Intrusion Inc (INTZ) 2007 Q4 法說會逐字稿

Good afternoon ladies and gentlemen.

My name is Gerald and I will be your conference operator.

At this time, I would like to welcome everyone to the Intrusion Q4 and year-end 2007 financial conference call.

All lines have been placed on mute to prevent any background noise.

After this biggest remarks there will be a question and answer session.

(OPERATOR INSTRUCTIONS).

I would now like to introduce your host, Mr.

Mike Paxton.

Sir, please go ahead.

Okay, thanks.

This is Mike Paxton, Chief Financial Officer for Intrusion.

Welcome to this afternoon's conference call to review our fourth quarter and year-end 2007 financial results and discuss our business.

Participating on the call today will be Ward Paxton, Chairman and CEO; and Joe Head, Vice President, strategic projects.

Ward will discuss Intrusion's financial results and current activities and Joe will give a current TraceCop business update.

We will be glad to answer any questions in the question and answer session after our prepared remarks.

We distributed the earnings release about an hour ago.

A replay of this conference call will be available from approximately 7 PM tonight until April 2.

The replay conference call number is 800-642-1687.

The replay prompt interconference ID number 41042829.

Also, a live and archived video or audio webcast of the conference call is available at our website, Intrusion.com.

In today's conference call, Company executives will be making several forward-looking statements with respect to financial results, business strategies, industry trends and certain other matters.

These statements are made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and involve risks and uncertainties which could cause actual results to differ materially from those in the forward-looking statements.

Additionally, we may be discussing our current outlook for 2008 which is based on limited information available to us now relatively early in the current year.

It is routine for our internal projections on which we base our guidance today to change and they could change prior to the end of the next quarter and/or the end of the year.

Of course, actual results may differ substantially from projections.

The Company assumes no obligation to update information concerning our expectations.

Many factors could cause our projections not to be achieved including but not limited to the uncertainties and lack of visibility caused by current economic and market conditions and other factors which can be found in our most recent filing with the SEC including the section titled "factors that may affect future results of operations" in our most recent 10-Q (inaudible) filed in November 2007.

If you need a copy of today's press release or Intrusion's prior SEC filings call us or visit our website at Intrusion.com.

Now I will turn the call over to Chairman, President and CEO, Ward Paxton.

Thanks, Mike.

Welcome to the Intrusion fourth-quarter conference call.

Revenue in the fourth quarter 2007 was $500,000 compared to $1,500,000 in the fourth-quarter 2006.

The largest revenue variant was produced by TraceCop.

TraceCop revenue in the fourth quarter 2007 was $300,000 compared to $1 million in the fourth quarter of 2006.

As you know, at the U.S.

government fiscal year runs from October 1 through September 30.

Congress did not approve the 2008 budget until late January 2008 which resulted in significant slippage of our TraceCop orders.

For the past six months we have increased our sales efforts on TraceCop and have broadened our focus on significantly more U.S.

government customers and resell partners.

At this time, all of our TraceCop sales efforts are directed toward the U.S.

government and even though we experienced a business gap in the fourth quarter we are excited by the potential for the future.

We just announced earlier today that we booked $700,000 of TraceCop orders in the first quarter with most of the revenue from these orders coming in the second and third quarters of this year.

Joe Head, co-founder of Intrusion and Vice President in charge of our TraceCop business will discuss more about TraceCop later in the call.

Our second strategically important product family is Compliance Commander, our data leak prevention product.

Compliance Commander revenue for 2007 was about the same as 2006.

We have broadened Compliance Commander sales thrust to include banks and hospitals along with our earlier focus on credit unions.

Our engineering team has focused on expanding the capabilities and functions of Compliance Commander.

We believe that Compliance Commander has the best accuracy in the industry.

We do well in shootouts with competitors.

We have broadened our sales focus to include security service providers and expect to see more traction with these new service provider customers.

Even with reduced revenue in the fourth quarter 2007, gross profit margin increased slightly from the 60% in the fourth quarter of 2006 to 61% for the fourth quarter 2007.

We expect gross profit margin to continue at about this current level through 2008.

Operating expenses in the fourth quarter 2007 were $1.1 million, about the same as fourth quarter 2006 and each quarter in 2007.

We expect operating expenses to continue approximately at this level going forward through 2008.

If gross profit margin continues at about 61% and operating expense continues at about $1.1 million, breakeven should occur at about $1.8 million of quarterly sales.

Our team is working as hard as we can to achieve breakeven.

Our net loss in the fourth quarter 2007 as a result of the reduced sales level was $800,000.

During the year 2007, we funded our company with private placements of common stock starting in December of 2006 then in March, June and September of 2007.

Mike Paxton, our CFO and I invested a total of $2 million in these four private placements.

In January 2008 I made available an additional $700,000 line of credit to Intrusion.

Even though the financial data looks kind of bad on the surface, it is my judgment that we are making good progress.

Now let's look at our business in a little bit more detail.

Joe, tell us about what you are doing to increase TraceCop sales.

Okay, Ward.

I've certainly not enjoyed the results of Congress's war with the president [yet] most of my customers the FY 08 funds are just now arriving at cost centers for the award of contracts originally scheduled for October 1 last year.

So long-awaited orders are now starting to be awarded.

Last time I mentioned favorable results in expanding the number of projects at new groups and organizations that we have not previously done business with.

Today we announced three orders totaling $700,000.

Two of these were to a previous customer.

The other was from a defense contractor we have never done business with before.

And this was not for a pass-through from a government customer but instead it was for our support of an internal research and development program designed to exploit technology and expertise we have built over the last two years in TraceCop and to seed and help create a new set of products leveraging our TraceCop project expertise into a new set of customers.

This will also represent an expansion in our sales force as this large defense contractor will demonstrate and market this new capability throughout their large customer base.

Reporting on our progress toward expanding the customer base and holding onto previous customers, our previous three customers for TraceCop continued to be good customers although two of them have been suffering from the congressional budget delays.

Although the September 1 fiscal year began almost six months ago only one has been able to renew so far but we're expecting all three to continue doing business with us.

From the sales force expansion, we have gone from one to three internal folks marketing our TraceCop products.

One major defense contractor is also engaged with us and are pursuing six of our 14 new projects with us and they represent a good expansion of the number of feet on the street promoting our products to new customers outside our traditional customer base.

Last time I mentioned that it was time to expand our sales efforts and go pursue business from new customers.

The number of new projects and their tempo is in alignment with my hopes from the last quarter with the number of projects we're engaged with doubling since I talked to you last, last quarter.

That doubling represents new opportunities from new groups and organizations that we have not previously done business with.

Actively on a daily basis we're chasing 14 new projects from six new customers.

Giving you a sense of magnitude, eight of these projects are equal to or larger than our largest historical project and order sizes.

Four are average and two are small and developmental.

Ward?

Thanks, Joe.

Now let's have a look at Compliance Commander.

As you know, Compliance Commander is installed at our customers Internet gateway.

All of the customers data moving onto the Internet passes through Compliance Commander and Compliance Commander will block any confidential information and keep it from leaking out of the customers network.

If the customer is a bank all of the banks customers personal information is confidential and should not be transmitted clear text onto the Internet.

If the customer is a hospital, all of the hospitals patients personal information is confidential and should not be transmitted clear text onto the Internet.

During every evaluation of Compliance Commander at customers locations, we find this confidential customer or patient information being transmitted clear text onto the Internet.

We always find violations.

Some potential customers decide to buy Compliance Commander and stop the loss of the confidential information.

A lot of the potential customers just decide to put off solving this problem and go forward knowingly violating the law.

Some of these have come back months later and purchased Compliance Commander and we expect others to continue to do that in the future.

We seldom lose the business to a competitor.

More frequently the potential customer just puts off the decision.

To date there has not been a much regulatory pressure applied but that should improve in the future we think.

In summary, we are developing good traction with TraceCop.

We are broadening our TraceCop sales efforts and we expect growth in sales in the future.

We are expanding our market segment focus for Compliance Commander to include banks and hospitals and concentrating on sales to security service providers.

We expect to see growth in sales here too.

We are pressing as hard as possible to reach profitability soon.

I am personally very upbeat upbeat on our future and I'm confident of our success.

Thank you for your continued interest and support.

Mike?

Okay, Gerald.

At this time, we will open up the call for questions.

If you could please remind participants how to queue up to ask the questions?

(OPERATOR INSTRUCTIONS) David Taylor, David P.

Taylor & Co.

You have had some success selling your services to the government but relatively little success selling your services to private industry which I think is a far larger market.

I mean PJX for example had this massive problem Hannaford Bros.

just announced a major problem.

Why can't you sell your services to these private industry customers?

What is the problem?

As you know we have two different product lines.

Our TraceCop product line is really geared toward our government customers and that is what we sell to the government.

We don't sell Compliance Commander to the government at this time.

We focus totally on private industry in particular banks, hospitals and credit unions.

We are getting traction there and as I indicated don't lose business to competitors in these competitions or in these sales activities.

The urgency of the customers to solve this problem is still less than we would like to see but we're seeing signs that perhaps it is increasing.

There has been very little regulatory pressure for this set of vertical markets that we are focusing on to install equipment to prevent the data leakage.

Your question is pretty astute though that the ones that you cited were folks who have gotten in and stolen a bunch of customer data, had they installed something like Compliance Commander that would've been stopped.

Why can't you sell these people?

What we are finding is that people are just delaying the decision to buy.

We don't lose out to a competitor.

The guy just procrastinates and buys.

We made a sale here very recently to a guy that we had demonstrated the product to a year ago and he sat there for a year before he decided to move forward.

So the lack of urgency is something -- we continue to try to increase the sense of urgency in the customers mind but we still see that in spite of the news you are referring to there of folks that are losing data and having grief over it, the urgency for folks to install this kind of the equipment and prevent the problem is still not where we would like to see it.

Why is that?

I think if you look at historically the emergence of firewalls and all of the new technology it takes a while before folks to scale up and then the big guys are still in the -- this is expensive and we don't know -- maybe we'll get lucky and they won't hit us (multiple speakers)

(multiple speakers) legal claims are expensive too.

We certainly expected that all those factors that we are discussing to move the market quicker but it has not.

From what we can tell our competitors are experiencing the same limited success.

I think we will see a change.

We're optimistic of that and we are geared to do that.

Our product is very good.

As I indicated we believe it is the most accurate which means that the customer sees very few false alarms.

We stop the things from going out and we do not give him an alarm that something shouldn't be going that really does not make any difference.

Our competitors all have a false alarm problem.

Okay?

Okay.

(OPERATOR INSTRUCTIONS)

Okay.

If there are no more questions then 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 any further questions call us at 972-234-6400.

Thanks a lot.

Thank you.

Bye.

Ladies and gentlemen this does conclude the Intrusion Q4 and year-end 2007 financial conference call.

You may now all disconnect.