Greetings, and welcome to the NAPCO Security Technologies Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. I’d now like to turn the conference over to your host Mr. Patrick McKillop, Director of Investor Relations. Thank you, sir. You may begin.

Thank you. Good morning. My name is Patrick McKillop, I’m the Director of Investor Relations here at NAPCO Security. Good morning and thank you all for joining us for today’s conference call to discuss our financial results for our fiscal third quarter 2017. 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 with me 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 other financial tables issued earlier today, you’ll 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. 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.

Thanks Patrick. Good morning everyone and welcome to our conference call. It's a pleasure for me to be here with you today to discuss our results. The third quarter marked another quarter of record revenue performance for NAPCO. The third quarter sales were 20.8 million. Sales were once again above the $20 million mark for the quarter. We have stated many meetings before that $20 million mark is where we begin to see significant expansion in our margin performance as incremental sales are leveraged over our fixed cost structure. Our SG&A was higher this quarter as we are in the midst of one of the largest product introductions in the company's history with the StarLink Connect. We are focused on the future and are committed to make this and other products we have developed launch successfully. Recurring revenue continues to grow at a solid pace up 68% year-over-year. The annualized run rate now exceeds 10% of the trailing 12 month sales. We love recurring revenue as it provides greater contribution to our margins as well as its effect on greater consistency and predictability in our financial results. Growth in a alarm communications, the Internet of Things and improving school security and safety are key industry trends that continue to impact our results favorably. We expect our business strategy will continue to take advantage of these trends and drive growth, profitability and shareholder returns going forward. Before I go into greater detail, I will now turn the call over to our CFO, Kevin Buchel. He will provide an overview of our financial results, then I'll be back with more on our strategies and outlook. Kevin?

Thank you Dick, and good morning everybody. For the third quarter, net sales increased 5% to 20.8 million, which was a record third quarter performance. For the nine months, net sales increased 6% to 61.7 million. The increase in sales for the third quarter was primarily related to increased sales of our intrusion products, access control products and door locking products. The increase in sales for the nine months was primarily due to increased sales of our intrusion products and door locking products. Recurring monthly revenue from the alarm division increased 68% for the quarter, 67% for the nine months and sequentially the increase was 14%. Gross margin for the third quarter was 32% of sales, which was 120 basis points improvement versus the second quarter last year. Gross margin for the nine months was 32%, which was 130 basis points improvement versus the nine months last year. The margin improvement for both the three and nine months was related to operating leverage in our business model, increased sales, increased recurring revenue and a more favorable product mix as partially offset by an increased investment in R&D to support the launch of new products and services. As Dick mentioned, we also have been investing in sales and marketing to support our portfolio of new products. This incremental investment was one of the primary drivers of the increase in SG&A cost during the quarter. SG&A costs for Q3 increased 13% year-over-year to 5.5 million and as a percentage of sales, increased to 26.6% from 24.7% last year. For the nine months, SG&A increased 9% to 16.8 million and as a percentage of sales increased to 27.3% from 26.3% last year. The increase in dollars for the three and nine months was due primarily from increased advertising and the addition of selling…

Okay Kevin, thank you. Today’s business has two key paradigm shift happening. One, recurring revenue and two, school security. Recurring revenue continues to grow at a very strong rate for us driven by alarm communications and the Internet of Things. School security continues to receive a significant amount of attention and we expect new spending related to making improvements for school safety to continue at a strong rate. To take advantage of these paradigm shifts, our strategy is focused on introducing new innovative products and services that are compelling to the end user as well as products and services to help our dealers grow and succeed. Our staff of 40 plus R&D engineers are working diligently to get new products developed as quickly as they can. At the recent ISC West Industry Trade Show in Las Vegas which saw record attendance, we unveiled new products that will add to our already existing portfolio. I would like to highlight the StarLink Connect communicator which won not one but two awards at the show. The first award is the 2017 Security Industry Association New Product Showcase best in residential and monitoring solutions award. And the second being the MVP, most valuable product annual 2017 award. The StarLink Connect communicator replaces the need for traditional phone lines in order to send the alarm signals to the central station. In addition, StarLink Connect can be used in tandem with our iBridge smartphone tablet app which gives the customers control of lighting, climate, door locks and remote video viewing. Demand for smart home products, as service is growing more and more every day and StarLink Connect is a great product entry into this category as evidenced by the two awards it received. It is important to understand that in addition to being a compelling value…

[Operator Instructions] Our first question is from Gary Mobley from The Benchmark. Please go ahead.

Kevin, what was the cash flow from operations? I’m assuming it was perhaps negative because you're building for a seasonally strong Q4, is that right?

That's correct. Our inventory was up and continues to be up, because as many of you know, our fourth quarter is our big quarter, last year, we did 24 million. So we're building the inventory up. We know that this one will be no different, will have a big quarter and so that did impact cash from ops. So cash from ops was about $1 million. Inventory change from last year is a significant change, as we drive inventory to new heights and hopefully it'll all be gone or a lot of them will be gone by June 30. That’s our expectation.

Okay. If I look back in time, I see that your fourth quarter is normally up about 20% sequentially. That's focused specifically on the product side. Would you expect a similar type growth rate for the fourth quarter this year?

Well, if it was up 20%, that would mean we'd be 24 million about. So that would be the same as last year. Our expectation is we want to do better than that, but you wouldn't be out of line 20% sequential increase over this quarter.

Okay. I'm assuming you guys have a pretty good handle on what type of RMR or recurring revenue you can generate just based on the installed base of radios out there and as well the revenue generator per radio out there, and so if you just took that installed base, extrapolated out a revenue run rate, where would you be at today and maybe if you’re not wanting to share that with me, could you give me a sense of whether you expect the RMI sales to slow over time and therefore not grow at 14% quarter-over-quarter rate you’ve seen for the past two quarters?

The way it is there's roughly 22 million installed alarms, installed by dealers all across the country. Those alarms predominantly use dial up phone line. But dial up phone lines are expensive, they are hard to get and they break and they're dangerous because a burglar can cut the wires which they do. It’s a low voltage wire and they break in. Also as houses sell, people want to upgrade, especially younger people to app controlled products. So that 22 million is a great place for our dealers to go after those accounts and turn those into StarLink Connect. They can get rid of the phone lines for the consumer. They can add IoT control what consumers want to turn your alarm on or off, see video and all the other good things you can get. So the potential is great and it’s a very new market for our industry, because typically if you want to upgrade an alarm system, you have to rip out all the old hardware and put it in. This invention is revolutionary and will bring us a lot of business. We don't really predict how much, but we're spending a lot of money in trade shows, training, advertising to make the whole industry aware of it and get the dealers all motivated to sell it and they are motivated because they make more money when they sell a StarLink Connect than just monitoring a traditional alarm when they get $20 to $30 a month. With StarLink Connect, the dealers can get up to $50 a month with all of the services and NAPCO gets a piece of that, because we supply the whole back end where they enroll the alarm system on StarLink Connect.

Okay. And with the StarLink Connect launched and I'm sure you’re still advertising the product, trying to sow the seeds in the marketplace, but perhaps the SG&A might slow over the next couple of quarters. Could we actually see an absolute dollar amount decline as we look into Q4 and as well the start of next year?

As we said, we think we're in balance now to keep advertising at the current levels and then we have a bunch of other products like we mentioned CA4K and we would maybe shift some of the advertising expenses, try to hold the line the CA4K, which also gets us recurring revenue, which is a new phenomenon for us and for our dealers. They can do managed systems of all kinds of buildings. They make recurring revenue when we make recurring revenue. So where we see the wind at our back, and we’re driving to make sure the dealers are trained, know about it and you have thousands of dealers. There were 30,000 dealers that showed up in ISC West. So we're trying to process as many of those dealers as we can and train those dealers. So we think that the spending level is appropriate now.

[Operator Instructions] And as there are no further questions, I’d like to turn the floor back over to management for any closing comments.

Okay. Thank you. Thanks everybody 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 all of you again in a few months to discuss NAPCO’s fiscal Q4 ’17 and fiscal 2017 annual results. Bye-bye.

This concludes today’s teleconference. Thank you for your participation. You may disconnect your lines at this time.