NAPCO (NSSC) Q2 2026: Recurring Revenue Run Rate Hits $99M, Margin Expansion Signals Durable Profitability
NAPCO’s Q2 2026 delivered record revenue and a $99 million recurring revenue run rate, underpinned by strong execution in both equipment and high-margin services. Margin gains reflect disciplined pricing, normalized channel inventory, and a strategic focus on cloud-based and subscription models. With hardware margin recovery and new platform rollouts, NAPCO is positioned for continued profitable growth and platform leverage across commercial, education, and infrastructure verticals.
Summary
- Recurring Revenue Platform Scales: Nearly half of sales now come from high-margin, predictable service contracts.
- Channel Dynamics Normalize: Distributor inventory stability and less discounting drive margin improvement.
- Cloud Access Control Catalyst: MVP rollout sets up second-half growth inflection for subscription revenue.
Performance Analysis
NAPCO reported a record Q2, with total revenue up 12.2% year over year to $48.2 million, driven by robust growth in both equipment and recurring service revenue streams. Equipment revenue rose 12% to $24.3 million, reflecting both volume and the full impact of late-2025 price increases, while recurring monthly service revenue climbed 12.5% to $23.8 million. Gross margin expanded to 58.6%, with equipment margin rising to 28%, up from 24% in the prior year, as price discipline, less discounting, and favorable product mix took hold.
Operating leverage was evident: operating income grew 32% and adjusted EBITDA margin exceeded 31%, outpacing top-line growth. Free cash flow increased 17.4% to $14.5 million, supporting a further dividend increase. The balance sheet remains a fortress, with $115 million in cash and no debt, providing flexibility for both organic investment and capital return.
- Margin Expansion: Equipment gross margin rose 400 basis points year over year, reflecting pricing, mix, and reduced discounting.
- Distributor Channel Stability: Normalized buying patterns lowered quarter-end discounting, supporting profitability.
- Recurring Revenue Quality: Service gross margin held above 90% despite minor data cost upticks, sustaining high cash conversion.
Recurring service revenue now accounts for nearly half of the business, and the $99 million annual run rate is up $4 million sequentially, locking in a durable, high-margin base for future quarters.
Executive Commentary
"At the core of our strategy is our recurring service revenue platform, which continues to deliver consistent high-margin growth. Recurring service revenue now represents nearly half of our total sales, supported by sustained gross margins of over 90%."
Dick Soloway, Chairman and Chief Executive Officer
"Gross margin was helped by a bunch of things. Less discounting, price increases, mix. Locking remains strong. That gives us tremendous margins. And when you discount less and you wind up with a price increase like we've done, that bodes well."
Kevin Buchel, President and Chief Operating Officer
Strategic Positioning
1. Recurring Revenue Engine and Platform Leverage
NAPCO’s recurring service revenue, primarily from Starlink commercial fire radios, has become the company’s economic anchor. With a 90%+ gross margin and a prospective annual run rate of $99 million, this stream offers predictability and high cash conversion. The company’s strategy is to expand this base further through new product integrations and migration from legacy copper lines, targeting millions of buildings facing mandated upgrades by 2029.
2. Equipment Margin Recovery and Channel Management
Equipment gross margin recovery to 28% was driven by price increases, less discounting, and a normalized distributor channel. The company expects to push hardware margins back into the 30% range, aided by stable inventory dynamics and strong demand for door-locking and intrusion solutions. The manufacturing facility in the Dominican Republic continues to provide cost and tariff advantages, supporting margin resilience.
3. Cloud and Subscription Expansion: MVP Access Control
MVP, the cloud-based access control platform, is positioned as the next growth catalyst. While meaningful revenue is expected in the second half of calendar 2026 and fiscal 2027, early dealer reception has been positive. This platform introduces new subscription revenue streams, especially for locksmiths, and extends NAPCO’s model of pairing hardware with recurring services. The company is actively promoting MVP at trade shows and through its dealer network.
4. Capital Allocation and M&A Optionality
With $115 million in cash and no debt, NAPCO has significant optionality for both strategic acquisitions and continued dividend increases. Management emphasized a disciplined approach to M&A, seeking accretive deals that fit operationally and can be integrated into its vertically integrated manufacturing base.
5. Vertical Focus: Education, Healthcare, and Infrastructure
School security remains a core vertical, with ongoing projects and a robust pipeline, though details are often confidential. The company’s integrated locking, access, and alarm platforms are also gaining traction in healthcare, retail, and airport infrastructure, broadening its addressable market and recurring revenue potential.
Key Considerations
NAPCO’s Q2 was marked by disciplined execution, channel normalization, and a clear focus on high-margin, subscription-based growth. Investors should weigh the following:
Key Considerations:
- Hardware Margin Upside: Further margin gains are targeted as equipment mix and scale improve, with a stated goal to return hardware margins to the 30% level.
- MVP Platform Ramp: The MVP cloud access control product is set for broader rollout, with material recurring revenue impact expected in fiscal 2027.
- Dealer Channel Expansion: ADI, distribution partner, continues to introduce NAPCO to large dealers, expanding reach and potential for both fire and locking products.
- Capital Deployment Flexibility: Cash build enables both organic investment and potential M&A, with management emphasizing accretive, integration-friendly targets.
- End-Market Diversification: Success in education, healthcare, and infrastructure projects reduces cyclicality and supports multi-year growth visibility.
Risks
Execution risk remains around the timing and adoption of new cloud platforms like MVP, as dealer education and channel conversion may take longer than anticipated. While no material supply chain disruptions surfaced this quarter, macro volatility, regulatory shifts, or shifting dealer dynamics could impact future growth. Margin expansion is partly dependent on continued pricing discipline and stable component costs, which could be pressured if inflation returns or competitive pricing intensifies.
Forward Outlook
For Q3 and Q4, NAPCO management expects:
- Fully realized benefit from prior price increases across equipment lines
- Stable to improving hardware margins, with a medium-term goal to reach the 30% range
For full-year 2026, management maintained its focus on:
- Continued double-digit revenue growth in both equipment and recurring services
- Further expansion of the recurring revenue base, especially as copper line conversions accelerate
Management highlighted several factors that will shape results:
- Dealer channel normalization and less discounting should sustain margin gains
- MVP platform ramp is a second-half and fiscal 2027 story, with early traction but gradual revenue build
Takeaways
NAPCO’s Q2 2026 underscores the power of its recurring revenue model and disciplined operational execution.
- Margin Structure Strengthens: Gross and EBITDA margins expanded as pricing, mix, and channel normalization took effect, supporting cash flow and dividend growth.
- Platform Transition Accelerates: The MVP cloud access platform and Starlink radio migration expand the addressable base and reinforce long-term subscription economics.
- Watch for MVP Monetization: Investors should track MVP’s contribution in the second half and into fiscal 2027 as a key lever for incremental recurring revenue and margin expansion.
Conclusion
NAPCO’s record quarter was defined by high-quality recurring revenue growth, margin expansion, and a robust balance sheet. The company’s strategy to pair hardware innovation with cloud-based and subscription services is gaining traction, positioning it for sustainable, profitable growth across multiple end markets.
Industry Read-Through
NAPCO’s results reinforce the industry-wide shift toward recurring, subscription-based revenue models in security and building infrastructure. The successful margin recovery and growing adoption of cloud access control platforms like MVP highlight the competitive imperative for hardware providers to integrate software and services. Channel normalization and reduced discounting suggest stabilization in distributor inventory management, a positive signal for peers. The ongoing migration from legacy copper lines to wireless communicators is a multi-year secular tailwind benefiting both NAPCO and competitors with strong dealer networks and integrated solutions.