This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk02: Good day and thank you for standing by. Welcome to the TELUS Corporation first quarter 2024 earnings call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you'll need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised, today's conference is being recorded. I would now like to hand the conference over to your speaker today. Alison Phillip, please go ahead.
spk00: Good morning. Thank you for joining us to discuss Telus Corporation's first quarter 2024 financial results. With me today is John Wood, Chairman and CEO of Telus, and Mark Benza, Executive Vice President and CFO of Telus. Let me quickly review the format of today's presentation. Mark will begin with remarks on our first quarter 2024 results. Next, John will discuss business highlights from the first quarter. Mark will follow this up with second quarter guidance and insights on the financial outlook for the company before turning back to John to wrap up. We will then open the line for Q&A, where 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 filing. 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 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 portion of our website. Please also note that financial comparisons are year over year unless otherwise specified. The webcast replay of this call will be available for the next year on our company website under the investor relations link. With that, I'll turn the call over to Mark.
spk03: Thank you, Alison, and good morning, everyone. Let's begin today on slide three. I am pleased to report that TELUS has again over-delivered on key financial metrics in the first quarter, exceeding both revenue and profit guidance. Overall, it was a straightforward quarter with better than guided performance across key financial metrics, leading to a meaningful beat on profit and cash flow. Let's get into some of the details. We delivered $29.6 million of revenue in the first quarter, or approximately $600,000 above our guidance range of $28 million to $29 million. Security Solutions delivered $18.6 million of revenue, which was above the top end of our guidance range due to modest outperformance across all lines of business. Secure Networks delivered approximately $11 million of revenue in line with the top end of our guidance range. GAAP gross margin was 37% above our guidance due to cost management on fixed price contracts and security solutions, better than expected utilization of direct labor and secure networks, and a slightly better overall weighting of revenues to our higher margin security solutions business. Security solutions generated approximately 63% of total company revenues in the first quarter of 2024, versus 56 percent in the first quarter of 2023, a favorable variance that is expected to widen as the year progresses. Cash gross margin was a notable 42.2 percent, expanding 249 basis points year over year and representing our second highest quarter since our IPO in 2020. Revenues and gross margins both above forecast resulted in gross profit above what was incorporated into our adjusted EBITDA guidance range. In addition, R&D and SG&A expenses were better than forecasted due to timing of spending and higher than forecasted capitalization of software development costs. As a result, adjusted EBITDA also exceeded the top end of our guidance range. Adjusted EBITDA was a $2.3 million loss compared to our guidance range of a $5.5 million loss to a $5 million loss. Lastly, cash flow from operations was a $350,000 outflow, and free cash flow was a $3.6 million outflow. Free cash flow improved from a $4.1 million outflow in the first quarter of 2023. So overall, it was a clean quarter with solid execution throughout the portfolio. I will now turn it over to John for an overview of business highlights. John?
spk05: Thanks, Mark, and good morning, everyone. Let's turn to slide four. As communicated on our last earnings call in March, TELUS has teaming agreements in place with prime partners who, in the first quarter, received awards from the federal government worth up to $525 million to Telus' security solutions business over five years. It's not uncommon for award decisions of this magnitude to be protested by incumbents or other bidders as part of a customary post-award protest period provided by the government, and that's the case here. These awards have been protested, and finalization of the awards is subject to resolution of the protests. Given the typical protest timetable, Resolution is expected in the second quarter and assuming a favorable outcome, revenues are expected to ramp throughout the balance of the year. We look forward to the conclusion of these protests as these awards represent pre-existing programs requiring a timely and smooth transition to ensure uninterrupted service to the federal government. Beyond these awards, it's important to highlight since 2023, we have won positions on five new federal contract vehicles including most recently a vehicle through which the United States Marine Corps will procure modernized capabilities for telecommunication and network infrastructure at all required Marine Corps bases, posts, camps, and stations globally. In the aggregate, these five new contract vehicles provide Telos with market access to compete for new business opportunities that represent a $12 billion addressable market. we will continue to pursue additional contract vehicles that will further increase our access to new federal markets over time. In addition, I'm pleased to report on several other key outcomes since our last earnings call. Our executive business has received new orders with the U.S. Air Force Services Center, as well as a major technology company and a federal government customer. Additionally, the executive business has achieved renewals with several key customers, including the U.S. 16th Air Force, the US National Geospatial Intelligence Agency, the US Defense Intelligence Agency, the US Department of Energy, a professional services company, and a leading cloud computing company. The company has received services renewals with the US Department of Homeland Security, the US Office of Naval Intelligence, and a federal executive department. Our automated message handling system business achieved a major contract renewal with a branch of the U.S. Armed Forces. And finally, within our TELUS ID business, transaction volumes in our TSA pre-check program have sequentially ramped every quarter for the last four quarters, including the first quarter of 2024. We continue to work closely with TSA to ensure our pre-existing enrollment locations are operating at the absolute highest possible standards necessary for a national security program of this magnitude, before accelerating our rollout of additional onsite enrollment centers around the country. We opened two additional enrollment locations in April, with more expected in the coming quarters. I will now turn the call over to Mark, who will discuss second quarter guidance. Mark?
spk03: Thanks, John. Let's turn to slide five. For the second quarter, We expect revenue in a range of $25 million to $28 million and an adjusted EBITDA loss of $8 million to $6 million. We forecast security solutions revenue to be down high single digits to up mid-single digits percent year over year, primarily driven by a non-recurring perpetual license sale in the second quarter of 2023 offset by growth in TSA PreCheck in 2024. We forecast secure networks revenue to decline low 40% to mid 30% year over year due to the ongoing reductions in backlog that we expect to persist sequentially throughout the year. Our second quarter guidance, combined with our first quarter reported revenue, implies first half revenue of $54.6 million to $57.6 million and compares favorably with the approximately $55 million of first half revenue that we outlined in the 2024 modeling inputs provided in the appendix of our fourth quarter earnings presentation. Overall, we expect total company revenue to return to sequential growth in the third or fourth quarter subject to favorable resolution of protests. Gap gross margin is expected to be down approximately 750 basis points to 425 basis points year over year, primarily due to higher amortization of capitalized software development costs and security solutions, and a non-recurring perpetual license sale in the comparable period last year, partially offset by a more favorable revenue contribution from our higher margin security solutions business in 2024. Cash gross margin is expected to be down 250 basis points to flat year over year. Cash below the line expenses, which adjust for capitalized software development costs, stock based compensation, restructuring costs and DNA are forecast to be approximately 1.9 to $2.1 million higher year over year primarily due to investment and growth initiatives. Lastly, our full-year outlook is substantially unchanged. We've made only minor adjustments to the full-year modeling inputs provided in the appendix. And with that, I'll turn it back to John.
spk05: Thanks, Mark. Let's turn to slide six. In summary, we once again exceeded expectations and delivered results above the high end of the guidance range on key financial metrics in the first quarter. We've made substantial progress on new business capture during the first quarter, and we expect security solutions and total company revenues to return to sequential growth in the third or fourth quarter, subject to favorable resolution of protests. And with that, we're happy to take questions.
spk03: Operator, please open the line for Q&A, and we ask the call participants to please be mindful of others in the queue by asking only one question. Thank you.
spk02: Thank you. Ladies and gentlemen, if you have a question or a comment at this time, please press star one one on your telephone. If your question has been answered, you wish to move yourself from the queue, please press star one one again. We'll pause for a moment while we compile our Q&A roster. Our first question comes from Zach Cummins with B Reilly Securities. Your line is open.
spk07: Hi, good morning, John and Mark. Thanks for taking my questions and congrats on solid performance here in Q1. I guess I'll try to make a multi-part question. One for John, can you speak to just the protesting process? I appreciate the timeline and I'm just curious if they give you any sort of indications or updates along the way, anything you can share incrementally on the protesting process. And then part two is just on a TFA pre-check program, nice to hear that you've ramped volumes every quarter since its launch, but Just curious if we could get more insight into how you're thinking about the rollout timeline for new locations and now that all three vendors are live on the program, if there's been any notable changes in transaction volumes.
spk05: Sure. Thank you for the question, Zach. You know, the protest process is typically 100 days. We would expect an outcome this quarter on both of the new awards that we announced last quarter. And we don't really have day-to-day insight into the protest process. That's really not our, we're not a part of that process. But as we've reported earlier, a very small percentage of these programs are resolved against the winner, if you will. So we're confident that we're gonna be able to move forward with these programs. Now as far as TSA PreCheck goes, I'm very pleased to say that we will be accelerating the ramp of our Office Depot locations, and we expect to accelerate that rollout into Q2, getting to 500 stores within 2025.
spk03: Yeah, Zach, I think what I'd add to that with respect to transaction volumes, as we've said, they've ramped nicely over the last few quarters. In terms of having all the participants come into the market in terms of the three participants, that was already factored into the prior guidance and modeling inputs that we've provided. Does that answer your question, Zach?
spk07: Yes, it does. I appreciate answering my questions, and best of luck with the rest of the quarter. Thank you.
spk03: Okay, thanks, Zach.
spk02: One moment for our next question. Our next question comes from Rudy Kissinger with DA Davidson. Your line is open.
spk09: Hey, thanks for taking my question. I guess I'm kind of curious, you know, this $100 million of revenue from existing contracts this year, how much from those existing contracts is going to fall in 25. So if it's 100 million this year, how much is that going to decline to in 25? Thank you.
spk03: Yeah, so really what we've said in the past, and I think it applies here as well, in a typical year, we expect a few tens of millions of headwind from prior year revenues. So if you think about the 100 million that's recurring in 24, I'd say in 25 that's approximately, that 100 becomes approximately 70. And then you're adding on from there the additional revenue from these programs that would come on board subject to resolution of the protest. We've given you an indication of what that could be in a typical year. And then we'd have additional revenue from TSA PreCheck as we continue to make progress in rolling out our office location. And then, of course, any other additional new business wins that we realize late this year, early next year. That's the typical seasonality pattern of new business wins. Does that answer your question, Rudy?
spk02: It does. Thank you.
spk03: Okay.
spk02: One moment for our next question. Our next question comes from Bradley Clark with BMO Capital Markets. Your line is open.
spk01: Thank you for taking my question. On the TSA side, one of the strategies is obviously opening the number of locations. Is there anything else that TELUS is doing to sort of differentiate its TSA offering now that sort of the competitive landscape is set. Is there anything from pricing or marketing that could actually fall into the expense line that we should be considering aside from new locations?
spk08: Mark Griffin, I'll answer first. First, I wanted to say how pleased we are with our strategic relationship with Office Depot for the TSA Pre-Check Program. This direct-to-consumer opportunity is of great value to TSA and the program. So as we roll out, obviously, from a marketing and an expansion point of view, that's a key partner that will be very critical for us as we do that. From an expense line, I'm going to, you know, turn it over to Mark, but right now, I'm not anticipating major expenses in that area other than our commitment to our strategic partner office depot and expansion in those areas.
spk03: I agree with that. I have nothing to add to what Chris has already said. Thank you.
spk02: One moment for our next question. Our next question comes from Alex Henderson with Needham. Your line is open.
spk04: Thanks. I was struck by how many renewals you have announced here. And in that context, you've also maintained the full year numbers. So I assume that these renewals were as expected and not changing the overall trajectory. Is that a fair statement?
spk03: Yeah, I think that's a fair statement, Alex. The track record on renewals is excellent. Our customers tend to be very sticky, and so we had another excellent quarter on renewals, and that's what we expected coming into the year.
spk04: And as you look forward into the back half of the year and into the first half of next year over the next 12 months, what does the renewal pipeline look like?
spk08: Awesome. Alex, on the contract renewal market, the security solutions contract renewals renew quite heavily on a renewal percentage basis. Where we see less renewal volume is on the secure network side. So I expect that the majority of the business in security solutions will renew and grow based on the other contract vehicles John mentioned in his script. Those five contract vehicles will also come into the portfolio, both for secure networks and secure solutions. So I think you'll see a growth area there, not only on contract renewals, but also new contract vehicles coming into play, which will add to the portfolio.
spk05: Yeah, so I'll say it a little more simplistically. So security solutions business, by and large, is a recurring revenue stream. That's where you can sort of you see the renewals coming in in a very consistent way, generally speaking. On the secure network side, those programs tend to have a beginning, a middle, and an end. So that's where you see that few tens of millions that Mark always talks about on these calls. So think about security solutions as being recurring revenue. Think about secure networks as being more episodic revenue.
spk04: I guess what I'm trying to ask, and maybe I'll just try it a different way, but it's the same question. Is there more or less than normal renewals in the headlights, or is it just the same level of typical renewals? We're trying to ascertain the potential change in the rate of renewals as opposed to what the closure rates look like.
spk05: Yeah, so it's about the same, Alex, and we would anticipate it to continue. There are four big points for us in the company. One is to continue our extreme focus on our current customers. The second is to very much accelerate the ramp of Office Depot locations, because that's going to accelerate the ramp of revenue for TSA PreCheck. And the third is to execute against new business wins that we previously announced. And the fourth is to focus on continuing to deliver new business awards. So our pipeline continues to grow, and it continues to be an opportunity for us to see top line. Thanks.
spk02: Thanks, Alex. One moment for our next question. Our next question comes from Nihal Chokshi with Northland Capital Markets. Your line is open.
spk06: Thank you. The five new federal contract vehicles that you've won positions in that represent a $12 billion trustable market, can you talk about, A, what is the Is that an annualized number or is that over X amount of years? And if it's over X amount of years, how many years is that? And then B, what would you expect the margin profile of this $12 billion addressable market that you've won the right to compete for now?
spk05: Yeah, so two of the awards are in the secure networks bucket, if you will. Two of the awards are in what I'll call our enterprise bucket, which is the entire company. And then one is in security solutions. As far as the margin profile goes, the period of performance on these can range anywhere from five to 10 years. And I'm going to turn to Mark on the margins, if you don't mind.
spk08: Yes, the margin profiles would follow what we have as projected and modeled as far as security solutions and secure networks. So those margin profiles would basically follow that based on what John indicated as the breakout of that total overall market value.
spk05: And keep in mind, for the analyst on the call here, each of these awards, there are several other awardees in each case. So what ends up happening is, and the reason we call it an addressable market is because on each of these awards, we have to compete at the task order level. So we're competing against limited competition on the task order level on each of these awards versus the previous two awards we chatted about where we're part of a team where it's a single award to one player, if you will, the team being one player. So that's why those other awards are much more predictable in terms of the way the revenue breakout is, whereas on these other rewards, these are contract vehicles which have ceilings, large ceilings, and in each case, we have to compete at the task order level. And task orders can be anywhere from like $2 million to $100 million, just to be, give it a little more, if you will, nuance to it.
spk06: Yeah, that's definitely helpful. And then, in task orders, you've been talking about your bidding pipeline, sizes of bidding
spk05: that's been growing uh did you give an update about can you do so sure so outside of these awards that these vehicles that have been won there's an additional roughly 3.2 billion dollars worth of of of pipeline um and that's unfactored without renewals got it great and that's up from uh what last quarter You know, truth be told, I don't want our analysts to fall into the trap of trying to measure it quarter to quarter because it's going to change. Some bids will come in. Some bids will go out. We'll no-bid certain things. We'll accelerate bids on other things. But in general, though, we like to see a pipeline like this because we want to see it be at least 10x what our potential is.
spk02: Got it. Great. Thank you. Ladies and gentlemen, this does conclude the Q&A portion of today's conference. I'd like to turn the call back over to John Wood.
spk05: Well, first of all, I just want to thank our shareholders for, you know, your ongoing support. And, you know, as we said here on the call, I'm very pleased with, you know, the progress we've made on our new business capture in the first quarter. You know, I'm looking forward to finally getting to sequential revenue growth in the third or the fourth quarter. and obviously it's subject to the resolution of the protest that we've talked about previously. You know, these contracts will have the potential to significantly and very positively impact our performance, along with us opening up office depot locations for TSA PreCheck. You know, I think the other thing I want to remain focused on is our pipeline expansion. I mentioned several quarters ago that we're going to go back to the markets that we know best, And I think we're seeing the kind of results that we expect to have for a company that knows the U.S. federal government and adjacent markets around it. So I remain very excited about the outlook for the company. And with robust and recession-resistant end markets, with well-funded customers, and a decades-long track record of serving the world's most security-conscious organizations, TELUS really does have a very strong foundation for the future. So I just want to say again, on behalf of all of us here at Telos, thank you.
spk02: Well, ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.
Disclaimer