Intrusion Inc. (NASDAQ:INTZ) Q1 2023 Earnings Call Transcript May 11, 2023

Intrusion Inc. misses on earnings expectations. Reported EPS is $-0.22 EPS, expectations were $-0.21.

Operator: Welcome to Intrusion’s First Quarter 2023 Earnings Conference Call and Webcast. At this time, all participant lines are in a listen-only mode. [Operator Instructions] Please note, that this conference is being recorded. [Operator instructions] I’d now like to turn the call over to Josh Carroll with Investor Relations.

Josh Carroll: 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, future performance of our business partnerships, future terms of agreements related to financing or plans may include forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. Please refer to our SEC filings including our 10-K 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, I’ll turn the call over to Tony.

Tony Scott: Thank you, Josh. Good afternoon, everyone and thank you all for joining us today. In today’s call, I’ll cover our Q1 results as well as provide an update on our strategic, operational and financial objectives, each of which I’ll talk about in greater detail. Total revenue for the first quarter was $1.3 million, a decrease of $0.5 million compared to the first quarter of 2022, and down $0.1 million compared to Q4 2022 revenue. The decline in total revenue for the quarter was largely due to the full quarter effects of the loss of a consulting contract that we previously disclosed in Q4. And while the revenue growth that we expected as a result of our sales and marketing efforts related to our Shield family of products is taking significantly longer than I expected or desired, I feel positive about the underlying progress in our business from a product and partner perspective, and we continue to receive very positive feedback on our underlying technology and the efficacy of our solutions.

Turning now specifically to our Shield family of products, Shield revenues for the first quarter were $0.3 million, which was flat sequentially, and up $0.1 million compared to the first quarter of 2022. Intrusion Shield revenues for the first quarter represented 24% of total revenue. And while it’s still too early to project the full year impact of the new Shield branded products we introduced last year, Cloud and Endpoint, we are seeing clear and growing interest in these new products in addition to our hardware solution. In addition to the interest we are seeing in our suite of Shield products, we announced in early March that Intrusion had entered into a reseller agreement with Netgate, the provider of the pfSense Plus family of firewall products.

This agreement allows Intrusion to sell the Netgate PFSense Plus firewall and Intrusion Shield as a package. Now PFSense is trusted by individuals, businesses, and governments all over the world, and the combination of our two products is an exciting entry into the cybersecurity marketplace. I believe that this combination will be welcomed by new customers as well as our install base due to the customer awareness and adoption of PFSense, which is already very high. I’m hopeful that we’ll be able to share with you some new customer announcements as a result of this partnership in the near future. In addition, we recently signed an agreement to partner with SEI Investments Company or SEI to jointly market our products to SEI’s client base as well as new prospective customers.

SEI is a leading provider of technology and investment solutions in the financial services industry. They serve 10 of the top 20 US banks and 49 of the top 100 investment managers worldwide. With capabilities across investment processing, operations and asset management, SEI works with corporations, financial institutions, financial professionals and ultra-high net worth families to manage, change, and help protect their assets for growth today and in the future and SEI also manages, advises or administers approximately $1.2 trillion in assets. In addition to these services, SEI assists its client base with cybersecurity protection through their SEI Sphere division, which offers a managed cybersecurity service capability to SEI customers. This partnership is moving quickly and we’ve already made several customer presentations with SEI.

We anticipate that this partnership will grow into a meaningful relationship and additional revenue for both Intrusion and SEI. We’ve also engaged with an alliance of business development professionals who are leveraging decades of experience with cyber and consulting divisions of one of the big four consulting firms. This alliance has quickly expanded our base of qualified leads and opportunities and brings the potential for significantly larger deals. And like our SEI partnership, we’ve moved quickly to operationalize this aspect of our sales motion and have already had very positive feedback from several potential customers that we’ve jointly presented to. Turning now to our consulting business, we experienced a decline of $0.6 million in revenue year-over-year and a decline of $0.1 million sequentially and as I noted earlier, Q1 consulting revenue now reflects the full quarter impact of the loss of that one consulting contract in Q4.

However, through our team’s hard work, we’ve been able to fill much of the revenue gap from this loss, and we continue to expect growth over the course of the year from our consulting business as a result of our partnerships, our business development efforts, and referrals from our business advisory board. As you may have seen last week, we announced a significant renewal in our consulting business from a major purchaser of our services utilizing our applied threat intelligence engine. And this renewal further exemplifies the confidence and the ongoing need for Intrusion’s critical cybersecurity solutions and validates the need to be proactive in protecting vital networks, utilizing tools with strong intelligence, and staying focused on emerging threats.

We also announced in early March that Intrusion had partnered with NetFoundry to support Zero Trust cybersecurity standards and principles in our endpoint products. This Zero Trust approach has been strongly endorsed by the U.S. government and is increasingly popular in the private sector as well. We’ve been working together with NetFoundry for some time now to integrate NetFoundry’s Zero Trust networking into our Shield endpoint, which will give immediate benefits to customers seeking better protection for their endpoint devices. In particular, this technology approach eliminates the potential for compromise as the result of man-in-the-middle based attack vectors. Now, during the first quarter, we made the difficult decision to further reduce our headcount and eliminate certain contractor spending as we deliberately moved to reduce our cash firm rate.

We also reduced our spending in other non-headcount areas to better align our available cash with the realities in our business from a revenue perspective. This is never an easy decision, as many of you know, and we greatly value all of our employees and contract partners. I believe we’ve taken swift and appropriate and adequate actions without sacrificing our long-term growth for our objectives for the business. Finally, we’ve continued to work closely with Streeterville regarding potential modifications to our existing debt agreements to provide more flexibility for our business. Kim will provide more details on our financial position. However, it’s worth noting that we believe our expected capital needs have been significantly reduced as a result of our lower cost structure and our anticipated pipeline of new business combined with the various funding levers and tools that are at our disposal.

I recently attended the Annual RSA Cybersecurity Conference in San Francisco and had a chance to observe firsthand the state of the cybersecurity industry. My takeaway from that event is that Intrusion is technically well-positioned to provide complementary enhanced capabilities for a wide variety of solutions and at the same time, there’s an abundance of solutions in the marketplace, often with very little objective differentiation in terms of capabilities or effectiveness for that matter. I heard repeatedly from buyers that they’re exhausted by the complexity of managing a complicated set of solutions and that they’re seeking to consolidate to fewer suppliers with more objectively provable value for the solutions that they do invest in. And what I continue to have confirmed from partners and customers is that our unrivaled applied threat intelligence capabilities provide a much needed and unique layer of protection and help illuminate where existing tools fall short in protecting the network and critical organizational assets.

I believe that while we have to earn our place in the set of solutions a customer may choose, we do have the right combination of ingredients with our NetGate and NetFoundry partners to satisfy the needs of any customer seeking better and more cost-effective cybersecurity solutions for their enterprise. I’ll have a few more comments later, but with that, I’d now like to turn the call over to Kim for a detailed review of our first quarter financials. Kim?

Kimberly Pinson: Thanks, Tony. Turning now to our financial performance for the quarter, revenues for the first quarter of 2023 were $1.3 million, a decrease of $0.1 million sequentially and $0.5 million year-over-year. First quarter revenues for our consulting business were $1 million, a decrease of 38% year-over-year and 9% sequentially due to the loss one of our prime contract sponsors who chose not to renew the final option year of their contract. As Tony mentioned earlier, we are now seeing the full quarter impact of this loss. First quarter revenue for Shield was $0.3 million, representing 24% of total revenues. In comparison to the prior year period, Shield revenues increased by $0.1 million for the quarter, representing a year-over-year increase of 50%.

The product shift toward Shield as a result of new customer sales, increased utilization of Shield by existing customers, and the reduction in consulting revenues as a result of the loss of a large consulting contract as previously mentioned. We continue to have several large deals in our qualified pipeline as the demand for our products continue to remain strong. The gross profit margin was 76% for the first quarter of 2023 compared to 51% in the first quarter of 2022. The increased margin in the current quarter is a result of our product mix with Shield revenues now representing a higher percentage of revenues and the loss of 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 first quarter of 2023 were $5 million, a slight increase from the $4.9 million in the comparable quarter of last year, which is due to increased sales and marketing activities, which was mostly offset by reduced contract labor spend, administrative and legal costs. The net loss for the first quarter of 2023 was $4.7 million, or $0.22 per share, compared to a loss of $4.1 million, or $0.21 per share for the first quarter of 2022. Turning to the balance sheet, on March 31, we had cash and cash equivalents of $0.4 million, down from $3 million on December 31. 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.

Subsequently, no redemptions have been made to date. As Tony mentioned earlier, we are in discussions with Streeterville to potentially amend our existing note agreements with terms that we believe are beneficial to both parties. In February, we entered into a note purchase agreement with Streeterville in the amount of $1.4 million, and a related security agreement, whereby Intrusion granted a security interest in the employee retention tax credits due to the company under the CARES Act. The ERC refund was received in March, and this note was repaid in full. Additionally, it is worth noting that in April, we billed and collected on a large renewal contract, bridging some cash needs while we continue to evaluate available financing options. As Tony indicated earlier, we implemented cost reduction measures in late March.

These reductions included the elimination of 16 full-time positions, reduction in contract labor utilization, and voluntary salary reductions for several of our executive officers. We estimate that these changes will result in cash savings of approximately $1.5 million per quarter. We believe these cost reduction measures, combined with our revenue growth expectations, significantly reduce the amount of cash needed to fund operations for 2023. As a result, if we are successful in amending the terms of our existing note agreements, we now estimate our capital needs for the remainder of the year to be reduced from our previous estimates. While there can be no assurance that we will be able to raise the capital necessary to fund our plan, we believe that the capital markets remain open to us for the future rounds of funding.

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

Tony Scott: Thanks, Kim. To conclude, we obviously have some short-term liquidity issues to resolve, but having said that, I believe the company is at a critical turning point and is heading in a positive direction overall. I’m very heartened by the reception we’ve received about our new products. I’m delighted by the quality of our products and the quantity of features our creative and talented product development teams deliver every day. And we’ll continue to make adjustments in our sales and marketing efforts as conditions dictate. And as I indicated earlier, I think some recent changes we’ve made are already showing very positive results. I look forward to sharing the next steps in our journey with all of you, and I want to personally thank our investors and financial partners for their continued patience and support as we execute our strategy. This concludes our prepared remarks, and now I’ll turn the call over to the operator for Q&A.

Q&A Session

Operator: [Operator instructions]

Operator: Your next question comes from the line of Zach Taylor with ARS Investment. Your line is open.

Operator: [Operator instructions] Your next question is from the line of Aaron Warwick with Breakout Investors. Your line is open.

Operator: Your next question comes from the line of Scott Buck with H.C. Wainwright. Your line is open. Q – Scott Buck Hi, good afternoon, guys. Thanks for taking my questions, and apologies if these were already asked and jumped in a little bit late here. Tony, can you talk a little bit about where you are with some of these reseller and technical partners? Are you still in the education phase with them, or are they outselling and having some level of success?

Operator: Your next question comes from the line of Ross Taylor with ARS Investments. Your line is open.

Operator: At this time, there are no questions in queue. I’ll turn the call back over to our host, Mr. Tony Scott.

Tony Scott: All right. Thanks. Well, I don’t have too much else to say. I think, I’m really looking forward to our next quarter call. I want to thank everybody for joining us today. And as I said before, it’s a pivotal time for Intrusion and our entire organization. I’m excited about our future, and I do appreciate the patience and sticking with us that our partners and financial partners have shown us we couldn’t do what we do without you. And as I said, I’m looking forward to a different conversation next time we talk. Thanks for joining us today.

Operator: Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.