Q1 2022 Telos Corp Earnings Call

May 10, 2022

[music].

Yes.

Ladies and gentlemen, thank you for standing by and welcome to <unk> Corporation first quarter 2022, Alright, Thanks 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 then one on your telephone.

If you require any further assistance please press star zero.

I would now like to turn the conference over to your speaker for today Christine.

Kristina Manav Mazzo Paris, you may begin.

Good morning, Thank you for joining us to discuss <unk> Corporation's first quarter 2022 financial results with.

With me today is John Wood, Chairman and CEO of <unk>, and Mark <unk> Executive Vice President and CFO would tell us.

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

John will begin with brief remarks on our 2020 to first quarter results and tell us as strategic priority.

And Mark will cover the financials and guidance for second quarter and full year 2022.

Then we will open the line for questions and answers, where Mark Weston Executive Vice President of security solution 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 tell us its financial performance.

These non-GAAP financial measures should be considered in addition to and not as a substitute for or in isolation from GAAP results.

You can find additional disclosures regarding these non-GAAP measures, including reconciliation and comparable GAAP results in our earnings press release and on the Investor Relations website.

Please also note that financial comparisons are year over year, unless otherwise specified the.

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.

I am pleased to report that tells US is off to a sound start for 2022.

Mark will discuss our financial performance later on this call, but at a high level, we delivered $52 million of revenue in the first quarter above the high end of our guidance range.

Security solutions grew 18% year over year, while secured networks was down 29% as expected due to a large program that is coming to a successful completion this year.

Both segments performed slightly better than our first quarter guidance.

Gross margin was also slightly above our guidance range at 37, 6%.

Due to margin outperformance in both businesses.

Finally, we delivered $1 million and adjusted EBITDA above the midpoint of our guidance range and a modest 1% adjusted EPS loss.

Now, let's turn to slide four to discuss our recent business highlights and updates.

This quarter, we announced a new product offering the tellers advance cyber analytics solution or telos HCA.

We believe this solution offers unique capabilities and we will address critical unmet needs within today's cyber security environment.

More specifically with Telos HCA customers can in near real time detect malicious activity on cover and identify previously unknown attacks and new malicious behavior enhanced network protections and over the near term attribute and Geo locate malicious cyber <unk>.

Activity and assist in the attribution of events of a concern with actionable information.

We are offering tell us.

As a service with sophisticated capabilities and comprehensive analytics with minimal financial and technical barriers to adoption.

We are very excited about this new offering, which we believe will create value for our customers and shareholders alike.

Beyond the <unk> launch, we have continued to maintain momentum with key wins and renewals for exact sales and services, including Ernst and young Amazon Web services, the National Security agency as well as a new foreign government customer.

We continue to focus on the government and commercial space and in particular prioritizing regulated industries.

Within our channel partner program recent developments in the first quarter include the establishment of a partnership with caris soft to further expand the reach of all of <unk> security solutions.

The secure communications business continues to perform at a high level of quality and customer satisfaction, achieving a 100% renewal rate for our automated message handling system.

Secure networks is having success with new contract wins, including a recent award with the United States Air Force Academy to upgrade and expand their network infrastructure.

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

So by the administration has now submitted its proposed FY 2023 budget to Congress, which calls for a nearly 11% increase in nondefense cyber security funding next year.

Much of this is to help agencies meet the priorities outlined in last year's cyber security Executive order.

As noted on our previous earnings call last year's Cyber security Executive order directed federal agencies to accelerate migration to the cloud and make greater use of zero Trust architecture.

Both of which are complemented by Telos solutions.

The President's budget.

Specifically emphasizes this continued push for zero trust as well as boosting supply chain security.

Yeah.

The proposed budget also calls for roughly a 4% increase in defense spending.

Although the department of Defense nodes. This did not include funding to help Ukraine or to address the potential Russia, Ukraine War impacts here at home.

Nor Dod acknowledged did the proposed budget fully account for the impacts of inflation.

In recognition of these items most observers anticipate that Congress will significantly boost defense spending in real dollar terms well above the levels proposed in the President's budget.

The Russia, Ukraine War has resulted in an increasingly elevated warnings or potential cyber attacks against U S interests, including against U S critical infrastructure.

This continues to highlight the need for the public and private sectors to adopt cyber security best practices and ensure their cyber security posture is ready and able to meet these new and evolving threats.

I will now turn the call over to Mark <unk>, who will discuss first quarter 2022 financial results and our guidance for the second quarter and full year 2022 Mark.

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

Let's turn to slide five.

As John mentioned, we're off to a sound start to the year with results that met or exceeded our guidance for the first quarter.

We reported sales and gross margin above the high end of our guidance range.

Over 1100 basis points of gross margin expansion.

30% increase in gross profit.

And adjusted EBITDA above the midpoint of our guidance range.

We also delivered a $6 $4 million increase in free cash flow.

Turning free cash flow positive for the trailing 12 months period.

Now, let's get into a bit more details starting with sales.

Total sales were $52 million.

Security solutions contributed $26 9 million or 54% of total sales.

And secure networks contributed $23 2 million or 46% of total sales.

The 54% contribution from security solutions compares favorably to the 41% contribution for the comparable quarter last year when a large order from a secured networks customer pulled forward from the second quarter to the first quarter of 2021.

Year over year total sales contracted 10% as expected due to the previously mentioned pull forward of the large order last year as well as the ongoing wind down of that same program. This year.

Excluding that program total sales grew 19%, including 18% growth within security solutions, and 20% growth within secure networks.

Turning to profitability and cash flow first quarter gross profit increased 30% as a result of more than 1100 basis points of gross margin expansion.

The gross margin expansion was driven by a more favorable sales mix between security solutions and secured networks as well as gross margin expansion within both reporting segments.

Security solutions gross margin expanded over 500 basis points to 55, 9%.

And secure networks gross margin expanded over 80 basis points to 16, 4%.

As a side note much of this gross margin expansion will reverse in the second quarter as expected, but net net we expect to deliver gross margin expansion for the first half of the year overall.

Adjusted EBITDA and adjusted EPS declined slightly due to the ramp in investments in R&D and SG&A over the course of 2021.

Free cash flow improved by $6 4 million, turning free cash flow positive for the trailing 12 months period.

The improvement in free cash flow was the result of more favorable working capital dynamics compared to the same period last year.

Let's turn to slide six to recap on our gross margin expansion and free cash flow trajectory over the past several quarters.

Since our IPO, we have made steady and significant progress on gross margin expansion and free cash flow generation.

On a trailing 12 month basis gross margins and free cash flows have improved every quarter for the past four quarters.

Gross margins expanded 530 basis points between the trailing 12 month period, ending March 31, 2021, and the equivalent period ending March 31, 2022, due to gross margin expansion within both security solutions as well as secured networks.

Similarly free cash flows improved by $19 6 million as a result of improved profitability and working capital dynamics.

I expect these metrics to have short term ups and downs over time, but the overall upward trajectory illustrates our focus.

On balancing investments in our future with margin and cash flow performance today.

In particular, our positive free cash flow for the trailing 12 months is an important milestone.

As we become a consistent free cash flow generator over time, we will consider various options to deploy our capital that remained consistent with our strategy, including a share repurchase program.

Now, let's turn to slide seven to discuss our outlook for the second quarter.

For the second quarter, we forecast sales in a range of $50 million to $54 million and adjusted EBITDA of negative $2 million to positive $2 million.

We forecast security solutions revenues to be down low to high teens, primarily due to the completion of the 2020 census program in 2021.

<unk> in perpetual license sales and lower revenues on a single program and secure communications.

We expect no TSA pre check revenues in the second quarter.

We expect secured networks revenues to be up mid single digits to mid teens, primarily due to lower revenues in the comparable period last year as a result of the previously mentioned pull forward of a large order into the first quarter from the second quarter of 2021.

Gross margin is expected to be down between seven percentage points and nine percentage points as expected primarily due to the year over year change in revenue mix between security solutions and secure networks.

In addition revenues within each of security solutions, and especially secured networks will mix lower in the second quarter.

But overall for the first half of the year, we expect gross margins to be higher year over year.

Below the line expenses, excluding stock compensation expense are expected to be approximately $3 $5 million higher due to the ramp of sales marketing and G&A investment during 2021.

And lastly on slide eight we're making no changes to our full year guidance. So far the year is progressing as we expected when we originally set our full year guidance in March.

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

Thank you Mark in summary, we reported substantial gross margin expansion and gross profit growth in the first quarter.

We generated significant free cash flow improvement in the quarter and free cash flow turned positive for the trailing 12 month period.

We continue to develop our portfolio of new growth vectors, including the launch of our telos advance cyber analytics offering.

And we remain focused on striking the right balance between investing in our future and managing costs margins and cash flows today.

And with that we're happy to take questions.

Operator, please open the lines for Q&A and we ask the call participants to please be mindful of others in the queue by asking only one question. Thank you.

Thank you ladies and gentlemen.

Wanted to ask a question you will need to press Star then one on your telephone.

So withdraw your question <unk>.

Again, Thats star one to ask the question.

Please standby, while we can Pat Mchugh Q&A roster.

Our first question comes from the line of Alex Henderson with Needham.

Okay.

Yes.

Thanks.

I was hoping you could give us some granularity the performance of exact goes to MH.

And I Trust with particular focus on.

<unk> scale and growth rates.

And what's the impact has been the sales hiring that you did last year as well as the third the resale opportunity whether that's kicked in with the key cloud companies, Microsoft and Amazon.

Of all wrapped up into that same question.

Hello, Alex This is mark Griffin.

Take your question a couple of parts.

We had expected or we had forecast that the exacting go sales would be starting to see results from the expansion in sales and marketing efforts in the second half of this year and so that is still tracking we did report that we received a foreign government award for exact in that.

Resulted in Q2, so things are tracking right now based on the forecast that we presented as it relates to exacting goes in the second half of the year.

Trust is progressing now with the confidential health program and our efforts within our defense manpower data center as well as other program. So right now the.

The progress that we're making in the Q1 and we're projecting in Q2 are playing out as we expected and the timing of those.

Could you just give us some sense of what the rate of growth is in those product areas. So that we have looser baseline.

Yes, Alex we're not.

We're not giving granularity down to the.

Level below our reporting segments.

Security solutions was up 18% I would say that was primarily driven by our I'd business.

Comms was a little secure communications, which includes A&H Edson Ghost was.

Lower year over year due to a single program that.

That renewed at a slightly lower level last year. So we'll see the impacts there and then on the IAA side, what I'll say is that.

Software revenues were lower although orders were higher.

The reason for the difference is that the orders this year were more weighted to <unk>.

Subscriptions than to perpetual licenses.

Thank you.

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

Yes. Good morning, Thanks for taking my questions and congrats on solid results here.

Just following up a little bit on Alex's question.

Our Q2 guidance Mark can you give us some more insight into what are some of the moving parts on the impacts that we're seeing for security solutions.

Down kind of low to high teens I believe is the guidance here in Q2.

Yes, so it's a couple of items.

I'd say on the information assurance side, where I would say were flattish year over year.

Secure comms will be lower year over year due to lower volume in that single program that I that I, just mentioned to Alex and then on the I'd side.

We did have.

Those census, ramped down significantly from 'twenty to 'twenty. One there was still sensus revenue running through 'twenty, one is running at about.

<unk>.

A million and a half or more a quarter.

And so when you look at that just on a quarterly basis and as described that only the security solutions.

Youre going to see a year over year impact there. So those were those are the main items. So census overall for total company.

Isn't that big of an impact, but when you start looking at it just for security solutions or in particular, just for the I'd business year over year, it's more meaningful.

Got it that's helpful. Thanks for taking my question.

Sure.

Thank you.

Our next question is from the line of Keith Bachman with BMO. Your line is open.

Hi, This is Brian Clark on for Keith. Thank you very much for taking my question I wanted to.

Okay.

Sorry program seemingly weigh down with the authority to operate but it seems like buy here.

Graham.

Three months ago.

Wanted to check if there's any sort of update that.

That could be helpful.

We should be thinking about.

The puts and take up the program throughout the year and uneven.

Forward.

Another follow up.

Jonson control program could go.

Half of 2022.

How would how should we be thinking about that scale crack and then baton Coppola.

Maybe some upside later in the year. Thank you.

Good morning, this is mark Griffin.

Yes, we are still engaging daily with TSA, and making progress towards an Ato positive progress and achievement of the security protocols is happening and we look forward to becoming a TSA pre check provider.

Our focus still is achievement of that this calendar year.

And so we are making progress on that.

Every day, we meet with them, we escalated our concerns up to the highest levels within TSA.

But every day, we are making progress towards that end, we are very excited about becoming a Tuesday project provider.

The Johnson controls.

Reached out obviously as a partner of them on the solution and that's the <unk> solution within that program and more confident based on their forecast and their executive leadership that ghost will become.

Our main stay in their product later in the second half of the year. So we're still very positive that could be upside.

For the year based on that.

In that area. So we look forward to seeing sales on that side as well.

Thank you.

Thank you our next call comes from the line of any hall Celski with Northland Capital markets. Your line is open.

Yes. Thank you.

Dan Farber Airlines program looks really interesting.

How long have you been building pipeline for us.

<unk>.

How big do you think this can be over time say relative to exactly.

Hey, knowledge John Wood.

So we started doing advanced cyber analytics and the government several years ago.

And we really fine tune it for the commercial market over the last nine months roughly.

I think the use cases for four advanced cyber analytics is pretty significant in that.

Most times when people go in and try and figure out what happened. It's a it's after the fact.

We're trying to do is we're trying to offer a service thats approximately 98% automated that provides near real time information as to anomalies on your network.

With a very small portion being service based which means we're able to then take that that anomalous data and then we're able to essentially put a fence around it and located if you will the bad actor from where they actually are operating and so in this particular case the use cases can range from.

When we started was around things like tariffs and dark.

<unk>.

Going after those kind of bad guys. In this case, it's going after that.

Bad guys that are involved in things like ransomware and other things so.

I think the market is quite significant for us on.

The other thing I think it's great about this particular offering is it's not hard for someone to sign up for it and it's basically an annual agreement with monthly pricing based on the scale of service than the kind of analysis. That's required. So we're very excited about it as it relates to the size compared to <unk>.

<unk>.

Say, it's too early to say exactly right now in the hall, but in terms of the excitement in the marketplace. I think it's people are quite excited about it.

Great. Thank you.

Youre welcome.

Thank you.

Our next question comes from the number kind of Moody Kissinger with D. A davidson.

Your line is open.

Great. Thanks for taking my questions I guess following up a bit on that last question. Just can you give an update on.

This commercial stand right now either as a percentage of revenue or the pipeline our growth rate and where do you see.

Getting to over the next six to 12 months.

And then with $120 million in cash getting the positive free cash flow and trailing 12 month basis, just how do you think going forward. How do you prioritize between buybacks you mentioned that but buybacks strategic M&A reinvesting into the business for accelerated growth how do you kind of prioritize between those three.

Okay.

Okay. So first on the on the pipeline.

A great deal of our pipeline, we feel is going to come through the channel going forward.

We do see direct sales opportunities obviously as a result, as a result of us selling as we had been selling all along but I think the vast majority of the growth from our point of view is going to come from large channel partners and so we.

In terms of percentages I'm not sure I can I can provide that level of detail for you.

Maybe maybe I'm going to turn over to Mark a little bit here and I think we had I'd say on a revenue basis commercial is still very modest very modest as we would've expected at this point I'd say on a pipeline basis, it's more weighted to commercial on a pipeline basis than it is on a revenue basis.

I agree and then I think the other thing.

The rest of the analysts on the call here just to remind you the vast majority of the of the commercial.

Sales opportunity is going to be in the form of.

The SaaS model or a subscription model, so you'll see a higher level of order, but we will be reflecting that revenue over a period of time versus the way we have traditionally done it as a perpetual model and the government in the past, where you take a upfront with 20% of the licenses over 20% in the maintenance over time.

I don't know if that answers that question Rudy does it.

Yes, it does.

And then I apologize what was the second part of your question yes.

Yes, just capital our buyback.

Yeah, just by allocation M&A, how do you think about capital allocation.

Got it I'm going to I'm going to turn it over to Mark to answer that Rudy I'd say I'd say in terms of prioritization first and foremost our priority is to invest in the business invest in our future and the growth of the company. So that's our first priority.

Four.

Our free cash flow generation going forward, where I would like to get to us to a place where we are.

Consistent free cash flow generator.

So that we can start to.

At some point here are put in place potentially a buyback program or we are consistently buying back stock and then I would say.

Third would be opportunistic M&A and the reason why I would put it third is that I think that will be a bit more opportunistic and episodic.

Where as.

On the buyback side again, Mike to get to a place where we are consistently generating free cash flow and then Ken Similarly consistently be buying back our stock, especially at these prices.

Great. Thanks, guys.

Okay.

Thank you.

So any further questions in the queue I would now like to turn the call back over to Mr. John <unk> for closing remarks.

Thank you operator.

First and foremost I just want to thank our shareholders for your ongoing support.

In these markets.

We are progressing as expected disc.

Despite all the turbulence out there and we remain focused on delivering for our customers and our shareholders.

In 2022 and beyond and so I just wanted to say thank you very much for your support and thank you for listening and I'll talk to you soon bye bye.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.

Okay.

Yes.

Sure.

[music].

Okay.

Fair enough.

Yes.

Hello.

Yes.

Okay.

[music].

Yes.

Got it.

Okay.

[music].

Yes.

[music].

Okay.

Yes.

Okay.

Sure.

[music].

Yes.

Okay.

Hum.

Okay.

[music].

Okay.

Yes.

Okay.

Yeah.

Yes.

Okay.

Yes.

Okay.

Yeah.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Yeah.

Okay.

Yes.

Okay.

Yes.

Okay.

Sure.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Thanks.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Ladies and.

Gentlemen, thank you for standing back and welcome to <unk> Corporation first quarter 2022, Alright, Thanks 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 then one on your telephone.

If you require any further assistance. Please press star then zero.

I would now like to turn the conference over to your speaker for today Chris.

Kristina Manav Mazzo Paris, you may begin.

Good morning, Thank you for joining us to discuss <unk> Corporation's first quarter 2022 financial results.

With me today is John <unk>, Chairman and CEO of pellets, and Mark <unk> Executive Vice President and CFO of <unk>.

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

John will begin with brief remarks on our 2020 to first quarter results.

And tell us a strategic priority and.

And Mark will cover the financials and guidance for second quarter and full year 2022.

Then we'll open the line for questions and answers when Mark question 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 clarify measures to help investors understand pellets its financial performance.

These non-GAAP financial measures should be considered in addition to and not as a substitute for or in isolation from GAAP results.

You can find additional disclosures regarding these non-GAAP measures, including reconciliation and comparable GAAP results in our earnings press release and on the Investor Relations website.

Please also note that financial comparisons are year over year, unless otherwise specified.

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.

I am pleased to report that tell us is off to a sound start for 2022.

Mark will discuss our financial performance later on this call, but at a high level, we delivered $52 million of revenue in the first quarter above the high end of our guidance range.

Security solutions grew 18% year over year, while secured networks was down 29%.

As expected due to a large program that is coming to a successful completion this year.

Both segments performed slightly better than our first quarter guidance.

Gross margin was also slightly above our guidance range at 37, 6% due to margin outperformance in both businesses.

Finally, we delivered $1 million and adjusted EBITDA above the midpoint of our guidance range and a modest 1% adjusted EPS loss.

Now, let's turn to slide four to discuss our recent business highlights and updates.

This quarter, we announced a new product offering the <unk> advance cyber analytics solution or <unk>.

We believe this solution offers unique capabilities and we will address critical unmet needs within today's cyber security environment.

More specifically with tell us.

Customers can in near real time detect malicious activity uncover and identify previously unknown attacks and new malicious behavior enhanced network protections and over the near term attribute and geo locate malicious cyber activities and assist in the attribution.

Events have concern with actionable information.

We are offering <unk> as a service with sophisticated capabilities and comprehensive analytics with minimal financial and technical barriers to adoption.

We are very excited about this new offering, which we believe will create value for our customers and shareholders alike.

We continue to focus on the government and commercial space and in particular prioritizing regulated industries.

Within our channel partner program recent developments in the first quarter include the establishment of a partnership with caris soft to further expand the reach of all of <unk> security solutions.

The secure communications business continues to perform at a high level of quality and customer satisfaction, achieving a 100% renewal rate for our automated message handling system.

Secure networks is having success with new contract wins, including a recent award with the United States Air Force Academy to upgrade and expand their network infrastructure.

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

The by the administration has now submitted its proposed FY 2023 budget to Congress, which calls for a nearly 11% increase in nondefense cyber security funding next year.

Much of this is to help agencies meet the priorities outlined in last year's cyber security Executive order.

As noted on our previous earnings call last year's Cyber security Executive order directed federal agencies to accelerate migration to the cloud and make greater use of zero Trust architecture, both of which are complemented by Telos solutions.

The President's budget.

Specifically emphasizes this continued push for zero trust as well as boosting supply chain security.

The proposed budget also calls for roughly a 4% increase in defense spending although.

Although the department of Defense notes. This did not include funding to help Ukraine or to address the potential Russia, Ukraine War impacts here at home.

Nor Dod acknowledged did the proposed budget fully account for the impacts of inflation.

In recognition of these items most observers anticipate that Congress will significantly boost defense spending in real dollar terms well above the levels proposed in the President's budget.

The Russia, Ukraine War has resulted in an increasingly elevated warnings or potential cyber attacks against U S interests, including against U S critical infrastructure.

I will now turn the call over to Mark <unk>, who will discuss first quarter 2022 financial results and our guidance for the second quarter and full year 2022.

Mark.

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

Let's turn to slide five.

As John mentioned, we're off to a solid start to the year with results that met or exceeded our guidance for the first quarter.

We reported sales and gross margin above the high end of our guidance range.

Over 1100 basis points of gross margin expansion.

A 30% increase in gross profit and.

And adjusted EBITDA above the midpoint of our guidance range.

We also delivered a $6 $4 million increase in free cash flow.

Turning free cash flow positive for the trailing 12 months period.

Now, let's get into a bit more detail starting with sales.

Total sales were $52 million.

Security solutions contributed $26 9 million or 54% of total sales.

And secure networks contributed $23 2 million or 46% of total sales.

Year over year total sales contracted 10% as expected due to the previously mentioned pull forward of the large order last year as well as the ongoing wind down of that same program. This year.

Excluding that program total sales grew 19%, including 18% growth within security solutions, and 20% growth within secured networks.

Turning to profitability and cash flow first quarter gross profit increased 30% as a result of more than 1100 basis points of gross margin expansion.

The gross margin expansion was driven by a more favorable sales mix between security solutions and secured networks as well as gross margin expansion within both reporting segments.

Security solutions gross margin expanded over 500 basis points to 55, 9% and.