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Telos Corporation (NASDAQ:TLS)
Q1 2021 Earnings Call
May 17, 2021, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day, and thank you for standing by. Welcome to the Telos Corporation first-quarter 2021 earnings conference call. [Operator instructions] After the speakers' presentation, there will be a question-and-answer session. [Operator instructions] I would now like to hand the conference over to your speaker today, Brinlea Johnson.

Please go ahead.

Brinlea Johnson -- Investor Relations

Good afternoon. Thank you for joining us to discuss Telos Corporation's first-quarter 2021 financial results. With me today is John Wood, CEO and chairman of Telos; and Michele Nakazawa, CFO of Telos. Let me quickly review the format of today's presentation.

John will begin with some brief remarks on the first-quarter results, our brief corporate overview, and Telos' strategic priorities. And Michele will cover the financials and guidance. Then I'm going to turn the call over to the analyst for Q&A. The earnings press release was issued earlier today and is posted on the Telos 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 law. These statements are based on current expectations and assumptions that are subject to risk and uncertainty. 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 statements.

In addition, during today's call, we will discuss non-GAAP financial measures, which we believe are useful as supplemental and clarifying measures to help investors understand Telos' financial performance. These non-GAAP financial measures should be considered in addition to and not as a substitute for or in isolation from GAAP results. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results in our earnings press release and on the investor relations page of the Telos website. The webcast replay of this call will be available for the next year on our company website under the investor relations link.

With that, I'll turn it over to John.

John Wood -- Chief Executive Officer and Chairman

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' requests 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. Now, I'd like to share with you the first-quarter business highlights and updates. In the first few months of 2021, we secured two large wins.

First, the General Services Administration, or GSA, named Telos and seven other companies as a contract team lead on the second generation information technology contract known as 2GIT, which is $5.5 billion that enables streamlined governmentwide IT purchasing. In addition to providing access to prevetted hardware and software IT vendors to all agencies across the entire federal government, 2GIT provides a simple path for the government to obtain all of Telos'security solution offerings, including Xacta, Telos Ghost, AMHS, and IDTrust 360. Telos was also awarded a five-year $35 million U.S. Army contract for implementing and securing communications systems in the Korean peninsula as a part of the Yongsan Relocation Plan and Land Partnership.

This realignment effort is critical to U.S. military operations on the Korean peninsula, and there's no greater honor than to support our men and women who bring peace and stability to this vital region of the world. Following our initial public offering in November, we've been busy growing our channel partner program and bolstering our sales and marketing teams. The formal launch of our channel program called Telos Cyber Protect is slater -- is slated for later this month.

At the end of Q1 2021, Microsoft Azure expanded its Xacta licensing to all U.S. government cloud instances, including Azure Government, Azure Government Secret, and Azure Government Top Secret to bring faster cloud compliance to Azure Government customers. By incorporating Azure with Xacta, Microsoft customers can automatically generate a large portion of the required evidence that their systems are operating in a secure way. This accelerates the systems and workloads to the Azure cloud.

Microsoft is a tremendous partner and they've been from the very beginning has believed that Xacta is the right solution to significantly streamline the risk management and compliance process for themselves, as well as for their customers, which will ultimately accelerate cloud adoption and do it in a much more secure way. Our solution development teams have been hard at work in the first months of 2021, and I'd like to highlight the continued innovation within Xacta and Telos Ghost. In January of 2021, we unveiled our Xacta offering for cyber supply chain risk management, or SCRM, to address the ongoing threat of cyber supply chain breaches and incursions. This Xacta module operationalizes supply chain risk management standards like the NIST 800-161, which we believe are essential for organizations to thwart future solar winds like attacks.

We recently introduced another Xacta module to help organizations address third-party vendor cybersecurity compliance standards such as the NIST 800-171 and the Cybersecurity Maturity Model Certification known as CMMC. This Xacta module meets the needs of more than 300,000 organizations that must comply with these cybersecurity standards. In March, Xacta was named in SC Magazine Award finalist in the best risk management solution category. We're pleased to be recognized for the well-regarded product award, one which is determined by a panel of technology peers.

Moving to our virtual obfuscation offering or Telos Ghost. We have begun integrating Telos Ghost directly into complementary networks to protect video security systems, industrial Internet of Things, or IoT, and other connected technologies out of the box. The success of Telos Ghost in its initial product launch, the ability to eliminate cyberattack services on the internet is all being leveraged for evolutionary innovations to expand beyond its initially intended use, which was for military and intelligence use cases to commercial applications. We're embedding Telos Ghost in a critical infrastructure to hide specific network resources from being seen on the public internet, thereby inhibiting the ability of cyber-adversaries to attack because you can't attack what you can't see.

Hiding servers from cyber-adversaries is a core capability of Telos Ghost and has allowed us to prepare the launch of new partner initiatives to hide video surveillance cameras, secure the network for campus security and gun detect solutions, and protect the privacy and security of students whether they're in school or operating remotely. Efforts are also being pursued to protect internet-based networking use for software download and updates from cloud-based repositories to software-enabled vehicles as an example. These initiatives are in the early stages but Telos and its partners are excited about prospects of using a technology that has been proven to protect intelligence and military operations, but to also protect critical infrastructure used to ensure the safety of people and critical assets in a commercial environment. You know, next, I'd really like to talk about a little bit is the industry landscape.

I know firsthand how important it is to stay in tune with the pulse of the industry. And with that in mind, there are three trends of particular interest to our organization that have the potential to positively impact our revenue in 2021 and beyond. The first is Internet of Things or IoT. According to Gartner, there are currently 20.4 billion IoT devices globally.

And that number is expected to grow to 75 billion by 2025. Every aspect of our society is on the verge of touching the internet. As more smart device platforms are placed online, our critical resources become harder to protect. But what if you could make IoT devices' user's information and resources invisible on the network and keep them hidden from unauthorized view and access? That's all possible with Telos Ghost, a virtual obfuscation or misattribution network that allows these connections to be totally isolated from the public internet through the use of a number of virtual network nodes, varying pathways, and eliminating source and destination IP addresses to make their presence and communications invisible.

We believe Telos Ghost is a viable answer to the concerns of IoT security. The second trend that will have an impact on our business is the increased occurrence of audit fatigue for organizations. With personal and enterprise security and privacy among the top concerns of our day, governments at all levels are responding with compliance requirements designed to protect citizens and defend networks. But what is the business aspect of this growing number of security and privacy regulations? This question led to a research study we commissioned with a third-party research firm, which we believed to be the first attempt to quantify the growing problem of audit fatigue.

The study, which polled 300 IT security professionals, revealed that, on average, organizations must comply with at least 13 different IT security and privacy regulations and they spend at least $3.5 million annually on compliance activities, with compliance audits consuming 58 work -- 58 working days each quarter. That means security compliance teams spent 232 working days each year, responding to audit evidence requests in addition to the millions of dollars spent on compliance activities and fines. This level of financial and time commitment is really unsustainable. The answer is to simplify and automate the compliance process, which promises many benefits, which include reduced workload for already strained IT security personnel, increased employee satisfaction and retention, limited reputational damage that comes with failing an audit, and increased savings in expensive compliance activities and costly fines.

Commercial organizations are ready and looking for ways to realize these benefits by streamlining compliance activities and automating the audit processes. Telos' Xacta is well-positioned to alleviate this compliance burden and help organizations achieve their business initiatives much more quickly. The third trend we're watching is the increase in air travel. Month over month, TSA is reporting ever-increasing passenger numbers.

Pre-pandemic, TSA was screening over 2 million passengers daily. Current passenger volumes are seeing highs of 1.6 million passengers screened daily with summer track -- traffic expected to surge. In February of 2021, TSA announced their intent to hire 6,000 screeners to prepare for the summer season. TSA, like the airports and airlines, are seeing the return of travel due in large part to leisure travel.

Telos is also experiencing a similar uptick in our IDTrust 360 airport programs where our aviation workers' biometric enrollments submissions have increased 177% from April 2020 to April 2021. Airports -- airport concessionaires and airlines are bringing these workers back to the airports to meet an increase in service support levels not seen since February of 2020. In conclusion, our company's exceptional results continue to be driven by strong demand for our advanced security solutions, recent long-term contract wins, 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 marketplace.

I'll now pass it over to our CFO, Michele Nakazawa, who will discuss the financials in more detail. Michele?

Michele Nakazawa -- Chief Financial Officer

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 a 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 of -- was negative $0.23 per share.

Adjusted earnings per share of zero cents 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 of $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. Turning to our financial outlook, we are pleased with our continued success at winning new business, combined with our backlog of orders and contracts.

And therefore, we are reaffirming our full-year 2021 guidance. We currently expect revenue in the range of $283 million and $295 million, an improvement of 57% to 64% compared to 2020; and adjusted EBITDA in the range of $33 million and $36 million, an improvement of 190% to 216% compared to 2020. We remain extremely confident in our market opportunities and look forward to providing updates on our progress on our next quarterly call. With that, I will turn the call over to the operator for questions.

Operator?

Questions & Answers:


Operator

Thank you. [Operator instructions] Our first question comes from the line of Alex Henderson from Needham. Your line is now open.

Alex Henderson -- Needham & Company -- Analyst

Awesome. Thank you. So 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 -- Chief Executive Officer and Chairman

Hey, Alex, how are you? This is John. We're doing well on that. I think we'll have the full boat if you will done by the end of June. We're about at 40 right now in sales marketing and channel activities that we're doing well against our plan.

Alex Henderson -- Needham & Company -- Analyst

And any change in the distribution partnership stuff?

John Wood -- Chief Executive Officer and Chairman

No, same -- we're on the same course as we were, sir.

Alex Henderson -- Needham & Company -- Analyst

Perfect. The second question, we -- when we talked 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 viewpoint?

John Wood -- Chief Executive Officer and Chairman

Yeah, 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 the AWS.

I don't think I missed one, did I? 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 -- Needham & Company -- Analyst

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 -- Chief Executive Officer and Chairman

At the end of the day, basically, what the government is 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 in the intelligence community which includes the military. So the military intelligence community.

So we do see a way to get into the rest of the DOD if you will through the backdoor. And I mean that not in a negative way, but it's because it becomes a kind of lexicon for the entirety of the government to use. So ultimately, we do see our Xacta becoming the standard throughout the government.

Alex Henderson -- Needham & Company -- Analyst

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 -- Chief Executive Officer and Chairman

Yes, we -- we're not planning on anything coming out of that channel until I think -- was it Q4? I think. 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 then.

So there was more activity happening there, although we don't have enough data to be able to tell you exactly what the results are going to be out that.

Alex Henderson -- Needham & Company -- Analyst

Yeah. One last question and 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 looking forward in for Xacta specifically? Thank you.

John Wood -- Chief Executive Officer and Chairman

You're welcome. I think this is a 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 narrow it down at the most simple level, what Xacta is doing is providing the automation that you are actually cyber, it's, you know, cyber-clean if you will, cyber-cleanliness and -- or 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 that's a capability that's not just of interest to the government but also to the commercial world.

Alex Henderson -- Needham & Company -- Analyst

Great. Thank you very much. I'll see the floor.

John Wood -- Chief Executive Officer and Chairman

Thank you.

Operator

Thank you. Our next question comes from the line of Andrew Nowinski from D.A. Davidson. Your line is now open.

Andy Nowinski -- D.A. Davidson -- Analyst

Great. Thanks and congrats on the nice quarter. So the question. So you solidly exceeded your guidance in Q1 and I think you talked, John, about the increase in TS activity -- 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 -- Chief Executive Officer and Chairman

Andy, thank you. Thank you for your question. No, there's nothing that's changed. It's really just being -- you know, 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, top and about the year. And as we're 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.

Andy Nowinski -- D.A. Davidson -- Analyst

Super, understood. You know, next question I had, I want to go back to a partnership that you announced last quarter with Johnson Control. I know it's a massive IoT play on using Ghost. I'm just wondering if you could give us an update on how that's progressed?

John Wood -- Chief Executive Officer and Chairman

Sure. So again, this is a relationship, it's a long-term strategic relationship. To put it in plain English, 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, you know, 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 I think a combination of that along with the gun detection capability that we announced with Omnilert.

Andy Nowinski -- D.A. Davidson -- Analyst

OK. Thank you. Actually, just one more clarification for you, John. So if we look at how the course of revenue maps off 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 IDTrust 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 -- Chief Executive Officer and Chairman

Yeah. 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 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 six 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.

Andy Nowinski -- D.A. Davidson -- Analyst

Great. Thank you, John. I have a -- keep up the good work.

John Wood -- Chief Executive Officer and Chairman

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 -- Wedbush Securities -- Analyst

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 where we're seeing more shift to the cloud and, of course, to the cyberattacks, as well as the Biden administration? Talk about -- maybe compare and contrast in terms of conversations you're having today versus, you know, even a year ago and how that's changed anecdotally?

John Wood -- Chief Executive Officer and Chairman

Sure, and good to hear your voice by the way. What I would say is that in the past, you know, 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. And as we have more and more offerings that we'll be off -- we'll 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 there's going be a lot more of that happening. So from our point of view, what it does is it helps accelerate the sales cycle and make the opportunities larger.

Dan Ives -- Wedbush Securities -- Analyst

So you're saying when John Wood calls, it doesn't go straight to voice mail anymore?

John Wood -- Chief Executive Officer and Chairman

Yeah, that's exactly right.

Dan Ives -- Wedbush Securities -- Analyst

I expect. Did you -- OK, just last, sort of follow on. Talk about -- when we see 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 really transform in terms of the types of deals that you're seeing that maybe we don't see today, or is it just more of the same? Thanks.

John Wood -- Chief Executive Officer and Chairman

So we have a 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, and 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 more people moved from the government to commercial, meaning more leadership actors if you will move from government to commercial. You know, 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, you know, sort of being a belt and suspenders if you will to deal with the kind of, you know, anything from ransomware to any of the hacking activities that you've been seeing out there. So there's a -- I think a tremendous opportunity for us in the commercial world for sure.

Dan Ives -- Wedbush Securities -- Analyst

Awesome, congrats.

John Wood -- Chief Executive Officer and Chairman

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 -- BMO Capital Markets -- Analyst

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 400 basis points lower than what were expected. And also, your cash flow from operations was call it negative nine for rough numbers, and Street and our models had a small CFO positive we've called it, you know, a few million dollars. So it's 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 issues surrounding both gross margins and cash flow from operations, please?

John Wood -- Chief Executive Officer and Chairman

Sure. And I want to turn to Ed if you will, Keith.

Ed Williams -- Executive Vice President and Chief Operating Officer

Hi, Keith. So 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 network stuff, slightly down on -- I mean, on our secure solution stuff, slightly down on the secure network stuff. But what 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 our outlook from a margin position and the secure networks is or the secure solutions is trending in the positive direction.

John Wood -- Chief Executive Officer and Chairman

I also think, Keith, that the -- on the secure network side of the house, we had customers wanting to accelerate orders, which caused the increase in revenue as well, Ed, right?

Ed Williams -- Executive Vice President and Chief Operating Officer

Yeah. And there's some industrywide shortages of some technology stuff that forced a little bit more expedited shipping costs, which hit us as well.

John Wood -- Chief Executive Officer and Chairman

And he had a question on cash flow.

Ed Williams -- Executive Vice President and Chief Operating Officer

On the cash flow, I --

Keith Bachman -- BMO Capital Markets -- Analyst

Yes, so cash flow was, you know, Street was a -- it was about a -- depending on what numbers you want to use, $11 million swing on CFO or cash flow from operations. What were the issues there? Why did cash flows turn so negative on Q1?

John Wood -- Chief Executive Officer and Chairman

I don't -- well, I do know we had about $13.7 million of stock-based compensation, but that's not --

Keith Bachman -- BMO Capital Markets -- Analyst

But that wouldn't hit cash flow. Yeah, that wouldn't hit cash flow.

John Wood -- Chief Executive Officer and Chairman

Yeah, so Michele, David, do you guys --

Michele Nakazawa -- Chief Financial Officer

Yeah, Keith, that's really -- frankly, it's just the timing the differences between our AP and AR that really drove most of it. And based on, you know, 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 -- BMO Capital Markets -- Analyst

OK, where you lead -- lead me perfectly to the next question. How do you want us to think about -- for calendar year '21, how should we think about growth both gross margin and cash flow from operation, please?

Ed Williams -- Executive Vice President and Chief Operating Officer

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, the billings in the third month of the quarter. And then they just haven't converted yet basically. But really, no fundamental change in any of the base business assumptions.

Keith Bachman -- BMO Capital Markets -- Analyst

OK, were you going to have to have a pretty steep ramp for the balance of the year then to kind of make our own and Street numbers, OK. And then my other question relates to --

John Wood -- Chief Executive Officer and Chairman

Hey, Keith.

Keith Bachman -- BMO Capital Markets -- Analyst

Yeah.

John Wood -- Chief Executive Officer and Chairman

This John real quick. So remember, the third and the fourth quarter, there's a lot of ramp coming from pre-tax CMS. You're also -- that pilot 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 -- BMO Capital Markets -- Analyst

OK. OK.

John Wood -- Chief Executive Officer and Chairman

And remember, the TSA -- from a TSA perspective, just keep -- this is really an important point to keep in your heads. TSA is a point of sale. So when you sign up to TSA and you swap your -- you swipe your credit card, that payment comes to us directly, which drives down our DSOs significantly.

Keith Bachman -- BMO Capital Markets -- Analyst

Understood. Understood. 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? You know, last week talk and you can keep TSA as a government business. But has there been any, you know, pipeline bookings, anything you can talk about how the commercial side of business may be gaining a bit more traction here?

John Wood -- Chief Executive Officer and Chairman

Yeah, 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 going from a relatively skinny V for commercial purposes to just like I am, a 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've -- 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 then. And I think that's a very, very conservative assumption.

Keith Bachman -- BMO Capital Markets -- Analyst

OK. OK. All right. Well, why don't I jump back in queue.

Many thanks.

John Wood -- Chief Executive Officer and Chairman

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 -- Colliers Securities -- Analyst

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'd push through? And then if you added any new partners in the quarter, and then what's the plan to add other partners? Thank you.

John Wood -- Chief Executive Officer and Chairman

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 toward 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 -- but we're going to be pushing in the beginning to get started is really Xacta and Ghost and to -- and we actually have found some take up for IDTrust 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 -- Colliers Securities -- Analyst

OK. 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 -- Chief Executive Officer and Chairman

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 cost in the numbers.

We didn't put any of the revenues into the numbers until the second half of 2022, Catharine.

Catharine Trebnick -- Colliers Securities -- Analyst

All right. Thank you very much. Keep up the good work.

John Wood -- Chief Executive Officer and Chairman

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, you know, by the market for our offering. So there is a good deal of demand for our 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 -- Northland Capital -- Analyst

Thank you and good to see the reaffirmation of the full-year guidance. Last quarter, you guys provided the first-quarter guidance. I don't think you guys are providing second-quarter guidance here. Is that correct? And if so, why?

John Wood -- Chief Executive Officer and Chairman

That's right, Nehal. 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 well aware, we stub our toe as it related to the accounting treatment for the complicated transactions around the IPO and 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 our toe again, which God forbid knows I'd never want to do again, we will -- we'll consistently reaffirm or not affirm the annual numbers.

Nehal Chokshi -- Northland Capital -- Analyst

Got it. OK, that makes a lot of sense. And then I'm not sure if you really commented on this or not. But -- so -- how has that water book trended in the past six weeks? At the last conference call at the end of March, you guys noted that year to date, it was up 2x year over year.

John Wood -- Chief Executive Officer and Chairman

I'm looking at -- I'm looking at Ed right now in the hall, just give me a second. 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 10-year multibillion-dollar contracts that we talked about during the IPO.

Nehal Chokshi -- Northland Capital -- Analyst

Got it. OK. And then at the beginning of this call, you talked about this 2GIT contract, and you said that there are several 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 -- Chief Executive Officer and Chairman

They -- we are the only ones that are selling our own solutions on that contract. But the rest of the -- rest of them are sort of what I consider to be sort of commodities. Wouldn't you say, Ed?

Ed Williams -- Executive Vice President and Chief Operating Officer

Yeah, commodities or manufacturers.

John Wood -- Chief Executive Officer and Chairman

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 it with all of you. I'm happy to share it with all of you, guys.

I just don't know at the top of my head.

Nehal Chokshi -- Northland Capital -- Analyst

Right. Thank you very much.

John Wood -- Chief Executive Officer and Chairman

You're welcome. The way I look at those kind of wins is number one, they're governmentwide, which is really important. Number two, even though it's a big number, 5.5 billion, that's a ceiling, that doesn't necessarily mean the government will 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 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 governmentwide acquisition contract, we find those valuable in the federal government.

Nehal Chokshi -- Northland Capital -- Analyst

Got it. Thank you.

John Wood -- Chief Executive Officer and Chairman

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 -- B. Riley Securities -- Analyst

Hey. Good afternoon, 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 networks 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 -- Chief Executive Officer and Chairman

I think there 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, you know, this is -- this particular item is, you know, 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 of the Biden administration's priorities. And so I think 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 -- B. Riley Securities -- Analyst

Understood. And can you give us an update on the authorization progress -- process for both the TSA pre-check-in and CMS contracts, kind of where and when you're anticipating to be live on those? It sounds like it's still tracking pretty close to your plan.

John Wood -- Chief Executive Officer and Chairman

Zach, thank you for your question. Yes, in the case of pre-check, I think we're looking at the end of June, Ed, right, to be officially approved. In the case of CMS, we're thinking Q3 to be approved. CMS has been a -- excuse me, allergies and asthma.

CMS has been somewhat -- you know, the 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 third quarter than 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 -- B. Riley Securities -- Analyst

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 ramping and potential contribution you're hoping to get from some of those commercial customers as we proceed forward?

John Wood -- Chief Executive Officer and Chairman

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 you an example earlier, Zach, of 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 say, you know, call it $20 million 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 reference ability, 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 IDTrust 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 happen probably Q3 or Q4 kind of timeframe.

Zach Cummins -- B. Riley Securities -- Analyst

Understood. And you actually just touched on kind of one of my other questions there, but just a final question for me. I mean, under the new executive order, it seems like there could be quite a bit of opportunity for Xacta about 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 -- Chief Executive Officer and Chairman

I do see it that way and I think Rick's on the phone with me. Rick, can you hear?

Rick Tracy -- Senior Vice President and Chief Security Officer

I am.

John Wood -- Chief Executive Officer and Chairman

Rick Tracy, would you comment on the size of the opportunity from your point of view? And just to remind everybody, Rick is the co-inventor of Xacta. He's also -- he's 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 -- Senior Vice President and Chief Security Officer

Well, the recent colonial pipeline hack has 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 but 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 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, are, you know, 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 -- B. Riley Securities -- Analyst

Understood. Well, thanks for taking my questions, and best of luck with the rest of the year.

John Wood -- Chief Executive Officer and Chairman

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 -- Needham & Company -- Analyst

Sneaking back in for a double-dip here. So I was hoping you could talk a little bit about the 2GIT $5 billion mandate. I realize that it's the ceiling and the like, but how do you see that feathering into your outlook, and at what point do you think it actually starts to contribute to revenues?

John Wood -- Chief Executive Officer and Chairman

So from our standpoint and obviously from your standpoint as the analysts out there, think of that as upside. And, you know, it's something that is going to have a 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 we think about it, Alex.

Alex Henderson -- Needham & Company -- Analyst

So -- but seriously, when does it start is really the question as opposed to how does it start?

John Wood -- Chief Executive Officer and Chairman

It's started. We're on it now.

Alex Henderson -- Needham & Company -- Analyst

OK. It's already been implemented, and therefore, it's in process. OK, that was what I was looking for.

John Wood -- Chief Executive Officer and Chairman

Yes, sir. Yes, sir.

Alex Henderson -- Needham & Company -- Analyst

The second question is in 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 -- Chief Executive Officer and Chairman

Yeah. So I think -- actually, what you're -- I think what you're referring to is that they'd have to be compliant with the FedRAMP, which Xacta can help them accelerate that process. And again, Rick, I'll ask you to answer this question specifically for Alex since it's right down your alley.

Rick Tracy -- Senior Vice President and Chief Security Officer

Is -- the question is about FedRAMP? I'm sorry.

John Wood -- Chief Executive Officer and Chairman

So 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 -- Senior Vice President and Chief Security Officer

Well, all the -- 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 is just really expensive. So our solution reduces a lot of that upfront cost for the advisory services associated with FedRAMP. I don't have a necessary way to quantify it.

There -- so -- and it -- 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 -- Needham & Company -- Analyst

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 -- Chief Executive Officer and Chairman

We can handle all those basically.

Rick Tracy -- Senior Vice President and Chief Security Officer

Exactly.

Alex Henderson -- Needham & Company -- Analyst

So if I am able to imply -- employ 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 -- Chief Executive Officer and Chairman

I'm saying -- we're saying that if you take the appropriate steps, the answer is yes, using Xacta. The issue that the -- ultimately the software vendors have to deal with is something called a 3PAO. And the 3PAO, for all intents and purposes, is basically an auditor, an audit function that looks at all of the body of evidence that you've created and signs off that, yeah, this is good. So those guys in the past have tended not to be paid to be efficient.

You know, they're paid by the hour. And Rick, you can probably give them some stories here about it. But as -- we're seeing 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 contractor, systems integrators, etc.

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 pull together as documentation for the FedRAMP process as a for example. You know, it's basically a lot of pedestrian kind of things that people used to do manually. And so by automating that process, by definition, you know, we're reducing time by up to 80% for purposes of FedRAMP.

How long do you -- how long -- yeah. And how long the assessor takes is a different question. We're 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 for the military intelligence community as well.

So they're very comfortable with using Xacta and update. If they want to put -- if they want to print out a 700-page report, you know, it's sitting in there if they want it. We did one experiment one time just to see, you know, the 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 workers to the cloud or getting FedRAMP certified or the supply chain activity, it just becomes much much more easy and streamlined.

Alex Henderson -- Needham & Company -- Analyst

One more question then I'll see the floor and we're probably running 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 -- Chief Executive Officer and Chairman

So I think that by virtue of the fact that they're using Xacta, the answer is yes. But if you're if you're asking about the specifics, Alex, I really don't know exactly where they are in their process.

Alex Henderson -- Needham & Company -- Analyst

OK. And so any sense of why there might be a difference in the timing and any thoughts on what kind of share implications that might have?

John Wood -- Chief Executive Officer and Chairman

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 share 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 out of the path and you'll see about this acquisition we're talking about for IDTrust 360, a lot of what people are trying to do now is, you know, they're avoiding going places even though they're -- there's a vaccine out there. You know, who wants to go hang out on a long line for a long time? So, you know, we're going to have a couple of announcements first around IDTrust 360 probably this quarter, which I think this intermediates that need to go places. So stay tuned.

Alex Henderson -- Needham & Company -- Analyst

All right. I'll see the floor. Thanks.

John Wood -- Chief Executive Officer and Chairman

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 -- Chief Executive Officer and Chairman

No, I just wanted to say really -- 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 our heads. But I'm -- what -- OK, I want to also say we continue to reaffirm the FY guidance we have given.

Thank you, Michele Nakazawa, as our CFO. But anyway, I'll -- 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

[Operator signoff]

Duration: 60 minutes

Call participants:

Brinlea Johnson -- Investor Relations

John Wood -- Chief Executive Officer and Chairman

Michele Nakazawa -- Chief Financial Officer

Alex Henderson -- Needham & Company -- Analyst

Andy Nowinski -- D.A. Davidson -- Analyst

Dan Ives -- Wedbush Securities -- Analyst

Keith Bachman -- BMO Capital Markets -- Analyst

Ed Williams -- Executive Vice President and Chief Operating Officer

Catharine Trebnick -- Colliers Securities -- Analyst

Nehal Chokshi -- Northland Capital -- Analyst

Zach Cummins -- B. Riley Securities -- Analyst

Rick Tracy -- Senior Vice President and Chief Security Officer

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