Q4 2021 Telos Corp Earnings Call

Good day and thank you for standing by welcome to tell US corporations fourth quarter 2021 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 to ask a question. During the session you will need to press.

Star one on your telephone please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to Christina Mr. <unk>. Please go ahead.

Good morning.

Thank you for joining us to discuss <unk> Corporation's fourth quarter and full year 2021 financial results.

With me today is John way, Chairman and Chief Executive Officer of Tallow, and Mark <unk>, Chief Financial Officer of Tel Aviv.

Let me quickly review the format of today's presentation.

John will begin with brief remarks on our 2021 year end results and tell us the strategic priorities and Mark will cover the financials and guidance for 2022.

Then we will open the line for questions and answers remark Griffin Executive Vice President of Security solutions will also join us.

The earnings press release was issued earlier today and is posted on the <unk> Investor Relations Web site, where this call is being simultaneously webcast. Additionally, we have provided presentation slides on our Investor Relations website.

Before we begin 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.

And the comments made during this conference call and in our SEC filings.

We do not 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 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 in comparable GAAP results in our earnings press release and on the Investor Relations page of <unk> 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 the call over to John .

Thank you Christina.

And good morning, everyone.

Let's begin today on slide three.

While I'm excited about the future of Telos.

I'm also disappointed with two customer delays, we've had on large programs.

We've tried our best to sync up with the timing of these programs, but I'm countered issues that were not predictable at the time.

Mark will discuss our performance later on this call, but at a high level, we delivered 43% revenue growth in the fourth quarter.

And 35% revenue growth for the year.

Or 59% for the year adjusted for the wind down of the 2020 census program.

Gross profit increased 38% for the year, finishing at $86 million.

We delivered $8 8 million of adjusted EBITDA.

13, 813, 8% of adjusted EBITDA margin for the fourth quarter and $24 $4 million of adjusted EBITDA.

And 10, 1% adjusted EBITDA margin for the year.

And we reported adjusted EPS of <unk> 27 for the year.

An increase of 42 cents year over year.

Now, let's turn to slide four.

In 2021, we welcome several new and accomplished leaders to tell us to the Telus team.

We had other leaders who announced their retirements.

As announced in January Jeff Wright, who served as the executive Vice President and General Counsel of the company since 2013 retired.

Jeff will remain with the company to assist in the transition of his responsibilities.

And we will handle several ongoing projects.

Effective February one.

Hutch Robbins has been appointed as the executive Vice President and General Counsel would tell us.

Hutch brings more than 28 years of experience, providing counsel to publicly traded companies on business and corporate matters dispute resolution and avoidance and litigation.

Additionally, we promoted Troy Bertram to senior Vice President of sales.

He will lead our channel direct federal and commercial sales efforts and will continue to expand our sales channel and cloud partnerships.

Troy joined <unk> last year, bringing with him more than 25 years of experience with government and transformative technology companies.

In January of 2022.

We announced changes to our board of directors.

We welcome Brad Jacobs, who will serve on the audit Committee and Derrick Dockery, who will serve on the management development and compensation Committee and the nominating Committee.

We also announced that burner Bailey will not stand for reelection after serving on the board for 16 years.

And on behalf of the company I want to thank Brian for his leadership and substantial contributions to tell us.

Now.

Let's turn to slide five to discuss our new reporting business segment structure.

As disclosed in the 10-K that we will issue for 2021, our business will now be broken out into two reporting business segments security solutions and secure networks.

Our security solutions segment is focused on cyber security and cloud security solutions, which include our exacta tell us coast.

<unk> 360, and our automated message handling system for AAM Hs as well as other offerings that are in the works.

Our security solutions segment generated $123 $5 million in revenue in fiscal 2021.

Representing 51% of total revenues.

We believe this business segment will generate approximately 60% of our total revenue over time.

Security solutions has grown at a compounded annual growth rate of approximately 13% over the last three years.

Our secure network segment provides secure networking architectures and solutions.

To our customers through secure mobility solutions and network management and defense services.

Secure networks generated approximately $118 $9 million in revenue in fiscal year, 2021, or 49% of total revenues.

Secured networks has grown at a compounded annual growth rate of 32% over the last three years.

With the segment growing an impressive 90% in 2021 alone.

We remain confident of the long term opportunities in both business segments.

Now moving to slide six we will discuss where we stand now since our IPO.

Since our IPO, we've taken several actions that have positioned us well for the future.

We bolstered our financial flexibility and improved our cash flow.

Invested for the long term and also expanded margins.

I'll start channel ecosystem expanded our customer base and cultivated our team.

We ended 2021 with financial flexibility.

We repaid all of our debt, we remain highly liquid with a cash balance of approximately $127 million and we are approaching positive cash flow.

Since our IPO, we have made significant investments in our business to support continued long term growth.

We doubled our total investments in our sales and marketing functions.

Our sales and marketing investments were focused on building out our direct federal enterprise and channel teams.

These sales professionals are focused on expanding our security solutions, primarily exacta tell us coast I'd.

Trust $3 60, and acquiring new customers largely in regulated industries.

And we've expanded our gross margins and adjusted EBITDA margins, while making these investments.

Furthermore, since our IPO, we made two inorganic investments.

We acquired the remaining equity interest in Telos, I'd, and we acquired Diamond fortress technologies, a manufacturer of patented touchless senior printing and other mobile enabled technologies that are integral to the continued expansion of <unk> 360 services at both the enterprise.

And the consumer level.

We built and launched our multifaceted channel program, the <unk> cyber protect partner program.

To enable tell us to reach a broader set of customers and markets.

We recruited and signed partners across our ecosystem, giving us access to new verticals, such as healthcare state local and education or sled and commercial.

Enterprises, while augmenting our presence in the federal market.

We signed two large distributors, which provide access to thousands of new customers vendors and resellers.

We launched our first multi partner go to market go to market partnership called faster.

<unk> stands for faster authority to operate or Ato with Splunk, Telos and threat alert for regulated markets.

And while we did not expect the channel to begin producing in 2021.

We did have a few deals transact through the channel, allowing us to pressure test the system.

Our business development efforts have helped maintain and expand our strong customer base through renewals and new wins.

We added more than two dozen marquee customers to our customer base, including AT&T.

Collins Aerospace IBM.

MSC Dean Oracle Red hat stack armor.

<unk> wear and wicker among others.

We worked with over 300 different customers in 2021.

I am proud of the hard working accountable and family friendly culture, we've cultivated at telos.

Fueled by the talented employees and serve our customers every day.

In the last nine months, we made seven new placements on our senior leadership team and.

<unk> board of directors as part of our reorganization aimed at better aligning leadership for the demands of a growing public company.

We haven't accomplished employee base.

75% of our U S based employees have a technical background and 62% of our U S based employees hold the security clearance.

We have consistently been named a winner as a top place to work from publications such as NR gauge, the Washington business Journal and the Washington Post.

Let me turn to some comments on the industry landscape in a number of recent initiatives in Washington, DC that present opportunities for tellers.

Congress has finally reached agreement.

On FY 2022 appropriations legislation.

Which will provide billions of dollars in cyber security funding to federal agencies, including many <unk> customers.

The final spending bill boost cyber security funding in several areas of note, including for the foreign defense.

Infrastructure, cyber security and risk management operations.

Funding is also included in these final FY 2022.

Appropriations bills to help implement president and <unk> executive order on cyber security issued in May of 2021.

That executive order, which drew heavily on guidance from the National Institute of standards and technology or NIST directed federal agencies to accelerate migration to the cloud and make greater use of zero Trust architecture.

Both of which are addressed by <unk> solutions.

To carry out that executive order the office of management and budget released its final zero Trust architecture strategy for federal agencies, the goals of which are organized using the cyber security infrastructure and security agencies or sisters Zero Trust.

Maturity model.

Agencies will be required to meet specific zero trust security goals by the end of FY 2024, and they must develop zero trust migration plans that meet the requirements and include budget planning for those efforts.

We continue to see increased federal state and commercial market interest for secure fully integrated enterprise class hybrid and multi cloud environments that support everything as a service.

We call it acts as a service or ex Aaas.

Our business developers are positioning <unk> cloud platform fully equipped and integrated with our suite of products, including Exacta Ghost and <unk> 362 accelerated cloud modernization, while aligning compliance with the administration's latest cyber security mandates.

Including Zero Trust architecture, and the department of Homeland Security Cyber security and infrastructure Security Agency cyber security division's continuous diagnostics and mitigation activities for strengthening the security posture of our customers.

One of our security solutions tell us Ghost complement zero Trust security.

This creates an additional layer of defense against intruders by hiring critical resources and users in an anonymous undiscovered Bull network.

Tell us goes to protect assets of critical infrastructure from unauthorized access.

Exact streamlines and automates the critical processes of the leading cyber security standards and frameworks, particularly the federal risk and authorization management program or fed ramp.

Allowing all process participants to collaborate within the same exact application to obtain a fed ramp ato.

Which facilitates faster migration to the cloud.

Exactly there is also a trailblazer in adopting the open security controls assessment language or <unk> for short, which is a multi format framework adopted by fed ramp to allow security professionals to automate security assessment auditing and continuous monitoring processes.

Here's some other initiatives to be aware of.

The executive branch is putting emphasis on greater use of automation and the fed ramp process and on supply chain risk management, which are also focus areas for Telus.

Mist is developing a ransomware profile based on the NIST cyber security framework, which is specifically intended to help organizations manage ransomware related risk and tell our solutions will support this.

In addition, the fed ramp process is now being adopted at the state level and state ramp will likely expand the market for telos fed ramp offerings.

We believe there could ultimately be an increased need for the solutions supplied by <unk> driven by the additional federal cyber security funding appropriated by Congress and the additional security goals agencies will be required to achieve.

And finally, the emergence of new conflicts in Europe have elevated the cyber threat level globally and further underscores the urgency of cyber security best practices.

I will now turn the call over to Mark.

Who will discuss fourth quarter and full year 2021 results and our guidance for the first quarter and full year of 2022.

Mark.

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

Let's turn to slide seven.

I am pleased with our results this quarter.

We completed a challenging year with a strong fourth quarter and delivered on our guidance.

We reported sales at the midpoint of our guidance range.

And adjusted EBITDA above the high end of our range.

During the fourth quarter, we achieved 43% sales growth.

Our 51% increase in gross profit.

196 basis points of gross margin expansion.

Our record adjusted EBITDA.

Our 13, 8% adjusted EBITDA margin.

And a 19% improvement in adjusted EPS.

Free cash flow was a $7 $2 million outflow as expected representing an $8 $2 million improvement over the same period last year.

Now, let's get into the details starting with revenues.

Fourth quarter revenues grew 43% from four from $44 $9 million in 2020 to $64 $1 million in 2021.

Fourth quarter revenues for our security solutions business grew 37% from $24 $7 million in 2022 to $33 $9 million in 2021.

Strong growth in security solutions was primarily driven by our Telos I'd business, where all major programs, including our confidential healthcare program with the federal government contributed to growth in the quarter.

Unlike earlier quarters in 2021, the wind down of our contract with the U S Census Bureau did not present, a year over year headwind in the fourth quarter.

Growth in <unk> was partially offset by year over year declines in information assurance and secure communications.

The decline in information assurance reflects the quarterly Lumpiness in perpetual license sales that are characteristic of the current revenue model in that business.

Perpetual license sales in the fourth quarter of 2020 were unusually high due to the timing of large sales.

<unk> the quarter and created a difficult year over year comparison with the fourth quarter of 2021.

Half of all perpetual license sales in 2020.

Occurred in the fourth quarter of that year.

If commercial customer preferences increasingly drives the revenue model in that business over time from a perpetual license model, which is more common historically with our government customers to.

To a subscription model, which is more common with our commercial customers.

We expect the quarterly year over year comparisons to become more consistent and predictable over time.

But of course, the trade off will be less revenue recognition and growth in the short term than we would otherwise realize under a perpetual license model.

The decline in secure communications reflects lower volume on a single large contract with a classified government customer.

Total fourth quarter revenues for our secure our secured networks business grew 49% from.

<unk> from $22 million in 2020 to $30 $1 million in 2021.

This significant increase was driven by the same two large programs that have driven growth for secure networks throughout 2021.

The rollout continued for a contract to provide security modules and kits to support the upgrade of theater Deployable communications for the U S Air Force.

And site work continued on a five year U S army contract to support the migration and modernization of telephone communication systems throughout the Pacific region.

As expected during the quarter and as discussed on our third quarter earnings call supply chain constraints with one of our subcontractors deferred several million dollars of revenue from the fourth quarter of 2021 into 2022.

The impact of these constraints was partially offset by revenue on other programs within secure networks that accelerated from 2022 and to the fourth quarter of 2021.

The net impact is a few million dollars of revenue slipping from 2021 into 2022.

Now, let's discuss profitability and cash flow.

Fourth quarter gross profit increased 51%.

From $16 million in 2020.

$224 $1 million in 2021.

Fourth quarter gross margin increased 196 basis points from 35, 7% in 2020.

To 37, 7% in 2021.

Cost of sales included $672000 of stock compensation expense, which did not exist in the same period last year.

Excluding the impact of stock compensation expense gross margins increased 301 basis points to 38, 8%.

Security solutions drove gross margin expansion for the company, primarily due to excellent profitability and Telos I'd.

Partially offset by lower margins due to less favorable sales mix and secure networks.

Security solutions gross margins expanded over eight percentage points.

From 47, 4% in 2020 to a record 55, 7% in 2021, driven by favorable sales mix within <unk>.

Secure networks gross margins contracted approximately 400 basis points from 21, 5% in 2020 to 17, 5% in 2021 due to higher revenue recognition on lower margin programs in the quarter.

SG&A and R&D expense increased by $3 9 million from $25 $7 million in 2020 to $29 $6 million in 2021.

The $3 $9 million increase was primarily driven by stock compensation expense that we did not have in the prior year period, as well as higher sales and marketing expense.

Partially offset by lower G&A expense due to the elimination of executive bonuses as a result of the company underperforming its financial plan for the year.

Operating income before stock compensation expense increased from a loss of $9 $7 million in 2020 to a profit of $7 $4 million in 2021.

Operating income benefited from higher gross profit driven by both sales growth and gross margin expansion as well as lower G&A expense due to the elimination of executive bonuses, partially offset by higher R&D and sales and marketing expense.

Adjusted net income increased from a loss of $4 $1 million in 2020 to a profit of $7 $3 million in 2021.

The corresponding adjusted quarterly earnings per share increased from a loss of <unk> <unk> per share in 2020 to a profit of <unk> 11 per share in 2021.

EBITDA adjusted for the impact of stock compensation expense increased by $11 5 million from a loss of $2 $6 million in 2020 to a profit of $8 $8 million in 2021.

Adjusted EBITDA margin was 13, 8% during the quarter.

The $8 8 million of adjusted EBITDA in the quarter was.

<unk> was $3 $9 million above the top end of our guidance range of $3 9 million to $4 9 million.

The $3 9 million outperformance above the top end of our guidance range was primarily the result of four items, including.

Lower cost as a result of actions, we took to restructure and defer expenses associated with the TSA pre check program to better align the timing of expenses with the timing of revenues on that program.

Higher than expected capitalization of research and development expense.

Lower G&A expense.

And a resolution with the defense contract management agency on final rates for incurred costs from prior years.

Free cash flow improved by $8 2 million from an outflow of $15 $4 million in the fourth quarter of 2020 to an outflow of $7 2 million in the fourth quarter of 2021.

The $8 $2 million improvement in free cash flow was primarily driven by $4 6 million of higher net income excluding stock compensation expense.

And $7 $5 million of improved working capital dynamics.

Partially offset by $3 5 million.

Of higher capital expenditures.

For the full year cash from operations was $7 $3 million inflow and free cash flow was a $5 9 million outflow.

Let's turn to slide eight to recap our full year 2021 performance compared to our original 2021 guidance.

Overall 2021 was a disappointing year due to the impact of customer delays beyond our control on two large programs that proved to be insurmountable.

At the midpoint, our original 2021 guidance included $34 5 million of adjusted EBITDA.

And an 11, 9% adjusted EBITDA margin.

Customer delays on major programs eliminated approximately $21 million of profit from our 2021 performance.

Accordingly, everything else held equal we were on a path to generate only $13 5 million of adjusted EBITDA and a five 7% adjusted EBITDA margin due to the deleveraging effect of markedly lower than planned revenues against our cost base.

But through outperformance compared to plan elsewhere in our portfolio, most notably in Telos I'd.

Revenue and margin performance.

As well as below the line cost discipline and actions, we took to restructure and deferred expenses associated with delayed programs.

We delivered $24 $4 million of adjusted EBITDA for the full year and preserved double digit adjusted EBITDA margins.

Although we are disappointed with the impact of the customer delays, we are proud of our team for focusing on what they can control outperforming in other parts of the portfolio and taking the actions necessary to deliver double digit adjusted EBITDA margins for our shareholders.

Now, let's turn to slide nine to discuss the special accounting topics relevant to our 2022 guidance.

And our past communications regarding the TSA pre check program. We have estimated the size of the revenue opportunity based on gross revenue accounting, assuming tell us would be treated as the principal to the transaction with the TSA pre check applicant for accounting purposes under ASC 600.

Six.

However, the application of ASC 606 in this particular case can be open to interpretation.

Accordingly, we engaged an independent third party to conduct a technical accounting review of the program and to provide an opinion on the application of ASC 606.

We also worked closely with our auditors.

Through this process, we have determined tell us to be an agent as defined by ASC 606, as it relates to the per applicant fee for service collected by tellers and paid to the TSA and FBI as part of <unk> enrollment services offering.

Therefore and occur in accordance with ASC 606 tell us will record revenue from applicants for this service net of the fees paid to the TSA and the FBI as part of the arrangement.

Under net revenue accounting revenue recognition of 64% lower than gross revenue recognition on new enrollments and 61% lower on renewals.

Profit, however is unchanged and margins are significantly higher.

The underlying profitability cash flow and fundamental economics of the transaction with the applicant are unchanged.

With that backdrop, let's turn to slide 10 to discuss our outlook for 2022.

For 2022, we forecast sales in a range of $226 million to $257 million based on the net revenue accounting illustrated on the prior slide.

This compares to sales of approximately $226 million to $276 million based on gross revenue accounting.

Our guidance includes $226 million to $245 million of revenue before any benefit from the TSA pre check program.

And $12 million of net revenue or $31 million of gross revenue from from pre check at the top end of the range.

The bottom end of the range includes no pre check revenue.

Adjusted EBITDA is the same under gross revenue accounting and net revenue accounting.

We forecast adjusted EBITDA of $21 million to $28 million, including approximately $3 million of contribution from pre check at the top end of the range.

Before any benefit from pre check we forecast security solutions revenue to grow plus or minus mid single digits, including modest contribution to growth from higher software sales.

Security solutions grows mid teens at the top end of the guidance range, including $12 million of pre check net revenue or approximately 31% on a gross revenue equivalent basis.

We forecast secure networks revenue to be down mid single digits to high single digits due to a $30 million headwind from the completion of two large programs, partially offset by new business in the second half of the year.

Gross margins are likely to be higher as a result of higher secured networks gross margins.

Margin accretion from pre check and a slightly higher weighting of revenues to security solutions as compared to last year.

We expect below the line expenses, excluding stock compensation expense to be approximately $3 million to $13 million higher due to higher depreciation and amortization TSA readiness sales and marketing and other G&A expenses.

Upside opportunities include faster than expected pre check ramp.

Higher end market demand due to the current threat environment.

Increased demand for multi cloud environment solutions as a service.

Better than expected sales force productivity high.

Higher secured networks new business.

And lower below the line expenses, especially at the high end of the guidance range.

Over the course of this year, we will be monitoring the returns on our investments very closely and making adjustments as needed to manage margins and cash flow.

Let's turn to slide 11 to discuss our guidance for the first quarter.

For the first quarter, we forecast sales in a range of $44 million to $48 million and adjusted EBITDA of negative $2 million to positive $2 million.

We forecast security solutions revenues to be up mid teens, primarily due to continued strength in a confidential healthcare program with the federal government.

We expect no pre check revenues in the first quarter.

We expect secured networks revenues to be down low 30% to mid 40% due to a $14 million headwind.

On a large program that is coming to successful completion in 2022.

Gross margin is expected to be up to 10 percentage points higher due to significantly higher security solutions gross margin.

And favorable mixed shift between security solutions and secure networks compared to the same quarter last year.

Below the line expenses, excluding stock compensation expense are expected to be approximately 4 million to $6 million higher due to the ramp in investment that occurred during the second half of 2021.

Lastly, before passing it back to John I'd like to provide an update on the filing of our 2021 and 10-K.

As previously discussed the filing of our 10-K was delayed primarily due to delays in completing our first annual Sox 404 assessment of our internal control over financial reporting.

On Monday of this week, our auditors notified us that they needed additional time to complete certain testing and internal quality control of their Sox 404 audit.

We intend to file our 10-K in the coming weeks.

As previously disclosed we and our auditors have identified material weaknesses within some of our internal processes that we are in process of remediated and will be disclosed in our 10-K.

At this time no audit adjustments are expected.

With that I'll pass it back to John who will wrap up on slide 12.

Thanks, a lot mark.

Obviously, we've had a lot going on in 2021, and we're very excited about the prospects of 2022.

I'm proud of the accomplishments we achieved in our first full year as a public company.

And we developed our leadership team and board of directors we.

We focused on what we can control and delivered growth in margin expansion notwithstanding the very disappointing customer delays our major programs.

And we reported a strong finish to a challenging year delivering on our fourth quarter guidance.

We are closely monitoring our returns on our investments and were focused on striking the right balance between investing in our future and managing our costs, our margins and cash flows.

And with that operator, I'd like to please open the line for Q&A. Thank you.

Thank you as a reminder to ask a question you will need your question I am wondering your telephone to withdraw.

A question please press the pound key.

Please standby, while we compile the Q&A roster.

Our first question comes from Sam.

B Riley Securities Your line is open.

Yes, hi, good morning, John and Mark Thanks for taking my questions Mark just starting off with security solutions the growth outlook mid teen year over year growth, even inclusive both TSA pre check.

Can you give us a sense of kind of what has really changed in that number versus what you provided in mid November and your preliminary outlook.

Yes, so the main difference there.

The ongoing delay in TSA pre check when I gave the.

22 outlook on the third quarter call I think what I indicated for security solutions was year over year growth in the high Thirty's.

With primary substantially all of that growth coming from pre check.

The assumption there was that we would receive the authority to operate by the end of 2021.

Here, we are mid March we have not received authority to operate yet and so youre seeing a difference in the assumption on TSA pre check there at the top end of range. So on a gross basis.

On a gross basis, including our pre check assumption you will see security solutions growing in the low thirties.

Versus the high Thirty's that I indicated the Delta there is the difference in the pre check consumption.

And then the difference between the low thirties.

The mid teens.

Is the difference between gross revenue accounting on pre check and net revenue accounting on pre check.

On.

On an apples to apples due to compare apples to apples it would be high <unk> growth.

Versus low <unk> growth.

And that difference being the delay in project.

Got it got it understood and just a point on TSA pre check I mean, any sort of updates you can give us on kind of what is.

Causing the ongoing delay in at the high end of your guidance would be assumption that youll receive the Ato for GSA project.

Yeah.

Exact this is Marc Griffin.

We still remain optimistic for an Ato in 2022, the timing of the TSA ATM still is solely within TSA is control.

So.

We do we do remain very optimistic that we will get it and as Mark indicated we have.

Our in our forecast still getting the Ato in 2022.

Understood and unsecured networks on that side of the business I mean down mid single digits to high single digits I believe for the full year guidance.

I mean can you give us a little more insight into kind of the assumptions baked into that number I know you have two larger programs rolling off but that was just kind of curious if there is other opportunities to offset some of those programs.

Yes so.

So you're right that the main driver there is the approximately $30 million headwind year over year.

As a result of the wind down of the two large programs that drove the growth in that business in 2021.

And then that's going to be partially backfill.

By new business.

That we're pursuing here in 'twenty, two youll see that mostly in the second half of the year.

But our assumptions on new business wins do not fully backfill the wind down in those two large programs.

Understood and a final question for me.

Nice to see some of the adjusted EBITDA margins can remain intact. Despite the delays with these larger programs, but how should we be thinking about free cash flow generation just based on the current adjusted EBITDA guidance you've given.

Yes, so on free cash flow my rule of thumb and I think that's the way I encourage folks too.

To think about free cash flow for us.

If you look at.

Think of it as a G.

Adjusted EBITDA.

Minus capex.

That will give you free cash flow approximately approximately free cash flow before any impact from working capital.

And so for 'twenty, one if you call it roughly $25 million of adjusted EBITDA approximately in the middle of the range.

Giving you about $12 million of Capex and capitalized software and the assumptions in the appendix the modeling assumptions in the appendix. So that gets you to about $13 million of free cash flow before working capital and so from there you got to think about some working capital assumptions I Havent gone so far as to put out working capital assumption.

<unk>.

Kind of going to depend on how working capital behavior towards the end of the year here.

With sales excluding pre check approximately flattish.

And then pre Chuck having pretty favorable working capital profile.

Would point us to.

Better free cash flow this year than we had last year.

Potentially positive free cash flow.

Understood well, thanks for taking my questions and best of luck with the remainder of the quarter.

Thanks.

Our next question comes from the line of Brad Clark with BMO. Your line is open.

Hi, Thank you for taking my question I wanted to ask about the Xi'an Nash contract and really an update on.

On the prior call you took it out of your day.

Fiscal year, 'twenty, two guidance, which I assume it inherently to scam.

Update but would you be able to provide.

Yes, thinking around that contract and it came back over the past EASA has awarded other types of contract too.

We can provide.

Looking for a really an understanding of what what quick back with that.

Going forward.

FY 'twenty kols, mostly beyond FY, 'twenty tailwind and any risk reward we could be thinking about.

Hello. This is mark Griffin on the CMS program.

We are still.

Very much in line with expansion for that contract and the ability for that contract to expand.

And so from a future point of view, although youre right. It is.

Not in our 'twenty two plan right now we.

We do feel as though the Medicare and Medicaid fraud, and abuse objective of that organization.

To fingerprint.

And certify healthcare providers is still a requirement and still exist. So although I don't have an update on the timing at this time, we still remain optimistic that it is a valid and an opportunity for <unk> to grow into that space.

Okay. Thank you and then just another follow up from me with.

With regard to the sales force, you've obviously done a lot of hiring over the past year and a half a lot focus on the commercial market would you be able to provide an update on where you are in.

Scale or general market investment process.

I need to be done.

To expand into some of these promotional and channel opportunities.

Just an update on the shape and size of California and planned for.

From.

Over the next 12 lifestyle months. Thank you.

Yes. This is mark Griffin again, so as far as the sales force is concerned we round it out that sale.

Salesforce, primarily at the end of 2021 with the last of the hires and so we increased our direct carrying sales force and channel.

Market to enhance the federal sales force that we had so now we're having the sales force listen to the customers and expand their knowledge base to position those products, whether it be exact that ghost variety Trust III 60, not only with the channel, but the state and local education markets that we spoke about earlier.

So from a marketing point of view the marketing group, obviously are supporting those sales force with sales books sales plans. So from my perspective, those groups are fairly flushed out now as far as staffing now we're into an execution stage, where we're starting to build the pie.

Blind and starting to build the backlog for sales opportunity. Although we are seeing the sales cycle on some of these.

Or a little bit longer than what we anticipated which is why we historically have said that we will see some results from those organizations in the second half of this year.

But I think the main point as well as Mark is that the pipeline has expanded relatively significantly for us.

Outside of the four walls of the federal government.

So we are seeing.

Relatively significant increase in our funnel.

Which as we've talked about previously we should see the result of in the second half of 2022.

Great. Thank you.

Thank you our.

Our next question comes from Rudy Kessinger with D. A Davidson your line is open.

Hi, Thanks for taking my question so on TSA.

On the Q3 call. It was mid November and you said you expected to hit the <unk> by the end of the year. So.

Kind of a six week window, where you expected to get it and now if I look at the low end of your guidance assumption zero from TSA Youre, essentially saying here, we sit in March and it could fall at any point in the year. So how do you go from expecting to get it within six weeks to know not.

Really being able to point us to when you expect to get it over the next nine months.

Mark Griffin again.

The working relationship we have with TSA.

It's primarily confidential as it relates to the details, but we are going through a government process and so our expectation on.

Our speed and in compliance with that process.

Was was one expectation that we had said we still believe we will rather expeditiously get through that process, but because it's a government ato process and its they are controlling the process.

I don't have any updates beyond that estimate at this point that we will get it in 2022.

I am not able to pick a specific date in 2022 at this time. So Rudy this is John .

And.

I'm going to say I'm going to be a little more.

That's about it.

In the past when we've given timelines those timelines have been given as a result.

So.

Information, we've gotten from the customer.

As everybody knows we have missed those timelines.

And as a result, there is it just a tremendous amount of frustration I am sure that you feel I know that I feel is a very large investors and im sure that the rest of the investment community feels.

So we said okay if.

If we assume that nothing happens in pre check.

What's it look like what's what's this case look like what does tell us look like.

And so we created this model this low end of the model.

Do I actually think that's going to be the case I don't.

I do believe we're going to get pre check.

I know that it's at the highest levels of the organization inside of TSA.

I know that it's very important.

But to this point, it's been a very frustrating process for us.

Because when we were first awarded the contract back in January of 2020.

The initial indication from the customers that we were supposed to have or Ato by September of 2020 and for various reasons that didnt happen.

Again beyond our control. So that's why we're putting in that low end case.

We went to market with the market to understand that we can still work to a profitable level.

Without it.

Obviously, though we want TSA in there clearly we I believe fundamentally TSA is going to be in a very very important part of the growth of the company.

But I for one have been just sort of tired of throwing out dates when when mark sent out Mark Burns.

On the Q3 call.

Set out.

Sort of we didn't give guidance just to be very clear to everybody on this call here, we gave a framework.

In that framework said that we pre suppose we would have an approval by June one.

The Ato.

That didn't happen.

So again, where we are.

Trying to do here with for purposes of 2022 and beyond is not leave our investor base frustrated that as we leave 2022, we want our investor base to be very happy that they have made the investment and stuck with the company. So that's my two cents on a Rudy.

Okay Fair enough and then.

So if I if I could.

The consideration Thats 30 million headwind, you're facing in secure networks. If I just do some quick math.

Exclude $30 million from your 2021 revenue would have grown.

18%.

Rather than 35% and then if I look.

At the guided 22 by assumes zero from TSA.

So it takes 6 million out of your revenue mid point that would drop into $2 $35 5 million and again compared to 21 X 30 million to adjust for that headwind.

You would only be looking for 11% growth in 'twenty two versus 18% in 'twenty, one ex the TSA and ex that $30 million headwind.

And just in light of the number of additional sales reps you've added the number of partners that you've added.

Why why are we not seeing results from those investments faster and why the lower growth profile, even after I make those adjustments.

Yeah. So first I wanted to address your point about secure networks on the secure network side when we when we come to a successful conclusion on our program generally speaking we're back with that same customer rebidding additional opportunities with that same customer. So we don't see it as is the same kind of risk.

Profile that perhaps youre.

Sure.

Putting the odds on if you will.

As it relates to the 2022 performance on the on the investment on commercial sales.

And channel sales, we do expect to see very good take up in the second half of the year, but we're not going to put numbers and until we feel like the numbers are there and so right now I think we have in front of US. The case that says this is what we see and as we see more things happening in the quarter, we will be sure to update our numbers.

To the street.

Mark I'll turn it in more closer.

Turning to you and see if you have any additional points on that.

The only additional points I would just put Stambul John had indicated there is and you kind of mentioned it earlier is the the hiring of the sales force and the training of the sales force to know the solution and to position that with the customer is taking a little bit longer than what I think.

We had originally anticipated and so I think we will see growth in the last half of the year.

And as we do see growth earlier, we will update those those positions, but I think it's really just the on boarding of the sales the positioning of those with the customer and listening to our customers on the value of our solutions.

We will drive additional growth beyond what we currently have shown.

Okay, and then just lastly.

The accounting change and TSA it makes perfect sense to me.

Its just youre, saying 12 million net $31 million gross that's 39% gross margin. If you were recognizing it on a gross revenue basis, obviously understanding going forward is on the net basis, but as we think about it from a modeling perspective, I think about 'twenty three if I take whatever two to 3 million sign ups.

Times 85 per times your share at a third what kind of gross margin.

Should we apply to the gross revenue.

To get to your net revenue on a longer term basis, I guess working at 39% gross margin go in.

In 'twenty, three and beyond as you get fully ramped with TSA.

So really I would think of it as.

So thinking of it on a net basis here.

The revenue is pretty much all margin on a net basis and then.

Youre going to have probably.

You get you get very good operating leverage there. So I'd say, we have about call. It high single digit millions high single digit to double digit millions of.

Relatively fixed costs.

In that program.

So as those net revenues ramp.

Youll see the margins expand with that both gross and adjusted EBITDA margins ramp with it.

So.

That's how I would think about modeling it over the medium term as you get to a run rate number.

Okay got it thanks for taking my questions.

Thank you. Our next question comes from Alex Henderson with Needham <unk> Company. Your line is open.

Thanks.

So.

You delayed your report because of the.

The issues associated with.

The material weakness.

The process and then.

Actually get that resolved.

Put out.

Change in the accounting here on <unk>, so it shouldnt that have been.

Bedded pre IPO.

And we Shouldnt have been consistent with what you had was doing.

Anyway, so shouldn't you have known that before your IPO.

And then on top of that.

Giving us guidance now on two segments, but.

Masking the difference between dosed in exactly which are very different than <unk> hundred 60 Trust why aren't you putting this into a into three segments. So that we can get reasonable transparency.

It seems like.

The transparency is not.

There that we need.

To properly analyze the situation based on.

Some of these changes the other point that I want to address a little bit upfront.

Can you give us some sense of.

What is going on in terms of Ghost you have mentioned that at all.

And then.

Also the lack of transparency on the reason behind Medicare Medicaid dropping completely out and the reason for the continuous delays, yes, we realize it's a government program and we realized governments can be sickle, but you should give us some sense of that.

Please.

This is occurring as opposed to just the fact that the.

That it's a government program can you please be a little bit more upfront about why TSA is.

Totally delaying and by the way the comment that it was supposed to be by September eight.

The original expectation was actually June July so, it's actually slipped out a lot more than you are indicating.

So no.

Some of those pieces.

Just to be clear, what I said when I said.

September I meant September of 2020.

The job was awarded in January of 2020.

And the initial indication by the customers that we would have been had our Ato 270 days. After the award in January of 2020 and that didn't happen.

And then to address your point the reasons. Please.

I'll have to turn it over to Mark because as far as I know that I don't think I actually can.

No Alex.

Yes.

<unk>.

TSA is largely a confidential program and so we're not able to talk the specifics of where we're at in the Ato process. The Ato process as a security compliance process.

So we can't divulge.

Basically the details behind that program or where we're at in that program because of security concerns as it relates to that program. So we still remain optimistic for an IPO in 2022.

Timing of the Ato is purely in TSA as control at this point.

Is this a function of your process on <unk>.

How you deliver the data to date situations, where they are uncomfortable with their security posture.

Theres got to be some some broader explanation then we can't talk about it at all.

We've given is hardly seems reasonable.

Excuse me.

We've said this in the past what we said is that the.

The customer was very concerned about ransomware and so they had to go true up all their own systems first.

And then they had to go after the other high priority systems of which this is one but we're just not through the process yet.

So you are saying and instill a security process in their operations, that's causing the issue.

Yes, Sir.

Mark Correct me if I'm wrong.

Alex by by Nature, and Ato is authority to operate its run by the security group within the TSA and so we are engaging with that group within TSA and Thats largely a confidential.

Operation in our program and run by TSA. So we're operating under the TSA rules and we'll get our Ato when TSA completes their process.

Okay, so going back to some of the other issues.

There is no mention of progress some dosed at all can you talk about what's going on there.

Sure before I do that though I'd like to talk about the segment reporting.

We mentioned that we saw with that special confidential customer that we were able to sell more or less our services as a solution.

And it's these are exact as a service ghost as a service <unk> Trust as a service that is happening more and more throughout the government.

And so we see a big opportunity for us to continue to do that which is going to take advantage of each of the different capabilities inside of security solutions. So it does make sense for them to be two segments versus one at least in our opinion, Alex when you think about ghost the opportunity.

<unk> is really an embedded opportunity.

We announced as an example, Johnson controls.

We have we've now been in put it into their line card with separate pricing.

Johnson controls has a.

Has a quota that they are running their own sales force through where they're selling ghost as a service through their cameras and then they will be adding ghost as a service through their HVAC systems et cetera, all of that stuff, we've announced I think previously just to.

We didn't think we needed to bring it up again today, but so I apologize if we didn't bring it up today.

So is there any progress on the timing of it when do you expect it to ramp any commentary.

It's going to create revenue for us in the second half of this year.

And thats coming directly back from Johnson controls.

So their own feeling is that this would be a very significant differentiator for their own sales force compared to other.

Cloud based cameras as a service and so they see this as a significant differentiator for them over the other cloud based camera providers.

And so.

I think we will see we will see good.

Uptick from that I also think that Youll see ghost being embedded as components of other capabilities over time and so that's how we expect to sell it won't really end up being sold direct to the end user by and large there are.

There are obviously examples where it is sold directly to end users, but the bigger opportunity is embedded.

So the product embedding.

Embedded in.

That it's going to be embedded and will be launched by Johnson controls by the.

Middle of the year, and therefore can ramp into the back half.

No. It is it'll be launch it will be launched by the first part of April .

Alright, so its launching in April and then some.

Months, plus cell cycle, therefore start to kick in in the back half.

I think thats correct.

Alright.

Back to exactly can you talk about your penetration of the cloud customers.

The Microsoft and Amazon.

Sales organizations are we selling your product and why.

That business is ramping at a steeper rate than your expectations.

Well, we have we have seen.

We are seeing our customers who are also our partners begin to sell us through their own channel.

WNS has sold four or five different opportunities for us.

Microsoft has sold two or three for us.

I think we'll be announcing.

In my opinion, probably the most.

Significant announcement, we've made around cloud providers.

This quarter.

Sure.

It's not just around if you will the government are fed ramp it's really an announcement that's related to them using us around their global footprint.

<unk>.

And I think that's going to be a very exciting thing for us where they've they've given us their own.

Internal financial models about what they expect it to mean and so when we announced that we'll give we'll put more detail around it but generally speaking Alex the other cloud providers have started out really in our sweet spot whether it be fed ramp or it be the intelligence community, so whether you're talking about oracle or.

Or IBM or excuse me oracle or Microsoft or AWS, that's really where they're starting to us is in those sweet spot that we're in.

This other cloud provider is really thinking of us as a way for them to accelerate cloud adoption globally as a way to differentiate themselves over the other players so.

As I said, we're very excited about it we will be announcing in the.

Worst case in April .

But it's a it's a relationship that's been under discussion now for the last year and change.

So just going back to the original question when do you expect this cloud customers.

Cloud sales organizations to materially impact and drive exact to growth.

A much higher rate of growth is currently guided to in the current outlook.

Like I said, we've we're keeping it.

I think Q3 Q4 is the timeframe to be thinking about where you see significant financial impact from the from the cloud providers Alex.

Which is in line with what I think we've been saying previously.

I'll cede the floor. Thanks.

Thank you.

Thank you.

Question comes from Tony.

Capital markets. Your line is open.

Yes. Thank you.

In the slide deck, you mentioned modest growth contribution from higher software sales can you help range what type of growth does that mean for exact suncoast online year over year basis.

Embedded in the guide it's relatively modest it's a think of it as.

Good.

Few million dollars year over year of additional information.

Information assurance software sales.

I also think it has changed in the model in the hall from mostly perpetual to mostly.

Pay as you go or subscription subscription base. So your order flow may be a lot higher based on the timing but.

But the revenue impact we will obviously be affected if you see my point.

Yes so.

Between those two answers few million year over year increase includes the negative impact.

Going from mostly perpetual to consumption.

That's correct.

And so if you were to normalize as it were.

Our all perpetual staying all perpetual what type of year over year growth on a percentage basis would we be looking at guessing that a few million dollars would be.

Hi.

Single digit.

Growth.

And so if you normalize for these for that.

Perpetual consumption, what does that mean in terms of year over year growth.

So I don't know that we've actually looked at it that way. We've just said that since it's going that way. This is how we believe the numbers.

Look.

We'd have to get back to you with the details on that when the home.

Okay you also.

Because it all comes down to timing right.

When the deal comes in right. So.

We have to we'd have to get back to you.

Yes understood.

And then you also mentioned in answer to one of the other questions.

You are seeing sales cycle expand a bit can you expand upon why you think thats happening.

Yes, as Mark Griffin.

A comment was related to.

Both not only in the government, but also in the commercial side.

Requirements that the customers have for certain fields and certain options within the tools that we sell and the software that we sell so from a from a development point of view, we're also having to update and enhance the products to address some of the commercial and some of the state and local markets with product enhancements.

And so that's extending some of the sales cycle, while we add make those modifications to the product in order to complete those opportunities.

I see I understand okay.

And then just on the 10-K filing to delay Mark I thought I heard you basically say that the delay is associated with the <unk>.

Sarbanes Oxley compliance need that the auditor and nothing to do with the weakness in controls identified is that correct.

Correct. So we're going through our first Sox 404 audit this year.

So it is the first time that both we and our auditors have gone through that process together.

First time, you go through that process, especially for a newly public company, it's never been through the process before.

It has a long and thorough and involved process.

So that's really been the driver of the delay.

Tail end here, our auditors are going through their own internal.

Quality check process.

Their audit and how they conducted it.

So until that is completed we have to hold off on filing our K, but it's not it's not directly driven by the material weaknesses, but rather just the ongoing duration of the process. One other thing worth pointing out historically, we filed our K over the last five.

Years three of the five times, we filed in early April .

And the other two years over the last five years, we filed on either the very last day of March or a few days before so relative to prior years, we are still on track here, but.

We became a large accelerated filer for the first time as of the end of this year, which which accelerated our filing date by a month.

So technically at this point.

The 10-K is late but relative to prior years, we are still on track.

Understood.

Last line of questioning is on TSA to be clear none of the other two TSA Gen. Two pre check contract providers have been given an aqua already operates correct.

That's correct.

Okay.

And then I think just a few days ago Accenture Federal services was recently awarded a TSA 190 $199 million win over seven year period for a consolidating three conventionally three credentialing systems into a single platform to improve our TSA response to threats.

Any relevance to the delays youre seeing on the Ato then.

So just just to be clear so that the contract we terminate internally as big Craig So.

Slowly see in humans.

We have an internal.

Classification that we call it big cred and so that contract is.

Ben held by Accenture, then IBM and now back to it to Accenture and its the modernization behind the scenes of TSA for that contract. So you are correct $199 million seven year contract and so we hope that contract would eventually add some efficiencies and some improvements.

To some of the processes, we're seeing on the program as I mentioned in the press release so.

No immediate impact because this contract has been around for a while and.

So they've recompete it and opened it up again and it was awarded we hope in the future. There is a modernization of TSA backend infrastructure that would facilitate contracts like we have today.

I guess.

It sounds like that's <unk>.

Modernization and consolidation should help with the cyber security posture.

And that seems to be the main thing that's been holding back the authority to operate.

Whereas that reasoning and correct.

TSA backend system historically have needed modernization and this is a contract that hopefully addresses that.

Not disagreeing with your comment.

Okay. Thank you.

Yes.

Thank you. Our next question comes from Andrew King from Colliers Securities. Your line is open.

Hey, there. Thanks for taking my question just a few clarifications on the TSA contract once you receive the authority to operate.

Customer goes to the TSA website in order to renew or to enroll and TSA pre check how has that awarded two three companies on the contract.

Hello, Alex are Andrew Marc Marc Griffin.

On the TSA website.

<unk> positioning.

Offers for each.

Offer that is eligible at the time.

Theyre Ato will be presented on the website in a consumer will be able to pick a rotating offering on that website on the.

Offer or the.

The company of their choice at that point, so its a rotating offer on TSA website, where you can enroll or renew youll.

You'll be the consumer will be given a choice.

Okay got it and then.

Looking at the market for the contract how quickly do you think you can get to a one third share given that one of the other companies on the contract because obviously the incumbent and other clearly as the large portion of travelers mindshare and a clear.

<unk> for cross selling with current travelers and a consumer based product.

Sure we would.

Hope with that within a year or two we would be at one year share of a one third share.

Any clarification as to how you get there and how you compete with the other.

People on the contract offering.

Sure as part of our strategy and offering that we had presented to TSA, we're expanding on enrollment sites to approximately 600 500 retail locations, which is doubling the current enrollment site offering that the incumbent has so we're doubling enrollment sites. So that's part of the strategy.

<unk>.

Is convenience for the customer to make enrollment easier and more convenient for the consumers.

That's one of the strategies that we are we'll be employing.

Okay.

Thank you. This will conclude today's question and answer session I will now turn the call back over to Mr. John <unk> for closing remarks.

Thank you very much.

I just wanted to thank everybody for their support I know, it's been a very.

So a rough and tumble year for 2021 for us, but despite that I'm very proud of my team for what we've been able to do to capitalize on what we had in front of us in any event.

And we see obviously an increased emphasis on cyber security across both.

Both the commercial and the government world.

Our solutions will continue to take us out into 2022 and beyond and I do see our take up accelerating so I just wanted to say to everybody on the call here today. Thank you very much for listening and for your ongoing support thanks a lot.

Thank you. This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.

[music].

Okay.

[music].

[music].

Good day and thank you for standing by welcome to tell US Corporation fourth quarter 2021 earnings Conference call. At this time, all participants are in a listen only mode.

After the Speakers' presentation there'll be a question and answer session to ask a question. During the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded.

If you require any further assistance. Please press star zero I would now like to hand, the conference over to Christina Mr. Virus. Please go ahead.

Good morning.

For joining us to discuss <unk> Corporation's fourth quarter and full year 2021 financial results.

With me today is John Wood, Chairman and Chief Executive Officer of Telos, and Mark Burns, our Chief financial Officer of Telus.

Let me quickly review the format of today's presentation.

John will begin with brief remarks on our 2021 year end results and tell us the strategic priorities and Mark will cover the financials and guidance for 2022.

Then we'll open the line for questions and answers.

Griffin Executive Vice President of Security solutions will also join us.

The earnings press release was issued earlier today and is posted on the tell US Investor Relations Web site, where this call is being simultaneously webcast.

Additionally, we have provided presentation slides on our Investor Relations website.

Before we begin 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.

And the comments made during this conference call and in our SEC filings.

We do not 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 in 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 the call over to John .

Thank you Christina.

And good morning, everyone.

Let's begin today on slide three.

While I'm excited about the future of Telos.

I'm also disappointed with two customer delays, we've had on large programs.

We've tried our best to sync up with the timing of these programs, but I'm countered issues that were not predictable at the time.

Mark will discuss our performance later on this call, but at a high level, we delivered 43% revenue growth in the fourth quarter and.

35% revenue growth for the year.

Or 59% for the year adjusted for the wind down of the 2020 census program.

Gross profit increased 38% for the year, finishing at $86 million.

We delivered $8 $8 million of adjusted EBITDA.

13, a 13, 8% of adjusted EBITDA margin for the fourth quarter and $24 $4 million of adjusted EBITDA.

And 10, 1% adjusted EBITDA margin for the year.

And we reported adjusted EPS of 2007 for the year.

An increase of 42.

Year over year.

Now, let's turn to slide four.

In 2021.

We welcome several new and accomplished leaders to tell us to the <unk> team.

We had other leaders who announced their retirements.

As announced in January Jeff Wright, who served as the executive Vice President and General Counsel the company since 2013 retired.

Jeff will remain with the company to assist in the transition of his responsibilities.

And we'll handle several ongoing projects.

Effective February one.

Hutch Robbins has been appointed as the executive Vice President and General Counsel will tell us.

Hutch brings more than 28 years of experience, providing counsel to publicly traded companies on business and corporate matters dispute resolution and avoidance and litigation.

Additionally, we promoted Troy Bertram to senior Vice President of sales.

He will lead our channel direct federal and commercial sales efforts and we will continue to expand our sales channel and cloud partnerships.

Troy joined <unk> last year, bringing with him more than 25 years of experience with government and transformative technology companies.

In January of 2022.

We announced changes to our board of directors.

We welcome Brad Jacobs, who will serve on the audit Committee and Derrick Dockery, who will serve on the management development and compensation Committee and the nominating Committee.

We also announced that burner Bailey will not stand for reelection after serving on the board for 16 years.

And on behalf of the company I want to thank Brian for his leadership and substantial contributions to tell us.

Now.

Let's turn to slide five to discuss our new reporting business segment structure.

As disclosed in the 10-K that we will issue for 2021, our business will now be broken out into two reporting business segments security solutions and secure networks.

Our security solutions segment is focused on cyber security and cloud security solutions, which include our exacta tell us coast.

<unk> 360, and our automated message handling system for AAM Hs as well as other offerings that are in the works.

Our security solutions segment generated $123 $5 million in revenue in fiscal 2021 Rep.

Representing 51% of total revenues.

We believe this business segment will generate approximately 60% of our total revenue over time.

Security solutions has grown at a compounded annual growth rate of approximately 13% over the last three years.

Our secured networks segment provides secure networking architectures and solutions too.

To our customers through secure mobility solutions and network management and defense services.

Secure networks generated approximately $118 $9 million in revenue in fiscal year, 2021, or 49% of total revenues.

Secured networks has grown at a compounded annual growth rate of 32% over the last three years.

With the segment growing an impressive 90% in 2021 alone.

We remain confident of the long term opportunities in both business segments.

Now moving to slide six we will discuss where we stand now since our IPO.

Since our IPO, we have taken several actions that are positioned telus well for the future.

We bolstered our financial flexibility and improved our cash flow.

Invested for the long term and also expanded margins.

Our channel ecosystem expanded our customer base and cultivated our team.

We ended 2021 with financial flexibility.

We repaid all our debt we remain highly liquid with a cash balance of approximately $127 million.

And we are approaching positive cash flow.

Since our IPO, we have made significant investments in our business to support continued long term growth.

We doubled our total investments in our sales and marketing functions.

Our sales and marketing investments were focused on building out our direct federal enterprise and channel teams.

These sales professionals are focused on expanding our security solutions, primarily exacta tell us coast.

Trust 360, and acquiring new customers largely in regulated industries.

And we've expanded our gross margins and adjusted EBITDA margins, while making these investments.

Furthermore, since our IPO, we made two inorganic investments.

We acquired the remaining equity interest in <unk>, and we acquired Diamond fortress technologies.

Manufacturer of patented touchless senior printing and other mobile enabled technologies that are integral to the continued expansion of <unk> 360 services at both the enterprise and the consumer level.

We built and launched our multifaceted channel program, the tellers cyber protect partner program.

To enable tell us to reach a broader set of customers and markets.

We recruited and signed partners across our ecosystem, giving us access to new verticals, such as healthcare state local and education or sled and commercial enterprises, while augmenting our presence in the federal market.

We signed two large distributors, which provide access to thousands of new customers vendors and resellers.

We launched our first multi partner go to market go to market partnership called faster with.

Which stands for faster authority to operate or Ato with Splunk, Telos and threat alert for regulated markets.

And while we did not expect the channel to begin producing in 2021.

We did have a few deals transact through the channel, allowing us to pressure test the system.

Our business development efforts have helped maintain and expand our strong customer base through renewals and new wins.

We added more than two dozen marquee customers to our customer base <unk>.

Including AT&T Collins Aerospace IBM.

MMC, Dean Oracle Red hat stack armor, Vmware and wicker among others.

We worked with over 300 different customers in 2021.

I am proud of the hard working accountable and family friendly culture, we've cultivated at telos fueled by the talented employees and serve our customers every day.

In the last nine months, we made seven new placements on our senior leadership team.

<unk> board of directors as part of our reorganization aimed at better aligning leadership for the demands of a growing public company.

We have an accomplished employee base.

75% of our U S based employees have a technical background and 62% of our U S based employees hold the security clearance.

We have consistently been named a winner as a top place to work from publications such as inner gauge, the Washington business Journal and the Washington Post.

Let me turn to some comments on the industry landscape in a number of recent initiatives in Washington, DC that present opportunities for tellers.

Congress has finally reached agreement.

On FY 2022 appropriations legislation.

Which will provide billions of dollars in cyber security funding to federal agencies, including many <unk> customers.

The final spending Bill Bruce Cyber security funding in several several areas of note.

Including for the foreign defense.

Infrastructure, cyber security and risk management operations.

Funding is also included in these final FY 2022.

Appropriations bills to help implement president and <unk> executive order on cyber security issued in May of 2021.

That executive order, which drew heavily on guidance from the National Institute of standards and technology or NIST directed federal agencies to accelerate migration to the cloud and make greater use of zero Trust architecture.

Both of which are addressed by Telos solutions.

To carry out that executive order the office of management and budget released its final zero Trust architecture strategy for federal agencies, the goals of which are organized using the cyber security infrastructure and security agencies or sisters Zero Trust.

The maturity model.

Agencies will be required to meet specific zero trust security goals by the end of FY 2024, and a must develop zero trust migration plans that meet the requirements and include budget planning for those efforts.

We continue to see increased federal state and commercial market interest for secure fully integrated enterprise class hybrid and multi cloud environments that support everything as a service.

We call it acts as a service or ex Aaas.

Our business developers are positioning tell us cloud flat platform fully equipped and integrated with our suite of products, including Exacta Ghost and I'd Trust $3 60 to accelerate cloud modernization, while aligning compliance with the administration's latest cyber security mandates.

Including Zero Trust architecture, and the department of Homeland Security Cyber security and infrastructure Security Agency cyber security division's continuous diagnostics and mitigation activities for strengthening the security posture of our customers.

One of our security solutions tell us Ghost complement zero Trust security.

This creates an additional layer of defense against intruders by heightened critical resources and users in an anonymous undiscovered will network.

Tell us goes to protect assets of critical infrastructure from unauthorized access.

Exacta streamlines and automates the critical processes of the leading cyber security standards and frameworks, particularly the federal risk and authorization management program or fed ramp.

Allowing all process participants to collaborate within the same exact application to obtain a fed ramp ato.

<unk> facilitates faster migration to the cloud.

Exactly there is also a trailblazer in adopting the open security controls assessment language or <unk> for short, which is a multi format framework adopted by fed ramp to allow security professionals to automate security assessment auditing and continuous monitoring processes.

Here's some other initiatives to be aware of.

The executive branch is putting emphasis on greater use of automation and the fed ramp process and on supply chain risk management, which are also focus areas for telos.

Mist is developing a ransomware profile based on the NIST cybersecurity framework, which is specifically intended to help organizations manage ransomware related risk and tell our solutions will support this.

In addition, the fed ramp process is now being adopted at the state level and state ramp will likely expand the market for telos fed ramp offerings.

We believe there could ultimately be an increased need for the solutions supplied by <unk> driven by the additional federal cyber security funding appropriated by Congress and the additional security goals agencies will be required to achieve.

And finally, the emergence of new conflicts in Europe have elevated the cyber threat level globally and further underscores the urgency of cyber security best practices.

I will now turn the call over to Mark who.

Who will discuss fourth quarter and full year 2021 results and our guidance for the first quarter and full year of 2022.

Mark.

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

Let's turn to slide seven.

I am pleased with our results this quarter.

We completed a challenging year with a strong fourth quarter and delivered on our guidance.

We reported sales at the midpoint of our guidance range.

And adjusted EBITDA above the high end of our range.

During the fourth quarter, we achieved 43% sales growth.

A 51% increase in gross profit.

196 basis points of gross margin expansion.

Our record adjusted EBITDA.

Our 13, 8% adjusted EBITDA margin.

And a 19% improvement in adjusted EPS.

Free cash flow was $7 $2 million outflow as expected, representing an $8 $2 million improvement over the same period last year.

Now, let's get into the details starting with revenues.

Fourth quarter revenues grew 43% from four from $44 $9 million in 2020 to $64 $1 million in 2021.

Fourth quarter revenues for our security solutions business grew 37% from $24 $7 million in 2022 to $33 $9 million in 2021.

Strong growth in security solutions was primarily driven by our Telos I'd business, where all major programs, including our confidential healthcare program with the federal government contributed to growth in the quarter.

Unlike earlier quarters in 2021, the wind down of our contract with the U S Census Bureau did not present, a year over year headwind in the fourth quarter.

Growth in <unk> was partially offset by year over year declines in information assurance and secure communications.

The decline in information assurance reflects the quarterly Lumpiness in perpetual license sales that are characteristic of the current revenue model in that business.

Perpetual license sales in the fourth quarter of 2020 were unusually high due to the timing of large sales that benefited the quarter and created a difficult year over year comparison with the fourth quarter of 2021.

Half of all perpetual license sales in 2020.

<unk> in the fourth quarter of that year.

If commercial customer preferences increasingly drives the revenue model in that business over time from a perpetual license model, which is more common historically with our government customers.

To a subscription model, which is more common with our commercial customers.

We expect the quarterly year over year comparisons to become more consistent and predictable over time.

But of course, the tradeoff will be less revenue recognition and growth in the short term.

And we would otherwise realize under a perpetual license model.

The decline in secure communications reflects lower volume on a single large contract with a classified government customer.

Total fourth quarter revenues for our secures our secure networks business grew 49%.

From $22 million in 2020 to $30 $1 million in 2021.

This significant increase was driven by the same two large programs that have driven growth for secure networks throughout 2021.

The rollout continued for a contract to provide security modules and kits to support the upgrade of theater Deployable communications for the U S Air Force.

And site work continued on a five year U S army contract to support the migration and modernization of telephone communication systems throughout the Pacific region.

As expected during the quarter and as discussed on our third quarter earnings call supply chain constraints with one of our subcontractors deferred several million dollars of revenue from the fourth quarter of 2021 into 2022.

The impact of these constraints was partially offset by revenue on other programs within secure networks that accelerated from 2022 and to the fourth quarter of 2021.

The net impact is a few million dollars of revenue slipping from 2021 into 2022.

Now, let's discuss profitability and cash flow.

Fourth quarter gross profit increased 51%.

From $16 million in 2020.

$224 1 million in 2021.

Fourth quarter gross margin increased 196 basis points from 35, 7% in 2022.

To 37, 7% in 2021.

Cost of sales included $672000 of stock compensation expense, which did not exist in the same period last year.

Excluding the impact of stock compensation expense gross margins increased 301 basis points to 38, 8%.

Security solutions drove gross margin expansion for the company, primarily due to excellent profitability and Telos I'd.

Partially offset by lower margins due to less favorable sales mix and secure networks.

Security solutions gross margins expanded over eight percentage points.

From 47, 4% in 2020.

To a record 55, 7% in 2021, driven by favorable sales mix within <unk>.

Secure networks gross margins contracted approximately 400 basis points from 21, 5% in 2020 to 17, 5% in 2021 due to higher revenue recognition on lower margin programs in the quarter.

SG&A and R&D expense increased by $3 9 million from $25 $7 million in 2020 to $29 $6 million in 2021.

The $3 9 million increase was primarily driven by stock compensation expense that we did not have in the prior year period, as well as higher sales and marketing expense.

Partially offset by lower G&A expense due to the elimination of executive bonuses as a result of the company underperforming its financial plan for the year.

Operating income before stock compensation expense increased from a loss of $9 $7 million in 2020 to a profit of $7 4 million in 2021.

Operating income benefited from higher gross profit driven by both sales growth and gross margin expansion.

As well as lower G&A expense due to the elimination of executive bonuses, partially offset by higher R&D and sales and marketing expense.

Adjusted net income increased from a loss of $4 $1 million in 2020 to a profit of $7 $3 million in 2021.

The corresponding adjusted quarterly earnings per share increased from a loss of <unk> <unk> per share in 2020 to a profit of <unk> 11 per share in 2021.

EBITDA adjusted for the impact of stock compensation expense increased by $11 5 million from a loss of $2 $6 million in 2020 to a profit of $8 $8 million in 2021.

Adjusted EBITDA margin was 13, 8% during the quarter.

The $8 8 million of adjusted EBITDA in the quarter was $3 $9 million above the top end of our guidance range of $3 9 million to $4 9 million.

The $3 $9 million outperformance above the top end of our guidance range was primarily the result of four items, including <unk>.

Lower cost as a result of actions, we took to REIT structure and defer expenses associated with the TSA pre check program to better align the timing of expenses with the timing of revenues on that program.

Higher than expected capitalization of research and development expense.

Lower G&A expense.

And a resolution with the defense contract management agency on final rates for incurred costs from prior years.

Free cash flow improved by $8 $2 million from an outflow of $15 4 million in the fourth quarter of 2020 to an outflow of $7 2 million in the fourth quarter of 2021.

The $8 $2 million improvement in free cash flow was primarily driven by $4 6 million of higher net income excluding stock compensation expense.

And $7 $5 million of improved working capital dynamics.

Partially offset by $3 $5 million of higher capital expenditures.

For the full year cash from operations was $7 $3 million inflow.

And free cash flow was a $5 9 million outflow.

Let's turn to slide eight to recap our full year 2021 performance compared to our original 2021 guidance.

Overall 2021 was a disappointing year due to the impact of customer delays beyond our control on two large programs that proved to be insurmountable.

At the midpoint, our original 2021 guidance included $34 5 million of adjusted EBITDA.

And an 11, 9% adjusted EBITDA margin.

Customer delays on major programs eliminated approximately $21 million of profit from our 2021 performance.

Accordingly, everything else held equal we were on a path to generate only $13 $5 million of adjusted EBITDA and a five 7% adjusted EBITDA margin due to the deleveraging effect of markedly lower than planned revenues against our cost base.

But through outperformance compared to plan elsewhere in our portfolio.

Most notably in Telos, I'd revenue and margin performance.

As well as below the line cost discipline and actions, we took to restructure and defer expenses associated with delayed programs.

We delivered $24 4 million of adjusted EBITDA for the full year and preserved double digit adjusted EBITDA margins.

Although we are disappointed with the impact of the customer delays, we are proud of our team for focusing on what they can control.

Outperforming in other parts of the portfolio and taking the actions necessary to deliver double digit adjusted EBITDA margins for our shareholders.

Now, let's turn to slide nine to discuss the special accounting topics relevant to our 2022 guidance.

And our past communications regarding the TSA pre check program. We have estimated the size of the revenue opportunity based on gross revenue accounting, assuming tell us would be treated as the principal to the transaction with the TSA pre check applicant for accounting purposes under ASC six.

<unk> hundred six.

However, the application of ASC 606 in this particular case can be open to interpretation.

Accordingly, we engaged an independent third party to conduct a technical accounting review of the program and to provide an opinion on the application of ASC 606.

We also worked closely with our auditors.

Through this process, we have determined tell us to be an agent has defined by ASC 606, as it relates to the per applicant fee for service collected by tellers and paid to the TSA and FBI as part of <unk> enrollment services offering.

Therefore and occurred in accordance with ASC 606 tell us will record revenue from applicants for this service net of the fees paid to the TSA and the FBI as part of the arrangement.

Under net revenue accounting revenue recognition is 64% lower than gross revenue recognition on new enrollments and 61% lower on renewals.

Profit, however is unchanged and margins are significantly higher.

The underlying profitability cash flow and fundamental economics of the transaction with the applicant are unchanged.

With that backdrop, let's turn to slide 10 to discuss our outlook for 2022.

For 2022, we forecast sales in a range of $226 million to $257 million based on the net revenue accounting illustrated on the prior slide.

This compares to sales of approximately $226 million to $276 million based on gross revenue accounting.

Our guidance includes $226 million to $245 million of revenue before any benefit from the TSA pre check program.

And $12 million of net revenue or $31 million of gross revenue from from pre check at the top end of the range.

The bottom end of the range includes no pre check revenue.

Adjusted EBITDA is the same under gross revenue accounting and net revenue accounting.

We forecast adjusted EBITDA of $21 million to $28 million, including approximately $3 million of contribution from pre check at the top end of the range.

Before any benefit from pre check we forecast security solutions revenue to grow plus or minus mid single digits, including modest contribution to growth from higher software sales.

Security solutions grows mid teens at the top end of the guidance range, including $12 million of pre check net revenue or approximately 31% on a gross revenue equivalent basis.

We forecast secured networks revenue to be down mid single digits to high single digits due to a $30 million headwind from the completion of two large programs, partially offset by new business in the second half of the year.

Gross margins are likely to be higher as a result of higher secured networks gross margins.

Margin accretion from pre check and a slightly higher weighting of revenues to security solutions as compared to last year.

We expect below the line expenses, excluding stock compensation expense to be approximately $3 million to $13 million higher due to higher depreciation and amortization TSA readiness sales and marketing and other G&A expenses.

Upside opportunities include faster than expected pre check ramp.

Higher end market demand due to the current threat environment.

Increased demand for multi cloud environment solutions as a service.

Better than expected sales force productivity high.

Higher secured networks new business.

And lower below the line expenses, especially at the high end of the guidance range.

Over the course of this year, we will be monitoring the returns on our investments very closely and making adjustments as needed to manage margins and cash flow.

Let's turn to slide 11 to discuss our guidance for the first quarter.

For the first quarter, we forecast sales in a range of $44 million to $48 million and adjusted EBITDA of negative $2 million to positive $2 million.

We forecast security solutions revenues to be up mid teens, primarily due to continued strength in our confidential healthcare program with the federal government.

We expect no pre check revenues in the first quarter.

We expect secured networks revenues to be down low 30% to mid 40% due to a $14 million headwind.

On a large program that is coming to successful completion in 2022.

Gross margin is expected to be up to 10 percentage points higher due to significantly higher security solutions gross margin.

And favorable mix shift between security solutions and secure networks compared to the same quarter last year.

Below the line expenses, excluding stock compensation expense are expected to be approximately 4 million to $6 million higher due to the ramp in investment that occurred during the second half of 2021.

Lastly, before passing it back to John I'd like to provide an update on the filing of our 2021 and 10-K.

As previously discussed the filing of our 10-K was delayed primarily due to delays in completing our first annual Sox 404 assessment of our internal control over financial reporting.

On Monday of this week, our auditors notified us that they needed additional time to complete certain testing and internal quality control of their Sox 404 audit.

We intend to file our 10-K in the coming weeks.

As previously disclosed we and our auditors have identified material weaknesses within some of our internal processes that we are in process of remediated and will be disclosed in our 10-K.

At this time no audit adjustments are expected.

With that I'll pass it back to John who will wrap up on slide 12.

Thanks, a lot mark.

Obviously, we've had a lot going on in 2021, and we're very excited about the prospects of 2022.

And proud of the accomplishments we achieved in our first full year as a public company.

And we developed our leadership team and board of directors.

We focused on what we can control and delivered growth in margin expansion notwithstanding the very disappointing customer delays our major programs.

And we reported a strong finish to a challenging year delivering on our fourth quarter guidance.

We are closely monitoring our returns in our investments and were focused on striking the right balance between investing in our future and managing our costs, our margins and cash flows.

And with that operator, I'd like to please open the line for Q&A. Thank you.

Thank you as a reminder to ask a question you'll need to press star one on your telephone to withdraw.

Our next question. Please press the pound key.

Please standby.

Of Q&A roster.

Our first question comes from Seth <unk> with B Riley Securities. Your line is open.

Yes, hi, good morning, John and Mark Thanks for taking my questions Mark just starting off with security solutions the growth outlook mid teen year over year growth, even inclusive of TSA pre check.

Can you give us a sense of kind of what has really changed in that number versus what you provided.

November and your preliminary outlook.

Yes, so the main difference there.

The ongoing delay in TSA pre check when I gave the.

22 outlook on the third quarter call I think what I indicated for security solutions was year over year growth in the high Thirty's.

With primary substantially all of that growth coming from pre check.

And the assumption there was that we would receive the authority to operate by the end of 2021 here.

<unk> mid March we have not received the authority to operate yet and so you're seeing a difference in the assumption on TSA pre check there at the top end of the range. So on a gross basis.

On a gross basis, including our pre check assumption you will see security solutions growing in the low thirties.

Versus the high Thirty's that I indicated the Delta there is the difference in the pre check assumption.

And then the difference between the low thirties.

And the mid teens is the difference between gross revenue accounting on pre check and net revenue accounting on pre check.

On.

On an apples to apples due to compare apples to apples it would be high <unk> growth.

Versus low <unk> growth.

And that difference being the delay in project.

Got it got it understood and just a point on TSA pre check I mean, any sort of updates you can give us on kind of what is causing the ongoing delay in at the high end of your guidance.

The assumption that youll receive the Ato or TSA pre check.

Exactly this is mark Griffin, we still remain optimistic for an Ato in 2022, the timing of the TSA Ato still is solely within TSA gives control.

So.

We do we do remain very optimistic that we will get it and as Mark indicated we have.

In our forecast still getting the Ato in 2022.

Understood and bark unsecured networks on that side of the business I mean down mid single digits to high single digits I believe for the full year guidance.

I mean can you give us a little more insight into kind of the assumptions baked into that number I know your two larger programs rolling off but that was just kind of curious if there is other opportunities to offset some of those programs.

Yes.

So you're right that the main driver there is the approximately $30 million headwind year over year and as a result of the wind down of the two large programs that drove the growth in that business in 2021, and then that's going to be partially backfill bye.

By new business.

That we're pursuing here in 'twenty, two youll see that mostly in the second half of the year.

But our assumptions on new business wins do not fully backfill the wind down in those two large programs.

Understood and a final question for me.

Nice to see some of the adjusted EBITDA margins going to remain intact. Despite the delays with these larger programs, but how.

How should we be thinking about free cash flow generation just based on the current adjusted EBITDA guidance you've given.

Yes, so on free cash flow my rule of thumb and I think that's the way I encourage folks to too.

To think about free cash flow for us.

If you look at.

Think of it as adjusted EBITDA.

Minus capex.

That will give you a free cash flow of approximately approximately free cash flow before any impact from working capital.

And so for 'twenty, one if you call it roughly $25 million of adjusted EBITDA approximately in the middle of the range we.

We've given you about 12 million of Capex and capitalized software and the assumptions in the appendix the modeling assumptions in the appendix. So that gets you to about $13 million of free cash flow before working capital and.

And so from there you got to think about some working capital assumptions I Havent gone so far as to put out working capital assumptions.

Kind of going to depend on how working capital behavior towards the end of the year here, but with sales excluding pre check approximately flattish.

And then pre Chuck having pretty favorable working capital profile.

Would point us to.

Better free cash flow this year than we had last year.

Potentially positive free cash flow.

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

The remainder of the quarter.

Thanks, Jeff.

Thank you. Our next question comes from the line of Brad Clark with BMO. Your line is open.

Hi, Thank you for taking my question I wanted to ask about the STM Nash contract and really an update on.

On the prior call you took it out of you.

Full year, 'twenty, two guidance, which I assume it inherently to sham.

Update but would you be able to provide.

Yes, thinking around that contract I understand in that over the past EASA has awarded other types.

The contract to do that.

<unk> provided.

<unk>.

Or really an understanding of what what to expect with that Mitch.

Going forward.

Slide 22, with mostly beyond FY, 'twenty tailwind and any risk reward we should be thinking about.

Hello. This is mark Griffin on the CMS program.

We are still.

Very much in line with expansion for that contract and the ability for that contract to expand.

And so from a future point of view, although you're right. It's not in our 'twenty two plan right now.

We do feel as though the Medicare and Medicaid fraud, and abuse objective of that organization to fingerprint and certify healthcare providers is still a requirement and still exist. So although I don't have an update.

On the timing at this time, we still remain optimistic that it is a valid and an opportunity for <unk> to grow into that space.

Okay. Thank you and then just another follow up from me with regard to the sales force, you've obviously done a lot of hiring over the past year and a half.

A lot focus on the commercial market it can be able to provide an update on where you are in the scale or general marketing investment tossed at AK steel to be Don perhaps.

Pleasure to expand into some of these commercial and channel opportunities.

An update on the shape and size of the accounts and planned for.

Hum.

Over the next 12 lifestyle months. Thank you.

Yes. This is mark Griffin again, so as far as the sales force is concerned we round that out that.

Salesforce, primarily at the end of 2021 with the last of the hires.

So we increased our direct carrying sales force and channel.

Market to enhance the federal sales force that we had so now we're having the salesforce listen to the customers and expand their knowledge base to position those products, whether it be exact that goes through <unk> Trust III 60, not only with the channel, but the state and local education markets that we spoke about earlier.

So from a marketing point of view the marketing group, obviously are supporting those sales force with sales books sales plans. So from my perspective, those groups are fairly flushed out now as far as staffing now we're into an execution stage, where we're starting to build the pipe.

Blind and starting to build the backlog for sales opportunity. Although we are seeing the sales cycle on some of these.

Or a little bit longer than what we anticipated which is why we historically have said that we will see some results from those organizations in the second half of this year.

But I think the main point as well as Mark is that the pipeline has expanded relatively significantly for us outside of the four walls of the federal government and so we are seeing a relatively.

Relatively significant increase in our funnel.

Which as we've talked about previously we should see the result of in the second half of 2022.

Great. Thank you.

Thank you our.

Our next question comes from Rudy Kessinger with D. A Davidson your line is open.

Hi, Thanks for taking my question so on TSA.

On the Q3 call. It was mid November and you said you expected to get the Ato by the end of the year. So.

Kind of a six week window, where you expected to get it and now if I look at the low end of your guidance Assumption Bureau from TSA Youre, essentially saying here, we sit in March and it could fall at any point in the year. So how do you go from expecting to get it within six weeks to know not.

Really being able to point us to when you expect to get it over the next nine months.

Mark Griffin again.

Working relationship we have with TSA.

It's primarily confidential as it relates to the details, but we are going through a government process and so our expectation on.

Our speed and in compliance with that process.

<unk>.

Was was one expectation that we had said we still believe we will rather expeditiously get through that process, but because it's a government ato process and its they are controlling the process.

I don't have any updates beyond that estimate at this point that we will get it in 2022.

I am not able to pick a specific date in 2022 at this time. So Rudy this is John .

And.

I'm going to say I'm going to be a little more.

That's about it.

In the past when we've given timelines those timelines have been given as a result of.

Information, we've gotten from the customer.

And as everybody knows we have missed those timelines.

And as a result this is just a tremendous amount of frustration I am sure that you feel I know that I feel is a very large investor and im sure that the rest of the investment community feels.

So we said okay if.

If we assume that nothing happens in pre check.

What's it look like what's what's this case look like what does tell us look like.

And so we created this model this low end of the model.

Do I actually think that's going to be the case I don't.

I do believe we're going to get pre check.

I know that it's at the highest levels of the organization inside of TSA.

No that is very important.

But to this point, it's been a very frustrating process for us.

Because when we were first awarded the contract back in January of 2020.

The initial indication from the customers that we were supposed to have or Ato by September of 2020 and for various reasons that didnt happen.

Again beyond our control. So that's why we're putting in that low end case.

We went to market with the market to understand that we can still work to a profitable level.

Without it.

Obviously, though we want TSA in there clearly we I believe fundamentally TSA is going to be in a very very important part of the growth of the company.

But I for one have been just sort of tired of throwing out dates when when mark sent out Mark Burns.

On the Q3 call.

Set out.

Sort of we didn't give guidance just to be very clear to everybody on this call here, we gave a framework.

And that framework said that we pre suppose we would have an approval by June one.

For the Ato.

While that didn't happen.

So again, what we are.

We're trying to do here with for purposes of 2022 and beyond is not leave our investor base frustrated that as we leave 2022, we want our investor base to be very happy that they have made the investment and stuck with the company. So that's my two cents on a Rudy.

Okay Fair enough and then.

So if I take into consideration this 30 million headwind you're facing in secure networks. If I just do some quick math, there I exclude $30 million from your 2021 revenue you would have grown.

18%.

Rather than 35% and then if I look.

At the guide in 'twenty, two by assumes zero from TSA and so it takes 6 million out of your revenue mid point that would drop into $2 $35 5 million.

And again I compared to <unk>, 21 X $30 million to adjust for that headwind.

You would only be looking for 11% growth in 'twenty two versus 18% in 'twenty, one ex the TSA and ex that $30 million headwind.

And just in light of the number of additional sales reps you've added the number of partners and you've added.

Why why are we not seeing results from those investments faster and why the lower growth profile, even after I make those adjustments.

Yes, So first I wanted to address your point about secure networks on the secure network side when we when we come to a successful conclusion on our program generally speaking we're back with that same customer.

Rebidding additional opportunities with that same customer so we don't see it as as the same kind of risk profile that perhaps youre.

Putting the odds on if you will.

As it relates to the 2022 performance on the on the investment on commercial sales and channel sales, we do expect to see very good take up in the second half of the year, but we're not going to put numbers in until we feel like the numbers are there.

So right now I think we have in front of US. The case that says this is what we see and as we see more things happening in the quarter, we will be sure to update our numbers to the street.

Mark I'll turn it.

Turning to you and see if you have any additional points on that.

The only additional points I would just put stomp what John had indicated there is and you kind of mentioned it earlier is the the hiring of the sales force and the training of the sales force to know the solution and to position that with the customer is taking a little bit longer than what I think.

We had originally anticipated and so I think we will see growth in the last half of the year.

And as we do see growth earlier, we will update those those positions, but I think it's really just the on boarding of the sales the positioning of those with the customer listening to our customers on the value of our solutions.

We will drive additional growth beyond what we currently have shown.

Okay, and then just lastly.

The accounting change and TSA it makes perfect sense to me.

Yes.

Youre, saying $12 million net on $31 million gross that's 39% gross margin. If you were recognizing it on a gross revenue basis, obviously understanding going forward is on the net basis, but as we think about it from a modeling perspective, I think about 'twenty three if I take whatever two to 3 million sign ups.

Times 85 per times your share a third what kind of gross margin.

We apply to the gross revenue.

To get to your net revenue on a longer term basis, I guess, what I can at 39% gross margin go.

In 'twenty, three and beyond as you get fully ramped with TSA.

So really I would think of it as.

So thinking of it on a on a net basis here.

The revenue is pretty much all margin on a net basis and then.

Youre going to have probably.

You get you get very good operating leverage there. So I'd say, we have about call. It high single digit millions high single digit to double digit millions of.

Relatively fixed costs.

And that program.

So as those net revenues ramp.

Youll see the margins expand with that both gross and adjusted EBITDA margins ramp with it.

So.

That's how I would think about modeling it over the medium term as you get to a run rate number.

Okay got it thanks for taking my questions.

Thank you. Our next question comes from Alex Henderson with Needham <unk> Company. Your line is open.

Thanks.

So.

You delayed your report because of that.

The issues associated with.

The material weakness.

Process and then.

Actually get that resolved.

Put out.

Change in the accounting here on 606 shouldn't that have been.

Added pre IPO.

And we shouldn't have been consistent with what you had was doing.

Anyway, so shouldn't you have known that before your IPO.

And then on top of that.

Giving us guidance now on two segments, but.

Masking the difference between dosed in exactly which are very different than <unk> hundred 60 Trust why aren't you putting this into a into three segments. So that we can get reasonable transparency.

It seems like.

The.

Transparency is not.

There that we need.

To properly analyze the situation based on.

Some of these changes.

The other <unk>.

That I want to address a little bit upfront.

Okay.

Can you give us some sense of.

What is going on in terms of dose you have mentioned that at all.

And then.

Also.

Lack of transparency on the reason behind Medicare Medicaid dropping completely out and the reason for the continuous delays, yes, we realize it's a government program and we realized governments can be sickle, but you should give us some sense of the real.

<unk>.

This is occurring as opposed to just the fact that the.

That it's a government program can you please be a little bit more upfront about why TSA is.

Assistants, delaying and by the way the comment that it was supposed to be by September .

The original expectation was actually June July so, it's actually slipped out a lot more than you indicated.

So.

Some of those pieces.

Just to be clear, what I said, when I said <unk>.

September I meant September of 2020.

The job was awarded in January of 2020.

And the initial indication by the customers that we would have been had our Ato 270 days. After the award in January of 2020 and that didn't happen.

And then to address your point the reasons. Please.

I'll have to turn it over to Mark because as far as I know that I don't think I actually can.

No Alex.

Okay.

TSA is largely a confidential program and so we're not able to talk the specifics of where we're at in the Ato process. The Ato process as a security compliance process and so we can't divulge based.

Basically the details behind that program or where we're at in that program because of security concerns as it relates to that program. So we still remain optimistic for an Ato in 2022.

Timing of the Ato is purely in TSA as control at this point.

Is this a function of.

Your process on <unk>.

How you deliver the data to date situations, where they are uncomfortable with their security posture.

Some some broader explanation then we can't talk about it at all.

Given this hardly seems reasonable.

Excuse me.

We've said this in the past.

What we said is that the customer was very concerned about ransomware.

So they had to go through a bowl of their own systems first.

And then they had to go after the other high priority systems of which this is one but we're just not through the process yet.

So you are saying that instill a security process in their operations, that's causing the issue yes.

Yes, Sir.

Mark Correct me if I'm wrong.

Alex by by Nature, and Ato is authority to operate its run by the security group within TSA and so we are engaging with that group within TSA and Thats largely a confidential operation in our program and run by TSA. So we're operating under the TSA rules.

And we'll get our Ato when TSA completes their process.

Okay, so going back to some of the other issues. There's no mention of progress. Some dosed at all can you talk about what's going on there.

Sure before I do that though I'd like to talk about the segment reporting.

We mentioned that we saw with that special confidential customer that we were able to sell more or less our services as a solution.

And it's these are exact as a service ghost as a service <unk> Trust as a service that is happening more and more throughout the government.

And so we see a big opportunity for us to continue to do that.

Which is going to take advantage of each of the different capabilities inside of security solutions. So it does make sense for them to be two segments versus one at least in our opinion, Alex when you think about ghost the opportunity for goes is really an embedded opportunity.

It's we announced as an example, Johnson controls.

We have we've now been in.

And put it into their line card with separate pricing.

Johnson controls has a.

Has a quota that they are running their own sales force through where they're selling ghost as a service through their cameras and then they will be adding ghost as a service through their HVAC systems et cetera, all of that stuff, we've announced I think previously just to.

We didn't think we needed to bring it up again today, but so I apologize that we didn't bring it up today.

So is there any progress on the timing of it.

When do you expect it to ramp any commentary.

It's going to create revenue for us in the second half of this year.

And thats coming directly back from Johnson controls.

Their own feeling is that this will be a very significant differentiator for their own sales force compared to other.

Cloud based cameras as a service and so they see this as a significant differentiator for them over the other cloud based camera providers.

And so we.

I think we will see is we'll see good.

Uptick from that I also think that Youll see ghost being embedded is.

Components of other capabilities over time, and so that's how we expect to sell it won't really end up being sold direct to the end user by and large there are.

There are obviously examples where it is sold directly to end users, but the bigger opportunity is embedded.

So the product embedding.

Embedded in.

That it's going to be embedded in will be launched by Johnson controls by the.

Middle of the year, and therefore can ramp into the back half.

No. It is it will be launch it will be launched by the first part of April .

Alright, so its launching in April and then some.

Months, plus cell cycle, therefore start to kick in in the back half.

I think thats correct.

Alright.

Back to exactly can you talk about your penetration of the cloud customers.

The Microsoft and Amazon.

Sales organizations are we selling your product and why.

That business is ramping at a steeper rate than your expectations.

Well, we have we have seen.

We are seeing our customers who are also our partners begin to sell us through their own channel.

WNS has sold four or five different opportunities for us.

Microsoft has sold two or three for us.

I think we will be announcing.

In my opinion, probably the most.

Significant announcement, we've made around cloud providers.

This quarter.

It's not just around if you will the government are fed ramp.

It's really an announcement that's related to them using us around their global footprint.

And.

And I think that's going to be a very exciting thing for us.

They've given us their own.

Internal financial models about what they expect it to mean and so when we announced that we will give we'll put more detail around it but generally speaking Alex the other cloud providers have started out really in our sweet spot whether it be fed ramp or be the intelligence community, so whether you're talking about oracle or.

Or IBM or excuse me oracle or Microsoft or AWS, that's really where they're starting to us is in those sweet spot that we're in.

This other cloud provider is really thinking of us as a way for them to accelerate cloud adoption globally as a way to differentiate themselves over the other players.

So like I said, we're very excited about it we will be announcing in the.

Worst case in April .

But it's a it's a relationship that's been under discussion now for the last year and change.

So just going back to the original question when do you expect this cloud customers.

Cloud sales organizations to materially impact and drive exact to growth to a much higher rate of growth in those.

Currently guided to in the current outlook.

Like I said, we are keeping it.

I think Q3 Q4.

Is the timeframe to be thinking about where you see significant financial impact from the from the cloud providers Alex.

Which is in line with what I think we've been saying previously.

I'll cede the floor. Thanks.

Thank you.

Thank you.

Question comes from Tony.

Capital markets. Your line is open.

Yes. Thank you.

In the slide deck, you mentioned modest growth contribution from higher software sales can you help range what type of growth to SaaS I mean for exact suncoast online year over year basis.

Embedded in the guide it's relatively modest it's a think of it as.

<unk>.

Few million dollars year over year of additional information.

Information assurance software sales.

I also think it has changed in the model in the hall from mostly perpetual to mostly.

Pay as you go or subscription subscription base. So your order flow may be a lot higher based on the timing but.

But the revenue impact we will obviously be affected if you see my point.

Yes so.

Between those two answers few million year over year increase includes the negative impact.

Going from mostly perpetual to consumption.

That's correct.

And so if you were to normalize as it were.

Our all perpetual staying all perpetual what type of year over year growth on a percentage basis would we be looking at guessing that a few million dollars would be.

Hi.

Single digit sort of year over year growth.

And so if we normalize for these for that.

Perpetual consumption, what does that mean in terms of year over year growth.

So I don't know that we've actually looked at it that way. We've just said that since it's going that way. This is how we believe the numbers.

We'll look.

We'd have to get back to you with the details on that when the home.

Okay.

Okay.

Because it all comes down to timing right.

When the deal comes in right. So.

We'd have to we'd have to get back to you.

Yes understood.

And then you also mentioned.

The answer to one of the other questions that you are seeing sales cycle expand a bit can you expand upon why you think thats happening.

Yes, as Mark Griffin the.

A comment was related to.

Both not only in the government, but also in the commercial side.

Requirements that the customers have for certain fields and certain options within the tools that we sell and the software that we sell so from a from a development point of view, we're also having to update and enhance the products to address some of the commercial and some of the state and local markets with product enhancements.

And so that's extending some of the sales cycle, while we add make those modifications to the product in order to complete those opportunities.

I see I understand okay.

And then just on the 10-K filing to delay Mark I thought I heard you basically say that the delay is associated with the <unk>.

Sarbanes Oxley compliance needs of the auditor and nothing to do with the weakness in controls identified is that correct.

Correct. So we're going through our first Sox 404 audit this year.

So it is the first time that both we and our auditors have gone through that process together.

First time, you go through that process, especially for a newly public company, it's never been through the process before.

It has a long and thorough and involved process.

So that's really been the driver of the delay.

Tail end here, our auditors are going through their own internal.

Quality check process.

Their audit and how they conducted it.

So until that is completed we have to hold off on filing our K, but it's not it's not directly driven by the material weaknesses, but rather just the ongoing duration of the process. One other thing worth pointing out historically, we filed our K over the last five.

Years three of the five times, we filed in early April .

And the other two years over the last five years, we filed on either the very last day of March or a few days before so relative to prior years, we are still on track here, but.

We became a large accelerated filer for the first time as of the end of this year, which which accelerated our filing date by a month.

So technically at this point.

The 10-K is late but relative to prior years, we are still on track.

Understood.

Last line of questioning is on TSA to be clear none of the other two TSA Gen. Two pre check contract providers have been given an aqua already operates correct.

That's correct.

Okay.

And then I think just a few days ago Accenture Federal services was recently awarded a TSA 190 $199 million of wind over seven year period for a consolidating three conventionally three credentialing systems into a single platform to improve how TSA response to threats.

Any relevance to the delays youre seeing on the Ato then.

So just just to be clear so that the contract we terminate entirely as big Craig So.

And we're slowly see in humans.

We have an internal.

Classification that we call it big cred and so that contract is.

Ben held by Accenture, then IBM and now back to it to Accenture and its the modernization behind the scenes of TSA for that contract. So you are correct $199 million seven year contract and so we hope that contract would eventually add some efficiencies and some improvements.

To some of the processes, we're seeing on the program as I mentioned in the press release so.

No immediate impact because this contract has been around for a while and.

So they've recompete it and opened it up again and it was awarded we hope in the future. There is a modernization of TSA backend infrastructure that would facilitate contracts like we have today.

I guess.

It sounds like this.

Modernization and consolidation should help with the cyber security posture.

And that seems to be the main thing that's been holding back the authority to operate.

Whereas that reasoning and correct.

TSA backend systems historically have needed modernization and this is a contract that hopefully addresses that.

Not disagreeing with your comment.

Okay. Thank you.

Yeah.

Thank you. Our next question comes from Andrew King from Colliers Securities. Your line is open.

Hey, there. Thanks for taking my question just a few clarifications on the TSA contract once you receive the authority to operate.

Customer goes to the TSA website in order to renew or to enroll and TSA pre check how has that awarded two three companies on the contract.

Hello, Alex are Andrew Marc Marc Griffin.

On the TSA website.

<unk> positioning.

Offers for each.

Offer that is eligible at the time.

<unk> will be presented on the website in a consumer will be able to pick a rotating offering on that website on the.

Offer or the.

The company of their choice at that point, so its a rotating offer on TSA website, where you can enroll or renew youll.

You'll be the consumer will be given a choice.

Okay got it and then.

Looking at the market for the contract how quickly do you think you can get to a one third share given that one of the other companies on the contract with obviously the incumbent and other clearly as the large portion of travelers mind share and a clear.

<unk> for cross selling with.

Current travelers and a consumer based product.

Sure.

Would hope with that within a year or two we would be at one year share are one third share.

Any clarification as to how you.

Do you get there and how you compete with the other crops.

People on the contract offering.

Sure as part of our strategy and offering that we had presented to TSA, we're expanding on enrollment sites to approximately 600 500 retail locations.

Which is doubling the current enrollment site offering that the incumbent has so we're doubling enrollment sites. So that's part of the strategy is.

Is convenience for the customer to make enrollment easier and more convenient for the consumers.

That's one of the strategies that we are we'll be employing.

Okay.

Thank you. This will conclude today's question and answer session I will now turn the call back over to Mr. John <unk> for closing remarks.

Thank you very much.

I just wanted to thank everybody for their support I know, it's been a very.

So a rough and tumble year for 2021 for us, but despite that I'm very proud of my team for what we've been able to do to capitalize on what we had in front of us in any event.

We see obviously an increased emphasis on cyber security across.

Both the commercial and the government world.

Our solutions will continue to take us out into 2022 and beyond and I do see our take up accelerating so I just wanted to say to everybody on the call here today. Thank you very much for listening and for your ongoing support thanks a lot.

Thank you. This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.