Please note, this conference is being recorded. I will now turn the conference over to your host, Mr. Brian Haugli, Chief Executive Officer with SideChannel. Sir, the floor is yours.
Thank you for joining us. I'll be brief on the quarter and then spend most of our time on what's actually mattering right now, the transition from services to platform. Q2 FY 2026 was a down quarter. Total revenue was $1.58 million, down from $1.89 million in Q2 FY 2025, 11.9% decline. More specifically, vCISO services revenue fell 28.4% year-over-year. That's the real number. It reflects a contracted vCISO pipeline and the fact that we're deliberately shifting client mix from hourly vCISO engagements towards fixed retainer platform models. Here's what matters. Our gross margin expanded 380 basis points from 49.7% to 53.5%. That's real operational leverage. It means the underlying product margin Enclave and our software bundle's working.
Six months into the fiscal year, we've lost $840,000 on revenue of $3.35 million. Cash burn from operations is negative $854,000. These are the facts, and they reflect exactly what we said we'd do, trade short-term service revenue for durable platform economics. What's our strategy? Three-phase delivery model on services. We're not pivoting. We're deliberately executing a known three-phase transition from services to platform. Phase one, where we started, vCISO or principal consultant-led time and materials vCISO work, one consultant per a client, margin's roughly 46%, growth requires hiring consultants. Phase two, what we're moving into right now, targeting August 2026, is AI-augmented delivery. One principal consultant or PC owns the client relationship. One senior consultant handles day-to-day execution augmented by our AI-powered skills, which generates first draft assessments, policies, compliance tracking.
Fixed retainer replaces hourly billing. The margin scales to 65%. One pod covers 15-20 clients instead of 8-12. Phase three, our strategic target, is Enclave First. Enclave itself becomes the operating security program layer. We layer advisory services on top as a retainer. Margin potential is 64%-75%. Clients per senior consultant scale to 30-50. Revenue can be classified as product ARR, which is why phase three matters for valuation. The vCISO decline in Q2 isn't a problem. It's phase two pulling clients out of phase one pricing and into phase two fixed retainer models. Gross margin expansion proves it's working. Enclave is our growth engine.
Our software and services category, which includes Enclave, engineering services, and third-party partnerships, grew 12.5% year-over-year from $1.54 million to $1.73 million in Q2 FY 2026. Enclave's our core product, but this line also captures delivery leverage and ecosystem commissions. Enclave's a network microsegmentation zero trust SaaS platform. It gives organizations three operational outcomes. One, real-time asset visibility without spreadsheet management. Two, microsegmentation without tearing apart the network. Three, certificate lifecycle management, which is increasingly critical as the CA/Browser Forum compresses the TLS certificate lifetimes to 47 days by 2029. The ideal customer is 50 to 2,500 employees, multi-site or hybrid cloud, compliance burden, and no in-house networking expertise. That's essentially every mid-market customer we already have. In phase three, Enclave's price, pricing tier is twofold.
Enclave Advisory, roughly $30,000-$90,000 per year, AI-powered risk assessment, policy generation, compliance tracking, all through the platform. Enclave Enterprise, $60,000-$80,000 per year. It's advisory plus dedicated hours from our consultants. That's reoccurring leverage-based revenue. Gross margin on platform approaches 70%, that's the business we are building. What's ahead? Q3 and Q4 FY 2026 are critical. We need to prove phase II works operationally, that phase III, Enclave First, is where real growth lives. We also need to get the sales motion right. We've had a number of bad sales hires in the past year, people who didn't understand our model or couldn't execute on it. It's partly why vCISO revenue contracted. We've corrected for that, our remaining sales team is solid.
We're not giving ourselves credit for sales execution yet because we're still rebuilding confidence in that function. On marketing, Jamie, our CMO, is only six months into the role and has already expanded her team with Paige and Melissa. Marketing takes time to produce results, we're seeing it now. We're seeing direct opportunities, more importantly, we're seeing channel growth. Our MSP and MSSP partners are moving from passive to active. They're embedding Enclave, they're co-selling vCISO, they're asking for marketing materials. That's the signal we need, we're seeing it. We're in the middle of a deliberate transition. The down services revenue is not a failure, it's a mechanism of the transition. We're pulling high touch clients into product leverage delivery models. We're building Enclave into the operating model and the operating system for mid-market security.
We are correcting for bad sales hires and seeing real momentum in channel expansion. Q3 FY 2026 is an inflection point. If we execute phase two delivery operationally, if Enclave adoption accelerates, if our MSP and MSSP partners continue to embed us in their go-to-market, then we have visibility into phase three, and phase three is where the valuation multiple lives. We know what we're doing. We have the product. We have the team. We have the client base to prove it. We just need to show it quarter-over-quarter. Thank you.
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