Q4 2023 Telos Corp Earnings Call
Okay.
Good day, and thank you for standing by well tell us corporations fourth quarter and full year 2023 financial results Conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During the session you will need to press star one on your telephone.
You can automate message advising your hands right to withdraw your question. Please press star one again, please be advised that today's conference is being recorded I would now like to hand, the conference or what's your first speaker today, Alison Philips director of corporate Communications. Please go ahead.
Good morning.
For joining us to discuss <unk> Corporation's fourth quarter and full year 2023 financial results.
With me today is John <unk>, Chairman, and CEO, and Mark <unk> Executive Vice President and CFO of Palo.
Let me quickly review the format of today's presentation.
John and Mark will begin with remarks on our 2023 year end results.
Next John will provide an update on the large portfolio of new business proposals that have been submitted and we're pending as of our last earnings call.
And lastly, Mark will follow this up with first quarter guidance and insight on our financial outlook for the company.
Before turning back to John to wrap up.
We will then open the line for Q&A, where Mark Griffin Executive Vice President of Security solution will also join us.
The earnings press release was issued earlier today and is posted on the <unk> Investor Relations Web site, 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 provision 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, <unk>.
Today's call, we will discuss non-GAAP financial measures, which we believe are useful supplemental and clarifying measures to help investors understand tell us its 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 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 link.
With that I'll turn it over to Mark.
Thank you Alison and good morning, everyone.
Let's begin today on slide three.
I'm pleased to report that tell US is again over delivered on key financial metrics in the fourth quarter and exceeded expectations for revenue profit and cash flow.
We delivered $41 $1 million of revenue in the fourth quarter or $7 $1 million above our guidance range of 30 million to $34 million.
Security solutions delivered $27 million of revenue.
Which represents approximately the top end of our guidance range, primarily driven by TSA pre shop.
Secure networks delivered $24 million of revenue.
And significantly exceeded the top end of our guidance range due to strong program management and favorable supply chain performance.
Which accelerated our $7 $8 million delivery to a customer in the fourth quarter of 2023.
The first quarter of 2024, thereby bringing the program to a successful completion several weeks earlier than forecasted.
The $7 8 million accelerated delivery drove the entirety of the $7 $1 million revenue beat the quarter.
GAAP gross margin was $34, 3% below our guidance range of 35, 1% to 36, 4% to two significant revenue outperformance.
Our lower margin secure networks business.
Excluding the accelerated product delivery and secure networks GAAP gross margin was 40% well above our guidance range due to margin outperformance in both reporting segments.
Revenues, well above forecast combined with gross margins only slightly below forecast resulted in gross profit well above what was incorporated into our adjusted EBITDA guidance range.
As a result, adjusted EBITDA also exceeded the top end of our guidance range.
Adjusted EBITDA was $3 $2 million loss.
Compared to our guidance range of $6 <unk> million dollars loss to a $4 $5 million loss.
Lastly, we returned to positive free cash flow in the fourth quarter and delivered positive cash flow from operations for the full year.
Fourth quarter cash flow from operation was a $5 million inflow.
And free cash flow was a $1 8 million.
Hello.
Full year cash flow from operations was a $1 $6 million in flow and free cash flow was $13 9 million outflow.
I'll now turn it over to John for a cap on 2023 John.
Thanks, Mark and good morning, everyone let's.
Let's turn to slide four.
We started 2023 facing a challenging outlook for.
More than 45% or $100 million of our.
2022 revenues would not reoccur in 2023.
Due to the successful completion of large programs.
Lower revenues on existing programs and one program losses.
We had just completed the government buying season with insufficient business wins.
<unk> build a large revenue headwinds in 2023.
We were overstaffed relative to our lower revenue outlook.
We indicated that 2023 would be a transition year.
Based on streamlining our operations and rebuilding and growing our revenue base.
As seen in our core end markets and the federal government, where we have a long history of success.
In anticipation of lower revenues in 2023, we reduced our employee base by approximately 20% companywide.
Including indirect and direct staff across all departments as well as among all levels of seniority, including a smaller executive team.
But we didn't stop there we.
We assessed our ending month to month and quarter to quarter throughout the year.
To find ways to reallocate resources to focus on winning new business returning to growth.
On the business development side, we hired new executives for our organization, we consolidated centralized growth oriented resources under their leadership.
In part as a result of these actions, our 2023 outlook and guidance improved and progress throughout the year.
Turn it back to Mark to provide a retail.
On the evolution of our guidance throughout 2023 Mark.
Thanks, John.
2023 full year guidance.
We set our original guidance on our fourth quarter earnings call, we reaffirmed guidance on our first quarter earnings call.
We raised guidance on our second and third quarter earnings call and.
And we completed the year with revenue and adjusted EBITDA, both above the top end of our original and final guidance ranges.
Within security solutions strong renewal rates within our information assurance.
<unk> secure communications businesses.
New high margin contract wins secured communications and better than expected performance on our TSA pre check program.
Drove revenue above the midpoint of our original guidance range and gross margin above the top end of our original guidance range.
Within secured networks favorable supply chain performance expanded revenues on large program.
And disciplined program and cost management also drove revenue and gross margin above the top end of our original guidance range.
Overall, nearly $12 million of better than expected cash gross profit combined with $5 million of lower than forecasted below the line expenses drove adjusted EBITDA approximately $17 million above the original midpoint of guidance.
Now I'll turn it back to John who will discuss our substantial progress on new business capture John.
Thanks, Mark, let's turn to slide five.
First and foremost we were absolutely thrilled with the progress we have made on new business capture in recent months.
Im pleased to announce that tell us is teaming agreements in place with Prime partners.
We received awards from lock from the federal government worth up to $525 million.
The <unk> security solutions business over five years.
That is over 85% of the $610 million of pending proposals that we mentioned on our last earnings call a truly terrific outcome for our company and our shareholders.
It's not uncommon for award decision of this magnitude to be protested by incumbents or other bidders as part of a customary post award protest period provided by the government and Thats the case here.
These awards have been protested and Finalization of the award is subject to the resolution of protests that are currently in process.
Although we are not able to opine on merits of any specific protest for.
For context, and as an example, according to data from the government Accountability office with a J O over the past five fiscal years nearly 10000 protests have been filed with the <unk> and approximately only 5% of those protests will ultimately sustains.
These statistics are publicly available on the government accountability office as web site.
We eagerly await resolution of these protests that they are ready to begin executing on these new awards and delivering value to customers alongside our client partners.
These are pre existing long term progress.
Resolution of the protest and a smooth transition of the work will be important to ensure continuity of service for our customers.
These new awards represent substantial high quality recurring revenue streams.
Assuming favorable resolution of the protest they should ultimately drive sequential revenue growth later, this year and annualized into significant revenue tailwind in 2025.
Beyond this exciting news I am pleased refer to several of the key outcomes since our last earnings call.
Our exact business has achieved critical renewals with the department of energy the large intelligence agency.
As well as new orders and incremental scope on existing contracts.
U S department of the interior.
U S government publishing office multiple other federal government agencies, the Australian government and a large commercial customer in the technology sector.
Additionally, our automated message handling system business achieved several major contract renewals, including with the U S Special operations command.
The defense information systems agency and several other federal government customers.
Within our <unk> business transaction volumes in our TSA pre check program has.
Sequentially ramp every quarter for the last three quarters of 2023 and into the first quarter of 2024.
We continue to work closely with the TSA to ensure our preexisting enrollment locations are operating at the absolute highest hospital standards necessary for our National Security program of this magnitude.
For accelerating our rollout of additional onsite Roland centers around the country.
And lastly, the secured networks team completed and delivered global satellite communications solution for the U S Air Force.
I'll now turn the call over to Mark who will discuss first quarter guidance and the outlook.
Mark.
Thanks, John Let's turn to slide six to discuss our guidance for the first quarter.
For the first quarter forecast revenue in a range of $28 million to $29 million and.
And adjusted EBITDA loss of $5 5 million to $5 million.
Yeah.
We forecast security solutions revenue to decline low teens to high single digit percent year over year, primarily driven by the expected timing of revenue and <unk>.
Partially offset by significant growth in TSA pre check.
We forecast secured next revenue declined low 30, percents to high 20% year over year.
Due to lower backlog at a $7 $8 million delivery that accelerated into the fourth quarter of 2023.
GAAP gross margin is expected to be down approximately 400 basis points year over year, primarily due to higher amortization of capitalized software development cost and security solutions.
Cash gross margin is expected to be approximately flat year over year.
Cash below the line expenses, which adjust for capitalized software development costs.
Stock based compensation restructuring costs, and depreciation and amortization are forecast to be slightly higher year over year, primarily due to increased expenses associated with our TSA pre check program.
Turning to the full year outlook.
Absolutely thrilled with the progress we've made on new business catheter in recent months.
As John mentioned, we are teaming agreements in place with Prime partners, who have received awards worth up to $525 million to tell us the security solutions business over five years.
Assuming favorable resolution of protest these new programs should drive large incremental revenue streams. Starting later this year.
Given the magnitude of the programs combined with the potential variability in pieces of resolving the protest and transitioning the work from incumbents. The revenue contribution is difficult to forecast at this point so.
So we're going to guide quarter to quarter for the time being.
But we can't provide insights into the high level revenue headwinds in tailwind for the year.
Let's start with an update on the revenue headwinds embedded in our pre existing programs that we previewed on our last earnings call.
We said on our last earnings call that we would have a few tens of millions of dollars of revenue headwind in 2024 compared to our 2023 revenue guidance at that time.
Since then we had approximately $8 million of revenue pull into 2023 from 2024.
So that adds an additional $16 million of headwind compared to our final 2023 results.
The quarterly year over year headwinds in our preexisting programs will increase sequentially throughout the year and are inclusive of.
Growth from the full year annual nation of our TSA pre check program based on our pre existing network of enrolment location.
And our online renewal platform.
Turning to revenue tailwind from new business, we estimate the New program Awards currently under protest could generate over $100 million of revenue in some years.
But for modeling purposes, we're assuming a more modest $60 million to $85 million of revenue contribution in a typical year.
Provided the protests are resolved in our favor we should capture some portion of that revenue starting second half of 2024 and the full year of that revenue into 2025.
In addition, any expansion of our TSA pre check enrollment centers will drive additional revenue growth beyond the quite meaningful revenue growth. We are already expecting from the simple annualized nation of the revenue we generated for a partial year in 2023.
We believe fully ramped network of new enrollment locations will ultimately generate several tens of millions of dollars of revenue.
And lastly, we continue to invest in growing and maturing our pipeline into new business proposals, if we're able to win new contracts over the course of 2024 as we did in 2023, we may be able to capture additional revenue upside during this calendar year.
And with that I'll turn it back to Jonathan.
Thanks Mark.
Let's move to slide seven.
So in summary, we exceeded expectations and delivered results.
The guidance range on key financial metrics for both the quarter and full year.
We're very pleased the progress we've made on new business capture in recent months. These.
These new opportunities represent high quality recurring business that will provide meaningful tailwind later this year and beyond.
With that we're happy to take questions.
Operator please.
Thank you.
At this time to ask a question you will need to press star one on your telephone to withdraw your question. Please press star one again, please wait for your name to be announced.
We ask that you limit your questions to one please.
Please standby will be compile the Q&A roster.
One moment for your first question.
Okay.
And our first question will come from the line of Jack Cummings with B Riley Securities. Your line is now open.
Yes, hi, good morning, John and Mark.
Thanks for taking my questions and congrats on the strong results and here in 2023.
John I.
I just wanted to focus on the New award wins can you talk about the typical protest process I mean, any sort of sense of how long those typically last.
Understanding that it's hard to have any sort of forecast around this but just curious.
Any happening as you've had in the past.
And kind of your assumptions that are baked in.
Sure.
So protest.
<unk>.
They can last as long as 100 days or so.
And.
But they can it can also be much shorter and sometimes it can be a little longer.
On average of about 100 days.
Thank you.
One moment for our next question.
Our next question comes from the line of Rudy Kessinger with D. A Davidson your line is now open.
Yes. Thanks for taking my question any more color you can provide around TSA pre check just revenue in Q4 expected in Q1, and just do you still feel like youre going to get to the full rollout of all enrollment centers by this year.
<unk> 12, I think it says.
They'll just 26 enrollment centers.
So when do you think that rollout will be complete.
Yeah, Randy I'll take the first part of question, it's Mark and then I'll pass it on to Mark Griffin.
So first of all we're very pleased with how our transaction volumes have ramped over the last three quarters of 2023.
So far into the first two plus months.
First quarter of 2020 for both transaction volumes and revenues have ramped quite significantly.
In the first quarter that program I am not going to give.
Program level.
Revenue our margins shelled I can say.
That program is contributing.
A very meaningful portion of our first quarter.
Revenue guide so we feel very good about that at this point.
And as you may know.
The lion's share of the revenue opportunity within that program is on new enrollment side. So as we as we ultimately.
Our rollout those 500 locations.
There are several tens of millions of dollars of potential revenue upside from where we are today.
With that segue I'll pass it onto Mark referenced answer your other part of your question Hello Rudy.
And the first TSA expansion enrollment provider.
Work, Tyler Tyrus Lynn long TSA.
Launch to address current and anticipated security and operational needs on the program.
This quality of driven approach while measured has been extremely systematic and will ultimately allow us to scale faster. Our goal is still 500 sites and currently and in the future. The throughput through those sites are meeting expectations. So we're pleased with the progress to date and.
We obviously.
Intend to expand.
Thank you one moment for our next question.
Our next question comes from the line of Alex Henderson with Needham. Your line is now open.
Yes.
Three part question.
All around the same subject.
Contract Award.
First off.
With the clock.
Clock start ticking on these contracts.
Youre aggregating them and <unk>.
<unk> with this call but I.
I don't think its 100 days starting today, so when does that.
Hey.
Start ticking second.
Can you talk a little bit about the gross margin.
Structure of these contracts.
Give us some sense of what the implication is for.
Gross margins as the.
Deals kick in.
And then third.
Obviously, a big part of the conversation here relative to these contracts.
It will kick in at some point and then there is a step up into 2000.
Five so as.
As you look out to 'twenty five.
The analysts could easily be adding significant.
Revenues to 25.
Assumption is that there is also offset catch that can you talk a little bit about what kind of contract to offset so we should typically expect.
Annually that Mike.
A.
An offset to the step up that you just.
Kicked in here.
Thanks.
Oh sure.
Sounds it's John Bob started within the last month.
And.
Wow I would capture that I will turn the rest of the question over to Mark <unk>, who.
We will cover margins as well as the tailwind heading into 2025 and whatever headwinds we might have in 'twenty glass as well.
I'll, let mark answer here. So good question on the margin.
I'll give you some color there while at the same time, we try not to comment directly on program.
Level margin, but we added a slide to the appendix slide 12.
That basically gives you.
All of the key components to model 2024.
And they're one of the things we point out is.
Overall cash gross margins.
Are similar to two.
2023.
So I mean that slide there is various assumptions embedded in there around.
Ed.
Range.
Potential revenue capture in 2024 on those programs.
Youll see that overall cash gross margins are similar to 2023.
And lastly on 2025.
The walks.
Think of the work what we said.
What we've said historically is that in a typical year.
We have a few tens of millions of dollars.
Revenue headwinds that we then have to.
Backfill with new business wins, I would say 225 would be.
Political year.
Tens of millions.
So I'd say, it's tens of millions.
Roughly a third of that.
Then you are adding to that as you pointed out the full year annual amortization.
The new programs.
Hi.
Peak years, we think these programs could potentially contribute $100 million or more.
But for the time being until we have some experience under our belt on these programs and see how revenues are trending for modeling purposes, we're assuming a more modest.
Okay.
$685 million a year, so youll get the full year annual addition of that in 2025.
And then of course.
You'll have the.
Still have the upside potential from the rollout of our pre tax locations, which as I mentioned earlier once those are fully up and running a full 500 location network.
That's several tens of millions of additional upside compared to.
The revenues, we're generating today.
And then lastly.
We have.
Our new business wins seasonality that we go through every year late this calendar year or next.
The year is usually around the time.
That will be.
The results from the government buying season, so any additional new business wins that come in late this year early next year will benefit 2025, there's some high level headwinds and <unk>.
Mark said this but I just want to mention again that.
These are pre existing programs that would be rolling over.
Brought to us from an economy.
Thank you one moment our next question please.
And our next question comes from the line of Nihon Chalky with Northland Capital markets. Your line is now open.
Yeah, Thank you and congrats on the.
The $100 million ACB ones here that will rollout throughout the end of 2024 and just when it doesn't.
Awesome.
What about the rest of the $3 5 billion pipeline.
How is that further grown and let's see.
Progression on the rest of the pipeline.
And confidence level on that rest of the pipeline.
So now the pipeline continues to grow.
It's going to be.
And ongoing.
Hi wheel, if you will and.
We really only go after business that we have.
A very good chance of winning so.
I'm confident that the pipeline is going to be something thats. It.
Is going to yield results for the company.
Mark could you have anything you want to say.
Okay.
But it continues to grow but not all just to answer your questions.
As a reminder to ask a question you will need to press star one on your telephone.
And just.
One moment for our next question.
Okay.
I have a follow up from the line of Alex Henderson with Needham. Your line is now open.
Yes, so just to paraphrase.
I think you said on the margin so we should be using the same gross margin in 2004.
We saw in 'twenty, three and it sounds like.
If these programs are kicking into the back half that.
Gross margin is pretty much the same as we go into 'twenty five as well so.
Steady gross margin.
Jeremy is that is that a fair statement.
Second piece of this is is there any of these contracts that are actually.
Coming from existing business in other words.
Offsetting something that you'd already had in your revenue stream.
So.
Overall cash gross margins in 2024, we expect to be approximately comparable to 2023 and I'll, let John answer the other part yes.
These contracts from from <unk> point of view would be considered to be incremental revenue.
All incremental okay.
Since this is Seth.
Eric question, there probably isn't a whole lot of people in the pipeline behind it I don't want to Miss the opportunity.
Can you talk a little bit about the split of the business between the segments.
As it kicks in is it all in one segment or.
But between the two segments so all of the business.
All of the large contract awards that we've announced today.
<unk> security solutions business.
Probably.
So around 80% of the pipeline is in the security solution area.
So.
We would see more of a movement towards the security solutions over time.
Okay.
Thank you.
And this will conclude today's Q&A session I will now turn the call back over to Mr. John <unk> for closing remarks.
First of all I just want to thank our shareholders for your ongoing support.
I'm very proud of my team's ability to manage through a challenging Q3 and delivered better than expected results across the board.
These results demonstrate our focus on execution and there are testament to our teams.
<unk> commitment to delivering for our customers.
And our shareholders.
We're also absolutely thrilled with the progress we've made on new business capture in recent months. These.
These outcome that the potential to significantly and positively impact.
Our financial performance. The addition of high quality predictable revenues to the tellers portfolio. Beginning later this year and into 2020.
And really we're just getting started.
Excited about the future outlook for the company with robust and recession resistant markets well funded customers and it really a decades long track record of serving the world's most security conscious organizations tell us as a strong foundation for the future. So I just want to say thank you.
This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.
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