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NAPCO Security Technologies Inc (NASDAQ:NSSC)
Q1 2021 Earnings Call
Nov 2, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the NAPCO Security Technologies, Inc. Fiscal First Quarter 2021 Earnings Release 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, Patrick McKillop, Director of Investor Relations. Thank you. You may begin.

Patrick McKillop -- Director of Investor Relations

Thanks, Daryl. Good morning. My name is Patrick McKillop, I'm the Director of Investor Relations here at NAPCO Security. Thank you all for joining us for today's conference call to discuss our financial results for our fiscal first quarter 2021. 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 section 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 presentation contains forward-looking statements that are based on current expectations, estimates, forecasts and projections of future performance based on management's judgment, beliefs, current trends, and anticipated product performance. These forward-looking statements include, without limitation, statements relating to growth drivers of the company's business, such as school security products and recurring revenue services, potential market opportunities, the benefits of our recurring revenue products to customers and dealers, our ability to control expenses and costs and expected annual run rate for SaaS recurring monthly revenue. Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those contained in the forward-looking statements. These factors include, but are not limited to, such risk factors as described in our SEC filings, including our annual report on Form 10-K. Other unknown or unpredictable factors or underlying assumptions subsequently proving to be incorrect, could cause actual results to differ materially from those in forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. You should not place undue reliance on these forward-looking statements.

All information provided in today's press release and this conference call is as of today's date, unless otherwise stated. And we undertake no duty to update such information, except as required under applicable law.

I will turn the call over to Dick in a moment. Before I do, I just wanted to mention a few things on the IR front. We will be attending the Needham Growth Conference, which is taking place January 11th through the 15th of 2021. Also, we are planning for more virtual road shows throughout the remainder of the year. Investor outreach is crucial especially 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.

Richard L. Soloway -- President

Thanks, Patrick. Good morning, everyone, and welcome to our conference call. Thank you for joining us today to discuss our results. I am pleased to report that because of our efforts and strong business model, we have delivered significantly improved results compared to the fourth quarter of fiscal 2020. Despite the ongoing COVID-19 pandemic, first quarter reoccurring service revenue, gross margin, net income and adjusted EBITDA all exceeded analyst expectations. Our recurring revenues continue to grow at a rapid rate. Our recurring revenues increased 36% in Q1 and now have an annual run rate of $29.7 million as of September. Our focus on targeting the professional installations and mostly commercial end markets is driving this continuous growth.

Our balance sheet remains strong and our cash balances continue to grow. We remain focused on capitalizing on key industry trends, which include school security solutions, wireless fire and intrusion alarm, plus enterprise access control systems and architectural locking products. The NAPCO management team continues to focus on the key metrics of growth, profits and returns on equity and controlling costs, especially during these difficult times. These metrics are important to us as well as our shareholders. We continue to execute our business strategy and our interests are aligned with our shareholders as senior management at NAPCO currently owns 36% of the equity.

Before I go into further detail, I'll now turn the call over to our CFO, Kevin Buchel. He will provide an overview of our fiscal first quarter results and then I'll be back with more on the strategies and outlook. Kevin?

Kevin S. Buchel -- Senior Vice President of Operations and Finance

Thank you Dick and good morning, everybody. For the first quarter, our financial performance was significantly better than last quarter as we generated major increases in each of these categories, recurring service revenue, gross margin for both equipment sales and recurring service revenue, net income and adjusted EBITDA. And we also exceeded analysts' expectations in each of these metrics.

Net sales for the quarter was $23.2 million compared to $23 million in the fourth quarter of fiscal 2020 and $26.3 million for the same period a year ago. The 12% decrease in sales for the quarter versus a year ago were primarily related to decreased equipment sales, which were caused by the ongoing COVID-19 pandemic, which has caused difficulties for security equipment professionals getting access to both commercial and residential installation sites. We believe this is an industrywide issue and not due to the loss of any market share unique to NAPCO or any longer-term negative view of the post-pandemic health of the security industry. On the positive side, StarLink radios and fire products continued to significantly increase in Q1 compared to both Q4 and Q1 in fiscal 2020. This is important as these are the products that generate recurring revenue. To that end, recurring monthly revenue continued its strong growth, increasing 36% for the quarter. Recurring revenue now has an annual run rate of $29.7 million based on September 2020 recurring revenue.

As I mentioned on our last earnings call, the majority of the company's factory costs are fixed costs. As you remember, when equipment sales for the quarter increased above $20 million, overhead absorption increases, gross margins expand. Conversely, when equipment sales are below $20 million, the opposite occurs. We're in the midst of a COVID-19 pandemic, which had temporarily affected the volume of our equipment sales. To combat this issue, we have taken certain cost-cutting measures, which contributed to a significant improvement in the gross margin of equipment sales, which increased by 1,400 basis points as compared to the equipment sales gross margin last quarter. In addition, the gross margin of 29% for equipment sales for Q1 was 400 basis points better than Street consensus. Gross margins for recurring revenue continued to improve, coming in at 84%, a 500 basis point improvement versus the year ago period and also beating the Street consensus estimate of 80%. Our blended gross margin for Q1 was 46% as compared to 44% last year and also beat the Street consensus estimate by 500 basis points. The increase in gross margin for recurring revenue was primarily due to increased sales of our StarLink commercial fire radios, which generate higher margins and continue to become a larger part of the overall recurring revenue mix.

Gross profit for the quarter was $10.7 million, which was 34% increase compared to the fourth quarter of fiscal 2020, which was $8 million and a 7% decrease compared to last year's gross profit of $11.5 million. Research and development costs for the quarter were $1.9 million as compared to $1.7 million in the year ago period, an 8% increase and were 8% of sales and 7% of sales for the quarters ended September 30, 2020 and 2019, respectively. The increase was due primarily to increased payroll from salary increases. Selling, general and administrative expenses for the quarter remained relatively constant at $6.1 million or 27% of sales as compared to $6.2 million or 23% of sales for the same period last year. The increase as a percentage of sales was primarily due to the aforementioned decrease in sales, while SG&A remained relatively constant as compared to the same period a year ago.

Operating income for the quarter was $2.7 million as compared to operating income before one-time charge of $1 million in the fourth quarter of fiscal 2020, and that represents 161% increase and $3.6 million for the same period a year ago, which is a 26% decrease. Income tax expense for the quarter was $329,000, which represents an effective tax rate of 12% as compared to $369,000 with an effective tax rate of 10% last year. Net income for the quarter was $2.3 million or $0.13 per diluted share as compared to net income before one-time charges of $1.5 million or $0.08 per share in the fourth quarter of fiscal 2020, a 53% increase and $3.2 million or $0.17 per share for the same quarter last year, a 28% decrease. Adjusted EBITDA for the quarter was $3.2 million or $0.17 per share as compared to $1.5 million or $0.08 in the fourth quarter of fiscal 2020, representing an increase of 115% and $4 million or $0.22 per diluted share for the same period last year, representing a decrease of 20%.

Moving on to the balance sheet. At September 30, 2020, the company had $21.9 million in cash and cash equivalents as compared to $18.2 million as of June 30, 2020. Working capital was $62.7 million at September 30, 2020 as compared with working capital of $61 million at June 30, 2020. The current ratio was 5.5 to one at September 30, 2020 and it was 4.5 to one at June 30, 2020. Net cash provided by operating activities for the quarter increased 29% to $3.8 million as compared to $2.9 million for the same period last year. CapEx was $143,000 during the quarter versus $181,000 in the year ago period.

That concludes my formal remarks. And I would now like to return the call back to Dick.

Richard L. Soloway -- President

Thank you, Kevin. Our first quarter equipment sales were impacted by the ongoing COVID-19 pandemic However, as Kevin mentioned, sales of StarLink radios and fire products were not impacted. And as a result, we continue our strong recurring revenue growth along with 84% gross margin. Our seasoned executive team here at NAPCO performed well by managing costs, delivering improved margins and beating Street consensus earnings per share estimate. We have recently seen positive signs from some of our largest distributors that sell-through rates have increased.

We continue to believe that we are well positioned to rebound for the economic recovery. Our business is comprised of 80% commercial and many of our products are deemed essential, such as non-discretionary commercial fire alarm communicators. NAPCO also plays a vital role in the healthcare vertical with our locking and access control divisions which, for example, provide entry exit devices and push-pull locks with antimicrobial finishes. The trend of violence in cities across America continues to happen every day, and these events are driving the need for more security. Many businesses such as stores, restaurants and offices are preparing for more volatile times ahead. The growth of recurring revenue, which in part is being driven by the commercial StarLink fire radios, continues to be a bright spot in our business. The fire radios in particular are also helping recurring revenue gross margin expansion as evidenced by the 500 basis point improvement versus the year ago period.

As the communication paradigm continues to sunset away from legacy copper and the 3G infrastructure, it creates a significant opportunity for our proprietary StarLink radios and alarm systems for fire and burglary to generate additional steady streams of recurring service revenue growth.

The school security market remains a significant market opportunity. While we have seen some delays in planned security upgrades, there have not been any significant cancellations. The availability of grants to schools to fund these security projects has never been better with options from the US federal government and the state government being reticle. In September, the Department of Justice issued $50 million in grants to schools across the US. And in the state of Indiana, as an example, the school board approved $19.4 million in state matching grants to security upgrades in schools. We remain focused on providing schools the products and the solutions they need to protect the students and the faculties. While schools are having students return full-time, hybrid or remote, it varies from state to state. We are still witnessing schools seeking to upgrade and implement systems during this time as they continue to plan for the future. Press releases regarding school and university security projects are issued when the opportunity is allowed as you must receive approval from these institutions prior to a release.

During our fiscal 2020, we launched the AT&T LTE StarLink line of universal fire, intrusion and IoT communications, which are playing a vital role in the need for the upgrade of older 3G AT&T communicator. Our StarLink communicators offer the widest coverage in the US to dealers with both AT&T and Verizon LTE served. Our iSecure commercial and residential 80 Zone alarm system, NAPCO's latest recurring revenue product innovation, continued its rollout during our fiscal first [Phonetic] quarter. We are still in the early days of the product launch and continue to receive favorable feedback from our dealers. iSecure, designed for the new breed of professional installers and savvy consumers as it has installation times of one hour and offers a feature-rich that of specifications that many residential and small, midsized businesses are looking for today. The iSecure offers the most cost effective functionality in the industry and has StarLink communicators inside, which will generate recurring revenue with every sale and installation. Looking into the future, expanding our cellular communications technology to other areas in the security interest is a focal point of our strategy. During the end of this calendar year, we plan to introduce a cellular-based locking and access control product line using our StarLink technology. It will be known as Air Exit. This will allow dealers and NAPCO to generate recurring revenue from locking and access control products. The benefits that end users will enjoy includes no need for upfront investment in hardware and additional IT personnel and no on-site database backups or software update.

We will begin our Q&A session portion of this call in a moment. Our first fiscal quarter '21 was a challenging one, but successful. Before the COVID-19 pandemic began to significantly impact our country back in March, NAPCO had achieved 23 consecutive quarters of year-over-year record sales. I am confident we are well positioned for the economic recovery to come and will soon start another record sales streak. Despite the challenges posed by COVID-19, we remain highly focused on successful execution of driving sales growth and increasing profitability, and are confident that our strategies will enable us to deliver strong financial performance in the future. NAPCO's senior management maintains a high level of ownership in our equity currently 36%. And I'd like to thank everyone for their support and for joining us in the exciting future we have.

Our formal remarks have now been concluded. We would now like to open the call for a Q&A session. Operator, please proceed.

Questions and Answers:

Operator

Thank you so much. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Matt Pfau with William Blair.

Matthew Pfau -- William Blair -- Analyst

Hey guys, thanks for taking my questions. I wanted to start off with the sell-through that you're seeing from your distributors and wondering if you can provide any more details on what you're seeing there? And then when you think we could potentially see some of these distributors ramp up their purchasing activity again?

Richard L. Soloway -- President

Kevin, do you want to take that?

Kevin S. Buchel -- Senior Vice President of Operations and Finance

Yes, sure. So Matt, we talked about sell-through on the last call and we had at that time, sell-through stats from -- we talked about a couple of distributors. We had it through July and August. So now I have July, August and September, I have the whole quarter. And I looked at a couple of the two biggest ones on the alarm side and I looked at a few on the locking side. And here's what I saw, it was very interesting. So on the alarm side, our biggest customer, who we've talked about at length here, had a 25% increase in sell-through stats compared to the prior quarter. So a sequential increase of 25%. Year-over-year, it was up 28%. It's pretty strong. Another big alarm distributor had a 35% sequential increase and a 39% increase year-over-year. This again is for the July, August, September quarter. On the locking side, I look there as well. We have looked at the three biggest ones we have. The first guy is part of that big customer that we have. Sequentially, they were up 32%. They were down only 4% year-over-year. The next big customer I looked at was up 55% sequentially and was up 16% year-over-year. And the third one I looked at was up 30% sequentially and up 15% year-over-year. So that bodes well for the future. And I said on the last call you just don't know when the distributors are going to actually place orders. They're probably playing it very conservative, trying to be just in time distributors. But with stats like these, they're going to have no choice soon.

So I expect this to translate into factory sales soon, will it be in this quarter, the quarter we're in now, Q2, one would think so. With stats like that and how low could their inventory levels get? Certainly, for the balance of 2021, Q3 and Q4 for us, I think that's the expectation we have unless something changes. I know the pandemic hasn't gone away yet, but more and more dealers are getting access. These are pretty powerful stats. So we continue to monitor it. And as we learn more, we'll share it with everybody. But right now, we're very encouraged by the sell-through stats.

Matthew Pfau -- William Blair -- Analyst

Great. And then the other thing I wanted to ask about was the fire business. So all of your recurring businesses seem to be doing well, but in particular, the fire business seems to be doing -- or at least seems to be a standout there. What are you seeing that's driving that business right now? And maybe just sort of an update on how you think about that opportunity longer term?

Richard L. Soloway -- President

We love the fire business because it's a mandated business to keep a certificate of occupancy in a building. So there are a lot of fire logs, millions and millions of them that use copper as the communications link to the central offices. Copper is going away, not being supported by the carriers anymore. And therefore, the dealers are looking to replace the copper with a radio solution, and StarLink seems to be a very important radio of choice to the dealers. So we have many, many years of the retooling of commercial buildings of all types from copper to radios. And as far as I can see in the future, we're talking about huge quantities of jobs that are going to be converted using StarLink. And we also have fire panel for new work. So when a new job goes into a building, they can use a StarLink Fire panel. So automatically, besides having zones for smoke and carbon oxide, it also has a built-in radio, which communicates to the central office and reports these fire conditions. So it holds very, very well for us. It's mandated. It's not elected and we're going to keep building upon this sector of our communications business.

Matthew Pfau -- William Blair -- Analyst

Great. Thanks guys. That's it from me, I'll pass it on.

Kevin S. Buchel -- Senior Vice President of Operations and Finance

Thanks Matt.

Richard L. Soloway -- President

Thank you.

Operator

Thank you. Our next question will come from the line of Mike Walkley with Canaccord Genuity. Please proceed with your questions.

Mike Walkley -- Canaccord Genuity -- Analyst

Great, thank you. Hope everybody is safe and well on the call. Kevin or Dick, I just wanted to follow up on the strong gross margins in the quarter. Can you help us think about the cost savings? Is there now a new level below $20 million where you start to see kind of cost improve from on the hardware front, or maybe just think about just maybe a product mix versus some permanent cost reductions that are going to help the gross margin trends?

Richard L. Soloway -- President

Well, in this quarter -- in last quarter, we took a big hit on the gross margin on equipment sales. And we didn't want to go through that again, because while we're seeing improvement and people are getting more access to buildings and the sell-through stats are strong, we can't live our life waiting for the distributors to necessarily place the kind of orders that they should. So we reacted to it. We have a lot of experience in reacting in difficult times. The recession of '09 taught us well. And so we made cost cuts that affected the margin on equipment sales. It's probably a combination of that and mix, but a lot of it was cost cutting. We saw this trend of declining hardware sales at the tail end of Q3 of last year, the March quarter. We obviously saw it continue in the June quarter, and we wanted to react to it. We're not going to sit back and just watch it happen. And so that's why you saw the margin increase on equipment sales go up so dramatically to about 29%.

We think things are going to be coming back. So these cost cuts are not permanent because once things are back, a lot of these costs will go up again. But we want to be -- our margins should be at a $20 million level, in the mid-30s. And again, as we get the hardware sales to go to $25 million like they've been say the Q4 period, then it starts to hit 40%. Those are still our goals. We want to grow hardware sales, just like we want to grow the recurring revenue sales. They're both important. Recurring revenue has been dramatically high margins, the 80% plus. The hardware sales will get dramatic margins as it grows. We believe it will grow. We'll cut costs as necessary, but when we don't have to, we'll restore them. And at $25 million, it will be a close to 40% gross margin on hardware sales. And as it goes above that, we want to get it to the 50% range. So it's very important, just like recurring both. And the mix will help us too depends on the mix. The mix helped us this quarter versus last year, but it's a combination.

Mike Walkley -- Canaccord Genuity -- Analyst

Okay, thanks. And just a follow-up question just on the hardware business. Historically, there's been a lot of end-of-quarter buying, and thanks for sharing some of those encouraging trends on your large customer sell-through trends, is there any early sign here in October that maybe they're going to more linear buying, so you're starting to see signs of recovery or I guess, another way to ask it is how much lower can some of these customers go in inventory until they really need to start buying products again to start seeing a little better growth trends with things opening and recovering?

Richard L. Soloway -- President

We have encouraged the distributors to not sit back and wait and we've seen on -- with some of them that they've been doing more buying on a week to week basis than we've seen before. So as I look at the October stats, it's just one month of factory sales, but on some of these guys, very encouraging. I think they want to buy as they go. They don't want to wait until the end because they're not even sure what's going to happen to wait until the end of December and put in a big buy. They can't afford to wait. They're running low as the sell-through stats remain strong. So some of them have done what we've told them to do, buy biweekly, don't just wait till the end. It's crazy that it all comes down to the last two weeks of a given quarter. So I think in these cautious times and them not wanting to run out, we're seeing that and that's encouraging also.

Mike Walkley -- Canaccord Genuity -- Analyst

Okay, thanks. And last question for me and I'll pass it along. Just on the school market, certainly makes sense with education, just struggling to operate during the pandemics it makes sense, some opportunities have been pushed out a little bit. Can you just talk about what you're seeing in terms of the pipeline? And feedback on when timing of these projects might happen if they're not lost but more delayed, just given such a challenging environment for the education system? Thank you.

Richard L. Soloway -- President

We're not seeing cancellations, we're seeing delays in some cases. Schools are wrestling with, am I open -- well for students, am I hybrid, 100%? Am I somewhere in the middle? They want to get the jobs done, that's what we're hearing. And in some parts of the country we're seeing that happen, and we're getting jobs in parts of the country. In other parts, it's like an on-hold type of situation. We're encouraged that we haven't seen any cancellations. We're encouraged that quoting still remains strong. When these integrators are going to be able to get into certain schools. It's hard to say schools are wrestling with overall problem of trying to keep the school safe from COVID. But we were encouraged by seeing Department of Justice issuing $50 million in grants to schools across the US. We were encouraged what we saw in the State of Indiana, improving $19.4 million in state grants. School security is not going away. It's slowed up somewhat understandably. But for us it remains a big part of this business. There are some jobs that we've gotten, and we're in the midst of trying to get approval on them so we could announce it. We have to get approval in order to announce it. And as we get that, we will announce it. But believe me, school security is here to stay and it's just a question of when it really starts to ramp up again, we feel the sales come through.

Mike Walkley -- Canaccord Genuity -- Analyst

Okay. Thanks for taking my questions.

Richard L. Soloway -- President

Thank you.

Operator

Thank you. Our next questions come from the line of Jaeson Schmidt with Lake Street. Please proceed with your question.

Jaeson Schmidt -- Lake Street -- Analyst

Hey guy. Thanks for taking my question. Just curious if you could comment on what customer reception has been on Air Access? And just if the current macro backdrop has changed your thinking on when that potentially could be a meaningful revenue contributor?

Richard L. Soloway -- President

Air Access is a very unique product in the industry. It will be the only one that uses the cellular network such that you don't have to go through the IT department's network, because the IT department doesn't like to have product on their network, which could create an entrance for hackers to come in. So it will also allow the dealers to connect to the building they are protecting with all the equipment up in the cloud. You won't have to have equipment on site. The equipment is servers and things like that, that will all be in the cloud. And it will make it easier for upgrades and changes to the software. And it will also allow the end users to be able to use apps to be able to interrogate, find out what's going on with their systems and allow the dealers to do time and attendance, roster list, do remote management through the cloud. So the end user will be able to access data and the dealer will be able to introduce to be able to get data from the cloud. And it allow the dealers to penetrate the market quicker and not having to have equipment, which is expensive on site. A lot of that equipment we don't make. It's other equipment that is communications on the network type of equipment. So we're not going to see any loss. We're going to pick up a lot more business. We're going to pick up recurring revenue in a whole vertical where we don't have recurring revenue.

Our recurring revenue comes from buyer systems, burglar systems and we want recurring revenue from our locking and access system, and Air Access will allow us to introduce it to that part of the trade, which does locking in access control and they can build equity in their businesses by putting in our systems. So their business is valuable and they could treat accounts like alarm dealers to each other and get a very nice multiple when they want to raise cash from their businesses. So right now dealers that are in access control unlocking, they put a job in and maybe they'll get a service contract, but they don't have a continuous flow of reoccurring. The way we're going to do it, they will. We're going to have it out this year toward the end of the year. And typically, it takes nine to 12 months for a product to mature. In the case of this one, it's going to be the same way because this is a complex system and it's a whole new development in the access control and locking business for the dealers. Having all this communication using StarLinks, having the ability to give services to their end user, offering the end user ability to look at things throughout their whole building. So I think you give it nine months to a year and it should be a nice contributor, and it's going to go on for years and years and years. It's unbelievable how many buildings will need this upgrade so that they can supply better communications, not have equipment on site. The dealers won't have to roll trucks and anymore to do upgrades or to change out equipment. It will all be done remotely, and it's the new way in the new order of things and we're first to do it.

Jaeson Schmidt -- Lake Street -- Analyst

Okay, that's very helpful. Appreciate that color. And then just as a follow-up. Previously, you guys were targeting exiting June 21 with that annualized recurring revenue target of $40 million. Just curious if you think that's still on the table?

Kevin S. Buchel -- Senior Vice President of Operations and Finance

We're at $30 million now, Jaeson. Basically, at 29.7% as of September. So three more quarters to get to $40 million. I don't see any big delay. We could get there a little early. We could get there a little after. But basically, our target is unchanged. The strength of the recurring revenue products hasn't diminished. If we saw that the hardware sales on radios had diminished in this quarter or even in last quarter then maybe we would feel differently and revise the $40 million target, but we didn't see that. We see the continual strength. So that target remains intact.

Jaeson Schmidt -- Lake Street -- Analyst

Okay, perfect. Thanks a lot guys.

Richard L. Soloway -- President

Thank you.

Operator

Thank you. Our next question comes from the line of Jeffrey Kessler with Imperial Capital.

Jeffrey Kessler -- Imperial Capital -- Analyst

Okay, thank you. And congratulations on continuing the recurring revenue sales throughout a tough period. And my question does relate to when you do begin to see some on-premises installations from the installers and the integrators begin to happen again and you begin to be able to start having. Are you in a position now where you are ramped up internally to take on that type of business? What type of flex between the actual installation of equipment installation business and your recurring sales, if you want to call it, for us will you have to go through when you begin to see pent-up demand come back as the pandemic wanes whenever it does?

Kevin S. Buchel -- Senior Vice President of Operations and Finance

I guess, Jeff, what you're asking is can we handle a large volume of more recurring revenue?

Jeffrey Kessler -- Imperial Capital -- Analyst

Right. And can you flex your expenses and your sales force and your installation force sufficiently in a short amount of time to maintain efficiency and margin?

Kevin S. Buchel -- Senior Vice President of Operations and Finance

Let me answer you. As far as recurring revenue, we built out a very scalable network operating center or cloud, so it can handle all kinds of volume. We expect it will be in the $40 million run rate by end of this fiscal year, which is June 30, on or about. And we can go beyond that much beyond that because it's a matter of just adding memory onto our expandable knock. And we have a couple of knocks now in different locations. So we're ready for all of that. As far as getting employees in our Dominican factory, we have no problem, there's a high unemployment rate down there. We can scale up. We have the -- we're running on one shift. We can scale up to a second shift. We go to a third shift. We can handle all the volume we can get. We can get our parts in from around the world, some are made in America, some are made in Asia and some -- including China, there's no duty. There's no tariffs of components in the Domincan. It's all converted there as a finished product. It comes up. So we can scale up pretty quickly. We get the labor to do anything, we have to do. We can get the parts. The vendors are collaborating for us to start buying more and more. So I think it's going to be a very smooth transition to handle the highest height. With all the recurring revenue StarLink or the Air Access, we expect very exciting recurring revenue, and we scaled up our business both from the manufacturing point of view and the north [Phonetic] point of view to handle it all.

Jeffrey Kessler -- Imperial Capital -- Analyst

Alright, great. The second thing is on the product, particularly specific to Air Access, but in terms of remote and cloud-based access in general, are you -- you're saying at the moment, you're about the only folks out there doing it. I have to believe that companies like, I don't know, I just throw out a name. It's just like a [Speech Overlap]

Richard L. Soloway -- President

We're the only company that is going to be doing it with cellular.

Jeffrey Kessler -- Imperial Capital -- Analyst

Okay.

Richard L. Soloway -- President

There are companies that are doing it the old fashion way through the IT department and not cellular. But that causes all kinds of grief for the IT management people in the company, and it causes a harder penetration for the dealers to get business. So we're going to do it as one aspect of it cellularly, the deal has a choice. It can go the traditional way or it can go into using our cellular radios and some unique technology that we've developed to do all that, so it can go either way. We expect that this is going to be a tremendous boost for the business.

Jeffrey Kessler -- Imperial Capital -- Analyst

Yeah, that was my question is basically, are you going to give your folks a choice with regard to, if they want to do the traditional way or they want -- or just simply because there may be some specifiers that demand or integrators have demanded that way because that's what they can do because they don't know how to do the cellular yet. You have a -- and given the ease of use, I'm assuming that using cellular is not a big education process and you have that capability of getting your people up to -- getting your clients up to speed quickly or at least the distributors do in being able to get them to understand how to use these cellular radios quickly?

Richard L. Soloway -- President

Exactly. We're going to do a lot of lunch and learns seminars, but it's not -- we made it very simple. So you didn't have to be a rocket scientist to utilize it. It will just cut out the interference you get from the IT department in the companies. And there will be no equipment required on site that will be up in the cloud. There will be no rolling of trucks by the dealers once it's installed and programmed, all changes will be done at the cloud. The dealer can interrogate the cloud and give valuable management services to businesses and even issue visitor's badges all remotely. And the consumer that working in the companies can get data out of it also with app. So it's going to be a thing that worked very well in the alarm business. You know our full recurring revenue was the alarm business. The integrators and the locksmiths will now be able to join that party and be able to get recurring revenue from their jobs, not just sell one off jobs.

Jeffrey Kessler -- Imperial Capital -- Analyst

Interesting. Okay. Thank you very much.

Richard L. Soloway -- President

Thank you.

Operator

There are no further questions at this time. I'd like to hand the call back over to management for any closing remarks.

Richard L. Soloway -- President

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 to discuss NAPCO's fiscal Q2 '21 results. Bye, bye.

Operator

[Operator Closing Remarks]

Duration: 51 minutes

Call participants:

Patrick McKillop -- Director of Investor Relations

Richard L. Soloway -- President

Kevin S. Buchel -- Senior Vice President of Operations and Finance

Matthew Pfau -- William Blair -- Analyst

Mike Walkley -- Canaccord Genuity -- Analyst

Jaeson Schmidt -- Lake Street -- Analyst

Jeffrey Kessler -- Imperial Capital -- Analyst

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