Intrusion Inc. (INTZ) Q3 2015 Earnings Report, Transcript and Summary

Good afternoon. My name is Andrew and I will be your conference operator today. At this time, I would like to welcome everyone to the Q3 2015 Financial Conference Call. All lines have been placed on mute to prevent any background noise. [Operator Instructions] Thank you. Michael Paxton, Chief Financial Officer, you may begin your conference.

Thank you. Welcome to this afternoon’s conference call to review our third quarter 2015 financial results and discuss our business. On the call with me today will be Ward Paxton, Chairman, Co-Founder, President and CEO and Joe Head, Vice President and Co-Founder of the company. Ward will give a business update, I will do the financial results and Joe will give an update of ongoing projects. We will be glad to answer questions after our prepared remarks. The earnings release went out 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 one-week period. The replay conference call number is 855-859-2056. At the replay prompt, enter conference ID number 80110002. In addition, a live and archived audio webcast 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 with respect to financial results, business strategies, industry trends and certain other matters. Forward-looking statements are based on management’s current expectations and are subject to risk and uncertainties. We maybe discussing our current outlook based on our own internal projections for the current quarter and fiscal year 2015. Actual results may differ substantially from internal projections. We are not responsible to updating forward-looking statements. Many factors could cause our projections not to be achieved, including the uncertainties caused by current economic and market conditions and other factors which can be found in our most recent filings with the SEC, including our most recent Annual Report on Form 10-K filed in March of 2015 and previous Form 10-Qs, the most recent one filed today. Now, I will turn the call over to CEO and President, Ward Paxton.

Thank you, Mike. Welcome to Intrusion’s third quarter 2015 conference call. It’s good to be with you today to discuss our third quarter results and our progress. Even though the numbers of large potential customers in the pipeline increased during the third quarter, it’s taken more time than expected to real demand resulting in a decline in orders. We booked $1.8 million in the third quarter compared to $2 million in the second quarter and $1.7 million in the first quarter. We are currently pursuing business from 40 different potential customers, 23 for Savant and 17 for TraceCop. As you know, we have two different product lines, TraceCop and Savant. Our older product line is TraceCop, which we sell primarily to U.S. government customers. Savant is our newer product family, which we primarily sell to large non-government customers. Long-term, Savant will be significantly larger than TraceCop. Currently, the most significant threat to network security is called advanced persistent threats, or APT. Our Savant product family is very effective in detecting advanced persistent threats. With Savant, we can identify the bad guys in our customers’ networks. Our challenge for Savant sales is to connect with larger numbers of new customers which we are pursuing with direct sales, sales representatives and large resell partners. Developing resell partners has been slower than expected, but we are making progress. We will discuss our sales activities later, but now Mike Paxton, our Chief Financial Officer will review our third quarter 2015 financial results that we released a little over an hour ago. Mike?

Okay, third quarter 2015 financials from the press release. Revenue for the third quarter was $1.6 million compared to $2 million third quarter of 2014 and $2.1 million sequential quarter of Q2 2015. Gross profit margin was 63% in the third quarter compared to 65% third quarter last year and 62% second quarter 2015. Gross profit margin can be greatly affected by sales product mix of deliverables in the quarter. In general, our goal is 65%, but this quarter it can be influenced due to product mix, like this quarter. Intrusion’s third quarter 2015 operating expenses were $1.4 million compared to $1.2 million for the comparable quarter in 2014 and $1.3 million for the second quarter 2015. Net loss for the quarter was $432,000 compared to a net income of $147,000 in the third quarter of 2014 and a net loss of $4,000 for the sequentially quarter - second quarter of 2015. Thank you. Now back to, Ward.

Thanks Mike. Now, Joe Head, my partner, Co-Founder and Senior Vice President will discuss our products, markets and sales activities. Joe?

Thanks, Ward. In the third quarter, we booked only one new Savant order and it was from our original resell partner. Our original resell partner is large and had a turnover of both field security engineers as well as management. So, their project pipeline stalled. This quarter, they are kicking off a roadshow with our participation where we will go to all their regions and introduce the offerings to more people in their sales force and the field engineering. In the initial sales, which were significant, there were a very limited number of account teams involved and many of them have moved on to new jobs. So, our partner looked at the small pipeline and decided last quarter to prime the pump again. With this original partner, I expect sales to start up again in Q1. Already, we have had – we have two renewals pending as well as the expectation that the roadshow will yield orders to new accounts in Q1 and Q2. In the third quarter, we booked renewal orders from five existing TraceCop customers and are installing a demo next week at a new Savant customer brought to us by the second resell partner. We expect two small renewals from Savant customers, one which is direct and one through our second resell partner. In the upcoming quarter, I also expect three renewal orders from existing TraceCop customers, but also two new TraceCop customers. And as I just recall from previous calls, the TraceCop is area of the business I have described as stable over the last few years with renewals coming in like clockwork year after year, but what we haven’t talked about was new TraceCop customers. So, as you recall on last quarter’s call, I said that I expected some TraceCop growth with orders expected in Q4 for two new customers that we have never sold to in the past. In addition, we are working on a third new medium sized TraceCop order, which would still book in Q4, but it might not make it through procurement before Q1. Since last quarter’s call, we do have a pipeline of new TraceCop opportunities for Q1. We are working on two more new TraceCop opportunities, while there is four more for Q2, all of which are new programs, not renewals. We are working on a number of new Savant customers as well. For Q1, we are looking to close 11, of which 5 are through the original resell partner, 1 is through the second partner, 4 direct and 1 is through a fourth partner we are just signing up. With our second resell partner, we just briefed their global team last month and have a follow-on meeting in the U.S. to stir up new U.S. opportunities. We are drawing up partner agreements with the fourth resell partner now brought to us by a friend we have worked for in the past, worked with in the past. In addition, we are engaging two additional resellers, each of which serves a captive market and expect these agreements in Q1 and Q2 to expand our sales efforts. Last quarter’s Savant sales were disappointing so we have continued to focus on stirring up the efforts of our partners as well as direct sales opportunities. The direct pipeline is growing significantly this quarter and there are a number of new TraceCop opportunities for Q1 and Q2 which offer enough upside to lock-in profitability going forward as we continue to promote Savant solutions to our resell partners as well as direct sales force. Ward?

Okay. Thanks Joe. We have a lot of new activity in both product areas and we expect growth of both product families. Our engineering team continues to develop new features for our products. To be competitive, it’s important that the capabilities of the products continue to grow and both Savant and TraceCop product families are growing. We thank you for your joining our call today and look forward to our communication with you in the future. Mike?

Alright. Andrew, can you remind the participants how to queue up for questions.

[Operator Instructions] Your first question comes from the line of [Howard Braus] [ph]. Your line is open.

Good afternoon. I would like to make one comment and then I have a few questions. You seem to have developed two fascinating products TraceCop and Savant that should be leading in the cyber security industry, but if that’s true and I have listened to and read the transcripts of call after call after call and sequentially nothing has happened, why are you not able to sell these products, what is wrong that when we look at last quarter’s conference call you talked about this quarter we expect to have five new customers installing Savant through our original reseller and I can go back quarter after quarter after quarter, what seems to be wrong here?

Do you want to take that Joe?

Yes. Sure. No question, the resell partners’ sell-through efforts have not met their own internal forecasts the way that we have expected, of the five that we expected for this quarter, three of the five are still on their list for renewal in Q1. So the critical thing is their appetite for what we are selling and I think the answer is yes, it’s just when you deal with large resell partners it just takes longer than you expect sometimes for them to get traction.

I can appreciate that, but you are talking about Q1, what happened to – what about Q4, and your comments in last quarter’s conference call about Q4 which seems not to exist and you are pushing it out to Q1 or Q2 again?

We have I think three that are up for Q4, but I think the lion’s share of the big opportunities are – well, it’s there the spreads, so we have some in Q4 and some in Q1, some in Q2 they all look pretty decent and large.

We understand your frustration, but it’s just a lot slower sales cycle than we had anticipated.

I can appreciate that and to some extent I can understand to some extent, but by when if this continues are you going to take a different tact, different tact could be a joint venture, selling the company, because frankly this has been quarter after quarter after quarter, at what point in time will you…?

We understand, we are working on all different fronts here on how to proceed.

What would that…?

Do you have another question?

What would that include?

All different fronts.

Fair enough. I will want till next quarter. Thank you.

Okay. Thank you.

Your next question comes from the line of Walter Schenker. Your line is open.

Thank you. I have the distinction of having been on many calls, this is the first time I’ve called from Incheon. This is just to reiterate but to make a question out of what [Mr. Braus] [ph] just said, we have many years now of a very large funnel using a term we used in the past which originally was TraceCop and is now Savant and TraceCop, yet the revenues continued to be I understand a disappointing the same or less than they were 3 years, 4 years, 5 years ago, to get into specifics Joe, on TraceCop, you expect to sign two additional contracts in the fourth quarter, it is now the middle of the fourth quarter, will you have signed additional contracts in the fourth quarter?

We have not to-date, but I have got two in the pipeline for this quarter plus a third one that I mentioned might be in the first.

Okay. And TraceCop I am not pinning anyone of them specifically would average $0.5 million – I know they can be $1 million, they can be up few hundred thousand, on average they should be $0.5 million plus on an annual basis?

Yes, that’s correct. I mean, we have some that are 200K and some that are 500, so we have got a couple of 200K ones that are in this quarter.

Okay. And on Savant, at what point as you saw in these agreements going forward, I understand you can’t disclose the customer, the ultimate customer, except that you have a non-disclosure from your first partner, but at what point can you give us the names of other people you are working with who are signing customers for you as you talked about number two, number three, number four some specialty guys which might be number five, why can’t we get the name of one or more of these or multiple of these people?

I mean, certainly we would like to tell you, because it would help our stock price to be visible, so that’s something that we continually look for in terms of when can we release it, I would say the second and the fourth are likely to say yes.

Okay. And then finally as a commentary to reiterate kind of being redundant to reiterate, what [Mr. Braus] [ph] said at some point doesn’t this, management and Board members that are on the call, doesn’t this Board look at three, four, five years of opportunity and inability to grow the business and come to the conclusion. Do you guys sit in the room together, I’ve sat in a room with you and say for whatever reason we either got bad technology or we haven’t figured out how to sell it, if we have bad technology there is nothing we can do about it, but you seem to be pretty optimistic we have good technology and therefore we, for whatever reason, just can’t sell them and therefore somebody else has to own this so they can sell the technology?

Well, Walter, we think that we are pursuing this in the correct manner. We constantly evaluate what’s the best action to take for our shareholders and we think we are on that track. But clearly, things change as you go forward and the dynamics that we have discussed here today with our resell partners are in place right now. We will see what kind of results we get here during the fourth quarter.

Okay. So, fourth quarter…

Walter, one additional thing I guess that we have - let me follow on something we have talked about in the past with our first resell partner, they use us on one solution and they have an internally developed competitor. To us, one of those we look for renewal last quarter went to the internal competitor, but they have not been pleased with their technology there and so they have let us know that they are going to put us in on that solution as well, which contributed to some of the pause you see now and some optimism for Q1 and Q2, because we basically then would be on both sides of their only set of solutions. And we think that’s a positive turn of event.

Okay. But the point I am making, you know the point I am making, I wanted to get a confirmation, it’s going to be Michael, Joe or Ward, we do understand there is windows here, we need to benefit from that window obviously the value the company is very low, which is appropriate given the performance of the fundamentals. And so you guys own a lot of stock, I own a lot of stock. If we have technology that has value we have to recognize that technology one way or the other and not keep thinking we are going to get contracts each quarter after quarter we don’t get, to speak I understand, it’s not a question.

We understand. What time is it over there, Walter?

It’s 12 hours difference. So, it’s 5 o’clock in the morning. I just took a shower in the lounge.

Thanks, Walter.

Your next question comes from the line of Keith Kramer [ph]. Your line is open.

Hello, Keith.

Hello.

I don’t think he is there anymore. Do we have any other calls operator?

Your next question comes from the line of Ross Taylor [ph]. Your line is open.

Yes, thank you. I would like to add my voice to those of Browse and Mr. Schenker, I think that it’s very hard as a shareholder to have the confidence in the company executing a strategy that you have talked about, because to be blunt we have heard the story for a year that you are on the verge of a breakthrough and I think Walter touched on something very important. The technology here seems to be of great interest, but you guys seem to be in capable of executing the sales process. And as a shareholder, I feel personally that the clock is running out on giving you guys the chance to execute this. If you can’t get it done, I think it’s important to find whether it’s one of your resellers or someone else to take on this opportunity, because this window won’t be open forever. And right now, the company probably isn’t selling for much more than the value of its tax loss carry-forward. But that as Walter said is something that you have earned, because you have put in quarter-after-quarter a disappointment. So, I think from our perspective, we would like to see a multi-pronged effort, one, trying to get the sales closed and the like and at the same time also hiring a banker to look into shopping the company to see what the value is. It wouldn’t surprise me at all to find that the value of this company is substantially greater meaning more than a double multiple of what the stock is trading at today to a strategic buyer. And I think you owe it to yourselves, but you most of all owe it to your public shareholders who don’t collection compensation from the company to move forward in this in an aggressive and timely fashion. We can’t sit here and wait forever on the hopes that you guys will execute, because history says you haven’t been able to.

Yes, I understand. Like I said the previous caller we are working on all fronts. I don’t have specifics to tell you, but I can tell you that we are as concerned as you are and we are working all different ways to sell our products whether it’s direct through resellers or partners.

Have you hired a banker?

No.

Okay. I would like to suggest that I think it’s probably timely that you do and you are under that as I said a multiple pronged, while you are trying to get these sales converted perhaps that process might spur some of your resellers to be more aggressive in closing deals, if fear is that they would find that if you don’t get deals closed that one of the other players in the game might end up with your technology.

Okay.

And fold it in-house, because I think the technology is very valid from talking to people. It seems to work well and it seems to be something that could be used and certainly someone in the space would be able to make use of the tax loss carry-forward, which in and of itself is a not inconsequential asset.

Yes, agree.

Well, thanks for the info.

Thanks.

There are no further questions at this time. I will now turn the call back over to the presenters.

Alright. We will wrap up the call. Thank you for participating in today’s call. If you did not receive a copy of the press release or if you have further questions, you can call me at 972-301-3658, e-mail mpaxton@intrusion.com. Thank you.

This concludes today’s conference call. You may now disconnect.