Telos Corporation

Good day, and thank you for standing by, and welcome to TELUS Corporation 2Q21 Earnings Call. At this time, our participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. To ask a question during the session, you'll need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to Brinley Johnson with Blue Shore Group. Please go ahead.

Good afternoon. Thank you for joining us to discuss Telos Corporation's second quarter 2021 financial results. With me today is John Wood, CEO and Chairman of Telos, and Mark Benza, CFO of Telos. Ed Williams, COO, will be joining us for the Q&A. Let me quickly review the format of today's presentation. John will begin with some brief remarks on the second quarter 2021 results and Telos' strategic priorities, and Mark will cover the financials and guidance. Then we'll open up the line for the Q&A session. The earnings press release was issued earlier today and is posted on the TELUS website, where this call is being simultaneously webcast. Before we get started, we want to emphasize that some of our statements on this call are forward-looking statements and are made under the safe harbor provisions of the federal securities laws. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could materially differ for various reasons, including the factors described in today's earnings press release, in the comments made during this conference call, and in our SEC filings. We do not undertake any duty to update any forward-looking statement. In addition to today's call, we will discuss 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 in isolation from GAAP results. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results in our earnings press release and on the investor relations section of Sightloads' website. The webcast replay of this call will be available for the next year on our company website under the investor relations link. And with that, I'll turn it over to John.

Well, thank you, Brinley. Welcome, everybody, to our second quarter 2021 financial results conference call. I'm proud of our execution this quarter. We continue to deliver revenue growth and win meaningful contracts with both federal and commercial customers. We expect our new business pipeline to expand and multiply as we continue to make key investments in resources and partners. We also delivered 17% growth in gross profit, 290 basis points of gross margin expansion, and positive cash flow. As the company announced on July 19th, Michelle Nakazawa, who's been the CFO of the company for nearly two decades, has stepped back from her role, marking the first phase of her path to retirement. To ensure a smooth transition, Michelle will stay on the senior executive team and will work on special projects to ensure we're more efficient as a company as we continue to grow. Mark Benza, former Vice President of Honeywell, has been appointed Executive Vice President and CFO. Mark brings over 20 years' experience in investor relations, business development, financial planning and analysis, financial strategy, mergers and acquisitions, and capital markets. I'm optimistic about the leadership and fresh perspective that Mark will bring to the organization, and I'm very excited to have him on board. You'll have a chance to hear directly from Mark later in this call, during the CFO update, and for Q&A. And now I'd like to share with you our recent business highlights and updates. To start, I'd like to update you on our growing sales organization. Since the beginning of 2021, we've tripled our sales marketing and channel team and continue to attract top talent. We will continue to make these investments in sales and marketing as we broaden our market reach. In June, we successfully launched the Telos Cyber Protect Partner Program, By formalizing our channel program and adding partners with complementary values, skills, and capabilities, this will allow us to drive accelerated growth, generate new revenue streams, and deliver on our mission of providing world-class security solutions. DLT Solutions, a tech data company, and Presidio Federal were among the first partners to join the program. In signing DLT, As a distributor, we gained access to the reseller ecosystem without the need to sign and manage all the resellers directly with Telos. We're actively building go-to-market plans with DLT and their partner ecosystem, as well as with Presidio. We're also charging forward with our referral partners. We signed two in the last month. We have a strong pipeline of additional partners in various stages under NDA and contract redline. that we look forward to sharing with you soon. From an operating perspective, we saw continued adoption of our solutions through existing customer expansion and new customer acquisitions. I'll now discuss highlights of these activities. At the end of July, we were awarded a $19.4 million expansion of a contract by the U.S. Air Force for our Xacta solution. With this new contract, the Air Force now owns a license for both Xacta 360 and Xacta IO. This is another example of how we've been able to land a contract and continue to expand upon it based on our current customer success. We've added a third cloud service provider, which we will be providing additional details on soon, to our roster of cloud customers using Xacta. We're proud to have strong relationships with Amazon Web Services and Microsoft Azure, and we will continue to expand to other cloud service providers and SaaS providers in the future. In the second quarter, we saw enterprise adoption of our Xacta 360 offering by the Department of the Interior, who selected Xacta over other commercial and government off-the-shelf software solutions. In addition, Another classified customer expanded our contract while extending our period of performance. This organization also added ExactIO to their approved product list, which is recognized reciprocally throughout the intelligence community for acquisition, implementation, and accreditation purposes. This means that other intelligence organizations can buy off this contract. We were awarded a renewal and expansion from a classified government customer for the continued use of Telos Ghost. Through this award, the total value of the contract increased by $13.5 million to $24.8 million. This customer also awarded us a data analytics support task order totaling $1.1 million. Other significant renewals and expansion business include the CIA awarded Telos a contract through June of 23 providing our Xacta solution in support of the CIA's new multi-cloud contract. A major intelligence community customer awarded Telos an option through May of 2022, providing our Xacta solution. The U.S. Department of State awarded Telos another contract through 2022, providing our Xacta solution. And the U.S. Space and Missile Command awarded Telos an expansion of their existing Xacta solutions contract as well. In addition, we continue to see increased commercial adoption of our security solutions with new and renewed contracts from AT&T, Collins Aerospace, Accenture, Northrop Grumman, Vibrant Health, IronNet Cybersecurity, and Contact Telecommunications Corporation. I'd also like to provide an update on the TSA pre-check contract. On July 1st, TSA said in a public notice that they expect the additional TSA PreCheck enrollment providers to become available in 2021. While we do not control the decision-making timeline within TSA, we do control our readiness to move out once the authority to operate is issued. We remain confident in our service launch in 2021. Now, next, I'd like to highlight recent updates within our EXACTA Telos Ghost, and ID Trust 360 solutions. On June 30th, we announced a new version of Exacta I.O., which expands our control mapping capability, which is really needed by regulated industries to address audit fatigue. We followed on August 11th with the release of a new version of Exacta 360, which offers multiple data exchange protocols to enable machine-to-machine interaction for more efficient collaboration, regulatory reporting, and reciprocity. These new capabilities increase commercial and international opportunities for Xacta, where there is increasing demand for automation. These capabilities also address FedRAMP acceleration requirements specified in the recent presidential cybersecurity executive order. The heavily regulated financial services industry requires substantial automation to keep up with the multitude of disparate IT security and privacy-related content. Exacta continues to provide significant value to this market, as evidenced by a recent renewal by a major insurance company. This Fortune 50 organization uses Exacta I.O. to aggregate the extensive data needed to to manage IT asset inventory and vulnerabilities while providing automated control mapping to multiple sets of standards. This ultimately reduces the burden and strain on their internal security operations and compliance teams. In the second quarter, Telos Ghost, Telos' virtual obfuscation network, won the 2021 Fortress Cybersecurity Award for Network Security. It's always an honor to be recognized alongside other companies advancing the cybersecurity agenda. Capabilities like Telos Ghost are critical to protecting privacy and identity in today's remote world, and we're excited to see such strong traction not only in the public sector, but in the commercial market as well. Over the past year, Telos has seen increased success and interest in Telos Ghost within the education, Internet of Things, banking, healthcare, and critical infrastructure markets, with developments including a strategic partnership with Johnson Controls to integrate Telos Ghost into their OpenBlue CloudView gateway, which supports a worldwide cloud-based video network used for surveillance and physical security. The integration of this solution will be completed in Q3. Telos also inked a partnership with OmniAlert, to integrate Telos Ghost into OmniAlert's GunDetect, the industry's first AI-powered visual gun detection solution. The integration of this solution will also be completed in Q3. The Johnson Controls and OmniAlert integrations will drive revenues for 2022. Since last we spoke, Telos has advanced our ability to serve the education market, Of note, we finalized the integration of Telos Ghost into Chromebooks. Nearly 60% of computers purchased by K-12 schools in 2018 were Chromebooks. And it's safe to say that number has increased significantly due to the rapid switch to remote learning in response to the global pandemic. Telos' Ghost-enabled Chromebooks are easy for K-12 institutions to deploy and manage. and we're glad to add that capability to protect students' privacy with the integration of TELUS Ghost. Beginning this month, a large Virginia school district will pilot the TELUS Ghost student privacy solution. This solution will be formally announced later in Q3. On July 30th, TELUS acquired the assets and patents of Diamond Fortress Technologies and will integrate the ONIX touchless fingerprint software with our ID Trust 360 platform. You see, ONIX eliminates much of the friction involved in biometric data gathering by leveraging a mobile device's camera to capture the user's unique fingerprint. This technology enables the fast and easy collection of fingerprint biometrics and will allow Telos to better serve our growing customer base at both the enterprise and consumer levels in verticals such as transportation, healthcare, financial services, and other industries. This acquisition solidifies Telo's position in an expanding market with contactless biometrics technology expected to grow from approximately $7 billion in 2019 at a compound annual growth rate of 20% from 2020 to 2027. Put simply, ONIX allows people to get their fingerprints taken in the comfort of their own home versus having to go somewhere. Over the last few months, we've won nearly a dozen re-competes from existing designated aviation channeling airport customers, including Chicago O'Hare, Minneapolis St. Paul, and Sacramento International Airport. Now, let me turn to some comments on the industry landscape and growing market opportunity. As extensively reported in the media, a number of cyber attacks targeting various sectors in the U.S. have pushed President Biden to put cybersecurity at the center of his agenda. This includes not only the President's recent executive order on cybersecurity and subsequent actions such as new requirements for pipeline security, but also includes some legislative initiatives in Congress which could have significance for TELOS. Here are some examples. The bipartisan infrastructure package supported by the White House and recently approved by the Senate calls for increased funding and other incentives to address the cybersecurity needs of U.S. critical infrastructure. The package also provides funding for cybersecurity grants to state and local governments. Additionally, the pending Senate version of the FY 2022 Defense Authorization Bill not only incorporates President Biden's full requested level of cybersecurity funding for the Defense Department, but it goes further to add funding above the requested level. And an FY 2022 Appropriations Bill approved by Committee in the House would boost funding for DHS's Cybersecurity and Infrastructure Security Agency, or CISA, by nearly 20% over last year's appropriation level. This includes increases above the President's request for infrastructure cybersecurity and risk management operations. These government actions haven't changed anything for Telos in the near term. However, in the long term, they will provide the company with far more opportunities and will grow our pipeline. The National Institute of Standards and Technology, known as NIST, is also developing a ransomware profile for the cybersecurity framework to help organizations manage security best practices required to thwart ransomware attacks. Telos is actively engaged in this effort by participating in the NIST-sponsored workshops, which will help shape the final version of the standard. The NIST CSF ransomware profile, once finalized, is something that we plan to operationalize via our Xacta solution. So in conclusion, we had a strong quarter and our company's exceptional results continue to be driven by increasing demand for our advanced security solutions and our growing sales channel. We are well positioned to continue to execute as a leading world-class organization in the cyber, cloud, and enterprise security market. I'd also now like to pass it over to our CFO, Mark Benza, who will discuss the financials and guidance in more detail. Mark, over to you, bud.