gorodenkoff
A quick take on intrusion
Burglary (NASDAQ:INTZ) reported its third quarter 2022 financial results on November 3, 2022, missing revenue and beating EPS estimates.
The Company provides cybersecurity products and services to US government agencies and businesses.
while it is While recent new product launches are encouraging, the company’s high operating losses will continue to weigh on the stock in a market environment that penalizes companies that fail to make serious progress towards operating breakeven.
I’m on hold for INTZ at short notice.
burglary overview
Based in Richardson, Texas, Intrusion was formed to develop a database of global IP addresses and related information to monitor cyber threat sources.
Management is led by President and Chief Executive Officer, Mr. Anthony Scott, who has been with the Company since November 2021, was also Chairman of TonyScottGroup and was previously the Federal CIO in the US Federal Government.
The company’s main offerings include:
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TraceCop – IP database
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Savant – network data mining
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Shield – detection of intruders
Market and competition of intrusion
According to a 2020 market research report by Research and Markets, the US government cybersecurity market is expected to grow by $11.5 billion from 2020 to 2024.
This represents a projected CAGR of 11.0% during the period.
The main drivers for this expected growth are increasing cybersecurity budgets at all levels of government due to greater cyber threat activity both domestically and internationally.
Key contestants or other industry participants include:
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niksun
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NetScout (NTCT)
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fire eye
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Darktrace (OTCPK:DRKTF, OTCPK:DRKTY)
Management says its TraceCop product has “limited competitors,” although it expects competition to arise in the future, albeit “with only a subset of the capabilities that we can do with TraceCop.”
Intrusion’s recent financial performance
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Total revenue per quarter has increased according to the chart below:
total revenue (search alpha)
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Quarterly gross profit margin has trended upwards over the past few quarters:
gross profit margin (search alpha)
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Selling, G&A expenses as a percentage of total revenue per quarter have declined over the past few quarters, although they remain very high:
Sale, G&A % of sales (search alpha)
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Operating income remains significantly negative by quarter, as shown in the chart below:
operating result (search alpha)
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Earnings per share (diluted) also remained negative:
earnings per share (search alpha)
(All data in the charts above is GA`)
Over the past 12 months, INTZ’s share price has fallen 12.1% while the Nasdaq 100 Index has fallen 14.6%, as shown in the chart below:
52 week stock price comparison (search alpha)
Rating and other metrics for penetration
Below is a table of relevant cap and valuation numbers for the company:
|
Measure [TTM] |
Crowd |
|
company value / turnover |
10.3 |
|
sales growth rate |
7.2% |
|
Net Income Margin |
-192.6% |
|
GA` EBITDA % |
-185.9% |
|
market capitalization |
$74,857,600 |
|
Enterprise value |
$79,708,608 |
|
Operating cash flow |
-$13,339,000 |
|
Earnings per share (fully diluted) |
-$0.77 |
click to enlarge
(Source – Search for Alpha)
The Rule of 40 is a software industry rule of thumb stating that as long as the combined revenue growth rate and EBITDA percentage is 40% or more, the company is on an acceptable growth/EBITDA trajectory.
INTZ’s most recent GA` Rule of 40 calculation was negative (178.7%) for the third quarter of 2022, so the company performed poorly in this regard according to the table below:
|
Rule 40 – GA` |
calculation |
|
Recent Revenue Growth % |
7.2% |
|
GA` EBITDA % |
-185.9% |
|
In total |
-178.7% |
click to enlarge
(Source – Search for Alpha)
Comment on intrusion
In its most recent earnings call (Source – Seeking Alpha), covering third quarter 2022 results, management highlighted its continued efforts to transition to a more channel-based sales model as well as improving its product offering.
The company launched its Shield Cloud and Endpoint products in Q3 2022, which management has since described as “very encouraging.”
As a result, the company believed its Intrusion Shield system “will be the biggest revenue stream of the future.”
In addition, SuperMicro will resell its intrusion technology while serving as the company’s primary global hardware supplier.
As for financial results, total revenue increased 20.5% sequentially to $2.2 million.
Aside from losing an education customer, management didn’t provide any information on the company’s customer retention rate.
The company’s Rule of 40 results were poor, with a modest revenue growth result offset by a significantly negative operating result, contributing to a very negative reading for this metric.
Gross profit margin has trended higher in recent quarters, but operating losses remain significant for the company’s tiny revenue base.
Earnings per share also remain deeply negative, but are nearing breakeven in the most recent quarter.
On balance sheet, the company ended the quarter with $6.9 million in cash and equivalents after completing a stock sale in September and raising $4 million from investors.
During the trailing 12 months, free cash used was $13.6 million, of which $300,000 was for capital expenditures. The company paid $1.3 million in stock-based compensation over the last four quarters.
Looking ahead, management hasn’t provided any guidance on expected sales or earnings per share other than to say it expects to “gain traction” with its new Shield products.
In terms of valuation, the market values INTZ at an EV/Sales multiple of around 10.3x.
The Meritech Capital Index of publicly traded SaaS software companies as of February 6, 2023 showed an average forward EV/revenue multiple of approximately 6.2x, as shown in the chart here:
Enterprise value / SaaS index for the next twelve months (Meritech Capital)
In comparison, INTZ is currently priced by the market at a significant premium to the broader Meritech Capital Index, at least as of February 6, 2023.
The main risk to the company’s prospects is a likely macroeconomic slowdown or recession, which may accelerate discounts for new customers, result in slower sales cycles and impact revenue growth.
Specifically, INTZ’s EV/sales multiple [TTM] is up 21.12% over the last 12 months as shown by the Seeking Alpha chart here:
EV/Sales Multiple Expansion History (search alpha)
A potential upside catalyst for the stock could be a notable deal win or additional partnerships with major resellers.
However, the company’s technological stability does not appear to inspire confidence, while persistently high operating losses suggest its growth plans will continue to require heavy spending and potentially dilute shareholders through further capital increases.
With such a thin revenue base and the possibility of an impending macro downturn or recession, I’m cautious on intrusion in the near term.
Editor’s Note: This article covers one or more Microcap stocks. Please be aware of the risks associated with these stocks.
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