pace. We are committed to provide our customer base with the most advanced and integrated technology to stay at the forefront of the security marketplace, and we are committed to be a thought leader and take an active leadership role in helping educational institutions and other private, public and governmental venues access and secure their facilities from threats of violence. This concludes our formal remarks. Kevin and I would like to open the call for questions. Operator, please proceed.

[Operator Instructions] And your first question today will come from John Curti with Singular Research.

I am new to the story, one thing that caught my eye in terms of the gross margin improvement, you mentioned 3 items: Product mix, lower R&D and more recurring revenue as contributors to the gross margin improvement. Could you kind of give a ballpark as to how much each of those contributed to that 200 basis point improvement?

Well, the 3 areas -- I'd say the R&D part is the smallest part. R&D I think we've lowered by a couple of hundred thousand dollars versus a year ago. The bigger part is, when you get recurring revenue in the mix, that's virtually all profit, so that's going to help the GP. And when you have commercial sales, commercial product sales like, for example, on the locking products, they have higher margins. So we don't breakout each piece individually, but if I was going to tell you which parts are the biggest -- bigger parts, I would say it would be sales mix, not so much the R&D being lowered.

In terms of -- you mentioned higher margins on the commercial product, so what's kind of the mix, say commercial versus I guess what, residential?

Yes, it's an 80-20 split. 80% commercial and 20% residential. So the majority of our sales come in the commercial aspect. All of the locking products through the Marks division and Alarm Lock, that's all commercial, 100%. The Access Control products through Continental, 100% commercial. And then on the intrusion, the NAPCO intrusion, that's more of a 50-50 split. And so when you do the math and it all works out, it's an 80-20 commercial versus residential split.

Then with respect to your recurring revenue streams, it sounds like you've got maybe several products that are going to benefit from that. Could you kind of give me an idea of how much per account it kind of varies? Per product lines?

What we do is we put it all together for competitive purposes as recurring revenue. So we have 3 different facets of it. We have the StarLink radios, we have the home automation systems called iBridge, and we have our iSee Video, which is smartphone video. And all of those are contributing nicely to our recurring revenue stream. The StarLink is becoming very, very popular due to the fact that there aren't a lot -- new homes aren't having copper dial up anymore, so the radio is a way to communicate security signals to a central station. And also the fact that people want to be able to see all of these home automation features, such as video on their smartphone and controlling your lights and your locks, opening your garage doors. Everything that you normally would have to do by being on site, you can do remotely by using our iBridge control home automation. So we see that as a very nice, strong growing area.

And then -- are monthly bills sent out, are people's credit cards?

We have a whole -- we have a department with a new software package where the dealers are logging in and registering their different devices. Remember all this is -- we're a B2B company, so these are dealers and integrators logging in systems of their consumers in our software package.

What do you anticipate your R&D expense and CapEx to be this year?

I think R&D will be similar to last year. Last year it was over $5 million. I imagine it'll be in a similar range. CapEx traditionally is somewhere between $500,000 to $750,000 per year, and I anticipate that to be in the same range as well.

And then lastly and I'll let somebody else jump on. In terms of your product manufacturing, is most, if not all of your products, being manufactured offshore?

We do the start up and the customization and critical part manufacturing here in Amityville. And the mass manufacturing is done in our other facility that we own in Dominican Republic.

And by mass, are you saying like the mass parts for all the various products?

Yes. All the lines on mass, the quantity work is done at our Dominican operation.

And, John, that Dominican operation gives us tremendous leverage, because it's a low-cost facility. When the revenue goes up, the overhead gets absorbed rapidly and money drops to the bottom line.

Yes, I saw a number -- you've got a couple of hundred million dollars of capacity but between the 2 plants?

The Dominican plant could do $100 million per shift, so it could do $200 million on 2 shifts.

Your next question will come from Pete Enderlin with MAZ Partners.

In the past, Dick, you've talked about exceeding $20 million to get a modest profit. Only now, at $17 million you had a decent profit. Does that mean you have a sort of a new business model? And if so, what part of it has changed?

Well, it's always been -- we figured somewhere north of $17 million is where we start making a modest profit. Of course, recurring revenue has helped because it kind of blends in and that's growing sector. But as you can see from the fourth quarter, the leverage became tremendous because of its volume. So we're trying to push the products at this higher volume levels and progressively, historically, it grows as we finish up our year, June 30, where the June 30 quarter is the strongest.

Okay, now I mean, R&R [ph] is still under 10%, otherwise you'd be breaking it out. And that has obviously very high gross margins, but aside from that, are you also seeing a sort of sustained shift in your mix toward higher gross margin products?

Well we are 80% commercial now as Kevin pointed out. So commercial products have higher margin than residential products. Except for the fact that the recurring revenue has in the 90 percentile margins.

Right, and then getting back to the residential category. Can you talk about the potential for existing home panels to be converted or upgraded to wireless? I mean, how many of them are out there that are still actively used and what do you see as the trend of those adding or converting to wireless?

Well, we see that from just the NAPCO branded products that have been out in the field, there are millions upon millions, probably close to 3 million alarms that have been installed. And those as younger households take over the premises, they want to get rid of dial-up lines. The alarm systems last for years. So just adding our StarLink radio box, which is a small box, on to the existing system and not having to rip the system out of a premise, just add our StarLink box, gives you all communications and the flexibility and all the uploading and downloading capability that a copper hard wire would do. So we'd expect over the years this will be -- get us a lot of business from StarLink. Then you have new installations where people are wanting communications with no phone lines, and they're installing at our new installations, so there's a great potential. Then you have all of the other systems that are out there, which are not made by us, where StarLink, and there's millions and millions of those, is compatible with every type of radio, every type of alarm system out there. So there's a lot of potential growth between upgrading old and adding new.

And with the StarLink installations that you had at record levels in the quarter, is that mostly before new systems or is there a significant amount of conversion going on at the same time right now, I mean?

It's hard for us to tell. Because of the fact that we sell B2B. So our customers are the dealers who sell to consumers. And we're trying to make the StarLink a universal tool, where it becomes for every alarm system a StarLink goes in. So -- but we can tell you exactly what the breakout is. That's up to the dealers. But we're seeing a nice acceptance, a very strong acceptance to our new 3G/4G version of it, which has wider coverage range and more communications than the previous 2G. And it's been really well accepted, the 3G version and the 4G version. And then it also is accepted because you can upgrade our StarLink as the telecom companies change their communications towers. You don't have to throw the radio away. All you do is put in a little circuit board and now it has the latest technology. That's why we say you can go to 5G, 6G, any type of communications by just changing the little circuit board and keep the radio on the premise.

Your next question will come from Walter Ramsley with Walrus Partners.

I've got a couple of questions about the school business. That big contract you had that you did over the summer, that was I guess like $1.5 million? Do you have some additional orders like that for the Christmas vacation?

We're getting orders continually and the momentum is building in the schools business. In fact, pretty sure on the website you can see a list of all the schools that we've done, there's probably more than 100 now, that type of thing, over the years. And the momentum is building with these products because the integrators and schools are getting used to them. And the large university was a very, very large one, of which it's a great reference tool, because it was installed so quickly. Not only was it installed quickly, but it was customized with the right architectural color due to the architect wanted it in an oil-rubbed finish, which is since we make all of our own architectural locking, we're able to do that very quickly to match the school's architecture. And then put our electronics into it. And it went up on the doors and went into their system very, very quickly. So we have a full turnkey delivery business, which is important to integrators because they have do these things quickly and they want customization. And we're the only company that does that.

So as far as the pipeline goes, the backlog, are there more or are you still negotiating those big deals?

We have -- we're always negotiating, we're always put on bid lists, we're increasing our visibility in the field with our S.A.V.I. index. There's a lot going on.

Okay. Last year, the sales, for the residential area in particular and probably some commercial too, got disrupted by the Sandy hurricane. Has that pretty much gone into the rearview mirror or are those dealers still reinstalling heating systems and being distracted away from the security business?

What happened in that is all installations were affected for that 6-month period. And that was for new jobs and they had to upgrade the old jobs and that type of thing, for the actual equipment. But also the collateral damage to the cell phone towers has been -- is continuous. So a lot of the systems that we had were 2G systems, the StarLink 2G. And what happened was those towers were never really put back online by the carriers. So the dealers were biding their time and waiting for our 3G/4G solution, which has been out since the beginning of this quarter, actually end of last quarter beginning of this quarter, but it's picking up momentum. And a lot of people are using the 3G/4G in areas where the towers are -- were never put back to 2G configurations. So that's kind of a collateral side effect.

Okay. And then there was some dealer consolidation either last quarter or the one before, I can't remember, has that rationalized itself?

Walter, that was several quarters ago, maybe even 3, and that's worked out. Remember, really it was a consolidation of distributors, not dealers. And so ultimately, it doesn't really affect us because it's the dealer that we ultimately get the sale from.

The way it works, Walter, is that the dealers go to the distributors and pickup the equipment they need. The dealers really don't stock equipment. What they do is if they get a school job or they get a residential job, or a shopping mall job or high-rise building, they pick up the various components at the distributor and then they put it together as a system. So distributors are our shelves out there. We have a lot of distributors.

Okay. And the new StarLink, did you change the price on that?

Yes, we increased the price to $119.95 from $99.95.

How does that compare that with the competition now? I mean are you still pretty far below them, or how's that stack up?

We have the most technology, the best reach, the simplest to use and the price is lower than most.

Good. Anyway, sounds like the outlook is good. Are there any obstacles in the way, or is it pretty much clear sailing, would you say?

I can't tell you what the economy is going to be like. But hopefully if everything keeps rolling along at this rate, we should be growing very, very nicely for the rest of this year, finishing up this year, and into the future. Let's see what happens politically in the country. Let's see what happens with the building trades or whatever. But it looks very promising.

Your next question on the line comes from Rick Federman from Federman Investments.

Do you see, for the foreseeable future the sales mix remaining around 80-20? Or is one or the other accelerating fast -- more rapidly than the other?

I think they're probably in lockstep with each other. I see it remaining the way it is, the ratio.

Okay. How close are you in terms of level of revenue for disclosing on a quarterly basis, the amount coming in from the recurring revenue sources?

We're getting closer is the only way I can put it, Rick. I don't think it'll happen this year, this fiscal year, I think maybe by next year. But if you keep putting up sequential growth of double digits, you're eventually going to get there. So I'm optimistic probably next year, maybe it would even be the year after, but I'm hoping for next year.

Okay. Regarding the S.A.V.I. program that you described, this one may be a little bit off the wall, but if a school -- or an institution, whether it's a school or anything else, were to initiate I'm going call it the outline, that you propose and they were to still have -- there was an unfortunate event took place. Have you asked your attorneys if there's any liability at all on your part where there's -- let's say if it was a school said, we did what you said and look what happened anyway?

Well, we're not dictating, we're only showing the potential vulnerability. It's up to them to decide how they want to deal with it. It's only for informational purposes only.

Okay, so you're just saying, here's your potential areas of weakness, you might want to address these.

Yes, you have a checklist that kind of shows you this, and then there's other that they have to do. But they make the ultimate decisions. It kind of just gives a little bit of structure to an unstructured security defense that most schools, shopping centers have.

So it sort of gives them a checklist as a starting point.

Right.

[Operator Instructions] And your next question on the line will come from Myron Cohn with Stifel.

I was listening to someone talking about ADT and they have a program similar to yours, and I know that they have been a customer of yours. And I was wondering if you are selling any parts into them? But I also think that them advertising the program is very good for you.

ADT buys products from us and they also have a similar home automation system, not as much functionality, harder to use, kind of dedicated to their set up of installers. And they do a lot of advertising, and the cable companies are doing a lot of advertising. And all of this we believe will lift all boats, because we want our dealer base, which is thousands upon thousands of dealers, to start putting in more smartphone, video and home automation. And it's kind of adding momentum to the whole offering. So we look at it as a very good thing.

And we seem to have no further questions at this time. I'll turn the call back over to Dick Soloway for closing comments.

Okay. Thank you, everyone, for participating in today's conference call. As always, should you have any questions, feel free to contact Hayden IR, Kevin or myself. We 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 second quarter 2014 results. Goodbye. Have a great day and a happy holiday season to all.

Ladies and gentlemen, that does conclude our conference call for today. We thank you for your participation and you may now disconnect your lines.