INTZ Q3 2018 Earnings Call
Operator: Good day ladies and gentlemen and welcome to the Intrusion Third Quarter 2018 Financial Conference Call. At this time all participants are in a listen only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder this call will be recorded. I would like to introduce your host for today's conference Mr. Mike Paxton. You may begin.
Mike Paxton: All right, thank you. Welcome to this afternoon's call to review Intrusion's third quarter 2018 financial results. Also participating on the call today are Ward Paxton, Chairman and Co-Founder, President, and CEO; and Joe Head, Senior VP and Co-Founder. Ward will give an update, I will discuss financial results, Joe will go over our current projects. We will be glad to answer questions after the prepared remarks. We distributed the earnings release at approximately 3:05 Central Time today. A replay of today's call will be available starting at approximately 6:30 PM tonight for a one-week period. The replay conference call number is 855-859-2056. And the replay prompt and our Conference ID number 807-7575. In addition, a live and archived audio webcast of the call will be available at our website intrusion.com. Please be reminded that during this call, including the question-and-answer session, we may make forward-looking statements with respect to financial results, business strategies, industry trends, and certain other matters. Forward-looking statements are based on management's current expectations and are subject to risk and uncertainties. We may be discussing our current outlook based on our own internal projections for the current quarter and fiscal year 2018. Actual, results may differ substantially from internal projections. We are not responsible to update any forward-looking statements. Many factors could cause our projections not to be achieved, including 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 2018 and previous Form 10-Qs. Now, I'll turn the call over to CEO and president, Ward Paxton.
Ward Paxton: Thank you, Mike. Welcome to Intrusion's third quarter 2018 conference call. It's good to be with you today to discuss our super third quarter 2018 results. Our revenue and profit have both had sequential growth over the past four quarters, and we expect this trend to continue in the future. This trend continues as exemplified by our third quarter orders booked, reaching $6.5 million and in addition booking another $3.6 million of orders since October the 1st. Our business pipeline includes approximately 15 customers, which we are currently doing business with. Our net income for the third quarter of 2018 was a little over $600,000, which is up 30% from the second quarter. Revenue for the third quarter 2018 was just under $2.7 million, which is up 12% from second quarter. As the new business revenue kicks-in, we expect a significant increase in revenue and profits. Now, Mike Paxton, our Chief Financial Officer will review our third quarter financials that we released little over an hour ago. Mike?
Mike Paxton: Okay, third quarter 2018 financials from the press release. Revenue for the third quarter was $2.7 million compared to $1.7 million for the third quarter 2017, sequentially up from $2.4 million in Q2 2018. Gross profit margin was 64% in the quarter compared to 56% in the third quarter of last year. In general our goal was 65%, the increase in gross profit margin is primarily due to favorable margins on the current project mix. Our third quarter 2018 operating expenses were $1 million compared to $1.3 million for the comparable quarter in 2017. Operating expenses improved mainly because of R&D expenses that shifted to cost of sales, R&D labor costs to direct labor. Direct income for the quarter was $617,000 compared to a net loss of $568,000 for the third quarter of 2017. And with that, I'll give it back to Ward.
Ward Paxton: Thank you, Mike. Now Joe Head, my partner, Co-founder of Intrusion and Senior Vice President, will discuss our outstanding sales results and our increased penetration in our marketplace. Joe?
Joe Head: Thanks, Ward. For some time now Ward and I've been reporting that we were optimistic about our prospects. In the third quarter we booked $6.5 million, of which $5.5 million was a single order for a new project. And then in October, we've booked an additional $3.6 million, which was a $2.4 million renewal and $1.2 million of additional renewals. I'm glad to report that the one customer we were eyeing as a possible loss has issued a renewal covering the next five years. And so expect this long-term customer to continue for quite a while. Their first 10 months renewal is included in the November bookings at $100,000 a month. So our base level of business has moved up a step based on several new large projects. The driver for this new business is entirely based on our customers being pleased with our performance on many projects over the past years. I've hired an additional large account specialist who will join us in January, because we have a number of new opportunities we want to capitalize on in 2019 and beyond. One of our customers noted that our record of delivering on hard challenges made them want to stretch us with some larger projects. So we could add staff and be capable and engage on even larger projects. There are many large contractors, but they don't always over perform, in fact they often underwhelm on their work and our customers want some options beyond their current stable of integrators and solutions providers. We're working to book new business to start work in a number of areas in the coming month. As a company, we have a number of datasets in our TraceCop family, which we used all the time in our analytic efforts to meet customer needs, but this represents - these large datasets represent part of our pipeline a fuel from new projects as well. In TraceCop, we have one dataset we licensed for $1.2 million a year, and it represents a case where our customer's analyst make use of the data directly. We find that developing new large datasets takes a few years to grow from an initial efforts to world class. During that time, we use the newer developmental datasets internally and weekly reports that answer customer questions and security challenges. But after a while, these datasets grow and represent new subscription feeds or opportunities that we sell on their own. In the $5.5 million order, we have a $600,000 license for analytics research using one of our newer datasets that we've been building for approximately seven years, but haven't sold licenses for till now. If a customer wants to license this feed for regular use, this dataset we'll license for about $1.8 million per year per customer. At Intrusion, we collate some rather large datasets, of which this one is the largest yet. We have been adding about $1 billion record a day to this new dataset for seven years and we have over 2 trillion rows added to this one dataset to-date. This one represents one of the largest commercial IP security databases in the world and this allows Intrusion to address a wide variety of concerns. Some of our datasets aimed to understand who is infected by what, but other datasets are used to understand the context of observed communications at one of our customers. For example, what is it mean when our customer observe communications from inside their network to one of the 1.5 billion live host on the internet this month. To be complete, these 1.5 billion host names are popped on 899 million servers, so many host names are on shared servers. So some of our databases specialized in what it means when you talk to a certain server, if that server serves up malware for a nation state actor a simple visit likely means you have a compromised computer. If a server has almost no content, and you have computers talking to it all the time than that can't be user web surfing it's likely a command and control node for a compromise that's already installed on your computer. So this fact shades light on what the advisory is up to on your network. So for every communication we see at a customer, we set out to answer many questions like why would you visit this server, what languages it in, where is it physically located, who owns it, what content or topic is this server serving up, is our customers' traffic showing signs of something risk just by communicating with it, et cetera. In this month's orders, we have a 250,000 order for Savant as part of the $2.4 million order. So as we've discussed Savant is another asset we now have time to market and leverage with our customers. One of our latest new datasets for TraceCop is a survey of the internet for topic. We know how owns every server and where it's located, but it's also nice to know what language and topic decides visitors go there for. We see a customer's machine going to a site and a language that he doesn't speak or read that is not unexpected unless they go there every day, in other words might go to a site you don't - can't read just don't go back. If so, if you go there every day it's probably a site used for relay for an exploit since the user doesn't speak the language. We have collection showing the language and topic for about 150 million www websites, but we see about 250 million sites active this month. So one of our new efforts is describe every homepage to discover new ones record their language topic, et cetera malware. Security can be a concern with who wants to make a bomb, who sells drug or who wants to be a terrorist. But these are used not easily that interesting or likely to be the case for our customers. Bad guys' takeover small sites to use them as relays for malicious command and control of compromised computers. So that if observed the security chief will dismiss the communication as just some employee surfing a website even a secure one. But one of Intrusion's specialties is to discover compromise within the sea of normal. There is about like I said before about 250 million www websites and about 1.5 billion total host on the internet not counting users. So pinpointing who's relaying through otherwise innocent servers they have comprise is important to know. We easily don't go down to this level of detail in the conference call, so I apologize for putting you all into a coma. But this is where we live day to day. Security is in the world is in a horrible state because people treat the problem superficially. It takes huge data discover and discern between normal and abnormal communications. Back to the main topic, discussing the nature of our new larger orders. There are a lot of companies talking up big data solutions, but they're big datasets really aren't that big. Intrusion has some of the largest datasets around as well as a track record of knowing how to apply that data to our customer's challenges. We're now starting to apply our knowledge on how to build, use and deploy our big data expertise at a higher level with our customers, instead of just being a boutique firm with more narrow focus. We are now working on solving larger customer challenges with custom engineering and systems, which expand on our in-house successes. As I mentioned earlier many times a company like us have the desire to take this step and expanding their base, but for whatever reason can't or don't see that desire bear fruit. In our case a good customer press us to take these steps in order - in his words to stretch us so we could solve bigger challenges for them, so we shall. We will make sure to keep them happy as we always do, and continue to add new and ever larger opportunities to our pipeline for next year. Ward?
Ward Paxton: Thank you, Joe. The third quarter was a continuation of a solid growth in sales and profits that we have experienced over the last four quarters. This growth has been primarily in our TraceCop family the products and services. We expect this growth to continue in the future. Our team is developing new products and services at a rapid rate and we are using these results to expand our base with existing customers, as well as to expand our customer base with new customers. I look forward to continued growth and look forward to communicating these results with you in the future. Thank you. Mike.
Mike Paxton: Okay, operator could you remind the participants how to queue up for questions?
Operator: Thank you. [Operator Instructions] And our first question comes from Howard Brous. Your line is open.
Howard Brous: Thank you. First of all Joe, Mike, Ward congratulations on a very good quarter.
Mike Paxton: Thanks, Howard.
Howard Brous: Very welcome. Just two, one, a bit of my new ship if I may, research and development the reason is now you're taking it on a different level, because it's down year-over-year from $617,000 to $329,000. So it's appearing someplace else as we discussed on the call.
Mike Paxton: Right. Yes, we basically had to borrow those people that we're doing R&D to put them on revenue as the orders came up so we'll have to backfill people.
Howard Brous: Okay. Going back to Q1, we've had conversations about additional orders, $2 million to $4 million worth of orders, several of them expected towards the end of the year. Where do we stand on that?
Ward Paxton: Well, we booked several of them already and we have several more working.
Howard Brous: Are they in procurements yet?
Joe Head: Most I have one - I have two that are still in procurement, but they're smaller than these whales. So most of the big ones have booked.
Howard Brous: The one that you booked are renewals or are they additional?
Joe Head: The $5.5 million was brand new, the rest have been renewals. There's a couple of small ones that are brand new, but they're pretty small couple $300,000 or so.
Howard Brous: Anything large in terms of potential new ones?
Joe Head: There are several. I have them in sort of the category for next year where you may see, I guess, we've got a few more renewals that are happening between now and the end of the year. But nothing astounding in the next 30 days or so, but a good pipeline of other good ones. I expect those to be probably first quarter kind of start for the next round of things.
Howard Brous: So those are new.
Joe Head: Yes. As I indicated earlier there of the new big order, the $5.5 million order, we expect that to generate about $1.4 million of revenue a quarter going forward as soon as it gets ramped up. I mean we're ramping it up now. When it gets fully ramped that's the level that it'll go at for about four quarters.
Howard Brous: And on all of these orders that you booked on the renewals and this $5.5 million it is likely that gets renewed afterwards?
Joe Head: Yes, the $5.5 million already got plan for three years.
Howard Brous: And last Savant, beside the small 250, any plans for larger orders?
Joe Head: That was the first one I worked honestly, I've been too busy doing the other thing and I mentioned in the last call that I was going be able to shift some emphasis back over. And this part one is a sort of an evaluation trial, which will grow as they like it. And - but, yes, we'll - I am starting to engage other customers on instrumentation and then we have a couple of other good size opportunities for some integration that I was talking about on the discussion as well.
Howard Brous: Well that's all I have for the moment. Again congratulations.
Joe Head: Thank you.
Operator: Thank you. Our next question comes from Walter Schenker. Your line is open.
Joe Head: How you're doing?
Walter Schenker: Good. Obviously over 15 years, I haven't had a lot of opportunity on two consecutive quarters to say good job. Congratulations. So I'm pleased to be able to do it now.
Ward Paxton: Thank you.
Walter Schenker: Listening to Joe about the breath of your databases and capabilities, could you give me a little more color on how the rest of the world, which is the other 99.99% of the world in cyber security area operates through all the other areas of government and private industry who don't have the breadth of access to your type of database. Are there are another 10 of these, 5 of these, or 100 of these. I'm just trying to understand how much broader the potential opportunity could be outside of your normal customer base.
Joe Head: Okay, a good point. So first of all, the rest of the folks that go at the business have - we've talked couple of years ago about the signature based world. There's some really large players that focus on understanding this code as part of this family of malware that the Russians, North Koreans, Chinese or whoever wrote. And so they have words like APT28 as a family of compromises I mean say well this country we believe wrote it. And this signature is a match for it. So they've focused on signatures and then cleansing of a network once it's there. Our approach is a little bit different. We've said as you move forward the adversaries can basically do a custom infection for each new victim. So in everything you - if you knew everything there is to know about previous infections you couldn't see the new one. So we've taken a communications behavioral approach with Savant and with TraceCop in that mandates that you sort of understand who you're talking to and what would it sound like if you're talking to. Like if you talk to Netflix you get big old movies, if you talk to a big database you'd make little small queries maybe millions of them. And so we're characterizing what the flow should look like if things are acting normally. And so our kind of strange approach has taken a while to convince people that it works. And now it's - people have shown that the other ideas and approaches are not good at finding things. So in my way of summarizing there's guys that discover exploits kind of every week that have been going for years and they just didn't see them we're looking at it the normal way. So we look at it as look at your flows and enrich them with something like TraceCop. There's not a lot of competition in our space, that's why I get sole sources all the time for subscriptions to this, no question there's a few like geolocation of IP addresses there is probably a dozen offerings in that space ranging from $100 a year to million a year with varying degrees of accuracy. But most time are not that accurate. But then we start looking at behavioral based comps. TraceCop is reasonably unique. So that when guys do surveys for who's got something like TraceCop at a super threshold level there is probably four or five that have something that sounds like it. But then you dig down deeper and our government customers end up write in sole source procurement because ours is sort of not - there is not viable competition at this point. You mentioned something else and I forgot the last.
Walter Schenker: No, no. But to take that a step further, your customer base and we discussed other government agencies, other areas of the government who are also very sensitive to this. Your customer base has largely been DoD end market. Is this as you get bigger in DoD does that open up all of the other large government agencies that are heavily concerned about - I mean, everybody real high end of efficiencies that are seriously interested being at the highest level of cyber security?
Joe Head: We think so, so that's one of the reason we're going to start to add some folks here and there to go engage with some of the ones we think are next likely candidates. But, yes, I'm optimistic about expanding the base.
Walter Schenker: Okay. And then - thank you, Joe. Just going back to Ward or Mike, you've indicated that the new contract first you would expect it to be although originally you got, I guess, 15 months you're expecting this to actually be a multiyear engagement, is that correct?
Joe Head: Yes, 15 is now 12.
Walter Schenker: And looking overall, that's going to be again only $1.4 million. You got a renewal on your $2.4 million contract. It's an annual contract in a very simplistic way, and you're not making a forecast historically away from that contract. The business was approaching $2 million a quarter again once this new contract is up and running. With all the renewals you're getting, it would be reasonable - again quarters can vary I understand that. But to take a look at the last four quarters without it and add $1.4 million to last couple of quarters without it. And that would be a reasonably quarterly - again with quarterly variances target that you'd hope to achieve.
Ward Paxton: Yes, thanks. So the - you're aware, of course, that gaps in our continuation just like the project - the $2.4 million project we've just experienced a gap and yet that's now closed, but where we had a couple of months there we would have funding on it. And when you get to that spot you of course have to spread the other business. But overall, the level of business that we have experienced here in the last three quarters of around $2.5 million a quarter that continues if we have continued reordering of the existing business. And then if that situation occurs then the $1.4 million a quarter is on top of that. So you add that up and say well everything continued and you didn't lose anything back there. You think about it getting up to around $4 million continuums, that's in the cards but…
Joe Head: I think this time a timely renewal.
Ward Paxton: Yes, right.
Walter Schenker: Okay. Hopefully you're smiling when you say that Ward, now that you haven't seen in a long time.
Joe Head: Like I mentioned to Howard, I said that in my narrative but maybe I didn't hear that. I looked through all the stuff I am on that I was worried about would it renew or would it not renew I had one that I was kind of worried about, and it renewed and they got five years of options in there. So I don't really see any gaps in the major stuff. I see them renew and then continuing without big gaps.
Ward Paxton: Walter, one of the other subscriptions from our customers is the fact that all of our business has been soul sourced. And that soul sourced because other capabilities don't exists.
Walter Schenker: Okay, again thanks a lot guys. Congratulations.
Ward Paxton: Thanks, Walter. Appreciate it.
Operator: Thank you. Our next question comes from Marsh Sudan [ph]. Your line is open.
Unidentified Analyst: Gentlemen, thank you for taking my call. I am actually a pretty new investor to the company and monitoring what you been doing for maybe the past year or so. And recently bought the stock six months ago. And I like to know more about the company and I've been trying to reach you guys via email and phone call and but not successful. I just want a conference call and let you know that I really like talk to you, and interview the company. We could take positions in the stocks that we like you. So it's part of my routine is I want to make sure that maybe you can give me the right e-mail right phone number to be contacting you on it. I called three or four times, sent several emails and some of your voice emails are going to like a full or different departments not working. So I was hoping maybe to get a better way to contact you guys here, on this call. Is there a - do you have a suggestion for me here, how to go about doing that?
Ward Paxton: Yes, I always give it out at the end of the call.
Unidentified Analyst: Okay. So I'll give you my phone number. I don't mind doing that here, if that's okay, you write down and my phone number is 267-246-3263 and my email is majmarsh@geoinvesting.com. We've been working around for 11 years and we cover small cap, middle cap companies.
Joe Head: So welcome, we'll give you a call. Appreciate it, Marsh.
Unidentified Analyst: That would be great. So I really appreciate it. I like what you are really doing. And I think there are 24 million [ph] investors following the story. So thank you, appreciate it.
Joe Head: Sorry you had trouble getting a hold of us.
Unidentified Analyst: Okay, thank you. Bye-bye.
Operator: Thank you. Our next question comes from Robert Rolfe [ph]. Your line is open.
Unidentified Analyst: Hi, gentlemen. Congratulations on a good quarter. If you could clarify of the $5.5 million, how much of that is in the quarterly $2.7 million if any?
Ward Paxton: There was hardly any of this quarter's $2.7 million whatsoever.
Unidentified Analyst: Okay. And then my next question is that's a nice sizable contract. Why is it barely towards in the sixth paragraph of the press release. Shouldn't that be considering the size something that's exciting that you should be announcing?
Ward Paxton: Well, we've talked about it the last quarterly press release, and so this is the second time around.
Unidentified Analyst: Okay, thank you very much.
Joe Head: Thanks, Robert.
Operator: Our next question comes from Howard Brous. Your line is open.
Joe Head: Okay. Go ahead, Howard.
Ward Paxton: Yes, we got his questions all answered.
Joe Head: Any more questions, operator.
Howard Brous: Yes, can you hear me?
Joe Head: Oh, there you are. I can hear you.
Howard Brous: Can you hear me now.
Joe Head: Yeah we can. Come alive we'll get you.
Howard Brous: New phone system. In any event that you are retaining an Investor Relations firm, where do you stand on that?
Ward Paxton: We're working on that right now as a matter of fact, I'm working on that right now.
Howard Brous: Good, I'm glad to hear that. And TraceCop for commercial use, is there any end use commercially for that and have you pursued it?
Joe Head: We haven't really started down that path yet, Howard. It's been mostly for military and government sort of users. So I think they're sort of early adopters at this at this level. However, I think when we look at the Savant for commercial and some of our commercial deployments, I think that's where it'll come out is we supplement the reports we do for our monthly commercial customers. And so one of the ordered we didn't talk about this month was a new commercial customer that's a couple hundred thousand dollars a year. And so we see that there's a lot of folks in that sort of category where we enrich flows they have and enrich logs they have and then give them weekly or monthly reports. And so we think there is some pretty good growth potential in that area, but I would view that - don't know how to cover that with you, because we're just kind of doing exploring in terms of how big a market is, how do you need to serve it and then how you reach those customers. Because obviously at our stage it's better to get a few big ones than a lot of little ones. But we're developing the expertise and the delivery and the automation to do those reports for commercial guys.
Howard Brous: Just getting back to my last question as a follow-up to my follow-up on the IR firm which you are suggesting not to speak, would that include your visiting the York of all places?
Ward Paxton: Well, as soon as we get the system and the situation with our IR firm in place, I'm sure that visiting other places like New York and Boston will be in the cards.
Howard Brous: Appreciate. Looking forward to seeing you all. Thank you. Congratulations on a great quarter.
Ward Paxton: Thanks, Howard.
Howard Brous: Thank you again.
Operator: Thank you. And I'm showing no other questions in the queue.
Mike Paxton: All right, we'll wrap up the call. Thank you for participating in today's call. If you did not receive a copy of their press release, or if you have further questions you can call me at 972-301-3658 or e-mail mpaxton@intrusion.com. Thanks again.
Operator: Ladies and gentlemen. Thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.