Q1 2021 Telos Corp Earnings Call

May 17, 2021

[music].

Good day and thank you for standing by welcome to the talents Corporation first quarter 'twenty or 'twenty One earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation there will be.

A question and answer session.

Good question during the session you will need to press star one on your telephone if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today readily Johnson. Please go ahead.

Good afternoon. Thank you for joining us to discuss Telos corporations first quarter 2021 financial results with me today is John Wood, CEO, and chairman of Telos, and Michelle not gazella CFO of Telos, let.

Let me quickly review the format of today's presentation, John will begin with some brief remarks on our first quarter results a brief corporate overview and tell us a strategic priority and Michelle will cover the financials and guidance then I'm going to turn the call every day analyst for Q&A.

The earnings press release was issued earlier today and is posted on the Telos Web site, where this call explaining simultaneously webcast before we get started we want to emphasize that some of our statements. On this call are forward looking statements and are made under the safe Harbor provisions of the Federal Securities Law. These statements are based on current expectations and assumptions that are subject to risks and uncertainties.

Actual results could materially differ for various reasons, including the factors described in today's earnings press release and the comments made during this conference call and our SEC filings, we do undertake any duty to update any forward looking statements. In addition, during today's call. We will discuss non-GAAP financial measures, which we believe are useful as supplemental and clarifying measures.

To help investors understand <unk> financial performance. These non-GAAP financial measures should be considered in addition to and not as a substitute for or in isolation from GAAP results. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results in our earnings press release and on the Investor Relations page.

They tell US website. The webcast replay of this call will be available for the next year on our company website under the Investor Relations link with that I'll turn it over to John.

Well, thank you Brenda.

Hey, everyone on John <unk>, Chairman and CEO of <unk> Corporation, and welcome to our first quarter 2021 financial results Conference call.

I'm proud of our execution this year, delivering 43% year over year revenue growth and continuing to win meaningful contracts and exceeding our prior guidance, giving us even greater confidence for the full year.

We surpassed our expectations on both the top and bottom lines as we were able to execute on our customers request to accelerate deliveries expected in the second quarter into the first quarter.

Since we covered a great deal Q1 during the last earnings call, which is only six weeks ago today I will focus on recent events as well as any new developments.

Now I'd like to share with you the first quarter business highlights and updates.

On the first few months of 2021, we secured two large wins first the general services administration or GSA named Telos seven other companies as a contract team lead on the second generation information technology contract.

Known as <unk>.

Which is $5 5 billion.

That enables streamline government wide purchasing in.

In addition to providing access to pre vetted hardware and software it vendors to all agencies across the entire federal government <unk>.

Provides a simple path for the government to obtain all of Telos security solution offerings, including Exacta Telos Ghost MHS in <unk> 360.

Tell US was also awarded a five year $35 million U S Army contract for implementing and securing communication systems in the Korean Peninsula has a part of the young sang relocation plan and land partnership.

This realignment effort is critical to U S military operations on the Korean Peninsula, and there is no greater honor than to support our men and women, who bring peace and stability to this vital region of the world.

Following our initial public offering in November we've been busy growing our channel partner program and bolstering our sales and marketing teams.

The formal launch of our channel program called Telos Cyber protect is Slater is slated for later this month.

At the end of Q1 2021, Microsoft Azure expanded its exact the licensing to all U S government cloud instances, including Azure government Azure government secret and Azure government top secret to bring faster cloud compliance to Azure government customers.

By incorporating azure with exacta, Microsoft customers can automatically generate a large portion of the required evidence that their systems are operating in a secure way this accelerates the systems and workloads to the Azure cloud.

Microsoft is a tremendous partner and from the very beginning has believed that exact is the right solution to significantly streamline the risk management and compliance process for themselves as well as per their customers, which will ultimately accelerate cloud adoption and do it in a much more secure way.

Our solution development teams have been hard at work in the first months of 2021.

And I'd like to highlight the continued innovation within exacta and Telos goes.

In January of 2021, we unveiled our exact offering for cyber supply chain risk management or CRM to address the ongoing threat of cyber supply chain breaches in incursions.

This exact the module operationalize supply chain risk management standards like the NIST 800 Dash $1 61, which we believe are essential for organizations to thwart future solar winds like attacks.

We recently introduced another exact a module to help organizations address third party vendor cyber security compliance standards, such as the NIST 800 Dash $1 71, and the cyber security maturity model certification known as C. M. M C.

This exact on module meets the needs of more than 300000 organizations that must comply with these cyber security standards.

In March exactly was named an SC Magazine Award finalist in the best risk management solution category.

We're pleased to be recognized for the well regarded product award one which is determined by a panel of technology peers.

Moving to a virtual <unk> offering or telos ghost, we've begun integrating telos goes directly into complementary networks to protect video security systems.

Industrial Internet of things or Iot and other connected technologies out of the box.

The success of Telos Ghost and its initial product launch the ability to eliminate cyber attack services on the Internet is all being leveraged for evolutionary innovations to expand beyond its initially intended use which was for military and intelligence use cases to two commercial applications, we're embedding Telus ghost.

The critical infrastructure to hide specific network resources from being seen on the public internet, thereby inhibiting the ability of cyber adversaries to attack because you can't attack what you can't see.

Hiding servers from cyber adversaries as a core capability of Telus Ghost and has allowed us to prepare the launch of new partner initiatives to high video surveillance cameras secure the network for campus security and gun to Tech solutions and protect the privacy and security of students whether they are in school are operating remotely efforts are also.

Being pursued to protect internet based networking use for software downloads and updates from cloud based repository to software enabled vehicles as an example.

These initiatives are in the early stages, but telos and its partners are excited about prospects of using a technology that has been proven to protect intelligence on military operations, but to also protect critical infrastructure used to ensure the safety of people and critical assets in a commercial environment.

Next day, I'd really like to talk about a little bit as the industry landscape.

I know firsthand how important it is to stay in tune with the pulse of the industry and with that in mind. There are three trends of particular interest to our organization that has the potential to positively impact our revenue in 2021 and beyond.

The first is internet of things or Iot.

According to Gartner there are currently 24 billion.

Iot devices globally, and that number is expected to grow to $75 billion by 2025.

Every aspect of our society is on the verge of touching the internet.

As more smart device platforms are placed online our critical resources become harder to protect.

But what if you could make Iot devices users information and resources invisible on the network and keep them hidden from unauthorized view and access.

That's all possible with Telos Ghost, a virtual obfuscation or Misattribution network that allows these connections to be totally isolated from the public internet through the use of a number of virtual network nodes varying pathways and eliminating source and destination IP addresses to make their presence and communications invisible.

We believe <unk> ghost as a viable answer to the concerns of Iot security.

The second trend that will have an impact on our business as the increased occurrence of audit fatigue for organizations.

With personal in enterprise security and privacy among the top concerns of our day governments at all levels of responding with compliance requirements designed to protect citizens and defend networks.

But what does the business aspect of this growing number of security and privacy regulations. This question led to a research study we commissioned with a third party research firm, which we believe to be the first attempt to quantify the growing problem of audit fatigue.

The study, which pulled 300 security professionals.

Revealed that on average organizations must comply with at least 13 different.

Security and privacy regulations, and they spend at least $3 $5 million annually on compliance activities with compliance audits consuming 50 858 working days each quarter that means security compliance team has been 232 working days each year responding to audit evidence requests in addition.

To the millions of dollars spent on compliance activities and fines.

This level of financial and time commitment is really unsustainable.

The answer is to simplify and automate the compliance process, which promises many benefits which include.

Reduce workload for already strained security personnel increase.

Increased employee satisfaction and retention.

Limited reputation damage that comes with failing on audit.

And increased savings and expensive compliance activities and costly fines.

Commercial organizations already and looking for ways to realize these benefits by streamlining compliance activities and automating the audit processes.

Tell us is exact that is well positioned to alleviate this compliance burden and help organizations achieve their business initiatives much more quickly.

The third trend we are watching is the increase in air travel.

Over months TSA is reporting ever increasing passenger numbers.

Pre pandemic TSA with screening over 2 million passengers daily.

Current passenger volumes are seeing highs of $1 6 million passengers screen daily with summer traffic expected to surge.

In February of 2021, TSA announced their intent to hire 6000 screeners to prepare for the summer season.

TSA like the airports and airlines are seeing the return of travel due in large part to leisure travel.

Telus is also experiencing a similar uptick in our <unk> 360, <unk> airport programs, where our aviation workers biometric enrollment submissions have increased 177% from April 2020 to April 2021.

Airports Airport Concessionaires and airlines are bringing these workers back to the airports to meet an increase in service support levels not seen since February of 2020.

In conclusion, our company's exceptional results continued to be driven by strong demand for our advanced security solutions.

Recent long term contract wins and our growing sales channel we.

We are well positioned to continue to execute as a leading world class organization in the cyber cloud and enterprise security marketplace.

I'll now pass it over to our CFO, Michelle <unk>, who will discuss the financials in more detail the shelf.

Thank you John and thank you all for joining US today I'm very pleased with our first quarter 2021 financial results and I am excited about our future revenue and earnings growth for 2021 and the years ahead.

For our first quarter financial performance.

Revenue increased 43% year over year to $55 $8 million, which exceeds our previous guidance of $49 million to $52 million.

Gross profit increased 17% year over year to $14 $4 million inclusive of stock based compensation expense of $737000.

Net loss was a negative $14 $8 million.

Adjusted net loss after adjustments for a charge for settlement of an outstanding litigation matter and stock based compensation expense was negative $54000.

Adjusted EBITDA after adjustments for a charge for settlement of an outstanding litigation matter and for stock based compensation expense was $1 $5 million, which exceeded our previous guidance of negative one nine to negative $1 7 million.

Our diluted net loss per share was.

Negative 23 per share.

Adjusted earnings per share of zero cents per share.

Our weighted average diluted shares for Q1 were $64 million 625000 shares.

Let me provide.

Some additional financial insight into our operations.

Revenue for our security solutions business was $22 9 million.

Gross margin per security solutions was 41% inclusive of stock based compensation expense of $660000 compared to 37% for Q1 2020.

Revenue for our secured networks business was $32 9 million.

Gross margin for secure networks was 16% inclusive of stock based compensation expense of $77000 compared to 19% for Q1 2020.

SG&A expense was $27 9 million.

An increase of 135, 2% from Q1 of 2020.

This is primarily as a result of stock based compensation of $12 9 million and an increase in labor and other indirect costs up $3 7 million. This increase in expenses reflects our planned investments for expansion in our sales channel and marketing team.

<unk>.

And finally, working capital finished the quarter at $102.2 million.

Turning to our financial outlook. We are pleased with our continued success at winning new business combined with our backlog of orders and contracts and therefore, we are reaffirming our full year 2021 guidance. We currently expect revenue in the range of $283 million and 200.

$95 million, an improvement of 57% to 64% compared to 2020.

And adjusted EBITDA in the range of $33 million and $36 million, an improvement of 190% to 216% compared to 2020 we've.

We remain extremely confident in our market opportunities and look forward to providing updates on our progress on our next quarterly call with that I will turn the call over to the operator for questions.

Operator.

Thank you as a reminder, cash question you will need to press star one on your telephone.

Withdraw your question press the pound key please standby, while we compile the Q&A roster.

Our first question comes from the line of Alex Henderson from need Ham. Your line is now open.

Awesome. Thank you.

So nice quarter, thanks for the print.

I wanted to get an update on where you were on your sales hires.

Your.

And on your distribution.

Channels.

To start with if I could.

Hey, Alex how are you. This is John we're doing well on that I think we will have.

The full boat if you will done by the end of June were about at 40, right now in sales marketing and channel activities.

We're doing well against our plan.

Any change in the distribution partnership stuff.

No I'm, saying, we're on the same courses we were served.

Perfect.

The second question.

When we talked earlier I think you had mentioned that.

There was a change in the.

The government's approach too.

They're talking to.

The cloud companies in terms of their requirements that essentially effectively requires them to have.

Zach on copies several exact copies.

Running.

If they had any intention of bringing any government.

<unk>.

Programs onto their networks.

Can you talk about the.

The degree to which that's an accurate statement.

Has that been legislated how does how do we think about.

The validity.

Validate that.

That viewpoint.

Yes. Thank you for that question the way to think about it is that it was really the intelligence community that we were talking about earlier and in the intelligence community. They start out with a single cloud provider being AWS and then very recently decided that they were going to move to multiple cloud environments to include.

IBM Oracle, Google Azure and AWS I don't think I Miss one did I don't think so.

And that they want the formats of all of the bodies of evidence and exact on which means ultimately the cloud providers are using exactly both for the high side, meaning the top secret regions as well as the secret reasons.

Does that extend to the other vendors such as IBM Oracle on Google over time, if they want to carry any government business.

At the end of the day basically what the governments, telling the vendors the cloud the cloud providers as we want everything in an exact a format and when I say the government in this case really what we're talking about the intelligence community.

But when you think about the intelligence community. There is also a component of the intelligence community, which includes the military.

On the military intelligence community. So we do see a way to get into the rest of the Dod if you will through the back door and I mean that not in a negative way, but its because its because it becomes a common lexicon for the entirety of the government to use so ultimately we do see our exact to becoming the standard.

Throughout the government.

And one last one on this subject.

Any update on.

Microsoft and Amazon.

Amazon reselling exactly on where we are on on that.

Ramping that opportunity.

Yes, we are not planning on anything coming out of that channel until I think it was a Q4.

I think I think it was Q4, Alex and.

<unk>.

And I think we're going to see a great deal of activity coming out of Azure. Although recently the guys at Amazon have reaffirmed their commitment to telos and so there is more activity happening there. Although we don't have enough data to be able to tell you exactly what the result is going to be out of that.

And one last question and then I'll see the floor obviously.

Big increase in commitment to security by by the administration.

Is that impacting your thoughts on the outlook for the year.

Forward in for exact specifically thank you.

Youre welcome.

I think this is the question that most people I think we probably have.

I think the we think that it has very big implications for telos, both in terms of exact and ghost.

When you net down at the most simple level what exactly is doing is providing the automation that you are actually cyber.

Yes.

Cyber clean if you will cyber cleanliness and our cyber hygiene is a better term.

I think the combination of exact they're providing that level of body of evidence and goes providing the ability to hide network assets like servers.

Is right down the middle of what the administration is looking for us. So we feel strongly that that's a capability that's not just of interest to the government, but also to the commercial world.

Great. Thank you very much I'll cede the floor.

Thank you.

Thank you. Our next question comes from the line of Andrew Nowinski from D. A Davidson your line is now open.

Great. Thanks, and congrats on the nice quarter just had a question. So you solidly exceeded your guidance in Q1.

You talked John about the.

Increase in tea as activity TSA activity that youre seeing.

But you didn't roll through the upside into the annual outlook. So I'm wondering is there anything that changed with regard to your confidence here your ability or your visibility into the back half of the year.

Andy. Thank you for your question no. There's nothing that's changed it's really just being.

Yes.

It's been driven into our heads that we have to meet or exceed our numbers.

I can we can we can tell you guys that we feel very confident about the year talking about the year and as we closer to the second half of the year, we will make a decision as to whether or not we're going to adjust to the upside, but just from our standpoint, we're just trying to be conservative.

Super.

Good.

Next question I had I wanted to go back to a partnership that you announced last quarter.

With Johnson control I know, it's a massive Iot play on.

And they're using ghost I'm, just wondering if you could give us an update on how that.

How that's progressed.

Sure.

So again. This is this is a relationship with this long term strategic relationship to.

Put it in plain English, we don't we did not plan on revenues per this year out of that relationship but the idea is to start with the cameras and then move into other areas of the organization like their HVAC systems, which account for a much bigger.

On a percentage of the revenue I think where we are in general is we're moving we're moving strongly with them. They are applying resources, we're applying resources and.

One of the first things we're going to do is show the two a showcase if you will have that capability right here on our headquarters. So it is going to be I think a combination of that.

Along with the gun detection capability that we announced with <unk>.

Okay. Thank you actually just one more clarification for you John So if we look at.

How the how the course of revenue maps on for the remainder of the year and you kind of look at it from a product perspective.

Where do you see I guess, where do you see a lot of the growth coming from in Q3 and Q4 as it is it mostly from.

Sort of I D Trust in the TSA and CMS Awards that you won there that are driving some of that big uptick in growth on the back half of the year or is there something else we should be watching.

So initially as we went public that that clearly was where the a lot of the growth came from but just to remind you guys. We were awarded.

Large pilot.

So I think $34 million and.

And we Werent able and we're still not able to disclose who the customers are the use case, but the way to think about is we sell it by unit and it's about $17000 per unit, roughly and Thats about one third of secure networks and two third of security solutions.

And that we think is going to be much bigger over time.

Call. It another six to 10 of similar size kind of opportunities and that's something that could easily.

If you will overshadow some of the growth that we have in the second half of the year, but in any event. It makes it makes us feel that much more confident as it relates to the total year performance.

Well that's great. Thank you John.

Good work.

Thank you Andy.

Thank you. Our next question comes from the line of Dan Ives from Wedbush. Your line is now open.

Thanks.

Could you maybe just give us little in page on into just how the conversations are changing.

Towels, and how it's being viewed within the beltway, especially everything we're seeing more shift to the cloud of course.

The cyber attacks as well as the bad initiatives talk about maybe compare and contrast in terms of conversations you're having today.

As you know, even a year ago on how thats changed anecdotally.

Sure and good to hear your voice by the way.

What I would say is that in the past.

We were seeing as sort of an it security <unk>.

Company almost like a.

Larry Evil, if you will that's probably not the right term, but something like that.

As these <unk> become very public both commercially and in the government.

We're seeing as part of the mission. So I think that has changed pretty dramatically.

Dramatically for us.

And as we have more and more offerings that will be off will be conveying to the market and sharing with the market Youll see why we are getting to become much more part of the mission. If you will and when you're part of the mission, it's just easier to find funding gets easier too.

As of the close faster.

<unk>.

And so I think theres going be a lot more of that happening so for our point of view.

What it does is it helps accelerate the sales cycle and make the opportunities larger.

So you are seeing with John would causes those grocery to voicemail anymore.

Yes.

That's exactly right.

Could you.

Okay, just glass sort of pile on talk about when we think about the opportunities obviously.

You guys have a ton of opportunities across battle.

But if we sit here a year from now what do you think the area.

That really.

Good day.

Could really transform in terms of the types of deals that youre seeing and maybe we don't see today or is it just more of the same. So we have one large financial services company again. Unfortunately, we cant disclose their name we have a crazy.

<unk> agreement with them, which is actually harder than the.

One we have with the agency, which is ironic because you can always find them looking for exact of personnel on line.

But anyway.

On that opportunity is a roughly 200 projects a year and we get about $4 million a year from that customer ish and it's going to go up to about 1000 projects I think what's happening now is that we have a reputation which.

It's really really strong here and as more people moved from the government to commercial meaning more leadership.

Actors if he will move from government to commercial.

Our phone gets picked up much much more easily than it has in the past. So I think the opportunity for us is around exact on ghost.

<unk>.

Sort of being a belt and suspenders, if you will to deal with the kind of.

Anything from ransomware to any of the hacking activities that you've been seeing out there. So there is a.

I think a tremendous opportunity for us on the commercial world for sure.

Awesome Congrats.

Thank you.

Thank you. Our next question comes from the line of Keith Bachman from Bank of Montreal. Your line is now open.

Hi, Thank you I had a couple of questions. Please the first I'm going to tie two things together.

But your gross margin percentages.

We're.

Looking at our model on the Street model, our three to 500 basis points lower than what were expected.

And also your cash flow from operations was call it negative nine for rough numbers in the street and our models had a small <unk>.

CFO positive of call it.

A few million dollars. So it was a pretty material swing to the negative on both gross margins and cash flow from operations could you help.

Reconcile what was were there any onetime charges what was the issues surrounding <unk>.

Both gross margins and cash flow from operations. Please.

Sure I'll turn that one to Ed if you will keep.

Okay. So on the gross margin in the aggregate Youre correct.

If you look at the breakdown between our secure networks business and our security solutions business.

We are actually trending positive year to year on the secure networks still slightly down on on.

Our secure solutions stopped slightly down on a secured network stuff.

But we did a tremendous amount of secure networks revenue in Q1. So the blended margin is slightly down but it doesn't change our view on our outlook from a margin position in the secure networks are secure solutions is trending in the positive direction I also thank Keith on.

On the secured network side of the house, we had customers wanting to accelerate orders.

What's caused the increase in revenue as well right.

And there's some industry wide shortages on some.

On technology stopped.

Force, a little bit more expedited shipping cost, which hit us as well.

Question on cash flow on the cash flow, yes. So cash flow was street was it was about depending on what numbers you want to use $11 million swing on CFO cash flow from operations what were the issues that are weighted cash flows turn some negative on Q1.

Well I do know we had about $13 7 million of stock based compensation, but that's not that with net cash flow.

Cash flow from.

Michelle David you guys Heath, it's really frankly, it's just the timing.

The differences between our AP NAR that really drove most of it and and.

And based on the revenue as it came in and the timing of such and the AAR that had not converted to cash as of the end of the quarter.

See that flip.

Okay.

Me perfectly. The next question how do you want us to think about per calendar year 'twenty. One how should we think about growth both gross margin and <unk>.

Cash flow from operations. Please.

Okay.

Our position on gross margin for the year really hasnt changed from from the IPO view.

Cash flow really hasnt changed either.

<unk> indicated it's really just the timing, sometimes where we get a lot of the revenue and therefore billing.

Billings in.

Third month of the quarter.

And then they just haven't converted yet basically.

Okay fundamental change to any of the base business assumptions.

Okay, we're going to have to have a pretty steep ramp for the for the balance of the year then.

Our on street numbers Okay.

And then my other question relates to the mix.

Mix.

This is John real quick so remember though.

Third in the fourth quarter, there is a lot of ramp coming from.

Pretax CMS Youre also that that pilot I referred to earlier. So there is going on there is going to be a significant ramp from Q1 to Q4.

And there was always planned to be that ramp so nothing from our point of view has changed there.

Okay. Okay.

And remember the TSA for from a TSA perspective, just keep.

Really important point to keeping their heads.

TSA as a point of sale. So when you when you sign up to TSA, New swap you swipe your credit card that payment comes to us directly.

Which drives down our dsos significantly understood.

Makes sense.

I just wanted to hear a little my final question is on one here a little bit about mix and so is there a way to talk about.

Bookings that you had on revenues in terms of.

The mix and what I'm really asking is has there been.

On incremental momentum surrounding the commercial side of the business.

Last week talking you can keep TSA as the government business.

But has there been any.

Pipeline bookings anything you can talk about how the commercial side of the business may be gaining a bit more traction here.

Yeah.

<unk>.

But we can see but we have had but we havent announced some of the some of the bookings like.

Put you guys on whole once again.

Yeah.

No.

So in general what I'd say is our pipeline has gone from.

If you're looking at as a V. It's gone from us relatively skinny V for commercial.

Commercial purposes.

Two just like I am relatively fat V.

So the opportunities have been.

Fairly significant and the other thing I will say in general is that we are closing commercial business.

We don't have the permission yet to give out the names of the companies that we've that we have been awarded business too, but it's in line with the way. It is in line with the cloud strategy that we outlined.

For you guys for the IPO on the follow on so so in general I would say that we are absolutely, making progress and I think.

We're going to see revenue before the second half of 2022, which is one I think we said we wouldn't see much from the channel until then and I think that's a very very conservative assumption.

Okay, Okay, alright, well why don't I jump back in queue. Thanks.

Thank you Keith.

Thank you. Our next question comes from the line of Catherine trend net from Colliers. Your line is now open.

Thank you for taking my question nice print I have one more on the partner program you're planning to launch.

Could you put some more specifics on that.

Campaigns that Youre looking at any particular products that you are hoping that you could push through and then if you added any new partners in the quarter and then what's the plan to add other partners. Thank you.

Catherine Thank you for that very complex question.

So the.

The answer is.

We have a very specific channel partner program, which we will be announcing in detail towards the end of the month, we are adding large partners to just out the chute, which we will again announce at the end of the month companies that you all know well I'm sure.

And.

But we're going to be pushing in the beginning to get started is really exact and ghost and two and we actually have found some take up for <unk> I'd Trust 360.

So.

Without I know on amount of giving them very specifics Catherine but I think we'll be able to answer the mail on that by the end of May.

Okay as a follow on to that built in your guide for the end of the year I mean, how long do you expect on these programs partnered programs help generate incremental revenue.

So for purposes of the models that we shared with you guys.

We didn't put really anything in from the channel partner program until the second half of 2022.

I think that Thats conservative and we may or may not update that as we see our progress changing.

Over time, we tried to be.

As conservative as we could be so basically what we did was we put all of the investment.

Into the numbers all of the cost into the numbers, we didn't put any of the revenues into the numbers until the second half of 2022 Catherine Alright.

Alright, Thank you very much keep on good work.

Programs.

Thank you Catherine also just one last point.

Ed reminded me we are actually launching this program a lot sooner than we thought we would be which again is a reflection of the traction that we're seeing by the market for our offerings. So there is.

A good deal of demand for four offerings, which I think is great.

Thank you. Our next question comes from the line of Nahal Chongqing current Northland Capital. Your line is now open.

Thank you.

Good to see the reaffirmation of our full year guidance.

Last quarter, you guys provided first quarter guidance.

I don't think you guys are providing second quarter guidance here is that correct and if so why.

That's right. The reason, we don't we never intended to provide quarterly guidance in general I think the reason we did it for last quarter is because as you guys are all well aware, we stubbed, our toe as it related to the accounting treatment for the complicated transactions around the IPO on it we had to push the date out and buy.

At the time, we actually announced we were so close to the end of Q1 that we felt like we had to kind of get some data out there because it was an obvious question that people would have so in our case, we're going to we're going to plan on it on an annual basis and as long as we don't stub, our toe again, which God forbid knows I'd never want to do again.

We will consistently affirm or not affirm the annual numbers.

Got it okay that makes a lot of sense.

And then.

I'm not sure if we really commented on this or not but so.

How has the order book trended in the past six weeks at the last conference call at the end of March you guys noted that year to date. It was up two ex year over year.

I am looking on looking at right now on the whole. It gives you give me a second.

Great.

Okay.

So ed's point is since it's been about six weeks. We're on plan, maybe a bit ahead I think the.

On the way to view it though going forward as we intend to see a significant ramp in the second half of the year due to those 210 year multibillion dollar contracts that we talked about during the IPO.

Okay and then at the beginning of this call you talked about the <unk> contract and he said that there are several other leads on there.

<unk> suites and do they cover the same functionality as tell us is going to be covering on this contract.

We are the only ones that are selling our own solutions on that contract but.

But the rest of the rest of them are sort of what I would consider to be sort of commodities. When you said.

Other manufacturers themselves, if youre, asking who the actual vendors on knowhow I'd have to get back to you, but that's public data and.

And I'm happy to share it with all of you I'm happy to share it with all you guys I just don't know off top my head.

Great.

You are welcome to the way I look at those kind of wins.

Is number one the government wide, which is really important.

Number two even though that's a big number of $5 5 billion Thats a ceiling.

That doesn't necessarily mean, the governor to spend that money that means that's how much the government can spend over the life of the contract.

For us really what it is it's just yet another vehicle that makes it easy for our customers to purchase our stuff.

And because it's what's called <unk> or government wide acquisition contract.

We find those valuable in the federal government.

Got it thank you.

Youre welcome.

Thank you. Our next question comes from the line of Zach Cummins from B Riley Securities. Your line is now open.

Hey, good afternoon. Thanks for taking my questions. John I, just wanted to ask about kind of what were some of the incremental upside drivers that we saw on the quarter. I know you highlighted that you had some business I imagine in a secure network side of that was pull forward from Q2 to Q1. So I'm just trying to get a sense of how much of an impact that was from Q2 to Q1.

I think that was a fair amount of it there was also the the pilot I mentioned earlier.

It is on a pretty quick burn, meaning they want to have it done as fast as possible.

It's typically.

This is this particular item is.

Number one on number two.

Well actually that the vaccine is number one for the per the administration, but so.

Its EBIT, it's in the top three if you will over the buy in administrations.

Priorities and so.

I think thats going to have an incremental.

Value to the company's performance over time, and if we did have risk. This basically mitigates everything from that standpoint, so it's a.

It's a real big win for us.

Understood and can you give us an update on the authorization process for both the TSA pre check in CNS contracts kind of win when you are anticipated to be live on those it sounds like it's still tracking pretty close to your plan.

Zack. Thank you for your question, yes in the case of free check I think we're looking at the end of June it right.

To be to be officially approved and in the case of CMS were thinking Q3 to be approved the CMS has been.

Excuse me allergies and asthma.

CMS has been somewhat.

<unk>.

The obviously the main thing that the administration wants is the vaccine out there. So that's going to be their main priority theyre getting to this other priority the other priority of doing the.

The health care facilities checks and so we anticipate that taking up for the rest of the year. It may start a little bit later in the third quarter than we were thinking but I think.

So much upside plant into that contract vehicle anyway that we don't worry about that at all.

Understood and.

I know you can't speak to specific commercial customer names, but can you just give us a sense of.

Some of the momentum you're seeing there and some of the revenue ramp and potential contribution youre, hoping to get from from some of those commercial customers as we proceed forward.

Sure.

So think of our commercial footprint as it's the same basic strategy as we have in federal government you get your nose under the tent you begin to deploy they see the value.

Want more instances more instances more emphasis than they were on cloud then it won't multiple cloud and so we're doing the same thing in the commercial side I gave the example earlier Zak of that large financial services company, who we do 200 projects with when we get paid about $4 million a year, we expect them to go to about one.

<unk> thousand projects and take on projects as system boundaries. So that'll mean that that could be for us.

Call it $20 million on your account.

And I think we're going to see the same kind of thing happening with the rest of the commercial accounts that we're looking at as long as we are able to deliver what we say we're going to deliver as long as we are able to continue with our reference ability nothing there is going to change and.

I will point out if youll recall that.

On the follow on.

During the follow on publicly we've stated that we're looking at a couple of acquisitions and.

One of which will help us in our <unk> hundred 60, offering and the other will help us with our <unk> offering.

We'll announce more about that later, but I do think that's going to happen.

One will happen probably no later than the end of June and the other will happen, probably Q3 or Q4 kind of timeframe.

Understood and you actually just touched on kind of one of my other questions. There, but just just a final question from me I mean.

Negative order.

It seems like there could be quite a bit of opportunity for exactly but to potentially work with commercial vendors now that they have stricter standards to work with the federal government I was just wondering if that's the way you see it personally in terms of exactly how big that opportunity could be.

Start to move margin needs any.

Initiatives.

I do see it that way and I think rich on the phone with me Rick Rick you here.

I am retrace would you comment on the size of the opportunity from your point of view and just to remind everybody. Rick is the co inventor of exact and he's also.

He is the father of the grandfather of this sort of community.

And around risk compliance automation kinds of things so.

What's your what's your perspective here for everybody.

The recent colonial pipeline <unk> is really brought to the surface.

On the need to address supply chain risk management.

Which is not which is not new NIST has been it's been pushing CRM for the better part of five years with the executive order does.

As expands supply chain risk management to include.

Critical software.

Not that she is not just within the government.

Within commercial and critical infrastructure. So it's it's basically.

It's basically an expansion on what already exists in terms of supply chain risk management opportunity.

Net debt addresses many different software companies around the world.

And the nice thing about it it's all based on.

Excuse me net standards.

Which is as you know our.

It's our forte.

It's not going to be very difficult or new for us to figure out how to deal with these new standards as news develops them over the next year.

Okay.

Understood well, thanks for taking my questions and best of luck with the rest of the year.

Thank you Zack.

Thank you. Our next question comes from the line of Alex Henderson from Needham. Your line is now open.

Sneaking back in for a double dip here.

So I was hoping you could talk a little bit about.

The two.

$5 billion.

Mandate.

I realize that.

It's the ceiling and the like.

But how do you see that.

Feathering into your outlook.

At what point do you think it's actually starts.

For revenues.

So from our standpoint, and obviously from your standpoint as the analysts out there think of that as upside.

<unk>.

It's something that is going to have a relatively significant amount of upside on the secure network side.

And it provides us with additional ways of distributing our security solutions.

So that's how I would think about it Alex.

But.

But seriously when when does it start is really the question as opposed to how does it start.

It started we're on it now so it's already it's already been implemented and therefore, it's in process. Okay. That's what I guess, Sir yes, Sir.

Second question is.

One of your filings you talked about I think it was 70000 companies.

<unk>.

Selling to the government in one form or another on where rig.

Have a relationship with the government.

In one form or another.

As they move.

Their applications.

Applications to the cloud in order to do business with the government they would need to.

Be compliant with exact but can you talk a little bit about that aspect of the opportunity.

Yes, so I think actually what I think what you're referring to is that they'd have to be.

Compliant with fed ramp, which exact that can help them accelerate that process and again, Rick I'll ask you to answer. This question specifically for Alex since is right down your alley.

The question is about fed ramp.

I'm sorry, the question is how the.

Question is how how big of an opportunity is it for us to be able to help customers get fed ramp ready so that they can sell their own software to the government.

Well.

There's a huge appetite as I understand it force for SaaS providers, who wanted to work with the federal government. The challenge has been the cost of going through the fed ramp process is just really expensive. So our solution reduces a lot of that upfront cost for the advisory services associated with fed ramp.

I don't have necessarily a weighted out to quantify it.

So because it's not just a number.

Of potential companies, but it's the number of software offerings are SaaS offerings that exist within the software companies. There's there is tens of thousands potentially.

So does it matter, whether it's fed ramp low fed ramp medium or fed ramp high how does it play against the various levels of fed ramp.

Exactly you can handle all of those basically exactly I think Elliot.

Yes.

So if I am able to.

Employee exact then.

The very rapidly move from.

Not qualified all the way to February on Pi is that what youre, saying.

I'm, saying, we're saying that if you take the appropriate steps. The answer is yes, using exactly the the issue that the ultimately the software vendors have to deal with is something called <unk>.

And the <unk> for all intents.

And purposes is basically.

And an auditor and audit function that looks at all of the body of evidence that you've created and signs off that yes. This is good so those guys.

In the past have tended not to be paid to be efficient.

They are paid by the hour.

And Rick you can probably give some some stories here about it but.

We're seeing that that our customer base wants everything they can to be put into exact and so exact is becoming if you will a common lexicon and breaking down barriers that we used to have with players like <unk> general contractors systems integrators et cetera, because the entire marketplace really is.

Fundamentally moving to the cloud and moving to a much more streamlined and automated.

Way of doing business and a lot of the stuff that is.

That we that we pulled together as documentation for the fed ramp process as a for example.

It's basically.

A lot of pedestrian kind of things that people used to do manually and so.

So by automating that process by definition.

We're reducing the time by up to 80% for purposes of headroom.

How long.

Yes on how long the assessor takes is a different question.

We're trying to convince all the assessors are the auditors that they should be using exactly so there is no paper.

That's how the CIA does all of their business. They don't they don't generate any more paper anymore everything exists inside of exactly all the auditors go to exact a and this is for not just for the intelligence community, but it's for the military intelligence community as well so they're very comfortable with using exact on up they want to they want to print out of a 700 page report.

It is sitting on there if they want it.

We did one experiment one time just to see.

If people are actually reading these things are called Sars.

So we turned off the user Ids and passwords for accessing the Sars and <unk>.

Full year non one user asks for their access to their Saar, which tells you that they're not even reading them. So so fundamentally what we're trying to do with exact is just get rid of all of the pedestrian manual efforts use automation where possible provide the continuous monitoring of the underlying risk.

Sure so that the process of moving whether it's workloads to the cloud, we're getting fed ramp certified or the supply chain activity. It just becomes much much more.

Easy and streamlined.

And one more question then I'll cede.

Probably you're running at a time here anyway, but.

Can you talk a little bit about where the competitors are relative to getting the TSA free.

Certification and to what extent.

Do you have an advantage.

And that process timeline.

I think.

There is a delta there.

It's pretty pretty advantageous to UBS.

So I think that by virtue of the fact that they are using exactly the answer is yes, but if youre if youre asking about the specifics Alex I really don't know exactly where they are on their process.

Okay.

So any sense of.

Why there might be a difference in the timing.

And then thoughts on what kind of share implications that might have.

So.

We think will be faster out the gate than clear.

Because they're not a cyber company.

And I think the fundamentally the point is that.

Our first thing to go after as far as share is to go after renewals and just to remind everyone on the phone.

There are about $2 million renewals a year roughly.

And.

And thats $85 per transaction roughly.

So.

Sure.

So as we get on the path and Youll see about this acquisition. We are talking about Friday Trust 360, a lot of what people are trying to do now is they are avoiding going places even though they are there's a vaccine. There's a vaccine out there who wants to go hang on a long line for a long time so.

We're going to have a couple of announcements first round antitrust 360, probably this quarter.

I think this or intermediates that need to go places so.

Stay tuned.

Alright, I'll cede the floor. Thanks.

Thanks.

Thank you Sir.

Thank you at this time I'm showing no further questions I would like to turn the call back over to management for closing remarks.

No I just wanted to say everybody we really appreciate your support.

Working very hard to make sure that we meet or exceed most likely we hope to exceed.

I Shouldnt say like that my guys are on shaking their heads on them, but.

So, let's just say we continue to reaffirm the FY guidance, we have given thank you Michelle now because our CFO, but anyway, we see a lot of opportunities out there we really appreciate the support.

From you guys and we know how valuable it is and so if you need US please do not hesitate to call. Thanks, a lot everybody.

This concludes today's conference call. Thank you for participating you may now disconnect.

[music].

Sure.

[music].

Good day and thank you for standing by welcome to the Telos Corporation first quarter 'twenty or 'twenty One earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.

Ask a question during the session you will need to press star one on your telephone if you require any further assistance. Please press star zero I would now like to hand, the conference over to your Speaker today really Johnson. Please go ahead.

Good afternoon. Thank you for joining us to discuss tell us corporations first quarter 2021 financial results with me today is John Wood, CEO, and chairman of Telus, and Michelle Nakagawa CFO I'll tell us on.

I quickly review the format of today's presentation, John will begin with some brief remarks on our first quarter results a brief corporate overview and tell us as strategic priorities and Michelle will cover the financials and guidance then I'm going to turn the call every other analysts for Q&A.

The earnings press release was issued earlier today and is posted on the Telus Web site, where this call is being simultaneously webcast before we get started we want to emphasize that some of our statements. On this call are forward looking statements and are made under the safe Harbor provisions of the Federal Securities Law.

These statements are based on current expectations and assumptions that are subject to risks and uncertainties actual results could materially differ for various reasons, including the factors described in today's earnings press release and the comments made during this conference call and our SEC filings, we do undertake any duty to update any forward looking statements. In addition, during today's call we will discuss.

Non-GAAP financial measures, which we believe are useful as supplemental and clarifying measures to help investors understand tell us its financial performance.

These non-GAAP financial measures should be considered in addition to and not as a substitute for or in isolation from GAAP results. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results in our earnings press release and on the Investor Relations page of the tell US website. The webcast replay of this call will be available.

For the next year on our company website under the Investor Relations link.

With that I'll turn it over to John.

Well, thank you Brenda.

Everyone on John Woods, Chairman and CEO of <unk> Corporation, and welcome to our first quarter 2021 financial results Conference call.

Surpass your expectations on both the top and bottom lines as we were able to execute on our customers' requests to accelerate deliveries expected in the second quarter into the first quarter.

Since we covered a great deal of Q1 during the last earnings call, which is only six weeks ago today I will focus on recent events as well as any new developments.

Now I'd like to share with you the first quarter business highlights and updates.

Yeah on the first few months of 2021, we secured two large wins.

On the General services administration, or GSA named Telos seven other companies as a contract team lead on the second generation information technology contract known as two G. I T, which is $5 $5 billion that enables streamline government wide it.

Purchasing.

In addition to providing access to prevent as hardware and software it vendors to all agencies across the entire federal government to Gi T.

Provides a simple path for the government to obtain all of Telos security solution offerings, including Exacta Telos coast.

Hey, Jess and <unk> Trust $3 60.

This realignment effort is critical to U S military operations on the Korean Peninsula, and Theres, no greater honor than to support our men and women, who bring peace and stability to this vital region of the world.

Following our initial public offering in November we've been busy growing our channel partner program and bolstering our sales and marketing teams.

The formal launch of our channel program called Telos Cyber protect is Slater is slated for later this month.

At the end of Q1 2021, Microsoft Azure expanded its exactly on licensing to all U S government cloud instances, including Azure government Azure government secret and Azure government top secret to bring faster cloud compliance to Azure government customers.

By incorporating azure with exact Microsoft customers can automatically generate a large portion of the required evidence that their systems are operating in a secure way this accelerates the systems and workflows to the Azure cloud.

Microsoft is a tremendous partner and from the very beginning has believed that exactly is the right solution to significantly streamline the risk management and compliance process for themselves as well as for their customers, which will ultimately accelerate cloud adoption and do it in a much more secure way.

Our solution development teams have been hard at work in the first months of 2021 and I'd like to highlight the continued innovation within exacta and tell us goes.

In January of 2021, we unveiled our exact the offering for cyber supply chain risk management or CRM to address the ongoing threat of cyber supply chain breaches in incursions.

This exact the module operationalize his supply chain risk management standards like the nest 800 Dash $1 61, which we believe are essential for organizations to support future solar winds like attacks.

We recently introduced another exact on module to help organizations address third party vendor cyber security compliance standards, such as the NIST 800 Dash $1 71, and the cyber security maturity model certification known as C. M. M C.

This exact on module meets the needs of more than 300000 organizations that must comply with these cyber security standards and.

In March exactly was named an SC Magazine Award finalist in the best risk management solution category. We were pleased to be recognized for the well regarded product award one which is determined by a panel of technology peers.

Moving to a virtual <unk> offering or telos ghost, we've begun integrating tell us goes directly into complementary networks to protect video security systems.

Industrial Internet of things or Iot and other connective technologies out of the box.

The success of Telus Ghost in its initial product launch the ability to eliminate cyber attack services on the Internet is all being leveraged for evolutionary innovations to expand beyond its initially intended use which was for military and intelligence use cases.

Two commercial applications, we're embedding telescope and the critical infrastructure to hide specific network resources from being seen on the public internet, thereby inhibiting the ability of cyber adversaries to attack because you can't attack what you can't see hide.

Hiding servers from cyber adversaries as a core capability of Telus Ghost and has allowed us to prepare the launch of new partner initiatives. The high video surveillance cameras secure the network for campus security and gun to Tech solutions and protect the privacy and security of students whether they are in school are operating remotely efforts are also be.

On pursued to protect internet based networking use for software downloads and updates from cloud based repositories to software enabled vehicles as an example.

You know next day, I'd really like to talk about a little bit as the industry landscape.

The first is internet of things or Iot.

According to Gartner there are currently 24 billion.

Iot devices globally and that number is expected to grow to 75 billion by 2025.

Every aspect of our society is on the verge of touching the internet.

As more smart device platforms are placed online our critical resources become harder to protect.

But what if you could make Iot devices users information and resources invisible on the network and keep them hidden from unauthorized view and access.

We believe telescopes as a viable answer to the concerns of the <unk>.

Iot security.

The second trend that will have an impact on our business as the increased occurrence of audit fatigue for organizations.

With personal in enterprise security and privacy among the top concerns of our day governments at all level of responding with compliance requirements designed to protect citizens and defend networks.

But what is the business aspect of this growing number of security and privacy regulations. This question led to a research study we commissioned with a third party research firm, which we believe to be the first attempt to quantify the growing problem of audit fatigue.

The study, which pulled 300 security professionals.

Revealed that on average organizations must comply with at least 13 different.

For the millions of dollars spent on compliance activities and fines.

This level of financial and time commitment is really unsustainable.

On the answer is to simplify and automate the compliance process, which promises many benefits which include.

Reduced workload for already strained security personnel increase.

Increased employee satisfaction and retention.

Limited reputation damage that comes with failing and audit.