Intrusion Inc.
Q4 2020 Earnings Call Transcript

Published: 28 Feb 2021

[Operator:]

Good afternoon, and welcome to Intrusion's Fourth Quarter 2020 Financial Results Conference Call. At this time all participants are in a listen-only mode. . As a reminder, today's conference call is being recorded for replay purposes. I would now like to turn the call over to Joel Achramowicz of Shelton Group Investor Relations. Joel, please go ahead.

[Joel Achramowicz:]

Thank you, Rob. Good afternoon, everyone, and welcome to the Intrusion's Fourth Quarter and Full Year 2020 Earnings Conference Call. I'm Joel Achramowicz, Managing Director of Shelton Group, Intrusion's Investor Relations firm. Joining me today are Jack Blount, Intrusion's President and CEO; and Franklin Byrd, Intrusion's new CFO.

[Franklin Byrd:]

Well, thank you, Joel, and thank you to everyone who joined us today. As you know, this is my first call as the CFO, and I'm excited to be on board. I look forward to meeting with you in the coming weeks and working closely with Jack and the team during this exciting time at Intrusion. So turning to the fourth quarter 2020 results. Revenue was $1.6 million compared to $1.6 million in the prior quarter and $2.6 million in the fourth quarter of 2019. Revenue for the full year 2020 was $6.6 million compared to $13.6 million in the prior year. 2020 revenue for the fourth quarter and the full year were impacted by extended government shutdowns related to the pandemic, which delayed subscription renewals and contract starts for our government business. However, as we indicated in the recent press release, we've begun to see signs of recovery on our government business, and we see those continuing to levels that we've seen historically.

[Jack Blount:]

Thank you, Franklin. I appreciate you giving that cover for us, and thank you all for being on the call today. We are extremely excited about the reception that Shield has gotten in the marketplace since we launched it and the progress that we're seeing in the field. I can tell you that the product continues to perform near perfect. As one of my prospects, as I was quoting in some of our data actually quoted back to me in a call earlier today, our numbers show that we are 99.999% accurate every time we make a decision about whether we kill a connection or not. There is no product on the planet that can get close to 3 9s, much less 5 9s. Most firewalls, most cyber security products actually tell you they have a 30% error ratio. So we are orders of magnitude on the other side of this equation compared to any other technology. Again, I draw you back to what makes Shield so unique and so valuable, and I'm not sure that people, even though we've talked about this many times, have fully picked up on it, so I'm going to restate it this morning - excuse me, this afternoon. Shield is really all 3 of Intrusion's technologies married together in a single product solution. The TraceCop database that we have created, managed, grown, used for 25 years, is the core of what makes Shield work today. Everyone asks me all the time, how can our AI be so much more accurate than any other company's AI in the world. The answer to that is understanding AI. AI is two things. It's mathematical algorithms that teach computers how to learn. But that's actually a very small piece of the equation. What AI is really about, as Google will tell you and says all the time on the news, and Amazon says all the time, AI is about data. If you have a massive amount of data, then AI can learn any and everything there is to learn. If you don't have enough data, you can't learn anything, in fact, you'll learn false truths.

[A - Joel Achramowicz:]

Please queue up for questions.

[Operator:]

And your first question comes from the line of Zach Cummins from B. Riley Securities. Your line is open.

[Zach Cummins:]

Yes. Hi, good afternoon, and thanks for taking my questions. I appreciate the commentary around the opportunities for Shield ahead. Jack, I know after your beta tests have completed at the start of this year, it sounds like a majority of those customers have went on and became actually paying customers for Shield. Is there any way you can kind of quantify the opportunity there, just within the beta participants, just to give us a sense of the potential seed opportunity?

[Jack Blount:]

Well, we have not given public numbers. As I've said many times, cybersecurity customers are very, very, reserved about disclosing who they are, what they'll tell you about them, because they believe any information, they give the cybercriminals, they give them more opportunity to effectively attack them. Now we have done 3 - 2 studies on 3 of those customers. So there is public information by names of those customers and three of those companies that are using the technology. We are working with other beta customers - former beta customers, to also get them to release case studies. We think we're going to get most of them to release in the next 30 to 60 days. So we are trying to get more data out there. I can tell you, as we said before, 90% of our beta customers became paying subscribers on the Shield product. I would have liked to have had 100%. I've never before, in my history, seen a company accomplish 100% of beta customers. In fact, I can't really find a company that had 90% of beta customers convert. So I think that's a very, very impressive number, that we were able to do that. I can tell you that one of our former beta customers, which is now a purchasing beta customer, is using the product at multiple locations here in the United States and is rolling - planning to roll out, as soon as we get approval, in six foreign countries. They are a worldwide business and they want to be protected worldwide. They want Shield running in every one of their offices around the world. So they are simply waiting on us to get federal approval to be able to export the product, which I think we will have by the end of the quarter. The lawyers, right now, are telling me thumbs up. We're getting every check box from the government, we're going to get this done very quickly. And that's very, very exciting because the international demand, even though we're spending nothing to advertise, promote internationally, we are getting a tremendous growth of inbound request in France, in Germany, in the United Kingdom, in Africa and Latin America. I mean we - the interest internationally is really, at this point, mind boggling. We have resellers that are begging us to let them sign up to be resellers, even though we can't ship internationally yet. So the demand internationally, I think, is extremely high. So we have not given out seat numbers and we have not given out revenue numbers on our customers to protect their privacy. You can work backwards from that, by the case studies, by looking at the size of the companies and get some of that information that way. We will, as the company grows and as people get more comfortable, make more public information about the number of seats. Certainly, our revenue each quarter will be a back - a way to back into that. But right now, companies are very, very reserved about wanting to reveal that kind of information.

[Zach Cummins:]

Understood. And then speaking on the distributor and retailer front, I know you can't do it internationally, but I mean, can you speak to the progress you've seen with signing up distributors and resellers here domestically?

[Jack Blount:]

We have 16 under contract as of this phone call. We have 42, in total, that are in process that I think will have signed up by the end of Q1. So that is going as fast as the other pipeline. Again, it's close to opening floodgates. People are learning about the company. They're learning about the technology and they're wanting to sign up. So I think that's going extremely well. We should have, I think, starting next week - we are doing a lot of rework on our website right now to make it dramatic better, and one of the things we're going to be adding is who those resellers are, how to get ahold of them. They will be on our website very shortly. So we will be adding nationally. You'll see that list as they come there. And as we add them, you'll see the list continually grow. So that should be dynamic on a week-to-week basis. As they sign up, once we get that launched here, I hope - I think, in the next week.

[Zach Cummins:]

Understood. And I appreciate the commentary kind of you outlining the pipeline. I mean, I know you can't give kind of specific seat quantities, but I mean, can you outline or even kind of quantify what some of these potential opportunities could look like at either some of these major enterprise customers? Or some of these federal government agencies? And I guess the second part of that question is, do you get paid as some of these companies are testing out the solution? It sounds like you're already in the door with many entities on that front.

[Jack Blount:]

We are not charging for evaluations. We might do that at some point. That's something I never liked doing at any company I've been at. I just feel like it's kind of a requirement of the complexity of the technology we deal with today to give customers that ability to get their hands on it, especially a product as unique as ours. I mean, you listened to what I had to say about the product. It's very, very easy for anybody to say, "Sounds too good to be true, Jack. I've heard that before. So I understand that. It does sound too good to be true. I've been in cybersecurity technology for 42 years. I designed and invented this product, and I think it's too good to be true. So I give them a free evaluation. They have to go through a qualification to show the size of the opportunity, the level of executive commitment in their organization, their ability in their budget to fund it, before I'm going to send them hardware. But we are doing that without charging them today. I should have - and again, I'm sure it's hard for you all to understand how busy one CEO can stay, but I'm extremely, extremely busy. If I'm not visiting with customers, or resellers, or distributors, and I'm not recruiting somebody, it's just unbelievable. One of the things I planned to prepare for today and I just ran out of hours and the fact that it just didn't stay in the front of my mind, is that I wanted to develop a list with some more information for you on that, so I'll get that out to you shortly. But again, I think the pipeline - again, I can tell you I have a Fortune 100 - more than one Fortune 100 company that's evaluating the technology right now. That single - any Fortune 100 company could be anywhere from 100,000 seats to 0.5 million seats. That's just the nature of a Fortune 100 company. Pretty much any federal government agency can be 50,000 and up. So any one of those are elephants that will change everything about this company overnight. Our target was not to go after these big boys because they're generally slower to decide and they can drag you along, but we're just - we can't not pick up the phone, and that's where some of our highest interest has come from. Midsize, certainly, we have companies of every character all across the company - all across the country that fall in that 100 to 500 seat range, and I think we're going to see many of those come online. Some of those in Q1, lots of those in Q2 because they just take less time to make decisions. So the pipeline is growing. Every day, it gets bigger. Again, I think the things Gary will be able to do from a MarTech standpoint to bring more warm leads to us, to bring more eyeballs to our website, again, he's doing a completely new website for us that'll generate more traffic, that this - the pipeline's just going to grow rapidly.

[Zach Cummins:]

Yes. Understood. I appreciate the additional color on that. And as far as the development side, I mean, you've mentioned some of the other products that we could be expecting for Shield here in the upcoming months, including either cloud or even kind of a remote worker capability. Can you give us an update on the development progress there? And when we could be expecting some new releases?

[Jack Blount:]

Well, we are - the two products we are really focused on working on is the remote worker. Now again, we handle the remote worker much better than people understood we did before. So if a remote worker uses a VPN to connect into their corporate network, then they are automatically protected by Shield today. And what we are finding is, we - to be honest, we haven't found a customer yet that comes to us that is not using a VPN. So the need for a specific remote worker products may be a lot less than we thought it was, so we've actually - I've actually pulled some resources off of that project until we learn more about the market opportunity and whether it's justified or not because we're just not finding companies calling in and saying the remote workers are not using VPNs. Much more than I expected, every company that went remote with COVID was apparently smart enough to force those employees to use a VPN, which makes them automatically part of the network and protected by Shield. So that product seems to have a less importance to us than we thought it was going to have. As a result, again, we're a limited size company, we have limited resources. I have pulled some of those resources on to some other things and while we track that opportunity. The cloud, again, I think, was a huge misunderstanding, and I'll take the blame for that myself. Initially when we launched the product, there's three different cloud segments that have to be looked at. It's not just cloud or no cloud. According to Gartner and Forrester, 70% of cloud customers today operate in either a private or a hybrid cloud environment. Again, like the VPN client, Shield today works perfectly normal and fine in a hybrid or private cloud implementation. We, ourselves, here at Intrusion, run out of a private cloud environment, and we certainly use Shield running in our own private cloud, protecting our employees around the country. So again, when you look at the cloud market and understand that 70% of it is hybrid or private, and we already support that, that says we support 70% of the cloud market already. The only thing we don't support is what's called multi-tenant cloud. That's your Amazon and your Azure, where multiple users from multiple companies are calling in and being serviced by the same piece of hardware in the same application. That is an extremely complicated engineering task to be able to implement in a multi-tenant cloud. I have one of the top cloud architects in the country, Byers Parsons working for me. Byers is working nonstop on that implementation. He believes he'll have that done by the end of the year with his team. So we are continuing that. But again, I'm not out hiring more resources trying to get it done faster because the urgency to get it done seems to be a lot less. I only have one customer to date that has a multi-tenant cloud environment that has asked me for Shield. All of the other customers that talked cloud ended up either having a private or hybrid cloud where Shield works for them today. So, the majority of the market is available to the Shield product currently today.

[Zach Cummins:]

Understood. That's helpful. And then just final question for me. I know not really your focus, but on your legacy government business, it sounds like you've started to see a recovery on that side. I mean, how should we be thinking about that business in the upcoming year, just given the challenges that you faced in 2020?

[Jack Blount:]

Well, I mean as I've always said, the legacy business is a flat business. It's been a flat business for 20 years. So I've never said there's going to be growth in the legacy business. I sustain and support and continue the legacy business primarily because I view it as my R&D center. And I know I've said this before so I mean I - that is where Intrusion gets access to the newest, hardest, most complex cyber breaches that the government has experienced that they want outside help with, and therefore, we get to be involved in those and learn from those and be cutting-edge of the latest and greatest thing that's going on. So we continue that, not because I think it's a growth business, because I don't think it is a growth business. It's a stick - it's a stand-alone self-profitable business, but I view it as my R&D center. That gives me the cutting-edge cybercrime attacks out of China and Russia that I don't have to wait to see at a customer site. So we're going to continue that. We are seeing those that revenue dollars come back. We think we will see about the same status that we've had at about that $10 million annual revenue number that the company's basically operated at for 20 years. It's just a niche market. So it's not - it's just not likely to grow significantly. But at the same time, it is valuable. So I am going to maintain it. I have the same people working on it, the same skills. I haven't pulled anybody off of it. I'm not - in fact, I promoted Mike McClure to be the VP, to focus on that because the CEO, Ward Paxton, used to focus on that business, when he was here. He's not here, and I'm focused on the Shield business, so I promoted Mike to a VP so that he can full-time, focus on maintaining that business for me.

[Zach Cummins:]

Understood. Well, thank you again, for taking my questions. And best of luck for quarters ahead.

[Jack Blount:]

Thank you for following our stock, we're appreciated.

[Operator:]

Your next question comes from the line of Ross Taylor from ARS Investments. Your line is open.

[Porter Taylor:]

Jack, can you walk us through a little bit there, the testing adoption process you expect from the large corporations and government agencies? You've commented that you thought they tended to be slow and kind of process-oriented in their adoption cycle. But yet, they're the ones knocking down your door, it seems, at this moment. So can you walk us through how long does it take? Should we think about it as being each of those like being a beta test? And what kind of resources do you need to commit to help get those over the line?

[Jack Blount:]

Well, sure. I'll be glad to comment on that. One, certainly, I am extremely pleased and excited by the demand that we're getting out of that segment early on. That's not normal. I think that is a direct result of the SolarWinds breach and the fact that it took out 16 federal agencies. I think they're all burning, right now, bad from this breach. They're all in panic mode, and therefore, they're willing to be a little less - a little more aggressive in looking at new technology. So I think it's going much faster than I thought it would, both by the level of interest and by the work they're doing. They are taking the product. They have put it into use in their environments. And the feedback there giving us is that their mouths are still open, they haven't closed yet. They are shocked every day. Every day, they're telling whoever the account person is that's working with them, that they're shocked that they can't find anything wrong with the product, that it does everything we claim it does. And that there's the volume of traffic of malware that they were never seeing before that was existing on their network anyway that they didn't know was there, that we're now identifying for them. So I think the adoption will be much faster than anticipated. I think we will see that sales cycle happen certainly this year. Normally, if you've ever been in IT, that historically, since my days at IBM in the '70s, the sell cycle for IT technology was 12 to 18 months. I mean that hasn't changed literally in 40 years. And I think that's still what Gartner and Forrester will tell you the answer is today. I believe we're going to see organizations in the federal government and in Fortune 100 companies, make a decision in a six to nine-month time frame instead of a 12-to-18-month time frame to implement the Shield product to put it in place and get that protection out of it. So we're spending very, very little resources to support those. So again, we don't have to go on site. We don't have to put anybody on a plane. We don't have to get online for hours to configure the product. They take it out of the box. They plug it into whatever part of their network that they're willing to trust it on, and they turn it on and they start monitoring what it's doing for them, and they're not having any problems. So they're not opening errors. So basically, we get feedback of how large their kill rate number's growing every day that they didn't expect and they can't believe, and it's more out of disbelief, can this really be going on? Is it really what I'm seeing? It's just - to me, it's just phenomenal. I think it's going to result in positive sales much quicker than we expected. Again, nobody has reported a bug. None of my new implementations for trial products have reported a bug to us yet that we're working on. And they have not reported any failures of the product. So they're simply evaluating it. And when all you're getting is everything is thumbs up, I don't know how they don't move forward.

[Porter Taylor:]

Okay. Now would you anticipate - you've worked with the government before, as I, and the government is not always the most efficient place to operate between cycles, between budget cycles. We're in the middle of a fiscal year. Do you anticipate any type of pushback from those people who write the checks to implementing this? Or because of SolarWinds and the like, do you think this is the type of thing that if they want it, they will get it?

[Jack Blount:]

I absolutely believe - again, I was there for four years as a CIO, I watched what happened to budgets during breaches. I know what happened when I got brought in. I believe that the federal government has already made offers of money to every department for cybersecurity enhancements. In fact, they are mandating cybersecurity enhancements. I know I've been told that by multiple people. So I believe the money is available today, regardless of the time of year, the budget cycle for them to fund a new purchase of cyber - of the Shield solution to protect their agencies. So I don't believe that's going to be an issue at all. I don't think the transformation from Trump to Biden is going to have anything to do with it. I think any President of this country is aware and concern about the threat cybersecurity, cyber warfare brings. And I think the SolarWinds, again, this was both Russia and China involved in this. And I think it's got everybody scared that things are worse than they thought it was.

[Porter Taylor:]

I'll leave you with that. I wish you good luck in getting that first major customer. I think that there's still a lot of people who feel that this is too good to be true. I think the market reflects that, and if we're able to get the validation of a major government contract or a major Fortune 100 or Fortune 500-type company that has a broad international reach, I think it will put the naysayers to rest.

[Jack Blount:]

It's a very quick one. I totally agree to you, Ross. I appreciate your comments. I'm going to be in D.C. in three weeks, again. So again, I am putting a high priority on this because of the impact it will have on businesses as well as just the overall marketplace. So it's very, very exciting. Thank you.

[Porter Taylor:]

Thank you, sir.

[Operator:]

Your next question comes from the line of Howard Brous from Wellington Shield. Your line is open.

[Howard Brous:]

Thank you. Jack, when you discuss Fortune 100 to Fortune 500 companies, can you give us a sense of the potential size of how big or how small a client could possibly be here in terms of number of seats?

[Jack Blount:]

Yes. I mean they're all big. When you talk Fortune 100 and Fortune 500, Howard, they're all big. They are, every one, big. Again, I don't want to be misleading, I don't want to, certainly - but again, I've dealt - most of my career, I've sold to the Fortune 500/100. I know those companies well. I know how big they are. One of the things that's unique, I think, in the cybersecurity space is you're not likely to make a cybersecurity purchase for a segment of your business as you do in most other technologies. You're going to either believe that this is a show - this is a game changer or it's not. And if it's a game changer, you're going to want every seat in your company on it. So - I mean, certainly, most of the defense contractor, Fortune 500, 100 companies that we are talking to right now are in the 100,000 seat range day one. Any one of them makes us a rock star, and there's multiple ones that I'm in discussions with right now, all of the names you would recognize in one second. Same with Fortune 100, 500 businesses. Again, one of our beta customers which became a purchaser is much bigger than I thought. I actually did not know about their international components, to tell you the truth, during the entire beta process. I thought of them as a U.S. company. They're a manufacturer here in the U.S. I only learned when I met with the CEO, I guess it was about six weeks ago, seven weeks ago, that he had subsidiaries in eight other countries around the world and that he's already told his Board he's rolling it out internationally as soon as I can get clearance. So again, that was a complete surprise to me. They went from what I thought was 1,000 seats to potentially now 8,000 seats, and that's just a midsized U.S. business.

[Howard Brous:]

Jack, that's all I had. Thank you.

[Jack Blount:]

Howard, thank you very much for following us and I appreciate your question and I look forward when we can announce some of these customers and give you real details. It's an exciting time to be out there in the market with what we have.

[Operator:]

And there are no further questions at this time. I'll turn the call back over to Jack Blount for some closing remarks.

[Jack Blount:]

Again, I want to thank you all very much for following the company, your involvement with the company, your advice that you've given me during individual phone calls. I do appreciate interacting with you. This is, I think, the most exciting market right now in the world to be in. Cybercrime is growing at an exponential curve, all of it bad. And we are really the first solution to come to market with patented technology. We filed 19 different patents. We don't know how many of those we'll get, but we know that we'll get many of them so we can defend this technology. We know that our TraceCop database is a one-of-a-kind database. There's nobody else sitting around with another database that they can point their AI at and have it get as smart as our AI. There simply isn't a second database in existence, and that's why our database results are 5 9s of accuracy as compared to 30% error rate of everybody else's product. So thank you very much for working with us. Thank you for your patience. I appreciate your excitement. I know you all want to hear me announce new customers, but it does take a few weeks and a few months to sign up big companies and move the needle like this. It is going to be a very, very exciting year. Trust me. Thank you again. Have a great evening.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.