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spk01: Ladies and gentlemen, thank you for standing by, and welcome to the TELOS fourth quarter and full year 2020 earnings call. At this time, all participant lines are in listen-only mode, so if you require operator assistance, please press star, then zero. After the presentation, there will be a question and answer session. To ask a question during the session, you will need to press star, and then one. Please be advised that today's conference may be recorded. I'd now like to hand the conference over to your host today, Brinley Johnson of the Blue Shirt Group. Please go ahead.
spk06: Good afternoon. Thank you for joining us today to discuss TELUS Corporation's fourth quarter and full year 2020 financial results. With me today, March 25th, is John Wood, CEO and Chairman of TELUS, and Michelle Nakazawa, CFO of TELUS. Let me quickly review the format of today's presentation. John will begin with some brief remarks on the 2020 year-end results, a brief corporate overview, and TELUS's strategic priorities, and Michelle will cover the financials and guidance. Then I'm going to turn the call over to the analyst to dig into Q&A. I will conclude by taking investor questions that were submitted in advance of our call. The earnings press release was issued earlier today and is posted on the TELUS website where the call is being simultaneously webcast. Before we get started, we want to emphasize that some of our statements on this car are forward-looking statements and are made under the safe harbor provisions of the federal securities law. These statements are based on current expectations and assumptions that are subject to risks and uncertainties Actual results could differ for various reasons, including the factors described in our today's earnings press release, in 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 certain non-GAAP financial measures, which we believe are useful as supplemental and clarifying measures to help investors understand TELUS's financial performance. These non-GAAP financial measures should be considered in addition to and not as a substitute for or an annihilation form GAAP results. You can find additional disclosures regarding these non-GAAP financial measures, including reconciliations with comparable GAAP measures in our earnings press release and on the investor relations page of the TELUS website. The webcast replay of this call will be available for the next year on our company's website under the investor relations link. With that, I'll turn the call over to John.
spk11: Well, thank you, Brindley. Hi, everybody. I'm John Wood, the CEO and Chairman of Telos Corporation. Welcome to our fourth quarter and full year 2020 financial results conference call. We're really excited to be hosting our first earnings call as a publicly traded company on the NASDAQ. Today, on behalf of the entire Telos team, I'm pleased to share with you our recent success and our roadmap for future growth. You know, 2020 was a momentous year for the company. We closed our public offering on November 23, 2020, raising just over $292 million in gross proceeds, $38 million over the initial raise due to our underwriters exercising the over-allotment option. With the proceeds of this transaction, we cleaned up our balance sheet, we simplified our capital structure, and we bought back the interest of Telos ID, a subsidiary that previously we only owned half of. After all those priorities, we ended up with a little over $120 million in cash in the balance sheet, which has allowed us to invest in our strategic priorities, which I'll discuss in more detail later in the call. Since this is our first earnings call, I wanted to start by giving you a brief overview of the company. The best way to set the stage is to underscore that the Telos brand is predicated on trust. Trust is reflected in the values that guide how we operate and in the solutions that we deliver. We're governed by the tenets of integrity and collaboration, and we deliver offerings that ensure cyber, cloud, and enterprise security for public and private enterprises. So at Telos, our core values are woven deeply into our culture, based on a commitment to serving our customers and helping them conduct their most critical missions. We are a leading cybersecurity company with a strong history, of providing security solutions to the most sophisticated security customers. Our customers include some of the most security conscious organizations in the world, including both the defense and the intelligence communities. We offer superior solutions and capabilities. Our solutions are designed for both government and commercial industries and are configured to operate in highly sensitive, highly classified environments. Our solutions fall into two broad categories, security solutions, and secure networks. Currently, security solutions account for about two-thirds of our revenue, and secure networks account for about one-third of our revenue. Our security solutions include Exacta, which is a premier platform for enterprise cyber risk management and security compliance automation, delivering security awareness for systems in the cloud, on-premises, in hybrid, and in multiple cloud environments. We also have a solution called Telos Ghost, which is a virtual obfuscation network as a service with encryption and managed attribution. These capabilities ensure the safety and privacy of people, information, and resources on the network. Essentially, the way it operates is if you can't be seen, you can't be hacked. That's Telos Ghost. We also have a solution called the Telos Automated Message Handling System, or AMHS. AMHS is a web-based organizational message distribution and management solution for mission-critical communications. And finally, we have a solution called ID Trust 360, an enterprise-class digital identity risk platform for extending SaaS and common digital identity services that mitigate threats through the integration of advanced technologies that fuse biometrics, credentials, and other identity-centric data used to continuously monitor your trustworthiness. Our secure networks solutions include secure mobility and network management and defense. Our secure mobility solutions for business and government enable secure remote work across and beyond the enterprise. Our network management and defense services allow for operating, administrating, and defending complex enterprise networks and defensive cyber operations. So for the next few minutes, I'd like to share with you some of the company highlights from 2020. From an operating perspective, we saw continued adoption of our solutions through existing customer expansion and new customer acquisitions. Notable customers who expanded their exact engagements with us in 2020 included the 16th Air Force, who expanded their licenses from top secret to now include secret. The U.S. Social Security Administration expanded upgraded to an enterprise-wide license, and as we recently announced, they also exercised the first option year of this contract. The U.S. Department of Energy's Office of Intelligence and Counterintelligence moved to full enterprise licensing, and the U.S. Environmental Protection Agency expanded to an enterprise-wide license. In 2020, we also saw the large-scale adoption of our EXACTA offering by a new customer, the Federal Bureau of Investigation, or FBI. The FBI awarded Telos a contract for enterprise-wide risk management valued at approximately $13.5 million. Xacta has been successfully deployed across the federal government, including the intelligence community, civilian agencies, the Department of Defense, and we are proud to extend this work to the FBI. We continue to see increased commercial adoption of our offerings, including the purchase of Xacta for internal use at places like Microsoft, Zscaler, Infor, Accenture, and others. Largely based on our success in airport employee vetting, we competed for and were awarded the U.S. Census Bureau contract to vet 2020 census enumerators or census takers. In partnership with Office Depot, we quickly developed a network of 1,100 physical processing centers supporting the objectives of the Census Bureau with an integrated digital and physical infrastructure solution on a national scale. We take great pride that we were able to process more than one million applicants over four months during the height of COVID, thereby keeping the decennial census on track. We also received multiple large long-term contract wins. TELUS was one of three awardees chosen by the Transportation Security Administration to provide TSA pre-check enrollment services. Under the terms of this 10-year contract, ID Trust 360 will collect application materials, biometric data, and fees from each applicant and will provide all the necessary information to TSA for adjudication. TELUS was also awarded a 10-year, multibillion-dollar contract by the Centers for Medicaid and Medicare Services in 2020 using ID Trust 360 to vet approximately 1.5 million healthcare providers annually, among other tasks. TELUS was also awarded a classified government contract where TELUS is providing the underlying security for our customers so that they can complete their missions on the public Internet and the dark web through misattribution. Several additional government customers are planning to use this contract to access these capabilities. We anticipate a long-term relationship with this customer. You know, we had other significant deals as well in 2020, including a $66.4 million contract with the Air Force and a $26.6 million contract with the Army. Both of these contracts are with our secure networks business. We also received a $15.6 million agreement with DISA for our AMHS solution. Over the past year, Telos formed strategic partnerships and alliances that helped expand our footprint both domestically and globally. For example, our relationship with ST Engineering, a global technology, defense, and engineering group, will extend the availability of Telos Ghost and Xacta into Asia and the Middle East. We also have continued and strengthened our relationships with leading cloud service providers like Amazon Web Services and Microsoft Azure, and we expect other cloud providers as well over time. We also bolstered our board of directors and advisory board in 2020. To usher in a new era of growth and expansion for the company, TELUS welcomes illustrious new members to our board of directors and advisory board, including noted entrepreneur and investment guru Fred Schaufeld, Presidential Medal of Freedom recipient and Tragedy Assistance Program for Survivors founder and president, Bonnie Carroll, and four-star Army general, the longest-serving director of the NSA, and the first commander of U.S. Cyber Command, retired General Keith Alexander. And as we look to 2021, the company is off to a strong start by creating new foundational partnerships, which I will discuss in more detail. We've also been successful in securing over 75 million of new orders so far this year, This includes a recently awarded one-year contract with a customer that is using both of our security solutions and our secure networks capabilities, and this is valued up to about $34 million. If this overall solution is proven successful, this could be repeated in several other locations around the United States. So now I'm going to talk a little about innovation. If we look towards our product portfolio, in 2020 we made a number of very important enhancements, to our Exacta offering to include support for multiple cloud environments. This functionality allows customers to manage cyber risk and compliance for complex IT environments that spend cloud, multi-cloud, on-premises, and hybrid environments. These enhancements also accelerate cloud adoption and digital transformation by reducing regulatory compliance efforts. These capabilities will benefit government organizations and regulated industries globally. As cyber threats continue to escalate, especially since the beginning of the pandemic, the solutions we provide must evolve and grow. In 2020, we added enhancements to the Telos Ghost offering that included a collaboration capability to the private unified communications platform that allows the ultimate cloaking of voice, video, and chat services with a secure collaboration repository. This enhancement provides the ability for worldwide collaboration of mission-critical information while ensuring cyber attack services are eliminated. As privacy and security of connected devices continue to be threatened, 2020 initiatives included not only adding new capabilities for device-based users, but development to embed the Telos Ghosts access technology into network devices and application software. These enhancements expand potential use cases for Telos Ghosts into markets like education, Internet of Things or IoT, banking, healthcare, and other critical infrastructure markets. So turning to strategic initiatives, we see significant opportunity to expand the sales channel and margins for Xacta and Telus Ghost. When sold through the channel, the gross margin of Xacta increases to approximately 90%, and the gross margin for Telos Ghost expands to approximately 85%. To accelerate the actualization of that expanded gross margin, we began formalizing our sales channel program in late 2020 and are continuing that effort in 2021 by bolstering the sales and marketing teams. With the proceeds from the IPO, we now have the additional resources necessary to fund expanded sales and marketing efforts. In the last three months, we've ramped up our overall sales investments, including hiring new senior channel leaders, senior sales reps, a senior sales leader, and a vertical subject matter expert. These sales professionals bring with them a broad swath of experience from organizations such as AWS, Dropbox, Code42, DocuSign, EMC, and more. In a relatively short period of time, we've made good progress executing against our plan to increase our sales organization from 14 people that would be eight quota-carrying salespeople and six support staff, to approximately 60 people before the end of June. Half of this investment is to build out a robust channel organization. In total, we expect to increase our sales and marketing expense to approximately $20 million in 2021, an almost 178% increase over 2020 spend. We expect to see the benefits of these investments with incremental revenue growth beginning to ramp in the second half of 2021. Over the next several years, we plan on increasing our sales and marketing spend as we see the results of our investments. We expect this new funding will allow us to increase margins as well as see significant expansion in both new customer acquisition and vertical markets. The effort to restructure and build the Telos partner ecosystem will be a key growth driver for the company. We look forward to strengthening and forming new relationships with partner companies who share in our unwavering commitment to integrity, and excellence for our customers. We have already seen success in this area, fostering new partnerships that will make a big impact. Next, I'd like to highlight just a couple of these partners. First, I'd like to talk about our newly formed relationship with Johnson Controls, or JCI. They are the global leader enabling smart, healthy, and sustainable building. JCI is also known, among other things, for their very sophisticated cameras and security systems. JCI and Telos came together to integrate the Telos Ghost virtual obfuscation network into JCI's CloudView gateway. The CloudView gateway allows multiple security cameras to connect to a cloud-based repository and a video analytics platform, which supports a worldwide cloud-based video network used for surveillance and physical security. By embedding Telos Ghost into the product, JCI is able to hide the camera's source location, and the destination information repositories from adversaries, thereby protecting their customers. In addition to the product integration, JCI and TELUS have formed a partnership to jointly market and sell the combined solution to various markets, including education, military bases, healthcare organizations, and other campus environments around the United States. We're also working with OmniAlert, a pioneer in emergency communications, to integrate Telos Ghost into the OmniAlert emergency communication system and AI-powered gun detection software. Adding network obfuscation and misattribution capabilities to OmniAlert's gun detection and emergency alert software enhances the solution's ability to prevent loss of life in the event of an active shooter situation. Mission is incredibly important to us at Telos, and we couldn't be more gratified that our cybersecurity technology will be leveraged by OmniAlert gun detection and emergency alert software to keep campuses safe and ultimately save lives. Integrating Telos Ghost into the OmniAlert's innovative gun detect offering will ensure all on campus remains safe and secure. We also recently announced our partnership with Zscaler, a leading cloud security provider, to integrate our enterprise risk management solution, or Xacta, into their offering. This integration will allow Zscaler to automate and streamline the complex FedRAMP and DoD IT security requirements, which will enable them to better serve their federal and Department of Defense customers. We see this as a starting point of this relationship between Telos and Zscaler and expect more to come in the future. Additionally, we are in discussions to develop a partnership with a leading K-12 online safety and effectiveness solutions provider, to integrate the Telos Ghost capabilities with their online learning solutions. We are working on a pilot project of this integration for grades K to 12 across all public schools in the Virginia County. Through this integration, Telos Ghost will protect the student's device, privacy, and identity while working online or accessing school resources remotely. We also see huge channel opportunity with the cloud service providers, or CSPs. The cloud providers see Xacta as a great way to accelerate their own customers to the cloud, and they're using it not just in the government, but in highly regulated commercial industries around the world. Cloud provider customers also take comfort that Xacta continuously updates their own security posture in multiple clouds, on-premises, and in hybrid environments, all in near real-time. In addition to fostering our existing strong relationships with AWS and Microsoft Azure, we are looking to expand our cloud partnerships with other cloud providers in 2021. Another strategic priority for 2021 is our focus on commercial and international expansion. For example, working with our partner, ST Engineering, we have recently begun an exact pilot program for a Singaporean government agency that allows them to perform security audits and assessments on their systems to determine the level of risk and manage the remediation process associated with risk mitigation. Once completed, Xacta would be adopted by multiple agencies across Singapore's government, at which point we would expand to other regulated industries like financial services in that region. In addition, ST Engineering is conducting a Telos Ghost pilot with a Singaporean government agency. We are well positioned to sell our capabilities into a dynamic and growing commercial market. For example, we have leveraged core Xacta functionality to meet the needs of large financial services and customer relationship management firms. We've also leveraged our U.S. federal government identity management qualifications to improve the speed and accuracy of employee vetting at over 100 airports, air carriers, and general aviation across the country. As a result of our focus on channel, commercial, and international expansion, our addressable market has grown dramatically. With the growth trajectory of our Xacta and Telus Ghost solutions, Driven by increased direct sales and channel partnerships, coupled with the multi-billion dollar TSA pre-check and CMS contracts, we believe we have visibility to almost a billion dollars of annual revenue within five years. In addition, about 85% of our revenue has been recurring, and we anticipate that will continue going forward despite our growth accelerating very rapidly. Moving forward, the strongest growth in our company should be driven by our security solutions business. And so in conclusion, 2020 was a record year for Telos. Despite the economic uncertainty, despite the pandemic, and everything else happening around the world, we're very pleased that we continue to win big contracts and expand our product portfolio to close out the year strong. The future is bright for the cybersecurity industry and for Telos. We're proud about what we've achieved, and we're very excited about what the future holds. So now I'd like to pass it over to our CFO, Michelle Nakazawa, who will discuss the financials in more detail. Michelle?
spk00: Thank you, John, and thank you all for joining us today on our first earnings call as a public company. I am very pleased with our 2020 financial results, and I am extremely excited about our future revenue and earnings growth for 2021 and subsequent years. During our fourth quarter of 2020, we successfully completed our IPO, which resulted in a transformation of our balance sheet. Our financial performance for the fourth quarter was revenue of $44.9 million, net income of $3.9 million, and diluted net earnings per share of 8 cents per share. Our weighted average diluted shares for Q4 were 51,288,000 shares. Our full year financial performance for 2020 is as follows. Revenue of $179.9 million, which is a 13% increase from 2019. Enterprise EBITDA was $19.4 million compared to $10 million in 2019. Adjusted EBITDA of $11.4 million, which is a 14% increase from 2019. diluted net earnings per share of $0.04 per share. Our weighted average diluted shares for 2020 were $42,877,000, which reflects the reverse stock split and the IPO. As of 12-31-2020, the outstanding share count was 64,625,071 shares. There are a number of financial results for this year that I would like to highlight. Revenue for our security solutions business was $117.3 million, which is a 15% increase from 2019. Revenue for our secure networks business was $62.6 million, which is a 9% increase from 2019. Gross profit was $62.4 million, which is a 19% increase from 2019. Year-end funded backlog was $127.7 million, which is a 14% increase from 2019. And finally, working capital finished the year at $105.3 million, which is a $102.3 million increase from 2019. Moving on to our financial outlook for the first quarter of 2021, We currently expect revenue in the range of $49 million and $52 million and adjusted EBITDA in the range of negative $1.7 million and negative $1.9 million. For the full year of 2021, we currently expect revenue in the range of $283 million and $295 million and improvement of 57% to 64% compared to 2020. and adjusted EBITDA in the range of $33 million and $36 million, an improvement of 190% to 216% compared to 2020. We remain extremely confident in our market opportunities and look forward to providing updates on our progress on a quarterly basis. With that, I will turn the call over to the operator for questions.
spk05: Operator? Operator?
spk00: Thank you.
spk05: As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Zach Cummins with B-Riley Securities. Your line is now open.
spk04: Yeah. Hi. Good afternoon. Thanks for taking my questions, and congrats on the strong results of first quarter out the gate here.
spk11: Thanks, Zach.
spk04: Yeah. John, I guess just starting off with Q4, I mean, can you go a little bit of a deeper dive into the gross margin line? I think it was a little bit better than what was in our model there and kind of some of the factors driving that better performance there in Q4.
spk11: Sure. And it's also contained in our MD&A, in our 10K, where we break out the gross margin for security solutions and secure networks. In both cases, we were ahead of plan without having the numbers directly in front of me Let me just see here. In the case of security solutions, I think we ended up at 43%. And in the case of secure networks, we ended up at around 19%. So in both cases, we were ahead of what we thought we were going to be, which I think is a reflection of a better mix of business and opportunities for us.
spk04: Understood. And can you provide us an update on the expected launch time for both the TSA and the CMS contracts as you make your way through those authorization processes?
spk11: Sure. I think that right now we are on our plan. Obviously, with the COVID vaccination rolling out, that's kind of put the healthcare industry, you know, in sort of a tizzy. But we still see very strong results for us for the second half of the year as we had expected through the IPO process.
spk04: Understood.
spk11: And the same goes with TSA PreCheck. If you think about it, we just discussed with one of our operations people inside of TSA PreCheck, when you think about it from a travel point of view, this time last year, travel was about 30% of the previous year. We're now at about 60%. of from where we were, you know, the previous year. So we see travel picking up. Obviously, with the vaccination taking place, and with testing taking place, I think people have become more more comfortable with the notion of getting on a plane and seeing friends or, or just just visiting.
spk04: Understood. And since the beginning of the year, I guess a little bit towards the end of last year as well, I mean, we've had the SolarWinds hack as well as the Microsoft Exchange hack as well. I mean, with those coming to the forefront and with the stimulus package including $2 billion of incremental technology modernization and cybersecurity funding, do you anticipate any sort of tailwind from these events or kind of how have you seen these impact your overall outlook?
spk11: So I think it does put wind in everybody who's in the cybersecurity industry's sails. You know, obviously there's a profound focus now with SolarWinds and Exchange, which is really, I think, long overdue. So, yeah, I do think there will be some benefit that will derive as an industry.
spk04: Understood. And just a final question for me around your guidance. I mean, can you give us a little more insight into kind of what's baked into there for your assumptions and maybe some areas where I guess maybe you haven't really baked into your guidance at this point?
spk11: You know, only thing I can say is our guidance is the most prudent forecast for our business at this time. And I think it's got – we think it has a – you know, we're very pleased with it. We think it's going to be a great year for the company, but without getting into lots of specific details, Zach, I think that's probably where I'd leave it.
spk04: Understood. Well, thanks for taking my questions, and congrats again on the solid first quarter out the gate. Thank you, Zach.
spk07: Thank you. Our next question comes from the line of Alex Henderson from Needham. Your line is now open.
spk02: Great. Thank you very much. I was hoping you could give us a couple of indications of Your guidance for the year is a little bit better than, I think, what the street or we were forecasting. And I was hoping maybe you could give us an indication of where that was better than, you know, where the upside variance is coming from between, you know, is it ID Trust? Is it coming from Ghost? Is it coming from, you know, any other part of your business? Which piece is driving the upside in the outlook?
spk11: Thanks for your question, Alex. What's driving our outlook is really the increase in demand on our security solutions business. I referenced an award recently that was made to us that was up to $34 million, and I think we'll be seeing more of that kind of activity, which is helping drive our optimism and confidence for 2021.
spk02: Can you give us any indication whether it's ID Trust or whether it's the Ghost AMS, you know, Ghost Xacta products that are driving it?
spk11: Sure. It's really across the board. It doesn't include the automated message handling system, Alex, but it includes Telos Ghost, Xacta, and ID Trust 360.
spk02: So all three are running ahead of the street expectations is what you're saying?
spk11: I think so, yes.
spk02: Okay. Relative to the recent hacks, can you talk about whether your Xacta product executed better than the industry as a whole in some of these fairly visible penetrations of a variety of government agencies as well as Microsoft and some cloud players? How did your software and your customers perform relative to the broader industry against that environment?
spk11: So in general, if you think about what Xacta is doing, it's helping to assure good cyber hygiene. So there are three specific cases where I think our solution helps with regard to our customers and therefore avoiding things like SolarWinds. One is in the area of strong passwords, the sharing of strong passwords. The other is in user access control, making sure that users are not able to increase their own privileges without getting either a system administrator and or an IT security professional to offset and okay those. And the last is ensuring, you know, multi-factor authentication, which if those things had happened, it would be – our customers would be safe because Xacta is constantly assessing those kinds of issues for our customers.
spk02: And if I go back to some of the announcements recently, like the JCI announcement, was that in the forecast or was that exogenous to the forecast?
spk11: So JCI as an entity is something that we talked about in generic terms during the IPO process. But JCI and the market opportunity is really a channel play between for future revenues late in 21.
spk02: Okay, so it was not in the expectations at the time of the IPO?
spk11: That's correct.
spk02: Okay, and then if I could, during the IPO process, I believe that there was a change in the federal mandate relative to what needed to be done in order to bring federal workloads to the cloud that increased the requirements to use Xacta on a site-wide license at any cloud taking those technologies on. Is that, in fact, accurate? Can you just give us some enunciation on some of that detail?
spk11: Sure. Essentially, when the intelligence community decided to move to a multiple cloud environment, the lexicon that they wanted to make sure that everybody used was the Xacta format. So that gives us an opportunity. It's a really kind of significant opportunity for us, not just in the intelligence community, but also throughout the government, I think. And remember, most of our customers are going to be not just quote, in the cloud, but most of them are going to be hybrid because they're all very large organizations. So that also presents an opportunity for Xacta.
spk02: So has they, in fact, required all clouds that are using to take on workloads that they now must have Xacta? Is that right?
spk11: Within the intelligence community, that is the understanding that everything will be put into the Xacta format.
spk02: I see. Okay. So are you now effectively the de facto standard with that product across all clouds as a result?
spk11: I think at the end of the day, for the intelligence community, I think you can say that with comfort. Overall, we are still working to make that happen government-wide, and so that is on our objectives to make happen.
spk02: And then one last question, then I'll cede the floor. Can you talk about to what extent you're seeing any traction from either AWS or Microsoft, Azure, Salesforce, selling Xacta to enterprise customers? And when do you think that that actually kicks in as a meaningful driver? Thanks.
spk11: You're welcome. From our standpoint, we see the Azure relationship driving revenues in the second half of the year towards the later part of 2021. although Azure has also just purchased more licenses, and they're doing a lot of stuff internally to make sure the testing works for their clouds. So I think it's kind of a fourth quarter activity.
spk02: And anything on Microsoft, any thoughts? I mean, AWS, any thoughts there? I'm sorry, what did you say, sir? So you answered the question relative to Microsoft. The question is to Microsoft or AWS.
spk11: I should have been more clear. We see the same opportunity with both those organizations, and it's happening roughly at the same time, Alex. Perfect. Thank you very much. Thank you.
spk07: Thank you. Our next question comes from the line of Daniel Ives from Wedbush. Your line is now open.
spk08: Thanks. So could you maybe, John, just talk about strategically conversations that you're having with a lot of these three-letter intelligence agencies? I mean, how have the conversations changed if I think about the last three months versus even the last year? I mean, is it really now a different strategic conversation, especially just given the shift to the cloud and all the threats? that we've seen across the board?
spk11: Yeah, that's a great question, Dan. There are two big swing thoughts in general, and it's not really just in the intelligence community. It's really with most of our customers. One is, you know, COVID has made people realize that they can get their work done remote, and so that becomes a conversation about how can we work with Xacta and with our remote workforce, and how can we do classified work on a remote basis? We haven't gotten there yet, nor will we for any period of time that I can see in front of us soon, where you're going to be able to classify work in a remote environment. But they may be doing things where they're declassifying some elements of the workload so you can get some work done remote. The other big strategic change in general across our customer base is multiple clouds. Everybody really doesn't want to get so invested in one cloud provider. So I think that's why having a multiple cloud capability like we do inside of Xacta is very, you know, relevant.
spk08: Great. And then just on the partnering, look, obviously Zscaler, you know, you sign, which they continue to be so focused on federal. Are you seeing that more? Are you starting to get more calls for some of these top tier companies potential strategic partners, just given where you guys sit within the Beltway?
spk11: Yes. And I think part of the reason for that is the public offering process really gave us a forum to sort of share what we do as a company. And that, I think, has helped us quite a bit in terms of incoming interest. The other thing that's happened is by hiring out additional partners the sales and channel organization, they're bringing with them their own relationships as well. So we see that you've got new technology companies coming our way, new CSPs, new ISPs. You've got white labeling as a part of our offering that we do with things like Johnson Controls, where you can embed ghosts inside of their own offerings, so you're not actually selling ghost. They're selling their own thing, and you're getting paid as a part of that, if you will. So we are seeing a relatively significant increase in business development and sales activity.
spk10: Awesome. Thanks.
spk11: You're welcome.
spk07: Thank you. Our next question comes from the line of Keith Backman from Bank of Montreal. Your line is now open.
spk10: Hi, thank you very much, and congratulations on completing your IPO and your first public conference call.
spk02: Thanks a lot.
spk10: I have a few. Number one is you talked about the ramp in both sales and marketing, and I wanted to understand the objectives. And so if you think about, A, what's the product orientation or solution orientation, and what I mean by that, is that going to be mostly sales? exact and goes where the focus is or orientation, or is it broader than that? And then B, if you could talk about the target customers. So in other words, will you continue to go after the government agencies, international targets, and or corporates to spread your customer base a bit? If you could talk about both of those vectors, please. Thank you.
spk11: Yes, Keith. Thank you. Our initial focus for our sales and marketing investment is really focused around Xacta and Ghost. As we build out our offerings, we absolutely are going forward to commercial, federal, international. We're not trying to shy away from our government customers, but we want to be able to sell through to get to the commercial marketplace much better than having to build our own direct sales force. So, you know, we'll have channel partners helping us with that, getting us to customers. We're not going to turn away from the government because we feel like it's a great place to, you know, have a steady state business, if you will. But we're absolutely going to augment into those other areas. Okay.
spk10: Primarily corporate through the indirect means, though, rather than direct.
spk11: Well, we're going to have to do both, right? So we'll have to sell – to establish that we actually can, that we have a referenceable account there, but the primary focus is going to be through channel. So when we sell direct, we'll bring with us a partner who will help us do the implementation services and therefore preserving that gross margin that we have for Xacta and for Ghost, whereas in the government, we've had to wrap our own subject matter experts around it, which dilutes the gross margins down.
spk10: Okay, okay. Then my second question is on the TSA side. Can you give us some indication? Are you essentially on track here? And what I mean by that is there's a couple parties that have the opportunity to participate in the growth as travel comes back. Do you still feel like you're in a leadership position because of your technology? And generally speaking, with, you know, where we are in the cycle here in March, Do you feel like the second half, a ramp, assuming that COVID and the vaccine gets more widespread, that you're really on track for that? I will tell you, I traveled on cross-country this weekend in the airports. We're pretty darn busy.
spk11: Yeah, so that's a great question. We are on track. We do think with the customer wanting us to certify and get the authority to operate through the use of Xacta, that that does give us a leg up over the other competitors who have to use Exact as well. And so we do think we're on track, and I think what we share during the IPO is still an appropriate metric in terms of the growth path.
spk10: Okay, fair enough. And my final... Okay, great. Many thanks. My final question is, you called out an opportunity for a billion dollars sometime down the road, given what you have in front of you. And We're on, it's now March 25th, and you're reporting your December quarter. And so, A, I'm just curious why the conference call report date was delayed. And just if you could talk about, you have this opportunity for pretty formidable and interesting growth from an investor perspective. And do you feel that you're in a position to manage this growth? In other words, from the operations side, from the finance side, and Do you feel like you have the pieces in place to not only manage the next quarter, but the next number of quarters as you have this opportunity in front of you? And if you could just speak again as part of that, why we're having the call on the 25th.
spk11: Absolutely, and thank you for your question. The reason the call got pushed to the 25th was because there were some very complicated accounting things that had to happen vis-a-vis the IPO. So if you think about it, we had to buy back the interest in Telos ID that we didn't own. We had to deal with the conversion of the public preferred shares. We had to deal with redeeming the debt that we are paying back the debt that we had. All those things caused the accountants to basically say they wanted to hold off until they got through those wickets. And so while it was regrettable that it happened, we're going to make very sure it doesn't happen again. because it's something that no company wants to have to go through. So your other question is around do we have the pieces in place, and I think the answer is yes. We made the investment in our plan to grow, and it's built into the forecast already, and we have a very significant growth in terms of investment, in terms of sales, marketing, and support. So I think the answer is yes to your question, Keith. Okay.
spk10: All right. I will see the floor. Many thanks and congratulations. Thank you.
spk07: Thank you. Our next question comes from the line of Andrew Nowinski from D.A. Davidson. Your line is now open.
spk09: Great. Thanks, and congrats on the next quarter. So you said the channel helps you expand your gross margin on the exact and gross products. when they are sold to the channel. So can you just give us any color as to how many channel partners you have now and perhaps how many you're targeting by the end of the year?
spk11: Yes. So your question is why does the channel enable that higher gross margin? Is that your question, Andy?
spk09: Well, I think I understand why. I'm just wondering how impactful it will be. So I'm wondering how many channel partners you have now and how many you're adding. Are you recruiting more now? Will that become a bigger piece of your business or a driver of your business?
spk11: Yes, it's going to be a relatively significant driver of our business. So we have a dozen in play currently at various stages, and then we're adding another 15 to 20. So our models internally, we modeled that each individual salesperson would sell $1 million to $3 million worth of our software and then each channel partner would sell somewhere between $2 million to $6 million of our software. So we are making a significant investment there, and we do believe we'll see a significant return that we really will see as incremental to our plan for this year. And I will say this. The official channel program launch is coming very soon, so stay tuned for that. So from our point of view, we're actually pretty ahead of where we thought we would be from a standpoint of where we would be as a channel organization. So I think we're doing pretty well there.
spk09: That's great. Thanks, John. And then shifting gears, I want to talk about, I guess, two of the wins. So first, the FBI win that you called out, I think you said it was a $13.5 million deal. Was that won in Q4 or was that something that was won prior to Q4 and how long? What is the duration on a contract like that? Just wondering. When you give us examples like this, how should we think about it in terms of is it in the quarter, is it a three-year contract, et cetera?
spk11: Thank you. It was one in the fourth quarter. It's over four years. But just like the rest of our business, we have a philosophy of, you know, getting the business and then expanding. So I think that there's an opportunity to do more with FBI and but this is what they've committed to now, and it's a significant win for us, which we'll record over that four years.
spk09: Okay, that's great. And then last one for me, I wanted to ask about Zscaler, which I was wondering, I know you said they're a partner, you're selling into their solution, which they in turn will sell to their, I assume their telecom and global service providers, customers of their own. I'm just wondering if you could just maybe put a finer point on how that partnership works, and just curious, Why did you call out that one specifically in both the press release and on the call today?
spk11: Absolutely. So Zscaler is very interesting to us for a lot of different reasons, but where we're starting with them is on what's called FedRAMP and DOD authorizations through a capability called OSCAL. And what OSCAL does, without getting into all the technical details, is it basically automates all of the various controls required in a machine language format, which enables much faster inheritance from Xacta. So what that means from Zscaler's point of view is as Zscaler is seeking to get its own authorizations and then getting their customers to get authorizations, it helps accelerate that process. And then from our point of view, again, this is sort of the nose under the tent strategy, if you will, and this is something that we expect to see expanding you know, beyond the four walls of the government. But it's a strong place for us to start.
spk09: That's great. Thanks, guys. Thank you.
spk07: Thank you. Our next question comes from the line of Nihal Chokshi from Northland Capital. Your line is now open.
spk03: Thank you. And congrats on what seems to be a really strong start to the year. As you said, there's 75 million orders here to date. Just give us a sense as to how that compares to a year ago period, and what's the annual contract value within those orders as well?
spk11: It's about double, I think. And your second question was what again?
spk03: What's the annual contract value of that $75 million in orders? Is that all in the one-year duration, or is that some of that more than one-year duration? It's all one year or less. Wow. Okay. That's fantastic. And then you did split out within that $35 million, you had a one-year contract for security solutions and security networks up to $34 million. And that's basically the max. But what's the minimum associated with that order that you have received in?
spk11: So... I'd say the minimum is, and this is an educated guess, but I think the minimum is 25, but I believe it's also possible that it could be quite a bit larger over time. But I think to be conservative, I think it being 25 million is kind of the floor.
spk03: Okay, great. And then what kind of customer would you categorize this as?
spk11: Okay. What I can say is it is a government customer.
spk03: Okay. All right. Very good. And then probably on some of the questions earlier in today's call where we talked about the SolarWinds attack, one of the things that's being talked about within the cybersecurity community is accountability. And part of that accountability potentially involves or basically taking some of these cybersecurity tools that typically have been utilized in a defensive posture and moving it towards an offensive posture. And it just seems to me that Ghost may fit the bill of that sort of change in posture. Is that a true statement there?
spk11: Ghost has many attributes that adversaries would find, you know, valuable attributes. I think the way to think of ghosts, though, in the confines of what's legal is ghosts can do a good job of what I would call active defense, where we can understand better who the adversaries are. And so I think while the U.S. government will probably never allow industry to actually counter offense of someone who's coming after them, I think there is a very active dialogue between industry and government now about how we can work much more closely together and dealing with adversaries as a team, if you will, versus as, you know, stovepipes.
spk03: Got it. Okay. My final question is that so you have material GM gross profit upside and gross margin upside as well, and it's through all the whole business. But what was the reason for that gross margin upside? Is it because you are further along in the channel program that you had expected, or is it something else?
spk11: Yeah, I think what's happening is the security solutions margins are just growing, and they're growing in some part because of channel. Mostly, though, it's also a mix issue inside the business. So I think it's a combination.
spk03: Okay, great. Thank you very much for taking my questions. Thank you.
spk07: Thank you. Our next question comes from the line of Alex Henderson from Needham. Your line is now open.
spk02: Great. I just wanted to go back very quickly to the issue of why the earnings release was delayed and just make sure to clarify one question on that. So the reasons you cited were specifically around changes in ownership structure and things of that sort. Was there any issues whatsoever relative to the operational performance of the company, the way you're accounting for revenues or anything along those lines that the accountants had any issues with?
spk11: There was absolutely no issue relating with operations and operational performance or revenues. The issue is, the real issue, guys, if you get to it, We're not an accelerated filer, and what that basically means is that in the past, when we filed our 10-K, it was typically right around the end of March, March 31st. So now that we're a public company, by the end of the year, we will become, we think, an accelerated filer, and so we will find ourselves in a position where we'll have to accelerate our filings and be able to call out our earnings sooner. But as of this year, we're just not an accelerated filer. So we absolutely want to, you know, once we had the IPO, we knew we needed to, yeah, we're not, think of it this way. We're not going to have any complex transactions like an IPO with all these various accounting changes that had to happen with regard to that. So as a result, I expect us to be having our earnings out at more of a timely pace, if you will.
spk02: Great. So nothing having to do with operations. It was all transitional issues. Going back to the operations for a second, so I had a question actually sent to me from one of our customers asking, are you saying that the indirect sales partners are not modeled into the guidance for the year, and how many of the 60 are going to be quota-carrying?
spk11: Yeah, so if you recall, what I think we said during the IPO is that we were not expecting a significant increase in revenue from our sales and marketing new investment for, I think we said, 15 months post-IPO. So to answer your question, we really haven't modeled any significant sales from that investment into 2021. We have all the expenses in there, but we haven't modeled in additional revenues.
spk02: I just want to go back to the JCI transaction. Was that modeled into your guidance, or was it because it had that contract closed after the close of the – well, it closed this quarter – that that was not in the expectations for the year.
spk11: Yeah, JCI was not modeled into our 2021.
spk02: And when do you think that that actually kicks in as a revenue contribution to the company? I guess there's basically some complexity around it.
spk11: I think the way to think about it from a revenue point of view, because, you know, it's a massive company, you know, and they have to do a whole bunch of, you know, configuration, testing, and so forth. From my perspective, I think it would be, to be most conservative, I would say Q4 of 21 to Q1 of 22. Right.
spk02: And then going back to the Microsoft hack for a second, with Exchange Server, are you involved with anything that has to do with Exchange Server, or is that independent of your relationship with Azure?
spk11: That's independent of the relationship that we have with Microsoft. Okay.
spk02: Great. And just one last question on the ID Trust business. Have you seen any reason to change your expectation of, I think it was 11% penetration of, you know, in 2021 of renewals? Any reason to believe that it's going to be that low? It seems like an awfully low number and quite a bit of upside there.
spk11: Yeah. You know, like I mentioned to you, Alex, we try and be as conservative as we can. I think the guidance we're giving everybody is, you know, is a prudent forecast, you know, for what we know at this time. You know, as things change, as we actually see the ramp and so forth, you know, we'll come back to you and maybe address it once that happens. But as of right now, I think our guidance is good. Okay. I'll take the floor. Thank you very much. Thank you.
spk07: Thank you. At this time, I am showing no further questions. I would like to turn the call back over to John Wood for closing remarks.
spk11: Well, you know, I just wanted to say, obviously, we're very, very pleased with our 2020 performance. Just as we're pleased about our 2020 performance, we're really excited about our 2021 prospects. And for all of you who decided to invest in the company and support the company, I just want to say we really appreciate it, and we look forward to a great year. So thank you.
spk07: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
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