Telos Corporation

Good day, and thank you for standing by. Welcome to Telos Corporation's fourth quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to Christina Luciveris. Please go ahead.

Good morning. Thank you for joining us to discuss TELUS Corporation's fourth quarter and full year 2021 financial results. With me today is John Wood, Chairman, and Chief Executive Officer of Telos, and Mark Benza, Chief Financial Officer of Telos. Let me quickly review the format of today's presentation. John will begin with brief remarks on our 2021 year-end results and Telos' strategic priorities, and Mark will cover the financials and guidance for 2022. Then we'll open the line for questions and answers from Mark Griffin, Executive Vice President of Security Solutions, will also join us. The earnings press release was issued earlier today and is posted on the Telos Investor Relations website, 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, 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 non-GAAP financial measures, which we believe are useful as supplemental and clarifying measures to help investors understand TELOS'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 and comparable gap results, 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 website under the investor relations link. With that, I'll turn the call over to John.

Thank you, Christina, and good morning, everyone. Let's begin today on slide three. While I'm excited about the future of TELOS, I'm also disappointed with two customer delays that we've had on large programs. We've tried our best to sync up with the timing of these programs, but encountered issues that were not predictable at the time. Mark will discuss our performance later on this call, but at a high level, we delivered 43% revenue growth in the fourth quarter and 35% revenue growth for the year or 59% for the year adjusted for the wind down of the 2020 Census program. Gross profit increased 38% for the year, finishing at $86 million. We delivered $8.8 million of adjusted EBITDA and 13.8% of adjusted EBITDA margin for the fourth quarter and $24.4 million of adjusted EBITDA and 10.1% adjusted EBITDA margin for the year. And we reported adjusted EPS of 27 cents for the year, an increase of 42 cents year over year. Now, let's turn to slide four. In 2021, we welcomed several new and accomplished leaders to the TELOS team, while we had other leaders who announced their retirements. As announced in January, Jeff Wright, who served as the Executive Vice President and General Counsel of the company since 2013, retired. Jeff will remain with the company to assist in the transition of his responsibilities and will handle several ongoing projects. Effective February 1st, Hutch Robbins has been appointed as the Executive Vice President and General Counsel at Telos. Hutch brings more than 28 years of experience providing counsel to publicly traded companies on business and corporate matters, dispute resolution and avoidance, and litigation. Additionally, we promoted Troy Bertram to Senior Vice President of Sales. He will lead our channel, direct federal and commercial sales efforts, and will continue to expand our sales channel and cloud partnerships. Troy joined Telos last year, bringing with him more than 25 years of experience with government and transformative technology companies. In January of 2022, we announced changes to our board of directors. We welcome Brad Jacobs, who will serve on the audit committee, and Derek Dockery, who will serve on the management development and compensation committee and the nominating committee. We also announced that Bernard Bailey will not stand for reelection after serving on the Board for 16 years. And on behalf of the company, I want to thank Bernard for his leadership and substantial contributions to TELOS. Now, let's turn to slide five to discuss our new reporting business segment structure. As disclosed in the 10-K that we will issue for 2021, our business will now be broken out into two reporting business segments, Security Solutions and Secure Networks. Our Security Solutions segment is focused on cybersecurity and cloud security solutions, which include our Exacta, Telos Ghost, ID Trust 360, and our Automated Message Handling System, or AMHS, as well as other offerings that are in the works. Our Security Solutions segment generated $123.5 million in revenue in fiscal 2021, representing 51% of total revenues. We believe this business segment will generate approximately 60% of our total revenue over time. Security Solutions has grown at a compounded annual growth rate of approximately 13% over the last three years. Our secure network segment provides secure networking architectures and solutions to our customers through secure mobility solutions and network management and defense services. Secure networks generated approximately $118.9 million in revenue in fiscal year 2021, or 49% of total revenues. Secure networks has grown at a compounded annual growth rate of 32 percent over the last three years, with the segment growing an impressive 90 percent in 2021 alone. We remain confident of the long-term opportunities in both business segments. Now, moving to slide six, we will discuss where we stand now since our IPO. Since our IPO, we have taken several actions that have positioned Telos well for the future. We bolstered our financial flexibility and improved our cash flow, invested for the long term, and also expanded margins, launched our channel ecosystem, expanded our customer base, and cultivated our team. We ended 2021 with financial flexibility. We repaid all our debt. We remain highly liquid with a cash balance of approximately $127 million, and we are approaching positive cash flow. Since our IPO, we have made significant investments in our business to support continued long-term growth. We doubled our total investments in our sales and marketing functions. Our sales and marketing investments were focused on building out our direct federal enterprise and channel teams. These sales professionals are focused on expanding our security solutions, primarily Xacta, Telos Ghost, ID Trust 360, and acquiring new customers largely in regulated industries. And we've expanded our gross margins and adjusted EBITDA margins while making these investments. Furthermore, since our IPO, we made two inorganic investments. We acquired the remaining equity interest in Telos ID, and we acquired Diamond Fortress Technologies, a manufacturer of patented, touchless, fingerprinting, and other mobile-enabled technologies that are integral to the continued expansion of IDTrust360 services at both the enterprise and the consumer level. We built and launched our multifaceted channel program, the Telos CyberProtect Partner Program, to enable Telos to reach a broader set of customers and markets. We recruited and signed partners across our ecosystem, giving us access to new verticals such as healthcare, state, local, and education, or SLED, and commercial enterprises while augmenting our presence in the federal market. We signed two large distributors which provide access to thousands of new customers, vendors, and resellers. We launched our first multi-partner go-to-market partnership called FASTER, which stands for Faster Authority to Operate, or ATO, with Splunk, Telos, and ThreatAlert for regulated markets. And while we did not expect the channel to begin producing in 2021, we did have a few deals transact through the channel, allowing us to pressure test the system. Our business development efforts have helped maintain and expand a strong customer base through renewals and new wins. We added more than two dozen marquee customers to our customer base, including AT&T, Collins Aerospace, IBM, MC Dean, Oracle, Red Hat, Stack Armor, VMware, and Wicker, among others. We worked with over 300 different customers in 2021. I am proud of the hardworking, accountable, and family-friendly culture we've cultivated at Telos, fueled by the talented employees who serve our customers every day. In the last nine months, we made seven new placements on our senior leadership team and board of directors as part of a reorganization aimed at better aligning leadership for the demands of a growing public company. We have an accomplished employee base, Seventy-five percent of our U.S.-based employees have a technical background, and 62 percent of our U.S.-based employees hold a security clearance. We have consistently been named a winner as a top place to work from publications such as Energage, the Washington Business Journal, and the Washington Post. Let me turn to some comments on the industry landscape and a number of recent initiatives in Washington, D.C., that present opportunities for TELOS. Congress has finally reached agreement on FY 2022 appropriations legislation, which will provide billions of dollars in cybersecurity funding to federal agencies, including many TELOS customers. The final spending bill boosts cybersecurity funding in several areas of note, including for the Department of Defense, infrastructure cybersecurity, and risk management operations. Funding is also included in these final FY 2022 appropriations bills to help implement President Biden's executive order on cybersecurity issued in May of 2021. That executive order, which drew heavily on guidance from the National Institute of Standards and Technology, or NIST, directed federal agencies to accelerate migration to the cloud and make greater use of zero-trust architecture, both of which are addressed by TELUS Solutions. To carry out that executive order, the Office of Management and Budget released its final zero-trust architecture strategy for federal agencies, the goals of which are organized using the Cybersecurity Infrastructure and Security Agencies, or CISA's, zero-trust maturity model. Agencies will be required to meet specific zero-trust security goals by the end of FY 2024, and they must develop zero-trust migration plans that meet the requirements and include budget planning for those efforts. We continue to see increased federal, state, and commercial market interest for secure, fully integrated, enterprise-class hybrid and multi-cloud environments that support everything as a service. We call it X as a Service, or XAAS. Our business developers are positioning Telos Cloud Platform, fully equipped and integrated with our suite of products, including Xacta, Ghost, and IDTrust360, to accelerate cloud modernization while aligning compliance with the administration's latest cybersecurity mandates, including Zero Trust Architecture, and the Department of Homeland Security, Cybersecurity and Infrastructure Security Agency, Cybersecurity Division's continuous diagnostics and mitigation activities for strengthening the security posture of our customers. One of our security solutions, Telos Ghost, compliments zero trust security. This creates an additional layer of defense against intruders by hiding critical resources and users in an anonymous, undiscoverable network. Telos goes to protect assets of critical infrastructure from unauthorized access. Xacta streamlines and automates the critical processes of the leading cybersecurity standards and frameworks, particularly the Federal Risk and Authorization Management Program, or FedRAMP, allowing all process participants to collaborate within the same Xacta application to attain a FedRAMP ATO, which facilitates faster migration to the cloud. Xacta is also a trailblazer in adopting the Open Security Controls Assessment Language, or OSCAL for short, which is a multi-format framework adopted by FedRAMP to allow security professionals to automate security assessment, auditing, and continuous monitoring processes. Here are some other initiatives to be aware of. The executive branch is putting emphasis on greater use of automation in the FedRAMP process and on supply chain risk management, which are also focus areas for Telos. NIST is developing a ransomware profile based on the NIST cybersecurity framework, which is specifically intended to help organizations manage ransomware-related risk, and Telos Solutions will support this. In addition, the FedRAMP process is now being adopted at the state level, and StateRAMP will likely expand the market for Telos FedRAMP offerings. We believe there could ultimately be an increased need for the solutions supplied by Telos, driven by the additional federal cybersecurity funding appropriated by Congress and the additional security goals agencies will be required to achieve. And finally, the emergence of new conflicts in Europe have elevated the cyber threat level globally and further underscores the urgency of cybersecurity best practices. I will now turn the call over to Mark, who will discuss fourth quarter and full year 2021 results and our guidance for the first quarter and full year of 2022. Mark?