Greetings, and welcome to the NAPCO Security Technologies Inc. Fiscal Fourth Quarter 2019 and Full Year Results Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.It is now my pleasure to introduce your host, Mr. Patrick McKillop, Director of Investor Relations. Thank you, you may begin.

Thank you. Good morning and thank you all for joining us for today's conference call to discuss our financial results for our fiscal fourth quarter 2019 and fiscal year 2019. 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 sections 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 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.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 the 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 before I do, I just wanted to mention a few things on the IR front. In terms of upcoming investor outreach, we will be attending and hosting a one on one meeting at the Lake Street’s B.I.G. three conference on September 12, in New York and also at the C.L. King conference in New York on September 19. Investor outreach is crucial especial 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.

Thank you, Patrick. Good morning, everyone and welcome to our conference call. Thank you for joining us today to discuss our results. The fourth quarter and fiscal year 2019 marked another record revenue and profitability performance for NAPCO. Our SaaS recurring revenues continue to growth at a rapid rate. Our recurring revenues annual run rate is now $20.4 million as of June. Our focus on targeting the professional installations and mostly commercial end market is driving this continuous growth.Our balance sheet remained strong with zero debt as of this report and our cash balances continue to grow. Capitalizing on key industry trends including school security solution, wireless, fire, and intrusion alarm communicators, enterprise access control systems, and architectural locking products remains our focus.The management team here at NAPCO continues to focus on the key metrics of growth, profit, and return on equity. These metrics are important for us as well as our shareholders. Our business strategy is executing well and our interests are aligned with our shareholders and senior management at NAPCO owns 38% of the equity.Before I go into greater detail, I'll now turn the call over to our CFO, Kevin Buchel. He will provide an overview of our fiscal fourth quarter and fiscal year financial results and then I'll be back with more on our strategies and outlook. Kevin?

Thank you, Dick and good morning everybody. The fourth quarter net sales increased 9% to $29.6 million which was a record quarterly performance and the 20th consecutive quarter of year-over-year record sales as compared to $27.3 million for the same period as compared to $27.3 million for the same period a year ago.For fiscal 2019 net sales increased 12% to a record $102.9 million as compared with $91.7 million a year ago. The increase in sales for the quarter were primarily related to increased sales of our alarm communication services, door-locking products and access control products. For the full fiscal year the increase in sales was primarily related to increased sales from alarm communications services and products, door locking products and access control products.Recurring monthly revenue from the alarm division increased 44% for the quarter and 45% for the fiscal year.Recurring revenue now has annual run rate of $20.4 million based on June 2019 recurring revenue. Gross profit for the fourth quarter increased 7% to $12.9 million with a gross margin of 44% as compared to $12.1 million with a gross margin of 45% last year. Gross profit for fiscal year 2019 increased 16% to $43.9 million with a gross margin of 43% as compared to $38 million with a gross margin of 41% last year. The increase in gross profit for the fourth quarter and the fiscal year was primarily due to the increase in sales and partially offset by increased salary and freight expenses.The slight decrease in gross margin in the fourth quarter was primarily due to product mix as well as additional sales discounts given related to several new product launches. The increase in gross margin for the fiscal year was primarily due to the 45% increase in recurring revenue where the gross margin was 78% as…

Kevin, thank you. The growth of our business is strong and we believe the trend will continue in the future. Demand for our recurring revenue products is coming from alarm communication, including fire, intrusion and the growth of the smart home category. We continue to believe that the market opportunity for school security in the United States is significant. There are approximately 100,000 K-12 and 10,000 colleges and universities in the U.S. None of us will ever forget the tragic events that took place during 2018 and continue to take place this year. We remain dedicated to providing solutions and products that schools so desperately need.During our past conference calls we have discussed an increased volume of legislation being passed by many states since 2018 which includes funding of $1 billion. According to a U.S. News & World Report article from earlier this year data considering nearly 250 different school safety bills in 2019. This underscores how the issue remains front and center for everyone.The federal government you may recall in 2018 passed a grant program which has allocated $100 million per year through 2028 for school security. We are also aware of other pending legislation which we are monitoring. The pipeline for school security products looks robust and we will continue to announce new wins when we can as we need to receive approval from the schools prior to doing so.Recently we have witnessed more and more active shooter incidences taking places at houses of worship and other public meeting places. We have seen the need to expand the use of our SAVI systems for these locations. The continuing violence in public area is painting a clear picture for the need to secure these areas with our products such as wireless locks and Access Control.During Q4 we began the…

Thank you. [Operator Instructions] Our first question comes from the line of Jaeson Schmidt with Lake Street Capital. Please proceed with your question.

Hey guys, thanks for taking my questions. I just wanted to start with the security market - school security market. It seems like you are seeing some really nice traction there. Can you comment if you're seeing the size of the installed increasing over the past few months here?

Good morning. There are many different types of jobs that we're getting, and some of them are larger than others, and we always find that with the jobs that we do, the schools, especially universities, keep adding to that.So we've done some schools - we've gone back four times, keep doing the dorm buildings and the classrooms and the executive offices. But they're all different sizes all over the country. If you've seen the press release that we put out, they're all starting to come together where localities want to protect their students, come to the realization this is not going to stop unless something major is done in policy within the country, which that looks like that's kind of stymied.I don't know what's going to happen with that. So the only way around all this is to put in school security. And our line of school security is to why this school security inline in the industry and that we make standalone and we make remote control, we make systems where you can have a man trap and lock an active shooter between doorways. There are different ways of configuring our systems and we're very flexible. So we expect that to continue small, medium and large job and each job increasing in volume as they add more facilities to it.

Okay, that's helpful, and along those lines, just given the increasing correction in that market, do you expect to need to add to headcount in a significant way to address all the opportunities?

We have a very nice network of sales agents and reps and in fact, we've made an integration between the Marks Group and the Alarm lack last group. So we have more sales people and they are more intense in their territory, but we don't expect to see an increase into the New Year. In fact this year the SG&A was basically flat.We were very budget conscious. We wanted to make sure we get the most efficiency at each of the sales people. As far as the manufacturing side of the business, you know, we're in the Dominican Republic. Our components are shipped in from all over Asia and we do all our assembly there. The minimum wage in the Dominican Republic is $2,500 a year, so it's not really material.If you get another 50 workers assembling products, the margins are great on the product so that it's not really a material effect. So we're pretty stable in both of these areas, both sales, marketing, and manufacturing.

Okay. And the last one from me and I'll jump back into queue. I know previously you threw out a $40 million recurring revenue run rate target for fiscal 2021. Do you still feel confident in that target?

Not only do I feel confident, this is Kevin, not only do I feel confident, Jaeson, I thought you know would be pushing hard to get to 20, we got the $20.4 million run rate, $40 million we could beat it and I'm just keeping on, I'm still saying $40, but if we had recurring revenue into the other areas of the business like we've talked about, try to get it into the locking size, the access will blow past the $40 million. For now, let's just call it $40 million by June of 2021.

Okay. Thanks a lot, guys.

You're welcome, Jason.

Thank you. Next question comes from the line of Mike Walkley with Canaccord Genuity. Please proceed with your question.

Great, thanks. Great to see the recurring revenue growth and reiteration of targets. Just a question for me on the hardware gross margin side. What about with a little bit closer to 40% with the 24 million hardware revenue achieved this quarter? Can you talk a little bit about the mix that impacted margins for the quarter and maybe a little more color on some of the price discounts that you gave during the quarter?

One of the things we tried to do Mike is to capture a lot of the AT&T radio market LTE. But we introduced that in the fourth quarter and our thought process was let's capture that market because once we start getting the recurring revenue, we've got that pretty much for life. It is a big market, we didn't have it. We're starting to get it. I would put about 2% margin effect, in the quarter because of that. So I would have expected normal, normal situation to be it 40% also.We came in at basically set 37%, so is a 3% differential. 2% I would say, is because of discounts we gave on the new product introduction. 1%, I would say, is due to the mix. Sometimes there's mix differences. We get a big school job at a university in one quarter and you get a job that's not as big the following year, that could easily affect it by 1%. Nothing that we saw out of the ordinary. They have a 1% differential on mix. Not that unusual. The part that was different was the 2% because of discounts. Virtually all due to the AT&T LTE radio intra.

Great, thanks. And then maybe just building on that, you've highlighted all kinds of new products ramping in the coming quarters. Yes, should we think maybe about Dick from the new product. How does that impact gross margin in the short term on the hardware side, obviously, growing recurring revenues greater for the long term, but how should we maybe think about short term margins given some of these new products coming into the model?

I think in Q1 you'll see a little more of what we saw in Q4 in the introduction, because the LTE, that's a big area for us. You'll see a little more of that. I don't think you'll see any discounting or we introduced the new anti leg. That's a very expensive high volition product to begin with. And everybody wants to get their hands on the new version. We don't have to do that. We're like one of the few that manufactures this. The iSecure, that's coming out of the gate very aggressively priced.We don't have to discount that beyond what it is. People are going to jump at the action because the price is so good, right out of the gate, going to blow away the competition. So I don't expect any discounting on that one either. It's really a little bit more on the radio side, but we believe that the recurring growing dramatically like it has with 78% to 80% gross margin, that it will more than make up for that.

Great, thanks. Last question from me and I'll pass it on, just on the recurring revenue given your conference, you still think of like 40% plus year-over-year growth rate or does it slow in the short term, then accelerate as the new products start to ramp? And then secondly, just given the ramp at AT&T any color how it's going so far, maybe relative to the Verizon launch? Thank you.

We expect that the $40 million is the number that we're going to hit in June 30, 2021 year. We think that with the AT&T, the iSecure and some of the locking products which we are going to be generating recurring revenue, which is revolutionary for the business never been done before but the whole industry bloc traditionally don't generate recurring revenue. They're one-off sales, but our versions of the locks generate recurring revenue. The installation companies as well as to get users.We think that we can go beyond the $40 million and we'll do whatever we have to do to get our market share. But I think that the price point that we've established are going to be pretty stable. And we're going to hit that number of 40 at the odd, that’s how we look at it.

Great, thank you.

Thanks, Mike.

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

Hey, guys, thanks for taking my questions. I wanted to ask on hardware growth in the quarter - the lowest for the year, but the full year was about 7%, which is sort of in line with what you guys have talked about longer term. Was there anything disappointing in the quarter or one-off in the quarter that had that growth rate below the other quarters and the year and how do we think about that growth rate going forward, is the fourth quarter more indicative of the go forward, or is the full year growth more or how we should think about it?

The hardware growth for the full year of 7% was one of the highest increases we've had in years. We've been saying our goal is to get to high single or double digits. So 7%, we're on our way to high singles, I don't think there's any reason for us to believe why we can't do more better from a percentage point of view in fiscal 2020 since we're introducing so many things - between, I iSecure and the new anti link [ph], the new radios and the FireLink panel hasn't been out that long. We don't spend a lot of money on R&D for us a lot hasn’t gone up by that much, but $7.2 million this past year. They're spending a lot of time on doing a lot of things that get us more recurring and more hardware.The hardware sales very important to us, too. The Dominican leverage, we talked about very important. You know, just we didn't see it as much in Q4, but you saw it for the full year and that's a big part of what we're doing. We're getting so busy down there, we're going to be going into a second shift on radios too these are all good things. So if I was projecting out, I would still believe that low single or the high single digits for Q, for the full year, even though it was lower in Q4, still the goal is still very achievable.

Got it. And then on the school security side, you mentioned all these funding bills that are out there and a few that have passed, how big of an impact has the government funding been to the school security business or is that still more of an opportunity with some of these bills being passed, potentially accelerating the growth of that business?

Well we're seeing an increase in school security jobs. We are publishing them as we get them. There's many, many more in the Q. If the schools are being - they're getting some funding from their regional area. We expect there's going to be federal funding. There is going to be legislation put out, though all of this primes the pump to get a lot more business.And since we have an offering for K-12, which are low cost, easy to convert K-12s to secure places for the students and not that expensive to do. Schools are jumping the gun and doing their own financing of this through state legislature and counties around the country. The college or universities have the large endowments. They're using that money in anticipation of more money coming down.And we're seeing a better situation in the schools that make these moves and they're going to be much more protective for the students. So we see this all in a very positive light. It's going to take many, many years of growth and the schools will be secure. But so far as we could see, I could see five years of continuous school growth ahead of us and the big money is starting to really come down.

Got it. And in terms of the hurricane that's currently impacted the Caribbean, any impact there to your operations in the Dominican? I realized it didn't hit there, but in terms of getting the goods out of the Dominican to the U.S, was there any disruption there from the hurricane?

We haven't yet. We – our factories category five in the Dominican Republic, so the hurricane itself didn't hit. There's going to be – we'll be shipping both by air and by sea. Though we haven't gotten feedback yet from the ocean shipping companies, but they are on top of their game. So we expect with the amount of inventory we have here that we'll be able to satisfy all demands and keep things rolling, so let's see how things go in the next week or so.

Got it. That's it from me, guys. Thanks a lot.

Thanks Matt.

Thank you. [Operator Instructions] Our next question comes from the line of Jeffrey Kessler with Imperial Capital. Please proceed with your question.

Thank you for taking my question. It's probably fair to say that there was a little bit of a surprise up on the analysts' part in looking at how much you spent on some of the new investments that you're making that the AT&T radio capturing that part of that market. And I'm wondering this brings up two questions; number one, do you think that, number one, by keeping this under wraps, at least publicly, not talking about what you were going to invest in, do you think you've been able to take the cup, the competitive market a little bit by surprise since you've already been in the Verizon side of the market, you hadn't been in the AT&T market so heavily. Do you think that you've again, taken a little bit of the AT&T folks, the communication side by surprise?And number two, all these investments that you are making now, where do you see the returns coming? Let's get, if you want to call it a little bit earlier and which ones are going to be taking a little bit longer to play out over the course of the next fiscal year and a half?

Jeff, you know, these are complicated questions. It is not an exact science, but it's always good to sneak up on the competition. And that's why the AT&T radios are very important to launch and you've hit the nail right on the head. We're going to have tremendous success AT&T radios to grow our recurring revenue. And we had to build and to run the business in a very solid way for mid-term and long-term and that AT&T Radio nationwide makes us very unique, the fact that we're doing Fire with it as well as home and small business.So it's important thing to do and it bodes well for our future. We expect that between AT&T radios and iSecure and iSecure has a radio built into it, so that every alarm that's installed going forward of iSecure, which we expect to be a real volume producer, will generate recurring revenue for us. And having it on all these networks is very important. So if you want more detail, we could do conversations later on getting in deeper if you want to go deeper than this.

Sure. And as far as, if you want to quote, I don't want to say a schedule, but what do you see as - which are we going to be seeing the returns from a little bit earlier, which are we going to see the returns from a little bit later, are those investments that you were making over the last quarter and into -- and obviously into the next quarter?

Well our investments are - we have this goal, we have the goal of June 30, 2021 that we're going to be at $40 million in recurring and we're going to be a $100 million in hardware manufacturing. And you put that together and you are over a $30 a share and that is our goal. And we're doing everything we can to win market share, to get to our goal and go beyond our goal. And looks like, this is working for us.

Okay. One final question. One of the real big issues that I'm dealing with right now and which the industry is overall is dealing with right now to try to -- not just prop up, but to just to reinforce the value proposition is the difference between verified and unverified alarm signals out there. The difference between convenience and having a professional service, have police show up within five or six minutes on the residential side, not just on the commercial side.What are you folks -- what are you doing? And I'm thinking about iSecure and products like that. What are you doing to accelerate the industries, the professional industry's ability to have police and [if you want to quote the] PSAPs, the 9/11 centers, except the signals more readily and allow police to come in and respond without having false alarms?

Well, a lot of the false alarms are caused by DIY products, not professionally installed products. DIY products are not attached to the walls or the ceiling that well, they move and they cause a false alarm or they're not close enough to the magnetic contacts to go on the windows. So that causes a lot of false alarms. Our iSecure is not aimed for the DIY market, but its price point and its functionality is to put the dealer, professional dealer in the game of installing more and more alarm systems which compete against the DIY product.So it's very professionally installed, which eliminates a lot of the false alarm that you're getting from DIY. And we're trying to arm our dealers and the dealers across the nation with a product which has a better return on investment, more reliable, more feature rich and in stores with less false alarms. That's our contribution to what's going on.It reports to all Central Stations and reports cellularly and it works to our back-end NOC, which has the ability to give it additional functionality to eliminate false alarms. And we can talk about that off line. I know that you and the industry and us, we're all proponents of keeping the police response to the real alarm and not false alarm, that's the major thing in the industry. But we can talk offline and go through exactly what this does from a...

Richard Yep, that's great. Okay thank you very much. I appreciate it?

All right.

Thank you. We have reached the end of our question-and-answer session. I would like to turn the call back over to Mr. Soloway for any closing remarks.

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. We thank you for your interest and support, and we look forward to speaking to you all again in a few months for first NAPCO's fiscal Q1 2020 results. Bye-bye.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.