Telos Corporation
Q1 2021 Earnings Call Transcript
Published:
- Operator:
- Good day, and thank you for standing by. Welcome to the Telos Corporation First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. I would now like to hand the conference over to your speaker today, Brinlea Johnson. Please go ahead.
- Brinlea Johnson:
- John Wood:
- Well, thank you, Brinlea. Hey, everyone. I’m John Wood, Chairman and CEO of Telos Corporation. Welcome to our first quarter 2021 financial results conference call. I’m proud of our execution this year delivering 43% year-over-year revenue growth and continuing to win meaningful contracts and exceeding our prior guidance giving us even greater confidence for the full year. We surpassed our expectations on both the top and bottom lines as we were able to execute on our customers’ request to accelerate deliveries expected in the second quarter into the first quarter. Since we covered a great deal of Q1 during the last earnings call, which is only six weeks ago, today, I will focus on recent events as well as any new developments.
- Michele Nakazawa:
- Thank you, John. And thank you all for joining us today. I’m very pleased with our first quarter 2021 financial results and I’m excited about our future revenue and earnings growth for 2021 and the years ahead. For our first quarter financial performance, revenue increased 43% year-over-year to $55.8 million, which exceeds our previous guidance of $49 million to $52 million. Gross profit increased 17% year-over-year to $14.4 million inclusive of stock-based compensation expense of $737,000. Net loss was negative $14.8 million. Adjusted net loss after adjustments for a charge for settlement of an outstanding litigation matter and stock-based compensation expense was negative $54,000. Adjusted EBITDA after adjustments for a charge for settlement of an outstanding litigation matter and for stock-based compensation expense was $1.5 million, which exceeded our previous guidance of negative $1.9 million to negative $1.7 million. Our diluted net loss per share was negative $0.23 per share. Adjusted earnings per share of 0.00 per share. Our weighted average diluted shares for Q1 were 64,625,000 shares. Let me provide some additional financial insight into our operations. Revenue for our Security Solutions business was $22.9 million. Gross margin for Security Solutions was 41% inclusive of stock-based compensation expense of $660,000 compared to 37% for Q1 2020. Revenue for our Secure Networks business was $32.9 million. Gross margin for Secure Networks was 16% inclusive of stock-based compensation expense of $77,000 compared to 19% for Q1 2020. SG&A expense was $27.9 million, an increase of 135.2% from Q1 of 2020. This is primarily as a result of stock-based compensation of $12.9 million and an increase in labor and other indirect costs up $3.7 million. This increase in expenses reflects our planned investments for expansion in our sales, channel and marketing teams. And finally working capital finished the quarter at $102.2 million.
- Operator:
- Thank you. Our first question comes from the line of Alex Henderson from Needham. Your line is now open.
- Alex Henderson:
- Awesome. Thank you. So a nice quarter, thanks for the print. I wanted to get an update on where you were on your sales hires and your expansion on your distribution channels to start with, if I could.
- John Wood:
- Hey Alex, how are you? This is John. We’re doing well on that. I think we’ll have the full board, if you will done by the end of June. We’re about at 40 right now in sales, marketing and channel activities. So we’re doing well against our plan.
- Alex Henderson:
- And any change in the distribution and partnership stuff.
- John Wood:
- No. Same – we’re on the same course as we were, sir.
- Alex Henderson:
- Perfect. The second question, when we had talked to earlier, I think you had mentioned that there was a change in the government’s approach to how they’re talking to the cloud companies in terms of their requirements that essentially – effectively requires them to have Xacta copies, several Xacta copies running, if they had any intention of bringing any government programs onto their networks. Can you talk about the degree to which that’s an accurate statement? Has that been legislated? How do we think about the validity validate that the viewpoint?
- John Wood:
- Yes, thank you for that question. The way to think about it is that, it was really the intelligence community that we were talking about earlier. And in the intelligence community, they started out with a single cloud provider being AWS, and then very recently decided that they were going to move to multiple cloud environments to include IBM, Oracle, Google, Azure and AWS. I don’t think I missed one today. I don’t think so. And that they want the format of all of the bodies of evidence in Xacta, which means ultimately the cloud providers are using Xacta, both for the high side, meaning the top secret regions, as well as the secret regions.
- Alex Henderson:
- Does that extend to the other vendors such as IBM, Oracle and Google over time, if they want to carry any government business?
- John Wood:
- At the end of the day, basically what the government’s telling the vendors, the cloud providers is we want everything in an Xacta format. And when I say the government in this case, really we’re talking about the intelligence community, but when you think about the intelligence community, there’s also a component of the intelligence community, which includes the military, so the military intelligence community. So we do see a way get into the rest of the DoD, if you will through the back door. And I mean that not in a negative way, but it’s because – it becomes a kind of a lexicon for the entirety of the government to use. So ultimately, we do see our Xacta becoming the standard throughout the government.
- Alex Henderson:
- And one last one on this subject, any update on Microsoft and Amazon reselling Xacta, where we are on that – ramping that opportunity.
- John Wood:
- Yes. We are not planning on anything coming out of that channel until I think it was a Q4, I think it was Q4, Alex, and I think we’re going to see a great deal of activity coming out of Azure, although, recently the guys at Amazon have reaffirmed their commitment to Telos. So there’s more activity happening there, although we don’t have enough data to be able to tell you exactly what the results going to be out of that?
- Alex Henderson:
- Okay. One last question then I’ll see the floor, obviously, a very big increase in commitment to security by Biden administration. How is that impacting your thoughts on the outlook for the year and going forward in for Xacta, specifically. Thank you.
- John Wood:
- You’re welcome. I think this is the question that most people I think would probably have. I think the – we think that it has very big implications for Telos, both in terms of Xacta and Ghost, when you knockdown at the most simple level, what Xacta is doing is providing the automation that you are actually cyber clean, if you will, cyber cleanliness. And our cyber hygiene is a better term. I think the combination of Xacta providing that level of body of evidence and Ghost providing the ability to hide network assets like servers is right down the middle of what the administration is looking for. So we feel strongly that’s a capability that’s not just of interest to the government, but also to the commercial world.
- Alex Henderson:
- Great. Thank you very much. I’ll see the floor.
- John Wood:
- Thank you.
- Operator:
- Thank you. Our next question comes from the line of Andrew Nowinski from D.A. Davidson. Your line is now open.
- Andrew Nowinski:
- Great. Thanks and congrats on the nice quarter. I just had a question. So you solidly exceeded your guidance in Q1 and I think you talked John about the increase in TSA activity that you’re seeing. But you didn’t roll through the upside into the annual outlook. So I’m wondering, is there anything that changed with regard to your confidence or your ability or your visibility into the back half of the year?
- John Wood:
- Andy, thank you for your question. No, there’s nothing that’s changed. It’s really just being – it’s been driven into our heads that we have to meet or exceed our numbers. So I can – we can tell you guys that we feel very confident about the year. And as we closer to the second half of the year, we will make a decision as to whether or not we’re going to adjust to the upside, but just from our standpoint, we’re just trying to be conservative.
- Andrew Nowinski:
- Super, understood. Next question I had, I wanted to go back to a partnership that you announced last quarter with Johnson Controls. I know it’s a massive IoT play, they’re using Ghost. I’m just wondering if you could give us an update on how that’s progressed.
- John Wood:
- Sure. So again, this is a relationship, it’s a long-term strategic relationship to put it in planning, which we don’t – we did not plan on revenues for this year out of that relationship, but the idea is to start with the cameras and then move into other areas of the organization, like their HVAC systems, which account for a much bigger percentage of their revenue. I think where we are in general is, we’re moving strongly with them. They’re applying resources, we’re applying resources. And one of the first things we’re going to do is show the – do a showcase if you will of that capability right here in our headquarters. So it’s going to be a – I think a combination of that along with the gun detection capability that we announced with Omnilert.
- Andrew Nowinski:
- Okay. Thank you. Actually, just one more clarification for you, John. So if we look at how the course of revenue maps out for the remainder of the year and you kind of look at it from a product perspective, where do you see – I guess, where do you see a lot of the growth coming from in Q3 and Q4? Is it mostly from sort of ID Trust and the TSA and CMS awards that you won there that are driving some of that big uptick in growth in the back half of the year? Or is there something else we should be watching?
- John Wood:
- Yes. So initially, as we went public that clearly was where the – a lot of the growth came from. But just to remind you guys, we were awarded a large pilot. So I think it’s $34 million. And we weren’t able – and we’re still not able to disclose who the customer is or the use case, but the way to think about it is, we sell it by unit and it’s about $17,000 per unit, roughly. And that’s about one-third of Secure Networks and two-third of Security Solutions. And that we think is going to be much bigger over time, call it, another 6 to 10 of similar size kind of opportunities. And that’s something that could easily if you will overshadow some of the growth that we have in the second half of the year, but in any event it makes us feel that much more confident as it relates to the total year performance.
- Andrew Nowinski:
- Well, that’s great. Thank you, John. Have keep as a good work.
- John Wood:
- Thank you, Andy.
- Operator:
- Thank you. Our next question comes from the line of Dan Ives from Wedbush. Your line is now open.
- Dan Ives:
- Thanks. Could you maybe just give us a little insight, John, into just how the conversations are changing in terms of Telos and how it’s being viewed within the beltway, especially, everything we’re seeing more shift to the cloud. Of course, the cyber attacks, as well as the Biden initiative. Talk about maybe compare and contrast, in terms of conversations you’re having today versus even a year ago and how that’s changed anecdotally.
- John Wood:
- Sure. And good to hear your voice by the way. What I would say is that in the past, we were seen as sort of an IT security company, almost like a necessary evil, if you will, that’s probably not the right term, but something like that. As these hacks become very public, both commercially and in the government, we’re seen as part of the mission. So I think that has changed pretty dramatically for us. As we have more and more offerings that we will be conveying to the market and sharing with the market. You’ll see why we’re getting become much more part of the mission if you will. When you’re part of the mission, it’s just easier to find funding, it’s easier to close faster. And so I think that there’s going to be a lot more of that happening. So for our point of view, what it does is it helps accelerate the sales cycle and make the opportunities larger.
- Dan Ives:
- So you’re saying when John would call those go straight to voicemail anymore.
- John Wood:
- Yes. That’s exactly right.
- Dan Ives:
- Okay. Could you – okay, just last sort follow-on, talk about when we think about the opportunities, obviously, you guys have a ton of opportunities across federal, but if we sit here a year from now, what do you think the area that really Telos could – could really transform in terms of the types of deals that you’re seeing and maybe we don’t see today? Or is it just more of the same? Thanks.
- John Wood:
- So we have one large financial services company, again, unfortunately we can’t disclose their name. We have a crazy confidentiality agreement with them, which is actually harder than the one we have at the agency, which is ironic, because you can always find them looking for Xacta personnel online. So, but anyway, that opportunity is roughly 200 projects a year, we get about $4 million a year from that customer-ish. And it’s going to go up to about a thousand projects. I think what’s happening now is that we have a reputation, which is really, really strong here. And as poor people moved from the government to commercial, meaning more leadership – actors, if you will move from government to commercial. Our phone gets picked up much, much more easily than it has in the past. So I think the opportunity for us is around Xacta and Ghost and sort of being a belt and suspenders, if you will, to deal with the kind of anything from ransomware to any of the hacking activities that you’ve been seeing out there. So there’s, I think, a tremendous opportunity from us in the commercial world, for sure.
- Dan Ives:
- Awesome. Congrats.
- John Wood:
- Thank you.
- Operator:
- Thank you. Our next question comes from the line of Keith Bachman from Bank of Montreal. Your line is now open.
- Keith Bachman:
- Hi, thank you. I had a couple of questions please. The first, I’m going to tie two things together, but your gross margin percentages were looking at our model and the Street model were 300 to 500 basis points lower than what we’re expected. And also your cash flow from operations was call it negative 9 for rough numbers and street. And our models had a small CFO positive of call it, a few million dollars. So it was a pretty material swing to the negative on both gross margins and cash flow from operations. Could you help reconcile what was – were there any one-time charges? What was the issue surrounding both gross margins and cash flow from operations, please.
- John Wood:
- Sure. I’m going to turn that one to Ed, if you will, Keith.
- Ed Williams:
- Hey, Keith. On the gross margin, the aggregate, you’re correct. If you look at the breakdown between our Secure Networks business and our Security Solutions business, we are actually trending positive year-to-year on the Secure Networks stuff slightly down on Secure Solutions stuff, slightly down on Secure Networks stuff. But we did a tremendous amount of Secure Networks revenue in Q1. So the blended margin is slightly down, but it doesn’t change our view or outlook from a margin position and the Secure Networks is – our Secure Solutions is trending in the positive direction.
- John Wood:
- I also think Keith the – on the secure network side of the house, we had customers wanting to accelerate orders, which have caused the increase in revenue as well.
- Ed Williams:
- Yes. And there’s some industry-wide shortages on some technology stuff that forced a little bit more expedited shipping costs, which hit us as well.
- John Wood:
- And he had a question on cash flow…
- Keith Bachman:
- Yes. So cash flow was – Street was – it was about depending on what numbers you want to use $11 million swing on CFO, cash flow from operations. What were the issues there? Why did cash flows turned some negative on Q1?
- Ed Williams:
- I don’t – well, I do know we had about 13.7 million of stock-based compensation, but that’s not yet…
- John Wood:
- So, Michele, David, you guys…
- Michele Nakazawa:
- Keith, it’s really – frankly, it’s just the timing. The differences between our AP and AR that really drove most of it. And based on the revenue as it came in and the timing of such and the AR that had not converted to cash as of the end of the quarter. So we should see that flip.
- Keith Bachman:
- Okay. Well, led me perfectly to the next question. How do you want us to think about for calendar year 2021? How should we think about growth, both gross margin and cash flow from operation, please?
- Ed Williams:
- Our position on gross margin for the year really hasn’t changed from the IPO view. And cash flow really hasn’t changed either as Michele indicated, it’s really just the timing sometimes where we get a lot of their revenue and therefore billings in the third month of the quarter. And then they just haven’t converted yet basically, but it really fundamental change to any of the basic business assumptions.
- Keith Bachman:
- Okay. Well, you’re going to have to have a pretty steep ramp then for the balance of the year, then to kind of make and Street numbers. Okay, then my other question relates to it…
- John Wood:
- This is John, of real quick. So remember the third and the fourth quarter, there’s a lot of ramp coming from pre-check CMS. You’re also that pile I referred to earlier. So there is going to be a significant ramp from Q1 to Q4. And there was always planned to be that ramp. So nothing from our point of view has changed there.
- Keith Bachman:
- Okay. Okay.
- John Wood:
- From a TSA perspective, just keep it’s a very important point, Keith, in your heads, TSA is a point of sale. So when you sign up to TSA and you swipe your credit card, that payment comes to us directly, which drives down our DSO, significantly.
- Keith Bachman:
- Understood. Understood. It makes sense. I just want to hear a little – my final question is I want to hear a little bit about mix. And so is there a way to talk about bookings that you had or revenues in terms of the mix and what I’m really asking is, has there been incremental momentum surrounding the commercial side of the business, last week talk and you can keep TSA as a government business. But has there been any pipeline bookings, anything you can talk about how the commercial side of business may be gaining a bit more traction here?
- John Wood:
- Yes. But we have had – but we haven’t announced some of the bookings, like, I’m going to put you guys on hold one second. So in general, I’d say as our pipeline has gone from – if you’re looking at it as a V, it’s gone from much relatively skinny V for commercial purposes to just like, I am relatively fat V. So the opportunities have been fairly significant. And the other thing I’ll say in general is that we are closing commercial business. We don’t have the permission yet to give out the names of the companies that we have been awarded business to. But it’s in line with the cloud strategy that we outlined for you guys for the IPO and the follow on. So in general, I’d say that we are absolutely making progress. And I think we’re going to see revenue before the second half of 2022, which is when I think we said we wouldn’t see much from the channel until that. And I think that’s a very, very conservative assumption.
- Keith Bachman:
- Okay. Okay. All right. Well, why don’t I jump back in queue? Many thanks.
- John Wood:
- Thank you, Keith.
- Operator:
- Thank you. Our next question comes from the line of Catharine Trebnick from Colliers. Your line is now open.
- Catharine Trebnick:
- Thank you for taking my question. Nice print. I have one more on the partner program you’re planning to launch. And could you put some more specifics on that campaigns that you’re looking at, any particular products that you’re hoping that you’ve pushed through and then gives you added any new partners in the quarter, and then what’s the plan to add other partners. Thank you.
- John Wood:
- Catharine, thank you for that very complex question. So the answer is we have a very specific channel partner program, which we will be announcing in detail towards the end of the month. We are adding large partners to just out the shoot, which we will again, announce at the end of the month, companies that you all know well, I’m sure. And what we’re going to be pushing in the beginning to get started is really Xacta and Ghost and we actually found some take-up for ID Trust 360. So without, I know I’m not giving very specifics, Catharine, but I think we’ll be able to answer the mail on that by the end of May.
- Catharine Trebnick:
- Okay. As a follow on to that, built in your guide for the end of the year, I mean how long do you expect these programs to help – partner programs help generate incremental revenue?
- John Wood:
- So for purposes of the models that we shared with you guys, we didn’t put really anything in from the channel partner program until the second half of 2022. I think that that’s conservative and we may or may not update that as we see our progress changing over time. We tried to be as conservative as we could be. So basically what we did was we put all of the investment into the numbers, all of the costs into the numbers, we didn’t put any of the revenues into the numbers until the second half of 2022, Catharine.
- Catharine Trebnick:
- All right. Thank you very much. Keep up the good work.
- Ed Williams:
- Again, sooner than we expect.
- John Wood:
- Thank you, Catharine. Also just one last point, we – Ed reminded me, we are actually launching this program a lot sooner than we thought we would be, which again is a reflection of the traction that we’re seeing by the market for the our offering. So there is a good deal of demand for four offerings, which I think is great.
- Operator:
- Thank you. Our next question comes from the line of Nehal Chokshi from Northland Capital. Your line is now open.
- Nehal Chokshi:
- Thank you. And good to see the reaffirmation of the full year guidance. Last quarter, you guys provided a first quarter guidance. I don’t think you guys are providing second quarter guidance here. Is that correct? And if so, why?
- John Wood:
- That’s right. The reason we don’t – we never intended to provide quarterly guidance in general. I think the reason we did it for last quarter is because as you guys are all well aware. We stubbed our toe as it related to the accounting treatment for the complicated transactions around the IPO, and that we had to push the date out. And by the time we actually announced, we were so close to the end of Q1 that we felt like we had to kind of get some data out there, because it was an obvious question that people would have. So in our case, we’re going to plan on it on an annual basis. And as long as we don’t stub your toe again, which God forbid knows, I never want to do again. We’ll consistently reaffirm or not affirm the annual numbers.
- Nehal Chokshi:
- Got it. Okay. That makes a lot of sense. And then I’m not sure if you really commented on this or not, but so how has the order book trended in the past six weeks at the last conference call at the end of March, are you guys noted that year-to-date it was up 2x year-over-year?
- John Wood:
- I’m looking at Ed right now and hold, give me a second.
- Ed Williams:
- About six weeks, I would say we’re on plan for the six weeks.
- John Wood:
- So Ed’s point is since it’s been about six weeks we’re on plan, maybe a bit ahead. I think the way to view it though going forward is we intend to see a significant ramp in the second half of the year due to those two ten-year multi-billion dollar contracts that we talked about during the IPO.
- Nehal Chokshi:
- Got it. Okay. And then at the beginning of this call, you talked about this 2GIT contract and you said that there were seven other leads on there. Who are those leads and do they cover the same functionality as Telos is going to be covering on this contract?
- John Wood:
- We are the only one that are selling our own solutions on that contract, but the rest of them are sort of what I consider to be sort of commodities. When you say Ed?
- Ed Williams:
- Yes, commodities or manufacturers.
- John Wood:
- Or manufacturers themselves, if you’re asking who the actual vendors are in the hall, I’d have to get back to you, but that’s public data. And I’m happy to share with all of you. I’m happy to share it with all you guys. I just don’t know off the top of my head.
- Nehal Chokshi:
- Great. Thank you. Fair enough.
- John Wood:
- You’re welcome. The way I look at those kind of wins is number one, they’re government wide, which is really important. Number two, even though that’s a big number $5.5 billion, that’s a ceiling that doesn’t necessarily mean the government’s going to spend that money. That means that’s how much the government can spend over the life of the contract. For us really what it is it’s just yet another vehicle that makes it easy for our customers to purchase our stuff. And because it’s what’s called a GWAC a government-wide acquisition contract, we find those valuable in the federal government.
- Nehal Chokshi:
- Got it. Thank you.
- John Wood:
- You’re welcome.
- Operator:
- Thank you. Our next question comes from the line of Zach Cummins from B. Riley Securities. Your line is now open.
- Zach Cummins:
- Hey, good afternoon and thanks for taking my questions. John, I just wanted to ask about kind of what were some of the incremental upside drivers that we saw in the quarter. I know you highlighted that you had some business, I imagine in the secure network side that was pulled forward from Q2 to Q1. So I’m just trying to get a sense of how much of an impact that was from Q2 to Q1.
- John Wood:
- I think that was a fair amount of it. There was also the pilot I mentioned earlier is on a pretty quick burn meaning they want to have it done as fast as possible. That’s typically this is – this particular item is number one or number two. Well, actually the vaccine is number one for the administration, but so it’s either – it’s in the top three, if you will over the Biden administrations priorities. And so I think that that’s going to have an incremental value to the company’s performance over time. And if we did have risk, this basically mitigates everything from that standpoint. So it’s a real big win for us.
- Zach Cummins:
- Understood. And can you give us an update on the authorization process for both the TSA PreCheck and CMS contracts kind of when you’re anticipated to be live on those, it sounds like it’s still tracking pretty close to your plan.
- John Wood:
- Zack, thank you for your question. Yes. In the case of a precheck, I think we’re looking at the end of June, Ed, right?
- Ed Williams:
- Yes.
- John Wood:
- To be officially approved. In the case of CMS, we’re thinking Q3 to be approved. CMS has been – excuse me, allergies and asthma. CMS has been somewhat obviously the main thing that the administration wants is the vaccine out there. So that’s going to be their main priority. They’re getting to this other priority – the other priority of doing the healthcare facilities checks. And so we anticipate that taking up for the rest of the year. It may start a little bit later in the – in third quarter and we were thinking, but I think the – we had so much upside planned into that contract vehicle anyway, that we don’t worry about that at all.
- Zach Cummins:
- Understood. And I know you can’t speak to specific commercial customer names, but can you just give us a sense of kind of the momentum you’re seeing there and some of the revenue ramp in potential contribution you’re hoping to get from some of those commercial customers as we proceed forward?
- John Wood:
- Sure. So think of our commercial footprint as it’s the same basic strategy as we have in federal government, you get your nose under the tent, you begin to deploy, they see the value, they want more instances, more instances, more instances, then they want cloud, then they want multiple cloud. And so we’re doing the same thing in the commercial side. I gave the example earlier, Zach that large financial services company, who we do 200 projects with and we get paid about $4 million a year. We expect them to go to about a thousand projects and think of projects as system boundaries. So that’ll mean that, that could be for us a call it $20 million a year account and I think we’re going to see the same kind of thing happening with the rest of the commercial accounts that we’re looking at. As long as we are able to deliver what we say we’re going to deliver, as long as we are able to continue with our referenceability nothing there is going to change. And I will point out if you recall that on the follow on – during the follow on publicly, we stated that we’re looking at a couple of acquisitions and one of which will help us in our ID Trust 360 offering. And the other will help us with our Ghost offering. We’ll announce more about that later, but I do think that’s going to happen and one will happen probably no later than the end of June and the other will happens probably Q3 or Q4 kind of timeframe.
- Zach Cummins:
- Understood. And you actually just touched on, I’ve got to word of my other questions there, but just the final question for me, I mean under the new executive order. It seems like there could be quite a bit of opportunity for Xacta, but to potentially work with commercial vendors now that they have stricter standards to work with the federal government. I was just wondering if that’s the way that you see it personally in terms of Xacta and how big that opportunity could be as we start to move forward with these initiatives.
- John Wood:
- I do see it that way. And I think Rick’s on the phone with me, Rick you here?
- Rick Tracy:
- I am.
- John Wood:
- Rick Tracy, would you comment on the size of the opportunity from your point of view and just remind everybody, Rick is the Co-inventor Xacta and he’s also either the father or the grandfather of this sort of community and around IT risk compliance and automation kind of thing. So, Rick, what’s your perspective here for everybody?
- Rick Tracy:
- Well, the recent colonial pipeline hack is really brought to the surface, the need to address supply chain risk management, which is not new NIST has been pushing SCRM for the better part of five years. What the executive order does is expands supply chain risk management to include critical software. That’s not – that’s used not just within the government, that’s used within commercial and critical infrastructure. So it’s basically an expansion of what already exists in terms of supply chain risk management opportunity, that, that addresses many different software companies around the world. And the nice thing about it, it’s all based on – excuse me, NIST standards, which is as you know, our – it’s our forte. It’s not going to be very difficult or new for us to figure out how to deal with these new standards as NIST develops them over the next year.
- Zach Cummins:
- Understood. Well, thanks for taking my questions, and best of luck with rest of the year.
- John Wood:
- Thank you, Zach.
- Operator:
- Thank you. Our next question comes from the line of Alex Henderson from Needham. Your line is now open.
- Alex Henderson:
- I’m sneaking back in for a double dip here. So I was hoping you could talk a little bit about the 2GIT a $5 billion mandate. I realize that it’s a ceiling in the light, but how do you see that feathering into your outlook? And at what point do you think it actually starts to attribute to revenues?
- John Wood:
- So from our standpoint, and obviously from your standpoint, as the analysts out there, think of that as upside. And it’s something that is going to have relatively significant amount of upside on the secure network side. And it provides us with additional ways of distributing our security solutions. So that’s how I think about Alex.
- Alex Henderson:
- So but seriously when does it start is really the question as opposed to, how does it start?
- John Wood:
- It’s started. We’re on it now.
- Alex Henderson:
- Okay. So it’s already been implemented and therefore it’s in process. Okay. That’s what I was looking for.
- John Wood:
- Yes, sir. Yes, sir.
- Alex Henderson:
- The second question is one of your filings you talked about, I think it was 70,000 companies that are selling to the government in one form or another or reg, or have a relationship with the government in one form or another that as they move their applications to the cloud in order to do business with the government, they would need to be compliant with Xacta. Can you talk a little bit about that aspect of the opportunity?
- John Wood:
- Yes. So I think actually what you’re – I think what you’re referring to is that they’d have to be compliant with FedRAMP, which Xacta can help them accelerate that process. And again, Rick, I’ll ask you to answer this question specifically for Alex since its right down your alley.
- Rick Tracy:
- Is that the questions about FedRAMP? I’m sorry.
- John Wood:
- The question is how big of an opportunity is it for us to be able to help customers get FedRAMP ready so that they can sell their own software to the government.
- Rick Tracy:
- Well, there’s a huge appetite as I understand it for SaaS providers who want to do work with the federal government. The challenge has been the cost of going to the FedRAMP process. It’s just really expensive. So our solution reduces a lot of that upfront cost for the advisory services associated with FedRAMP. I don’t have necessarily a way to quantify it there – it’s so – and because it’s not just the number of potential companies, but it’s the number of software offerings or SaaS offerings that exist within those software companies. There’s tens of thousands potentially.
- Alex Henderson:
- So does it matter whether it’s FedRAMP low, FedRAMP medium or FedRAMP high, how does it play against the various levels of FedRAMP?
- John Wood:
- Xacta can handle all those basically, I think Alex.
- Rick Tracy:
- Exactly.
- Alex Henderson:
- So if I am able to imply Xacta, then I’m able to very rapidly move from not qualified all the way to FedRAMP high. Is that what you’re saying?
- John Wood:
- I’m saying – we’re saying that if you take the appropriate steps, the answer is yes, using Xacta. The issue that – ultimately the software vendors have to deal with this something called a 3PAO. And the 3PAO for intents and purposes is basically an auditor and audit function that looks at all of the body of evidence that you’ve created and signs off that. Yes, this is good. So those guys in the past have tended not to be paid to be efficient. They’re paid by the hour. And Rick, you can probably give some stories here about it, but as we’re seeing that, that our customer base wants everything, if they can to be put into Xacta. And so Xacta is becoming if you will a common lexicon and breaking down barriers that we used to have with players like 3PAOs, general contractors, systems integrators, et cetera, because the entire marketplace really is fundamentally moving to the cloud and moving to a much more streamlined and automated way of doing business. And a lot of the stuff that is that we pulled together as documentation for the FedRAMP process as a for example, it’s basically a lot of pedestrian kind of things that people used to do manually. And so by automating that process by definition, we’re reducing the time by up to 80% for purposes of FedRAMP. Yes. And how long the assessor takes is a different question. We were trying to convince all the assessors or the auditors that they should be using Xacta. So there’s no paper that’s how the CIA does all their business. They don’t generate any more paper anymore. Everything exists inside of Xacta. All the auditors go to Xacta. And this is for not just for the intelligence community, but it’s for the military intelligence community as well. So they’re very comfortable with using Xacta and update. They want to print out a 700 page report, it’s sitting in there if they want it. We did one experiment one time just to see if people actually reading these things are called SARs. So we turned off the user IDs and passwords for accessing the SARs and for a full year, not one user asked for their access to their SAR, which tells you that they’re not even reading them. So fundamentally, what we’re trying to do with Xacta is just get rid of all of the pedestrian manual efforts, use automation where possible, provide the continuous monitoring of the underlying risk posture. So that the process of moving, whether it’s workloads to the cloud or getting FedRAMP certified or the supply chain activity, it just becomes much, much more easy and streamlined.
- Alex Henderson:
- One more question then I’ll see the floor and probably running the out of time here anyway, but can you talk a little bit about where the competitors are relative to getting the TSA pre certification and to what extent that you have an advantage in that process timeline? Because I think there is a delta there that’s pretty advantageous to you, yes?
- John Wood:
- So I think that by virtue of the fact that they’re using Xacta the answer is yes. But if you’re asking about the specifics, Alex, I really don’t know exactly where they are in their process.
- Alex Henderson:
- Okay. And so any sense of why there might be a difference in the timing and any thoughts of what kind of share implications that might have?
- John Wood:
- So we think we’ll be faster out the gate than clear, because they’re not a cyber company. And I think the fundamentally the point is that we’re – our first thing to go after as far as shared is to go after renewals. And just to remind everyone on the phone, about – there are about 2 million renewals a year, roughly, and that’s $85 per transaction, roughly. So as we get on the path and you’ll see about this acquisition, we’re talking about for ID Trust 360, a lot of what people are trying to do now is they’re avoiding going places, even though they’re – there is a vaccine out there, who wants to go hang out in a long line for a long time. So we’re going to have a couple of announcements first round ID Trust 360, probably this quarter, which I think disintermediates that need to go places. So stay tuned.
- Alex Henderson:
- All right. I’ll see the floor. Thanks.
- John Wood:
- Thank you, sir.
- Operator:
- Thank you. At this time, I’m showing no further questions. I would like to turn the call back over to management for closing remarks.
- John Wood:
- No, I just wanted to say everybody, we really appreciate your support. We’re working very hard to make sure that we meet or exceed most likely we hope to exceed. I shouldn’t say it like that. My guys are all shaking their heads on it, but I’m – okay, but I’m supposed to say we continue to reaffirm the FY guidance we have given. Thank you, Michele Nakazawa, our CFO, but anyway we see a lot of opportunities out there. We really appreciate the support from you guys and we know how valuable it is. And so if you need us, please do not hesitate to call. Thanks a lot, everybody.
- Operator:
- This concludes today’s conference call. Thank you for participating. You may now disconnect.
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