Intrusion Q3 2024 Earnings Call Transcript

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November 12, 2024

There are 5 speakers on the call.

Operator

Welcome to Intrusion Inc. Third Quarter 2024 Earnings Conference Call and Webcast. At this time, all participant lines are in a listen only mode. For those of you participating in the conference call, there will be an opportunity for your questions at the end of today's prepared comments. Please note, this conference is being recorded.

Operator

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.

Speaker 1

Thank you, and welcome. 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'd like to remind everyone that the 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.

Speaker 1

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 U. S. 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.

Speaker 1

With that, let me now turn the call over to Tony for a few opening remarks.

Speaker 2

Well, thank you, Josh, and good afternoon, and thank you all for joining us today. Our Q3 results reflect another quarter of improved performance as we delivered our 2nd consecutive quarter of sequential revenue improvement, which marks an important milestone in our continuing journey towards sustainable growth and profitability. As I noted in our strategic update call last month, we signed an additional 7 new shield logos during the Q3, bringing our total new logo count year to date to 18. I'm also pleased to report that we've continued to experience near zero churn with our Shield customers. And as I previously noted, we were able to expand 2 contracts with existing logos as a result of the positive experiences that these customers have had using our technology.

Speaker 2

So we continue to remain excited about the strong momentum that we have been experiencing for our suite of shield technology solutions. And as we deploy our solutions to these new customers over the coming quarters, we anticipate that we will experience further improvements to our financial results that will help us achieve our growth and profitability goals. As I noted on our call in October, we're also continuing to see strong demand for our products in both the Philippines and the broader Asia Pacific region. As a result of the increased presence of our technology in the region and the positive reputation of our solutions with these customers, our pipeline is growing with additional high quality opportunities that we expect to close in both the Q4 and in the first half of twenty twenty five. On the domestic front, we are engaged in several exciting POCs with large enterprise customers, which we also expect will turn into bookings in the Q4 and beyond.

Speaker 2

As you've been hearing me say for some time, the cybersecurity challenges most organizations face will only continue to grow, and we have a unique and valuable solution that can address many of the most pressing challenges that these institutions face. Now with respect to our product development efforts, we've continued to focus on adding new capabilities to increase the efficacy and the value of our products. We've been improving the speed and the frequency of our updates, which ensure that our customers will benefit from timely, relevant and up to date cybersecurity protections. The AI features we've introduced into the Shield Command Hub will continue to expand with the goals of providing near real time expert analysis, substantially reduced workload for security operations staff and additional ease of use and automation tools for our customers. On the leadership front, our longest serving Board member, Jim Giro, has announced his retirement from our Board of Directors effective November 20, 2024.

Speaker 2

Jim has been a Board member of Intrusion for 21 years and is stepping away as a part of a long planned transition to retirement to focus on other activities. And over the years, Jim has been a great resource for the Board as he has utilized his extensive executive leadership experience to provide intrusion with counsel that assisted the company in addressing a wide range of challenges that we faced over the last few years, in particular. It's been a pleasure to work with Jim on the Board, and I would like to personally thank Jim for his extraordinary commitment to intrusion during his tenure, and we wish him the best as he begins his well deserved retirement. A replacement for Jim has not yet been identified, but the Board has already begun a search to identify and evaluate qualified candidates. We'll provide additional information when it's appropriate to do so.

Speaker 2

Now briefly on to our financials. As you'll hear from Kim later in greater detail, our Shield revenue during the Q3 increased by 49% sequentially. The most significant portion of the increase in Shield revenue during the Q3 was driven by the addition of a U. S. Department of Defense contract, which is a combination of Shield and our more traditional consulting services.

Speaker 2

We expect to see additions to and expansions of this contract in the coming quarters. As in previous quarters, we've managed to control our costs, which remain relatively flat, and we continue to maintain a healthy gross margin above 77%, which I believe is essential for our long term goals. And at the same time, we continue to invest in R and D at a relatively constant level with our prior quarters, which allows us to quickly design, develop and implement new capabilities to keep our products fresh, relevant and effective in a constantly changing cybersecurity environment. Now before I turn the call over to Kim, I'd like to address our current share price. As many of you are aware, we've received a written notice from the NASDAQ Stock Market indicating that intrusion is not in compliance with the $1 minimum bid price requirement for continued listing.

Speaker 2

The notice has no immediate effect on our listing on NASDAQ, and we have 180 calendar days to regain compliance. Like many of our loyal investors, we're extremely disappointed with how our share price has performed over the past few months. But we recognize that the best cure for this situation is delivering on our revenue goals, and we believe that the Q4 and the Q1 will continue to deliver the results that we've committed ourselves to. While there's still a lot of work ahead of us, we are on the right path forward given the steps that we've taken to strengthen our balance sheet and grow our customer base, which, as you can see, has already begun to yield improved financial results. As we look ahead, I believe that the recent customer wins, coupled with our strong pipeline of high quality opportunities, have positioned us to improve our financial performance and ultimately drive our stock price higher in a sustainable fashion.

Speaker 2

And with that, I'd now like to turn the call over to Kim for a more detailed review of our Q3 financials. Kim?

Speaker 3

Thanks, Tony. In the Q3 of 2024, revenues were $1,500,000 an increase of 3% sequentially and 2% when compared to the prior year period. A key area of growth that we would like to highlight this quarter is the increase in shield revenue of $100,000 or 49% sequentially over the Q2 of 2024. As you may recall, our shield revenues declined in the June 2024 quarter as a result of the loss of a large early intrusion shield customer that had implemented a highly customized and non standard configuration of the product. The loss of revenues from this customer has now been fully offset by revenues from new customers signed in recent quarters and to a large degree from the recent $2,000,000 contract with the U.

Speaker 3

S. Department of Defense that Tony previously mentioned. Consulting revenue in the Q3 totaled $1,100,000 a decrease of $100,000 sequentially and flat on a year over year basis. The sequential decrease in consulting revenue was related to a reduction in task order related services. Gross profit margin was 77% for the Q3 of 2024 compared to 76% in the June quarter and 78% in the Q3 of 2023.

Speaker 3

The gross profit margin will vary depending on product mix. Our gross profit increased slightly during the quarter as a result of product mix with Shield revenues representing 30% of our revenues in the Q3 of 2024. Operating expenses in the Q3 of 2024 totaled $3,200,000 an increase of $100,000 sequentially and a decrease of $600,000 when compared to the Q3 of 2023. The increase in operating expenses during the quarter was primarily driven by salary increases given to non executives. The decrease on a year over year basis was driven by reduced legal defense cost associated with matters that are now fully settled, decreased spending on contract labor and lower costs associated with software support services.

Speaker 3

As we move forward, we will continue to remain diligent with not only our spending decisions, but also our investments that will ensure future growth. The net loss from operating activities for the Q3 of 2024 was $2,000,000 which is in line with the June 2024 quarter and represents a $700,000 or 24% improvement on a year over year basis. The improvement over the prior year period was driven by lower operating expenses. The net loss for the Q3 of 2024 was $2,100,000 On a year over year basis, net loss improved by $1,100,000 from a loss of $3,200,000 in the Q3 of 2023. The improved net loss relates to both lower operating expenses and reduced interest charges of $500,000 related to the Steerville notes.

Speaker 3

As you may recall, we converted $9,500,000 of debt to equity in March of this year. From a liquidity perspective, on September 30, we had cash and cash equivalents of $1,100,000 I'd like to now turn the call back over to Tony for a few closing comments. Tony?

Speaker 2

Thanks, Kim. While we are encouraged by these results, we are definitely not satisfied and our team is continuing to remain focused on improving our products and our financial results, which will create a share price that will deliver meaningful value for our stakeholders. As I noted throughout the call, we've experienced a lot of great momentum over the past few quarters from a customer win and a pipeline standpoint, all of which gives us confidence that we are on the right path forward. We're excited about the future here at Intrusion, and we look forward to providing additional updates on our progress during our Q4 earnings call. This concludes our prepared remarks, and I'll now turn the call over to the operator for Q and A.

Operator

Thank The first question comes from Scott Buck with H. C. Wainwright. Please proceed.

Speaker 4

Hi, good afternoon, guys. Thanks for taking my questions. Tony, can you remind us when that large shield client started to exit? Just trying to figure out when that gets anniversary here in 2025, whether it's the Q1 or the Q2?

Speaker 2

I think and Kim can correct me if I'm wrong, but I think the last revenue we got from that initial Shield client was in the Q2 of this past year. So it was fully exhausted by then.

Speaker 3

Yes. No, the largest market was

Speaker 4

in the Q1. It was the Q1. Okay.

Speaker 2

Yes,

Speaker 4

Q1. Okay. So theoretically, that should help the revenue growth optics as you anniversary that then?

Speaker 2

Yes, yes, exactly.

Speaker 4

Perfect. That's helpful. And I was wondering if you could give us any color on what kind of size you're seeing with some of these new shield logos? I recognize that in most cases you probably start small and build within, but just kind of curious who are these businesses that you're signing?

Speaker 2

Well, they're still all over the map. I guess what I'm encouraged by is, as I kind of mentioned on the call is our reputation in the Asia Pac region has continued to be a factor. We're getting more and more peer to peer referrals and we're getting the opportunity to bid on bigger, more important deals and so on. And then I think as I mentioned on our strategic call, this big DoD contract that we have, we're expecting to or hoping I should say to try to replicate that in other regions around the world. So and I think we can do that because of these enterprise features that we've been building into the product over the last 2 years that now start to resonate with larger customers.

Speaker 2

So that's kind of the deal. Even on the smaller deals that we signed, we've got a couple of MSPs who have been running the product for a year and now feel very comfortable having gone through a couple of upgrades and other experiences to recommend to their other clients. So far nobody is saying I want less. There's some great signs that people want more.

Speaker 4

Good. That's very helpful. And then the last thing, just curious if there's any read through from the election results, whether there is potential there to help with the government business or at least federal government budgeting, but curious to hear your thoughts.

Speaker 2

Yes. We don't think we're going to be impacted in any significant way because of politics. What we always run-in fear of, I guess, is some long continuing resolution that kind of hobbles things along for a while. And it's still a little too early to tell what that's going to look like. I mean, your guess is as good as mine.

Speaker 2

But I guess the good thing about being in the cybersecurity business is the bad guys don't really care who's in office and they just keep doing their thing and that creates a market for our solutions. So I'm not expecting them to go away or stop doing what they're doing.

Speaker 4

Of course. I appreciate the time guys. Thank you very much. Thanks guys.

Operator

The next question comes from Ed Woo with Ascendiant Capital. Please proceed.

Speaker 4

Yes. Thanks for taking my question. Obviously, election integrity is very big in the U. S. As it is around the world.

Speaker 4

And the Philippine election is a great win for you guys. Have you seen any increased opportunities in the U. S. Bring your product as a solution for the elections integrity?

Speaker 2

We've certainly gotten some inquiries, but I don't have any solid signed business at this particular point. I think as everybody has noticed, the claims of election fraud this time around were way lower than they've been in the last couple of cycles. And so we'll see long term what that really means. But I think it's a concern for any government organization anywhere in the world, the capability for somebody to try to hack in and mess with a campaign or fool around with the results, those opportunities are going to be there for a long time. And we think we've got a good solution that can help defend against that.

Speaker 4

Great. And then just going back to the prior question in terms of now the elections are over, have you seen these Chief Information Officers saying that now the election is behind us, they can kind of focus on 2025 and figure out their capital spending plans?

Speaker 2

I think it's too early to know that. I'm actually attending a big exposition here in Southern California the next couple of days where we're going to be talking to couple of 100 managed service providers and so on. So I expect to get some read as a result of those conversations. But right now, I think it's probably a little too early to make any kind of specific comment on that.

Speaker 4

Great. Well, thank you and I wish you guys good luck. Thank you.

Speaker 2

All right. Thanks,

Operator

Okay. We currently have no questions in queue. I'll turn the call back over to your host, Mr. Tony Scott for closing remarks.

Speaker 2

Well, thanks everyone for taking the time to listen to our call today. As I said on the call, we're committed to working hard to achieve our revenue and profitability goals in 2025. And I'm still pretty excited. I remain excited. Some of these big wins certainly help us create more visibility and enhance our reputation.

Speaker 2

So we're really looking forward to what the next couple of quarters can bring and appreciate everyone's support. It's been a long hard road for many of us and I also want to thank our team who's stuck with us. We've had not only near zero churn from a customer standpoint, but we've had near zero churn from a talent perspective and it's our highly focused super employees who keep this engine running and keep us alive every single day. So I appreciate everything that everyone's doing. I think we've got a great future in front of us and look forward to the next call we can have together.

Speaker 2

Thanks.

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Intrusion Q3 2024
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