Are there any indications that the 91% gross margin on recurring services can offset the overall revenue decline and drive profitability improvements in FY2026?

Fundamental outlook – The 91 % gross margin on recurring‑service revenue (RSR) is a powerful tailwind for NAPCO. RSR grew 14 % YoY to $86.3 m in FY 2025 and now represents roughly 48 % of total net sales. At that margin, every incremental dollar of RSR lifts adjusted EBITDA by almost a full dollar, offsetting the 4 % decline in total revenue that was driven primarily by slower hardware sales. Management has sign‑posted a “focus on expanding the service portfolio and contract renewals” for FY 2026, and the current run‑rate suggests that a 10‑12 % year‑over‑year increase in RSR could add $9‑11 m of high‑margin revenue. Even a modest 5 % rebound in hardware sales combined with the RSR growth would bring FY 2026 EBITDA close to or above FY 2025 levels, indicating a clear pathway to profitability improvement.

Market dynamics & technical cues – The broader security‑systems market is stabilising after a pandemic‑induced demand surge, and customers are now prioritising cost‑efficient, managed‑service contracts—exactly the niche where NAPCO’s RSR shines. Competitors with lower‑margin hardware mixes are seeing pressure on earnings, which could further shift spend toward recurring services and benefit NAPCO’s margin profile. On the chart, the stock is holding above its 50‑day SMA and has formed a bullish flag around the $18‑$20 range; a break above the $20 resistance line on strong volume would confirm the market’s belief that the margin‑rich service business can carry the company forward. Conversely, a dip below $16 would suggest investors are skeptical about the upside of the service tail.

Actionable take‑away – Given the high‑margin, fast‑growing RSR line and the company’s explicit FY 2026 guidance to double‑digit service growth, the fundamentals support a modest upside thesis. Traders could consider a long position on a breakout above $20 with a stop‑loss near $16, targeting the $24‑$26 upside zone that aligns with a 12‑15 % FY 2026 earnings‑per‑share expansion scenario. If the stock stalls below $18 without clear guidance improvement, a short‑term sell‑off or defensive hedge may be warranted until the next earnings beat validates the service‑driven profitability narrative.