Intrusion Inc (INTZ) 2009 Q2 法說會逐字稿

Good afternoon.

My name is Stephanie, and I will be your conference operator for today.

At this time I would like to welcome everyone to the Intrusion Inc.

second quarter 2009 financial 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).

I would now like to turn the call over to Mike Paxton, Chief Financial Officer.

You may begin your conference.

Thanks.

Welcome to this afternoon's conference call to review Intrusion's second quarter 2009 financial results and discuss our business.

Participating on the call today will be Ward Paxton, Chairman, President 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 business update specific to our TraceCop product line.

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 today's call will be available at approximately 7 PM tonight for a one-week period.

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

At the replay prompt, enter conference ID number 23890825.

In addition, a live and archived audio webcast of the call is available at our website, Intrusion.com.

Before we begin I would like to remind you that during this call, including the question and answering 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 for the remainder of 2009, which is based on our own internal projections.

These projections could change prior to the end of this quarter and calendar year.

Of course actual results may differ substantially from projections.

The information in this conference call related to financial results, projections and other forward-looking statements is based on current expectations, and we expressly disclaim any responsibility to update forward-looking statements.

Many factors could cause our projections not to be achieved, including the uncertainties and lack of visibility caused by current economic and market conditions, and other factors, which can be found in our most recent filings with the SEC, including our current annual report on Form 10-K filed in March of 2009, and our most recent 10-Q that was for the second quarter of 2009, which is filed today.

Now with that behind us, I will turn the call over to our CEO and President, Ward Paxton.

Welcome to the Intrusion second quarter conference call.

It's good to have you with us today, and it's good for you to have an opportunity to learn a little more about our company, our financial results, and our goals and objectives.

It was great to return to profitability in the second quarter, and we will work as hard as we can to maintain that in the future.

Our goal is to achieve steady growth in our profitability as we take advantage of the market requirements for our products and technology and grow our sales.

At this time our most important product family is built around TraceCop.

The TraceCop family of products and services allow us to find the source of cyber attacks and other types of network crime.

Almost all of our revenue comes from our TraceCop family at this time.

We will look more into our business later, but now let's spend a few minutes on our financial results.

Intrusion's net income in the second quarter was $50,000, a 22% increase from the second quarter of 2008.

Our revenue in the second quarter was $1.3 million, which is about the same as the revenue in the second quarter last year.

Gross profit margin in the second quarter was 66% of revenue, which is about the same as second quarter 2008.

Our second quarter operating expenses were $0.8 million, again, about the same as operating expenses in the second quarter last year.

Our debt at June 30, 2009 was $835,000, up from $630,000 at March 31, 2009.

Our debt at June 30, 2008 was $1,180,000.

So we have been able to reduce our debt by $345,000 over the past year.

The second quarter was sound, and it was good to return to profitability.

But that's not enough.

To achieve our goal of steady growth and profitability, we must gain growth in our sales.

We see our pipeline of potential sales growing, and we must increase this pipeline growth even more in the future and translate the pipeline potential to sales at a faster rate than in the past.

We are working hard to achieve this goal.

Now Joe Head is going to spend some time today to discuss some of our efforts and results and TraceCop sales.

Joe?

As on the past four conference calls, the business area we've created around TraceCop has continued to prosper.

As we reported in July, we booked another $0.8 million of business for TraceCop.

Keeping tabs on our progress toward expanding the customer base and holding onto previous customers, we have nine TraceCop projects that are currently under contract.

One of these just renewed for the $800,000.

Our oldest major customer in this category is up for renewal in September, and they continue to like us.

The fourth was a small project we started in the fourth quarter, and it continues to be worked at a small level.

I expect it to be renewed but stay small for a while.

In April we booked an initial order for five more new TraceCop projects totaling $1.2 million on the initial order.

We expect each of these small starter projects to grow into four midsize and one major project and are working on getting follow-on orders.

Looking at project growth, in 2007 we had two major TraceCop projects, which we expanded to three projects in 2008.

We've added six more projects this year and will conclude one which has been small for a while for a total of eight legacy projects going forward.

We added one in the first quarter, five on the last day of April, plus one renewal in July.

We're working on eight additional projects through the developmental process currently, plus a number of other prospects in the pipeline.

Sales force expansion.

Last fall I reported that we've gone from one to three Intrusion folks marketing our TraceCop products.

They are up to speed with the products and are multiplying our efforts by supporting more customer interactions.

Both pre- and post-sales interactions have been multiplied by the benefit of our growing business in this area by adding the additional people.

We have initiated a push into marketing TraceCop to new parts of the DOD and have added the DOE and Justice Departments, areas we understand there is a need for TraceCop and ample budgets to support additional subscriptions.

As previously reported, we've already engaged some of our lead engineers as account level engineering contacts to further expand our customer facing capabilities, giving our customer more connection time with the company and increasing our success and wins on their projects.

This is doing great and has achieved the desired results with the customers' liking the increased attention from dedicated teams.

This also frees up our lead sales staff to spend more time on developing new business.

Major defense contractors continue to engage with us as I reported for over two years, and their team landed five of these new projects, and they represent a good expansion in the number of feet on the street.

We have engaged this last quarter on new potential customers and projects through them to expand the base further.

We do anticipate adding additional direct sales staff as our revenues grow so we can invest more effort into marketing the new potential customers that we expect big things from.

The US economic decline has not reduced our pipeline activity.

It just continues to look better from my vantage.

I reported last quarter that my focus would be on ensuring that the five new projects booked in April proceeded smoothly and grow into larger and renewal projects, as well as spending time pursuing the next eight unbooked projects plus the ones in the pipeline.

Our capabilities in this area are winning repeat business from old customers, and our engagements with new customers is getting equally good feedback.

So I expect things to look good in the future.

Ward?

We are making good progress in building the pipeline for TraceCop sales, and we expect to make more progress in the future.

As the result of our increased sales efforts begin to pay off with increased sales, we will expand our sales team.

And with this expected expansion of our sales team, we will direct efforts toward new government areas and to some new commercial customers.

Our team here at Intrusion is outstanding in all areas of our operation.

The outlook is bright, and we are committed to achieve our goals.

Thank you for your continued interest and support.

We will entertain questions now.

Mike?

Operator, can you remind the participants on how to ask questions?

(Operator Instructions).

Walter Schenker, Titan Capital.

Can you walk me through, because I don't fully understand the revenue progression over the last three quarters -- meaning the fourth quarter, the first quarter, and the second quarter -- and the contribution of the incremental $1.2 million from the four slash five -- to the five new contracts -- that's the term we're using is five now -- and how that contributed incrementally to this quarter and should contribute to the current quarter, i.e., we went from $1.2 million to $900,000, back to $1.3 million.

The contract we announced in April or May was for $1.2 million over six months, which simply put, which is probably wrong, is $200,000 a month.

And so the question I have is were there only two months of that in the quarter we just ended?

Does it ramp over the six months?

Did we lose business from one of our pre-existing people who provided us with the 900 odd thousand in the prior quarter?

Well, the new order that we booked in April for $1.2 million that was related to the major new projects was spread over six months including April and so fairly evenly spread over six months or the two quarters.

And therefore, if that's the case, it contributed $500,000 or $600,000 -- we'll make it $600,000 because it's half of six months, or three months.

$600,000 to this quarter, which means that the legacy business, which contributed $1.2 million, $1.3 million in December, or last year at this time, has gone down to $700,000?

Well, the legacy business does go up and down.

It's not a continuous business.

And -- but clearly the business that was involved in making up the $1.2 million or whatever in the fourth quarter was down to about half that level in this quarter.

So it went down in the first quarter and went down further in this quarter?

Yes, about -- I think it went down a little from the first quarter to this quarter as the numbers represented there indicate.

Which means we've lost a client or two?

This means there's -- as I indicated, sales aren't continually even.

They are up and down from time to time, and that's the way they have been for the -- that's the way they are.

Okay.

And therefore we going forward, we would expect that group -- again, I'll call them the old four versus the new five -- the old four to remain at the level they were in the June quarter?

Or are they likely to recover some back toward where they were last year?

Well, in general I think we would expect the -- we haven't lost customers, so we would expect the old customers to run at about the same levels as they did in the past.

But again, it's not a continuous thing, and we will see quarters popping up and popping down.

Okay.

Well, we've had a couple of quarters of -- using your term -- popping down, or one quarter of popping down and one quarter of slipping some from popping down.

And again, I'm just trying to understand if it's likely they will pop back up.

Well, we are pursuing them, and we don't have any reason to think they're going to go away.

Okay.

And Joe, in talking about the renewal of or expansion of the startup of the five new contracts, which I guess you said were four (multiple speakers)

You're correct, yes.

I think before I called it four because it was -- two were combined, so you're right, four and five, you are correct on your assessment there.

Okay.

Those contracts will be up for renewal roughly at the end of September?

Correct.

Do we have any indication yet?

Or we won't know until the end of September?

Or they might renew earlier?

As to what they are going to do?

And is this subject to a federal budget renewal for this department or somebody, so we might get hung up in a budgetary issue?

I think the -- there is not a -- there's no budget delay in terms of a year-over-year that is anticipated this year in terms of federal budget, and I expect those -- those projects, I think they're pleased with what we are doing, and I am expecting renewal and growth.

Okay.

Both renewal and growth?

Correct.

And that's what I reported in the narrative, that I expect the renewals for four to be what we call medium and one to be large.

And medium is $0.5 million to $1.0 million, and large is over $1.0 million?

Correct.

Okay.

And on the eight that we're working on and continue to work on, those are all still with our legacy type customers, meaning DOD-related, either directly or indirectly, as opposed to our new effort to move out to some of the other agencies or departments within the Government?

Yes.

Let's see -- two -- the three -- one, two, three, four -- yes, one is DOE and the other, DOD, so it's -- it looks like one outside in the new space, and they are in the kind of a small startup mode for first order kind of thing.

One could be large, actually.

So yes.

So I've got a mixture of smalls and large ones.

And I'll do one or two more and then I'll get off because there may be a long queue of other people waiting to ask questions.

We no longer talk about Compliance Commander.

Why don't you just give me a few words about it, or we'll say rest in peace, and -- or where are we?

Well, as we indicated at last call, our efforts along the lines of selling Compliance Commander have been reduced to just a vestige.

We are pursuing, though, Compliance Commander with some special focus at a very low level.

Okay.

And lastly then, going forward, the next growth in -- and I was pleased to see, Ward, you say that we need to accelerate or close more of the contracts as a priority.

I guess it's always a priority.

But going forward, the efforts into the other agency departments would have the similar type year to two years type gestation period we've seen with many of the DOD customers?

Or hopefully we can -- once we start a dialogue with some of these people, we can move a little faster than we have historically with some of the DOD guys who have been talking to you for a long time?

Well, I mean two -- it will break into two different groups.

One group will be new customers that we can build on with respect to our current experiences a whole lot and that the existing business will make a great impact on.

The others will be ones that will be farther removed and will be less influenced.

But in every case, as our cadre of customers and experience increases, it tends to shorten the interaction time that we have.

I'd agree with that.

Okay.

And that was my last -- this is my really last -- Ward, you indicated you would expect or hope -- expect -- I'll use the word -- that the company should, given the base we now have, remain profitable going forward?

I don't think I said that, Walter, but we are clearly running at that rate.

And actually the first quarter's dip down to $900,000 was a fairly minor perturbation in terms of orders supplied and that we were expecting in earlier.

So that right now our current rate has been running at this $1.2 million level now for the last six quarters or so with the perturbation included.

And we certainly are doing a lot of things to make that rate increase.

Okay.

Thanks a lot.

Brian Riley, Wells Fargo Advisors.

It's been a while since I've taken a look at things.

I just was wondering, sort of to key off the prior I guess question, Joe, I'm trying to understand the -- our customer base continues to grow, right?

Yes.

With TraceCop, and we really haven't -- I think one of you said that we haven't really lost any customers.

Right.

We still have our customer base, and it's growing.

So when they sign on -- but the revenues are lumpy.

You would think that -- are the contracts subscriptions where they pay a flat fee ongoing?

Or they have an upfront and then it's less on the back end of the year?

Or -- I'm trying to understand the lumpiness.

If the base of customers is growing, why the volatility?

That's a good question.

Some of them are annual subscriptions to where it's the same every month for -- forever.

Others are lumpy because they basically have tasks, and they say, do this, do that.

And then they sometimes go into periods where the projects are smaller or the needs are different.

So some of it is task-oriented rather than subscription-oriented -- if that makes sense.

And that --

Yes.

No, that explains probably why you have so much volatility.

Yes.

And as I said on there though, we have one that the customer isn't going away but the project is going away.

So that's why I reported nine going to eight next month.

It's been small for a while.

If you start adding numbers, it's a good to be truthful and say one died, and it wasn't from our fault, they just went away.

Right.

Now, the other question, from the standpoint of the customers -- there's a benefit, obviously, or they wouldn't be buying it.

What is -- what has been the benefit to these folks that have been signing on?

Is there real meaningful benefit that they are deriving from the TraceCop?

And what (multiple speakers)

Yes.

I mean, as you can see by the revenues, it's a reasonably expensive subscription and service.

So we've got a lot of expertise, and yes, the customers come back with universal compelling wins or they wouldn't continue.

And I think part of the strength we've got is just we've been doing it for a lot of years.

When you start investigating bad guys, old data is more valuable than new data, which tends to pre-create a substantial barrier if you didn't start a decade ago.

Yes.

Are you talking about the database that you have?

Correct.

Right.

Yes.

But my question, what is their benefit?

In other words, are these people actually finding the bad guys and doing -- and having a benefit from that?

Or what's (multiple speakers)

Yes.

They are?

Yes.

That's the idea.

Yes.

Right.

So -- well, I guess that's -- it must be there or they wouldn't be staying on as customers.

Yes.

Brian, I think the good thing there is that over the last five years, the customers that we have been working with are still with us.

Yes.

Right.

That's great.

So moving out, is there any potential to move outside of the government side?

Or is at all --?

There is.

I talked to Walter about that at some point.

Yes, I think there is room for commercial subscriptions for big folks in the e-commerce side and the anti-fraud sort of world.

There's a few missing pieces that I want to add before we go to the full commercial thrust that we've been working on for about the last year.

And we actually have that kind of in the process of being birthed in terms of a new set of data in the TraceCop database.

And that's one of the reasons for expanding the sales force is just -- I think certainly going into DOE, DOJ, lots of other -- DOD, arms -- is more profitable early, but certainly branching off into the commercial space is the goal.

Do you envision any potential at the state level?

There are certainly some that have been attractive in the past.

The State of Virginia has a really big child porn pursuit team, and anybody that has a state-level cyber team that cares about where are these things are coming from, from a fraud and a criminal standpoint, absolutely those are potentials.

But I haven't looked at it enough.

Besides for -- I've read about Virginia in the press, but I don't know what other states have a -- I would call it a competent effort in that area.

I wouldn't expect that many.

Is there any restriction in your mind to selling this outside the United States?

No, there's not any real restriction to doing it.

So that's a market potential as well.

Okay, and just sort of a bean counter question.

Are we going to be needing to borrow more money at some point do you think, Ward?

Or we've got enough to -- there's not much there, but --

Well, certainly over the last year we've actually reduced our debt on an annual basis.

From time to time it -- that goes up and down, of course -- and we'd like to have the requirement for -- as revenues were growing so fast that we had to borrow money to support the receivables.

Right.

Yes.

Good.

Mike, do you know what the cash flow numbers are for the quarter?

I know we have the six-month filing, but do you have the quarterly number?

I don't recall it off the top of my head.

You can call me off-line, and I can get it to you.

Yes.

That's fine.

You know we filed our 10-Q today, so it would be online.

Well, actually I'm looking at it, but the cash flow statement is for six months, and it shows a negative $774,000 cash used, but the bulk of that is deferred revenue.

So I'm just wondering if you exclude those balance sheet changes, you're still negative about $200,000 for six months, but I'm thinking that for the last quarter you should be showing a positive number.

The quarterly -- the cash flow statement is a six-month statement in the 10-Q.

It's not a quarterly.

Yes.

We should get to a point to where when we are making -- when we have net income, we should get to a point where we are pretty cash flow positive because we are not buying any capital items or anything like that at this time.

Brian, that's why the number for the last year is pretty indicative.

So for the last four quarters, we actually reduced our debt and showed a small loss for that period of time.

Right.

Yes.

Oh, it's definitely on the upswing.

Your loss for the six months was $834,000 and now it's $271,000 so I'm guessing you're probably cash positive.

If you exclude the balance sheet tangent you should be cash flow -- you should have a good (multiple speakers).

Okay, well congratulations.

Things are looking better, and it's always a pleasure talking to you guys.

Thanks Brian.

Operator, do we have any more questions?

At this time there are no further questions in queue.

At this time 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, you can reach us at 972-234-6400.

Thanks a lot.

Bye.

This concludes today's conference call.

You may now disconnect.