Q2 2021 Telos Corp Earnings Call

August 16, 2021

[music].

Yeah.

Good day, and thank you for standing by and welcome to the Telus Corporation through Q 'twenty one earnings 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. Please be advised that today's conference is being recorded to ask a question. During the session you will need to press star one on your telephone you require any further.

The assistance. Please press Star Zero I would now like to hand, the conference over to bring Lee Johnson with Blue Shore Group. Please go ahead.

Good afternoon. Thank you for joining us to discuss <unk> Corporation second quarter, 2021 financial results.

With me today is John Wood, CEO, and chairman of Telus, and Mark <unk> CFO of Palace at Williams.

<unk> will be joining us for the Q&A.

Let me quickly review the format of today's presentation, John will begin with some brief remarks on the second quarter 2021.2021 result, and tell us your strategic priority and Mark will cover the financials and guidance.

Then we'll open up the line, particularly in a session earning.

Earnings Press release was issued earlier today.

On the <unk> 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 of course looking statements and are made under the safe Harbor provisions of the Federal Securities laws. 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 not undertake any duty to update any forward looking statements.

In addition to make the call we will discuss non-GAAP financial measures, which we believe are useful as supplemental and clarifying measures to help investors understand telesis 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 section of this website blood.

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

Well, thank you Bradley wealth.

Welcome everybody to our second quarter 2021 financial results Conference call.

I'm proud of our execution this quarter.

We continued to deliver revenue growth and when meaningful contracts with.

With both federal and commercial customers.

We expect our new business pipeline to expand and multiplied as we continue to make key investments in resources and partners.

We also delivered 17% growth in gross profit.

290 basis points of gross margin expansion and positive cash flow.

As the company announced on July 19th Michel market Dawah, Who's been the CFO of the company for nearly two decades.

Stick back from rural marking the first phase of our path to retirement.

To ensure a smooth transition Michele will stay on the senior executive team and will work on special projects to ensure a more efficient as a company as we continue to grow.

Mark Penza, former Vice President of Honeywell has been appointed executive Vice President and CFO.

Mark brings over 20 years experience in Investor Relations business development financial planning and analysis of financial strategy mergers and acquisitions and capital markets.

I'm optimistic about the leadership and fresh perspective, Denmark would bring to the organization and I'm very excited to have him on board.

You'll have a chance to hear directly from Mark later in this call during the CFO update and for Q&A.

Now I'd like to share with you our recent business highlights and updates.

To start I'd like to update you on our growing sales organization.

Since the beginning of 2021, we have tripled our sales marketing and channel team and continue to attract top talent.

We will continue to make these investments in sales and marketing as we broaden our market reach.

In June we successfully launched the telos cyber protect partner program by Formalizing, our channel program, and adding partners as complementary values skills and capabilities. This will allow us to drive accelerated growth generate new revenue streams and deliver on our mission of providing.

World Class Security solutions.

DLT solutions.

Data company and Presidio Federal were among the first partners to join the program.

In signing DLT as a distributor we gained access to their reseller ecosystem without the need to sign and manage all the resellers that directly with tell us.

We're actively building go to market plans with DLT and their partner ecosystem as well as with Presidio.

We're also charging forward with our referral partners, we signed two in the last month with a strong pipeline of additional partners in various stages under NDA and contract Red line that we look forward to sharing with you soon.

From an operating perspective, we saw continued adoption of our solutions to existing customer expansion and new customer acquisitions.

Now I'll discuss highlights of these activities.

At the end of July.

We were awarded a $19.4 million.

Expansion.

The contract by the U S Air Force for our exact solution.

With this new contract the Air Force now owns a license for both exacta $3.60 and exact the Io.

This is another example of how we've been able to land a contract and continue to expand upon it based on our current customer success.

We've added a third cloud service provider, which we will be providing additional details on soon to our roster of cloud customers using exactly.

We're proud to have strong relationships with Amazon Web services, and Microsoft Azure, and we will continue to expand to other cloud service providers and SaaS providers in the future.

In the second quarter, we saw enterprise adoption of our exact of $3.60, offering by the department of the interior, who selected exact over other commercial and government off the shelf software solutions.

In addition, another classified customer expanded our contract while extending our period of performance.

This organization also added exact Io to their approved product list, which is recognized reciprocally throughout the intelligence community for acquisition implementation and accreditation purposes. This means that other intelligence organizations can buy office contract.

We were awarded a renewal and expansion from a classified government customer for the continued use of <unk> ghost.

Through this award <unk>, the total value of the contract increased by $13.5 million to $24.8 million.

This customer also awarded US the data analytics support task order totaling $1.1 million.

Other significant renewals and expansion business include the CIA awarded <unk> a contract through June of 'twenty, three providing our exact solution and supported the cia's new multi cloud contract.

A major intelligence community customer awarded <unk>, an option through May of 2022, providing our exact solution.

The U S Department of state awarded <unk>, another contract through 2022, providing our exact solution.

In the U S space and missile command awarded tell us and expansion of their existing exacta solutions contract as well.

In addition, we continued to see increased commercial adoption of our security solutions.

With our new and renewed contracts from AT&T.

<unk> Aerospace Accenture, Northrop Grumman vibrant health Iron net cyber security and contact Telecommunications Corporation.

I'd also like to provide an update on the TSA pre check contract.

On July one TSA said in a public notice that they expect the additional TSA pre check enrollment providers.

To become available in 2021.

While we do not control the decision making timeline within TSA.

We do control our readiness to move out once the authority to operate is issued.

We remain confident in our service launch in 2021.

Now next I would like to highlight recent updates within our Exacta Telos Ghost Niv Trust 360 solutions.

On June 30, we announced a new version of exact to Io.

Which expands our control mapping capability, which is really needed by regulated industries to address audit fatigue.

We followed on August 11, with the release of a new version of exactly 360.

Which offers multiple data exchange protocols.

To enable machine to machine interaction for more efficient collaboration regulatory reporting and reciprocity.

These new capabilities increased commercial and international opportunities for Exacta, where there is increasing demand for automation.

These capabilities also address fed ramp acceleration requirements specified in the recent presidential cyber security executive order.

The heavily regulated financial services industry require substantial automation to keep up with the multiple multitude of disparate it security and privacy related content.

Exactly continues to provide significant value to this market as evidenced by our recent renewal by a major insurance company.

This fortune 50 organization uses exact io to aggregate the extensive data needed to manage Iot asset inventory and vulnerabilities, while providing automated control mapping to multiple sets of standards.

This ultimately reduces the burden and strain on their internal security operations and compliance teams.

In the second quarter Telos Coast tell us is virtual obfuscation network when the 2021 fortress Cyber Security Award for network security.

It's always an honor to be recognized alongside other companies advancing the cyber security agenda.

Capabilities like Telos ghost or critical to protecting privacy and identity in today's remote world and we're excited to see such strong traction not only in the public sector, but in the commercial market as well.

Over the past year <unk> seen increased success in interest and tell US goes within the education Internet of things banking health care and critical infrastructure markets with developments, including our strategic partnership with Johnson controls.

To integrate <unk> into their open Blue cloud view Gateway, which supports a worldwide cloud based video network used for surveillance and physical security.

The integration of this solution will be completed in Q3.

Tell us also anchor partnership with <unk> to integrate <unk> into <unk> gun detect.

The industry's first AI powered visual gun detection solution.

The integration of this solution will also be completed in Q3.

The Johnson controls anomaly alert integrations will drive revenues for 2022.

Since last we spoke tell us has advanced our ability to serve the education market.

Of note, we finalize the integration of Telos ghost in the Chromebooks.

Nearly 60% of computers purchased by K 12 schools in 2018, where chromebooks.

And it's safe to say that number has increased significantly due to the rapid switch to remote learning and response to the global pandemic.

Tell us this ghost enabled chromebooks are easy for K 12 institutions to deploy and manage and we're glad that to add that capability to protect students privacy with the integration of telescopes.

Beginning this month, a large Virginia School district will pilot the Telus Ghost student privacy solution.

This solution, we formally announce later in Q3.

On July 30, <unk> tell us acquire the assets and patents of Diamond fortress technologies.

And we will integrate the Onyx touchless fingerprint software with our IV Trust 360 platform.

You see onyx eliminates much of the friction involved in biometric data gathering by leveraging our mobile device's camera to capture the user's unique fingerprint.

This technology enables the fast and easy collection of fingerprint biometrics and will allow tell us to better serve our growing customer base at both the enterprise and consumer levels in verticals, such as transportation health care financial services and other industries.

This acquisition solidifies <unk> position in an expanding market with contactless biometric technology expected to grow from approximately $7 billion in 2019 at.

At a compound annual growth rate of 20% from 2020 to 2027.

Put simply <unk>.

<unk> allows people to get their fingerprints taken in the comfort of their own home versus having to go somewhere.

Over the last few months, we've won nearly a dozen re competes from existing designated aviation Channeling airport customers, including Chicago, O'hare Minneapolis, St Paul and Sacramental International Airport.

Now, let me turn to some comments on the industry landscape and growing market opportunity.

As extensively reported in the media a number of cyber attacks targeting various sectors in the U S have pushed president Biden to put cyber security at the center of his agenda.

This includes not only the President's recent executive order on cyber security and subsequent actions such as new requirements for pipeline security.

But also includes some legislative initiatives in Congress, which could have significance for Telus.

Here's some examples.

The bipartisan infrastructure package supported by the White House and recently approved by the Senate.

Calls for increased funding and other incentives to address the cyber security needs of U S critical infrastructure.

The package also provides funding for cyber security grants to state and local governments.

Additionally, the pending Senate version of the FY 2022 defense authorization Bill.

Not only incorporates president <unk> full requested level of cybersecurity funding for the defense Department.

But it goes further to add funding above the requested level.

And in FY 2022 Appropriations Bill approved by committee in the house with boost funding for DHS is cyber security and infrastructure security agency or scissor by nearly 20% over last year's appropriation level. This.

This includes increases above the president's request for infrastructure cyber security and risk management operations.

These government actions haven't changed anything for <unk> in the near term. However in the long term they will provide the company with far more opportunities and will grow our pipeline.

The National Institute of standards and technology known as NIST is also developing a ransomware profile for the cyber security framework to help organizations managed security best practices required to poor ransomware attacks.

<unk> is actively engaged in this effort by participating in the niche sponsored workshops, which will help shape. The final version of the standard.

The NIST CSF ransomware profile once finalized is something that we plan to operationalize via our exact solution.

So in conclusion, we had a strong quarter in our company's exceptional results continue to be driven by increasing demand for our advanced security solutions and our growing sales channel.

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

I'd also now like to pass it over to our CFO Mark Venza.

Who will discuss the financials and guidance in more detail.

Mark over to you Budd.

Thank you John and thank you everyone for joining us today.

First and foremost I'd like to begin by saying, how thrilled I am about the opportunity to join tell us.

I am excited about the numerous opportunities ahead to execute for our customers partners and shareholders and to work with this team.

I am pleased with our second quarter results underpinned by strong revenue growth.

Gross margin expansion and positive cash flow.

Let's start with revenues.

Year over year reported second quarter revenues grew 8% from $48.6 million in 2020 to $52.6 million in 2021.

Excluding our contract with the U S census Bureau, which is ramped down as planned since the same period last year <unk>.

Total second quarter revenues grew 48%.

Sequentially total second quarter revenues declined 6% from $55.8 million in the first quarter due to a large delivery and our secure networks business that was originally planned for the second quarter.

What was delivered in the first quarter per our customers request.

If the delivery had shipped during the second quarter as originally scheduled second quarter revenues would have been approximately $57.4 million sequential growth would've been 13% instead of negative 6% and year over year growth would have been 18% instead of 8%.

But in either case first half results are the same with reported revenues up 24%.

Now, let's turn to our individual businesses.

Total second quarter revenues for our security solutions business declined 9% from $34.2 million in 2020 to $31.2 million in 2021.

This decrease was driven by nearly $13 million of lower sales in <unk>.

On the contract with the U S Census Bureau as mentioned previously.

This contract recognized peak revenues in the second quarter of 2020, and largely ramped down according to plan through the second quarter of 2021.

New contracts in <unk>.

Our exact solution and telescopes are quickly back filling the ramp down on the contract with the U S Census Bureau.

In fact, excluding this contract second quarter revenues and security solutions grew 48%.

In part as a result of the new pilot program awarded by a confidential customer to Telos I'd.

Early in the second quarter, which we mentioned on our last earnings call.

As well as 18% growth in our exact solution.

And 12% growth in telescopes.

Growth in our exact solution and Telos coast reflects both the expansion of relationships with pre existing customers as well as new wins and increased commercial adoption of our offerings as John explained earlier.

Total second quarter revenues for our secured networks business also grew approximately 48% from $14.4 million in 2020 to $21.4 million in 2021.

This significant increase was mostly driven by two large programs issued under the U S Air Force net sense contract vehicle.

The rollout began for a $66.4 million contract to provide security modules and kits to support the upgrade of the theater Deployable communications Black core architecture.

And site work began on a five year $45 million U S Army contract to support the migration and modernization of telephone communications systems throughout the entire Pacific region.

Secure networks continues to wind related business as a result of these programs and expect work on these programs to continue into 2022.

Before turning to our profitability metrics I would like to provide some color on our stock compensation expense, which will be mentioned throughout my remaining comments about the quarter.

As a newly public company stock compensation is an effective tool to retain existing staff post IPO.

To attract seasoned professionals.

And two enhanced incentive compensation.

As a private company, we recognized a de minimis amount of stock compensation expense in 2020.

But starting in the first quarter of 2021, we began amortizing stock compensation expense through our income statement as a result of an initial round of post IPO grants made in the first quarter.

Because of this expenses new for 2021 and because it is non cash.

We believe it is appropriate to provide adjusted metrics, excluding the impact of stock compensation expense were around equipment.

This year, we recorded $13.7 million of total stock compensation expense in the first quarter.

And $21.3 million in the second quarter.

We expect stock compensation expense to step down to approximately $13 million to $14 million in each of the third and fourth quarters of this year.

With that backdrop, let's turn to profitability and cash flow.

Second quarter gross profit increased 17% from $17.6 million in $2000.20 million to $26 million in 2021.

Cost of sales included $795000 of stock compensation expense, which did not exist.

Here.

Second quarter gross margin increased 290 basis points from 36, 2% in 2020 to 39, 1% in 2021 due to gross margin expansion in both security solutions as well as secured networks.

Excluding the impact of stock compensation expense during the quarter gross profit was $21.4 million and gross margin increased 440 basis points to 46%.

SG&A and R&D expense increased by $26.6 million to $39.1 million in the second quarter.

Out of the $26.6 million increase $25 million was attributable to stock compensation expense that we did not have in the prior year period.

The balance of the increase was driven by previously discussed investments in our Salesforce marketing and channel staff, which will drive ongoing high margin revenue growth and rapid expansion into commercial international state and local markets.

We're also making investments in G&A functions to support our post IPO business model and investments in R&D to ensure our customers have the world's most sophisticated cyber cloud and enterprise security solutions and that these solutions continue to address new and evolving threats for years to come.

Operating income before stock compensation expense was $2.8 million compared to $5.1 million in the prior year period.

Operating income benefited from higher gross profit driven by sales growth and gross margin expansion offset by investments in R&D and SG&A all of which I have outlined previously.

Adjusted net income increased from $262000 in 2020 to $2.6 million in 2021.

The increase in adjusted net income was primarily driven by the same factors as operating income discussed previously but also.

Benefited from the elimination of $1.8 million of interest expense and the elimination of $2.8 million of minority interest compared to the same period last year as a result of the actions we took to deleverage our balance sheet and simplify our capital structure post IPO.

The corresponding adjusted earnings per share increased from <unk> <unk> per share to <unk> <unk> per share.

EBITDA adjusted for the impact of stock compensation expense was $4.2 million compared to $6.4 million in the second quarter of 2020.

The decrease is attributable to the previously mentioned investments in SG&A and R&D, partially offset by the increase in gross profit.

We generated $3.5 million of positive cash flow from operations during the quarter compared to a cash outflow of $904000 in the second quarter of 2020, and a cash outflow of $9.3 million in the first quarter of 2021.

The improved cash flow was primarily the result of higher adjusted net income.

And favorably working capital dynamics during the quarter.

Now I will turn to our financial outlook for the year.

We are reaffirming our guidance for the full year, including total revenue in the range of $283 million to $295 million.

And adjusted EBITDA in the range of $33 million to $36 million.

Our guidance implies year over year revenue growth in the range of 89% to 102% for the second half of the year and.

57% to 64% for the full year.

We're forecasting approximately 40% to 50% sequential revenue growth from the second quarter to the third quarter.

With additional sequential revenue growth from the third quarter to the fourth quarter, primarily driven by TSA pre check.

Our overall guidance remains unchanged. However, the composition of our sales growth in the second half has evolved.

We previously forecasted approximately $8 million of TSA pre check revenues in the third quarter and $30 million in the fourth quarter.

We're now assuming no revenues from that program in the third quarter and approximately $25 million in the fourth quarter due to short term program delays as discussed earlier by John.

Similarly, we previously assumed approximately $8 million of revenues from the centers for Medicare and Medicaid services in each of the third and fourth quarters.

But we're now assuming no revenues from that program this year.

So overall, we're assuming approximately $30 million of revenues from those two programs will be recognized in 2022 instead of during the second half of 2021.

Keep in mind. These are short term customer driven delays that impact the initial timing of revenue at the beginning of these programs during the second half of 2021.

The value of these programs and our out year expectations have not changed these remain multibillion dollar profitable long term programs.

We have a solid base of business that supports our full year guidance notwithstanding the short term delays in CMS and TSA pre check.

The revenue that has been pushed into 2022 has been replaced by new customer wins and expansion of existing customer relationships across all of our businesses as John discussed earlier.

These successes are further supported by our rapidly expanding new business pipeline.

In closing, we're very pleased with our performance this quarter, which was underscored by 48% adjusted revenue growth 290 basis points of gross margin expansion and $3.5 million of cash flow from operations.

And we are well positioned for 2022 with multiple large programs launching in a fully resources sales and marketing team building, our channel program and cultivating a strong pipeline of opportunities and commercial international state and local markets.

With that John Ed and I are available to take your questions. Operator. Please open the line for Q&A.

And thank you ladies and gentlemen.

As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key please standby we compile the Q&A roster.

And our next first question comes from Alex Henderson from Needham.

Your line is now open.

So.

Breathing a sigh of relief I thought you guys were going to have to lower the guide for the year. This is a pretty good outcome.

The degree to which TSA pre was late.

And the risk to.

Medicare and Medicaid.

So I was wondering if you could talk a little bit about.

What it is.

His exact and goes just replacing it is network solutions, that's replacing it.

Sure.

As the revenue streams coming from.

And given you had expected to get to double digit operating margins in the back half of the year.

That something that you still expect to be able to obtain without.

The TSA in Medicare Medicaid programs.

Hey, Alex This is John Thanks for your question. Thank you for your comment.

The way to think about it in general is that our mix our revenue mix will be about the same as we projected from an IPO point of view, which means that security solution should be around 60% of the revenue going forward, which is going to be a result of a mix of those three areas plus debt.

<unk>.

Confidential customer that we talked about before doing more work with us.

Because we're we've done well with them.

So it's across the board Youll see Youll see growth really within our secured networks group as well.

So.

I believe that we will have a good solid second half of the year.

Okay.

Ghost as an exact.

Color on.

Thats, obviously running well ahead of forecast.

To offset the losses I think if I do the math right.

Five.

$30 million.

The fourth third quarter and.

Going into the fourth quarter.

Basically what it is is all of the security solutions components are doing better than plan from a pipeline point of view and then the second part is with secure networks as well, we're seeing good growth across the board.

Okay and then the.

On the margin comments.

Any re margins or the margins arent going to be at least as good then.

That's why we have held our guidance we wanted to make sure that the market understands that we believe the mix will hold and as a result, the margins would.

Okay.

To the extent that TSA pre in Medicare and Medicaid.

Starting.

Sort of.

Think about it as a physics battery value problems started later does that change the.

Expectations for 'twenty two.

Or alternatively the.

The fact that it started later has no impact because you had expected.

The volume in 'twenty, two either in either case.

Tom.

Talk to the magnitude of <unk> 22 based on the difference in timing.

So one part of that Alex is going to be obviously, CMS and and.

Pre check some components of that pushing but the other component of keeping the back of your minds eye.

As I think we assumed 600.625000 transactions I think it was for 2022 and I think that's going to prove to be conservative.

Okay. So it sounds like you think that you will still hit the.

The original expectations for TSA premium Medicare Medicaid in 'twenty two.

Yes.

Based on yes, better transaction volumes and whatever share despite the delay in the start time.

Correct that right.

Perfect and then.

One last question and then I'll see the floor.

As im looking at.

This delay.

Does that help you at all or hurt you at all relative to the to the competitive balance between the.

Your offering in that arena and your competitors in that arena does it give you more of an opportunity.

Yes, because the exact tie in or does it have any impact at all or is it is not impacted.

So from our standpoint, it allows us to hit the ground running.

So it allows us to prepare ourselves we will have several hundred sites up and ready.

As a result of that I think it gives us.

A better chance of much faster success.

Alright, I will cede the floor. Thanks.

Yes.

Thank you and our next question comes from Daniel Ives from Wedbush Securities. Your line is now open.

Hi, This is Sam brand days on for Dan.

My question is can you speak on this.

This surge of federal spending that we're seeing on cyber towards yearend.

How does this environment compared to the last few years in terms of spending thanks.

Youre welcome.

So.

I would say from a standpoint of our year. This year I would say, it's going to have little impact. This year. However, it will have impact over the next year and two years.

Even though the government has put money to work you still have to go through what's called the contracting process and that inevitably tends to slow things down.

So from a standpoint of planning, we're not planning on additional revenue out of that.

That plus up if you will from the government if it happens great.

But we're not planning on it we are however, all over it.

And we're making sure that we mine all of the opportunities that we see out there, which there are many.

But we're also realizing we have to all realize that there is a contracting process that goes behind when they when they pushed dollars into these kind of big programs.

So the pipe the way to think about it for all of you on the line here is our pipeline is getting a lot bigger.

In general as a company.

Great. Thank you.

Thank you.

Thank you and our next question comes from that Cummins from B Riley security.

Yes.

Okay.

Yes, Hi, Hi, John and Mark Thanks for taking my question I appreciate the time here.

I mean, John just given that the business remains on track here and reaffirming your full year outlook can you just give us a little bit more insight into why we have been seeing this string of insider selling of late.

Sure.

As I've pointed out to certain investors that have call me about it and and spoken to some of the research some of the people and research as well.

One of the great assets. We have here is we have longevity here and so a lot of people here with a lot of tenure.

And they have never sold a share so we expected there to be some selling and these plans. The so called <unk>. One plans were put in place months ago. So when they start their process of selling its kind of like it's out of their control at that time.

So I think that's where it really comes from.

It's not a it's not a question about the company or its condition.

It's more really getting liquidity for.

My own employees, who have an opportunity to diversify most of their wealth out of the company and put it prudently into other investments as well.

Understood. That's helpful and also encouraging to hear the progress we've seen with the expansion on the sales and marketing and the channel team I mean can you give us some updates on kind of the early progress that you've seen there and expectations from that expanded group as we go into the second half of the year.

Yes, so just to remind everybody we started with <unk> I think we're about 66 now something like that plus 50 or something.

So we're up about 50 people.

We're seeing I think the partner ecosystem is going to be much broader than we were.

Expecting.

We are we think that will pull in some opportunities into the early part of 'twenty two maybe the late part of 'twenty one.

And.

And we're seeing that it's also translated commercially which is very important to us as you. All know so I would say again this is a.

Reflection of a much much faster growing pipeline for us.

As a company and remember every time when we get into an account the whole idea of once you get in is expanded over time.

So we're continuing that process as well, which I think is helpful for the company obviously.

Understood and it sounds like with the ramp in revenue we should see the.

Margin expansion as well in the second half of this year. So mark should we expect the company to continue to be free cash flow positive as we see this ramp in the back half of the year.

Yes, that's certainly our expectation for the full year is that.

Based on our guidance even at the low end, we're expecting to be cash flow positive.

In the absence of an unusual end of year ramp in working capital, we would which we're not expecting we would expect to be cash flow positive for the year.

Understood well, thanks again for taking my questions and congrats again on the solid quarter.

Thanks, guys. Thanks.

Thank you and our next question comes from.

<unk> Hall.

<unk> from Northland capital.

Your line is now open.

Thank you can you guys hear me.

We can yes, sir okay great.

Okay. So yes.

<unk> my sentiments for the great quarter and great to see the reiterated guidance given the TSA pushout.

<unk> of that.

So some work with confidential customer. This is the same customer that was announced during the <unk> call that was the contract that was worth up to 45 correct.

That was worth up to 45 million Thats correct now.

It was $35.35 million.

I'm, sorry that celebrity of $5 million.

Right Yep Yep Yep, Okay, and so what this confidential customer the composition of their work.

It sounds like it's heavily weighted towards the <unk> hundred 16, but there is a bit of exact angle similar as well and therefore, that's why you are maintaining that margin profile as well.

Yes, the way the way to think about it.

Think it's <unk>.

$75.25.

In terms of the mix roughly.

The whole secure networks is roughly 25% of it and.

The rest of the work as security solutions with about $25 million of that.

$34 five for $35 million being recurring.

Okay.

And then you made a.

Other interesting comments that the same comment that you made from prior call.

Wider v shaped.

Funnel.

Two questions with that one is that isn't even wider.

Wider v-shaped funnel that you referred to on the prior call and then can you just.

What you mean by wider do you mean like a more diverse set of customers or something else.

It's really it's really a combination of depth breadth and size.

So the size of the opportunities are getting bigger.

The duration of the opportunities are getting longer.

The type and flavor of opportunity meaning.

Security solutions versus secured networks is broadening its happening and sort of across the board and it's not really.

It's not in one group or another it's happening across the board and I think Thats correct, yes.

Yes in the channel and the fact that we've got a lot more people out there.

Doing their jobs as well as we are in.

General partners, who also bring our portfolio of customers on there and so that helps us helps to broaden the pipeline even more and just to put a fine point on that we talked about DLT, but there are others. Other large distributor types, who have hundreds and hundreds of contract vehicles of their own.

And basically from our point of view, we're dealing with one.

Buyer.

The distributor, but then they have hundreds of contracts of their own that they would as orders come in and administer on our behalf, but from our point of view, we're dealing with one entity. So again, it's that it's another flavor of the channel strategy that we've been discussing with everybody since the IPO.

Okay, Great and then anticipate clearer.

The widening.

Widening.

A trend that has happened from first.

End of the fourth quarter and during the first quarter to second quarter, It's not just had one delta step.

That's right yes.

That's right.

Great and then finally.

I think a very important line in the press release, we announced new and renewed contracts a bunch of impressive commercial names such as AT&T Accenture iron at cyber security Comtech.

Which of these were actually new.

I think those are all new yes, those are all new homes.

They were all new so and has that generated through the channel program or is that correct.

Correct. It was all direct newhall.

But in each in each case, they start out as internal.

Use kind of things and then they plan on expanding channel remember, we want certain of our partners to do like as an example in accenture.

Excuse me, we want them to build out their own capabilities of many exacta.

So that as we sell we're selling more software as a service versus solutions as a service.

Right right well does sound like these would be important beachhead customer.

Within each.

Commercial vertical that should help the channel program is that a correct assessment.

It's not an correct thats correct.

Okay, great. Thank you.

Youre welcome. Thank you.

Yes.

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

Hello, Keith.

If your phones on mute could you please on mute it.

Okay.

Next question, Keith Bachman from bank of Montreal.

Can you guys hear me.

Hey, Keith.

Alright, yes, sorry.

A little bit of technical difficulty today, I had little trouble getting into the call too. So I might have to do a little bit of repeat but I want to start on TSA. When could you revisit I had a few questions. Around this was is the delay of supply or demand driven delay what I mean by that was there something on the technical side of rolling out the program from the <unk>.

<unk> side or was it.

Purely demand driven.

Delay and that there is fewer.

Business travelers Chesapeake who are primary driver of the TSA program. If you could just clarify.

Sure Keith I'm glad you're asking that question. Thank you.

What I'd say is that it's driven by virtue of the fact that we've had as everybody is well aware a bunch of different.

Cyber security hacks.

And that has caused the TSA to take a step back to make sure that their own systems are fundamentally won't have a problem by any third parties coming after them. So that's why there's more supply.

That's the main reason why this is all being pushed out.

Okay.

Its programmatic it really has zero to do with demand.

The demand is actually there still that hopefully will hold but.

The demand is definitely there still.

Okay.

And I want to stick with it because right now if I go on.

And this is a competitive landscape question how does this evolve if I go on the TSA site.

Takes you too okay.

Universal enroll pre.

Graham how does the TSA to the government.

Here with the distribution of work.

As as the program rolls out more in earnest in other words is it going to be a redirect to a competitor or do you get a fair shake out at.

Does the distribution of opportunities occur so to speak as the program unfolds more in earnest.

So first and foremost they've said theres going to be equity amongst between and amongst the different players, but Keith we don't we've never really expected that we expect that we're going to have to compete on the merits.

It's going to have to be that's how we're planning on this as competing on the merits.

But how do you generate.

Okay.

How do you think you win that business.

From the three other participants excuse me to other participants in the market.

Sorry.

Keith This is Ed some for my on the new customer side of it there is a direct marketing play here, where we will be marketing and Theres also points of presence where.

We will be establishing John mentioned earlier, a couple of hundred expanding to eventually thousands of sites for people to GAAP to apply.

So that right.

There is a distinction between competition, where we're at and where they're not and so forth and also from a marketing perspective.

We feel very comfortable with that program and what we're going to be doing there on the on the Recompete side.

There are some nuances as well as terms of benefits that potentially come to one.

It wont using one youre enrolling versus another.

As John mentioned, we're not quite sure how it's going to play out on the site.

But we still anticipate between our marketing adventures will be also marketing through distributors.

Two customers that are both renewals as well as.

New customers that will be able to do direct impact there as well.

The way these things we see it playing out at this point.

And then just to remind.

To remind you the universal enrollment contract is very different than the expansion contract Keith.

In that.

<unk> the provider of that program.

Which is the <unk>.

The government directly.

The full amount of the of the <unk>.

Cost of pre check.

And then the government then issues a check back to them.

Per sort of government terms over usually the government paid within 60 to 90 days.

In our case in our case, we're taking at the point of sale, which allows us to do things like do discounting that you really can't do on universal enrollment.

They have to pay the government a certain amount of money every with every transaction in our case, we pay the government.

A smaller fee, but we take the entirety of the $85 and are able to use it in a way where we get paid upfront, but b. We're also able to do things like provide no cost incentives, which include things that I've referred to in the past like.

<unk>.

Discounts on various websites for purchasing merchandise et cetera, and then those merchandisers pay us on the backend which becomes another source of revenue for the company. There is a ton of additional activity behind that that we just don't get into because this is a <unk>.

<unk>.

For them. So it's very if you will.

Haile.

We hold it very close all of the various initiatives we have internally.

But we do think that out the chute will be very well prepared to execute from Q4 and beyond as I mentioned earlier, we will have a couple of hundred or few hundred actually up to a few hundred sites by by the fourth quarter anyway, which puts us into a running start mode.

Got it got it Okay question number two relates to the previous question.

Was asked by somebody else, but on the commercial side could you just give us an update on either the percent of perpetual bookings or pipeline or revenues. How you see that today, how do you see that unfolding at your own.

Okay.

And let's just keep TSA out of commercial definition, yes, I get your point I get your point I think I think at the end of the day, we will probably be somewhere around 90.10.

By the end of 'twenty one.

I think by the end of 'twenty, two we're going to be around 80, 20, if you don't count TSA pre check.

Okay.

Okay and that could that could change very rapidly based on the channel and based on the distribution models.

So remember the numbers that we have are based on channel and the commercial.

<unk> not having any impact.

<unk> 2022 until the second half of the year of 2022.

So my our.

Our assessment will be refreshed once we go through our end of year planning for purposes of full year 2022, and then come out with our <unk>.

<unk> for full year 'twenty two at some point in the not too distant future.

Okay. Okay. My final question is distress.

And by that his.

It's understandable that as <unk>.

Then.

Paid Medicare pushes that.

There could be some downward pressure on previous guidance youre maintaining your.

Your guidance.

Which.

It sounds like the pipeline is robust enough.

Maintaining that but.

I think investors might come away with a.

They leave a tall hill to climb.

That is to say good management leave a tall hill to climb to even make those current guidance and see why 'twenty, one given that two of our largest programs.

Are being pushed into 'twenty two.

I think a different way to ask that question just on overall.

Maybe if you could just characterize how the pipeline has evolved from say December 31, two.

15th So today is it up 15% is about 20% is there any way to think about that because just.

Again, it's towards the larger programs are pushed you're maintaining guidance I think the natural question is going to be what stress did you, thereby leave with.

On the <unk>.

It's a great. It's a great question Keith.

And another one I am glad you asked upfront.

Sure.

One of the things that market. His presentation was he gave you a sense of what we think Q3 looks like.

That's without CMS, that's without pre check so that gives you. Some sense that gives you some sense of the way that we've been able to fill in that hole if you will.

With with existing and or new customers or expansion of existing customers.

If I were to if I were to estimate what that would be for Q3.

Probably.

15 to 20.

Revenue.

Okay.

Yeah.

Im saying the.

The amount, where we're covering from CMS and pre check.

It's roughly I think 50 million Bucks.

Roughly yes.

Alright.

Yeah, So we're covering a $15 million as a whole with other business.

Which has which has the same or better margin profile than then.

These programs on their own.

And the margin profile again, that's interesting and then.

I say it a different way it comfortable with Q3 and Q4 that.

We are we're comfortable as of today with Q3 and Q4.

And yes, so that's why we reaffirmed guidance otherwise we wouldn't have now I'll say it a different way.

Had we been up and running with both programs, we would've guided up.

At the end of the day, but any.

And an overabundance of being cautious we basically just said.

Going to stick with what we're what our guidance is.

Okay, I will cede the floor of many thanks.

Thank you.

And thank you and our final question comes from Katherine <unk>.

Your line is now open.

Oh, Thanks for taking my question can we dive into the gross margins I might've missed it when you talked about.

And really trying to understand better.

The solutions versus network gross margin.

Sure Catherine Kathryn I'd like you to meet Mark Venza, who is our CFO and great to hear hear you again.

So mark pleased to dive into the gross margin for Catharine Hey, Catherine. Thank you for the question. So.

I don't think we've been giving out.

Precision around gross margins at that level, but what I can say is that security solutions.

Gross margins are.

Tens of.

Yes.

Nearly double let's say.

Between security solutions and secured network. We also saw pretty significant gross margin expansion from the first quarter to the second quarter in both security solutions and secure networks.

And then in addition to that we also saw some mix benefit from <unk> <unk> with security solutions.

From 40% of total revenues in the first quarter to 60% in the second quarter. So that 3500 basis points of gross margin expansion that you saw sequentially from <unk> to <unk>. It was both mix between security solutions and secured network as well as gross margin expansion within each of those two businesses.

A fine point on it just everyone is aware Q1, you will everyone recall, our secure networks business is more like 59% of revenue and our security solutions business is more like 41% and there was concern that the model.

Was wrong it was off and we said no. It's really just a point in time, if you look where we are today in terms of revenue mix, it's where we were thinking it should be which is much more like around 59% security solutions and.

40%, 41% as secure networks, so that that is going to have the.

The impact of obviously affecting <unk>.

Gross margins not just on a dollar basis, but as a percentage of sales.

Alright, and that helps because I agree I remember the year networks was.

Thank you frequently discussed last quarter. So thank you very much.

Youre welcome Kathryn Thank you for your question.

And thank you and I am showing no further questions.

I would now like to go ahead and turn the call back to management for closing remarks.

Thank you very much operator, I just wanted to say how much we appreciate everybody.

And their belief in the company and what we're up to as an organization.

I try to avoid watching the stock price, but of course occasionally they do it and its just its a crazy world out there is all I can say I'm hopeful that we will just continue to hit numbers and perform and over time people will begin to trust that the kind of information that we get people in the kind of growth that we perceive is out there is going to actually happen in there.

I would like people to remember that we have very long term contracts in 2022 is going to be a bang up year in my opinion, so have a great night, everybody and we'll talk soon.

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

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Good day, and thank you for standing by and welcome to <unk> Corporation through Q 'twenty One earnings 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. Please be advised that today's conference is being recorded if you ask a question. During the session you will need to press star one on your telephone.

Wire any further assistance. Please press star Zero I would now like to hand, the conference over to Burnley Johnson <unk> with Blue Shore Group. Please go ahead.

Yeah.

[music].

Okay.

Good afternoon. Thank you for joining us to discuss Palo Corporation second quarter, 2021 financial results.

With me today is John Wood, CEO, and chairman of Telus and Mark <unk> CFO of Atlas at Williams, CFO will be joining us for the Q&A.

Let me quickly review the format of today's presentation, John will begin with some brief remarks on our second quarter 2021.2021 result, and tell us your strategic priorities and Mark will cover the financials and guidance.

Then we'll open up the line for the Q&A session.

<unk> press release.

Earlier today and is posted on <unk> 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 laws. 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.

The comments made during this conference call and our SEC filings.

Not undertake any duty to update any forward looking statements.

In addition, 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 this financial performance.

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

Well, thank you Bradley wells.

Welcome everybody to our second quarter 2021 financial results Conference call.

I'm proud of our execution this quarter.

We continue to deliver revenue growth and when meaningful contracts with.

With both federal and commercial customers.

We expect our new business pipeline to expand and multiplied as we continue to make key investments in resources and partners.

We also delivered 17% growth in gross profit.

290 basis points of gross margin expansion and positive cash flow.

As the company announced on July 19th Michel <unk> Who's been the CFO of the company for nearly two decades.

Stepped back from rural marking the first phase of our path to retirement.

To ensure a smooth transition Michele will stay on the senior executive team and will work on special projects to ensure we are more efficient as a company as we continue to grow.

Mark Penza, former Vice President of Honeywell has been appointed executive Vice President and CFO.

Mark brings over 20 years experience in Investor Relations business development financial planning and analysis financial strategy mergers and acquisitions and capital markets.

I'm optimistic about the leadership and fresh perspective that Mark will bring to the organization and I'm very excited to have him onboard.

You'll have a chance to hear directly from Mark later in this call during the CFO update and for Q&A.

And now I'd like to share with you our recent business highlights and updates.

To start I'd like to update you on our growing sales organization.

Since the beginning of 2021, we have tripled our sales marketing and channel team and continue to attract top talent.

We will continue to make these investments in sales and marketing as we broaden our market reach.

World Class Security solutions.

DLT solutions, a tech data company and Presidio Federal were among the first partners to join the program.

In signing DLT as a distributor we gained access to their reseller ecosystem without the need to sign and manage all the resellers that directly with tell us.

Were actively building go to market plans with DLT and their partner ecosystem as well as with Presidio.

From an operating perspective, we saw continued adoption of our solutions to existing customer expansion and new customer acquisitions.

I'll now discuss highlights of these activities.

At the end of July.

We were awarded a $19.4 million dollar expansion.

The contract by the U S Air Force for our exact solution.

With this new contract the Air Force now owns a license for both exacta $3.60 and exact Iot.

This is another example of how we've been able to land a contract and continue to expand upon it based on our current customer success.

We've added a third cloud service provider, which we will be providing additional details on soon to our roster of cloud customers using exactly.

We're proud to have strong relationships with Amazon Web services, and Microsoft Azure, and we will continue to expand to other cloud service providers and SaaS providers in the future.

In the second quarter, we saw enterprise adoption of our exact a 360 offering by the department of the interior, who selected exact over other commercial and government off the shelf software solutions.

In addition, another classified customer expanded our contract while extending our period of performance.

We were awarded a renewal and expansion from a classified government customer for the continued use of tellers ghost.

Through this award <unk>.

The total value of the contract increased by $13.5 million to $24.8 million.

This customer also awarded US the data analytics support task order totaling $1.1 million.

Other significant renewals and expansion business include.

The CIA awarded <unk> a contract through June of 'twenty, three providing our exact solution in support of the CIA is new multi cloud contract.

A major intelligence community customer awarded <unk> and <unk>.

Option through May of 2022, providing our exact solution.

The U S Department of state awarded tell us another contract through 2022, providing our exact solution.

In the U S space and missile command awarded tell us and expansion of their existing exact solutions contract as well.

In addition, we continued to see increased commercial adoption of our security solutions with new and renewed contracts from AT&T Collins Aerospace Accenture Northrop Grumman vibrant health Iron net cyber security and contest Telecommunications Corporation.

I'd also like to provide an update on the TSA pre check contract.

On July one TSA said in a public notice that they expect the additional TSA pre check enrollment providers.

To become available in 2021.

While we do not control the decision making timeline within TSA.

We do control our readiness to move out once the authority to operate is issued.

We remain confident in our service launch in 2021.

Now next I would like to highlight recent updates within our Exacta Telos Ghost Niv Trust 360 solutions.

On June 30, we announced a new version of exact Io, which.

Which expands our control mapping capability, which is really needed by regulated industries to address audit fatigue.

We followed on August 11th with the release of a new version of exactly 360.

Which offers multiple data exchange protocols to enable machine to machine interaction for more efficient collaboration regulatory reporting and reciprocity.

These new capabilities increased commercial and international opportunities for Exacta, where there is increasing demand for automation.

These capabilities also address fed ramp acceleration requirements specified in the recent presidential cyber security executive order.

The heavily regulated financial services industry require substantial automation to keep up with the multiple multitude of disparate security and privacy related content.

Exactly continues to provide significant value to this market as evidenced by our recent renewal by a major insurance company.

This fortune 50 organization uses exact io to aggregate the extensive data needed to manage it asset inventory and vulnerabilities, while providing automated control mapping to multiple sets of standards.

This ultimately reduces the burden and strain on their internal security operations and compliance teams.

In the second quarter Telos Ghost tell US is virtual Obfuscation network won the 2021 fortress Cyber Security Award for network security.

It's always an honor to be recognized alongside other companies advancing the cyber security agenda.

Over the past year tell us has seen increased success in interest in Telus goes within the education Internet of things banking health care and critical infrastructure markets with developments, including our strategic partnership with Johnson controls to integrate <unk> into their.

Open Blue cloud view Gateway, which supports a worldwide cloud based video network used for surveillance and physical security.

The integration of this solution will be completed in Q3.

Tell us also anchor partnership with army alert to integrate <unk> into Aldi alerts gun detect.

The industry's first AI powered visual gun detection solution.

The integration of this solution will also be completed in Q3.

Johnson controls anomaly alert integrations will drive revenues for 2022.

Since last we spoke tell us as it has advanced our ability to serve the education market.

Of note, we finalize the integration of <unk> ghost in the Chromebooks.

Nearly 60% of computers purchased by K 12 schools in 2018, where chromebooks.

And it's safe to say that number has increased significantly due to the rapid switch to remote learning and response to the global pandemic.

Tell us this goes to enabled chromebooks are easy for K 12 institutions to deploy and manage and we're glad that to add that capability to protect students privacy with the integration of <unk>.

Beginning this month, a large Virginia School district will pilot the <unk> Ghost student privacy solution.

This solution, we formally announce later in Q3.

On July 30th tell us acquired the assets and patents of Diamond fortress technologies.

And we will integrate the Onyx touchless fingerprints software with our IV Trust 360 platform.

You see onyx eliminates much of the friction involved in biometric data gathering by leveraging a mobile device's camera to capture the user's unique fingerprint.

This technology enables the fast and easy collection of fingerprint biometrics and will allow us to better serve our growing customer base at both the enterprise and consumer levels in verticals, such as transportation health care financial services and other industries.

This acquisition solidifies <unk> position in an expanding market with contactless biometrics technology expected to grow from approximately $7 billion in 2019 at.

At a compound annual growth rate of 20% from 2020 to 2027.

Put simply.

<unk> allows people to get their fingerprints taken in the comfort of their own home versus having to go somewhere.

Now, let me turn to some comments on the industry landscape and growing market opportunity.

As extensively reported in the media a number of cyber attacks targeting various sectors in the U S have pushed president Biden to put cyber security at the center of his agenda.

This includes not only the President's recent executive order on cyber security and subsequent actions such as new requirements for pipeline security.

But also includes some legislative initiatives in Congress, which could have significance for Telus.

Here's some examples.

The bipartisan infrastructure package supported by the White House and recently approved by the Senate.

For increased funding and other incentives to address the cyber security needs of U S critical infrastructure.

The package also provides funding for cyber security grants to state and local governments.

Additionally, the pending Senate version of the FY 2022 defense authorization Bill not.

<unk> not only incorporates president <unk> full requested level of cyber security funding for the defense Department, but it goes further to add funding above the requested level.

And in FY 2022 Appropriations Bill approved by committee in the house with boost funding for DHS, Cyber security and infrastructure Security agency or <unk> by nearly 20% over last year's appropriation level. This includes.

<unk> increases above the president's request for infrastructure, cyber security and risk management operations.

These government actions haven't changed anything for tell us in the near term. However in the long term they will provide the company with far more opportunities and will grow our pipeline.

<unk> is actively engaged in this effort by participating in the niche sponsored workshops, which will help shape. The final version of the standard.

The NIST CSF ransomware profile once finalized is something that we plan to operationalize via our exact solution.

So in conclusion, we had a strong quarter in our company's exceptional results continue to be driven by increasing demand for our advanced security solutions and our growing sales channel.

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

I'd also now like to pass it over to our CFO Mark <unk>.

Who will discuss the financials and guidance in more detail.

Mark over to you Budd.

Thank you John and thank you everyone for joining us today.

First and foremost I'd like to begin by saying, how thrilled I am about the opportunity to join tell us.

Im excited about the numerous opportunities ahead to execute for our customers partners and shareholders and to work with this team.

I am pleased with our second quarter results underpinned by strong revenue growth.

Gross margin expansion and positive cash flow.

Let's start with revenues.

Year over year reported second quarter revenues grew 8% from $48.6 million in 2020 to $52.6 million in 2021.

Excluding our contract with the U S census Bureau, which is ramped down as planned since the same period last year <unk>.

Total second quarter revenues grew 48%.

What was delivered in the first quarter per our customers request.

If the delivery hub shipped during the second quarter as originally scheduled second quarter revenues would've been approximately $57.4 million sequential growth would've been 13% instead of negative 6% and year over year growth would have been 18% instead of 8%.

But in either case first half results are the same with reported revenues up 24%.

Now, let's turn to our individual businesses.

Total second quarter revenues for our security solutions business declined 9% from $34.2 million in 2020 to $31.2 million in 2021.

This decrease was driven by nearly $13 million of lower sales in <unk> on the contract with the U S Census Bureau as mentioned previously.

This contract recognized peak revenues in the second quarter of 2020, and largely ramped down according to plan through the second quarter of 2021.

New contracts in <unk>.

Our exact solution and telescopes are quickly back filling the ramp down on the contract with the U S Census Bureau.

In fact, excluding this contract second quarter revenues and security solutions grew 48%.

In part as a result of the new pilot program awarded by a confidential customer to Telos I'd.

Early in the second quarter, which we mentioned on our last earnings call.

As well as 18% growth in our <unk> solution.

And 12% growth in telescopes.

Growth in our exact solution and Telos coast reflects both the expansion of relationships with preexisting customers as well as new wins and increased commercial adoption of our offerings as John explained earlier.

Total second quarter revenues for our secured networks business also grew approximately 48% from $14.4 million in 2020 to $21.4 million in 2021.

This significant increase was mostly driven by two large programs issued under the U S Air Force net sense contract vehicle.

The rollout began for a $66.4 million contract to provide security modules and kits to support the upgrade of the theater Deployable communications Black core architecture.

And site work began on a five year $45 million U S Army contract to support their migration and modernization of telephone communication systems throughout the entire Pacific region.

Secure networks continues to win related business as a result of these programs and expect work on these programs to continue into 2022.

Before turning to our profitability metrics I would like to provide some color on our stock compensation expense, which will be mentioned throughout my remaining comments about the quarter.

As a newly public company stock compensation is an effective tool to retain existing staff post IPO.

To attract seasoned professionals.

And to enhance incentive compensation.

As a private company, we recognized a de minimis amount of stock compensation expense in 2020.

But starting in the first quarter of 2021, we began amortizing stock compensation expense through our income statement as a result of an initial round of post IPO grants made in the first quarter.

Because of this expenses new for 2021 and because it is non cash.

We believe it is appropriate to provide adjusted metrics, excluding the impact of stock compensation expense were wrong with them.

This year, we recorded $13.7 million of total stock compensation expense in the first quarter and.

And $21.3 million in the second quarter.

We expect stock compensation expense to step down to approximately $13 million to $14 million.

In each of the third and fourth quarters of this year.

With that backdrop, let's turn to profitability and cash flow.

Second quarter gross profit increased 17% from $17.6 million in $2000.20 million to $26 million in 2021.

Cost of sales included $795000 of stock compensation expense, which did not exist.

Here.

Second quarter gross margin increased 290 basis points from 36, 2% in 2020 to 39, 1% in 2021 due to gross margin expansion in both security solutions as well as secure networks.

Excluding the impact of stock compensation expense during the quarter gross profit was $21.4 million and gross margin increased 440 basis points to 46%.

SG&A and R&D expense increased by $26.6 million to $39.1 million in the second quarter.

Of the $26.6 million increase $25 million was.

Pivotal to stock compensation expense that we did not have in the prior year period.

Operating income before stock compensation expense was $2.8 million compared to $5.1 million in the prior year period.

Operating income benefited from higher gross profit driven by sales growth and gross margin expansion offset by investments in R&D and SG&A all of which I've outlined previously.

Adjusted net income increased from $262000 in 2020 to $2.6 million in 2021.

The increase in adjusted net income was primarily driven by the same factors as operating income discussed previously but also.

The corresponding adjusted earnings per share increased from <unk> <unk> per share to <unk> <unk> per share.

EBITDA adjusted for the impact of stock compensation expense was $4.2 million compared to $6.4 million in the second quarter of 2020.

The decrease is attributable to the previously mentioned investments in SG&A and R&D, partially offset by the increase in gross profit.

We generated $3.5 million of positive cash flow from operations during the quarter compared to a cash outflow of $904000 in the second quarter of 2020, and the cash outflow of $9.3 million in the first quarter of 2021.

The improved cash flow was primarily the result of higher adjusted net income.

And favorably working capital dynamics during the quarter.

Now I will turn to our financial outlook for the year.

We are reaffirming our guidance for the full year, including total revenue in the range of $283 million to $295 million.

And adjusted EBITDA in the range of $33 million to $36 million.

Our guidance implies year over year revenue growth in the range of 89% to 102% for the second half of the year.

And 57% to 64% for the full year.