Intrusion Inc Q3 FY2025 Earnings Call

Welcome to Intrusion Inc.'s Third Quarter 2025 Earnings Conference Call and Webcast. Please note, this conference call is being recorded. An audio replay of the conference call will be available on the company's website within a few hours after this call. I would now like to turn the call over to Josh Carroll with Investor Relations.

Thank you, and welcome. Joining me today are Tony Scott, President and Chief Executive Officer; and Kimberly Pinson, Chief Financial Officer. This call is being webcast and will be archived on the Investor Relations section of our website. Before I turn the call over to Tony, I would like to remind everyone that statements made during this conference call relate to the company's expected future performance, future business prospects, future events or may include forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. Please refer to our SEC filings for more information on the specific risk factors that could cause our actual results to differ materially from the projections described in today's conference call. Any forward-looking statements that we make on this call are based upon information that we believe as of today and we undertake no obligation to update these statements as a result of new information or future events. In addition to U.S. GAAP reporting, we report certain financial measures that do not conform to generally accepted accounting principles. During the call, we may use non-GAAP measures if we believe it is useful to investors or if we believe it will help investors better understand our performance or business trends. With that, let me now turn the call over to Tony for a few opening remarks.

Thank you, Josh, and good afternoon, and thank you all for joining us today. I'm pleased to report that during the third quarter of 2025 we continue our path towards achieving our goal of creating sustainable growth and long-term profitability. A few highlights of our progress in Q3 include our sixth consecutive quarter of sequential topline growth, demonstrating consistent execution and increasing demand for our products, continued near-zero customer churn, which we view as a testament to the value of our offerings, and the expansion of our Shield technology offering through the launch of Shield Cloud on the AWS marketplace. I'd also highlight the ongoing rollout of our critical infrastructure solutions, reinforcing the demand that we see to help protect these essential assets from cyber threats. Finally, the strong momentum we are seeing from our solution partner, PortNexus, as they continue to deploy the MyFlare Alert platform. None of what we achieved this quarter would be possible without our incredible team, and I'm deeply grateful for the passion and commitment our employees show every day in serving our customers and advancing our mission. I'd like to provide some additional context on a few of these highlights, all aimed at positioning Intrusion for sustained growth. First, we're really excited about the launch of our Shield Cloud offering on the AWS marketplace, which we believe will help drive long-term growth for our business. By making Shield Cloud available on the AWS marketplace, we're not only expanding the opportunity for customers to access our Shield technology, but we're also positioning our cybersecurity engine directly where innovation is taking place. Although still in the early stages, we're already seeing encouraging traction with new potential customers, which we believe will begin contributing positively to our financial results in the fourth quarter and throughout fiscal year 2026. In addition to AWS, we're also preparing for the launch of our Shield Cloud offering on Microsoft's Azure Cloud platform later this quarter or early in the first quarter of 2026. This launch will further expand our ability to reach new potential customers. Next, I wanted to mention that we're continuing to make progress with the rollout and adoption of our Shield critical infrastructure offering. At the end of the third quarter, we shipped over 230 units of this critical infrastructure device as part of our previously announced contract with the Department of Defense. As we've previously noted, this represents a promising opportunity for Intrusion, driven by the growing need to protect critical infrastructure from evolving cyber threats. We're actively pursuing additional contracts in the private sector as well at both the federal, state, and local government levels, and we remain optimistic about pursuing new agreements in the near future. As for our partnership with PortNexus, we're continuing to see strong demand for Shield endpoint that's embedded within their MyFlare solution, which provides enhanced security for education and law enforcement customer endpoints. As I've mentioned during recent discussions, the sales cycle for this solution has been one of the shortest I've ever seen. The demand for this solution, especially among school districts, is strong, and we anticipate that we will see further adoption of this offering in coming quarters. Now briefly on to our financials for the quarter. Total revenues for the third quarter were $2.0 million, representing a 5% increase compared to the previous quarter and a 31% increase on a year-over-year basis. This was largely driven by the contract expansion with the Department of Defense that we've previously discussed. Our operating expenses increased modestly this quarter, primarily reflecting the continued strategic investments that we're making in the business to drive growth. As we've noted in the past, we remain committed to disciplined spending as we invest to support our growth over the coming quarters. I'd like to address the current government shutdown. As you all know, the current government shutdown has impacted businesses across the board. For Intrusion, we've not yet seen any meaningful effect on our business. Thankfully, it looks like the situation is on a path to resolution. Most government contract conversations are still occurring, and we expect that we will see additional government contracts once this situation has been resolved in Washington. In the meantime, we're continuing to see our pipeline of non-government opportunities expand, and we remain excited about the future here at Intrusion, as the demand for our products continues to grow. With that, I'd now like to turn the call over to Kim for a more detailed review of our third quarter financials.

Thanks, Tony, and good afternoon, everyone. Third quarter 2025 revenue was $2 million, up 5% sequentially and 31% year-over-year. Growth was driven by expansion of work performed under the contract with the U.S. Department of Defense, which utilizes both Shield technology and consulting services. Consulting revenue of $1.5 million is up $0.1 million sequentially and $0.4 million year-over-year. Shield revenues in the third quarter totaled $0.5 million, which was relatively flat sequentially but up approximately $0.1 million year-over-year. The increase in Shield revenue primarily reflects the work performed under the previously noted DoD contract work. As Tony mentioned, we are continuing to see strong demand for our services with both governmental and commercial customers and anticipated deeper penetration in both sectors, which will result in changes to our customer mix. Third quarter gross profit margin was 77%, down 58 basis points year-over-year, which is consistent with expected variability based on product and service mix. Operating expenses in the third quarter of 2025 totaled $3.6 million, an increase of $0.1 million sequentially and $0.4 million year-over-year. The increase sequentially was largely driven by sales and marketing expenses related to increased participation in trade shows and programs to generate brand awareness. We may continue to further increase our investment in both product development and sales and marketing to accelerate the growth of our customer base, which will result in higher operating expenses. The increase over the prior year period of $0.4 million is primarily due to higher share-based compensation from equity grants made in the first quarter, timing of merit increases, and minor changes to staffing. Net loss for the third quarter of 2025 was $2.1 million or $0.10 per share compared to a net loss of $2.1 million for the third quarter of 2024. From a liquidity perspective, on September 30, 2025, we had cash and cash equivalents of $2.5 million and short-term investments in U.S. treasuries of $2 million. Subsequent to quarter end, we received $3 million in cash related to the DoD contract extension, which increased our cash position, inclusive of short-term investments to $7.5 million. We believe this is sufficient to fund operations through the remainder of 2025 and into early 2026. With that, I'd now like to turn the call back over to Tony for a few closing comments.

Thank you, Kim. The third quarter was another step in the right direction for Intrusion as we are continuing to make great progress towards achieving our goal of generating sustainable growth and long-term profitability. While we're proud of the progress we've made, we're not satisfied with our overall financial results. We know there's still more work to do, and we're confident that we can and will deliver stronger performance over time. Achieving this will require continued discipline and time, but we believe our ongoing investments in the business, the strength of our expanding pipeline, and the improved engagement we're seeing with both customers and partners, has positioned us well to drive enhanced financial results. This concludes our prepared remarks. I will now turn the call over to the operator for Q&A.

The first question comes from Scott Buck with H.C. Wainright.

Tony, I think you touched on it a little bit in the prepared remarks, but I wanted to dig in a little bit deeper on the infrastructure work with the DoD. When do you get far enough along the process or prove yourself enough that maybe you open the door to some additional work of a similar nature with them?

Already in progress. So with this first project, it's opened the doors for us to have conversations about deployment in other locations. Right now, we're in one island location in the Pac Rim, but there are lots of islands there. There are also domestic opportunities for this from a government perspective and we think even more opportunities from a private sector or commercial perspective. I'm particularly excited about this product. As we've seen in this particular case, it's a big dollar sale when it happens and we think we have an opportunity for many more of these not only in the next quarter but next year. It's a big area, a big opportunity for us. Now we've got to close them. We got to get government funding squared away, which as we've all experienced, is a daily up and down sort of situation. But the potential is big for this product. It is our most successful product at this particular point. We're going to bet on it and get all we can.

No, that's great to hear. Now Kim, do you need to add heads or any kind of other supports to press on those opportunities?

No. There's a fairly small capital investment because there is a device that goes with this infrastructure monitoring. But otherwise, we don't expect or anticipate having to add heads or increase our operating expenses to any large degree.

All right. Perfect. And then, Tony, I want to ask you about the experience on AWS so far, what interest you may be seeing, and any initial feedback you’re getting would be helpful.

Yes. We've actually been in AWS for the bulk of the third quarter and now into the fourth quarter. We've already done a couple of updates to make it easier to configure and install. We have one more big update coming shortly that I think will make it even easier. This is all based on feedback we've received from our initial beta customers and so on. With these changes, it will significantly make it easier for people to adopt. There's a lot of excitement around it. The numbers aren't huge at the moment, but we're on our plan. We are starting to do the marketing and advertising work that we've talked about on prior calls, and we expect that this will pay off. The lessons we've learned from this will also apply as we get into the Azure marketplace on the Microsoft platform, and I expect that the acceleration there can go even quicker than what we've experienced in the AWS environment. But I'm very positive about it.

Good. No, that makes sense. And on Azure, it sounds like it could be end of this quarter or it could be the beginning of '26. What steps do you have left there to get up and active?

We created a new kind of gold from scratch variant of Shield for the cloud that makes it much easier to deploy in these virtual environments. That is the one we're going to target for Azure as well. It's a better build for us, easier for the customer to adopt. The current AWS version is coupled with pfSense, the open-source firewall, and the new versions that will go into AWS shortly and also Azure are just Shield and not coupled to pfSense. We think that will attract a broader set of customers. We'll still offer the pfSense version in AWS. So we'll actually have two properties in AWS, one with pfSense and one stand-alone.

Does that change the way you price it, Tony?

Pardon me? Does it change the pricing? Not a whole lot because the pfSense is open source. There are no royalties or anything like that associated with it. What we heard from customers is that some of them want choice around which firewall they use. While we like our technology, they had a different choice for firewall than what we chose, which was pfSense. This will give customers broader choice. If they don't have a firewall and want one and like open source, they can use that. If they want to choose something else but still want our technology, they can have that choice.

Congrats on the progress this quarter.

The next question comes from Ed Woo with Ascendiant Capital.

Congratulations on the progress. My question is on your channel partner, PortNexus. What are you able to do there that gives you the successes? And is this able to be translated to other channel partners?

Yes. What we're providing to PortNexus is endpoint security for their solution that's deployed in classrooms and other public places. Endpoint security is important so that the devices are effectively tamper-proof and safe from hacking. I'm excited about it because as we've done trade shows with PortNexus, school administrators come by, see the demo, and understand the capability, and they get excited. The sales cycle appears to be pretty short. The feedback is, 'I want this now,' which with other solutions, there tends to be a much longer conversation. We're in a couple of school districts already, and I believe as experience with this product grows, excitement will only accelerate. We're attending all the right trade shows with PortNexus, and word of mouth is beginning to get out that this is a remarkable solution. We've got great expectations for this.

Can you translate these opportunities to other channel partners? Or is this very specific just to PortNexus?

We can certainly port it to or extend it to other endpoint kinds of solutions where network security is paramount, and we are looking for those opportunities. The success with PortNexus will certainly be a good indicator for other potential partners as well. Yes, I think it can extend, and we are looking for opportunities.

Great. And my last question is, as you rolled out in AWS and soon on the Azure platform, do you care where your customer buys it? Is there a difference in profitability and R&D costs?

No impact on R&D costs. We're only at this point extending to U.S. customers. We're not in the global marketplaces. This kind of, by definition, restricts where it's for sale, but it doesn't really impact our costs.

And you don't really care where your customer gets it because the profitability margins are about the same?

Yes, correct.

The next question comes from Howard Brous with Wellington Shields. Anthony Scott, the CEO, stated that there is no impact on R&D costs. Currently, they are only extending to U.S. customers and are not participating in global marketplaces, which limits sales locations but does not affect costs. Edward Woo, an analyst, asked if the company cares where customers purchase the product since profitability margins remain similar. Anthony Scott confirmed that it is correct they do not care.

Tony, congratulations on the increase quarter-over-quarter. I have a couple of questions. Can you discuss the revenue opportunity with OT Defender as an example?

I can talk about it generally. The nice thing is compared to our Shield or PortNexus deals that tend to be smaller, these tend to be bigger sales. Opportunities are typically $100,000 to $200,000 and above. This means there's a more meaningful impact in terms of revenue and overall sales. The OT environment is probably the biggest area of underinvestment from a cybersecurity perspective, and it also happens to be one of the biggest targets for nation-state actors. A lot of the environment in these OT spaces is old gear that, over time, got hooked up to networks but was never designed to fend off modern-day attacks. We've been slow to wake up to this aspect of cybersecurity. We think market opportunities are really big, and we have a proven solution to this particular problem. We're excited about the protection this can bring to vulnerable environments in our cities and critical infrastructure.

So the second question, the same question with revenue opportunity on PortNexus school safety offering, which I understand should be critical with every school in the country.

Yes. That one is probably not as big as the critical infrastructure stuff, but this is one of those things that once you see it, you can't unsee it. School administrators love the simplicity of it and the capability that the PortNexus solution provides. The critical aspect is visibility in the first one to five minutes of an incident where you have great situational awareness. First responders call that the critical first few minutes. If you can understand what's going on and have situational awareness, you can have a better response, and that's what the PortNexus solution provides. We're happy to partner with PortNexus on that journey.

So my last question is about the PortNexus. Do you have any insight into the revenue opportunity for 2026?

I'd be wildly guessing at this point, Howard, but our eyes are towards up and onward from a revenue perspective. We're excited about the opportunity. We've got to execute, get in front of customers, and make the case. We have all the right tools to sell and I'm excited about it.

My last question, then one comment afterwards, Shield Cloud revenue opportunity?

Again, as I said on the call, that's the place where innovation is happening. The growth in small to medium business is moving to the cloud, and that's where the economy is growing fastest. It’s probably the biggest opportunity for that part of the market. We have to execute, continue to work our marketing plan and demand generation plan. We've seen companies before us do it, and we will follow suit. It's hard to predict exactly, but we have great expectations.

At what level of revenue per contract would you make a public announcement, $100,000, $1 million?

It's not so much the dollar amount that would determine whether we can make an announcement. We signed some deals in Q3 that didn't produce revenue in Q3, but will produce revenue in Q4. By contract, we were prohibited from announcing some of these. The only way you'll see them is when revenue shows up after a quarter. That's not uncommon in cybersecurity. We'll announce what we can when we can if it's significant. I'm not going to announce a $5,000 deal, but if it's $100,000 or $400,000, I'll certainly announce it if I'm allowed to.

The next question comes from Jerry Yanowitz, who is a private investor.

Tony, do you believe your intellectual property alone could be worth multiples of your current stock price? I'm looking for a simple yes or no answer.

Yes.

Based on your knowledge in the cybersecurity market, do you believe your products could integrate well with a larger cybersecurity company suite of products? Yes or no?

Yes. Yes, yes, I do. It may not always be the obvious first names that come to mind. But the answer is yes. It could be very interesting and exciting for us.

At this time, there are no other questions in the queue. I'll turn the call back over to our host, Mr. Tony Scott, for any closing remarks.

Thankfully, the government shutdown is close to coming to an end. I think we all breathe a sigh of relief. We're looking forward to working with our government partners as we've talked about at some length today. The opportunity in front of us is better protection for critical infrastructure, whether in the public or private sector. It's the biggest cybersecurity opportunity I think there is. With the shutdown behind us, it opens the door for us to move ahead. We'll let you know when we can about any developments. As I said earlier, I'm excited about the opportunity and look forward to our next quarterly call and annual results. Thanks for your patience. We're working hard and making great progress. Talk to you all soon. Thanks.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.