IronNet, Inc. (NYSE:IRNT) Q1 2023 Earnings Conference Call June 14, 2022 5:00 PM ET
Company Participants
Nancy Fazioli – Investor Relations
Keith Alexander – Founder, Chairman and Co-Chief Executive Officer
William Welch – Co-Chief Executive Officer
James Gerber – Chief Financial Officer
Conference Call Participants
Mike Cikos – Needham & Company
Joseph Gallo – Jefferies
Stefan Schwarz – BTIG
Anja Soderstrom – Sidoti
Imtiaz Koujalgi – Guggenheim Securities
Operator
Greeting and welcome to the IronNet, Inc., Fiscal 2023 Q1 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
I’d now like to turn the conference over to your host Nancy Fazioli, Investor Relations. Please go ahead.
Nancy Fazioli
Thank you, operator. Hello and thank you for joining us. Today’s conference call will address IronNet’s financial results for the fiscal first quarter ended April 30, 2022 that were announced this afternoon.
Before we begin, please note that some of the statements we will be making today are forward-looking. These matters involve risks and uncertainties that could cause our results to differ materially from those projected in these statements. We, therefore, refer you to the risk factors included in our latest SEC filings. Supplemental information is also provided on the Investor Relations website from time-to-time.
And now I’ll turn the call over to our Founder and Co-CEO, General Alexander, who is joined by our Co-CEO, Bill Welch; and CFO, Jamie Gerber. All of whom have some brief remarks before we move to the question-and-answer portion of the call.
General Alexander, over to you.
Keith Alexander
Thank you, Nancy. Good afternoon to everyone, and thank you for joining us today. I am quite optimistic about our progress. We added new transactional annual recurring revenue ARR of $5.5 million in the first quarter. As noted in our earnings release, our revenue and net ARR results were consistent with our expectation that certain customers in our transactional business would be delayed in signing or renewing their contract. Those delayed opportunities and one non-renewal resulted a decline of $7.2 million in ARR for the quarter, leading to a net decline of $1.5 million in ARR quarter-over-quarter.
We would like to reiterate that we see the significant majority of these ARR opportunities as pending rather than lost. Two of these pending transactions, representing approximately $5 million in ARR, our public sector customers impacted by budget delays. Another non-renewed contract, the only one we would categorize this loss represents approximately $1 million in ARR. This is a structural issue. This is an opportunity that has not been fully deployed due to the FedRAMP Authority to Operate or ATO not being achieved. We have achieved FedRAMP Ready Status, but not ATO. This is an area where we are making progress, and we hope to have the result this fiscal year. Once this is achieved, we also expect this customer to come back in as well.
We believe FedRAMP ATO status has the potential to uplift our sales momentum when complete. We do not see it as an impediment to closing the majority of public sector strategic opportunities that are in our pipeline today. Our issue continues to be largely, timing and bureaucracy, not a lack of perceived value by our customers. And this is important to highlight as a reason for our high confidence and our ability to bring this business back. Our customer wins this quarter win sectors that represent important areas of growth for us healthcare, space, state agencies, energy and public utility. Bill will provide additional color on these wins and give insights into the value customers are finding.
Pipeline opportunities from strategic customers, which to remind you we define as those exceeding $5 million in ARR remain as robust as discussed last quarter. We feel confident that we will see these opportunities start to close in the next couple of quarters. As a team we continue to show strong thought leadership and to increase our brand awareness. From customer engagement at Gartner Security and Risk Management Summit to our targeted presence at the resurrected RSA event in San Francisco to our presentation at the National Association of State CIOs, where we partnered with AWS to present on the importance of a holistic approach to cyber security. We will maintain this space and momentum and highlighting our value proposition, while also continuing to show discipline in our approach to sales and marketing.
In April in partnership with the New York Stock Exchange CISO, Steve Pugh, we hosted National Cyber Director, Chris Inglis and Southern Company’s CEO, Tom Fanning for a virtual webinar uncollected defense. It was well attended by critical infrastructure and particularly, energy company executives and IT leaders. There are two noteworthy comments from the presentation that I believe speak eloquently to IronNet’s unique value proposition. Director Inglis remarks that cyber defenses must evolve to a point where you have to be all of us to be one of us. CEO of Southern Company, Tom Fanning cautioned that none of us can individually own the talent in our organizations are to adequately support our own supply chain working alone rather, that we must work collectively. He also highlighted that addressing these gaps is a judiciary responsibility for boards and management teams.
I would like to add that there is simply no amount of cyber security investment even for the most sophisticated among us that will enable us to prove the positive in our environments the way collective defense can. This perspective comes from my experience, leading the offense for our nation. An isolated approach to cyber security is a legacy and from my perspective a short-sighted and dangerous approach. What we have set out to accomplish in transforming cyber security through collective defense is hard it has not been frictionless, yet our approach and our technology are increasingly being validated as I’ve just noted and as Bill will further illuminate for you through customer insights. We are encouraged about our opportunity and confident that we are on the right path.
With that, let me now turn it over to Bill for his remarks.
William Welch
Thank you, General. I’d like to echo the General’s long-term outlook and share what our customers see as the value of the IronNet collective defense platform. Speaking to what is the value that IronNet brings to market. Here’s a snapshot of customer perspectives from this quarter. A customer at our IronDome for space that as a highly sophisticated environment and cyber security investment posture. This customer indicated that they start their day with IronNet by logging in and evaluating every alert. So this customer IronNet is a valuable source of information on the tax and vulnerabilities that they’re not getting from any other vendors. Ours is a highly differentiated level of visibility. Their perspective and level of sophistication is similar to that one of our financial customers in Eastern Europe, for whom IronNet still specific gaps in their technology stack. As a result, they frequently calling us for support when they are under attack.
A second customer, a large healthcare consortium with a mature posture and sophisticated level of investment was concerned about potential attacks against payers and potential for ransomware and they set the personal health information and the resulting HIPAA consequences. They have been relying on intrusion detection systems IDSs and looking for an NDR solution that could fit their needs and scale. They choose IronNet because of our behavioral analytics and unique ability to detect unknown, unknowns. Our platform enables them to eliminate IDS.
A third customer, a mid-sized college without its own security operation center was the victim of a costly and disruptive cyber attack and so IronNet as a low-cost, high-value insurance policy against cyber-attacks. As a result of the institutions proof of value and selection of us, the institution is now transforming the sophistication of its overall approach to cyber defense. In a short time this institution has become a powerful evangelists for IronNet collective defense and is seeking to build a dome for institutions of its size.
A fourth customer, a new customer on the West Coast came via referral from New York Power Authority, it’s public utility peer. The team is already sharing information with its ecosystem and was impressed by IronNet approach to automated collaboration, a competitive NDR solution was about to get in order prior to our introduction. Our pilot project identified vulnerabilities in the customer’s environment that were not previously detected.
A fifth customer, a healthcare clinic as part of a larger healthcare community of providers saw IronNet as the first step to defending in collaboration and an on-ramp to a more sophisticated posture. They are an early adopter for their size and seeing the power of leverage cyber resources. Their decision to buy following a strong pilot program was also based on recognize the value of going beyond compliance to being secure. This customer validation is energizing for our team and enable us to feel highly optimistic as we drive awareness and market adoption of what we believe to be our highly transformational cyber security solutions.
Let me turn it over to Jamie now for some comments on guidance and cash before we take your questions. Jamie?
James Gerber
Thanks, Bill and good afternoon. We have reaffirmed our prior fiscal year 2023 revenue and exit ARR guidance based on the visibility we have on pending new and renewal opportunities and the transactional side of the business, as well as confidence around certain strategic opportunities. Our pipeline remains healthy and has grown. We still expect ARR and also revenue to build more strongly into the second half of the fiscal year. If we’re able to execute on the opportunities we believe we have in front of us, we think we could achieve record revenue in the third and fourth quarters of this fiscal year.
With regard to our cash and liquidity and with ongoing careful management, we believe our financial position can remain sound. We have not yet drawn on our equity line with Tumim Stone Capital, and we will continue to benefit from having options for liquidity from being a public company. We will continue to take a disciplined and balanced approach to growth being mindful of cash preservation and with a goal to get as close to cash neutral as possible. We believe the network effect potential of our business model, enabling us to bring in a community of customers via single strategic deals coupled with tight expense management will enable us to strike this balance.
In addition, we benefit from being in a growing market for cyber security investment and providing a solution that not only depends across sectors more effectively and also drive significant IT cost efficiencies in human capital for our customers. We remain quite encouraged as we navigate the business forward this year and for the longer term.
Thank you. Operator, we are ready for our first question.
Question-and-Answer Session
Operator
Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Your first question comes from Mike Cikos with Needham & Company. Please proceed with your question.
Mike Cikos
Hey guys, thanks for taking the questions here. I did want to first circle up on the ARR. I know that you guys went through that in the opening remarks, so just want to make sure I’m clear on this. So you added $5.5 million in new transactional ARR and the comment was that there were $7.2 million decline in ARR from the combination of the lead customers and that one non-renewal that we spoke about is that — am I thinking about that properly?
William Welch
Yes, Mike. This is Bill and then I’ll ask Jamie and the General to come alongside me. But the offset to our strong new and renewal ARR on the transactional side of the business in Q1 was a result of delayed renewals, due to some government delays not lost deals. So we first saw as indicated on the Q4 earnings call that we might not be able to finalize a couple of key deals in Q1, which is what happened. We recognize this is an area of leading improvement for us, we have to get better about shortening the timelines for these new and renewal contracts there have been some structural impediments as we’ve referenced before, like the continuing resolution at the government funding level, but as that has been resolved and is resolving there’s is an opportunity for us to work more effectively with our public sector sponsors to help push through with the government contractors as well. And then on top of it, we’ve also realized some great value with our customers with our value management selling and the value that we’ve been delivering to them.
Mike Cikos
Okay, okay. And that — I guess that $7.2 million decline that we were talking about earlier as well or the — those two phrases, are those two transactions from the public sector customers that were delayed or impacted by funding. Is that the bulk of that $7.2 million, like can you help us conceptualize what [Multiple Speakers]
William Welch
Yes. That is accurate. Yes, Mike, that is accurate, the inaccurate statement is that we have of the ones that have been paused and not lost the majority of that churn is opportunities that have been paused or delayed, but not lost. But mechanically, we had to take them as a loss.
Mike Cikos
Understood, understood and then — yes and I’m sorry.
Keith Alexander
[Multiples Speakers] $5 million, that’s $5 million there in those two that we had to pause on and until those deals are finalized, we couldn’t count them this quarter. And then there’s another $1 million in a deal that we’re waiting on the APO as soon as we get the APO we think that one will be back. So that’s why we wanted to be clear and transparent that those aren’t lost deals. Those are deals that have been delayed. In large part two of them because of the continuing resolution and the impacts on the federal government.
Mike Cikos
Okay. And then two more follow-ups on the ARR, if I could before I turn it over to my colleagues. The first — I know that you guys reaffirm the guidance here for the year on both ARR and revenue. Is — can you help us think about 2Q like, should we expect ARR to increase from Q1 levels?
And I guess the second question, while we’re still on the ARR topic there was commentaries with respect to the reaffirmed guide that you guys have a visibility and confidence around certain strategic opportunities. Maybe I’m reading too much into the weeds, but are you starting to include strategic deals in the guidance here or no strategic deals remain excluded from the guidance today?
William Welch
Yes. So I’ll jump in on that one, so I think the key number to focus on remains the annual number here. We do have a number of opportunities still in play for this quarter. So I think in terms of giving any updated guidance for that we’re going to hold, I think the most important thing is to keep an eye on announcements that we’ve said that will make as important transactions come along.
Mike Cikos
Okay, okay. So — yes, go ahead.
Keith Alexander
And I add to that, yes, remember, I’m the guy who knows released about this. So what we had said in our last quarter is that we weren’t going to count the strategic deals in, but that we would announce them and if appropriate raised guidance accordingly. So what we see is they look promising, but we still don’t want to guide, because we’re dealing with the government, but we remain optimistic.
Mike Cikos
I see, okay. Thank you, I’ll turn it over to my colleagues. Thank you very much guys.
Operator
Your next question comes from Joseph Gallo with Jefferies. Please proceed with your question.
Joseph Gallo
Hey, guys, appreciate the question. I guess, following up on that line of questions. What’s the confidence in that $6.2 million have slipped, but not lost deals coming in fiscal ’23. I think you had verbiage that was like, I hope it closes in fiscal ‘23. And so it’s kind of why not just lower the full-year guide by the $6 million. So I’m just trying to get your visibility into that?
William Welch
Yes. We still are very confident as I had answered on Mike’s question is that the timing is the only thing that we wanted to make sure that we get very accurate and as General said is we secure those transactions, we will announce them, but very confident in the value we’re delivering, very confident in the proof of values that we have done, very confident in the executive sponsorship, every confidence in the technical results that we have seen. So it is a matter of just getting through the budget process, the funding and then the award of the contract.
Joseph Gallo
I guess, I can slip to part B of that is — and again, I think you hinted this in the last question, but what’s the confidence that this I guess won’t be a problem going forward, like in our models should we decline or should we model a 1Q decline sequentially each year going forward, because that appears to be the trend in the last two years or how should we think about the gross renewal rate as we’re modeling ARR going forward?
William Welch
No, I would not model that, but we don’t see no implications for future quarters.
Joseph Gallo
Okay. And then maybe just for the General and you Bill, maybe just walk us through demand environment, I think you mentioned POVs were up 300% last quarter, but at RSA, I think people are certainly cognizant that the macro is worsening. Are you seeing an extra level of approvals right, like I’m sure the pipeline is strong, but are you seeing an extra level of approvals or scrutiny or cycle times you elongating and does your guidance reflect any of that?
Keith Alexander
Yes, I believe that we are seeing, first of all, absolutely, I believe that customers are reviewing their budgets, but cyber is still very, very, very important and the long-term viability of cyber continues to be a very active business. We have seen the rationale for IronNet’s existence to be being stronger given the threat landscape and what you see in the reasons of concern across the world, whether, you know, the world that continues to become even more and more dangerous, what you’re seeing over in Ukraine and Russia, you’re seeing where cyber is an element of national power the mummy spiders threat group, wiper viruses. We think we’re uniquely positioned because we proved the positive and environments on the spot analytics with our threat indicator, we also provide anonymized collaboration across the community. So a one plus one really equals a multiple of three for efficiency and the 5 times growth of 5G and then really the human element of cyber is really challenged right now and reset many cannot win and I think that the ability to bring collaboration, network detection are still in the early phases of the market, but we’re going to continue with our thought leadership of collective defense.
And as you saw great industry recognition by the JC, DC or the Joint Cyber Committee around SE labs with a AAA rating and then also some very strategic partnerships, you saw with the announcements with Mandiant and others.
William Welch
And Joe, I’d just like to add that. Yes, Joe I was just going to also add that added RSA we were actually seeing quite strong information from the CISOs there, particularly in the network detection sub-segment of cyber security, which of course is one of our foundation technologies here. So I think in terms of the overall economic environment, obviously we’re very cognizant of that. But I think in terms of the demand signals that are particularly focused in our part of cyber, we are continuing to see some good reaction from the buyers CISO is out there. And certainly in terms of the contracts that are out there, these ones that have paused here in the first quarter that those signals have remained very strong too.
Keith Alexander
Yes. So, Joe, I want to add in, you know, that when we started the company we were focused on the commercial sector. After solo wins, we shifted to starting to support the public sector, the federal government and state governments. I think now given what’s going on in the markets that has been a really good move for us. Now the downside is, those are harder to predict the upside is those are significant long-term contracts for us that when they do come in will be — I think significant for our company. And it also helps us build what we said we were going to do a public-private partnership, but we could bring a commercial and the federal government together or defending our nation.
So I think when you look at it, we’re in a good position for that. Now the continuing resolution has been resolved, the federal government is getting their money and it’s working through that process. So we are optimistic about that, Joe.
Joseph Gallo
Awesome. Really appreciate the color. Thanks guys.
Operator
Your next question comes from Gray Powell with BTIG. Please proceed with your question.
Stefan Schwarz
Hi, this is Stefan on for Gray. Thanks for taking my question. I guess to start off, similar to previous line of questioning, could you talk about linearity in the quarter, were there any changes in customer buying pattern?
Keith Alexander
Yes. I think, as Bill was just referring to the changes that we saw in ARR in first quarter really were two fairly large transactions. So I don’t think that one should read seasonality into that. Now you’ve asked about linearity within the quarter and again the primary transactions are quite large and lumpy. The good — really good news is that we had a — one of our largest orders, certainly in the last two quarters signed within the very first month of first quarter. So where we see good demand all through the quarters and we’re very, very pleased to see that. But it’s — we’re still a little too, kind of, too few deals to really call for some and identify some linearity patterns.
Stefan Schwarz
Got it. Okay, that’s helpful. And then just switching to gross margins, it saw in the press release you called out some sensor inventory charges, was there anything else impacting gross margins?
Keith Alexander
Well, the gross margin is one that we’re actually still very optimistic about where some new some of our new technical configurations that are just getting deployed into the marketplace right now continue to drive our margins on. But I think you did note the 3% effect on this quarter, just from the fact that we’ve got a fair amount of inventory standing by for a couple of these upcoming orders and it’s really just the warranty there that we’re taking some charges on right now while we hold that. But we’re very optimistic about the effects of — on lowering our compute and improving our margins as we continue to deploy those new technology version.
Stefan Schwarz
Got it. Thank you very much.
Operator
Your next question comes from Anja Soderstrom with Sidoti. Please proceed with your question.
Anja Soderstrom
Hi, yes. Thanks for taking my question. I just have a few follow-ups for the inventory that you holding onto for future deployments, are those — their strategic deals that you are anticipating or those for the transaction that you already have in the —
Keith Alexander
Well, it’s for both, but needless to say, these strategic opportunities are the — noticeably larger ones, and we have positioned ourselves properly to be able to respond quickly.
Anja Soderstrom
Okay. So it seems like they’re very — you might have announcements soon, but then I wonder for the full-year guidance and those are just from transactional, right? So if you are — when you are announcing a strategic deal, you will adjust the guidance accordingly and that should add on to the strategic guidance you have — other transactional guidance you have for the year?
Keith Alexander
Yes.
William Welch
That’s correct. That’s correct.
Anja Soderstrom
Okay, thank you. And then just a last one for me, for — in terms of the new customer count, I think I alluded to it in your commentary already, but it was a little bit light in the addition of customers for the quarter. Can you just talk to the dynamics around that?
William Welch
Yes. On our customer count, there are certain strategic public sector opportunities that we think have the potential to serve as that impact your ability to grow both in customer count and revenue and ARR and cash flow. As we mentioned, these are pause deals not lost deals. We expect these pause deals to return five of the six now are on pause and have either already come back in or in a position to come back, mechanically we had to net them out and we’re encouraged by what we were able to achieve in Q1 and what we see the reaffirmation of the year and we see good growth through the year potential.
Anja Soderstrom
Okay, great. Thank you. That was all from me.
Operator
Your next question comes from Imtiaz Koujalgi with Guggenheim Securities. Please proceed with your question.
Imtiaz Koujalgi
Hey guys, thanks for taking my question. I have a question on the deal that did not renew and I think the General mentioned that was because of the FedRAMP, a new certification. Can you give some more color on that? Was that a new requirement that came up for that customer? And then secondly for you guys to get to that subscription, what does it take? And is there any kind of timeline that you guys simple eye on how [Multiple Speakers]
Keith Alexander
Yes. Thanks, Imtiaz. So yes, when we started out with the customer, they didn’t realize that the FedRAMP is going to be an issue from their perspective. So they actually brought that and said, hey, we’d really like to be FedRAMP certified and go through the IPO process. We were in the process of doing that anyhow. So that deal was paused and as we said, that one was — we considered it loss, but we think it will come back. We’ve talked to both the CEO and their CISO and leaders, once we get IPO, we think we’ll be back in, they partner with us as we also — we think that will come back as well.
The FedRAMP process is a long process as you know for companies, what you have to do is, got through all the certifications, we’ve done that FedRAMP ready portion of that and are now working with one of the departments to get to a FedRAMP certified that will take probably several more months. Once we get an IPO, which they can give us over the next four or five weeks, we’re good to work with everybody. So we don’t see this impacting any deals, but just impacted this one with the company that works with the defense industrial base and the federal government.
Imtiaz Koujalgi
Got it. Very helpful. I have a few more follow-ups on the deals that the renewals that got delayed, you mentioned continuing resolution is one of the reasons and the way I understood how the budget process won’t [indiscernible] when you’re in a continuing resolution, you could not buy new stuff, but whatever you have already deployed can be renewed. I guess that’s not the case. Can you just explain a little bit more, how the continued resolution impacts both new purchase and renewals looks like its impact your renewals as well, while I thought — while we have thought that, it impacts all these new purchases?
Keith Alexander
Yes. So on those deals, the issue for the continuing resolution was actually in a POV, we’re doing a POV, a Proof of Value. And what happened for that customer, does that POV got delayed and they — with the continuing resolution, they can take a POV that’s considered a new start. So that was delayed, they had some other issues internal to that, we have overcome those with that customer and are in the process of bringing that one back on, that’s the majority. When you look at those two combined, that’s five of the $7 million right there.
Imtiaz Koujalgi
Yes. And one last one, the average duration [indiscernible] quite a bit this quarter from last year and last quarter. Was that one large deal that skew that duration or are you seeing average duration go up, the only business this quarter?
William Welch
Yes, so — right. So the good news here is that, that we have been renewing longer deals and it’s a factor of actually two things: one, one or longer deal coming online; and two, one or two shorter deals that have — that went into this pause as they’re getting ready to sign those longer deals. So it’s a little bit of a factor of both things coming into the mix this quarter, but longer is better.
Imtiaz Koujalgi
Yes. Got it. Thank you. Thanks a lot.
Operator
Your next question is a follow-up from Mike Cikos with Needham & Company. Please proceed with your question.
Mike Cikos
Hey guys, just two quick follow-ups on the gross margin items that we were talking about earlier. I just want to make sure I’m thinking about this properly. So the 3.1% impact on gross margins we’re talking about that was the impact on total gross margins, correct?
Keith Alexander
I’d say, yes, was the effect from services is really quite small on that. So yes effectively the same on both.
Mike Cikos
Okay, okay. And then the other question I had for you. I know that this is I guess you have inventory standing by for upcoming orders is the way that you would freeze it earlier. But to the extent that these orders don’t come through in 2Q, let’s say, it’s more of a second half event. Is there potential that we incur additional charges related to the sensors now in 2Q?
William Welch
Well, they are ongoing charges. So yes, if we’re — if we go on another quarter here, then we’ll just see that same amount of warranty charge without revenue for the quarter, but it’s yes, you can expect it, but that’s a cost of standing by to be ready.
Mike Cikos
Understood, understood. Thank you for that.
Operator
Ladies and gentlemen, we have reached the end of the question-and answer-session. And I would like to turn the call back to Mr. Bill Welch, Co-CEO for closing remarks.
William Welch
Yes, actually General, would you like to give the wrap up. Yes, [Multiple Speakers]
Keith Alexander
I think, Bill are you there. So let me just wrap this up for all of you. First, as we stated, we are optimistic about this quarter and the follow-on quarters. As you know, some of the lost revenue is not lost, it’s delayed and it stays in part. We believe that our future for the second half is growing and something that we’re very proud of and we believe the company is on a sound financial position with our cash and other things.
Jaime stated and we all agree that we see the revenue that we told you, we’re going to do, we’re going to do at least that. We believe that’s the future for this company. And finally this has been a tough journey changing the culture in terms of cyber security, but we all believe it’s important for our nation and we’re starting to see traction from comments from people like Chris Inglis.
So with that, thanks for the time. Thanks for everything that you all are doing. Have a good evening.
Operator
This concludes today’s conference. You may disconnect your lines at this time. Thank you all for your participation.
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