Earnings Call Transcript
TELOS CORP (TLS)
Earnings Call Transcript - TLS Q2 2022
Operator, Operator
Good day and thank you for standing by. Welcome to the Telos Corporation Second Quarter 2022 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. Please be advised, today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Christina Mouzavires. Please go ahead.
Christina Mouzavires, VP of Investor Relations
Good morning. Thank you for joining us to discuss Telos Corporation’s second quarter 2022 financial results. With me today is John Wood, Chairman and CEO of Telos; and Mark Bendza, Executive Vice President and CFO of Telos. Let me quickly review the format of today’s presentation. John will begin with brief remarks on our 2022 second quarter results and Telos’ strategic priority, and Mark will cover the financials and guidance for the third quarter and full year 2022. Then we will open the line for questions-and-answers where Mark Griffin, Executive Vice President of Security Solutions, will also join us. The earnings press release was issued earlier today and is posted on the Telos Investor Relations website where this call is being simultaneously webcast. Additionally, we have provided presentation slides on our Investor Relations website. Before we begin, we want to emphasize that some of our statements on this call are forward-looking statements and are made under the safe harbor provisions of the federal securities laws. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could materially differ for various reasons, including the factors described in today’s earnings press release 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 that help investors understand Telos’ financial performance. These non-GAAP financial measures should be considered in addition to and not as assessed to for or in isolation from GAAP results. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results in our earnings press release and on the Investor Relations portion of our website. Please also note that financial comparisons are year-over-year unless otherwise specified. The webcast replay of this call will be available for the next year on our company website under the Investor Relations page. With that, I will turn the call over to John.
John Wood, Chairman and CEO
Thank you, Christina, and good morning, everyone. Let’s begin today on slide three. I am pleased to report that Telos over delivered again on key financial metrics in the second quarter of 2022. Mark will discuss our financial performance later in this call, but at a high level, we delivered $55.8 million of revenue in the second quarter, above our guidance range of $50 million to $54 million, up 4% year-over-year and 11% sequentially. Gross margin was 37.5%, above our guidance range of 33% to 35%. Finally, we delivered $4.5 million of adjusted EBITDA, above the high end of our guidance range of negative $2 million to positive $2 million and $0.04 of adjusted EPS. Now, let’s turn to slide four to discuss our recent business highlights and updates. This quarter we announced a new strategic partnership with IBM. Telos is the launch partner for the new active governance service or AGS offering with IBM Security. Telos and IBM are teaming to provide capabilities to address the significant challenges organizations are facing with cybersecurity and risk compliance. AGS is a unique and comprehensive offering, coupling the Xacta suite of tools with IBM’s services and security expertise to significantly improve the efficiency of clients’ approach to cyber security risk management in today’s increasingly challenging cyber environment. Target customers include large enterprise organizations in global markets such as financial services, healthcare, telecommunications, and energy. We are very excited about this opportunity to partner with IBM, a leading global organization that brings recognized thought leadership and leading capability in the cybersecurity management space. This relationship also enables us to effectively broaden our reach in the global marketplace for sales of our Xacta suite of tools to drive future growth for Telos. Beyond the IBM partnership, we have continued to maintain momentum in the current environment. Within the Security Solutions business, Telos received Xacta renewals with several key customers, including the Central Intelligence Agency, The U.S. Department of the Interior, The U.S. Environmental Protection Agency, our U.S. Federal Reserve Bank, and The U.S. Department of Energy, as well as Salesforce. The company was also awarded new contracts with a foreign government customer, The U.S. Army Space and Missile Command, The U.S. Department of Homeland Security, Palantir Technologies, and OmniHealth. We continue to focus on the government and commercial space, and in particular, prioritizing regulated industries. The company also received an important Ghost renewal with a classified customer to continue providing support. Additionally, we were awarded up to a 10-year contract to continue and expand our aviation security practice with the U.S. Transportation Security Administration. Our ONYX technology won first place in the Mobile Fingerprint Information Challenge posted by the National Institute of Standards and Technology. Finally, the Secure Networks business continued to add to its backlog with new wins, including a new contract to support The U.S. Air Force SIPRNet Enterprise Modernization. Let me turn now to some comments on the industry landscape and a number of recent initiatives in Washington, D.C., that presents opportunities for Telos. There are indications that Congress plans to boost spending above the level called for by President Biden in his proposed FY 2023 budget. The House and Senate versions of the Annual Defense Authorization Bill provide for increasing topline defense spending respectively $37 billion to $45 billion above the level proposed by the President. We still have to see how the appropriations process plays out this fall to know how much funding will actually be provided for our military customers, but signs are there that the FY 2023 defense budget will see a meaningful increase. On the non-defense side, as with defense, we will have to wait for Congress to agree on appropriations legislation. But so far, the spending bills under consideration reflect a consensus that more funding is needed for cybersecurity throughout the various departments and agencies. A great example of this is with CISA, The Department of Homeland Security’s cybersecurity agency. CISA works to detect and mitigate the effects of cyber attacks on federal, state and local governments, and the private sector, and then manage cyber risks to our critical infrastructure. We understand that recognizing the importance of this mission, the draft Senate Appropriations Bill for DHS seeks to give CISA a 16% increase above last year’s funding. Congress clearly recognizes that more resources are needed by federal departments and agencies to combat challenges they face in cyberspace. A major factor in that thinking is the Ukraine situation, which has resulted in continued warnings of potential cyber attacks against U.S. interests, including against U.S. critical infrastructure. So far, the United States has done an excellent job in preventing what had been expected to be widespread impacts from cyber attacks in retaliation for our support for Ukraine. The policymakers and companies like ours know that the public and private sectors can’t let up and they must continue to follow cybersecurity best practices, including deploying and updating effective cyber defenses. I will now turn the call over to Mark who will discuss second quarter 2022 financial results and our guidance for the third quarter and full year 2022.
Mark Bendza, Executive Vice President and CFO
Thank you, John, and thank you everyone for joining us today. Let’s turn to slide five. As John mentioned, we delivered a strong second quarter, with results that exceeded our guidance on key financial metrics. We reported revenue, gross margin, and adjusted EBITDA above the high end of our guidance range. We also delivered $5.4 million of free cash flow, representing a nearly four-fold increase in free cash flow year-over-year. Before I turn to the year-over-year comparison, I just wanted to remind everyone again, as I did in our last earnings call, that we had a large delivery on a lower margin program in our Secure Networks business last year that was pulled forward from the second quarter of 2021 to the first quarter of 2021 per the request of our customer. The accelerated delivery caused the Secure Networks contribution to total revenue to shift from 60% in the first quarter of 2021 to 40% in the second quarter of 2021 and gross margin to shift from 25.9% in the first quarter of 2021 to 42% in the second quarter of 2021, thereby skewing some of the second quarter year-over-year comparisons this year. So I will provide year-over-year comparisons for the second quarter as usual and also for the first half overall to normalize for the accelerated shipment from the second quarter to the first quarter of last year. Okay, with that backdrop, I will go into details. For the second quarter, total sales were $55.8 million, up 11% sequentially and up 4% year-over-year. Performance above the high end of the guidance range of $50 million to $54 million was driven by favorable timing variances and pre-existing higher margin programs in Security Solutions and strong supply chain management in Secure Networks. Security Solutions sales were $30.8 million, up 15% sequentially and down 4% year-over-year, due to lower revenues on a classified program and the completion of the U.S. Census program, partially offset by growth in other pre-existing programs. Secure Network sales were $25 million, up 7% sequentially and up 17% year-over-year, due to continued strong supply chain management, higher revenues on major programs and favorable year-over-year comparison due to the previously mentioned large delivery that pulled forward from the second quarter of 2021 to the first quarter of 2021. Turning to profitability and cash flow, second quarter gross margin was 37.5%, above our guidance range of 33% to 35%, primarily due to the margin outperformance in Security Solutions. Gross margin contracted 449 basis points year-over-year and gross profit declined 7%. The gross margin contraction was driven by a less favorable sales mix between Security Solutions and Secure Networks compared to last year, as well as gross margin contraction within Secure Networks, both of which were the result of the previously mentioned early shipments in 2021. Security Solutions revenues as a percentage of total company revenues declined from 60% in 2021 to 55% in 2022, as Secure Networks gross margin contracted nearly 700 basis points to 18%. Security Solution gross margins held constant at 53.3%. Adjusted EBITDA declined by approximately $700,000 due to lower gross profit, partially offset by lower below the line expenses. Free cash flow improved nearly four-fold to $5.4 million. The improvement in free cash flow continued the trends from the first quarter of more favorable working capital dynamics compared to last year and created an opportunity to begin returning capital to shareholders. On May 24th, we announced that our Board of Directors authorized a share repurchase program for up to $50 million of the company’s stock. During the second quarter, we deployed $3 million to repurchase over 360,000 shares at a weighted average price of $8.33 and we have continued repurchasing stock daily during the third quarter. During the third quarter till last Friday, we deployed an additional $1.1 million to repurchase nearly 143,000 shares at a weighted average price of $7.86. Now let’s recap on the first half overall to normalize for the accelerated shipments from the second quarter to the first quarter of 2021. First half revenues declined 3%. Secure Networks revenues declined 11%, as expected, due to the headwind associated with the ongoing wind down of two large programs in 2022. Security Solutions revenues grew 5%, primarily due to the ramp up of a confidential program. First half gross margin expanded 374 basis points to 37.6% and gross profit increased 8%. The gross margin expansion was driven by a more favorable sales mix within Security Solutions and Secure Networks, as well as gross margin expansion within Security Solutions. Security Solutions revenues as a percentage of total company revenues increased from 50% in 2021 to 54% in 2022 and Security Solutions gross margin expanded 638 basis points to 54.5% due to the ramp of high margin progress. Secure Networks gross margin contracted 206 basis points to 17.2%. Adjusted EBITDA declined $1.3 million due to higher SG&A, offsetting $2.8 million of higher gross profit. Lastly, free cash flow was $10.3 million higher due to favorable working capital dynamics, driving significantly better cash flow from operations in the first and second quarters. Overall, our first half has performed ahead of forecast and guidance, primarily due to favorable timing differences and variances between the second half and the first half in orders and deliveries on pre-existing programs and diligent supply chain management. Now, let’s turn to slide six to discuss our outlook for the third quarter. For the third quarter, we forecast sales in a range of $58 million to $62 million, up 4% to 11% sequentially and down 10% to 15% year-over-year. We forecast Security Solutions revenues to be down mid- to high-teens year-over-year, primarily due to the completion of the 2020 Census Program in 2021, lower orders expected on a single pre-existing program and lumpiness of perpetual licensing. We continue to make good progress on the TSA PreCheck program, but revenues for this program in 3Q, if any, are expected to be de minimis. We expect Secure Networks revenues to be down mid-single digits to mid-teens year-over-year due to the ongoing wind down of two large programs coming to a successful completion. We expect gross margins to be down approximately 350 basis points to 500 basis points year-over-year, primarily due to a slightly lower weighting of revenues to our high margin Security Solutions segment and revenue within both Security Solutions and Secure Networks mixing lower in the quarter. Below the line expenses, excluding stock compensation expense, are expected to be approximately $1 million higher due to the ramp of R&D and G&A investments during 2021. Adjusted EBITDA is expected to be $3.5 million to $5 million, representing a 6% to 8% mark. Now, let’s turn to slide seven to discuss our updated outlook for 2022. For the full year, we have narrowed our revenue range from our prior guidance of $226 million to $257 million to our updated range of $226 million to $242 million. There is no change to the low end of the revenue. The reduction at the high end of the range reflects lower assumptions on TSA PreCheck revenues and new business in the second half, partially offset by higher revenues on pre-existing programs within Security Solutions. We have lowered and widely narrowed our adjusted EBITDA range from our prior guidance of $21 million to $28 million to our updated range of $18 million to $24 million. The reduction at the high end of the range reflects our lower gross profit associated with the corresponding revenue reduction, partially offset by lower than previously forecasted below the line expenses. The reduction at the low end of the range primarily reflects the impact of lower than previously forecasted gross margins on Secure Networks in the second half, including on new business. Overall, we have performed ahead of forecast in the first half, our core business is performing well and we expect that to continue, pre-existing programs are performing well, sequential sales growth is expected to continue into the third and fourth quarters as originally planned, and we are taking a slightly more cautious approach to new business in the second half in part as a result of the more complex macro environment, which could create some headwinds for our new business growth initiatives in the short-term.
John Wood, Chairman and CEO
Thanks, Mark. In summary, we delivered a solid second quarter during which we formed a new strategic partnership with IBM and outpaced guidance on our key financial metrics. We also delivered gross margin expansion and strong free cash flow in the first half of the year and have begun to return free cash flow to shareholders through share repurchases. Our core business and pre-existing programs are performing well and we expect that to continue for the balance of the year. We are taking a slightly more cautious approach to new business in the second half of the year and are managing our forecasting expenses accordingly. With that, we are happy to take questions.
Operator, Operator
Thank you. Our first question comes from the line of Zach Cummins with B. Riley. Your line is open. Please go ahead.
Zach Cummins, Analyst
Yeah. Thanks. Good morning. Hi, John. Hi, Mark. Thanks for taking my questions. Mark, my question is really geared towards the updated guidance for the year. I mean can you give a little more granularity around the assumptions you are making for TSA PreCheck and maybe why you are taking a slightly more cautious approach to new business wins here in the second half of the year?
Mark Bendza, Executive Vice President and CFO
Yeah. Sure, Zach. Thanks for your question. So why don’t I dissect that a little bit for you? So, at the high end of the guidance range, we are taking sales down by $15 million, $11 million of the $15 million is PreCheck net revenue. So we previously assumed $12 million of net revenues for PreCheck at the high end of the guidance, now we are assuming $1 million. The PreCheck process is progressing well. Obviously, we don’t have the ATO yet and so we felt it appropriate to take that guide down, but certainly, wanted to leave revenue in there as a recognition that we still expect the ATO this year. The balance of the $4 million is really net reductions across the rest of the portfolio, primarily driven by lower assumptions on new business in the second half. The thought there is, even though we are not seeing impact from the more complicated macro environment right now in our core business, our core business is performing very well, it’s not being impacted by the macro environment and you are seeing that in the second quarter results. But we wanted to acknowledge at least as we scrub the forecast for PreCheck, we wanted to take a broader look at some of the higher risk items in the forecast. For example, anywhere where we are selling new solutions for pre-existing solutions to new customers in new end markets, we wanted to take a slightly more cautious approach there. So that’s the $4 million of additional net reduction. To put that in perspective, at the midpoint of the range that would represent about 80 basis points of year-over-year growth, so a very modest reduction as a nod in part to the macro environment, but very modest nonetheless. On adjusted EBITDA at the high end of the guidance, we are taking down by $4 million. That is the reduction in the gross profit corresponding to the revenue reduction, partially offset by reduction in below the line expenses. And then at the low end, no change to sales, but what you are seeing in the $3 million of lower adjusted EBITDA is lower gross margin on Secure Networks, primarily in new business in the second half.
John Wood, Chairman and CEO
Understood. That’s helpful. Much appreciated and best of luck in the coming quarter.
Mark Bendza, Executive Vice President and CFO
Thanks, Zach.
Operator, Operator
Our next question comes from the line of Rudy Kessinger with D.A. Davidson. Your line is open. Please go ahead.
Rudy Kessinger, Analyst
Hey, everyone. I just want to follow up on that question regarding the $4 million reduction at the top end. I'm being more conservative excluding TSA and considering the rest of the portfolio. I would like to know if the channel and the direct sales representatives are meeting your expectations in terms of pipeline development and sales performance as we move into the second half of the year. Additionally, do you have any updates for IBM included in your guidance for this year? Looking at the bigger picture, how significant of a growth driver do you see IBM being in 2023?
John Wood, Chairman and CEO
Hey, Rudy. This is John. I will address the second question and ask Mark Griffin to respond to the first one. Regarding IBM, we have a few hundred thousand dollars included in our model for this year. As for its potential size, we believe it could be quite significant, but I can't provide exact modeling specifics at this stage. However, I can say that their pipeline is rapidly filling with what I consider to be top-tier companies, including major car manufacturers, large banks, and major pharmaceutical firms, as well as countries. These are entities that would be challenging for us to penetrate independently. What's notable is that they have integrated Xacta as their launch partner for their advanced governance solutions. I see a great deal of potential ahead. When we release our guidance for 2023, I am confident we will provide more detailed insights. Overall, I am pleased with how the relationship is developing, flourishing much like I had hoped it would be with cloud service providers, though they have been slower to adopt. In contrast, IBM is fully embracing this. They are also considering using it internally, which indicates a substantial opportunity for us over the next five to ten years. Mark, if you can, please address the first question regarding the sales force.
Mark Griffin, Executive Vice President of Security Solutions
Sure. Hello, Rudy. This is Mark Griffin. Commercial adoption is progressing, but we have taken a more cautious and slower approach than initially planned. We are continuously refining our team, not just in sales but also in capturing and business development to improve operational efficiencies and maximize our potential. We are seeing progress, with an increasing pipeline and opportunities that we expect to close in late Q3 and Q4. We will keep refining our team and seeking additional opportunities and growth across sales and business development.
John Wood, Chairman and CEO
Go ahead.
Operator, Operator
Thank you. And our next question comes from the line of Alex Henderson with Needham & Company. Your line is open. Please go ahead.
Alex Henderson, Analyst
Thanks. I have a couple of questions. First, could you clarify why you believe there is any improvement in TSA? The main question is regarding Xacta. It’s challenging to analyze the numbers and discern what is actually happening with the product. Could you provide some clarity on the growth rate for Xacta based on your current guidance for the full year? Is it experiencing double-digit growth, is it stable, or is it around 20%? Could you provide some parameters on the true underlying growth rate, as it seems unclear in the data?
Mark Bendza, Executive Vice President and CFO
Yeah, Alex. It’s Mark. Regarding our Information Assurance business for 2022, while we don’t provide specific guidance at that level, I would estimate that we will likely finish the year in the low-to-mid single digits, with mid single-digit growth being a reasonable expectation, possibly at the higher end of that range but generally around the midpoint.
Alex Henderson, Analyst
And the reason for the TSA optimism that it actually was going to close, I mean, you thought it was going to close in September, then you thought it was going to close at the end of the year, now we are still thinking it’s somehow going to close and that it’s improved. What makes you think that?
Mark Griffin, Executive Vice President of Security Solutions
Sure, Alex. This is Mark Griffin. So ultimately we follow TSA guidelines and schedules for launch. We are engaged with them extensively on a daily basis going through their launch plan and their security approvals. We are getting to the end of that schedule and we are in this process now deploying to our enrollment sites and gearing up training and operational enrollment capabilities for those sites. So every indication is we are following TSA schedule. They are positive on our results at this point and we fully expect to launch this year.
Alex Henderson, Analyst
So just so I understand, when you say gearing up training, they have been instructed you to train your employees and they understand that that’s an expense you are carrying and therefore they wouldn’t stretch that…
Mark Griffin, Executive Vice President of Security Solutions
Look…
Alex Henderson, Analyst
...ask you do that it would if it wasn’t imminent. Is that the right way we should be reading that?
John Wood, Chairman and CEO
Yeah. Would you explain a little more about...
Mark Griffin, Executive Vice President of Security Solutions
Sure. Alex, yeah, the entire program is under guidance and policy and procedures from TSA. So every aspect of the program is reviewed and approved by TSA. And so everything we do from approval of sites, to training of personnel, to our soft launch, to our security processes and procedures are all controlled by TSA. So, yes, TSA reviews every document. There are contractual delivery deliverables that we have to adhere to on every aspect of this launch. So, yes, TSA is the ultimate approval of when we launch, but we are meeting their schedules and we are doing everything that they are asking in the time frame they are asking for a launch this year.
Alex Henderson, Analyst
Great. Thanks.
Operator, Operator
Thank you. And our next question comes from the line of Nehal Chokski with Northland Capital Markets. Your line is open. Please go ahead.
Nehal Chokski, Analyst
Yeah. Thank you and congrats on the solid results, and commend you, Mark, on especially a clear guidance deck. Thank you very much for that. Where are you guys in terms of percent of software billing sold on a term basis versus perpetual basis now and relative to the one, two and four quarters ago?
John Wood, Chairman and CEO
That’s a good question. I would say, the majority of what we are selling now, Nehal, is subscription or term versus perpetual and that’s true in our pipeline as well that the vast majority of our pipeline are subscription-oriented. There are a couple of exceptions. There are a couple of government examples that are exceptions, but the vast majority of the remaining pipeline, whether you are talking about ACA or Ghost or you are talking about Xacta, there are going to be subscription-based or term-based licenses versus perpetual.
Nehal Chokski, Analyst
Okay. Great. And how much of an impact does that transition have on the projection of low-to-mid single-digit growth for Xacta?
John Wood, Chairman and CEO
It definitely has an impact. I don’t have the exact number at the moment, but in the past, when we generated $6.5 million in revenue, that was all perpetual. Currently, I estimate that about 60% to 50% of our revenue is perpetual, and I believe that moving forward, the vast majority will be from term or subscription.
Nehal Chokski, Analyst
And then to be clear, what is for every dollar of perpetual that’s capitalized into term, what the...
John Wood, Chairman and CEO
What that means is, if I am aiming for a $6 million target for the year with all term revenue, I need to secure $12 million in orders by no later than June 30th.
Nehal Chokski, Analyst
Got it. Great. Thank you. And then my last question is that, Mark you alluded to in terms of a more cautious outlook on the macro being part of the $15 million take down on the high end of the guidance, but that you are not seeing any impact yet. Why do you think you are not seeing any impact yet?
Mark Bendza, Executive Vice President and CFO
Correct. So what I am distinguishing between there is our core business. Our core business has been very strong through the first half of the year and including in the second quarter as the macro became choppier. So we are not seeing any impact there. I think it’s really just the nature of our portfolio and the customers and markets that we serve. And then, for the second half, again, slightly outside of our core business where we are selling either new solutions or pre-existing to new end markets and customers, we just wanted to take a finer point on that forecast. And again, the net effect is only 80 basis points of year-over-year growth.
Nehal Chokski, Analyst
Thank you.
Operator, Operator
Thank you. And our next question comes from the line of Brad Clark with BMO. Your line is open. Please go ahead.
Brad Clark, Analyst
Hi. Thanks for taking my question. I want to ask a question about the sort of new business slowdown and how it’s in the guide and so much more of a clarification. And what I am trying to understand is, the deals out there that are sort of being pushed back either by the customers or from Telos’ perspective given the sort of proposed margin profile and it’s more not so good business at this or is it, yeah, it basically trying to understand between those two, more from the customer side or from Telos’ side to sort of push back and delay the new business? That’s it from me. Thank you.
John Wood, Chairman and CEO
It depends on the customer’s side. The government’s process often takes longer than anticipated, and we have factored that into our guidance. On the commercial side, we are seeing success, but customers are starting small and expanding over time. We acquired another commercial customer this quarter, beginning with a six-digit amount, but we anticipate it will grow to a seven-digit opportunity annually as they implement Xacta across their offerings. Therefore, on the commercial side, there is a trend of customers trying it out at a smaller scale before gradually expanding. In contrast, with more established markets like the Federal Government, pilots are typically more controlled, with a clear start, middle, and end. Customers in these areas are likely to move to an enterprise-wide license more quickly due to our strong reputation.
Operator, Operator
Thank you. And we do have a follow-up question from the line of Alex Henderson with Needham & Company. Your line is open. Please go ahead.
Alex Henderson, Analyst
Great. Thank you very much. So I was hoping you could talk a little bit about what’s going on with the voice-over-AWS and is your big chunk of the story when you guys came out was that those guys were going to be reselling it starting kind of in the beginning of this year and that they thought it was a big driver of acceleration of their services business, yet that doesn’t seem to be materializing. Can you talk about what the environment is there and why it’s taking so long or not materializing?
John Wood, Chairman and CEO
Metastasizing. That’s a good word. Thank you, Alex. I think it is taking longer than expected, which is frustrating. Internally, there are parts of the organization that still prefer to develop their own capabilities. Progress is being made, but it's slow. On the other hand, IBM decided to buy instead of build, partnering with Xacta for their launch. We have a service provider using us in the way I hoped cloud providers would adopt us. This does not mean that cloud providers won’t eventually get there; they just haven’t yet. They continue to use our services increasingly. For example, one of our recent awards, which we haven’t announced yet, began within the intelligence community, where they recognized our value. Now, they are bringing us into their Department of Defense operations, and ultimately we aim to enter the commercial sector. Each cloud provider has approached this differently. For Azure, there has been significant turnover in their security and compliance team, so we are essentially starting over with them. Each cloud provider has its own narrative, but overall, this situation is frustrating.
Alex Henderson, Analyst
Similarly, can you talk a bit about the Ghost product and the progress or what’s going on there in terms of commercializing it into a product that’s used outside of the government security infrastructure play?
John Wood, Chairman and CEO
Sure. I’d like to expand on your comment. One key insight about Xacta is that it aligns closely with government terminology. This has required us to significantly adjust the language we use to describe what we do in Xacta. For instance, the term "poem" is relevant in government contexts but means nothing to those in the commercial sector; "remediation" is the commercial equivalent of a poem. Consequently, we needed to adapt the product to better reflect the needs of the commercial market, which was an important aspect of our development process. Regarding Ghost, we have made steady progress with JCI, who offers Ghost as an embedded option with their cameras. These cameras are not visible online, and their security product sales are growing robustly. We anticipate some initial sales from this offering by the end of this year. However, due to some promotions rather than turnover, launching this has taken longer than we would have preferred. Nonetheless, other organizations are also interested in similar collaborations with JCI, and we are actively negotiating with them. We hope to announce advancements regarding our capabilities in conjunction with these additional partners. Additionally, it's important to note that our work with advanced cyber analytics is also integrated within Ghost, creating opportunities with both our current customers and through other partners.
Alex Henderson, Analyst
Since we are going around into the second round of questions, I am going to ask one more, if it’s okay. If not then just let me know. But I was hoping you could talk a little bit about the security networking business. It sounds like some projects were pulled forward in that business into the first half and just the favorable timing comment. Does that mean that you are expecting little less in the back half of the year from Security Networks?
Mark Griffin, Executive Vice President of Security Solutions
So not in Secure Networks, the dynamic within Secure Networks, the team there is doing a really terrific job of managing their supply chain risk. And so when we set guidance we account for their supply chain risk in guidance and they have been outperforming that risk. So the program management teams there are doing a terrific job and outperforming guidance. The pull-forward I think that you are referencing is more or less the Security Solutions side. We did have some higher margin order on one program in particular within that business that came into the second quarter that we were otherwise expecting to more so come in the second half. So that’s the favorable...
Alex Henderson, Analyst
Mark, but…
Mark Griffin, Executive Vice President of Security Solutions
I am not sure I understand the question.
Alex Henderson, Analyst
You have got an order from a government agency to deploy a, I don’t know, choose a location…
Mark Griffin, Executive Vice President of Security Solutions
Oh! I think you are referring to last year.
Alex Henderson, Analyst
No. I am not. Mark, I am talking about the current environment. You used that as an example because they could not know specifically which projects we are involved. But you have a pipeline of business that you need to deploy gear for in order to get the revenue. If you get the parts sooner than expected...
Mark Griffin, Executive Vice President of Security Solutions
Yeah.
Alex Henderson, Analyst
...then that do reduces your pipeline into the forward period, correct?
John Wood, Chairman and CEO
That assumes that the pipeline is static, Alex. So the pipeline is not static.
Mark Griffin, Executive Vice President of Security Solutions
Correct.
Alex Henderson, Analyst
Thank you. That’s what I was looking for.
Mark Griffin, Executive Vice President of Security Solutions
Yeah. Thanks, Alex.
Operator, Operator
Thank you. And I am showing no further questions and I would like to turn the conference back over to John Wood for any further remarks.
John Wood, Chairman and CEO
Oh! Thank you very much, Operator. Well, first, I really want to thank our shareholders for your ongoing support. And despite the current environment, I am pleased with our recent performance. And well, our year-to-date has progressed as we have expected. We are taking a balanced approach to the second half and we remain very focused on delivering for our customers and our shareholders. And again, I just want to say thank you to all of you for listening and to the analysts for asking questions and covering our stock. Thanks a lot everybody.
Operator, Operator
This concludes today’s conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.