Intrusion Inc. (INTZ) Q1 2019 Earnings Report, Transcript and Summary

Good afternoon. My name is Julian and I will be your conference operator today. At this time I would like to welcome everyone to the Intrusion Incorporated First Quarter 2019 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. [Operator Instructions] Thank you. Mike Paxton, Chief Financial Officer, you may begin your conference.

Okay, thank you. Welcome to this afternoon's call to review Intrusion's first quarter 2019 financial results. Also on the call today are Ward Paxton, Chairman, Co-Founder, President, and CEO; and Joe Head, Senior Vice President, Co-Founder of the Company. Ward will give a business update, I will discuss financial results and Joe will give - will update new and ongoing projects. We will be glad to answer any questions after our prepared remarks. After the market-close today, Intrusion issued a press release announcing the financial results for the first quarter of 2019. A replay of today's call will be available starting tonight for a one week period. The replay conference call number is 855-859-2056. At the replay prompt, enter Conference ID number 4269625. 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 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 may be discussing our current outlook based on our own internal projections for the current quarter and fiscal year 2019. Actual, results may differ substantially from internal projections. We are not responsible to update any forward-looking statements. Many factors could cause our projections not to be achieved, including 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 2019 and previous Form 10-Qs. Now, I'll turn the call over to CEO and president, Ward Paxton.

Thank you, Mike. Welcome to Intrusion's first quarter 2019 conference call. It's good to be with you today to discuss our first quarter and our outlook for the future. Our revenue and profit had been - both had sequential growth again. Our revenue in Q1 reached $3.2 million, up from $3.0 million in the fourth quarter. Net income was a $947,000 in first quarter up from $851,000 in the fourth quarter of last year. Now, Mike Paxton our Chief Financial Officer will review our first quarter financials that we released a little over an hour ago. Mike.

Okay. First Quarter 2019 financial highlights, revenue through the first quarter was $3.2 million compared to $2.3 million for the first quarter of 2018, and as Ward mentioned, $3 million for Q4 2018. Gross profit margin was at 60% in the first quarter compared to 62% in the first quarter of last year. Gross profit margin can be greatly affected by sales product mix of deliverables in the quarter. Intrusion's first quarter of 2019 operating expenses were $0.9 million compared to $1 million for a comparable period in 2018. Operating expense was $1 million and fourth quarter of 2018. Net income for the quarter was $947,000 compared to net income of $346,000 for the first quarter of 2018 and $851,000 net income in Q4 2018. Thank you. Now back to Ward.

Thank you, Mike. Now, Joe Head, my partner, Co-Founder of Intrusion and Senior Vice President will discuss our outstanding sales results for the first quarter and our opportunities for the future. Joe?

Thanks ward. Good afternoon, everybody. In the fourth - third quarter of 2018, we booked $6.3 million, which $5.5 million was a single order for a new project. Then in Q4, we booked and additional $5.2 million which is mostly renewals, except for one $2.4 million we will talk about a new one. And as I reported last time, one of our $1.2 million a year customers issued us to renewal covering the next five years, so we expect this long term customer continue for quite a while. Because the annual nature of many of our contracts, the good news is that we booked ourselves full of business in the last half of 2018 and we spent the first few months in 2019 hiring people and settling in to making deliveries for our newest contracts. The large majority of our orders are for the 12 months of business at a time. So the big up uptick in new orders in Q3 and Q4 won't be up for renewal until Q3 and Q4 of 2019. So as usual, our new orders for the first half of 2019, is expected to be down quite a bit from this year in highs and bookings. But the increased revenue will ensure our profitability for 2019, as we continue the deliveries for these new orders. As we anticipated in our Q4 call, our Q1 bookings were zero since we had no contracts up for renewal. And all of our big new projects were booked at the end of 2018. But already in Q2, we have booked $2.3 million in renewals as the first ones have come up for renewal. In Q4, we entered an order for a $2.4 million for a new customer. And based on our performance today, this customer has decided to renew and put in for funding so they can renew for $2.4 million for a second year. Likewise, our $5.5 million new order in Q3 represents our largest order, so I spend a lot of time since our last call focusing on their needs, on deliveries and what they might want if they could renew for a second year. We'll meet next week to discuss various options. But for now they have two groups interested in renewal and pooling funds to renew again at the same level as before. When we got this order, we assumed it might only be for one year. But the customer wisely made contracting arrangements to allow renewal for two more years on the original paperwork. That'll be my focus this quarter to do all we need to do in order to maximize the renewal chances. We need to put together the funding request package next week, and I have two teams creating the funding requests for about half of the $5.5 million each. So I'm happy to report, no setbacks on renewals on the big two. We do not expect any renewal issues on any of our other long standing business this year. We also booked, new Savant customer in Q4, in addition to a renewal of another Savant customer. Both of these are small and just - in total just $350k. But as I've mentioned with the base business, now up to a profitable level, we've been able to shift a little bit of our attention to other business areas with growth potential. This year I expect to see some incremental Savant business, and I'm spending some cycles beginning discussions, training, deployment, and marketing discussions with a few new partners and potential customers that our size, we don't have the sales bandwidth to sell Savant and STA enrichment to the commercial market. So we started preparing presentations and product briefings for three well-known companies. So they can consider adding Savant and STA with their commercial offerings. We perhaps haven't talked about STA much lately. It stands for Savant Threat Analysis. This is a big data enrichment system, which provides contextual enrichment to all kinds of flow data, both from Savant as well as a myriad of other sources. As such STA offers immediately deployable wins, and new product offerings to any large company wanting to expand the scope and completeness of their security solutions. Also talk about expansion of our base business. In our last call I discussed that our huge reference data sets and TraceCop take years to build and that each new way of the capabilities enable us to market to new groups. In the normal progression of things, the customer usually contracts with us to create reports and offer solutions to a variety of security challenges. After some time with these reports, the customers will consider a license to portions of TraceCop data so that they can expand on our work, using their own researches and their own security investigators. Nowhere to say that is early on they don't know how to use the data or do the stuff, so we teach them with phase one of doing reports and train them. And then as they grow, they have two options and keep doing it the old way of just having us do research reports or they can take it in house and then we sell it as a subscription license. We find that developing these new large datasets takes a few years to grow from initial effort to world class. During that time, we used the newer developmental datasets internally and weekly reports and answer customer questions and security challenges. But after a while these datasets grow and represent new data subscription fees that we can sell on their own. In the $5.5 million orders, we have a $600,000 license for analytic research using one of our newer data sets that have been building for approximately seven years. The customer wants two licenses this for regular use, this data set will license for about $1.8 million per year per customer. In Intrusion we correlate some very large data sets, of which this is the largest yet. We've been adding about 1 billion records a day and that this new data set for seven years and have over 2 trillion rows added to this one data set today. This one represents one of the largest commercial IP security databases in the world. And this allows Intrusion to address a wide variety of concerns. One of the latest new data sets for TraceCop is a survey of the internet for topic. We know who owns every server and where it's located, that's in our old data set, but it's also nice to know what language and topic the sites' users go there for. When we see a customer's machines going to the site and language they speak or read that is not unexpected unless they go there every day. If so, this is probably a site used for relay for an unexploited stealing the customers using data since the user doesn't speak the language of the site. We have collections showing the language and the topic for about 150 million websites and we see about 320 million sites active this month just for WWW sites. So one of our new efforts is to scrape every homepage to record their topic, their language and so on. So security can certainly, with many things and if who wants to make a bomb, who sells drugs or who wants to be a terrorist but these are not usually that interesting or likely to be the case. Bad guys take over small sites to use them as relays for malicious command and control of compromised computers. So if you observe communications of those, the Security Chief doesn't want to dismiss that communication as just some employee surfing a website. So one of Intrusion's specialties is discover compromise within the see if normal and I will skip through all that since I covered it last time. So anyway, we build a lot of really large data sets, and I expect a first order for a new customer in the space in Q2 and expect that to grow and renew for many years. So typically we will find a customer interested in that thing and we may take a long time to build a data set but we will have a customer waiting already to use it. So, back to the main topic, discussing nature of our new larger orders. As lot of companies talking big data solutions and their big data sets aren't really that big. So we have some of largest data sets around as well as track record of knowing how to apply that data to our customers' challenges. We are now starting to apply our knowledge on how to build, use and deploy our big data expertise at a higher level with the customers. Instead of just being a boutique [ph] firm with a narrow specialty focus, we're now working on solving larger customer challenges with custom engineering of systems that expand upon our in-house success. As I mentioned earlier, many times the customer has the desire to take this step in expanding their base, but for whatever reason can't or doesn't see that desire to bear fruit. In our case, a good customer had pressed us to take these steps to stretches us so we could solve bigger challenges for them as well, those are two large orders at the end of last year. [Indiscernible] counter work in 13 new customer prospects currently and expect that pipeline to grow throughout the year. We will make sure to keep our current customers happy as we always do and continue to add new and even larger opportunities to our pipeline for a next year. Ward?

Thank you, Joe. The first quarter was a continuation and the outstanding growth in sales and profits that we have had for the past six quarters. The significant orders that we received in the third and fourth quarters last year allowed us to begin the current year on solid footing. Our orders continue to be bumpy and we expect that to continue. We are currently adding both sales and engineering people to sustain and fuel our growth. I look forward to another great year and the opportunity to communicate with you regularly. Thank you. Mike?

Okay. Operator, can you remind the participants how to queue up for questions?

Certainly. [Operator instructions] Your first question comes from Howard Brous. Your line is open.

Thank you. Ward, Joe, Mike, first congratulations on a great quarter, a year-over-year and Q over Q. I would like to, Joe, go to the cadence comparing last year to what you expect this year. Would you say that the cadence for new and renewed orders probably is the same?

I would say so. So, I mean, obviously, we got two months or one. So I spent a little bit of time buttressing those and making sure they were happy. So the wandering around looking for totally new ones I didn't know diminished in the first quarter. But I've - but I'm on track now for - and seeing lots of guys who will be new ones for this quarter and next quarter.

You had mentioned in your fourth quarter conference call that you had a pipeline for the prospect for another $1.2 million TraceCop subscription. Was that the renewal that you got or is that in addition?

That was a different one, and that one actually went flaky on me, so - but still working that same group.

Okay. In addition, so you're - the number of prospects in the pipeline for new orders has increased, if I remember correctly the fourth quarter to now from 9 to 13?

That's correct. And I fudged a little bit because I want to count my 13, I was counting people, not necessarily proposals under the people and there was a couple in there that have four pieces. So I think - but that's in keeping we have done in the past.

And the size of these potential contracts and is it TraceCop, Savant or a combination of both? Could you give me some granularity, please?

Mostly TraceCop. So there are - Savant has been nearly flat and zero forever. But I do have some Savants in here, not monster ones, we've got one for maybe, 40 of the boxes and lots of analysis, but it's not major yet. But I think in being a good communication - good communicator of what we're up to, I do see some growth potential in that, more so by leveraging commercial partners, which I'm in beginnings of talking to a couple of those now. So I think it's time that our approach is so much better than what the industry is suffering through right now. Don't want to squander the opportunity to find a partner to get to the commercial space. But we're seeing traction in the government sector, DoD world. And the fact is, we're able to find stuff that others cannot and it's therefore leverage of all.

You also discussed the opportunity for Savant in two states. Is that still active, that opportunity?

It is, yes. Both of those are on my active list. And then that isn't in the 13 by the way, probably should have been.

Would you consider that third, fourth quarter this year?

Yes.

And the margins in Savant, are they similar to TraceCop?

They are.

All right. Just one or two more. When you talked about STA Savant Threat Analysis.

Yes.

What type of size of contracts are you talking about?

I would say, at a per customer commercial basis, those are anywhere from $200k to $400k a year for a STA enrichment of a basket of things for replace. And that's why we kind of see that as a sell-through opportunity with bigger partners. We've automated that to a huge degree and it's pretty scalable. But it's not something that I want to go fly around the country for $400k order. However, when you start considering DoD wide or army wide or pick the sector, it represents some pretty big numbers when you start looking at a few hundred or a few thousand locations, because each of those represents a pretty good chunk of change each.

So that's basically what you would call the military end of the market as opposed to commercial?

Correct. But I think the adversaries are the same. When you start looking at…

No, I really don't.

They're eating everybody and part of the patriot side of me I don't like to see our intellectual property every country getting stolen and used by our adversaries. So fits in, it's a good thing. But I don't want to imbalance that in terms of our talking today, the bulk of our orders this year will be for TraceCop related work. And I see this as a potentially good growing area, as we look over at the commercial side, as well as the Pentagon taking better stock on-on.

Good. I have just two more questions? Can you attempt to just define the size of the TraceCop market, DoD, military, if you will? I mean, how big or how much bigger could we be annually if you will, not looking at any particular contracts? Is this say $40 million $50 million dollar market or more?

I don't know how far you take it honestly, the thing that I see it's an important piece is I think I sort of talked about in our long narration which is bringing a bigger chunk of the problem. Some of the times we run in the case where our customer would sort of like to do it, but they just don't know how. And so you see this sometimes in the early adapters of a market is you can't just say here, install a bunch of hardware and do something like this. They really, they really need you to do it for them instead of show them, you can't just tell them what to do and let them do it. And so I think, initially with some of our government customers, and we will move into sort of a system administration and installation mode to see that growth occur early. And then as you as you see it, but I think your numbers are roughly right. There's the fair license thing that's somewhere between four and 10 times where we are right now. But then when you said, hey, I don't want our adversaries stealing, our systems' access for whatever reason, military or stealing the plans for a new fighter plane, then suddenly you get to an immense market.

All right. Thank you. Last question. We've been discussing an IR firm for nine months to about a year. Where do we stand on that?

We're making progress there. I think we're about ready to kick off opportunity there.

Could you define ready to kick off as the next month or two?

Whenever we decided to do that. Really, we've kind of decided on here we're going to work with and all out. And so it's matter of when it's the best time to start doing it.

All right. That's all I have for the moment. Again, Ward, Joe, Mike, congratulations on really, just a great quarter.

Thanks Howard.

Thank you.

Thank you.

You are welcome.

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

Hi, guys. Great to make money you made before.

Yeah, thanks, Walter.

And I'm paying off Ward's debt which is good too. When you talk, Joe, about marketing and what you're doing, a lot of it keeps coming back to I'm doing this and I'm doing that. What are we doing to bring in, I know there are other people on your sales thing. But I know we've talked in the past about bringing in people at a higher level, who probably cannot be you but can take a more senior role in dealing with clients and generating sales.

So we've got a couple of good candidates. We had one we thought was sooner but he's not here yet, had some complications, staying where he is. But yeah, it's a subject of ongoing work, find somebody that's good enough to matter. You need him Senior enough not to embarrass you, and also want to have connections at a place that we don't.

And you got a different strategy for your Savant sales?

Yeah. And like, yeah, like I mentioned before, though, my approach on Savant is to bring in, one to three commercial monster places that then add it to their commercial offering. And I think that'd be a lot more effective bang for buck. The good news is the senior people that it takes to work with a partner we already have. So difference between a large account salesperson and folks again, fully support every question that comes up, deployments and analysis and we do have that covered well.

Okay. And along it - again, the ability to leverage the data sets, you talked about trillions and billions and enormous data sets, which then you have a client who hopefully who want to become a licensee or pay you for. Are these data sets much broad - more broadly applicable across other non-DoD government security areas? I mean, we've talked in the past about, and you've never made any progress on it and then frustrated because they're happy to talk to you, but they don't sign on the bottom line. But there ought to be a bunch of other people through the government who are equally interested in some of the same thing The Department of Defense is. Do we need someone new to get us in those stores, or we've got enough on our plate at the moment trying to get a commercial partner, as well as further getting DoD type contracts.

Yeah, good point. So one of the well, two of the three partners that I'm considering, both work in the government space as well and have strengths in areas where we don't hang out. And so I think your questions are appropriate. Yeah, there is. We do think there's some traction over there for the data sets and other parts of the government. And we think that's the most effective way to get there. Hiring direct guys to do all that isn't quite as effective as leveraging somebody that's already there with the contract vehicles in place. We think that's a pretty sound approach from where we sit right now.

Okay. And these will be different partners that when you first introduced Sawant, hopefully different partner?

Hopefully. Yes.

And just the last part of that question, I'm done. I'll see everybody Thursday. You still are optimistic, you can get something done on a partnership basis this year?

Yes.

Okay. Thanks. See you Thursday.

Okay.

Thank you Walter.

Thank you, Walter.

Your next question comes from Howard Brous, Your line is open.

As I was listening to Walter, it just occurred to me. When I go back and look at last year's win rate, if you will. And that was a substance. Can I interpret a similar type of win rate, not necessarily on a contract by contract basis, but is that reasonable to assume?

I think so. I mean, like I said earlier, I always judge myself by how do we get our renewals of stuff and we've got two monster ones, both are intending to renew. But I'd rather be nervous early than sad later. So I work extra hard to make sure they're happy. So we win most of the things that get a pretty good conversion rate as well as a good renewal rate. And we've got some additional new ones to bring online this year.

Joe, thank you. Once again, congratulations on the quarter.

Thank you, Howard.

Thank you.

Thank you.

Talk to you soon. Thank you.

Okay.

We have no further questions. I'll turn the call back over to the presenters.

Okay, thank you. At this time, we'll 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, my phone number is 972-301-3658 email mpaxton@intrusion.com. Thanks again.

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