Intrusion Inc. (INTZ) Earnings Call Transcript & Summary

Hi, everyone. My name is Jeff, and I will be your conference operator today. At this time, I would like to welcome everyone to the Intrusion Fourth Quarter 2019 Financial Conference Call. [Operator Instructions] Thank you. I would now like to turn the call over to Mr. Michael Paxton. Sir, you may now begin your conference.

Okay. Thank you. Welcome to this afternoon's conference call to review Intrusion's fourth quarter 2019 financial results. Also participating on the call today is Joe Head, Senior Vice President and Co-Founder of the company. I will go over our financial results, and Joe will go over current projects and give you business update. We will be glad to answer any questions after our prepared remarks. We distributed the earnings release at approximately 3:05 p.m. Central today. A replay of today's call will be available at approximately 6:30 p.m. tonight for a 1-week period. Replay conference call number, (855) 859-2056, conference ID number 2281388. In addition, a live and archived audio webcast of the call is available at our website, intrusion.com. Please be reminded that during this call, including the question-and-answer session, we may make forward-looking statements, which reflects management's expectations regarding future events and operating performance and speak only as of the date hereof. Forward-looking statements involve a number of risks and uncertainties. Such statements include, without limitations, statements regarding expectations of future revenue, product orders from new and existing customers and profitability and are qualified by the inherent difficulties in forecasting future sales caused by current economic conditions, spending patterns of and appropriations to U.S. government departments, the effects of sales and implementation cycles for our products on our quarterly results and difficulties in accurately estimating market growth, the unpredictability of government and corporate spending on information security products as well as other statements. These statements are made under the safe harbor provisions of the Private Securities Litigation Act of '95 and involve risks and uncertainties, which could cause actual results to differ materially from those in forward-looking statements. The factors that could cause actual results to differ materially from expectations are detailed in the company's most recent report on Form 10-K and 10-Q, particularly under the heading Risk Factors. Now let's move to the financial results. Okay, the fourth quarter and annual 2019 financial highlights from the press release. Revenue for the fourth quarter was $2.6 million compared to $3 million for the fourth quarter 2018. For the year 2019, sales were $13.6 million compared to $10.3 million in 2018. Gross profit margin was 61% in the fourth quarter compared to 63% in the quarter last year. For the year 2019, gross margin was 61% compared to 63% in 2018. Gross profit margin can vary based on product mix of deliverables. Intrusion's fourth quarter 2019 operating expenses were $1.3 million compared to $1 million for the comparable quarter in 2018 and $3.8 million for the fourth quarter -- or for the year 2019 compared to $4 million in 2018. Net income for the fourth quarter was $0.3 million compared to a net income of $0.9 million for the fourth quarter 2018. Net income for the year 2019 was $4.5 million compared to $2.3 million in 2018. Thank you, and now I'll turn the call over to Senior Vice President, Vice Chairman and Co-Founder, Joe Head. Joe?

Thanks, Mike. In the past 2 quarterly calls, I've touched on 3 items: the prospects for renewing the 2 large orders, which were not set to auto-renew; and steps towards the expansion of our business. As I mentioned in November, funds for new projects and nonprogram of record projects have not cascade down -- have not cascaded down to our customers, so we don't know -- yet know what funding of our 2 bonus projects from fallout money last year will be available. We were told that the next round of funding would fall before Thanksgiving, but nothing happened. I presumed at that time, based on previous similar circumstances, that the money for nonprogram of record funds likely were swept away to fund the $2.7 billion for the wall, but this has not been confirmed. It's taken some time to understand the delay and for our customers to pass from despair to seeking a way forward. And as I come along later in the call, I'll give you some good news on that front. But if we reflect back to where we were in October, November, up until last week when we had the good news on 1 of the big 2, we were told that this whole year might not -- might just be skipped over and that the prospects for unfunded requests were not good. So starting back in October, me and our new sales guy have been focused on all 3 items, investing market energy to get new business to grow our base in case the fallout funds for the 2 big ones just didn't come through this year, but also staying in front of the 2 prospects to increase our chances of renewing them as well. Now both of those looks like they'll be successful, but not without a dry spell, while we waited. Recall last time, I reported, over the past year, we've built new capabilities in 3 areas: one, improvements to Savant and Savant Threat Analysis, which is our Hadoop-based analysis system. We can talk about later, if you want, in the question and answer. We built the TraceCop machine learning capabilities into a new platform, along with adding some new TraceCop data sets and started work on novel, new kind of, security solution in the Zero Trust space, which complements Savant and STA without competing with it. We also built cash, paid off our debt and hired some new staff to help our push into the new areas. As you know, I hired a new salesman to push Savant and Savant Threat Analysis into the Department of Defense space and the groups that we didn't know previously, and he got on board in Q3 last year. Far from being a sales -- just a salesman, our new hire has a Bachelor's, Master's and Doctored in Electrical Engineering and is one of the best cybersecurity folks around. As we grow -- have grown into this new area, I've been excited about what we've stirred up in new customer projects and portions of DoD, who I've never worked with. To that end, we compiled a list of DoD entities that we should call on, and we've also compiled a list of programs, where he has connections -- previous connections to, and he began interacting with them for sales opportunities. So today, I'm happy to report that via his efforts, we've developed relationships with 4 new customers who are in the process of putting new contracts in place for us. These 4 represent $6 million to $8 million of potential orders this year. I say potential orders, but we actually haven't forecasted, so not pie in the sky potential. And the first 2 are proceeding to contracts on their first few items to put under contract as we speak. By my count, we took the 16 we were working on in Q4 and turned 4 into the forecasting -- forecasted orders in 2020. In addition to those 4, we're now working on 19 new prospects and expect that pipeline to grow throughout the year. The ratio of larger projects continues to improve. Also as we've pushed hard to develop new relationships, we've built some good ones. And to our surprise, I found a number of teams that already knew us and were looking at solutions right in our sweet spot. So we had 1 of our Savant STA customers refer us to 2 companies in their industry that have suffered breaches, while our customers stayed safe. We see this as a great opportunity, but one where we don't have enough staff to go and engage the wider commercial marketplace, even though we have a few good customers purely in the commercial space, ready to offer good referrals. Further, over the last quarter, we've been pondering how best to expand our marketing and sales. To that end, I've been talking to a few potential partners or those who can introduce us to potential partners as a way to expand the sales of our products outside our normal DoD customer base. No question, we'll find some success in instrumentation of DoD with STA and Savant this year, but we believe the broader commercial market is ready for a more complete solution. So back to our renewal of the 2 non-automatically renewing projects. Last week, our customer for last year's $2.4 million project that ended in September told us that their goal is to have us back under contract in billing by April 1. And toward the larger of the 2, they have 1 data purchase order that they might even get out in March, but we'll see about time whether that gets us to March or -- in billing in March or April. But that will give us back toward the level I guided last time about those 2 combined being about half of last year's run. This project has several elements in the TraceCop and Savant space, which are ongoing and we've discussed before, but one of the prime movers is a new technology we've been working on for about 6 months. If we're going to go through the goals of a defender, his job is to make it harder for an adversary to penetrate, to operate and remain undetected in his infrastructure. So far, our Savant STA and Savant products and TraceCop as well primarily address just 2 of those 3. They help you prevent an adversary from operating and remaining undetected in your network, lets you trace them and attribute them. It doesn't stop them from initially penetrating. So last year, we participated in the conception of a novel way to make it harder for an adversary to penetrate, too. This is the area, which has proven most elusive because a large number of unaddressed threats and realities, which I won't bore you with on this call, but we can talk about that separately if you want. This new thrust will make it much harder to penetrate a network in the first place and harder to spread through an enclave by changing the approach radically. For sure, this is what all antivirus and security products are marketed to do, but the ongoing number of breaches and huge sums of money being paid to ransomware criminals underscore that the world's current enclave of network, desktop and host penetration defenses just aren't working. This new set of solutions will be novel and greatly reduce the number of adversaries and methods that can stay in the compromised game. We've worked out that there will be a free version available to DoD and perhaps others in the federal government, but Intrusion will offer paid subscriptions and services to layer on top of the solution. Independent of that, like I said before, we believe that the $2.4 million will be back under contract and billing in Q2. And they have some funds to commit toward the larger contract that was not auto-renewed from the original team that sponsored it. As I mentioned last time, it looks like the 2 will run about half of last year's revenues initially, but with the net upside -- but with net upside, as we booked the other 4r new businesses -- business opportunities discussed above, plus a few others will increase us above that. We'll make sure to keep our customers happy, as we always do, and continue to add new and ever larger opportunities to our pipeline for next year. We were disappointed that funds our customers would have competed for to renew our 2 nonautomatic renewals went 100% -- I assume, went 100% to the wall, but we doubled our sales efforts to fill that potential hole with new projects only to learn last week that they expect us to back -- have us back under contract in Q2 as well. So we're excited to see that our new sales efforts have stirred up new opportunities as well as seeking a sales partner to further add to our sales channel and optimize shareholder value. Mike?

Okay, Joe. Thank you for your business update. You covered a lot of ground, and we have a lot of work and challenges in front of us. Thank you for your attendance today and for your continued support of Intrusion, and special thanks to our dedicated employees. We have a tremendous team here at Intrusion. I'd like to go ahead and end the prepared remarks, so we could get on to the questions. Operator, could you please remind the participants how to queue up for questions?

[Operator Instructions] We have one question from [ Howard Brous ].

Mike, Joe, basically, this whole issue for the first quarter, and this was not a surprise, was the United States budget. Is that a fair comment?

Absolutely.

And personally, I believe your wall is more important than the other wall that people are talking about, but that's just my own personal opinion. Just going through a few items that I'd like to address given the budget the way it is. Going back to discussions we've had in the past, there have been several Savant and Savant STA orders that you believe were in the pipeline. Can you discuss those in particular? There was one for $2 million to $3 million and one for maybe $6 million or $8 million. Where do you stand on those, in particular?

The one $6 million or $8 million has not -- I'm still interacting with the team, but it hadn't gotten down to plans. I don't know if they've delayed. It was moving into a new facility, and I'm not sure of their time line, but I'm still talking to those guys about every 2 weeks. If not dead, but it's not kind of imminent. At first, I thought they were going to be moving in by June and will be placing the order about now. And it looks like they're placing orders maybe by June. So not dead, but not as hot as I wanted it to be. On the other one that was going to be a couple of million, that one is actually one that's developed pretty well. We've got -- we're engaged with a couple of outfits in DoD that are charged with a wider responsibility to basically chase down problems as they occur in real time by sending teams on the ground to go sniff out what's happened, when something happens. And then there's also some proactive elements that go out and instruments, DoD contractors or help them with what to do. And that's kind of in the middle of what we've been working on for the last quarter, and that actually looks pretty decent. But what's interesting, Howard, is that what I didn't expect is I thought we would be only instrumenting with our Savant and adding basically our own data and our analysis only. And the teams that we're working with actually have a lot of history and a lot of instrumentation already there. And so there are actually a number of these new opportunities in that $5 million to $8 million I mentioned. Of the new stuff, it's actually going to be us enriching on our -- with our STA enrichment products to their data and then do an analysis of the combination of our data plus their data, which is better for us in lots of ways.

I absolutely understand that. When we looked at the third quarter, it was about $3.5 million in procurement and the $6.5 million hope to go into procurement. Where do we stand, not on the $3.5 million, but on the potential, the $6.5 million in procurement? And that's without these 2 large orders. Is that a correct statement?

I think I was still hoping that the $2.4 million would come in, in the fourth quarter, which it did not. And so what was the bookings fourth quarter, Mike?

I don't have that right in front of me. Let's see.

So I think the delta between that number and what we booked was the $2.4 million, Howard. That's more by Joe's mind, and Mike's the financial wizard. I'm the techie engineer guy.

Maybe it's $4.4 million.

Yes. So I think we've got $4.4 million, so the delta is the $2.4 million that didn't come in on the one renewal.

Yes.

Has anything come in from January 1 through today that you haven't announced?

I can't recall the exact-- which ones came in and...

We've had some, but we haven't announced any of the new ones yet. But as I've thought -- inferred here, we've been holding our breath waiting on some of the…

No, we haven't had any of these new customer orders come in.

No. So we just -- after this call, I'll -- we'll end up finishing the proposal for the first of the 4, which we'll submit tonight. And they'll have us under contract by March 2.

So I understand that, basically, the shortfall isn't your business, it's procurement from the United States government.

Correct.