Q1 2023 IronNet Inc Earnings Call
Speaker 2: Is being recorded. I would now like to turn the conference over to your host, Nancy faoli Investor Relations. Please go ahead.
Speaker 3: Thank you, operator Hello, and thank you for joining us. Today's conference call will address iron net's financial results for the fiscal first quarter ended April thirtieth 2022 that were announced this afternoon. Before we begin, Please note that some of the statements we will be making today are forward-looking.
Speaker 3: These matters involve risks and uncertainties that could cause our results to differ materially from those projected in these statements. We therefore refer you to the risk factors included in our latest SEC filings.
Speaker 3: Supplemental information is also provided on the Investor Relations website from time to time.
Speaker 3: And now I'll turn the call over to our Founder and coceo, general Alexander, who is joined by our coceo bill welch and CFO Jamie gerver, all of whom have some brief remarks before we moved to the question-and-answer portion of the call, general Alexander, over to you.
Speaker 4: Thank you, Nancy. Good afternoon to everyone and thank you for joining us today. I am quite optimistic about our progress.
Speaker 4: We added new transactional annual recurring revenue, AR of five point five million in the first quarter.
Speaker 4: As noted in our earnings release, our revenue and net AR results were consistent with our expectation that certain customers in our transactional business would be delayed in signing for renewing their contract.
Speaker 4: Those delayed opportunities and one nonrenewal resulted in a decline of seven point two million in AR from the quarter, leading to a net decline of one point five million in AR quarter-over-quarter.
Speaker 4: We would like to reiterate that we see the significant majority of these opportunities as pending rather than lost.
Speaker 4: two of these pending transactions, representing approximately $5 million in ARR, are public sector customers impacted by budget delays.
Speaker 4: Another nonrenewed contract, the only 1, we would categorize. This loss represents approximately one million dollars in ARR.
Speaker 5: This is a structural issue.
Speaker 4: It is an opportunity that has not been fully deployed due to the pedrampatory to operate for atl not being achieved. We have achieved pedram ready status but not atl. This is an area where we are making progress and we hope to repeirit result this fiscal year.
Speaker 5: Once this is achieved, we also expect this customer to come back in as well. We believe fedram ATO status has a potential to uplift our sales momentum when complete. We do not see it as an impediment to closing the majority of public sector shared. It's a strategic opportunity that are in our pipeline today.
Speaker 4: Our issue continues to be largely timing in bureaucracy, not a lack of perceived value by our customers.
Speaker 5: And this is important to highlight as a reason for our high confidence and our ability to bring this business back.
Speaker 4: Our customer wins this quarter were in sectors that represent important areas of growth for us: health care space, state agencies, energy and public utility.
Speaker 4: Bill will provide additional color on these wins and give insights into the value customers are finding.
Speaker 4: Pipeline opportunities from strategic customers.
Speaker 5: Which to remind you, we define as those exceeding five million knowllars in ARR, remained as robust as discussed last quarter.
Speaker 5: We feel confident that we will see these opportunities start to close in the next couple of quarters.
Speaker 4: As a team, we continue to show strong thought leadership and to increase our brand awareness.
Speaker 5: From customer engagement at Gartner's security and risk management Sumit to our targeted presence at the resurrected RSA event in San Francisco, to our presentation at the National Association of state CIS, where we partnered with AWS.
Speaker 5: To present on the importance of a whole of state approach to cybersecurity. We will maintain this spacete and momentum and highlighting our value proposition, while also continuing to show discipline in our approach to sales and marketing.
Speaker 4: In April and partnership with the new York stock exchange ISO stepu. We hosted national cyber Director Chris English and Southern companyies CEO Tom panning for a virtual webinar. uncollective defense.
Speaker 5: It was well attended by critical infrastructure and particularly energy, company executives and it leaders.
Speaker 4: There are two noteworthy comments from the presentation that I believe speak eloquently to Internet's unique value proposition.
Speaker 5: Director English remark that cyber defenses must evolved to a point where you have to be all of us to be one of us.
Speaker 4: CEO of Southern company Tom fanning. Caution that none of us can individually own the talent in our organizations or to adequately support our own supply chain working alone.
Speaker 5: Rather that we must work collectively. He also highlighted that addressing these gaps is a judiciary responsibility for boards and management teams.
Speaker 4: I would like to add that there is simply no amount of cybersecurity investment, even for the most sophisticated among us, that will enable us to prove the positive in our environments. The weight-collective defense scan.
Speaker 5: This perspective comes to my experience leadaving the offense for our nation.
Speaker 4: An isolated process side. The security is a legacy and, from my perspective, a short-sighted and dangerous approach.
Speaker 4: What we have set out to accomplish in transforming cybersecurity through collective defenes is hard and has not been pictionless.
Speaker 5: Yet our approach and our technology are increasingly being validated, if I just noted, and as Bill will further illuminate for you, through customer insights.
Speaker 5: We are encouraged about our opportunity and confident that we are on the right path.
Speaker 5: With that. Let me now turn it over to Bill for his remarks.
Speaker 6: Thank you, general. I'd like to echo the general's long-term outlook and share what our customers see as the value of the IronNet collective defense platform.
Speaker 6: Speaking to what is the value that IronNet brings to market.
Speaker 6: Here's a snapshot of customer perspectives from this quarter.
Speaker 6: A customer or iron own for space that as a highly sophisticated environment and cybersecurity investment posture. This customer indicated that they start their day with iron net by logging in and evaluating every alert.
Speaker 6: With this customer. Ironnet is a valuable source of information on taxs and vulnerabilities that they're not getting from any other vendors.
Speaker 6: Ours is a highly differentiated level of visibility. Their prospective and level of sophistication is similar to that one of our financial customers in Eastern Europe from room IronNet fill specific gaps in their technology staff. As a result, they frequently call on us for support when they are under attack.
Speaker 6: A second customer, a large health care consortium with a mature aposture and sophisticated level of investment, was concerned about potential attacks against payers and potential for ransomware and the theftth of personal health information and the resulting hippoconsequences.
Speaker 6: They have been relying on intrusion detection systems ids- and looking for an npr solution that could fit their needs and scale. They chose IronNet because of our behavioral analytics and unique ability to detect unknown unknowns.
Speaker 6: Our platform enabled them to eliminate IDs. A third customer, a mid-sized college without its own security operations center, was a victim of a costly and disruptive cyber attack and saw IronNet as a low-cost, high-value insurance policy against cyber attacks.
Speaker 6: As a result of the institution's proof of value and selection of us, the institution is now transforming the sophistication of its overall approach to cyber defense.
Speaker 6: In a short time, this institution has become a powerful evangelist for IronNet collective defense and is seeking to build a dome for institutions of its size.
Speaker 6: At fourth customer. A new customer on the West Coast came viaa referral from new York power authority, its public utility, peier. The team is already sharing information with its ecosystem and was impressed by IronNet's approach to automated collaboration.
Speaker 6: A competitive NDR solution was about to get an order prior to our introduction.
Speaker 6: Our pilot project identified vulnerabilities in the customers' environment that were not previously detected.
Speaker 6: A fifth customer. A Healthcare clinic that is part of a larger Healthcare community of providers, saw IronNet as the first step to defending in collaboration and an on-ramp to a more sophisticated posture.
Speaker 6: They are an earlier adopter, for their size, in seeing the power of leverage cyber resources.
Speaker 6: Their decision to buy following a strong pilot program was also based on recogniz the value of going beyond compliant to being secure.
Speaker 6: This customer validation is energizing for our team and enables us to feel highly optimistic as we drive awareness and market adoption of what we believe to be our highly transformational cybersecurity solution.
Speaker 6: Let me turn it over to Jamie now for some comments on guidance and cash. Before we take your questions, Jamie.
Speaker 5: Thanks Bell, and good afternoon.
Speaker 5: We have reaffirmed our prior fiscal year 2023 revenue and exit AR guidance based on the visibility we have on pending new and renewal opportunities in the transactional side of the business.
Speaker 5: As well as confidence around certain strategic opportunities.
Speaker 5: Our pipeline remains healthy and has grown. We still expect ARR, and also revenue, to build more strongly into the second half of the fiscal year.
Speaker 5: If we're able to execute on the opportunities we believe we have in front of us. We think we could achieve record revenue in the third and fourth quarters of this fiscal year.
Speaker 5: With regard to our cash and liquidity, and with ongoing careful management, we believe our financial position can remain sou.
Speaker 5: We have not yet drawn on our equidity line with twomb and stdown capital and we will continue to benefit from having options for liquidity from being a public company.
Speaker 5: We will continue to take a disciplined and balanced approach to growth, being mindful of cash preservation and with a goal to get as close to cash neutral as possible.
Speaker 5: We believe the network effect potential of our business model, enabing us to bring in a community of customers via single strategic deals, coupled with tight expense management, will enable us to strike this balance.
Speaker 5: In addition, we benefit from being in a growing market for cybersecurity investment and providing a solution that not only defends across sectors more effectively and also drive significant it cost efficiencies in human capital for our customers.
Speaker 5: We remain quite encouraged as we navigate the business forward this year and for the longer term. Thank you, operator. We are ready for our first question.
Speaker 2: Thank you. At this time we ll be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question Q. you may press star two if you would like to remove your question from the que for participants using speaker equipment and may be necessary to pick up your handsset before pressing the STAR keys. one moment Please, while we pull for questionsyour first question comes from Mike cos with Needham and company. Please proceed with your question.
Speaker 7: Guys thanks for taking the questions here. I did want to first circle up on the AR. I know that you guys went through that in the opening remarks but just want to make sure I'm clear on this. So you aided five point a half million in new transactional AR and the comment was that there was $7.2 million decline in AR from the combination of the lead customers and that that one non renewal that we spoke about is that. Am I thinking about that properly?
Speaker 6: Then like this is bill and then I'll ask Jamie and the general to come along time me. But the offset to our strong new and renewal or the transactional side of the business in Q1 was a result of delayed renewals due to some government delays not lost deal. So we first saw as indicated on the Q4 earnings call that we might not be able to finalize a couple key deals and Q1 which is what happened. We recognize. This is an area need an improvement for us. We have to get better about shortening the timelines for these new and renewal contracts. There have been some structural impediments as we ve referenced before like the continuing resolution of the government funding level. But as that has been resolved and is resolved and there's an opportunity for us to work more effectively with our public sector sponsors to help push through with the government contractors as well and then on top of it. We've also realize some great value with our customers with our value management selling and the value that we've been delivering to themok and that.
Speaker 7: I guess that $7.2 million decline that we were talking about earlier as well are the or those two heado one prrases. Are those two transactions from the public sector customers that were delayed or impacted by funding? Is that the the bulk of that $7.2 million like? Can you help us conceptualize as that as accurate?
Speaker 6: Yeah my de an accurate statement is that we have of the ones that have been pause and not lost. The majority of that turnurn is opportunities that have been pause or delayed but not lost but mechanically had to take them as a lost understood. So So and then you get yes. So as are $5 million that's $5 million that are in those two that we had to pause on and until those deals are finalized. We couldn't count them this quarter and then there's another million in a deal that we're waiting on the a P o as soon as we get the a we think that one will be back. So that's why we wanted to be clear in transparent that those aren't lost deal. Those are deals that have been delayed in large part two of them because of the conuing resolution in the impacts on the federal government OK and then two more follow ups on the a or if I could before it turn over by colleagues that.
Speaker 5: Think the most important thing is to keep an eye on announcements that we've said that we'll make as important transactions come along.
Speaker 8: Okay okay and so. And I add to that: yes, I remember I'm the guid who knows released about this. So what we had said in our last quarter is that we weren't going accomplished strategic deals in.
Speaker 4: But that we are nounce some and appropriate raise guidance accordingly. So what we're, what we see, is they look promising, but we still don't want to guide because we're dealing with the government. But we are main optimistic.
Speaker 7: Actually okay, Thank you, I'll turn it over to my colleagues. Thank you very much, gu.
Speaker 2: Your next question comes from Joseph gall, o with jefffriys. Please proceed with your question.
Speaker 9: Hey guys appreciate the question. I guess, falling up on that that line of questions, what's the confidence in that six point two million of slipped but not lost dealss coming in fiscal 23? I think you had verbage that. It was like I hope it closes in fiscal 23 and so it's kind of: why not just lower the full year guide by the six million? So I'm just trying to get your, your visibility into that.
Speaker 6: Yeah we still are. Very confident is I had answered on mke's question- is that the, the timing is the only thing that we, when I make sure we very accurate and as a general Senate, is we secure those transactions, we will announce them. But very confidentin the value we're delivering, very confident the P of values that we have done, very confident in the executive sponsorship, every confident in the technical results that we have seen. So it is matter of just getting to the budget process, the funding, and then the, the award of the contract. I guess I can flip part is again, I think you H this in D in the last question- But what's the confident that this, I guess, won't be a problem going forward, like in our model? Should we decline? Should we model of one Q decline sequentially each year going forward, because that appears to be the trend in the last two years? Or how should we think about the growth renewal rate as we're modeling are going forward? No, I would not model that, but we don't see no implication for our future curk, future quarters.
Speaker 9: Ok and then maybe just for the general and you bill, maybe just walk us through the demand environment. I think you mentioned P V's were up 300% last quarter but you know, at our's a, I think people are certainly cognizant that the macro is worsening. Are you seeing an extra level of approvals? Right, like I'm sure thepipeline is strong, but are are you seeing an extra level ofapprovals? Are scrutiny, our cycle times, long gaining and does your guidance reflect any of that? Yeah, I believe that we are seeing. First of all, you know absolutely, I believe, that customers are reviewing their budgets but cyber still, you know very very, very important and the long term viability of cyber continues to be very active business. You know we we have seeing the rationale for iron, that existence to be, you know, being stronger, given the threat landscape and and what you see in the reasons of concern across the world, whether you know the world that continues to become even more and more dangerous, what you're seeing over in Ukraine and Russia.
Speaker 6: You're seeing where cyberers is an element of national power: the mummy spider threat group, wiper viruses. We think we're uniquely positioned because we prove the positive and environments on the on the spot analytics with our threat indicator. We also provide the anymized collaboration across the community. So a one plus one really equals a multiple three for efficiency and the five X growth of five G and then really the human element of cyber is really challenged right now in a race that many cannot win and I think that the ability to bring collaboration, network detection still in the early phases of the market. But we're going to continue with our thought leadership of collective defense and, as you saw, great industry recognition by the jcdc or the joint cyber committee around SC Labs of a tria rating and then also some very strategic partnerships. You saw with the announcements, with Mandy and others.
Speaker 5: And Joe. Just my add thatyes Joe, I was just going to also add that out. In our a we were actually seeing quite strong affirmation from the those there, particularly in the network detection subsegment of cybersecurity, which of course is one of our foundation technologies here. So I think, in terms of the overall economic environment, obviously wewere very cogniz on a bat. But I think in terms of the demand signals that are particularly focused in our part of cyber, we are continuing to see some good, good reaction from the, from the buyers, this those out there, and certainly in terms of the, the contracts that are out there, these ones that have paused here in the first quarter, that those signals have remain very strong too.
Speaker 4: yesso Joe, I want to add in: you know that when we started the company we are focused on the commercial sector. After solar wins we shifted to starting to support the public sector, the federal government and the state governments. I think now, given what's going on in the markets, that has been a really good move for us. Now the downside is those are harder to predict. The upside is those are significant long-term contracts for us that, when they do come in, will be, I think, significant for our company.
Speaker 4: And it also helps us build what we said we were going to do: a public private partnership. But you could bring a commerciional and the federal government together for defending our nation. So I think, when you look at it, we're in a good position for that and now that continuing resolution has been resolved, the federal government getting their money and is working through that process, So we are optimistic about that, jo.
Speaker 9: alsoes really appreciate the color. Thanks youyour next question comes from Gray. How with btiig? Please proceed with your question.
Speaker 10: This steph and am or greay. Thanks for taking my question. I guess to aren T often similar to previous line of questioning. Could you talk about linearity in the quarter? Were there any changes in customer buying pattern?
Speaker 11: Yes I think, as as Bill was just referring to the changes, that we saw an ARR in first quarter really were' two fairly large transactions. So I don't think that one should read seasonality of that. Now you've asked about linearity within the quarter and again the primary transactions are quite large and lumpy. The good, really good, news is that we had a one of our largest ordters, certainly in the last two quarters, signed within the very first month in the first quarter. So we see good mand all through the quarters and we're very, very pleased to see that, but it's we're still a little to kind of 2, few deals to really call for some and identify some linearity patterns.
Speaker 10: Got it. Okay, that's helpful. And and then just switching to gross margins, I saw in the press release you called out some spen or inventory charges. Was there anything else impacting gross margins?
Speaker 5: Well the gross margin is 1- that we're actually still very optimistic about where some new, some of our new technical configurations that are just getting deployed into the marketplace right now can continue to drive our margins on. I think you did note the 3% effect on this quarter just from the fact that we've got a fair amount of inventory standing by for a couple of these upcoming upcoming orders and it's really just the warranty there that' that we're taking some charges on right now while we holdpe that. But we're very optimistic about the effects on lowering our compute and improving our margins as we continue to deploy this new technology versionand I thank you very muchyour next question.
Speaker 12: That should, that should D.
Speaker 12: Add on to the strategic guidance you have other, the transactional guidance you have for the year.
Speaker 13: Yes that's correct, that's correct.
Speaker 12: Thank you. And then just the last month from me, for in terms of the new customer count, I think I alluded to it in your commentary already, but it was a little bit light in the addition of customers for the quarter. Can you just talk to the dynamics around that?
Speaker 6: Yes it's on our customer count. There are certain strategic public sector opportunities that we think have the potential to serve as that ability to grow both in customer account and revenue and ARR and cash flow. As we mentioned, these are pause deals, not lost deals. We expect these pause deals to return. five of the six are on pause and have either already come back in or on a position to come back mechanically that we had to net them out and we're encouraged by what we were able to achieve in Q1 and what we see- the reaffirmation of the year and we see good growth through the year potential.
Speaker 12: Okay great, Thank you. I us for meyour next question comes from Taz kaggi with Guggenheim Securities. Please proceed with your question.
Speaker 14: Think I thank you. My question, other question on the deal that did not renew- and I think the gentle mentioned that was because of the said ramp it you so ification. Can you give some more color on that? Was that a new requirement that came up for that customer? And then secondly, for for you guys to get to that certification, what is it? What does it take and is there any kind of time of leven? You guys impplely on how well and Don T think that that's case.
Speaker 4: Thanks tod. So yes, when we started out with a customer, they didn't realize that the Fed ramp was going to be an issue from their perspective.
Speaker 4: So they actually bought that in. We really like to be FedRAMP cerified and go through the at? O process. We were in the process of doing that anyhow. So that deal was pause and, as we said that one is, we considered it loss but we think it will come back. We talked to both the C? O and their siiso leaders. Once we get at T we think'll be back in their partner with us as well, So we think that will come back as well. The pedram process is is a long processesas you know. For companies what you have to do is go through all the certifications. We've done the FedRAMP ready portion of that and are now working with one of the departments to get to a pedram certified. That will take probably several more months once we get an at T? O which they can give us over the next four or five weeks. We are good to work with everybody, So we don't see this impacting any deal.
Speaker 4: Which just impacted this. one with a company that works with the defense industrial base and the federal government, that ful. I have a few more followups under the these that the renewals that got delayed. You mentioned continuing resolution as one of the were of the reasons and we understood how the budget process will far when you re a continuing resolution. You could not buy new stuff but whatever you have already deployed can be renewed. I guess that's not the case. Can you just explain a little bit more how the continuing resolution impacts both new purchase and renewal? Looks like it impact renewals as well, while I thought we have that it impacts on these new new purchases.
Speaker 4: Yes So. So those, the the- the issue for the continuing resolution was actually in- a PO o b- were re during a PO o B aapproof of value and what happened for that customer? That PO o B got delayed in their and they with the continuing resolution. They CAn't take a PO o B. that's considered a new start. So that was delayed. They had some other issues internal to that. We have overcome those with that customer and are in the process of bring that. one back on. That's the majority. When you look at those two combined, that's five of the sevenventy million right thereyes, and last one the average durition up quite a bit this quarter from thing last year and last quarter one launch D that skewed that durition. Or you ING average duration go up the new business this quarter. Yes, I know.
Speaker 5: Right So the good news here is that we have been renewing longer deals and it's a factor of actually two things: one of the 1- a longer deal- coming online and 2- one or two shorter deals that have went into this pause as they are getting ready to sign this longer deal. So it's a little bit of a factor of both things coming into the nexti us quarter, but longer as better got itthankyouthank.
Speaker 8: Your next question is a follow-up from Mike CEOs with needimum company. Please proceed with your questionguys. Just just too quick follow-ups on the gross margin items that we were talking about earlier. I just want to make sure I'm thinking about this properly. So the 3% impact on gross margins we're talking about that was the impact on total gross margins, correct?
Speaker 5: That yeah, I was. The effect from services is really quite small on that. So yes, effectively the same on those okay, okay. And then the, the other question I had for you. I know that this is.
Speaker 7: I guess you have inventory standing by for upcoming orders is the way that you had freedit earlier. But to the extent that these orders don't come through in two Q, let's say it's more of a second half event. Is there potential that we incur additional charges related to the sensors now in two Q?
Speaker 5: Well they are ongoing charges. So yes, if we're, if we go on another quarter here, then we'll just see that same amount of warranty charge without revenue for the quarter. But it's yes, you can expect it, but that's a cost of standing by to be ready.
Speaker 7: Understood understood. Thank you, thatladies and gentlemen, we have reached the end of the question-and-answer session and I would like to turn the call back to MR bill welch, co CEO , for closing remarks.
Speaker 15: Actually general. Would you like get a wrap up? I don't you. Are you there?
Speaker 15: So So let me just wrap this up for for all of you. First, as we stated, we are optimistic about this quarter and the follow on quarters. As you know, some of the lost revenue is not lost, is delayed and it stays in part. We believe that our future for the second half is growing and something that we're very proud of, and we believe the company is on a sound financial position, without cash and other things. Jamie stated, and we all agree, that we see the revenue that we told you we re going to do- we're going to do at least that we believe that the future for this company and finally, this has been a tough journey, changing the culture in terms of cyber security, but we all believe it's important for our nation and we're starting to see traction from comments from people like Chris ingthis to that. Thanks for the time, thanks for everything that you are doing. Have a good eveningthis concludes today's conference. You may disconnect your lines at this time. Thank you.
Speaker 16: The.