Intrusion's (INTZ) CEO Ward Paxton on Q3 2016 Results - Earnings Call Transcript

| About: Intrusion, Inc. (INTZ)

Intrusion Inc. (OTCQB:INTZ) Q3 2016 Earnings Conference Call November 14, 2016 5:00 AM ET

Executives

Mike Paxton - CFO

Ward Paxton - Chairman, Co-Founder, President and CEO

Joe Head - SVP and Co-Founder

Analysts

Howard Brous - Wunderlich Securities

Walter Schenker - MAZ Capital Advisors

Operator

Good afternoon. My name is Amber, and I will be your conference operator today. At this time, I would like to welcome everyone to the Third Quarter 2016 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.

Mike Paxton, Chief Financial Officer, you may begin your conference.

Mike Paxton

Okay, thanks. Welcome to this afternoon’s conference call to review Intrusion's third quarter 2016 financial results. Participating on the call today are, Ward Paxton, Chairman, Co-Founder, President and CEO and Joe Head, Senior Vice President and Co-Founder. Ward will give a quick update. I will discuss financial results. And Joe will go over ongoing projects. We will be glad to answer any questions after the prepared remarks.

We distributed earnings release at approximately 3:05 today. A replay of today’s call will be available at approximately 6:30 PM tonight for a one-week period. The replay conference call number is 855-859-2056. At the replay prompt, you enter the conference ID number, 18411485. In addition, a live and archived audio webcast of the call is available at our Web site, 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 risks and uncertainties. We may be discussing our current outlook based on our own internal projections for the current quarter and fiscal year 2016.

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 2016 and previous Form 10-Qs, the latest was filed this afternoon.

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

Ward Paxton

Thank you, Mike. Welcome to Intrusion’s third quarter conference call. It’s good to be with you today to discuss our third quarter results and progress. As you know, we have two major product lines, TraceCop and Savant, and sell federal government entities and large commercial customers. We sell our products and services directly to the end user, and through larger resell partners. Our products address network security issues and are used to identify and locate bad guys, who penetrate our customers’ network. We have been selling TraceCop for more than 10 years and have been selling Savant for the past three years.

Our revenue has been running between $1.5 million and $1.6 million per quarter this year. We have increased our focus on TraceCop sales in order to reach profitability since. We have about 18 new potential customers in our sales queues, and we expect first orders from most of these new customers in the next two quarters. At this time, we have three existing old customers who have -- who buy about $1.2 million annually; another two who spend about $600,000 annually; and four more who has spend about 400,000 annually, in addition to other customers.

We are expecting one of the $1.2 million customers to increase to $2 million for the next year, and are expecting one of the $600,000 per year customers to increase to $1 million, so that we do see activity in our existing customer base with expansion with our customers. We will discuss our sales activities later, but now, Mike Paxton, our Chief Financial Officer, will review our third quarter 2016 financial results that we released a little over an hour ago.

Mike Paxton

Okay. Third quarter 2016 financial highlights, revenue for the third quarter $1.6 million compared to the same amount for the third quarter 2015. Gross profit margin was at 62% in the third quarter compared to 63% third quarter last year. Gross profit margin is affected by sales product mix of deliverables in the quarter. In general, our goal is around 65%. Intrusion’s third quarter of 2016 operating expenses were $1.2 million compared to $1.4 million for the comparable quarter in 2015. Net loss for the quarter was $280,000 compared to a net loss of 432,000 for the third quarter of 2015.

Thank you. And now back to Ward.

Ward Paxton

Thanks Mike. Now, Joe Head, my partner, Co-Founder and Senior Vice President, will discuss products, markets, and sales activities. Joe?

Joe Head

Hey Ward. As I mentioned in previous two calls, shift in my tactical focus to trace up to maximize our opportunities; first of them working primarily with one of our new partners. Last quarter I mentioned that we defined 12 new projects with that one new partner of which six have included, and the customers were working on decisions and budgets. We continue to propose these dilutions to new problems sets weekly and deliver samples as part of the proposal. We’ve new ones come up almost weekly as old ones seek money, fail to get funds, or promised that money is on the way. Presently, two customers have sent just over $0.5 million, earmarked for us, which awaits the contract shops to put the money on our contract. We expect another $700,000 to be transferred to procurement for us this month, which will make its way our contract vehicle mix.

There are six to eight other projects we are continuing to develop with this partner, and are working on those weekly. Orders encourage to be not to pull all our eggs in one basket. Our basket sound familiar with the development of our new business areas to maximize our upside potential, and then guard against delays if you focus just some one area. So in this past quarter of being seeing the first potential customers on two new partners, so now I am also working on new commercial channel for STA technology in the Big Data space. Last quarter, we discussed how to engage with that vendor in the graph analytic space, and they’ve taken us to two of their potential customers, beginning with this new partner.

Another partner has introduced us to their customers this past month, and both look promising. One has indicated that they intend to do business with us, and the other is promised to do a proposal with us for their customer. I am working with some other long term potential customers to see new projects as well, while supporting our Savant sales reps and their sales efforts. One large enforcement prospect indicated that they will put us under contract as soon as the continuing resolution is over. My goal is to focus on TraceCop opportunities until that get us above the breakeven revenue level, then I will shift back time back to Savant and STA sales. On that front, I was able to secure Savant renewal this last month.

Ward Paxton

Thanks Joe. The new projects that are in the queue or going to make a good impact on our business and should contribute to sales growth and a return to profitability. We thank you for joining our call today, and look forward to an exciting future. Mike?

Mike Paxton

Okay. Operator, can you remind the participants how to queue-up for questions?

Question-and-Answer Session

Operator

Certainly [Operator Instructions]. And your first question comes from Howard Brous. Your line is open.

Howard Brous

Getting to the report to $1.2 million orders booked in the third quarter. Was that all TraceCop or all Savant, or what mix?

Ward Paxton

No, during the quarter, was any of that Savant?

Joe Head

No that was TraceCop...

Howard Brous

So all TraceCop, okay. The $1 million, or the 625 and the balance that’s coming in November, that’s all TraceCop?

Ward Paxton

Yes.

Howard Brous

With these orders and the potential, do you expect to be breakeven in the fourth quarter?

Ward Paxton

Breakeven requires about $1.8 million, $1.9 million in revenue depending on the mix of the sale. So that we’ve been down just a little from that. If we have all of these potential projects come-in but we will get to that level. But right now, we don’t know whether that’s going to take place or not. The government business right is always a little unknown in terms of when it's going to take place this time of the year, because of the budget approval for the next year’s budget. And the fact that we’re right now in continuing resolution situation where the projects it can go forward had to be ones that have been in place already. So, as we get pass that here in the next few weeks, we hope, that will open up the opportunity for new business.

Howard Brous

And in the prior quarter, all of us had a very open discussion about announcing orders. And it was my personal understanding, and I review the conference call, that I think we all agreed that you would make announcements when you had orders?

Ward Paxton

I think we discussed that we would move in that direction soon. We haven’t gotten there yet in terms of announcement of orders. We haven’t had very many orders to announce. We do plan to get to that level soon.

Howard Brous

Okay. So, let me ask the question, by when?

Ward Paxton

I don’t have, it’s been down and time yet.

Howard Brous

I can appreciate that, but one of the problems the street has with the Company is we have communication each quarter, and we have nothing else other than the quarter. And what we need certainly is better communication with management of the Company, prior to each or during each quarter. And when you say soon, and you don’t come back and they give me a definition, soon could be next week or two years from now. And I think it's inappropriate that you can't -- look, the three of you control the Company. Why is it -- and I asked the same question last call. Why is it that you can't decide now that you will commit to announcing orders as you get some? Why can you not do that today? Why is it soon and undefined? And I am being very open. We need better communication, and it's certainly not fair. You are controlling the Company and you’re giving no credit or information to anyone during the quarters.

Ward Paxton

We’ll review that again, and communicate our decision on it to you.

Mike Paxton

We’re announcing these orders today, so I guess is that good news for you, I don’t really understand.

Howard Brous

Of course it's, Mike, it's -- of course good news. What I'm truly asking for is, if you’re getting another order. And you’re working on many of them as you've already defined appropriately. And we're pleased to hear that. But it's not defined, and if you have an order of 425, so I'm creating a number. It's the same number that I’ve talked about last quarter. Why can you not announce? You have the TraceCop quarter, assuming you get this December 7, 2016. Just announce it on the take?

Ward Paxton

We’ll review our policy there and communicate back to you. Okay?

Howard Brous

Okay. Last but not least, a relevance of -- getting back to TraceCop and your focus on TraceCop. And I understand the government issues, and I'm very well aware of the continuing resolution. Can we be comfortable that if it's not fourth quarter that it would be first quarter that you will achieve breakeven? And I'm only referring to what's your public comments were in the past quarter.

Ward Paxton

That’s certainly -- our goal is to do that. And it is a lot -- it's messed around that based on the government budgets and the continuing resolution, and all those things. But as you've noted from Joe's presentation, we have a significant number of new projects that are in the queue. These are not this projects that we've identified, these are projects that we've had ongoing sales activity with the customer for the last three months, okay.

Howard Brous

Mike, can I assume that at some point in time, I'll get a phone call indicating the resolution of your policy in terms of making announcements to the street. Is that a fair question?

Mike Paxton

I think let me just interject there. When we make the first announcement with this new policy, you get the communication there.

Howard Brous

That will be fine.

Mike Paxton

That’s why I asked you if you were happy with the announcement today?

Howard Brous

Well, of course I am.

Mike Paxton

And I am not -- I am saying that -- I don’t know what would make our investors happy. If we announce an order for $200,000, I don’t really think what good that does for us.

Howard Brous

Mike, you take a number that you are comfortable that you feel is material. Stick to that number and anything above that make an announcement that you’ve had that contract. That’s all.

Mike Paxton

All right.

Ward Paxton

We’ll communicate that to you.

Howard Brous

I appreciate that.

Mike Paxton

And I'll let you know.

Howard Brous

No, I appreciate that, and I am not looking for anything else other than what everybody else gets on the street.

Mike Paxton

No, I understand.

Howard Brous

Clearly, we’re all interested. We all care. If we didn’t care, we won't have these comments.

Mike Paxton

I'll be saying that if -- we’re not trying to withhold information, because if we had really good information we would get it out. But it's just been flat as you know.

Howard Brous

No, I recognize that and I understand it. But again, the optimism that you’ve had over a long period of time has not happened in terms of the translation to orders. All I am hoping for is that it translates to orders, and we hear about it in a timely fashion.

Joe Head

This is Joe. You asked question about the CR, so team leads are hard to see after December 8th. But I think the question is for fourth quarter, get all better by the first quarter. And thereby, expect set to be dealt with. It could be pretty Christmas, but there is no early indication other than Paul Ryan's statements. But I think certainly my uncertainties get better, first quarter than there on the fourth in terms of how quickly can you get new program starts.

Howard Brous

Look, we’re getting stock, we’re interested, and we appreciate any communication that you can give us to help us better understand what's going on.

Ward Paxton

Okay, we understand.

Howard Brous

Thank you.

Operator

Your next question comes from Walter Schenker. Your line is open.

Walter Schenker

Let me second Mr. Brous’ comment about orders. I understand Michal, if you have one order or two orders a quarter it's not a lot of announcements. However, it is a policy which is a good policy and in response to your question, yes, it would be beneficial for you to announce; we just got a $400,000 order; we got a $200,000 order; we got a $1 million order. As it stands now once every three months, we come out of this shell a little bit announced that we’re still going sideways, and to be better I believe along the way to either for investors to hear that even we’re not making progress because there aren’t many orders announced .So we are making progress. Given the optimism, we’re going to make progress, I strongly second Mr. Brous’ comment that it’s a policy going forward. If you announce orders, it is what it is. I heard your response. I am just piling on hopefully to some benefit.

Ward Paxton

Well, I am just trying to say that if we announce that we have $200,000 order that’s not going to tell you if we’re making progress or not.

Walter Schenker

Well, it will tell is over the course of the quarter if you announced $200,000 orders, or $1 million order, $400,000 order, an $800,000 order, we’re suddenly over $2 million in orders and we’re making progress.

Ward Paxton

Obviously, we’ll tell you...

Walter Schenker

I understand no one single order is going to put to scale. But at least we get some flow so we can evaluate things on an actual basis.

Ward Paxton

Walter we will communicate to you a policy for announcement.

Walter Schenker

Okay. Changing the subject, which I haven’t thought of before, I understand we spend or the Company spends $400,000 to $500,000 a quarter on sales and marketing. Sales have now been flat to down for five years, it might be 10 years, I just have to go back. What we get for $1.8 million a year?

Ward Paxton

Are you talking about our total sales and marketing expenses?

Walter Schenker

Yes, I mean, Joe talked about the fact we have as we’ve got half of dozen, to get the exact number, long-term customers, a couple of the million, a couple that you know $600,000 number, $400,000, we’ve been long time customers. And so that is not, I mean, I realize you’re actually working with them, but that’s not new customers. Yet, we’re spending $1.7 million or $1.8 million if I add noise last quarter on sales and marketing. Is that just servicing the existing base of customers, but we’ll keep spending that time to get new customers on successful?

Ward Paxton

Well, after total expense for sales and marketing activities, which includes selling the existing customers, which does take an effort there, plus the sales activities for new customers includes everything that we do there. So that that level of expense and activity isn’t dramatic -- that isn’t a very high number as the world goes in my judgment Walter.

Walter Schenker

It wasn’t a question whether it’s a high number. I’m just trying to understand what we’re getting for it, even if it’s a modest number, because we don’t seemed we added line of customers in some time, the way general toward trade the customer base.

Mike Paxton

Yes, I would say it's something we currently review because I agree with you, our results aren’t good enough.

Walter Schenker

Okay, I think everyone understands the problems with a continuing resolution, which we’ve run into a fair number of years in the past. Hopefully, again, once this is resolved, we will see whether or not this queue of orders that Joe is working on prove to be real or not. So I guess it's just a wait and see what happens there. Okay, thank you.

Operator

[Operator Instructions] As there are no further questions -- I apologize, we just got a question from Charles Lavitant [ph]. Your line is open.

Unidentified Analyst

I wasn’t listening intently, so if I ask you question that you’ve already, I apologize you’ve got the people on the call. So $1.6 million that was reported for the third quarter, was any of that new business?

Ward Paxton

A small amount was new business, probably on the order of $300,000.

Unidentified Analyst

So $1.3 million came from ongoing business?

Ward Paxton

I believe that’s correct.

Unidentified Analyst

But in the fourth quarter, you won't do anywhere near. And I am just -- I am not guessing, but I'm just saying. You won't do anywhere near that rate $1.3 million from ongoing business.

Ward Paxton

I think we will, yes.

Unidentified Analyst

And you just got $1 million of new business?

Ward Paxton

Yes, that’s scheduled for over the next 12 months.

Unidentified Analyst

Okay, because in the release I read $625,000 was booked in October, and the rest should have been booked in November. And I thought booked meant actually booked, but...

Ward Paxton

But if you look in the order, which schedules the implementation of revenue.

Unidentified Analyst

Okay.

Ward Paxton

Those are annual contracts.

Unidentified Analyst

All right, well, they’re not really contracts.

Ward Paxton

No, we're all sort of

Unidentified Analyst

Their intention to buy...

Ward Paxton

They are more than that, they’re purchase orders. That is a contract under that basis. It's not..

Unidentified Analyst

And you still book at 12 to month?

Mike Paxton

Yes, we recognize revenue on a monthly basis.

Unidentified Analyst

Okay, all right. Thank you very much.

Mike Paxton

Thank you.

Unidentified Analyst

By the way, I’ll third -- I’ll be the third to that issue of letting us know more about sales that you actually make during the quarter. And I know I quote in there, you’re not going to let Howard know whether you’re going to do it or not and we’ll tell if you’re going to do it or not.

Mike Paxton

We’ll let everybody know.

Unidentified Analyst

Yes, thank you very much.

Mike Paxton

Okay, operator, at this time we will wrap up the call. Thank you for participating in today's call. If you did not receive the copy of the financial press release, or if you have further questions, you can reach me at 972-301-3658, or email mpaxton@intrusion.com. Thanks again.

Operator

This concludes today's conference call. And you may now disconnect.

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