Q3 2022 IronNet Inc Earnings Call
Greetings and welcome to the Ironwood, Inc, Q3 fiscal year 2022 earnings call.
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A question and answer session will follow the formal presentation.
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I will now turn the conference over to your host Nancy Fuzzy only Investor relations. Thank you you may begin.
Thank you operator, Hello, and thank you for joining US today's conference call will address iron nuts financial results for the third quarter ended October 31, 2021 that were announced this afternoon.
Before we begin please note that some of the statements we will be making today are forward looking these matters involve risks and uncertainties that could cause our results to differ materially from those projected in these statements are.
We therefore refer you to are the risk factors included in our latest SEC filings.
Our comments today also include non-GAAP financial measures.
All details and reconciliation to the most directly comparable GAAP financial measures can be found in our third quarter earnings release, which is on the Investor relations portion of our website at IR dot iron that dot com.
And now I'll turn the call over to our co Ceos General Alexander and Bill Welch, who have some remarks, they will be joined by our CFO, Jamie Gerber for the question and answer portion of the call.
And all of the tender.
Good afternoon, and thank you for joining us today I'd like to address our disappointing third quarter results and revised fiscal your outlook right upfront.
Prior outlook for this fiscal year was supported by what we assess is late stage multimillion dollar strategic customer opportunities.
The majority of these customers are in the U S. Public sector. We had previously expected to finalize these opportunities in the second half of this fiscal year.
However, a number of them are now being impacted by delays in funding at the federal level.
Given the delayed timing, we have removed the strategic opportunities from our fiscal year, a or our outlook.
I want to be clear that these are not lost deals they remain almost without exception in the pipeline is strong viable opportunities.
Let me give you several examples that might help illuminate these delays there.
The first is a double digit million dollar a or our opportunity with the branch of the military has held up as part of the federal funding delays playing out in Washington.
This contract continues to grow but at a reduced pace.
The second is another multimillion dollar defense industrial base customer, whose contract with us is making its way more slowly to government procurement than we anticipated.
We have several deals with states that are gaining momentum as the American rescue plan funds are arriving and being approved by state legislatures.
We also have a large multimillion dollar opportunity with an international government that was working to political turmoil and the impacts of the pandemic.
At our stage large strategic opportunities remain an important driver of growth.
We're also extremely important and developing the public private partnership.
As you saw in our press release, we now expect revenue of approximately 26 million in fiscal year, 'twenty, 'twenty, two which would be down from 10% from the prior fiscal year.
We reduced our outlook for exit a IRR for the fiscal year to approximately $30 million, which giving timing uncertainty now excludes large strategic opportunities.
We have missed our expectations and we understand the criticality of being accountable and predictable as a public company.
Well, we are not proud of our performance.
We remain optimistic about our future.
I would like to underscore that our conviction about our technology and market opportunities is unchanged and that we remain committed to our mission transforming cyber security through collective defence.
Our proof of value pilot opportunities have doubled over the last year and collective defense as a concept is gaining momentum in the marketplace.
Let me give you a few examples.
A major state power authority and the North East asked to have additional electrical suppliers in this area added to its collective defense group.
Malicious nation state activity was quickly identified and eradicated with the help of Iron dome and Iron defense.
This model of energy sector leadership is also now being considered for replication and major states in the Midwest and South Central United States.
Another example is a Midwest based insurance customer this past quarter, we displaced competitors network detection and response solution to expand our own footprint.
We're expanding in the Midwest in both financial services and the health care industry.
A third example is a U S department of Defense organization with advanced cyber capabilities, the dashed iron that to submit to a laboratory evaluation to validate iron that's network detection and response capabilities.
This focused on detecting advanced cyber threats, using behavioral analytics and artificial intelligence.
The rigorous test stimulated and advanced low and slow attack against a representative commercial network.
The scenario was specifically designed to evade common signature detection tools and endpoint detection technology.
Iron that was tested against twenty-five separate sophisticated attacks, representing nearly a dozen specific mitre attack techniques.
The evaluation concluded that the iron defense capability identified all attacks within the environment.
We are currently engaged with government contract Representatives as a result of this positive outcome.
On the product development side.
We have made important progress this quarter as well.
First in expediting time to deployment, thanks to significant orchestration effort.
Here in defense can now be provisioned and deployed in Amazon Web services in minutes.
We continue to build our virtual network sensor capabilities, which will allow the customer to leverage compute resources already existing in their data center.
Second with regard to our user interface, we developed and are now implementing a comprehensive training curriculum to improve knowledge of the significant features included in our product and to facilitate increased product adoption.
We have made strides in making the user interface more user friendly facilitating greater collaboration among security users of various levels of experience.
Third and notably we have developed a proprietary and further differentiating event correlation engine, we called coda.
Correlation of detection analytics.
Which allows us to effectively chain of events and then she used together and provide the user a view of all related events and attack sequence.
This evolution of the product provides incredible alert efficiency, while reducing overall alert fatigue of the users.
We are in beta testing with key customers and anticipate their tissue will be highly appreciated development for crushers as we roll it out more broadly next year.
And a recent example of our product shrinks the log for Jay vulnerability highlighted iron that's detection and collaboration capabilities.
We leveraged our cyber operations center and Hunt diagnostics.
Understand the exposure of the vulnerability.
We deployed more than 400 rules and nearly 30, new behavioral analytics to ensure our customers remain protected.
Our confidence in our underlying model is bolstered by the dynamics at play in security software in general with Digitization comes heightened cyber risk there's continued to increase.
We saw it this weekend with log for Jay.
The Department of Justice announced last month that it.
Ransomware attack is targeted as many as 1500 companies this past summer.
The F B I issued a warning to U S companies about the threat from Iranian hackers.
And the Canadian Health care system was subjected to a disruptive attack.
Yes, halation malicious cyber activities happening. Despite what has been reported as a highest level of investment in cyber security spending on infrastructure protection that software has ever seen which according to Gartner. It's almost 25 billion this year and growing at nearly 70% 70.
18% worldwide.
Clearly, it's a significant investments that the private and public sectors have made.
In cyber defense in the manner in which they are being employed is still not working.
The company's states and nations that are the foundation of global economies remain vulnerable.
Collective defense as an important way to break the defendant in isolation model that continues to show itself to be too slow.
Two inefficient and it is in fact, a hindrance to the public and private sector like from enabling each of their significant investments there.
We've become more than the sum of their parts.
Iron that is the sole cyber technology addressing this gap our network detection and response solution and our unique collective defense model has been evaluated and then recognized in lauded as you transform it to a technology that's absolutely critically needed.
Recently, Krish English U S National Cyber director is quoted as having commented on iron that's collected defense model reading.
We need to make it such that if you are a drinks gusher in this space.
That you need to beat all of us to beat one of us.
He acknowledged that we have not done that before and.
And we have had the wrong model when we're attempting to do that in the past.
Iron that extended the concept of collective defence into cyber security.
Developed capabilities to make collective defence possible.
And we are uniquely positioned to develop this market further.
We missed our financial expectations for this year.
We are working hard to rebuild your trust in us.
I will now turn it over to bill to address changes, we're making and our plans to accelerate our business in important ways Bill.
In general we are very disappointed in our results we did not meet our targets and we know that is our responsibility.
We recognize the importance of becoming a more predictable business.
First I'd like to highlight a few changes to the team.
As disclosed in our form 8-K filed today with the earnings release, we insure and foster our Chief revenue officer have mutually agreed.
And he will depart our company at the end of December to pursue other opportunities I will provide increased oversight of the sales organization for as long as needed Sean and I are working closely together between now and his departure to appropriately transition our sales efforts with.
Greatly appreciate his commitment to our customers, we thank him and wish him well in his future endeavors.
We've also recently appointed a new Chief Marketing Officer, Michael Donahue, who has moved quickly to support our marketing organization and in particular identify areas for improvement in our sales motion.
Our behavioral analytics based network detection and response is significantly more robust than the solution being offered by our peers. We are now doing a better job of conveying that value.
Also joining us earlier this quarter to lead corporate development was John O'hare.
John is helping to support important initiatives that broaden the company's offerings penetrate new markets and facilitate enterprise transformation.
John has fielded a number of inbounds from cyber experts and tacticians from leading companies, who see potential synergies and recognize the tremendous value and iron it and our mission.
We're also extremely pleased to welcome this month, a new head of customer success, Michel nicer to our organization Michelle brings a wealth of experience to this critical function well.
Well, we have an opportunity to quickly make a tremendous difference for our customers to realize the value of iron it.
In addition to michelle's expertise in the area of customer success, we're focused on cloud offering to facilitate ease of deployment.
We were also supported by the strength of our external partnerships and our relationship with Mandy and we were able to leverage Mandy and services for threat assessment and security validation with the threat detection and response and intelligence sharing capability of Iron, It's defense and dome offerings.
The drag as we publicly announced an acceleration of the pace and depth of a new joint initiatives designed to help ensure the security of the nation's critical infrastructure through an integrated I T O T approach to cyber security.
And with our cloud partners, we are seeing leverage in a couple of ways with AWS, we jointly targeted and successfully close on several opportunities in the public and private sector, leveraging the network threat detection and remediation capabilities of iron that and their backend hosting solution of AWS.
With Microsoft we launched a deep technical integration with Azure Sentinel cloud Native Sim the joint efforts have accelerated iron and entry into the Microsoft Intelligent Security Association MISO and ecosystem of independent software vendors and managed security service providers that are integrated their solutions.
To better defend against a world of increasing threats.
We remain encouraged by these relationships with partners and the advantages of our joint sales efforts.
A quick comment on results. We ended the third quarter with 74 customers, adding 23, new logos or a or are at the end of the third quarter was 30% higher than at the end of the third quarter last year, our cloud subscription revenue grew 71% year over year, which is where the market is developing the fastest.
And which gives us the greatest benefit.
We have made strides in accelerating our ability to be more predictable on the transactional side of the business and we will continue to emerge in the strategic opportunities as they close.
Finally, before we turn to your questions I wanted to anticipate a question and touch upon how we were thinking about our current cash position.
We are being mindful about the investments, we're making in assessing strategic uses of cash.
Year to becoming public we had work to become an efficient organization from a head count perspective, we have a strong culture and a team inspired by our mission to transform cyber security through collective defence.
This includes the best threat hunters I would argue in any company in the world, we understand that we need to remain nimble and highly efficient with our cash but we also have strong conviction in our strategy now that we have an exceptional team and see opportunities before us that had the potential to transform us quickly as a company.
To conclude I would like to end by saying that we are disappointed by our results. So far this year. So we remain highly encouraged by what we see as an opportunity is still before us and we're working hard to rebuild your trust and confidence in us as a team.
Operator, we are ready for our first question.
Thank you.
At this time well be conducting a question and answer session.
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Our first question comes from the line of Mike Seagulls with Needham and company. Please proceed with your question.
Hey, guys I had a question for you obviously on the downtick, we're seeing today with the guidance as we look to calendar 'twenty one for revenue in a or maybe first for the general on the topic I guess can you talk to these budgeting issues that you're you're seeing on your side and I Oh.
I'm interested in your thoughts specifically, just because I know that you do have that that sort of experience on your side and I'm just interested how these dynamics are different from maybe what you would've seen when you were still in the position and I'm just curious how how that's moved since we last received an update and then the I guess part two of the question would be more Virgin.
Yeah.
But last time, we received an update I believe it was in mid August and I'm curious if you can help us in any way to think about calendar 'twenty two with this mark down we're seeing how how numbers would change given the size of the magnitude we're seeing today.
Yeah.
Yeah.
Okay well. Thank you for that question I'll start off with answering the first part and then turn it over to Jamie with respect to the strategic opportunities that we have and what we're seeing in the marketplace.
First.
The passage of the N D a a or the national Defense authorization Act today.
Means that we could start to see some of these move forward, we've seen a slowdown in public sector, especially in the ones, where we're dealing with are based on the congressional lack of movement on the N D. A a that was pushed forward today as you as you may know and is now being pushed to the white house for signature.
Our confidence remains high in these strategic opportunities.
We've revised our guidance for the year and it reflects the fact that we are confident on what quarter. They will actually come in but we see these as viable opportunities for the future.
We recognize that you wanted us to have a predictable business and we can accomplish that with our transactional side and we're going to do that and these strategic deals will add momentum into our revenue as we move forward.
I'll push it over to Jamie for his site.
So Mike. Thank you for your question I think you are just asking about our guidance for this year of the 26 million for revenue.
As we've noted a what a what we've significantly down there is to completely remove all of these larger strategic transactions that are are still out there, but difficult to predict so we've reset the guidance at this point to not include them or guidance from August had included there.
And so where we're setting so setting ourselves up here. So that we can be sure that as they come in and add materially to our number that we get that information out well update our guidance Accordingly was that your question.
Yes, yes, and just I think if I'm looking back to the last time, we had received an update like this I believe the comment was something along the lines of.
The commitment to maybe maybe it was fiscal 'twenty, three and fiscal 'twenty four targets and I guess one of the things I'm trying to determine is if we're backing out some of these larger opportunities, which still remain in the pipeline and are viable is the expectation then that as we look to next year. When you guys do.
Provide guidance for that year, maybe some of these larger opportunities, which again are a little bit more difficult to predict will be stripped away from that initial number that we received I'm just trying to get a sense of how we're looking at guidance, though given some of the updates that we had tonight.
Yeah, Mike This is bill well, let me answer the question. So we are not proud of this year's projected performance. You know, we we obviously have to do better but based on the foundation that we've set up our objective is to grow at the rate of our high growth SaaS company, we're going to provide guidance on next fiscal year on the Q4.
And fiscal year end earnings call, which most likely will be in early April where we expect we will align with other high growth SaaS companies. We know this is a a critical objective.
Our revised guidance for FY 'twenty two is really that recognition then we have to be a more predictable business based on our transactional business, which we're accelerating to be commensurate with these other high growth SaaS companies and as the General mentioned, we have a number of pending strategic opportunity.
Is that could transform the company quickly. So we're really managing those two realities in windows strategic opportunities do come are available then we will notify.
The market.
Thanks for that Bill and then just two more if I could real quick the first so with the passage of the N D. A a and that being sent over to the white house for those of us that might be less familiar with public sector movements in the budget, if let's say the whitehouse signs that paper.
Work when it arrives at their desk how.
How quickly can some of these potential customers of yours turnaround and start deploying that budget do we have a feel for timeline for when those dollars become immediately available to them and then the second question more towards deal.
But if I'm thinking about the announcement for the Chief revenue officer to portrait year end could you explain and I'm guessing you'll be coming during the salesforce in the interim but is there a search on their way at this point.
So I would expect the transition to the leadership of that team.
So I'll I'll handle the first part on that with respect to the N D. A a as you noted correctly. It will go to the president he will sign it. It then goes to OMB the office of management and budget, they take that and they pushed that out to the defense Department, which then breaks it down and it pushes it out to all of the service.
<unk> and <unk> and department agencies.
Once they have that money and they know now what their full authorization levels are they can apply that to these contracts and others.
I talked to some of our partners are and the defense industrial base on that strategic partners. They face the same problem that we face here theyre, having the same issue and they believe that this will help it won't change overnight. So the president signs it doesn't happen overnight, but we think this is something that will happen in the next few months.
<unk>.
And then Mike I'll address your question related to the Chief revenue Officer announcements today I will as I said in my comments I will be providing overwatch and oversight to the sales organization as many of you on the call know that I have a history of running sales organizations Oh.
And I will be helping the teams in the a P. J and me are America's our customer success marketing and those sales teams to drive the outcome in the transactional business that we've spoken about so that is something that we will not start a search I will provide.
The overwatch for as long as it takes to drive this flywheel or this engine that's required for this type of software company.
And I wanted to add one thing that it was part of what I think you intended to ask and that is the American rescue plan dollars are being pushed out to the states and they do see that as an opportunity and part of that includes security and cyber security, we are seeing momentum gain in those areas as well.
And we think that's a future opportunity and why some of our strategic goals.
Goals and objectives are increasing that pipeline is growing.
Thank you for that I'll cede the floor now thank you.
Okay.
Our next question comes from the line of Joseph <unk> with Jefferies. Please proceed with your question.
Guys really appreciate the color and all the delayed deals I guess when you look at the strategic deals I assume you mean government deals and are we to assume that the entire delta sort of $75 million of air are going to 30.
He's those deals or were there any of the transactional deals you talked about also implied in that Cogs.
So I'll start off first we had more than sufficient pipeline to.
To cover the Delta that we're talking about in our strategic deals and that's growing as I mentioned earlier.
We also recognize that we have to drive predictability as Bill mentioned and we are working towards that and that's getting the singles and doubles or as we call them as we've talked to you in the past on and growing that I'll I'll turn it over to bill to add to that on what we're doing in the singles and doubles not transactional area.
Yeah. So I just want to add a couple more commentary is that you know we recognize that we must drive the predictability and that's really going to come from that development of the transactional side of our outlook for FY 'twenty. Two was primarily based on our ability to close these large strategic opportunities we are gaining momentum.
Hum in the transactional side as you heard in the commentary of evidence of you know we added 23, new logos this quarter, which is almost as many as we added all of last year, we had 30% year on year growth in our E. R. R. Again, good growth, but we want to drive more growth.
We had great traction with several of our domes as you know we set up these cyber security domes with energy space and financial services all of those zones have doubled in participation year to date as I mentioned before you know we are driving a disruptive paradigm.
Shifting company I've had the opportunity to be part of those types of companies and I'm, taking overwatch over the sales org and what we're doing to really accelerate the transactional business to drive the printed predictability that is required and expected is in marketing our demand generation you saw we.
You announced a new leader our brand awareness in our analyst coverage doing much work there in product you heard about what we're doing with the user experience and in our coda as it's called a we're also on the sales cycle. We're encouraged by early indicators of new hires who have N D. R. <unk>.
Work detection and response sales experience, where they're being able to open managing closed deals a lot faster. We also are encouraged by our customers' success leadership around driving value and upsell and then as you heard about our strategic partnerships. These are all pipeline drivers.
Including our cloud our relationships with AWS and Microsoft the integrator community like Jacobs that you have heard our public sector and in our our technology alliances with the likes of Mandaean and drag is so we believe those are the things that will help us drive our transactional business to a more visible predictable.
And repeatable business. So Joe let me just add in one one final thing to hit in two sentences. The transactional model that we're talking about we believe will put US right in line with what our high growth SaaS company should be and were modeling our company on that something that you can use to predict and forecast.
We will go we see these strategic deals as accelerants that will add to that model, we're not taking them off the table, it's just hard to say which quarter. They will come in does that make sense Joe.
Sense and then based off your your comments general it sounds like so that.
The strategic deals were more than a 45, but the transactional business actually did pretty well and the pipeline is strong there I guess and then as a follow up to that bill great to hear you're doing a lot of steps to improve visibility, but how should we think about guidance methodology for F for Q, especially given you added about 4 million of.
<unk> this quarter and your guidance implies about 2 million next quarter, or so and I would assume at <unk> would be the seasonal strongest quarter, so anything to read into that.
Right. This is Jamie Ghabra, let me jump in on that one Joe.
A key part of our guidance and I think it's important to to the way you asked it about methodology and so we're really just kind of focus on this transactional part of the business and we're going to hold off on identifying any of these.
Much larger.
No.
Double digit million dollar announcements until they come in so matter logically we're going to just tell you about those as they come we have not seen any in the last quarter or even in the upcoming quarter material.
Our losses are on the on the retention. So we feel good about that we had some earlier in the year, but really the trends here at about about.
Slower <unk> growth per se, it's really just not adding in the strategics.
Okay, and then if I can sneak one more in the 'twenty three customers you added I guess, how should we think about the split between cornerstone customers and just add on dome some existing customers already.
Yeah. So good question I will tell you that the majority of the customers that we added this quarter were focused on the lower end of the community. These were logos that we filled in the energy space financial those domes that I had mentioned had doubled our year to date.
Okay. Thank you.
Thank you.
Our next question comes from the line of Gray Powell with D. T. I G. Please proceed with your question.
Okay, great. Thank you very much and so so yeah I appreciate you addressing the balance sheet prepared remarks, I did want to follow up there.
All right. So just just kind of looking at headline numbers, you're you have 74 million in cash in the balance sheet free cash flow year to date is negative 61 million give or take.
How should we think about your liquidity and ability to fund for future growth targets and then within that like like do you have the head counts in place today to hit your growth targets.
Okay.
Yeah, Let me take that one on gray are another excellent question.
I think the starting point is really to talk about the the raise that was done in the summer that raised 138 million. So that did give us a really great spot Ah got us.
Completely cleaned off all debt on the balance sheet.
So we did end up the quarter with a little over 70 million as you know it in cash.
Now a couple of things as we address though they forward looking part of your question. So I do keep in mind that these larger strategic opportunities are have a lot of cash in them as well. So we're going to keep an eye on that which.
Which means that we're gonna stay agile, we do have all the resources that we need right now to fully scale and have them. So we're not at all constrained on that front. The other thing that we're going to do and I think bill touched on this a little earlier is that we really are accentuated our commitment to the SaaS and of our.
Business and that gives that brings itself a number of efficiencies and how you can structure and organize your organization, we're going to stay very thoughtful about where we make our investments and continue to add add to our skill set which we well, but we're going to keep a really close eye on that and at the end of the day.
This is about to that point conserving our ability to have cash on the balance sheet. All the way through the end of next year. That's our approach to how we're going to approach the best as a public company, we retain opportunities to do raises and are in the markets and we're going to keep our eye on that too.
But without a raise we're really focused on how to drive the correct balance or to navigate all the way through next year with the cash that we've got available and we feel confident in being able to do that.
Got it Okay. That's helpful. And then just next one's gonna be a tough question, but you know I I really do appreciate your candor here in the call in terms of how you're managing your cash position.
With investors, but you know customers do look at balance sheet too how do you make how do you make your potential customers comfortable in your financial position.
Yeah, Okay I'll take that this is bill well so one of the things that we're most encouraged by is the community organization that we've been able to establish with these domes within energy space financial and some of the other ones you've heard about and.
And all of these anchor tenants are all very committed to the long term mission of the company they understand they've been with us for many many years as you know these contracts are long in term we have some in five years plus many of them have already been renewed and as a matter of fact, they are actually out there.
Where I'm trying to help us drive additional community membership into these dome. So it's it's all across the spectrum and including some of the stuff we're doing with the defense industrial base.
That's helpful. Okay. Thank you very much.
Thank you ladies and gentlemen, we have reached the end of the question and answer session. I will now turn the call over to general Alexander for closing remarks.
Thank you.
We want you to know we are setting up the company as a SaaS based disruptor in cyber security. This is a long term endeavor and we are committed to making it a success.
We believe and we are committed to our mission.
Swarming cyber security through collective defence.
Thank you and have a good evening.
This concludes today's conference and you may disconnect your lines at this time.
Thank you for your participation have a wonderful day.