NAPCO Security Technologies NASDAQ: NSSC reported fiscal third-quarter 2026 results showing higher revenue, expanding margins, and continued growth in its recurring service revenue base, while also disclosing a $16 million litigation settlement charge recorded in connection with resolving outstanding legal matters.
Quarterly results and mix shift toward recurring revenue
Net revenue for the quarter ended March 31, 2026 rose 11.8% to $49.2 million versus $44.0 million a year earlier. For the first nine months of fiscal 2026, net revenue increased 11.9% to $146.5 million compared with $130.9 million in the prior-year period.
Recurring monthly service revenue grew 15.4% year over year to $24.9 million in the quarter, up from $21.6 million, and increased 13% to $72.2 million over the nine-month period. Management said recurring revenue represented approximately 51% of total company sales in the quarter.
Kevin Buchel, President and COO, said the company’s recurring service revenue “once again delivered outstanding performance,” adding that the business carried gross margins exceeding 90% and provided “strong visibility and predictability” to results.
Hardware growth led by locking products; margin improvement continued
Equipment revenue increased 8.4% to $24.2 million in the quarter, compared with $22.4 million a year ago. For the nine months, equipment revenue rose 10.9% to $74.3 million versus $67.0 million.
Management attributed the equipment revenue increase primarily to higher volume of door locking products and the impact of price increases in locking, intrusion, and access products. Buchel highlighted “continued demand for our locking products” as the primary driver.
Equipment gross margin improved to 28.7% in the quarter from 24.6% a year earlier, while equipment gross profit rose 26.4% to $6.9 million. CFO Andrew Vuono said equipment margin expansion reflected a combination of product mix, higher locking volume improving fixed overhead absorption, price increases implemented during fiscal 2026, and reduced discounting.
On the call, Buchel emphasized a more disciplined approach to discounting. In response to a question about whether lower discounting could pressure volumes and downstream recurring revenue, Buchel said, “Whatever discounting we’ve done or haven’t done, it’s never around radios. Radios is what gives us the recurring. It’s almost unaffected.”
Profitability, cash flow, and balance sheet
Gross profit for the quarter increased 17.4% to $29.5 million, with gross margin rising to 60% from 57.2% in the prior-year quarter. Recurring service gross margin was 90.4% in the quarter, compared with 90.8% a year ago.
On a non-GAAP basis, operating income increased 32.9% to $14.8 million for the quarter. Non-GAAP net income rose 36.9% to $13.9 million, or $0.39 per diluted share, compared with $10.1 million, or $0.28 per diluted share, a year earlier.
Adjusted EBITDA increased 20.2% to $15.8 million, equating to an adjusted EBITDA margin of 32.2% versus 29.9% in the prior-year quarter.
Free cash flow increased 20.3% year over year to $16.0 million in the quarter, representing a free cash flow margin of 32.6%. Vuono reported cash and cash equivalents and marketable securities of $125 million as of March 2026, up from $99.1 million as of June 2025, and said the company had no debt.
Buchel said the company announced another dividend of $0.15 per share, payable July 3, 2026, to shareholders of record on June 12, 2026. Asked whether the litigation settlement would pressure the dividend, Buchel said the company could afford the payout and that it would not affect its ability to continue dividends, though he noted the dividend was kept unchanged this round.
Litigation settlement, operating expenses, and tariffs
Management said the company recorded a $16 million charge in connection with settling existing litigation. Buchel said the company was “pleased to have that uncertainty behind us.” Vuono noted that as a result of the settlement, the provision for income taxes was $200,000 for the quarter, compared with $1.9 million in the prior-year quarter.
Operating expenses rose modestly. Research and development expense increased 7.3% to $3.4 million, while SG&A increased 4.3% to $11.3 million. Vuono attributed the SG&A change primarily to higher trade show expenses, including timing of ISC West, along with compensation-related costs and insurance, partially offset by lower professional and legal fees.
During Q&A, Buchel said the company generally does not anticipate “any huge increases in SG&A,” and said the settlement should bring “more predictability into the legal portion” of SG&A. He added that the company targets R&D spending at “somewhere in the 7% to 7.5% range” of sales as it adds engineers to accelerate product development.
On tariffs, Vuono said the company was at a 10% rate at the time of the call and was in the process of submitting refund claims after a portal opened. He estimated tariff cost was running “just under $2 million” annually at that 10% level and said most tariff exposure related to movement of goods from the Dominican Republic to the U.S. He added the company did not expect tariff exposure to increase “absent…some legislation,” and noted it was possible the Dominican Republic could return to a zero-tariff level depending on policy changes, though the company characterized the outlook as “wait and see.”
Strategy updates: StarLink, MVP, and market opportunities
Buchel pointed to StarLink Fire commercial fire cellular communicators as a major contributor to the recurring revenue trajectory, calling it “the industry standard for commercial fire alarm communicators.” He said demand remained healthy for both new installations and the installed base as the industry transitions away from legacy copper phone lines to cellular connectivity, noting StarLink connectivity across AT&T, Verizon, and T-Mobile.
Buchel also said the company saw strong demand signals at ISC West 2026, describing a “record number of leads across all NAPCO platforms,” with sales and marketing teams building a pipeline from those opportunities.
Regarding the company’s MVP cloud-based access control platform, Buchel said management expects “meaningful recurring revenue” to begin around October 2026, referencing an 18-month timeline that he said started around ISC West the prior year. He said the company was encouraged by interest and focused on training and incorporating feedback before scaling.
On capital deployment, Buchel said the company was seeing M&A opportunities presented by bankers but that nothing was imminent. He said any deal would need to be “accretive from day one,” at a fair multiple, and ideally benefit from leveraging the company’s manufacturing footprint. Asked about share repurchases, Buchel said the company has authorization and the cash to buy back shares, but “we don’t need to do it if the stock is performing well,” adding that management generally likes where the float stands.
About NAPCO Security Technologies NASDAQ: NSSC
NAPCO Security Technologies, Inc NASDAQ: NSSC is a designer and manufacturer of electronic security solutions for commercial and residential applications. The company's product portfolio spans intrusion and fire alarm control panels, alarm communicators, access control locks and readers, as well as a broad range of peripheral modules and integrated security accessories. NAPCO's offerings are engineered to deliver scalable, networked security systems suitable for new installations and retrofit projects alike.
Key product lines include hybrid alarm control panels that support both wired and wireless peripherals, cellular and IP alarm communicators for reliable central station reporting, and the acclaimed “Alarm Lock” series of standalone and networked electronic door locks.
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