Intrusion Inc. (INTZ) Earnings Call Transcript & Summary

Welcome to Intrusion Inc.'s Business Update Call and Webcast. [Operator Instructions] Please note, this conference is being recorded. An audio replay of the conference call will be available on the company's website within a few hours after this call. I would now like to turn the call over to Josh Carroll with Investor Relations.

Thank you, operator. Joining me today are Tony Scott, Chief Executive Officer; and Kimberly Pinson, Chief Financial Officer. This call is being webcast and will be archived on the Investor Relations section of our website. Before I turn the call over to Tony, I would like to remind everyone that the statements made during this conference call related to the company's expected future performance, future business prospects, future events or plans may include forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. Please refer to our SEC filings for more information on the specific risk factors that could cause our actual results to differ materially from the projections described in today's conference call. Any forward-looking statements that we make on this call are based upon information that we believe as of today, and we undertake no obligation to update these statements, as a result of new information or future events. With that, I'll now turn the call over to Tony.

Thanks, Josh. I wanted to provide a general update on our business through Q3 and also an update on the work that our engineering teams have been doing to improve the efficacy of our products and the attractiveness of our products in our target markets. But before I start, I just want to say our thoughts are with all of those in the Florida Panhandle who are affected by the Hurricane Milton. Having had a house down there, I'm quite sympathetic to their plight and also familiar with the area. So our thoughts are with all of those folks in that area. In terms of our business update, in Q3, we added 7 new logos for Shield, and we had expansion in 2 other existing logos. And also continuing on from Q2, we had no churn in our Shield customers. So cumulatively, in the fiscal year '24, we've added -- we've had 19 new deals for Shield, 17 new logos. So you can see momentum is picking up, and we expect to see continued increases in new logos for Q4 and continued expansion momentum as well in Q4 with existing customers. Q2 to Q3 saw a roughly 50% revenue increase sequentially for Shield. And we expect when we release our final results to have a roughly 2% improvement in our gross margin for Q3 as well. Our cost management practices continue and delivered additional savings in Q3, which you'll see again in our results when we announce them. Our management of working capital will greatly reduce the need for additional capital in Q4, a very positive moment for us. And also the $2 million DoD contract we recently announced is a combination of Shield and consulting and contributed to revenue in Q3. This will likely lead to add-on contracts in Q4 and additional contracts in the Q4, Q1 time frame for similar capabilities in other regions of the world. So we're excited to have that under our belt. In Q3, both Joe and I traveled to the Philippines. And Joe went to Guam as well, I think, twice actually. And we met with both government and commercial customers. And these trips have resulted in additional high-quality pipeline opportunities, which we expect to close in Q4 and some in Q1. So we're pretty excited about the direction and momentum of the business, as you can probably tell from these results. On the product front, we continue to add features and capabilities that are relevant to our target market. And we also continue to get great customer feedback. And as a reminder, our market is managed service providers, managed service security providers, ISP -- ISPs, mid- to large enterprise. And we also are now targeting expanded use of Shield in government agencies as well as in critical infrastructure. The features that we've added allow us to address the needs of these larger and diverse customers, and I believe will lead to larger deal sizes over time. Specifically, we added some AI features to our command hub, and that adds to the value that, that whole platform brings to our customers. And finally on the product side, we continue to make steady progress in reducing the time required to update and refresh our rule set and our extensive database, which enables even more timely and relevant up-to-date cybersecurity protection for our customers. So between all of these, we're pretty excited about where we are and our prospects for Q4. So with that, let me open it up for questions, and then I'll have some summary comments at the end.

[Operator Instructions] And your first question today is coming from Scott Buck from H.C. Wainwright.

Tony, appreciate you hosting this call. First, just for clarification, your comments on revenue in the third quarter, it was Shield revenue is up 50% sequentially, right? Not total revenue?

That's correct.

And Shield revenue was just roughly $300,000 or $400,000 in the second quarter. Does that sound about right?

$300,000.

It was $300,000 according to Kimberly who's sitting across to me. Yes.

Perfect. And then the second question. I'm sure this has been discussed before, but maybe you could remind us. Why all the positive momentum in the South Pacific? I mean, I understand the one Philippine contract tied to the election, but it seems like you have some pretty strong traction there beyond that.

Yes. I think all over the region, and it's beyond the Philippines and Guam. There's considerable concern around Chinese cybersecurity issues, particularly things like critical infrastructure. And so we're just seeing heightened both concern and also those organizations seeking solutions that can help protect against that specific adversary. And so I think that's one of the drivers. The other driver, I think, is compared to the U.S., there's relatively a lot less advertising and penetration in other cybersecurity solutions there. So the audience there is more receptive to the kind of solution that we're offering because they're not inundated with 50 other things that might sound the same or purport to do the same things that we do. So -- and then I think the third factor is these are smaller communities, and kind of all the CISOs and CIOs know one another. And based on some of the early results that we had, word of mouth is spreading that, hey, you ought to take a look at this and consider this for your organization. So all of those, I think, are significant contributors to our success there.

Great. That makes a lot of sense. And then last one, since you have Kim right there next to you. The cost cutting -- I'm curious, Kim, the current cost infrastructure that you have in place, how much growth can that support? Can you guys double the size of the business without having to meaningfully add to some of that infrastructure? Just trying to get a sense of what operating leverage looks like through '25 and maybe even into '26.

Yes. Our operating expenses are very scalable. I would say the one variable component in there that will grow as our revenue base grows is perhaps sales commissions. And so to the extent we're -- it's not a house account, so to speak, as in U.S. government, commissions on sales will grow and our expenses will grow with that. But otherwise, our infrastructure is very scalable, and we don't see having to invest additional dollars unless we choose to reinvest to increase marketing activities or to accelerate deployment of new product features.

And I'll add in saying -- yes. I'll add in saying that hidden in Kim's comment is, all along, we've been keeping our infrastructure more modern. And so we have been investing, and we will continue to invest, but it's not beyond current levels in making sure we don't get behind the power curve or have significant technical debt. So all of that gives us the ability to scale up and out -- without adding a ton of cost at any one point. And I think that's one of the things I've always been focused on is making sure that we don't get obsolete in terms of our technology footprint.

Great. I appreciate the color, guys.

Thank you.

The next question will be from Ed Woo from Ascendiant Capital.

Yes. Congratulations on the progress. I was just wondering what you see out in the marketplace in terms of the sales cycle. Do you attribute your momentum to your execution, or to just a better environment for people looking for cybersecurity software?

It's an interesting question. I don't know that I have any gem to share with you there. As I said, I think last quarter, we've seen things all over the map. We've seen some customers act quickly, and we've seen other customers who we thought were going act quickly take a relatively long time, and it's been kind of tricky to predict how that's going to happen. We certainly see a surge of interest every time there's a cybersecurity incident. We get calls from people saying, I saw this in The New York Times or The Wall Street Journal. Would you guys have been able to prevent that particular attack? And in most cases, our answer is probably, we would have, or we know that we could have. But from that moment until the time somebody decides to actually buy our solution can be all over the map, as I just said. So it's just still incredibly hard to predict. What I do hear from my friends, those people that are CIOs and CISOs, is that they're still under the same pressures that they have been all year, which is their bosses, the CEOs and CFOs, are asking them, are you sure we're getting good bang for the buck -- for the money we're spending? And I think we have a good series of things that we can do to help them better answer that [Technical Difficulty] by deploying our technology because you can pretty quickly see what's working and what's not working. But that continues to be a constant pressure. And particularly also because AI is now creating demands on the budget in most organizations. It's also putting some pressure on the overall spend budget for most [Technical Difficulty] and I don't think that's going to change in the near future.

All right. And then my last question is just on your overall pipeline. Would you say that it's bigger, about the same as it was maybe at the beginning of the year?

It's growing every quarter. We expect to have increases in that qualified pipeline every quarter going forward.

Great. Wish you guys, good luck.

Thank you, Ed.

The next question will be from Russell Cleveland from RENN Capital.

Okay. The big question here on everybody's mind is the marketing, and it just seems like it took so long to get off the ground. Makes no sense that we have a good product. We have experienced people. And it's just -- that's why our stock is so down, because the marketing doesn't seem to be working. So can you talk about the marketing here and why it's taking so long to get off the ground?