Last August, cybersecurity company IronNet (IRNT) went public by merging with a SPAC (special purpose acquisition company). It initially attracted a lot of attention because its founder and co-CEO is Gen. Keith Alexander, a retired four-star general who previously led the National Security Agency (NSA), the Central Security Service (CSS), and the U.S. Cyber Command.
IronNet's stock started trading at $13.44 after the merger and surged to an all-time high of $41.40 last September, but now trades barely above the $1 mark. To understand why IronNet's stock collapsed, let's review five bright red flags.
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1. Falling short of premerger estimates
IronNet's platform uses AI-driven behavioral analytics and collective defense tools (which collect and share data across different sectors and companies) to shield organizations from cyberattacks. In its premerger presentation, IronNet claimed its platform offered a "fundamentally new layer of defense" in the cybersecurity market.
But in its subsequent SEC filings, IronNet admitted that it faces direct competition from similar network detection and response (NDR) service vendors including DarkTrace and Vectra Networks, as well as diversified network security vendors including Cisco and Palo Alto Networks. All that competition seems to have prevented IronNet from achieving its lofty premerger growth targets.
During its investor presentation, IronNet claimed that its revenue would rise 25% to $28.9 million in fiscal 2021 (which ended in January of the calendar year), grow 87% to $54.2 million in fiscal 2022, then surge 105% to $110.8 million in fiscal 2023.
In reality, IronNet's revenue rose 26% to $29.2 million in fiscal 2021 but declined 6% to $27.5 million in fiscal 2022. Its revenue rose only 7% year over year to $13.3 million in the first half of fiscal 2023, and it withdrew its already whittled prior forecast for 25% revenue growth for the full year.
By comparison, Palo Alto Networks expects its revenue to rise 25% to about $6.9 billion this year. It's generally a bright red flag when an underdog is growing at a slower rate than its much-larger competitor.
2. A loss of customers
IronNet ended fiscal 2022 with 88 customers. That number rose to 91 in the first quarter of 2023, yet dropped back to 78 in the second quarter. As a result, its annual recurring revenue (ARR) declined from $31.8 million at the end of fiscal 2022 to just $26.5 million at the end of first half of 2023.
3. Plunging margins and widening losses
During its SPAC presentation, IronNet claimed its gross margins would climb from 71.2% in fiscal 2020 to 74.7% in fiscal 2023. Its gross margin rose to 76% in fiscal 2021 but subsequently dropped to 65.9% in fiscal 2022 and 62.5% in the first half of fiscal 2023. For reference, Palo Alto ended its latest fiscal year with a gross margin of 68.8%.
Those plunging margins are worrisome because IronNet is still deeply unprofitable. Its operating loss widened to $55.3 million in fiscal 2021, then more than quadrupled to $228.8 million in fiscal 2022 (compared to its investor presentation forecast for an operating loss of $47.9 million). Its net loss also widened year over year in the first half of fiscal 2023 -- from $32.3 million to $60.6 million.
IronNet plans to lay off 110 people, or 35% of its entire workforce, to rein in that spending. However, downsizing the company right now could make it even less competitive against larger rivals.
4. Running out of cash
IronNet ended the second quarter with a mere $9.7 million in cash and equivalents. It borrowed another $10 million after the quarter ended, but those new notes mature in just 18 months, with a high interest rate of 5%. That's a dire situation for a company that will likely lose tens of millions of dollars throughout the second half of the year.
5. Its co-CEO and CFO just quit
As IronNet faces this existential crisis, two of its top executives -- co-CEO William Welch and CFO James Gerber -- abruptly resigned. Alexander will become sole CEO, while Fidelis Cybersecurity's president, Cameron Pforr, will replace Gerber. These jarring executive changes could make it even harder for IronNet to implement a coherent turnaround strategy while staying solvent.
The company said Gerber is leaving IronNet to join a private cybersecurity company while Welch is resigning "in light of the restructuring of the business."
Avoid this company
IronNet's stock doesn't look cheap even at four times this year's sales, especially since that price-to-sales ratio is still tethered to analysts' outdated expectations for 21% sales growth this year. Its growth rates also look abysmal compared to other better-run cybersecurity companies. Investors should avoid this broken SPAC-backed company like the plague.
