IronNet, Inc.

And welcome to the IronNet Q4 Fiscal 2022 Earnings Call and Webcast. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Nancy Faziole, Investor Relations. Please go ahead.

Thank you, Operator. Hello, and thank you for joining us. Today's conference call will address IronNet's financial results for the fourth quarter and full year ended January 31st, 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. Our comments today also include non-GAAP financial measures. Additional details and reconciliation to the most directly comparable GAAP financial measures can be found in our earnings release issued today, which is on the investor relations portion of our website at ir.ironnet.com. And now I'll turn the call over to our founder and co-CEO, General Alexander, who has some remarks. He will be joined by our co-CEO, Bill Welch, and CFO Jamie Gerber for the question and answer portion of the call. General Alexander.

Good afternoon. Thank you for joining us today. We have four areas to cover today prior to taking your questions. I'll start with a review of key fourth quarter results and then provide insight into our outlook for fiscal year 2023. I'd also like to comment on the current geopolitical backdrop and the role of collective defense in an environment where using cyber warfare as an element of national power is now a very real and present danger. And finally, I will address why behavioral analytics and collective defense, the technology IronNet's platform is based upon, which are necessary components of modern-day cyber defense. Regarding fourth quarter and fiscal 2022 results, as you saw in our press release, We exceeded our expectations for the fourth quarter and delivered on revised revenue and ARR targets, delivering revenue of $27.5 million compared to guidance of $26 million and ARR of $31.8 million compared to guidance of $30 million. We achieved 23% year-over-year ARR growth this year by executing on the transactional side of the business. These results do not include strategic customers. As we stated last quarter, anticipated strategic deals were delayed, so we took them out of our forecast and will continue to do so. Most of these strategic customers are in the U.S. public sector and were impacted by delays in federal funding. These are not lost deals. Today, almost without exception, they remain in the pipeline as strongly viable opportunities. Our pipeline of strategic opportunities remains healthy and continues to grow. Also relevant, as you may recall, we had two noteworthy contracts up for renewal in the first half of last fiscal year that combined totaled a few million dollars. They are delayed. They are not lost deals. If they had renewed in a timely manner, we would have been looking at close to 35% year-over-year ARR growth instead of the actual 23%. One of the two deals is a branch of the military whose contract migrated and will be expanded upon under another government contracting entity as a strategic opportunity. This is one that has been caught up in the federal funding delays I mentioned. The other deal is an international government agency opportunity that also migrated to a new contracting entity in their organization. As a result, it is going through a required reevaluation as part of its migration process, which is taking longer than expected to complete. From a revenue perspective, the $8.2 million in revenue we recognized in the fourth quarter represented approximately 18% growth over the prior quarter. This record performance resulted in part from a significant paid pilot in Q4. We are in final negotiations with that customer, and we anticipate a contract. And in fact, the opportunity is captured in our full year guidance, but it is not clear if it will close in Q1. A few other points of context about fiscal 2022 revenue. Our fiscal 2022 results are more product driven than they were in the prior year. Professional services revenue declined $2.3 million or approximately 50% from the prior fiscal year. We do take on professional services contracts from time to time, but I believe a promising outcome from this year is the revenue shift to our recurring revenue model based on the collective defense platform. Our platform includes our NDR product, our AI behavioral analytics, our software operations, and the Dome. The combined offering is strongly differentiated. We are the only provider in the marketplace offering a holistic, collective defense, NDR-based solution. From a technology standpoint, this means that our customers can see automatically correlated alerts within their individual enterprise networks. That's our network detection and response product, as well as anonymized automated correlated alerts across companies. That's our unique collective defense capability. Our fiscal year results also demonstrate a strong shift toward cloud deployments by our customers. This ramp up of cloud migration is aligned with market trends and therefore a strength for our business. Cloud represented 63% of our product revenue for fiscal 2022 versus 52% in fiscal 2021. Cloud benefits scalability and also helps to mitigate the impact of supply chain disruptions as we become less hardware dependent. We believe that we are well positioned to benefit from this longer term trend toward cloud adoption. Although hyperscalers are responsible for securing the cloud and offer some multi-layered tools for customers to secure their data and assets in the cloud, IronNet's platform adds an essential layer for complete visibility of cloud deployments. Because the platform can see traffic to and from the cloud, it adds an important layer of security. Additionally, our sensors can deploy across multiple clouds so customers can protect the threat surface across their entire hybrid or multi-cloud environments. Our growth in fiscal 2022 was driven by community-sized customers. Accelerating the transactional side of the business is an important trend and continued objective for us. We ended the year with 61 new customers. We described the 27 customers that were in our base at the start of the fiscal year as largely cornerstone-like in terms of potential to support a dome. Over the course of fiscal 2022, our base did indeed expand with the creation of a number of communities joining our dome, namely in the space sector, in healthcare, as well as in some international geographies. and we continue to expand participation in the energy and finance sectors. We are also now making progress in several U.S. states to build state domes, where a state can bring together education, public utilities, finance, and state agencies into a state dome. This is evidence that our land and expand strategy is taking hold as we start with a cornerstone customer and expand into affiliated members of that customer supply chain. As we have noted previously, it is often supply chain providers that represent the greatest vulnerability to the larger entities that rely on them. Our major cornerstone customers are our biggest champion in this endeavor, particularly in the energy sector. For instance, the New York Power Authority set up a dome to include entities from across the state's in municipal utilities and cooperative energy companies. While community members are critical to securing sectors, the price point of joining a sector dome reflects the size of the organization. Our technology protects each member of the dome while also adding shared visibility and collaboration between its members. We can do this while protecting data anonymity and privacy. We are strongly encouraged by this momentum and are working to replicate that further in this fiscal year, bringing in both deeper pocketed and more cyber resilient cornerstone customers and the community members that are just as important for securing sectors at large. That's a natural segue to comment on the guidance we provided for the fiscal 2023, our current fiscal year. As we said last quarter, we appreciate the criticality of being accountable and predictable as a public company. In the second half of fiscal 2022, we confronted headwinds in the public sector that we did not expect. As a result, we based our revised fourth quarter guidance on strong line-of-sight opportunities for the transactional business. The difficulty in predicting timing for these public sector opportunities is not yet behind us, We were encouraged to see that Congress finally passed and President Biden signed in mid-March the $1.5 trillion Omnibus Spending Package that we have been waiting for. The Consolidated Appropriations Act 2022, as it is called, provides funding for 12 appropriation bills that make up the federal budget, including a significant allocation to fund an increase in support for critical physical infrastructure to help prevent cyber attacks, and other measures to root out cyber intrusions. And just last week, the Biden administration indicated that it wishes to further boost cybersecurity spending across the federal government to record levels to continue to modernize U.S. cyber defenses. Specifically, the President's FY2023 budget asked Congress for an 11% increase over the previous year in cybersecurity funding across civilian government agencies. So while encouraged, we remain cautious regarding expectations for how quickly this funding will be deployed. Hence, we will continue to focus on our transactional, more predictable pipeline in our forecast for now. Strategic opportunities will provide upside to our outlook which we will communicate back to you as they occur and concurrently raise our guidance. From a full-year perspective, our guidance for ARR of approximately $48 million by the end of fiscal 2023 is 50% year-over-year growth. We expect revenue of approximately $34 million for a full year or growth of approximately 25%. Revenue will lag exit ARR due to how we anticipate linearity of deals throughout the year, strengthening into the second half of the year. Let me now turn to a discussion of the current threat environment. Since mid-February, our team has been sharing insights on the escalating crisis in Ukraine through blog posts and webinars, one of which I supported last Friday with the New York Stock Exchange hosted by their CISO, Steve Few, and joined by National Cyber Director, Chris Inglis, Principal Advisor to the President on Cybersecurity Policy and Strategy, as well as Tom Fanning, Chairman and CEO of Southern Company. As evidenced by our discussion, it's clear that the necessary mind shift toward a collective defense approach is accelerating across the public and private sectors. In addition, this past Monday, I participated in a roundtable moderated by Matt Peterson of Barron's on the topic of evolving risk for corporate executives and investors, specifically now with the current conflict in the Ukraine. I also have authored several op-eds in the past quarter alone and been accessible to Tier 1 news outlets. Today, we announced that we enhanced our longstanding relationship with the U.S. Department of Homeland Security's Cybersecurity and Infrastructure Security Agency, CISA, to become a specialist partner of the Joint Cyber Defense Collaborative, JCDC. IronNet has collaborated with CISA in numerous areas to enhance the nation's cybersecurity through public-private partnership, including through our membership in the Cyber Information Sharing and Collaboration Program. We will continue to drive thought leadership to support the education that we see as necessary to drive transformation in cyber and create awareness about the need for collective defense. The Russia-Ukraine war underscores the urgent need for us to drive a collective defense solution. Our assessment of the situation is as follows. Cyber is a weapon of war And one of the tactics that I believe Putin will continue to use. President Biden concurred in his recent high-profile press conference, noting that the magnitude of Russia's cyber capacity is fairly consequential and it's coming. This is where we all need to work together. Unfortunately, we did not create the missile defense shield and cyber that we have for missiles. That's exactly what IronNet is trying to do, and we think that's important. Which sectors do we believe are most likely to be targeted? I think there's consensus from experts, which we agree with, that the financial, oil and gas, energy, and government sectors are potential targets. The effort will be focused on where the biggest economic and human impact can be made in an attempt to break our collective resolve. In each of these sectors, Major organizations have world-class cybersecurity, but even a world-class security team can't stop everything when defending individually and won't see everything. This is where real-time sharing in a radar picture is important. It enables companies to see what's hitting others, providing collective defense, or as Director Inglis says, to beat one of us, you have to beat all of us. What should we be thinking about? I would frame cyber risks in three buckets. One, defending against a direct attack such as what Ukraine and its Eastern European neighbors have already experienced. Last week, for example, we saw the disclosure of a new data wiper virus called Acid Rain. This is the eighth wiper virus that we have seen in this conflict. Two, the collateral damage that would likely result from a direct attack. the NotPetya virus released during Russia's 2017 attack of Ukraine was intended to attack tax accounting software, perhaps as an attempt to disrupt Ukraine's supply network, quickly spread, and cause significant collateral damage around the world. Three, there is the question of who else joins. The story emerged last week that China was involved in cyber attacks on Ukraine. In the early days of the war, Whether it is China or other nation-state or criminal actors, we could be dealing with multiple adversaries. This is where behavioral analytics, which is the iron net approach to NDR, is a significant differentiator from rules-based NDR solutions on the market, those that look for no-knows. The focus of security operations centers should be about proving the positive or proactively triaging alerts at network speed. The industry's current model for cybersecurity is not sufficiently predictive. We believe now it's essential to have the capability, like the IronNet Collective Defense Platform, to automatically correlate patterns of suspicious behavior, rapidly identifying malicious threats that would have gone unnoticed based on a signal occurrence. Our solution earned the highest AAA rating after independent evaluations by SE Labs, It was also rigorously tested by a branch of the U.S. military with exceptional results. My experience, having led our offense, is that no defense is impenetrable. So this is where working together at network speed between the public and private sector becomes very important. It's the public-private partnership that collective defense advocates, like Director Chris Inglis, have said is so hugely important. Our public defenders cannot protect us against what they can't see, plain and simple. We believe IronNet's collective defense platform bridges that gap. Operator, we are ready for our first question.