Greetings and welcome to the NAPCO Security Technologies Fiscal Year and Fourth Quarter 2014 Financial Results Conference Call. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brett Maas of Hayden IR. Thank you sir, you may begin.

Good morning and thank you all for joining us for today's conference call to discuss NAPCO's financial results for the three and 12 months ended June 30, 2014. By now, all of you should have had the opportunity to have reviewed the press release discussing the results. If you have not, please call our office, Hayden IR, at 646-419-4300, and we'll immediately send it to you either by fax or e-mail. 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, Chairman and President of NAPCO Security Technologies. Dick, please go ahead, sir.

Thank you, Brett. Good morning, everyone. Thank you for joining NAPCO's quarterly conference call to discuss the financial results for the three months and 12-months ending June 30, 2014. This was a year of progress for NAPCO; our focus this year was expanding our addressable market by entering new segments, specifically emerging segments that were ancillary to our historical areas of focus. We also wanted to expand our base of recurring revenue providing us greater visibility in to our revenue stream and more effectively leveraging our business model. We were successful in both of these key strategic goals, and I am confident that as we enter fiscal 2015 the company is solidly positioned to move forward. While we are encouraged by our progress and increasingly confident in our long-term opportunities, this progress is not fully reflected in our short-term financial results. We did generate record revenue for the full-year, a positive sign considering how strong 2013 was for NAPCO. Our recurring revenue essentially doubled over the last year. Our growth was broad-based with almost all of our divisions showing growth. We expect this growth to accelerate in the fiscal 2015 and beyond. We’re just at the beginning of the adoption curve for many of our solutions, most notably our Connected Home offerings and our solutions for school security. Response from our dealers has been strong; we are changing the market, bringing high-technology to a traditional lower tech industry, and it takes time to train our dealers. I’m encouraged by our progress here; we’ve invested heavily to make our solutions easy to install and this is helping us gain market share. We expected the growth to come more quickly than it has, but I share this comment with you to demonstrate the progress we have made and continue to make. We…

Thank you, Dick, and good morning, everybody. Revenues for the three months ended June 30, 2014 was 21.5 million compared to 21.8 million in the same period a year ago. For the 12 months, sales increased 4% to a record 74.4 million from 71.4 million in the same period a year ago. The small decrease in sales for the three months was due to a challenging comparison, which was a result of a large contract award from Pepperdine University, during the fourth quarter of fiscal 2013. The increase in revenue for the 12 months was due primarily to increased sales of access control and door locking products, as well as an increase in intrusion recurring revenue, which was partially offset by a decrease in sales to one of our intrusion customers. Gross profit for the three months ended June 30, 2014 was 8.3 million or 38.5% of sales, compared to 8.3 million or 38.1% of sales for the same period a year ago. As Dick mentioned, this was our highest gross margin in eight years, demonstrating the strength of our business model and the increased contribution of recurring revenue. Gross profit for the 12 months increased approximately 9% to 23.7 million or 31.9% of sales, compared to 21.7 million or 30.4% of sales for the same period a year ago. The increase in gross profit and gross profit as a percentage of sales for the 12 months was primarily due to the increased sales and a favorable shift in product mix and the impact of increased recurring revenue. As Dick mentioned we’ve been investing in our sales and marketing functions and this is reflected in our SG&A expenses. Selling, general and administrative expenses for the quarter were 5.5 million or 25.3% of sales compared to 4.7 million or 21.7% of…

Thanks Kevin. Let me speak for a few minutes about the industry and our increasing strong position within this industry. The security systems market continues to be a dynamic one, driven by strong end-user demand for high-tech solutions to protect against intrusion fire, as well as capabilities for protecting and managing access to homes and businesses remotely. And this is where we are uniquely positioned to deliver. NAPCO is the only security and locking systems company, with end-to-end solutions for commercial and residential security systems, with a broad and expansive dealer network for distribution. Our portfolio products are the only complete one-stop shop for security layers and their customers. Our dealers more and more are seeking an integrated approach with both security systems and locking solutions for protection of businesses and homes. NAPCO can provide both aspects seamlessly all in one place. Our product stand up to market and customer demands, because we are intimately involved in not only the manufacturing and distribution of the products but the initial design and development is all done in-house by our in-house team of industry experts who have first-hand field experience. I have no doubt each of these strengths with serve us well and differentiate us from our competition in the future. There are several facets to the security systems market and we are in all the hot areas that consumers are interested in now primarily school security with our LocDown products and the Connected Home segment with our iBridge solutions. All of these areas are in the infancy stages of development, making for a fragmented market, with ample opportunities for long-term growth and expansion. Let me speak in more detail about each of these high profile opportunities. First, the concept of the Connected Home, this concept truly is the wave of the…

(Operator Instructions) Our first question comes from the line of Kurt Caramanidis with Carl M. Hennig. Please proceed with your questions.

Question for you, do you think this upcoming fiscal year is a year where you could may be do a $20 million quarter other than the fourth quarter?

We are in the early stages of our business and we have a solid business where we have a whole catalog of products, which give us a nice base line of products. And we believe that with our Connected Home and our school security products and our fire products and additional other products, we can grow our business nicely. I can’t really predict exactly how quickly the products are going to be accepted and how fast, but I know we are on the right track with these products, and I also know that everyday we are adding more and more recurring revenue products to our pile of business. So that’s going to help generate a lot of top line also. Our goal is to have four fourth quarters, which is our strongest quarter, all year round, and our goal also is to get rid of some of the lumpiness which we typically see in the first quarter by having recurring revenue being a strong base and someday in the future, we may even be able to predict exactly how things are going and where our numbers are going to be, but right now it’s a little early to say. The only thing I can say is we have a great business, and there is more demand for security systems than ever before.

So generally, though, would you be looking for top line growth in this fiscal year?

Of course, we want to see top line growth and we’re pushing very hard to get it. That’s why we did the additional sales and spent more money for sales personnel because our time is now, and as we know that Connected Home and school security is very important aspect they way people are thinking and we want to make sure that we present it and have it out there, so the adoption rate is as quick as possible.

Yes, certainly it seems like with all the crazy stuff going on out there this is a great time to be in the security business.

Any other questions?

(Operator Instructions) Our next question comes from the line of Pete Enderlin with MAZ Partners. Please proceed with your question.

Can you give some sense of how big that contribution from the Pepperdine business was in the fourth quarter of last year?

Pete last year fourth quarter, the Pepperdine order was in total was 1.5 million, in the fourth quarter it was a good portion of it, let’s say three quarters of it at least.

And most of the rest fell in the first quarter of this fiscal year?

In Q1 of fiscal ’14.

Okay, you mentioned 8000 dealers, could you give us an idea of the geographical spread of those dealers. Obviously not in great detail, but are they mostly concentrated on the East Coast, are there pockets on the West Coast. It looks like there are but how is that spread across the country are there areas where you could add more dealers that you don’t have the penetration right now to be out.

We’re talking about dealers in the intrusion and fire space, and we have dealers spread out in most of the major cities and towns throughout the country. There is a large portion of our dealers in the East coast, but we are spread out all over the country. The dealer base of 8000 is a rough approximation, there are thousands of dealers that are out there that may not be using NAPCO products right now, they may be using another brand, and we believe that with our technology solutions and our end-to-end components that we are going to win more and more dealers over to our side as the industry continues to evolve specially in the Connected Home because we have a great solution that can upgrade our panels and can be used for new jobs, and also our radio communicator which is becoming universally used products so that it can send alarm signals from any type of premise to a dealer’s central station without having the dealer add any additional expensive fancy equipment or having to recertify. So that’s become very, very popular, in fact, we are now packaging them in mass quantity so dealers can carry them and use them on jobs for intrusion and fire. So there’s a lot of good things here, and we try to develop as many product as we can with recurring revenue. So we’re not just selling the product once, which was historically the way the company operated up until a couple of years ago, and now we’re building the recurrent revenue base with our StarLink radios, our iBridge and our video systems.

Okay, thanks. And with regard to that, when might we see the recurring revenue stream grow to the point where you need to break it out from a financial reporting standpoint.

Well Pete we said at 10%, so right now the recurring revenue is several million for us. So my hope is within the next few years, like I don’t believe it’s going to happen this year. I wish it would. It would be great. I don’t think it’s a fiscal 2015 story yet, but maybe by ‘16 or certainly ’17.

(Operator Instructions) Our next question comes from the line of John Curti with Singular Research. Please proceed with your question.

Question regarding further increases in the SG&A line. We had a big increase in the fourth quarter as you put a lot of money in to hiring people and training, et cetera. Do you anticipate those kinds of increases at least maybe in the first couple of quarters of the upcoming physical year relative to last year?

I do, I do anticipate that for the next couple of quarters. Q4 was particularly heavy also because we had a couple of big tradeshows that fell into that period, and spent more on the marketing and the advertising within that show. But I’d say from a spending point of view the next couple of quarters I would expect it to continue.

Are the tradeshows annual tradeshows or they come like every couple of three years?

No, these are annual shows. For example, we had the ISC West Show that occurred in the fourth quarter. That’s the biggest show of the year for our industry, and so when you get an opportunity to showcase your products - you get one shot at a big show like that, you want to do it right and as Dick mentioned earlier, we have a lot of products that time is now. So we felt it was smart to spend the money, and that was just one avenue of how we spent the money.

Your gross margins were up a little bit in the fourth quarter, and obviously the Pepperdine contract probably skewed things in the fourth quarter of the prior year. I’m trying to get a little better sense; I know you’re not breaking out the number in recurring revenue because you did mention improvement margin was due to product mix and recurring revenue. And I am wondering if you could maybe at least talk a little bit more about that, and maybe give us some clue as to how much of the margin improvement is being driven by the recurring revenues, which you had indicated are now several million dollars.

Right, so recurring revenues gross margin is very high, it’s 80% to 90%, let’s say. It’s a very high percentage, so as that grows that’s going to have a big effect on gross margin as a whole. Last year in Q4, the Pepperdine order, that was a very high gross margin order as well. This year we didn’t have it, we had smaller ones. The school security gross margins are very good. When you sell these sophisticated LocDown systems, they have great margins and instead of having one large one, we had smaller ones in the fourth quarter, but each one of them has great margin. So as locking product grows or the recurring revenue grows or access control grows, those are the margin products, those are the gross margin areas, and they all did well in this fiscal year, particularly Q4. 38.5% is the highest we’ve had a quarter since 2006, and I knew that was going to be a tough comp because last year it was 38.1. So I was pleasantly surprised and happy to see that we could continue that, and that just proves our model that when we get to $20 million plus quarter to the $80 million-$90 million levels, that’s going to be what the margin is, we’ve been saying that. Let’s say it’s 80 million, gross margin is 35%, 90 million, gross margin is between 37 and 38, now maybe even 39% and over 100 million, the gross margin will go 40%. We get big bottom-line numbers for that. So the challenge for us is we got to have as the gentleman earlier said $20 million quarters every quarter and then the money is going to drop to the bottom line. We are investing in the SG&A to get to that point, as well as the R&D to develop those products.

In terms of getting to the hundred million in revenue and getting a 40% margin, assuming that hundred million includes a sizeable amount of recurring revenue in that number to get to 40% over our margin for a year stop.

You know when we did our modeling at the hundred million, 40% GP, we weren’t really, assuming use growth in the recurring revenue to get to that gross margin. You get to that gross margin because of overhead absorption. That’s the part that really makes that GP grow, and the recurring revenue is the icing on the cake, and believe me it helps a lot. But just expansion of GP through our offshore facility, it happens very naturally when you hit the volume. Overhead gets absorbed rapidly kind of when you hit to 20 million or better, that’s when you see that margin expansion. We saw it again this quarter that helped, school security, orders helped and of course the recurring. It was all part of this.

One last question, the Pepperdine order was a big order and you’ve had some big orders in the past. This quarter you had mentioned that you had a lot of small orders. Are you changing your marketing approach at all or changing your target market to go after more smaller orders that are maybe easier to and quicker to complete?

What we’re doing is, we have a sales organizations, we have three that are specifically in this, the access control sales organization, the two locking companies, and even our intrusion people. As they see opportunities, they will of course for selling and getting other of our groups involved. We try to go after as many projects as we can. A lot of the school projects and that includes large universities and colleges as well as K through 12s which are a little bit short of cycle on acceptance and delivery. But what happens is we had many, many bridge out there working with our integrators that are doing the installations, and we would expect that as schools get more in to protecting their campuses, they are going to want more and more of the products and bids will be moved up and awarded. So we always have a lot of bids out there, and we try to do with every sales person we have, but there is no specific time that we can guarantee when a bid is going to be approved except that we have great solutions, and as Pepperdine said and we have glowing reports on our system, it takes a little bit of time , but it works through the school administrations. When the schools meet with each other and they have their conferences, there is a lot of discussion about security and what we are going to do to improve security and our [strategy] report is becoming very, very well know, that we are kind of a leader in the industry of talking about all aspects of school security. Even things we don’t manufacture like unbreakable glass and certain types of door closers, and things like that. But we have the technology solutions and we are getting well known. So I would expect to get traction, I just can’t tell you exactly what it is that these bids are going to be awarded. But they were always piling more and more in to the [harper] as far as bids and showing the advances and the product risk and the safety that a NAPCO system can give a school, the K to 12 or college and university.

And very last question regarding your tax rate, it continues to remain very low. Do you expect that to continue for the foreseeable future?

I do. It jumps around a little but it’s at advantageous rate. It will go from anywhere between 5% and 15% depending upon the specific condition if that exist is that period we are reporting. But its an advantageous rate and we expect it to continue.

It appears we have no further questions at this time. I would now like to turn the floor back over to management for closing comments.

Thank you everyone for participating in today’s conference call. If you have any further questions, please feel free to call Hayden IR, Brett, Kevin or myself. We thank you for your interest and support, and look forward to speaking to you all in the coming months as we head in to our fiscal 2015 year. Thank you very much. Have a great day everybody.

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.