Intrusion Inc (INTZ) 2010 Q1 法說會逐字稿

Good afternoon.

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

first quarter 2010 financial results 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 would now like to turn the conference over to Mr.

Mike Paxton, Chief Financial Officer.

Please go ahead, sir.

Okay.

Thanks.

Welcome to this afternoon's conference call to review Intrusion's first-quarter 2010 financial results and discuss our business.

Participating on the call today will be Ward Paxton, Chairman, President and CEO, and Joe Head, Vice President of Strategic Projects.

Ward will discuss our financial results and current activities, and Joe will give a current business update on other ongoing projects.

We will be glad to answer any questions 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, you can enter conference ID number, 74291816.

In addition, a live and archived audio webcast is available at our website.

Before we begin, I would like to remind you that during this call, including the question-and-answer session, we may be making 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 risks 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 10K filed in March of this year and our most recent 10-Q which was filed today.

Now I'll turn the call over to our CEO and President Ward Paxton.

Thank you, Mike.

Welcome.

It's good to be with you today and have an opportunity to discuss our first-quarter financial results and our progress in growing our business.

The first quarter was good and we made good, sound progress for the future.

Our net income was $200,000 in the first quarter compared to a loss of $320,000 in the first quarter last year.

It is good to start the year with a good solid profitable first quarter.

Perhaps even more important at this stage in our development is the growth we achieved in revenue.

Revenue in the first quarter was $1,540,000 compared to $860,000 in the first quarter last year.

Extremely good growth.

Another important result is net orders booked.

In the first quarter we put $1,200,000 of new orders compared to only $100,000 in new orders in the first quarter last year.

The frequency of receiving new orders varies a great deal and it is not uncommon for orders to either increase or decrease dramatically year-to-year.

But it is still good to get off with a good start in the first quarter with a substantial increase.

Additionally, we announced earlier today that we have entered $920,000 of new orders so far in the second quarter.

Also we announced stop work orders relating to $640,000 on the backlog.

A little bad with a lot of good.

Backlog was $2,285,000 at March 31 compared to only $300,000 at the end of the first quarter last year.

Now let's have a look at gross profit.

Gross profit was 64% of revenue in the first quarter compared to 68% in the first quarter last year.

Gross profit margin is affected by many things, including product mix.

The decrease in gross profit margin in the first quarter this year compared to last year was primarily related to product mix.

And now, our look at operating expenses.

Operating expenses were $760,000 in the first quarter compared to $890,000 in the first quarter last year.

We expect operating expenses to increase a little through the course of the year, primarily in sales expense and development expense.

Total expense was approximately 50% of revenue in the first quarter.

We expect expense as a percent of revenue to decrease slightly as revenue increases.

At the end of the first quarter, we had 28 people on the team.

Four in sales, 20 in engineering and four in G&A.

We are currently looking for two additional salespeople and two additional engineers.

Since we made a profit last year, we were able to pay our unpaid dividends on our Preferred Stock.

Also the profit from last year in the first quarter has resulted in a reduction of our stockholders deficit.

Stockholders deficit is now $743,000 compared to $1,460,000 at March 31 last year.

We have made a lot of progress in the last two years in the development of our business and we expect the trend to continue.

As you know, we have for product families.

Namely TraceCop, Savant, Compliance Commander, SecureNet.

At this time, most of our revenue is generated by the TraceCop family.

Our two older product families, Compliance Commander and SecureNet, generate a small amount of maintenance revenue each month.

Our new exciting product family is Savant.

We expect great things from Savant, both from large commercial customers and from the US government customers.

We recently released the product and are pursuing several opportunities.

We don't have any Savant sales yet, but we expect to change that soon.

Now Joe Head, Cofounder and Senior Vice President, will discuss the products and some business opportunities.

Joe?

Thanks, Ward.

Our TraceCop business area continues to be a growing source of new business for us.

In our TraceCop business I view that most of our projects are of the sort that continue for many years as the need for our data and analysis doesn't go away over time.

But some of the projects will continue for a year or two and naturally terminate due to our completing the project or because the customer changes their priorities or charter over time.

On our February 2010 call, I summarized that back in 2008 our TraceCop business was built around three projects that grew to six projects in 2009.

And as I said in February, and now in 2010 I tallied up by the new ones for a total of 11 projects that we expect to have under contract this year.

So to update from that outlook in February, we just reported a $900,000 TraceCop order which leaves us with eight current projects.

Of the three remaining orders I projected to round out our year at 11 projects, two have been combined into one double-sized large order and the third one is a medium-sized order.

And we are engaged on these two orders actively and expect to complete my adjusted 10 project goal for 2010, way ahead of schedule.

Even if the stop work order Ward mentioned turns into a cancellation, my two short-term prospects will more than cover that shortfall.

And we will increase our billing rate with the eight projects remaining.

But I am not taking the last half of the year off or anything.

We are having too much fun engaging on new projects.

On new TraceCop projects, we are in the early stage of working six new projects which could turn into orders this year.

All that new customers of this group of six new ones, two are medium and four are large.

We have also engaged in prospecting projects for Savant.

Savant is a new high-speed network monitoring product which gives the customer a unique ability to monitor his network trunk fully at any rate up to the highest trunk speeds available today.

The season records every traffic flow ever in a very unique and concise form that answers the fundamental question, what is going on that I've never noticed?

In security, there has always been the need to go beyond signatures of attack and to fully understand and characterize the flow of traffic and data -- both within an organization and without -- so you know if you are leaking confidential data.

And I tell you the side note there, we typically think about leaking outside over the Internet, but leaking inside do a [thumb] drive or hard drive that people carry out is just as big of an issue.

Because we cannot monitor very high speeds, we can look at both now.

It doesn't matter if hackers have breached your defenses or if an insider is wide banding them out due to negligence or complicity.

Savant tracks all flows.

So for the first time you know everything that is going on out -- that is going out or going on inside.

We have been thinking about Savant for quite a number of years and now Savant is a working product.

As with any new product, we have a long list of things to add on top of it over time.

But all we need to start selling and using it in the field is completed and solid.

I would call it early-stage prospecting, but we have five customers in the prospecting stage for Savant.

Four are large, one is small.

All of these won't ultimately turn into orders due to the nature of early-stage launch of new products, but two or three probably will.

In addition, four of our current customers have taken it upon themselves to assist us in our growth.

They are actively telling other folks with similar needs about our good work.

All of these prospects are being worked by other members of our team, multiplying my personal sales efforts.

All of these are in our TraceCop analytics area, where we have a good deal of success over the past few years.

In the past two months, I've personally been working on a couple of new monster-sized products beyond those mentioned above.

The idea is to lay a foundation for continued growth in the years ahead.

Ward?

Thanks, Joe.

The future is truly exciting, isn't it?

Now to summarize.

We are making good progress in the development of our Company.

The outlook is bright and we are confident that we are making the right moves.

We are expanding our customer base and the potential for growth in both our existing products and new product is outstanding.

Our team continues their outstanding efforts and continues to deliver good results on all fronts.

I thank you for your continued interest and support.

Mike?

Okay, operator, at this time, could you please remind the participants how to queue up and ask questions?

(Operator Instructions).

Walter Schenker with Titan Capital.

Gentlemen, I shall look forward to seeing you all next week at the annual meeting.

A couple of questions.

First, we have a new term this quarter which is a "stop work order".

I don't remember hearing that before.

Can you just sort of explain what a stop work -- I mean, I understand the words stop work order means you stop work.

A little bit more color since I am not going to know who it is anyway on what would cause that or what that refers to.

Well, for whatever the reasons that caused it, it is a -- again, just as it says an order there to stop work on the project until further determination is made.

The fact that we mentioned that is that we expect that that will probably go to a cancellation of the backlog of the project.

However, we are working hard to try to reverse that.

You hadn't heard it before, but we did look back in our past and saw that we had a stop work or cancellation a couple of years ago about the same magnitude.

So.

And therefore the, just again, the $600,000 is what was left in the backlog over the next 12 months from this order?

Actually it was expected to be to generate revenue over the next two quarters.

So it would basically come out of expected revenue in the second and third quarters.

So this was a major what we define as a major contract because in six months it was $1 million plus contract.

Yes.

Okay.

And are you willing to comment as to whether or not the cause of this was something that the project was not or TraceCop was not working as expected?

No, at this time, I wouldn't want to make any comments about it.

Okay, next question.

I'll ask a few and I will get off and I'll get back on.

When you refer to Savant and you said some large and some small prospects, a large Savant customer is sort of what order of magnitude?

I'm using the same criteria as before.

$1 million a year for large and small is $0.25 million and medium is $0.5 million a year.

Okay and then we also have a new word, I'm smiling by the way, which we don't know if we are going to get or not which is called monster size.

It sounds like something from McDonald's.

We will monster size.

Exactly.

Monster size, I'm supposed to define as well in excess of large?

Yes.

I figured double large is a couple million and monster is bigger than that.

And the -- a contract that you announced in the quarter or the two contracts you announced in the quarter that you've signed in the second quarter for $900,000 plus, those are 12-month contracts?

Or are they government fiscal year contracts so they are really six-month contracts?

Actually the $900,000 is expected to generate revenue in the second and third quarters.

Okay so it's a project with a fail -- not a 12 month project.

It's a six-month project more or less?

Correct.

Yes.

And you seem to have more enthusiasm which -- what can't have more enthusiasm as I'm referring to Joe?

You seem to have more confidence or enthusiasm as to your ability to close some of the remaining contracts that get you to 10.

That's because we are closer to the finish line?

Correct.

Okay.

And just one, maybe just one other comment or question.

Going back to Savant, which is again something new which we haven't talked about before.

That -- could you give us just some sense in broadbrush terms?

I mean, every day I get e-mails on cyber security.

Cyber security is obviously a rather topical subject these days on many levels.

Savant broadly fits into that and, therefore, the potential market is hundreds of millions or it's a very large market.

Just a little bit more color on that?

I would say so, obviously, the first thing I would focus on and the infrastructure and federal sort of markets.

So the kind of the pointy end of the spear in terms of the highest speed trunks and the deepest pockets.

But when you start looking at the overall cyber security, it has been my view that people are looking at it wrongly.

They are looking at attacks and defensive sort of things.

When in fact, insider and malware that gets on your machine because you received an e-mail, look in the other direction to say which of my proprietary things are leaving out my gateway that I am not noticing.

It's just hidden with Web serving.

It addresses that.

So certainly I see the potential for this to go down market and to basically be on every Internet facing trunk at every little business and house.

So we have started out at the very high end with expensive fast big trucks, but we have actually built versions of Savant onto $50, $100 hardware.

We don't see that rolling out immediately.

It needs to be from this sort of a continuum from early adopters to idiot-resistant, which will take probably a year before we are ready to make it more unresistant, if you would, to go down market.

When you are ready with idiot-resistant, I'm here.

There you go.

Yes so I think that's -- it is a maturity of the user interface, but the underlying stuff to understand flow is a fundamental good thing and we have got a couple of patents filed on the methods and the way we roll things up and analyze it.

Which you think, who will be looking at this for 40 years.

So time to -- we understand it now.

Walter, it's -- the applications here are kind of new, but at the same time if you look at some other folks that are making products to focus on the recording of all of the data that is flowing, I think you would see some of those are private companies but a couple hundred million dollars a year kind of market just for a piece of what we are talking about.

And we are really talking about applications that are new and different from that.

But they use some of the base technology of sensing the data.

And hopefully this will not be nothing negative because we finally sort of turned the corner with TraceCop.

But this hopefully will not have the rim TraceCop had over years of we added one -- we have two, six months later and nine months later we have three.

And six months later, we have four.

This is not supposed to happen that way?

No.

I think it will be a much more rapid expansion as we get past the early stage.

And margins on this should be comparable to the rest of your business?

I think so.

Probably so.

Walter Schenker.

Okay.

Again, see you next week.

Thank you.

(Operator Instructions).

There are no further questions at this time.

Okay, operator, at this time we would like to 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 further questions, you can call us at 972-234-6400.

Thank you.

Thank you all for participating in today's conference call.

You may now disconnect.