Telos Corporation

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.

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.

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?