Intrusion Inc (INTZ) 2009 Q4 法說會逐字稿

Good afternoon.

My name is (inaudible—background noise) and I will be your conference operator for today.

At this time I would like to welcome everyone to the Q4 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).

Thank you.

I will now turn the call over to Mr.

Mike Paxton, Chief Financial Officer.

Sir, you may begin your conference.

Okay, thank you.

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

Participating on the call with me today is 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 after our prepared remarks.

00 p.m.

tonight for a one-week time period.

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

At the replay prompt, you can enter conference ID number 55916057.

In addition, a live and archived audio web cast of the call is available at our web site intrusion.com.

Before we begin, I would like to remind you that during this call, including the question-and-answer 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 2010, 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 most recent annual report on Form 10-K filed in March of 2009 and our most recent 10-Q, which was filed in November of 2009.

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

Thanks Mike.

Welcome to the fourth quarter 2009 Intrusion conference call.

It's good to be with you today to review the fourth quarter and year 2009 Intrusion financial results.

Both the year of 2009 and the fourth quarter of 2009 were outstanding for Intrusion.

We reached net income of $186,000 for the total year 2009 compared to a loss of $809,000 for all of 2008.

For the fourth quarter, we generated net income of $379,000 compared to only $8,000 in the fourth quarter of 2008.

This dramatic improvement of net income in the year and the fourth quarter was primarily driven by growth in revenue.

For the year 2009, revenue increased to $4.9 million, a 19% increase over 2008.

And for the fourth quarter of 2009, revenue grew to $1.5 million, a 29% increase over the fourth quarter of 2008.

Also fourth quarter 2009 revenue grew 21% sequentially over third quarter revenue.

Gross profit margin was down slightly in 2009 compared to 2008.

In 2009, GPM was 66% for both the year and the fourth quarter compared to 67% for the quarter and 68% for the year and 68% for the fourth quarter in 2008.

Intrusion's fourth quarter 2009 operating expenses were $604,000, down from $771,000 in Q4 of 2008.

For the year of 2009, operating expenses were $3.008 million, down from $3.491 million in 2008.

Going forward, we expect operating expenses to increase as sales increase.

Backlog and deferred revenues totaled $2.729 million at the end of last year compared to $1.783 million at the end of '08, a 53% increase.

Most of our revenue is generated from sales of TraceCop.

TraceCop is our product family that provides abilities to find the source of cyber- based attacks and other types of Internet crime.

Our TraceCop family includes a database of worldwide IP addresses, which we have collected and which we regularly update.

In addition, other information and analysis results, such as geo-location data, may also be included.

We've been gathering and processing this TraceCop data for a long time and continue to expand its value and usefulness in tracking down bad guys involved in cyber crime.

As I indicated on our last call back in November, we are in the process of hiring additional sales, engineering, and analyst people.

In November, I indicated we were going to hire six additional people.

So far we've hired three.

We are now planning to hire an additional four people during the first quarter.

This will bring our total people level to 31, a 30% increase since October.

In October, at the end of October, we had 24 and at December 27.

We're hoping to have 31 by the end of March.

As revenue grows, we will add additional people across our company, but primarily in sales and engineering.

Now let's hear more about TraceCop from Joe Head, Vice Chairman, Vice President, and Co-Founder of Intrusion.

Joe?

Thanks Ward.

Well, on the past six conference calls, the business we've created around TraceCop has continued to prosper.

Over the years, we've built upon our code base, our reference databases, and our in-house analytic resources.

Along the way, business that was originally only earned via long-term customer relationships has begun to mature into leverageable capabilities that we can sell to create new wins at new customers.

Back in 2008, our TraceCop business was built around three projects.

That grew to six projects in 2009.

Now in 2010, I've tallied up five new ones for a total of 11 projects that we expect to have under contract this year.

So growing year to year from three to six to eleven projects is another benchmark of what I see as a multiyear growth trend for expanding TraceCop.

Keeping tabs on our progress toward expanding the customer base and holding on to previous customers, as I've said, we have six TraceCop projects that are currently under contract.

We've received renewal orders from the six previous projects in the last quarter extending this work another year.

Two of our old large projects were also expecting to renew in addition to these six.

One has been delayed due to congressional delays in passing the budget, but we believe those funds are specifically allocated for our project to remain continuously funded.

The renewal of an older project is expected to be renewed for a project that we last had under contract over a year ago.

On the sales force expansion, last fall I reported that we'd gone from one to three Intrusion folks marketing our TraceCop projects.

And they continue to be up to speed with the products and have multiplied our efforts by supporting more customer interactions.

And as previously also reported, we've 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 successes 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.

In addition, I've transitioned two of our current projects and two of our five new developmental projects to be led by another member of our team, so I can focus more on winning large new projects, as well as providing valuable wins to our existing projects.

This last quarter we approved adding two new direct salespeople.

We've added one from in-house and his addition as a primary point of contact has been very well received by our customers.

We continue to look for additional sales candidates from outside the company and will hire two more as we find suitable candidates.

Ward?

Thanks Joe.

As you see from Joe's remarks, we are increasing our connections to customers and projects, which will lead to growth in revenue and profit.

It is difficult to quantify exactly the size of the market we serve because of the nature of our products and the attitude of customers about identifying themselves.

As the TraceCop market grows and the application of the TraceCop family of products and services broadens, competitors will emerge and the visibility of the market will become clearer.

In the meantime, we will work as hard as we can to increase the number of customers and projects, broaden the TraceCop product family, and increase sales and profits.

The market potential for TraceCop is quite large and will continue to grow.

Summarizing, we have an outstanding team at Intrusion that works smart and hard to achieve our goals.

We had a terrific year last year, resulting in growth in revenue and profitability.

We have set our goals higher this year and will do everything in our power to achieve them.

Let me thank our shareholders for their support and renew my pledge to do all that I can to make our shareholders' investment rewarding.

Thank you.

Mike?

Yes, Operator, could you remind participants how to queue up to ask questions?

Yes sir.

(Operator Instructions).

You do have a question from the line of Walter Schenker with Titan Capital.

Hey guys, now that you're making money, it'd be nice if a second person got on the line.

How're you doing, Walter?

Hey Walter.

I'm doing well.

Obviously it's better to make money than not make money, so that's a big plus.

Joe, I'm not sure I followed everything you said.

You talk about 11 projects this year in 2010.

Those are all projects that you either have already signed or are prior projects, which will either renew or have already renewed?

No, what I'm really saying there is of the eleven, six -- eight are previous, you know, customers that are renewing and three are new that we haven't done business with before.

And those are the ones that are just sort of in my, you know, firmly believe they're going to get ordered this year.

In addition, we've got a, you know, others as usual that I'm working.

Okay.

Just, again, to make sure I'm still - I'm less confused, six are already renewed.

There are two who were - who have not yet renewed, but are currently paying you?

Yes, well, it was one of those that's late on giving us the go-ahead order for this 12-month period, but we expect them to pay for the full 12 months.

And another one we stopped doing work for them over a year ago.

We did a little trial project for them and they're planning on re-upping at a larger level.

And therefore to get $1.5 million in revenues within the context of six, eight, or eleven, how many people paid you roughly?

I realize there's some small stuff that goes into it.

Six.

--Six, okay.

So if we were to go from six to eleven, we would expect significantly higher revenues than $1.5 million?

Correct.

And I -- in the past, I've characterized those by size and I apologize I didn't do it this time, but of the eleven, the differential five, only one of those was small.

The rest are all large if I remember correctly.

Okay.

So, Walter, there's a lot of variables there with respect to that, but if those 11 were all in full gear and everything, then that's a correct and -- deduction, but we have all different degrees of that, of course.

No, no, I - as you know, I've been here long enough to understand that.

I just wanted to understand, you know, get a better feel for where we ought to be.

The - I know there was some delays in revenue from the delay in the budget at the federal level, you talk about three new contracts with a high degree of conviction -- that's you, Joe.

Ward always has a lot of conviction.

But there's a lot of optimism anyway that you would hope therefore that you would be able to announce them in the fairly short term?

They will vary.

Some are early in the year, some are in like September time frame.

But about half and half.

Okay.

And beyond those normally when you've talked on prior things, the number of incremental contracts, obviously they don't all come to fruition, otherwise you'd have a lot more contracts now.

With typically more than three in the hopper and was between five and ten, there's still a bunch of other contracts floating around.

You just have less conviction as to how - as to the likelihood of them taking place, so they could -- or they may or may not.

Yes, I'd probably better characterize it by saying I've got about the same number of things I'm working as I always have, which is about ten new ones that haven't ever been on the string before, but the fact that I'm up in my confidence on landing some big ones, I think we'll see some uptake in new ones this year.

Okay.

I'm going to ask one more question and then just before I hang up, so I'll come back to it.

Can you just give us any updates on the non-Trace—I'll do it first—no I'll stay here—and therefore on a cost bases you've added seven people on a base of 24.

One would therefore expect your cost structure to go up at least proportionally?

You've added about 30% more people, so costs should go up about 30%.

So far we've only added three of that seven and have the other four that we're trying to add as soon as we can.

As soon as they're all added, then you would expect the cost structure to go up about 30%.

Okay.

And then the only other questions is is there any hope for anything away from TraceCop?

There's always hope, I know.

Well, we are - we continue to sell a small amount of Compliance Commander and we are working on some new things.

But at this time, there's nothing significant in the forecast.

Okay.

And my last, my really last question, there is probably every other day discussions in the papers, at least in New York, Wall Street Journal, on cyber security, issues of cyber security at very high levels.

Is there a point, Joe, where we actually become in front of some of those people and there's a possibility instead of adding accounts one at a time larger entities become aware of or become interested in the product and we pick up large - much larger groups of business?

Yes, I think that's - I mean, that's our goal for the year that's in the unspoken, unannounced sort of size, very much we're planning on how do we scale this.

And I think that when you look at cyber security and cyber attacks against the country that have gotten more press lately, understanding who that is that just thumped you and what you need to filter to make it stop or who you need to rattle the sword against is very much what our database is all about.

So I think that the maturity of our database is to the point where that's ready to be scaled as a tool in that sort of context.

Whether the market is ready to take that groundswell of understanding and turn that into a budget item where people just go and fix the problem, I'm not at all pessimistic, I'm just questioning is that this summer or two years away?

But I think we're in a good position to capitalize on it when it happens.

Okay, thanks a lot, guys.

Thanks Walter.

Alright.

(Operator Instructions).

Okay, Operator, if we don't have any more questions, we'd like to wrap up the conference 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.

This concludes today's conference call.

You may now disconnect.