Good day and thank you for standing by and welcome to TELUS Corporation 2Q 'twenty one Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. 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 TELUS Corporation's Q2 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 and A. Let me quickly review the format of today's presentation.
John will begin with some brief remarks on the Q2 2021 results, TELUS' strategic priorities and Mark will cover the financials and guidance. Then we'll open up the line for the Q and A session. Earnings press release earnings release was released 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 and 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' 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 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 cellulose's 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, Renly. Welcome everybody to our Q2 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, 2.90 basis points of gross margin expansion and positive cash flow.
As the company announced on July 19, Michelle Nakazawa, who has been the CFO of the company for nearly 2 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 in 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 and 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 At Presidio Federal, we're 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 that directly with TELUS.
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 2 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 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 $19,400,000 expansion of a contract By the U. S. Air Force for our Exacta solution. With this new contract, the Air Force now owns a license for both Exacta 360 And Exact.
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 3rd cloud service provider, which we will be providing additional details on To our roster of cloud customers using Exacta, 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 Q2, we saw enterprise adoption of our Exacta 360 offering by the Department of the Interior, who selected Exacta 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 Exact.
Io 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 TELUS Ghost. Through this award, the total value of the contract increased by $13,500,000 To $24,800,000 This customer also awarded us a data analytics support task order totaling $1,100,000 Other significant renewals and expansion business include the CIA awarded Telos A contract through June of 'twenty three, providing our Exacta 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 Exacta solution.
The U. S. Department of State awarded TELOS another contract through 2022 providing our Exacta solution. And the U. S.
Space and Missile Command awarded TELUS an expansion of their existing Exacta Solutions contract as well. In addition, we continue to see increased commercial adoption of our security solutions with new and renewed contracts from AT and 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 PreCheck contract. On July 1, 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 Now next, I'd like to highlight recent updates within our Exacta, TELOS Ghost and IDTrust 360 Solutions.
On June 30, we announced a new version of ExactIO, which expands our control mapping capability, which is really needed by regulated industries to address audit fatigue. We followed on August 11 with the release of a new version of Exacta 360, which offers multiple data exchange protocols These new capabilities increase commercial and international opportunities for Exacta, 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 Acquire 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 our recent renewal by a major insurance company.
This Fortune 50 organization uses Xact. Io to aggregate the extensive data needed to manage IT asset inventory and vulnerabilities, while providing automated control mapping to multiple sets of standards. This ultimately reduces the burden and on their internal security operations and compliance teams. In the 2nd 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 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, TELUS has seen increased success and interest in TELUS Ghost within the education, Internet of Things, Banking, Healthcare and Critical Infrastructure Markets, with developments including a strategic partnership With Johnson Controls to integrate TELUS Ghost into their OpenBlue CloudView Gateway, which supports a worldwide cloud based video used for surveillance and physical security. The integration of this solution will be completed in Q3. TELUS also inked a partnership with OmniAlert to integrate TELUS Ghost into OmniAlert's gun detect, The industry's 1st 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, TELUS has advanced our ability to serve the education market. Of note, we finalized the integration of TELUS Ghost into Chromebooks. Nearly 60% of computers Purchased by K-twelve 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, TELUS' ghost enabled Chromebooks are easy for K-twelve institutions to deploy and manage. And we're glad that 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 we formally announced later in Q3. On July 30, TELUS acquired the assets and patents of Diamond Fortress Technologies and will integrate the Onyx touchless fingerprint software with our IDTrust 360 platform.
You see, On X eliminates much of 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 TELUS 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 TELUS position in an expanding market with contactless biometrics technology Expected to grow from approximately $7,000,000,000 in 20 19 at a compound annual growth rate of 20% From 2020 to 2027. Put simply, On X 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 recompetes 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 include 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 in FY 2022 appropriations bill approved by committee in the House would boost funding for DHS's Cyber Security 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 TELUS 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 He is also developing a ransomware profile for the cybersecurity framework to help organizations manage security best practices required to thwart ransomware attacks. TELUS 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 Exacta 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, Budd.
Thank you, John, and thank you everyone for joining us today. 1st and foremost, I'd like to begin by saying how thrilled I am about the opportunity to join TELUS. I'm excited about the numerous opportunities ahead To execute for our customers, partners and shareholders and to work with this team. I'm pleased with our 2nd quarter results, Underpinned by strong revenue growth, gross margin expansion and positive cash flow. Let's start with revenues.
Year over year reported second quarter revenues grew 8% from $48,600,000 in 2020 to $52,600,000 in 2021. Excluding our contract with the U. S. Census Bureau, Which has ramped down as planned since the same period last year, total second quarter revenues grew 48%. Sequentially, total second quarter revenues declined 6% from $55,800,000 in the 1st quarter Due to a large delivery in our Secure Networks business that was originally planned for the Q2, but was delivered in the Q1 Per our customers' request, if the delivery had shipped during the Q2 as originally scheduled, 2nd quarter revenues would have been $57,400,000 sequential growth would have been 13% instead of negative 6% And year over year growth would have been 18% instead of 8%.
But in either case, first half results are the same, with reported revenues up 24%. Now let's turn to our individual businesses. Total second quarter revenues for our Security Solutions business Declined 9% from $34,200,000 in 2020 to $31,200,000 in 2021. This decrease was driven by nearly $13,000,000 of lower sales in TELUS ID on the contract with the U. S.
Census Bureau As mentioned previously, this contract recognized peak revenues in the Q2 of 2020 And largely ramped down according to plan through the Q2 of 2021. New contracts in TELUS ID, Our Exacto solution and TELUS Ghost are quickly backfilling the ramp down on the contract with the U. S. Census Bureau. In fact, excluding this contract, 2nd quarter revenues in Security Solutions grew 48%, In part as a result of the new pilot program awarded by a confidential customer to TELUS ID early in the second quarter, Which we mentioned on our last earnings call, as well as 18% growth in our Exacta solution And 12% growth in TelosGhost.
Growth in our Exacta solution, EntelosGhost Reflects both the expansion of relationships with pre existing customers as well as new wins and increased commercial adoption of our offerings, As John explained earlier, total second quarter revenues for our Secured Networks business Also grew approximately 48 percent from $14,400,000 in 2020 to $21,400,000 In 2021, this significant increase was mostly driven by 2 large programs issued under the U. S. Air Force NetSense contract vehicle. The rollout began for a $66,400,000 contract to provide security modules and kits To support the upgrade of the theater deployable communications black core architecture. And site work began on a 5 year $45,000,000 U.
S. Army contract to support the migration And modernization of telephone communication systems throughout the entire Pacific region. Secure Networks continues to win related business as a result of these programs and expects work on these programs to continue into 2022. Before turning to our profitability metrics, I'd like to provide some color on our stock compensation expense, which will be mentioned throughout my remaining comments about the quarter. As a newly public company, Stock compensation is an effective tool to retain existing staff post IPO, to attract seasoned professionals and to enhance incentive compensation.
As a private company, we recognized a de minimis amount of stock compensation expense in 2020. But starting in the Q1 of 2021, we began amortizing stock compensation expense through our income statement As a result of an initial round of post IPO grants made in the Q1. Because this expense is new for 2021 And because it is non cash, we believe it is appropriate to provide adjusted metrics, excluding the impact of stock compensation expense where relevant. This year, we recorded $13,700,000 of total stock compensation expense in the 1st quarter And $21,300,000 in the second quarter. We expect stock compensation to step down to approximately $13,000,000 to $14,000,000 in each of the 3rd and 4th quarters of this year.
With that backdrop, let's turn to profitability and cash flow. 2nd quarter gross profit increased 17% From $17,600,000 in 2020 to $20,600,000 in 2021. Cost of sales included $795,000 of stock compensation expense, which did not exist 2nd quarter gross margin increased 290 basis points from 36.2% in 2020 to 39.1 percent in 2021 due to gross margin expansion in both security solutions as well as secure networks. Excluding the impact of stock compensation expense during the quarter, gross profit was $21,400,000 And gross margin increased 440 basis points to 40.6%. SG and A and R and D expense increased by $26,600,000 to $39,100,000 in the 2nd quarter.
Of the $26,600,000 increase, dollars 20,500,000 was attributable to stock compensation expense that we did not have in the prior year period. The balance of the increase was driven by previously discussed investments in our sales force, Marketing and channel staff, which will drive ongoing high margin revenue growth and rapid expansion into commercial, International, state and local markets. We're also making investments in G and A functions to support our post IPO business model And investments in R and D to ensure our customers have the world's most sophisticated cyber, cloud and enterprise security solutions and that these solutions continue to address new and evolving threats for years to come. Operating income before stock compensation expense was $2,800,000 compared to $5,100,000 in the prior year period. Operating income benefited from higher gross profit driven by sales growth and gross margin expansion, offset by investments in R and D and SG and A, all of which I've outlined previously.
Adjusted net income increased From $262,000 in 2020 to $2,600,000 in 2021. The increase in adjusted net income was primarily driven by the same factors as operating income discussed previously, But also benefited from the elimination of $1,800,000 of interest expense and the elimination of $2,800,000 of minority interest compared to the same period last year as a result of the actions we took to deleverage our balance sheet and simplify our capital structure post IPO. The corresponding adjusted earnings per share Increased from $0.01 per share to $0.04 per share. EBITDA adjusted for the impact of stock compensation expense Was $4,200,000 compared to $6,400,000 in the Q2 of 2020. The decrease is attributable to the previously mentioned investments in SG and A and R and D, partially offset by the increase in gross profit.
We generated $3,500,000 of positive cash flow from operations during the quarter Compared to a cash outflow of $904,000 in the Q2 of 2020 and a cash outflow of $9,300,000 in the first The improved cash flow was primarily the result of higher adjusted net income And favorably working capital dynamics during the quarter. Now we'll turn to our financial outlook for the year. We are reaffirming our guidance for the full year, including total revenue in the range of $283,000,000 to 295,000,000 And adjusted EBITDA in the range of $33,000,000 to $36,000,000 Our guidance implies year over year revenue growth in the range of 89% to 102% for the second half of the year And 57% to 64% for the full year. We're forecasting 40% to 50% sequential revenue growth from the 2nd quarter to the 3rd quarter with additional sequential revenue growth From the Q3 to the Q4, primarily driven by TSA PreCheck. Our overall guidance remains unchanged.
However, the composition of our sales growth in the second half has evolved. We previously forecasted approximately $8,000,000 of TSA PreCheck Revenues in the 3rd quarter and $30,000,000 in the 4th quarter. We're now assuming no revenues from that program in the 3rd quarter And approximately $25,000,000 in the 4th quarter due to short term program delays as discussed earlier by John. Similarly, we previously assumed approximately $8,000,000 of revenues from the Centers for Medicare and Medicaid Services in each of the 3rd 4th quarters, But we're now assuming no revenues from that program this year. So overall, we're assuming approximately $30,000,000 of revenues from those two programs Will be recognized in 2022 instead of during the second half of twenty twenty one.
Keep in mind, these are short term Customer driven delays that impact the initial timing of revenue at the beginning of these programs during the second half of twenty twenty one. The value of these programs and our out year expectations have not changed. These remain multibillion dollar Profitable long term programs. We have a solid base of business that supports our full year guidance, Notwithstanding the short term delays in CMS and TSA PreCheck, the revenue that has been pushed into 2022 Has been replaced by new customer wins and expansion of existing customer relationships across all of our businesses, As John discussed earlier, these successes are further supported by our rapidly expanding new business pipeline. In closing, we're very pleased with our performance this quarter, which was underscored by 48% adjusted revenue growth, 290 basis points of gross margin expansion and $3,500,000 of cash flow from operations.
And we are well positioned for 2022 with multiple large programs launching and a fully resourced Sales and marketing team, building our channel program and cultivating a strong pipeline of opportunities in commercial, international, State and local markets. With that, John, Ed and I are available to take your questions. Operator, please open the line for Q and A.
And thank you. And our next our first question comes from Alex Henderson from Needham. Your line is now open.
Thanks. So, boy, I'm breathing a sigh of relief. I thought you guys were going to have to lower the guide for the year. This is a Pretty good outcome, considering the degree to which TSA Pre was late and the risk To Medicare and Medicaid. So I was wondering if you could talk a little bit about what it is that Is it Exacta and Ghost that's replacing it?
Is it Network Solutions that's replacing it? Where is the Revenue streams coming from and given you had expected to get to double digit operating margins in the back half of the year, Is that something that you still expect to be able to attain without the TSA and Medicaid programs?
Hey, Alex, this is John. Thanks for your question. Thank you for your comment. The way to think about it in general is that our mix, Our revenue mix will be about the same as we projected from an IPO point of view, which means that security solutions should be around 60% Of the revenue going forward, which is going to be a result of a mix of those three areas plus that Confidential customer that we talked about before doing more work with us, because we are we've done well with them. So it's across the board.
You'll see growth really within our Secure Networks Group as well. I believe that we'll have a good solid second half of the year.
Is it Ghost? Is it Exacta? Any color on What it is that's obviously running well ahead of forecast to offset the loss of I think if I do the math right, something like $30,000,000 in the 4th 3rd quarter and 4th going into the 4th quarter?
Basically, what it is, is all of the security solutions components are doing better than planned From a pipeline point of view. And then the second part is with secure networks as well. We're seeing good growth across the board.
Okay. And then the margin comments, any reason to believe the margins aren't going to be at least as good then?
That's why we upheld our guidance. We wanted to make sure that the market understands that we believe the mix will hold And as a result, the margins will hold.
Okay. And so to the extent that TSA Pre and Medicare and Medicaid starting Boundary sort of a if you think about it as a physics boundary value problem, it started a little later. Does that change the expectation For 'twenty two or alternatively, the fact that it started later has no impact because you'd expected The volume in 2022 in either case, how do you talk to the magnitude of 2022 based on the difference Timing?
Yes. So one part of that, Alex, is going to be obviously CMS and PreCheck Some components of that pushing, but the other component to keep in the back of your mind's eye is I think we assumed 600 625,000 transactions, I think it was for 2022. And I think that's going to prove to be conservative.
Okay. So it sounds like you think that you'll still hit the original expectations for TSA Pre and Medicare Medicaid in 2022 Based on better transaction volumes and whatever share despite the delay in the start time. Correct. Is that right? Perfect.
Correct.
And then one last question, then I'll cede the floor. As I'm looking at This delay, does that help you at all or hurt you at all relative To the competitive balance between the your offering in that arena and your Competitors in that arena. Does it give you more of an opportunity because of the Exacta tie in Or does it have any impact at all or is it is that not impacted?
From our standpoint, it allows us to hit the ground running. So it allows us to prepare ourselves. We'll have several 100 sites up and ready. So as a result of that, I think it gives us A better chance of much faster success.
All right. I'll see the floor. Thanks.
Yes. Thank you. And our next question comes from Daniel Ives from Wedbush Securities. Your line is now open. Hi.
This is Sam Brandeis on for Dan. My question is, can you speak on the surge of federal spending that we're seeing On cyber towards year end, and how does this environment compare to the last few years in terms of spending? Thanks. You're welcome. So I would say from a standpoint of our year this year, I would say it's going to have little impact this year.
However, it will have impact over the next year 2 years. Even though the government has put money to work, you still have to go through what's called the contracting process And that inevitably tends to slow things down. So from a standpoint of planning, we're not planning on additional revenue Out of that plus up, if you will, from the government, if it happens, great, But we're not planning on it. We are, however, all over it and we're making sure that we mine all the opportunities that we see out there, of which there are many. But we're also realizing we have to all realize that there is a contracting process that goes behind when they Push dollars into these kind of big programs.
So the pipe the way to think about it for all of you on the line here is Our pipeline is getting a lot bigger, in general as a company. Great. Thank you.
Thank you. Thank you. And our next question comes from That comes from B. Riley Securities.
Yes. Hi, John and Mark. Thanks for taking my questions. I appreciate the time here. I mean, John, Just given that the business remains on track here and reaffirming your full year outlook, can you just give us a little bit more insight into why we've been seeing this string of insider selling of late?
Sure.
As I've pointed out to certain investors that have called me about it And spoken to some of the research some of the people in research as well.
One of
the great assets we have here is we have longevity here. And so I have a lot of people here with a lot of tenure and they've never sold a share. So we expected there to be some selling And these plans, these so called 10b5-1 plans were put in place months ago. So when they start their process So selling, it's kind of like it's out of their control at that time. So I think that's where it really comes from.
It's not a question about the company or its condition. It's more really getting liquidity For my own employees who have an opportunity to diversify most of their wealth out of the company and Put it prudently into other investments
as well. Understood. That's helpful. And also encouraging to hear The progress we've seen with the expansion on the sales and marketing and the channel team. I mean, can you give us some updates on kind of the early progress that you've seen And expectations from that expanded group as we go into the second half of the year?
Yes. So just to remind everybody, we started with 16, I think we're About 66 now, something like that, plus 50 or something.
So up
to about 50. So up to about 50 people. We're seeing I think the partner ecosystem is going to be much broader than we were expecting. We think that will Pull in some opportunities into the early part of 'twenty two, maybe the late part of 'twenty one. And we're seeing that it's also translating commercially, which is very important to us as you all know.
So I'd say that again, this is a Reflection of a much faster growing pipeline for us as a company. And remember, every time when we get into an The whole idea once you get in is to expand it over time. So we're continuing that process as well, which I think is helpful for the company, obviously.
Understood. And it sounds like with the ramp in revenue, we should see the margin expansion as well in the second So Mark, should we expect the company to continue to be free cash flow positive as we see this ramp in the back half of the year?
Yes. That's certainly our expectation for the full year is that based on our guidance, even at the low end, we're expecting to be cash flow positive. In the absence of an unusual end of year ramp in working capital, we would which we're not expecting, We would expect to
be cash flow positive for the year.
Understood. Well, thanks again for taking my questions and congrats again on a solid quarter.
Thanks, guys.
Thank you. And our next question comes from mehalsh Koski From Northland Capital, your line is now open.
Thank you. Can you guys hear me?
We can. Yes, sir.
Okay, great. Okay. So yes, I echo my sentiments of a great quarter and great to see the reiterated guidance given the TSA push out Timing of that. So the work with the confidential customer, this is the same customer that was announced during the 4Q call. That was contract that was worth up to $45,000,000 correct?
That was worth up to $45,000,000 That's correct, Nahal. It was $35,000,000
I'm sorry, dollars 25,000,000
Time of the award, right?
Yes.
Yes, yes.
Okay. And so with this confidential customer, The composition of their work sounds like it's heavily weighted towards IDTrust 360, but there is a bit of exacting goes in there as well. And therefore, That's why you're maintaining that margin profile as well.
Yes. The way to think about it, it's I think it's Ed here, is it 75%, 25% in terms of the mix? Roughly. Secure networks. So secure networks is roughly 25% of it.
And the rest of the work is security solutions with about $25,000,000 of that $34,500,000 or $35,000,000 being recurring.
Okay. And then you made another interesting comment, same comment that you made from prior call, wider V shape funnel. Two questions with that. One is that, is it even wider than the wider V shaped funnel that you referred to in the prior call? And then can you just define what you mean by wider?
Do you mean like a more diverse set of customers or something else?
It's really a combination of depth, breadth and size. So the size of the opportunities are getting bigger. The duration of the opportunities are getting longer. The type and flavor of opportunity, meaning Security solutions versus secure networks is broadening. So it's happening in sort of across the board and it's not really It's not in one group or another.
It's happening across the board. And Ed, I think that's correct. Do you?
Yes. And the channel and the fact that we've got a lot People out there doing their jobs as well as we're enlisting channel partners who also bring A portfolio of customers on their end, so that helps to broaden the pipeline even more.
Yes. And just to put a fine point on that, we talked about DLT, but there are others, other large distributor types who have hundreds and hundreds of contract And basically from our point of view, we're dealing with 1 buyer, meaning the distributor, Then they have hundreds of contracts of their own that they would as orders come in administer on our behalf. From our point of view, we're dealing with 1 entity. So again, it's that it's another flavor of the channel strategy that we've been Discussing with everybody since the IPO.
Okay, great. And then just to be clear, the widening is A trend that has happened from the 1st end of Q4 to end of Q1 to end of Q2. It's not just you had one delta Steph?
That's right.
That's right, Naho.
Great. And then finally, you had a I think a very important line in the press release where you Announce a lot of new and renewed contracts, a bunch of impressive commercial names such as like AT and T, Accenture, IronNet, Cybersecurity, Comtech, which of these were actually new?
I think those are all new. Yes, those are all new, Naha.
They were all new. So and was that generated through the channel program or is that direct?
It was all direct, Nahal. But in each case, they start out as internal Use kind of things and then they plan on expanding channel. Remember, what we want certain of our partners to do, Like as an example in Accenture, we want them to build out their own capabilities of implementing Exacta, So that as we sell, we're selling more software as a service versus solutions as a service.
Right, right. Well, these sound like these would be Important Beachhead customer within each commercial vertical that should help the channel program. Is that an incorrect assessment?
That's not incorrect. That's correct.
Okay, great. Thank you.
You're welcome. Thank you.
Thank you. And our next Question comes from Keith Bachman from Bank of Montreal. Your line is now open. Hello, Keith. If your phone is on mute, could you please unmute it?
Next question, Keith Bachman from Bank of Montreal.
Can you guys hear me?
Hey, Keith. We hear you now.
All right. Yes, sorry. I'm having a little bit of technical difficulty today. I had A little trouble getting into the call too. So I may have to do a little bit of repeat, but I want to start on TSA.
And could you revisit I had a few questions around this. Is the delay a supply or a demand driven delay? What I mean by that, was there something side are rolling out the program from the TSA side? Or was it purely was it demand driven delay in that there's fewer Business travelers, so to speak, who are primary driver of the TSA program, if you could just clarify?
Sure. Keith, I'm glad you're asking that question. Thank you. What I'd say is that it's driven by virtue of the fact that we've had, as everybody is well aware, a bunch of different cybersecurity hacks. And that has caused the TSA to take a step back to make sure that their own systems fundamentally won't have a problem By any third parties coming after them.
So that's More supply. That's the main reason why this is all being pushed out.
Okay.
So it's programmatic. It really has zero to do with demand. The demand is actually there Still, hopefully, it will hold, but the demand is definitely there still.
Okay. And I want to stick with it because right now, if I go on, And this is a competitive landscape question. How does this evolve? If I go on the TSA site, it takes you to UE universal enroll Program, how does the TSA to the government deal with the distribution of work as the program rolls out more in earnest. In other words, is there going to be a redirect to competitors?
Or do you get a fair shake at it? How does the distribution of opportunities occur, so to speak, as the program unfolds more in earnest?
So first and foremost, they've said there's going to be equity amongst between and amongst the different players. But Keith, we don't we've never really expected that. We expect that we're going to have to compete on the merits. So it's going to have to be that's how we're planning on this is competing on the merits.
But how do you generate how do you think you win the business then from the 3 other participants excuse me, 2 other participants in the market.
Sorry, Ed, were you going to say something?
Keith, this is Ed. So for my on the new customer There's a direct marketing play here where we'll be marketing. There's also points of presence where we'll be establishing, John mentioned earlier, a couple of 100 Expanding to eventually thousands of sites for people to go to, to apply. So that right there is A distinction between competition, where we're at and where they're not and so forth, and also from a marketing perspective, We feel very comfortable with that program and what we're going to be doing there. On the recompete side, there are some nuances as well as In terms of benefits that potentially come to 1 using 1 enrollee company versus another.
And as John mentioned, we're not quite sure how it's going to play out on the site, but we Still anticipate between our marketing ventures, we'll be also marketing through distributors to Customers that are both renewals as well as new customers, so we'll be able to do direct impact there as well. So that's the way these things we see it playing out at this
And then just to remind you, the universal enrollment contract is very different than the expansion contract, Keith, In that, the provider of that program, which is edemia, Pays the government directly the full amount of the cost of free check. And the government then issues a check back to them per sort of government terms Over usually, the government pays within 60 to 90 days. So in our case, we're taking at the point of sale, Which allows us to do things like do discounting that you really can't do on universal enrollment. They have to pay the government a certain amount of money every with every transaction. In our case, we pay the government A smaller fee, but we take the entirety of the $85 and are able to use it in a way where we, A, get paid upfront, But B, we're also able to do things like provide no cost incentives, which include things that I've referred to in the past, Like discounts on various websites for purchasing merchandise, etcetera.
And then those merchandisers pay us on the back end, which becomes another source of revenue for the company. There is a ton of additional activity behind that, that we just don't get into because this is a public Forum. So it's very, if you will, highly we hold it very close, All the various initiatives we have internally, but we do think that out the chute, we'll be very well prepared To execute from Q4 and beyond, as I mentioned earlier, we'll have a couple of 100 or a few 100 actually, Up to a few 100 sites by the Q4 anyway, which puts us into a running start mode.
Got Got it. Okay. Question number 2 relates to the previous question, was asked by somebody else. But on the commercial side, could you just give us an update on either the percent of Commercial bookings or pipeline or revenues, how you see that today? How you see that unfolding at year end?
Okay.
And let's just keep TSA out of commercial
Yes. No, I get your point. I think at the end of the day, we'll probably be somewhere around ninety-ten By the end of 'twenty one. I think by the end of 'twenty two, we're going to be around eightytwenty, if you don't count TSA PreCheck.
Yes.
Okay.
And that could change very rapidly based on the channel And based on the distribution models. So remember, the numbers that we have are based on The channel and the commercial pipeline not having any impact on 2022 until the second half of the year Of 2022. So my our assessment will be refreshed once we go through Our end of year planning for purposes of full year 2022 and then come out with our guidance for full year 2022 at some point In the not too distant future.
Okay. Okay. My final question is just stress. And what I mean by that is, it's understandable that if TSA and Medicaid and Medicare pushes that there could be some downward pressure on previous guidance. You're maintaining Correct.
Your guidance, which it sounds like the pipeline is robust enough to maintain that. But I think investors may come away. Did they leave a tall hill to climb? That is to say, did management leave a tall hill to climb to even make those The current guidance in CY21 given that 2 of the largest programs are being pushed into 2022. And so I think a different way to ask that question just on overall, maybe if you could just characterize how the pipeline has evolved from say December 31 to June 15, so today, is it up 15%, is it up 20%, is there any way to think about that because just Again, if 2 of your larger programs are pushed, you're maintaining guidance.
I think the natural question is going to be what stress did you thereby leave with
It's a great question, Keith. And another one I'm glad you asked upfront. One of the things that Mark did in his presentation was he gave you a sense of what we think Q3 looks like. And that's without CMS, that's without PreCheck. So that gives you some sense of the way that we've been able to fill in That whole, if you will, with existing and or new customers or expansion of existing customers.
And if I were to estimate what that would be for Q3, it's probably 20, 15, 20 Revenue? Percent? $1,000,000 New customers? No, no. I'm saying The amount we're covering from CMS and PreCheck is roughly, I think, $15,000,000 Roughly?
Yes.
Is that right?
Yes. For
Q3, yes.
Yes. So we're covering a $15,000,000 hole With other business, which has the same or better margin profile than Those programs on their own.
Yes, yes. And the margin profile, again, that's interesting. And then just say it a different way, comfortable with Q3 and Q4 then?
We are. We're comfortable as of today with Q3 and Q4. And yes, so that's why we reaffirm guidance. Otherwise, We wouldn't have. Now I'll say it a different way.
Had we been up and running with both programs, we would have guided up Yes.
At the
end of the day, but in an overabundance of being cautious, we basically just said we're going to stick with what we're what our guidance is.
Yes, makes sense. Okay. I will cede the floor. Many thanks.
Thank you.
And thank you. And our final question comes from Catherine Trebnick from Colliers, your line is now open.
Thanks for taking my question. Can we dive into the gross margins? I might have missed it when you talked about them. And I'm specifically trying to understand better The solutions versus the network gross margin.
Sure, Catherine. Catherine, I'd like you to meet Mark Benza, Who is our CFO? And great to hear you again. So Mark, please dive into the gross margin for Catherine.
Hey, Catherine. Thank you for the question. So, I don't think we've been giving out precision around gross margins At that level, but what I can say is that Security Solutions gross margins are
Tens
of nearly double, let's say, between Security Solutions and Secure Networks. We also saw pretty significant gross margin expansion from the Q1 to the 2nd quarter in both security solutions and secure networks. And then in addition to that, we also saw some mix benefit from 1Q to 2Q with security solutions Going from 40% of total revenues in the Q1 to 60% in the second quarter. So that 1300 basis points of gross margin expansion that you saw Sequentially from 1Q to 2Q, it was both mix between security solutions and secured networks as well as Gross margin expansion within each of those two businesses. Yes.
And to put a fine point on it, just so everyone is aware, Q1, everyone will recall, Our Secure Networks business is more like 59% of revenue and our Security Solutions business is more like 41%. And there was concern that the model was wrong, it was off. And we said, no, it's really just a point in time. If you look where we are today in terms of revenue mix, it's where we were thinking it should be, which is much more like around 59% Security Solutions And 40% 41% is Secure Networks. So that is going to have the impact of obviously affecting Gross margins, not just on a dollar basis, but as a percentage of sales.
All right. And that helps I remember the secure networks was significantly depressed last quarter. So thank you very much.
You're welcome, Catherine. Thank you for your question.
And thank you. And I am showing no further questions. I would now like to go ahead and turn the call back to management for closing remarks.
Thank you very much, operator. I just wanted to say how much we appreciate everybody and Their belief in the company and what we're up to as an organization. I try to avoid watching the stock price, but of course, occasionally I do it. And it's just It's a crazy world out there is all I can say. I'm hopeful that we'll just continue to hit numbers and perform and over time people will begin to trust that The kind of information that we give people and the kind of growth that we perceive is out there is going to actually happen.
And therefore, I like people to remember that we have very long term contracts and 2022 is going to be a bang up year, in my opinion. So Have a great night everybody and we'll talk soon.
Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.