Intrusion Inc. (NASDAQ:INTZ) Q4 2022 Earnings Call Transcript

Intrusion Inc. (NASDAQ:INTZ) Q4 2022 Earnings Call Transcript March 6, 2023

Operator: Welcome to Intrusion Inc.’s Fourth Quarter and Full Year 2022 Earnings Conference Call and Webcast. At this time, all participant lines are in a listen-only mode. 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 Sam Cohen with Alpha Investor Relations.

Sam Cohen: Thank you, and welcome. Joining me today are Tony Scott, Chief Executive Officer; and Kimberly Pinson, Chief Financial Officer. The 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’d like to remind everyone that statements made during this conference call relating 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. In addition to US GAAP reporting, we report certain financial measures that do not conform to generally accepted accounting principles. During the call, we may use non-GAAP measures, if we believe it is useful to investors, or if we believe it will help investors better understand our performance or business trends. With that, let me now turn the call over to Tony for a few opening remarks.

Tony Scott: Thank you, Sam. Good afternoon and thank you all for joining us today. In today’s call, I’ll cover our Q4 results, as well as talk about Intrusion’s full year performance. And I think that longer-term perspective is useful to understand our long-term goals and objectives. Our fourth quarter top line results did not live up to our expectations. However, for the full year, Intrusion improved its overall performance in nearly every standard metric. — capping an important year-long journey where we made significant progress along our financial, operational and strategic objectives. I’ll talk more about those accomplishments later. Total revenues for the fourth quarter were $1.4 million, a decrease of $0.2 million compared to the fourth quarter of 2021, and a decrease of $0.8 million from Q3.

Shield revenues for the fourth quarter were $0.3 million, which was flat sequentially and up $0.2 million compared to the fourth quarter of 2021. This was disappointing, but understandable when taken in the context of the broader macroeconomic landscape. We released the Cloud and Endpoint solutions late in the third quarter and didn’t expect any meaningful contribution to our revenue in Q4 2022. On a positive note, interest remains strong for the Shield family of products, with several larger deals that we didn’t get across the finish line in Q4 remaining in our qualified pipeline. Our consulting business was relatively flat through the first three quarters of 2022, and somewhat as expected. However, during the fourth quarter, the business experienced a year-over-year revenue decline of $0.4 million, due to the loss of a single contract.

Intrusion’s prime contract sponsor experienced leadership changes and subsequently chose not to renew the final option year of a contract that had been in place since 2018. Intrusion’s gross margin on this contract was 14%. And as a result, the loss of this revenue while significantly impacting the top line had a marginal impact on profitability. Our team is working hard to replace that revenue in 2023, and we do expect growth over the course of the year as a result of our reseller partnerships, our business development efforts and referrals from our Business Advisory Board. While the fourth quarter results were not as we expected, Intrusion improved its overall financial performance in nearly every standard financial metric during FY 2022.

Total revenue for the full year grew at $7.5 million, a 3% increase compared to 2021. Our gross margin improved from 50% to 55% and earnings per share improved $0.23 to a loss of $0.82 reflecting an improvement of 22% compared to 2021. Notably, Intrusion Shield contributed 16% of full year revenue in 2022, up from just 7% in 2021. As we’ve discussed, we fully expect Shield to become a significantly larger portion of our revenue as we move forward. As I step back and look at the full year in what has been my first year as CEO, we have a lot to be proud of as an organization. We’ve made great strides in standing up the organization, rounding out the management team to include Kim Pinson, Chris Duzich, Ross Mandel, and Doug Haloftis, who joined our CTO and Founder, Joe Head, and our amazing technical team to set the stage to ensure Intrusion is properly positioned to capitalize on the significant opportunities in the ever-changing cybersecurity space.

In short, 2022 is an important year, where we achieved most of our objectives for the business and made significant progress along our longer-term financial, operational and strategic goals. Let me touch a bit more on our progress in the promising market trends. During 2022, a number of product milestones were achieved. Earlier in the year, we recognized that there were some performance and reliability issues with our Shield, on-premise solution. We moved swiftly to successfully increase the stability and performance of the Shield appliance, while improving the overall bandwidth it can service. In addition, we realized the need to expand our Shield product offerings beyond the on-premise hardware appliance to both make our capabilities easier to demo and to increase our ability to cover workloads in the cloud and to provide Shield protection to endpoint devices.

The indications of interest and pipeline expansion as a result of our Shield cloud and endpoint products are encouraging. A couple of data points to help you understand what we’re seeing. We have 20 active proof-of-value engagements currently, and our qualified pipeline has grown 5x from Q4 2022 levels, including the pipeline from our resellers. We continue to be encouraged by the response from our channel partners for this full suite of our products. As you may have noticed, earlier this week, we announced the availability of Intrusion Shield Mobile version 1.0 in the Google Play Store. This is yet another opportunity for us to expose INTRUSION Shield’s capability to a wider audience and make it easier to understand our value, especially for protecting an increasingly mobile-first platform that both businesses and consumers are moving to.

We have great confidence in these new products and are excited to have the full suite available for the entirety of 2023 and beyond. From a sales and marketing perspective, we took several measures to simplify and focus our messaging and shifted toward a more channel-driven sales structure to better align with Shield’s growth opportunities. We made significant positive changes to our company and product branding, our logos, messaging and our marketing communications, which have all been well received by our partners and customers. In addition, we have enhanced our messaging so that we can clearly articulate the value proposition of our products. Recently, a report published by Constellation Research, highlighted Intrusion’s pioneering of a new aspect of cybersecurity technology with Constellation is called Applied Threat Intelligence.

The key message of this report highlights Intrusion’s technology approach, which empowers organizations to take a more comprehensive view of their network, examining its full history and ongoing behavior to determine what is safe and what is a threat. The report is available on our website for those who are interested. The revamping of our messaging around Shield and the launch of our new website has helped us better communicate the potential buyers the uniqueness of our new and enhanced suite of products and solutions. In the fourth quarter, we announced a partnership with vTech Solutions, an IT services firm based in Washington, D.C. With vTech’s reach in four countries in 40 US states, we’ve been able to expand our reach in providing protection to public sector organizations who are managing their critical IT infrastructures.

Additionally, as we announced in February, we are partnering with Carahsoft to help protect its public sector customers across federal, state, and local government agencies and education and health care markets. With Carahsoft’s deep industry expertise and broad customer base, we can provide INTRUSION Shield products to help protect their customers’ critical infrastructure from virtual attackers. We have long been a trusted partner of the federal government and this partnership will expand our reach in the public sector as well. In 2022, in total, we announced five new partners, which expands our reach as we provide INTRUSION Shield protection to a greater number of customers in the quarters to come. I would also like to comment on our efforts to improve the company’s financial discipline and stability as we advance upon our strategic initiatives.

We continue to prioritize the most suitable options against our goal of raising $15 million to $20 million in 2023. While we operate in the challenging backdrop amidst the difficult interest rate and macroeconomic environment, we feel there is a strong interest from the investment community in Intrusion’s growth strategy and value proposition. We believe 2023 will be a key building year for Intrusion, we have overcome several of the key hurdles for the company, stood up the organization, and set ourselves up with a clear path forward to achieve our objectives. We’ve retired the majority of the legal overhang, we started with in 2022 and have created a best-in-class organization with the top people in the field, as recognized by our 2022 best places to work designation.

We continue to view the channel as a force multiplier, and we have strong partners in place, two of which we’ve highlighted in this call. We’ve greatly expanded our reach, both in the US and internationally to get Intrusion Shield in front of potential customers. Long term, the demand backdrop for our solutions continues to grow, specifically in the market subsegments we serve. What I believe and continue to have confirmed from partners and customers, is that our unrivaled threat intelligence data set provides a needed additional layer of protection, within an advanced comprehensive suite of cybersecurity products. As we begin to see the market adoption of our unrivaled Intrusion Shield products, there will be a dramatic positive shift in the trajectory of growth and margin profile of this business on a go-forward basis.

2022 was a year of investment, tactical change and improvement for our organization to ensure that we are well positioned for the future ahead. All of the actions we have taken under the surface in 2022, such as product development, sales and marketing, partnership expansion and financial management, have created momentum and a clear path forward, as we look forward to 2023 and beyond. Now, with that said, I’d like to turn the call over to Kim for a detailed review of our fourth quarter financials. Kim?

Kimberly Pinson: Thanks, Tony. We continue to benefit from the increased focus and intensity on cybersecurity solutions and expect our results going forward to reflect the strong demand from customers and channel partners for our Intrusion suite of products. We expect that going forward, these new products, as well as the advancements made to our existing Shield on-premise solutions will guide the transformation into our recurring revenue, high-margin and software-focused business model, supported by the stability of our consulting business. I would now like to discuss our financial performance for the quarter and full year period ended December 31, 2022. Revenues for the fourth quarter of 2022 were $1.4 million, a decrease of $0.7 million sequentially and $0.4 million year-over-year.

Revenue was $7.5 million for the full year ended December 31, 2022, an increase of $0.3 million compared to 2021. Fourth quarter revenues for our consulting business were $1.1 million, a decrease of 25% year-over-year and 40% sequentially. Full year 2022 revenues for our consulting business were $6.4 million, a decrease of $0.4 million or 6% year-over-year. As Tony stated earlier, the decline in our consulting revenues is due to a loss of a consulting contract in the fourth quarter. That contract represented almost $2.6 million in annual revenues. Fortunately, this contract carried a lower margin profile, so the impact on our bottom line was not as pronounced. However, we do expect consulting revenues in 2023 to increase as a result of our ongoing business development efforts.

Shield revenues for the three and 12 months ended December 31, 2022, totaled $0.3 million and $1.2 million, representing 22% and 16% of total revenues, respectively. In comparison to prior year periods, Shield revenues increased $0.2 million for the quarter and $0.7 million for the full year, both representing a year-over-year increase of 124%. During the quarter, we signed several new customers, which mitigated the effects of a lost customer who chose not to renew. Similar to the churn we experienced last quarter, this was another case where the customer was an early Shield adopter and the solution was never fully deployed. We have taken steps to proactively monitor customer utilization of Shield products to improve retention and reduce turnover.

The gross profit margin was 63% for the fourth quarter of 2022, compared to 50% in the fourth quarter of 2021. The gross profit margin was 55% for the full year ended December 31, 2022, compared to 50% in 2021. The improved margin in both the current quarter and full year is a result of our product mix, with Shield sales representing a higher percentage of revenues and the loss of the low-margin consulting contract, as previously mentioned. We are continuing to control our cost structure, while also making prudent investments in our long-term profitable growth. Operating expenses in the fourth quarter of 2022 were $5.4 million, an increase from $4.7 million in the comparable quarter of last year. Operating expenses were $20.5 million for the full year ended December 31, 2022, a decrease from $23.2 million in 2021.

The net loss for the fourth quarter of 2022 was $5.2 million, or $0.25 per share, compared to a loss of $3.8 million, or $0.20 per share for the fourth quarter of 2021. The net loss was $16.2 million, or $0.82 per share for the full year ended December 31, 2022, compared to a loss of $18.8 million, or $1.05 per share in 2021. Turning to the balance sheet. On December 31, we had cash and cash equivalents of $3 million, down from $4.1 million in the prior year. In January of this year, we amended our debt agreement with Streeterville, whereby Streeterville agreed to waive their right to principal redemptions through March 31. Additionally, in February, we entered into a note purchase agreement with Streeterville in the amount of $1.4 million and the related security agreement, whereby Intrusion granted a security interest and the employee retention tax credits due to the company under the CARES Act.

More information relating to these agreements is available on our current reports on Form 8-K. Both the amendment to the existing agreement and the new note purchase agreements were entered into in order to provide a longer runway to secure financing on terms acceptable to the company. We need to raise additional funds in the near term to continue operations. We estimate we need between $15 million to $20 million for the full year 2023 to fund our growth plan and financial commitments. We intend to obtain these funds from sales of our common stock through registered direct offerings and the use of our aftermarket program. While there can be no assurance that we will be able to raise the capital necessary to fund our plan, we remain confident that the capital markets remain open to us for future rounds of funding.

With that financial overview, I’d like to now turn the call back over to Tony for a few closing comments. Tony?

Tony Scott : Thanks, Kim. To conclude, I want to let you know that I believe we’re moving forward with our transformation through compelling products and innovative strategies. We have positive momentum as a result of the great strides that the team has made in 2022 to right-size the organization, develop new products, and revamp our sales and marketing, which allows us to capitalize on the strong sales pipeline we’ve developed and drive further revenue expansion as we carry over this progress into 2023. We look forward to sharing the next steps in our journey with all of you, and we thank our investors for your continued support as we execute our strategy. This concludes our prepared remarks. And I’ll now turn the call over to the operator for Q&A.

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Q&A Session

Operator: Thank you. Your first question today comes from the line of Scott Buck with H.C. Wainwright. Your line is now open.

Scott Buck: Hi, good afternoon guys. Thank you for taking my questions. Tony, it sounds like from the release in your comments that you’re seeing a little bit of hesitation from potential customers and getting some of these sales over the finish line. What do you think breaks that hold and allow some of those sales to actually go through?

Tony Scott: Sure. Great question, Scott. So what we’re seeing is an interesting thing that I think we can address in our sales process. What we’ve seen is some what I’d call late-breaking questions that we can in the future and should address much earlier in the sales cycle. So that’s been a bit of a hang up. Things like integration with other products, kinds of, questions and also details on IP addresses that we block, what are the specific reasons we block them and things like that, all of which we’ve learned from, and we’ve — we’re building back into our sales process, so that salespeople can clear those hurdles much earlier in the cycle. So it’s been a bit of a learning. And then also, it’s been training our channel partners to answer some of these questions earlier in the process as well.

So we’re learning. But I think the good news is we’re starting to see smart questions and enthusiasm for what we do as we do this proof of values and so on. So I’m not discouraged by these questions, although, as noted, it has delayed the sales cycle in a number of cases.

Scott Buck: Great. I think that’s helpful. And then could you give us some indication of what the early color or feedback has been on cloud and endpoint. I know you had somewhere between three, six months at this point of sales. So just curious what you’re hearing there.

Tony Scott: Yeah. Well, I kind of discount Q4 just because it’s filled with holidays and people are distracted and so on. But in Q1, we’ve seen increased interest. Again, there’s a learning here selling cloud and endpoint, it’s little different than selling the appliance. And so we’re learning from those conversations with customers. One of the areas that looks interesting in the cloud discussion, in particular is people that are migrating workloads to the cloud seems to be a good entry point for us, to have the kind of conversations we’d like to have, when they’re moving workloads from on-prem or — on-prem or from one cloud to another is sort of a great place for us to engage.

Scott Buck: Okay. Perfect. And then last one, Kim, it looked like sales and marketing expenses were up sequentially. I assume that, due to some of these newer product launches. What should we expect for 2023 in terms of that expense line?

Kimberly Pinson: Yeah. You’re correct in terms of the expense in the fourth quarter. We do plan on continuing to invest in sales and marketing. And I think that, you won’t see us as market of an increase, but we do plan to continue to invest, and you’ll see it stay relatively flat, or increase over the course of the year.

Scott Buck: Okay. Great. I appreciate the time guys. Thank you.

Kimberly Pinson: Thank you.

Operator: Your next question comes from the line of Zach Cummins with B. Riley Securities. Your line is now open.

Zach Cummins: Yeah. Hi, good morning, Tony and Kim. Thanks for taking my questions. Kim, I think you mentioned within your script that Shield saw a little more churn here in Q4 once again. It sounds like it was one of our legacy customers that had adopted Shield outdate. Can you give us a sense of kind of what €“ what was going on in that situation and some other initiatives that you’re undertaking to monitor the overall health of that Shield customer base?