Nicholas Mattiacci: And then I think in the release, you talked about an expectation for much improved gross margins this year. I guess the service gross margins are a little less volatile than equipment gross margins, but should we think about that 30% equipment gross margin in Q4 sort of being the baseline or how else should we think about equipment gross margins this year and especially related to the seasonality throughout the year?
Kevin Buchel: Historically, the equipment gross margins used to be in the 30s. And then as the volume picked up, which usually was in our fourth quarter, the June quarter, and the equipment margins would go up into the high 30s, sometimes low 40s. That all went out the window during the supply chain crisis and our need to have to buy component parts at very expensive prices just to keep things moving. So buying a $50 micro that’s normally $5 from a broker just to keep the radios moving knowing that we would get recurring revenue at the end of it. That’s why we did it. And hey, as we got rating improved radio sales, big new dealers, big customers, et cetera. But now those expenses are behind us. And not only the cost of the parts, but the airfare, the freight.
One of the big things with the supply chain prices was freight super expensive. Whether you’re flying or putting it on a boat, the pricing was crazy. A lot of it’s come back to Earth. And so we wound up having by our standards poor margins, poor hardware margins for the year. So here we are, we did $110 million of hardware sales in fiscal 2023, with an 18% gross margin, which is well below what it should be and what we say, what it will be. So going forward, you saw in the fourth quarter, margins was 30% for hardware. That’s more normalized. Now whether we’re going to be 30% right out of the gate in Q1, I’d be more conservative about that. I believe we will build ourself up as the quarters go by to being in the 30s, and that will become the more normalized level of margin as it used to be.
And then probably go beyond that as the volume kicks up even higher, the volume kicking up leads to the overhead absorption and margin expansion from manufacturing in the Dominican Republic. That’s one of the benefits you get. So standard will be in the 30s. I take a quarter or 2 to get there.
Nicholas Mattiacci: Got it. That’s all for us. Thanks for taking the questions.
Kevin Buchel: You’re welcome.
Operator: And our final question comes from Jim Ricchiuti from Needham & Company. Your line is open.
James Ricchiuti: Yes. Kevin, just with respect to the last comment. I get the fact that the increased volume will be will benefit you from – in terms of greater absorption in the Dominican Republic. But I’m wondering the other way around is with this bit of an air pocket that you’re seeing in the lower-end intrusion radios, black radios what about the potential headwind from utilization being not as strong in the Dominican Republic in the next quarter or 2?
Kevin Buchel: Well, that could have an effect. But on the other side, the mix will be better. So in Q1, as an example, of last year of fiscal ‘23, the mix was much more heavily leaned towards the radios than the locking Radios, which we love, that’s a lower gross margin item, best case, we don’t care so much about the margins. We do care a lot about the recurring revenue, which follows. But for locking and for access control for the other pieces of the business, those are much higher margin items. And so we might lose some overhead absorption if the radios are much lower. I don’t think they will. I think only on one type, it might be, but we’ll pick up absorption from blocking. We saw it in the fourth quarter. There was overhead absorption pickup in the fourth quarter of this fiscal year that we just finished.
And that had the lower radios and it had the improved locking and both the mix help and the DR overhead absorption help. So eventually, we’re going to get to the point where it’s all going and it’s all working where the radios are up, the locking is up, it’s all up, then we get the best of both worlds.
James Ricchiuti: Thank you.
Kevin Buchel: Okay, Jim.
Operator: I’m seeing no further questions, I’ll turn the call back over to our host.
Richard Soloway: This is Richard Soloway. I want to thank 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 with you all again in a few months to discuss NAPCO’s fiscal Q1 2024 results. Have a great day, everybody. Bye-bye.
Operator: The meeting has now concluded. Thank you for joining, and have a pleasant day. Goodbye.
