Intrusion Inc (INTZ) 2010 Q2 法說會逐字稿

Good afternoon.

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

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

second-quarter 2010 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 would now like to turn the call over to Mike Paxton, Chief Financial Officer.

Please go ahead.

Thank you.

Welcome to this afternoon's call to review Intrusion's second-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, Strategic Projects.

Ward will discussion Intrusion's financial results and current activities.

Joe will give a current business update on other ongoing projects.

We will be glad to answer any questions after the prepared remarks.

We distributed the earnings release about an hour ago.

A replay of today's call will be available at approximately 7 p.m.

tonight for a one-week period.

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

At the replay prompt, enter conference ID number 93746268.

Also, 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-answer session, we may make forward-looking statements with respect to financial results, business strategies and 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 2010 and our most recent 10-Q, which was filed today.

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

Welcome to Intrusion's second-quarter conference call.

It is good to have you with us today.

It is also good to have achieved our fifth consecutive profitable quarter, and we are proud of the accomplishment.

We are continuing to grow our business and are seeing good results in both of our primary market segments.

As you know, our two primary product families are TraceCop and Savant.

TraceCop is a suite of Internet monitoring and tracking products that provides unprecedented capabilities for the identification of malicious and illegal activities.

Savant is a transparent network data capture and analysis solution that provides real-time access and insight into a company's quantifiable network data.

At this time, most of our revenue and profit comes from our TraceCop family of products, and we expect our TraceCop business to continue to grow.

Our newest product family, Savant, is getting good reception in the marketplace, and we are expecting big things from Savant in the future.

Now let's review our financial results.

In the second quarter, net income was $121,000, which was up from $50,000 in the second quarter last year.

This, of course, was 142% increase, not bad.

For the first half of this year, net income was $325,000 compared to a $271,000 net loss for the first half of last year.

Revenue in the second quarter increased 19% to $1,538,000 compared to $1,292,000 for last year's second quarter.

For the first six months, revenue reached $3,073,000 compared to $2,148,000 for the first six months last year.

This calculates a 43% increase.

Gross profit margin was 64% of revenue in the second quarter compared to 66% in the second quarter last year.

Gross margin for the first half was also 64% this year compared to 67% last year.

Most of the year-to-year variation in GPM was a result in a slight change in product mix.

Our total debt was reduced to $551,000 in the second quarter.

This was a $500,000 reduction.

Of the $551,000 total debt, $470,000 comes from a loan from me.

This $470,000 loan is a part of the $2,200,000 loan commitment I have made to Intrusion.

Our R&D is divided about equally between TraceCop and Savant, and we can plan to continue this division.

As you know, these types of products require constant development to add new features and capabilities.

Along this line, we have had super performance from our R&D team in the development of these new features and capabilities for both TraceCop and Savant.

Over the past few months, we've increased our sales effort through assignment of some of our people to sales roles.

At this time, we have six people either full- or part-time selling.

We expect to increase the sales effort by approximately 50% by the end of the year.

This expansion will come from new hires.

We are currently interviewing candidates.

During the second quarter, we radically changed our website.

If you haven't seen it, you should dial in intrusion.com and have a look.

There is a good description of both TraceCop and Savant businesses in the new website.

Now let's look a little closer at our businesses.

Joe Head, cofounder of Intrusion, is with us today to share some recent results from the marketplace.

Joe?

Thanks, Ward.

I had my phone muted.

As in the last seven conference calls, the business area we've created around TraceCop has continued to prosper.

Over the years, we've built 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 (inaudible) began to mature into leverageable capabilities that we can sell to create new wins and new customers.

I mentioned last time, back in 2008, our TraceCop business was built around three projects that grew to six projects last year in 2009.

Since the last call in 2010, I've tallied up six new ones, for a total of 12 projects that we expect to have under contract this year.

Because we've gone year-to-year from three to six to 12 projects is another benchmark of what I see as a multiyear growth trend for expanding TraceCop.

Since the last call, we've worked presales on three new potential TraceCop customers with people we've known for many years who've indicated they are considering how to allocate funds for new TraceCop programs with us.

Referrals from current customers are also helping us connect with new customers.

And as Ward mentioned, we've expanded our sales force, initially from one to three to now six folks supporting marketing of TraceCop and Savant products.

They are up to speed with the products and are multiplying our efforts by supporting more customer interactions, both pre- and post-sales, and that helps us grow this area.

In addition to current customers, we continue to market TraceCop to new parts of the DOD and Justice Department and some other select customers, where we understand there is a need for TraceCop and ample budgets to support the additional business.

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

We see that's paying off.

Since last call, ongoing discussions with previous partners and system integrators have surfaced a number of new opportunities.

As the customers have gotten to know our capabilities over the years, they remember our expertise and the shared wins we've had together, and think of us when they have new opportunities.

So they've been bringing us those on an ever-increasing basis.

I've now transitioned three of our current projects and three of these new developmental projects to be led by other members of our team so I can focus more on deploying large, new projects, as well as providing valuable wins to our existing customers.

As Ward mentioned or inferred, in the last quarter, I've been marketing Savant to a variety of potential customers.

Savant has so many potential applications, you can go many places.

But I've primarily focused on Air Force Common Carriers and the new US Cyber Command.

The customers like what they hear about Savant and, like me, are excited about what we see in the product.

I see this as a great product to fuel future growth.

Ward?

Thanks, Joe.

There sure is a lot of new opportunities brewing in the marketplace for both TraceCop and Savant, and we look forward to translating these opportunities into revenue and profits.

Probably the best early indication of sales growth is tied to the number of projects we are working.

As Joe just indicated, we are looking to grow with the projects for TraceCop from six to 12 over the next year.

In addition, Joe mentioned some early activities for Savant, and then we have some other activities of Savant being led by some other folks, particularly focused on resell partners.

In all, we have 12 new projects for Savant that we are pursuing; five of those are tied to retail partners.

This is a dramatic improvement and change from the previous quarter.

In summary, the second quarter was outstanding and the outlook for the future continues to grow.

Our people are working hard and we are making good progress on all fronts.

Thank you for joining us today, and continuing your support for Intrusion.

Mike?

Okay.

Operator, now if you could please remind participants how to queue up and ask questions.

(Operator Instructions) Walter Schenker, [Maz Partners].

I was going to start with asking you a definition of continued and growth, since we seem to be on a plateau.

But then we got into a discussion of the large number of new contracts Joe has now put himself in the public domain claiming he is going to get.

So I guess I am supposed to be pretty happy with that.

What I first question, Joe, when you mentioned the six additional TraceCop, your indication was that you expected them to be generating revenues before the end of this calendar year or over the next 12 months.

I couldn't -- you and Ward used different syntax.

As I mentioned last quarter, I was expecting to get orders on those this calendar year.

So I expect that many to fall in between now and the end of December.

Last quarter, you mentioned the possibility of substantially larger orders, a couple of them you were talking to.

Might any of those be included in this group?

Yes, two of them are.

Okay.

So if in fact you were to get six more orders and two of them were very large, the average revenue of the six new ones are probably greater than the revenues for the six existing ones?

A number are about the same.

One is about twice as big -- two are twice as big.

One is about the medium-sized.

The other two are the large typical one.

Okay, so therefore, if we get them, we should double our revenues -- more than double our revenues.

That's fair, yes.

And on Savant, where I was actually hoping -- maybe you were hoping too -- to be able to announce that you actually are generating revenues from that at this point under contract, but you did mention five prospects.

Since we've played cat and mouse -- wrong term -- for years now about contracts and potential contracts, those are also contracts -- some or all of the five you would expect to be generating revenue this calendar year.

That's mixed bag.

I think, yes, most everything I am working, I expect to have orders this year.

Okay.

And when you daily -- or almost daily, there are cyber security issues.

There is a cyber -- we talked about that when I was down there -- a cyber command.

You mentioned the cyber command.

To the extent they are aware of who you are, that would create a very large opportunity, if you ever -- if they and you ever agreed to do something?

I think it is certainly a good one, having one place like Cyber Command buying from you is not quite as good as having a thousand corporations equally panicked to deploy stuff.

So -- I see excitement in both the commercial and the federal space, but certainly cyber is a good place.

Albeit the ability to say that they are a client even -- I guess you are allowed to say it -- would provide a rather high level of credibility to the thousand panicked corporate clients.

It would help, yes.

So it will remain to be seen what we can say once we get under contract.

But that would be my desire.

Okay.

So we all believe you and Ward, and that Ward's continued high level of optimism is finally about to be fulfilled over the next couple of quarters?

Yes.

I'm laughing, so you know -- Ward knows that.

I've been actually using Savant a lot, and as I've built my use case and win examples for my customers, I really like the product.

It has got appeal across a big cross-section.

Yes, but you supposed to like the product.

That's like some father saying I like my kids.

Well, we've had a lot of products in the past you haven't heard me say those things about, some of our commercial things.

So -- but I do like this product a lot.

Okay.

Well, hopefully, we will get a bunch of those signed sooner rather than later, guys.

Thanks a lot.

(Operator Instructions) At this time, there are no further questions.

Okay.

Thank you, 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 any further questions, you can call us at 972-234-6400.

Thanks a lot.

Thank you for participating in today's conference call.

You may now disconnect.