Q2 2024 Telos Corp Earnings Call

August 9, 2024

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Operator: Standing by. Welcome to the Telos Corporation's second quarter 2024 financial results conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 1 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press R11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Allison Phillipp, Director of Corporate Communications. Please go ahead.

Speaker Change: Good day and thank you for standing by. Welcome to the Telos Corporation's second quarter 2024 financial results conference call.

Speaker Change: At this time, all participants are in a listen-only mode.

Speaker Change: After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again.

Speaker Change: Please be advised that today's conference is being recorded.

Speaker Change: I would now like to hand the conference over to Allison Phillipp, Director of Corporate Communications. Please go ahead.

Allison Phillipp: Good morning. Thank you for joining us to discuss Telos Corporation's second quarter 2024 financial results. With me today is John Wood, Chairman and CEO of Telos, and Mark Benza, Executive Vice President and CFO of Telos. Let me quickly review the format of today's presentation. Mark will begin with remarks on our second quarter 2024 results. Next, John will discuss business highlights from the second quarter. Then, Mark will follow up with third quarter guidance 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 Solutions, will also join us.

Speaker Change: Let me quickly review the format of today's presentation.

Mark Benza: Mark will begin with remarks on our second quarter 2024 results.

Speaker Change: Next, John will discuss business highlights from the second quarter, then Mark will follow up with third quarter guidance 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 Solutions, will also join us.

Allison Phillipp: 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 uncertainty.

Speaker Change: The earnings press release was issued earlier today and is posted on the Telos Investor Relations website, where this call is being simultaneously webcast.

Speaker Change: Additionally, we have provided presentation slides on our Investor Relations website.

Allison Phillipp: Actual results could materially differ for various reasons, including the factors described in today's earnings press release, in the comments made during this conference call, and in our SEC filing. We do not undertake any duty to update any forward-looking statements.

Speaker Change: 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.

Speaker Change: These statements are based on current expectations and assumptions that are subject to risks and uncertainties.

Speaker Change: Actual results could materially differ for various reasons, including the factors described in today's earnings press release, in the comments made during this conference call, and in our SEC filings.

Speaker Change: We do not undertake any duty to update any forward-looking statement.

Allison Phillipp: 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 portion of our website.

Speaker Change: 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.

Speaker Change: These non-GAAP financial measures should be considered in addition to, and not as a substitute for, or in isolation from, GAAP results.

Operator: Thank you for standing by.

Speaker Change: 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.

Speaker Change: Please also note that financial comparisons are year-over-year unless otherwise specified.

Allison Phillipp: 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 the call over to Mark.

Speaker Change: The webcast replay of this call will be available for the next year on our company website under the Investor Relations link.

Mark Benza: Thank you, Allison, and good morning, everyone. Let's begin today on slide three. I'm pleased to report that Telos again exceeded key financial metrics in the second quarter, exceeding both revenue and profit guidance. We delivered $28.5 million of revenue in the second quarter, or approximately $500,000 above our guidance range of $25 million to $28 million. First half revenues were $58.1 million, and we're comfortably ahead of the $55 million of first half 2024 revenues that we forecasted in our fourth quarter 2023 earnings presentation.

Speaker Change: With that, I'll turn the call over to Mark.

Mark: Thank you, Allison, and good morning, everyone.

Mark: Let's begin today on slide 3.

Mark: I'm pleased to report that Telos has again overdelivered on key financial metrics in the second quarter, exceeding both revenue and profit guidance.

Operator: Welcome to the Telos Corporation's second quarter 2024 financial results conference call. At this time all participants are in a listen only mode.

Operator: After the speaker's presentation there will be a question and answer session. To ask a question during the session you'll need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question please press star 1-1 again.

Mark: We delivered $28.5 million of revenue in the second quarter, or approximately $500,000 above our guidance range of $25 million to $28 million.

Operator: Please be advised that today's conference is being recorded.

Mark: First half revenues were $58.1 million and were comfortably ahead of the $55 million of first half 2024 revenues that we forecasted in our fourth quarter 2023 earnings presentation.

Allison Phillipp: I would now like to hand the conference over to Allison Phillipp, Director of Corporate Communications. Please go ahead. Good morning. Thank you for joining us to discuss Telos Corporation's second quarter 2024 financial results. With me today is John Wood, Chairman and CEO of Telos, and Mark Fenza, Executive Vice President and CFO of Telos.

Mark Benza: Returning to the second quarter, Security Solutions delivered $17.9 million in revenues, which was approximately in line with the top end of our guidance range due to strong performance across the portfolio. Secure Networks delivered $10.6 million in revenue, exceeding the top end of our guidance range and representing the entirety of the revenue beat for the company. The outperformance in secure networks was driven by excellent program management on a program that ended as scheduled in the quarter. Gap gross margin was 34.1%, above our guidance range of 30% to 33.3% due to better than forecasted mix within security solutions and Strong Margin Performance on Multiple Secure Networks Programs that ended up as scheduled in the quarter, partially offset by higher amortization. Security Solutions generated nearly 63% of total company revenues in the second quarter of 2024 versus 52% in the second quarter of 2023, a favorable variance that is expected to widen in the second half.

Mark: Returning to the second quarter, Security Solutions delivered $17.9 million of revenues, which was approximately in line with the top end of our guidance range due to strong performance across the portfolio.

Mark: Secure Networks delivered $10.6 million of revenue, exceeding the top end of our guidance range and representing the entirety of the revenue beat for the company.

Allison Phillipp: Let me quickly review the format of today's presentation. Mark will begin with remarks on our second quarter 2024 results. Next, John will discuss business highlights from the second quarter. Then Mark will follow up with third quarter guidance 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 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.

Mark: The Outperformance in Secure Networks was driven by excellent program management on a program that ended as scheduled in the quarter.

Allison Phillipp: Before we begin, we want to emphasize that some of our statements on this call are forward looking statements and are made under the state 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 can 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 filing. We do not undertake any duty to update any forward looking statement.

Mark: Gap gross margin was 34.1%, above our guidance range of 30% to 33.3% due to better than forecasted mix within security solutions.

Mark: and Strong Margin Performance on Multiple Secure Networks Programs.

Mark: that ended up scheduled in the quarter, partially offset by higher amortization.

Allison Phillipp: In addition, during today's call, we will discuss non-GAP financial measures, which we believe are useful as supplemental and clarifying measures to help investors understand Telos' financial performance. These non-GAP financial measures should be considered in addition to and not as a substitute for or an isolation from gap results. You can find additional disclosures regarding these non-GAP measures, including reconciliation with comparable gap 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.

Mark: Security Solutions generated nearly 63% of total company revenues in the second quarter of 2024 versus 52% in the second quarter of 2023, a favorable variance that is expected to widen in the second half.

Mark Benza: Cash gross margin was 42%, expanding 326 basis points year over year and representing one of our highest margin quarters since our IPO in 2020. Revenues and gross margins, both above forecast, resulted in gross profit above what was incorporated into our Adjusted EBITDA guidance. In addition, R&D and SG&A expenses were better than forecasted due to lower cash expenses, including timing of some expenditures, and higher than forecasted capitalization of software development costs. As a result, Adjusted Ibiza also exceeded the top end of our guidance.

Mark: Cash Gross Margin was 42%, expanding 326 basis points year-over-year and representing one of our highest margin quarters since our IPO in 2020.

Mark: Revenues and gross margins, both above forecast, resulted in gross profit above what was incorporated into our Adjusted EBITDA guidance range.

Allison Phillipp: The webcast replay of this call will be available for the next year on our company website under the investor relations link.

Mark: In addition, R&D and SG&A expenses were better than forecasted due to lower cash expenses, including timing of some expenditures.

Mark Benza: With that, I'll turn the call over to Mark. Thank you Allison and good morning everyone.

Mark: and higher-than-forecasted capitalization of software development costs.

Mark Benza: Let's begin today on slide three. I'm pleased to report that Telos has again over delivered on key financial metrics in the second quarter exceeding both revenue and profit guides. We delivered $28.5 million of revenue in the second quarter or approximately $500,000 above our guidance range of $25 million to $28 million. First half revenues were $58.1 million and were comfortably ahead of the $55 million of first half 2024 revenues that we forecasted in our fourth quarter 2023 earnings presentation.

Mark: As a result, Adjacente Vidal also exceeded the top end of our guidance range.

Mark Benza: And Justin Ivedal with a $2.9 million loss compared to our guidance range of an $8 million loss to a $6 million loss. Lastly, cash flow from operations was an $8 million outflow, and free cash flow was an $11.3 million outflow. The year-over-year decline in free cash flow was in line with the year-over-year decline in adjusted EBITDA. I will now turn it over to John for an overview of recent business highlights

Mark: Adjusted EBITDA was a 2.9 million dollar loss compared to our guidance range of an 8 million dollar loss to a 6 million dollar loss.

Mark: Lastly, cash flow from operations was an $8 million outflow, and free cash flow was an $11.3 million outflow.

Mark: The year-over-year decline in free cash flow was in line with the year-over-year decline in adjusted EBITDA.

Mark: I will now turn it over to John for an overview of recent business highlights. John ? Thank you. Thank you.

John Wood: Thanks, Mark, and good morning, everyone. Let's turn to slide four.

John: Thanks Mark and good morning everyone. Let's turn to slide four.

John Wood: I'd like to begin with our recent progress on TSA PreCheck. I'm pleased to report we have successfully and significantly accelerated the expansion of our network of enrollment centers in the second quarter. Our footprint has nearly tripled in size from 28 locations as of our last earnings call to 83 locations today. Additionally, it's important to point out that we have focused our expansion in key markets geographically distributed across 23 states around the country. These states comprise approximately 70% of the population of the United States.

Mark Benza: Returning to the second quarter, security solutions delivered $17.9 million of revenues, which was approximately in line with the top end of our guidance range due to strong performance across the portfolio. Secure networks delivered $10.6 million of revenue exceeding the top end of our guidance range and representing the entirety of the revenue B for the company. The outperformance and secure networks was driven by excellent program management on a program that ended out scheduled in the quarter.

John: I'd like to begin with our recent progress on TSA Pre-Check Program.

John: I'm pleased to report we have successfully and significantly accelerated the expansion of our network of enrollment centers in the second quarter.

John: Our footprint has nearly tripled in size from 28 locations as of our last earnings call to 83 locations today.

John: Additionally, it's important to point out that we have focused our expansion in key markets geographically distributed across 23 states around the country. These states comprise approximately 70% of the population of the United States.

Mark Benza: Gap gross margin was 34.1%, above our guidance range of 30% to 33.3%, due to better than forecasted mix within security solutions and strong margin performance on multiple secure networks programs that ended up scheduled in the quarter partially offset by higher amortization. Security solutions generated nearly 63% of total company revenues in the second quarter of 2024 versus 52% in the second quarter of 2023, a favorable variance that is expected to widen in the second half.

John Wood: TSA PreCheck is well on track to becoming our single largest program in 2020. We plan to build on this progress and continue the growth of our footprint in the coming quarters with the expectation of reaching 500 locations in 2025. Most importantly, we are thrilled to be working with TSA to effectively grow this important national security program and provide this critical service to the community of U.S. travelers.

John: TSA PreCheck is well on track to becoming our single largest program in 2024.

John: We plan to build on this progress and continue the growth of our footprint in the coming quarters, with the expectation of reaching 500 locations in 2025.

John: Most importantly, we are thrilled to be working with TSA to effectively grow this important national security program and provide this critical service to the community of U.S. travelers.

John Wood: Next, I'd like to provide an update on the status of the program award protest discussed on our prior earnings call. As previously communicated, Telos has teaming agreements in place with prime partners who, in the first quarter, received two new program awards from the federal government, worth up to $525 million in the aggregate for Telos' security solutions business over five years. Also, as previously communicated, it is not uncommon for award decisions 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 that is the case here.

John: Next, I'd like to provide an update on the status of the program award protests discussed on our prior earnings calls.

Mark Benza: Cash gross margin was 42%, expanding 326 basis points year over year and representing one of our highest margin quarters since our IPO in 2020. Revenees and gross margins both above forecast resulted in gross profit above what was incorporated into our adjustity with our guidance range. In addition, R&D and SGNA expenses were better than forecasted due to lower cash expenses, including timing of some expenditures and higher than forecasted capitalization of software development costs.

John: As previously communicated, Telos has teaming agreements in place with prime partners who, in the first quarter, received two new program awards from the federal government.

John: worth up to $525 million in the aggregate to Telos Security Solutions business over five years.

John: Also, as previously communicated, it is not uncommon for award decisions 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 that is the case here.

John Wood: Both awards have been protested, and finalization of the awards is subject to resolution of the process. As of today, both programs remain under protest. The protest on the first program, as expected, was resolved by the Government Accountability Office, or GAO, by the end of June. The award was re-evaluated and re-awarded to our prime partners. We believe the government has shown confidence in our collective team for this program by awarding it to our prime partner a second time.

John: Both awards have been protested and finalization of the awards is subject to resolution of the protests.

Mark Benza: As a result, adjusted EBITDA also exceeded the top end of our guidance range. Adjusted EBITDA was a $2.9 million loss compared to our guidance range of an $8 million loss to a $6 million loss. Lastly, cash flow from operations was an $8 million outflow and free cash flow was an $11.3 million outflow. The year over year decline in free cash flow was in line with the year over year decline in adjusted EBITDA.

John: As of today, both programs remain under protest.

John: The protest on the first program, as expected, was resolved by the Government Accountability Office, or GAO, by the end of June .

John: The award was re-evaluated and re-awarded to our prime partner.

John: We believe the government has shown confidence in our collective team for this program by awarding it to our prime partner a second time.

John Wood: I will now turn it over to John for an overview of recent business highlights. John? Thanks, Mark.

Speaker Change: An incumbent on this program has since submitted a subsequent protest on the re-award.

John Wood: Good morning, everyone. Let's turn to slide four. I'd like to begin with our recent progress on TSA pre-check program. I'm pleased to report we have successfully and significantly accelerated the expansion of our network of enrollment centers in the second quarter. Our footprint has nearly tripled in size from 28 locations as of our last earnings call to 83 locations today, today. Additionally, it's important to point out that we have focused our expansion in key markets geographically distributed across 23 states around the country.

Speaker Change: This new protest is expected to be resolved by the GAO at the end of September based on their process timetable.

John Wood: These states comprise approximately 70% of the population of the United States. TSA pre-check is well-entracted becoming our single largest program in 2024. We plan to build on this progress and continue the growth of our footprint in the coming quarters with the expectation of reaching 500 locations in 2025. Most importantly, we are thrilled to be working with TSA to effectively grow this important national security program and provide this critical service to the community of U.S, travelers.

Speaker Change: Separately, the award on the second program remains under protest directly with the customer.

Speaker Change: for what is referred to as an agency-level protest.

John Wood: Resolution on this protest is expected in the fourth quarter. Although we're not able to communicate a firm and definitive timeline for the final completion of the protest, we currently anticipate minimal impact on 2025 revenue potential for these programs if both protests are favorably resolved by the end of 2020. As we have communicated previously, history indicates that a small percentage of protests are ultimately sustained, and our confidence in a favorable resolution has not changed.

Speaker Change: Resolution on this protest is expected in the fourth quarter.

Speaker Change: Although we're not able to communicate a firm and definitive timeline for the final completion of the protests, we currently anticipate minimal impact on 2025 revenue potential for these programs if both protests are favorably resolved by the end of 2024.

Speaker Change: As we have communicated previously, history indicates a small percentage of protests are ultimately sustained.

Speaker Change: And our confidence in a favorable resolution has not changed.

John Wood: We look forward to the conclusion of these protests as these awards relate to pre-existing programs requiring a timely and smooth transition to ensure uninterrupted service to the federal government. In addition, I'd like to report on several other business outcomes since our last earnings call. Our executive business has received new orders from the New Zealand government, 59, and a Fortune 100 technology company. The Executive Business has also achieved renewals with several key customers, including the Government Publishing Office, the National Endowment for the Arts, the National Archives, several other U.S. government customers, and a Fortune 100 company in the technology sector.

Speaker Change: We look forward to the conclusion of these protests as these awards relate to pre-existing programs requiring a timely and smooth transition

Speaker Change: to ensure uninterrupted service to the federal government.

John Wood: The company received new cyber services orders from a commercial space technology company and a federal government customer. Finally, our automated message handling system business achieved new orders from the New Zealand Defense Force, as well as renewals from the Federal Aviation Administration, several other U.S. government customers, and a foreign government customer. I'll now turn the call back to Mark, who will discuss third-quarter guidance. Mark?

Speaker Change: In addition, I'd like to report on several other business outcomes since our last earnings call.

Mark Benza: Thanks, John. Now, let's turn to slide 5.

John Wood: Next, I'd like to provide an update on the status of the Program Award protests discussed on our prior earnings calls. As previously communicated, Telos has teeny agreements in place with prime partners who in the first quarter received two new program awards from the federal government worth up to $525 million in the aggregate to Telos security solutions business over five years. Also, as previously communicated, it is not uncommon for award decisions 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 that is the case here.

Speaker Change: Our executive business has received new orders with the New Zealand government.

Speaker Change: 5'9", and a Fortune 100 technology company.

Speaker Change: The Xacta business has also achieved renewals with several key customers.

Speaker Change: including the Government Publishing Office, the National Endowment for the Arts, the National Archives,

Speaker Change: several other U.S. government customers, and a Fortune 100 company in the technology sector.

Speaker Change: The company has received new cyber services orders from a commercial space technology company and a federal government customer.

Speaker Change: Finally, our automated message handling system business achieved new orders from the New Zealand Defense Force, as well as renewals from the Federal Aviation Administration.

John Wood: Both awards have been protested and finalization of the awards is subject to resolution of the protests. As of today, both programs remain under protest. The protests on the first program as expected was resolved by the government accountability office or GAO by the end of June. The award was re-evaluated and re-awarded to our prime partner. We believe the government has shown confidence in our collective team for this program by awarding it to our prime partner a second time.

Speaker Change: several other U.S. government customers and a foreign government customer.

Speaker Change: I'll now turn the call back to Mark, who will discuss third quarter guidance. Mark?

Mark Benza: For the third quarter, we expect revenue in a range of $22 million to $24 million and an adjusted EBITDA loss of $8 million to $6.5 million. The third quarter guidance includes a revenue reduction of approximately $7 million compared to our prior internal forecast, as a result of the extended protest that John described earlier. Accordingly, we forecast security solutions revenue to be down mid-teens to high single digits percent year-over-year, primarily driven by a short-term customer program in the second half of 2023 that is not reoccurring in 2024, and revenue fluctuations in various Telos ID programs, partially offset by year-over-year growth in TSA pre-chip.

Mark: Thanks, John . Let's turn to slide 5.

Mark: For the third quarter, we expect revenue in a range of $22 million to $24 million and an adjusted EBITDA loss of $8 million to $6.5 million.

John Wood: An incumbent on this program has since submitted a subsequent protest on the re-award. This new protest is expected to be resolved by the GAO at the end of September based on their process time table. Separately, the award on the second program remains under protest directly with the customer or what it's referred to as an agency-level protest. Resolution on this protest is expected in the fourth quarter. Although we're not able to communicate a firm and definitive timeline for the final completion of the protest, we currently anticipate mental impact on 2025 revenue potential for these programs if both protests are favorably resolved by the end of 2024.

Mark: The third quarter guidance includes a revenue reduction of approximately $7 million compared to our prior internal forecast.

Mark: as a result of the extended protests that John described earlier.

John: Accordingly, we forecast security solutions revenue to be down mid-teens.

John: to high single-digit percent year-over-year, primarily driven by a short-term customer program in the second half of 2023 that is not reoccurring in 2024, and revenue fluctuations in various Telos ID programs.

John: partially offset by year-over-year growth and TSA pre-check.

Mark Benza: We forecast Secure Networks revenue to decline high 60% to mid-60% year-over-year due to the completion of programs and resulting step-down in revenues during the second half that we previewed in our prior two earnings presentations. Gap gross margin is expected to be down approximately 475 basis points to 275 basis points year-over-year, primarily due to a short-term, high-margin customer program in the second half of 2023 that will not reoccur in 2024, partially offset by a more favorable revenue contribution from our higher-margin security solutions business in 2023.

John: We forecast Secure Networks revenue to decline high 60% to mid 60% year over year due to the completion of programs and resulting step down in revenues during the second half that we previewed in our prior two earnings presentations.

John Wood: As we have communicated previously, history indicates a small percentage of protests are ultimately sustained and our confidence in a favorable resolution has not changed. We look forward to the conclusion of these protests as these awards relate to free-existing programs requiring a timely and smooth transition to ensure uninterrupted service to the federal government.

Speaker Change: Gap gross margin is expected to be down approximately 475 basis points.

Speaker Change: to 275 basis points year over year.

Speaker Change: primarily due to a short-term, high-margin customer program in the second half of 2023 that will not reoccur in 2024, partially offset by a more favorable revenue contribution from our higher-margin security solutions business in 2024.

John Wood: In addition, I'd like to report on several other business outcomes since our last earnings call. Our executive business has received a new orders with the New Zealand government, five-nine, and a Fortune 100 technology company. The executive business has also achieved renewals with several key customers, including the government publishing office, the National Endowment for the Arts, the National Archives, several other U.S, government customers, and a Fortune 100 company in the technology sector.

Mark Benza: Cash gross margin is expected to be down 75 basis points to up 50 basis points year over year. Cash below the line expenses, which adjust for capitalized software development costs, stock-based compensation, restructuring costs, and DNA, are forecast to be slightly lower year over year. We continue to assess opportunities to reduce our cost base in order to maximize our operating leverage, incremental margins, and cash flow as we return to growth in 2025.

Speaker Change: Cash gross margin is expected to be down 75 basis points to up 50 basis points year-over-year.

Speaker Change: Cash below the line expenses, which adjusts for a capitalized software development cost, stock-based compensation, restructuring costs, and DNA, are forecast to be slightly lower year over year.

John Wood: The company has received new cyber services orders from a commercial-space technology company and a federal government customer. Finally, our automated message handling system business achieved new orders from the New Zealand Defense Force, as well as renewals from the Federal Aviation Administration, several other U.S, government customers, and a foreign government customer.

Speaker Change: We continue to assess opportunities to reduce our cost base.

Speaker Change: in order to maximize our operating leverage, incremental margins, and cash flow as we return to growth in 2025.

Mark Benza: Our guidance does not include any restructuring charges that could result from additional cost actions. Lastly, we expect the fourth quarter to be similar to the third quarter with potential for modest sequential growth if protests are favorably resolved early in the fourth quarter. And with that, I'll turn it back to John.

Speaker Change: Our guidance does not include any restructuring charges that could result from additional cost actions.

Speaker Change: Lastly, we expect the fourth quarter to be similar to the third quarter, with potential for modest sequential growth if protests are favorably resolved early in the fourth quarter.

Mark Benza: I'll now turn the call back to Mark, who will discuss Third Quarter Guidance. Mark? Thanks, John. Let's turn to slide five. For the third quarter, we expect a revenue in a range of $22 million to $24 million, and an adjusted EBITDA loss of $8 million to $6.5 million. The third quarter guidance includes a revenue reduction of approximately $7 million compared to our prior internal forecast as a result of the extended protests that John described earlier.

John Wood: Thanks, Mark. Now, let's turn to slide 6.

Speaker Change: And with that, I'll turn it back to John .

John Wood: In summary, we once again exceeded expectations and delivered results above the high end of the guidance range on key financial metrics in the second quarter. Additionally, we expanded our network of TSA pre-check enrollment locations to 83, nearly tripling our footprint since the last earnings call. We continue to expect we'll reach 500 locations in 2025. Finally, we look forward to the conclusion of the protests on the new business awards to our prime partners, and we expect minimal impact on the 2025 revenue potential for these programs if both are favorably resolved by the end of 2021. And with that, we're happy to take questions.

Speaker Change: Thanks, Mark. Let's turn to slide 6.

John: In summary, we once again exceeded expectations and delivered results above the high end of the guidance range on key financial metrics in the second quarter.

Speaker Change: Additionally, we expanded our network of TSA pre-check enrollment locations to 83, nearly tripling our footprint since the last earnings call. We continue to expect we'll reach 500 locations in 2025.

Mark Benza: Accordingly, we forecast security solutions revenue to be down mid-teens to high single digits per cent year over year, primarily driven by a short-term customer program in the second half of 2023 that is not reoccurring in 2024, and revenue fluctuations in various TELOSID programs partially offset by year-over-year growth in TSA pre-check. We forecast secure networks revenue to decline high 60 percent to mid-60 percent year-over-year due to the completion of programs and resulting step-down in revenues during the second half that we previewed in our prior to earnings presentations.

Speaker Change: Finally, we look forward to the conclusion of the protests on the new business awards to our prime partners, and we expect minimal impact on the 2025 revenue potential for these programs if both are favorably resolved by the end of 2024.

Operator: Operator, please open the line for Q&A. Thank you. As a reminder, if you'd like to...

Speaker Change: And with that, we're happy to take questions.

Speaker Change: Operator, please open the line for Q&A. Thank you.

Operator: As a reminder, if you'd like to ask a question at this time, please press star 1 1 on your touchtone telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Please stand by while we compile the Q&A roster. Thank you. Our first question will come from the line of Zach Cummins with B Reilly Securities.

Speaker Change: As a reminder, if you'd like to ask a question at this time, please press star 1 1 on your touchtone telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again.

Speaker Change: Please stand by while we compile the Q&A roster.

Mark Benza: GAP Gross Margin is expected to be down approximately 475 basis points to 275 basis points year-over-year, primarily due to a short-term high-margin customer program in the second half of 2023 that will not reoccur in 2024, partially offset by a more favorable revenue contribution from our higher margin security solutions business in 2024. GAP Gross Margin is expected to be down 75 basis points to up 50 basis points year-over-year. Cash below the line expenses, which adjust for capitalized software development costs, stock-based compensation, restructuring costs in DNA, are forecast to be slightly lower year-over-year.

Speaker Change: Our first question will come from the line of Zach Cummins with B Reilly Securities.

Zach Cummins: Hi, good morning, Mark and John. Congratulations on a solid quarter, and I appreciate you taking my questions. John, I wanted to start off with the protest process.

Zach Cummins: Hi, good morning, Mark and John . Congrats on a solid quarter and appreciate you taking my questions. John , I wanted to start off with the protest process. I mean, I appreciate all the additional insight that you gave us on both the programs, but

Zach Cummins: I mean, I appreciate all the additional insight that you gave us on both the programs, but could you give us a sense of the size of each of these opportunities? Is it meaningfully different from one to the other? Sure.

Speaker Change: Can you give us a sense of maybe the size of each of these opportunities? Is it meaningfully different from one to the other?

John Wood: Sure, Zach. Thanks for the question. The first opportunity is 90% of the total of $525 million. The second opportunity is about $10 billion.

John: Sure, Zach. Thanks for the question. The first opportunity is 90% of the total of the $525 million. The second opportunity is about 10%.

Zach Cummins: Got it. That's helpful. I'm just curious, in terms of the timeline, I mean, is there a window where this eventually closes, where you can't keep protesting? It feels like if it's been re-awarded already, I guess it just feels odd that they can keep protesting, especially on the first award.

Mark Benza: We continue to assess opportunities to reduce our cost base in order to maximize our operating leverage, incremental margins, and cash flow as we return to growth in 2025, and Mike. Our guidance does not include any restructuring charges that could result from additional cost actions. Lastly, we expect a fourth quarter to be similar to the third quarter with potential for modest sequential growth if protests are favorably resolved early in the fourth quarter.

Zach Cummins: Got it, that's helpful. And.

Speaker Change: I'm just curious, in terms of the timeline, I mean, is there a window where this eventually closes where you can't keep protesting? It feels like if it's been re-awarded already, I guess it just feels odd that they can keep protesting especially on the first award.

John Wood: Well, it is a tactic that incumbents tend to use to try to extend their runway of revenues as long as they can. But they can't bring back new topics.

Speaker Change: Well, it is a tactic that incumbents tend to use to try to extend out their runway of revenues as long as they can.

John Wood: So, my confidence level remains very high that we'll get through this process within the timeframe that we talked about on the call earlier.

Speaker Change: They can't bring back new topics, so my confidence level remains very high that we'll get through this process within the time frame that we talked about on the call earlier.

John Wood: And with that, I'll turn it back to John. Thanks, Mark.

John Wood: Let's turn to slide six. In summary, we once again exceeded expectations and delivered results above the high end of the guidance range on key financial metrics in the second quarter. Additionally, we expanded our network of TSA pre-check enrollment locations to 83 nearly tripling our footprints since the last earnings call. We continue to expect will reach 500 locations in 2025.

Zach Cummins: Got it! And then just shifting over to TSA PreCheck, I mean, great to see nearly tripling your number of locations here in recent months. I mean, can you talk about any new learnings as you're really starting to expand out the footprint? Kind of how are these new locations performing versus maybe some of the ones that were there near the start of the program?

Speaker Change: Wood dialing

Speaker Change: And then just shifting over to TSA PreCheck, I mean great to see

Speaker Change: Nearly tripling your amount of locations here in recent months. I mean, can you can you talk about?

Speaker Change: Any new learning as you're really starting to expand out the footprint, kind of how are these new locations performing versus maybe some of the ones that were there near the start of the program when you started ramping?

John Wood: Finally, we look forward to the conclusions of protests on the new business awards to our prime partners and we expect mental impact on the 2025 revenue potential for these programs to both are favorably resolved at the end of 24.

John Wood: Sure, if we were to interpolate the run rate of enrollments that are going through the current footprint, and we blow that out against the 500 that we have coming, you know, that we're going to be bringing forward through 2025, I think we'll get to the market share that we talked about previously with you and the other investors. But our one-third market share, we think we'll get.

Speaker Change: Sure, if we were to interpolate the run rate...

John Wood: And with that, we're happy to take questions.

Operator: Operator, please open the line for Q&A. Thank you. As a reminder, if you'd like to ask a question at this time, please press star 11 on your touch tone telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by. Will we compile the Q&A roster?

Speaker Change: enrollments that are going through the current footprint and we look and we blow that out against the 500 that we have coming you know that we're going to be bringing forward.

Speaker Change: through 2025, I think we'll get to the market share that we talked about previously that with you and the other investors, our one-third market share we think we'll get to.

Zach Cummins: And then final question for me, maybe geared towards Mark. Any sort of changes to key assumptions we should be thinking about going into 2025? Obviously, the timeline of the protests is a key factor to this, but just curious about maybe other factors that you're seeing when it comes to potentially new business pipeline beyond TSA pre-check expansions and these protests.

Speaker Change: Understood. And then a final question for me, maybe geared towards Mark. Any sort of

Zach Cummins: Our first question will come from the line of Zach Cummins with B. Riley Securities. Hi, good morning, Mark and John. Congrats on a solid quarter and appreciate you taking my questions. John, I wanted to start off with the protest process. I mean, appreciate all the additional insight that you gave us on both the programs, but can you give us a sense of maybe the size of each of these opportunities? Is it meaningfully different from one to the other?

Mark: changes to

Mark: Key assumptions we should be thinking about going into 2025, obviously timeline of the protests is a key factor to this, but just curious on maybe other factors that you're seeing when it comes to potentially a new business pipeline beyond TSA pre-check expansions and these protests.

Zach Cummins: Sure. Sure, Zach. Thanks for that for the question. The first opportunity is 90% of the total of the 525 million. The second opportunity is about 10%. Got it. That's helpful. And I've just curious in terms of the timeline. I mean, is there a window where there's eventually closes where you can't keep protesting? It feels like if it's been re-awarded already. I guess it just feels odd that they can keep protesting, especially on the first award.

Mark Benza: Yeah, so Zach, it's Mark Benzie here. Why don't I start, and then if Mark Griffin has something to supplement with, he'll jump in. So I think of 2025 as having a few key components; you're going to build up a forecast for 2025. There's the core business we have today, excluding pre-check and excluding the programs that are under protest. That core business next year will generate somewhere around $60 to $65 million of revenues at a high 40% cash gross margin. Then you have the protested programs that we're talking about.

Mark: Yeah, so Zach, it's Mark Benzie here. Why don't I start and then if Mark Griffin has something to supplement with, he'll jump in. So I think of 2025

Mark Griffin: as having a few key components here to build up a forecast for 2025. There's the core business we have today, excluding pre-check.

Mark Griffin: and excluding the programs that are under protest.

Mark Griffin: That core business next year will generate somewhere around 60 to 65 million of revenues at high 40% cash gross margins.

Zach Cummins: Well, it is a tactic that Cummins tend to use to try to extend out their runway of revenues as long as they can. You know, they can't bring back new topics. So my comments will remain very high that we'll get through this process within the time frame that we talked about on the call earlier. Got it.

Mark Griffin: Then you have the protested programs that we're talking about. You know, we've previously talked about those programs.

Mark Benza: We've previously talked about those programs being worth up to $525 million over five years, which could mean as much as $100 million or more in a given year, but for now, we're modeling that at somewhere around $60 to $85 million in a typical year. And that's kind of in the mid-to-high 30% cash gross margin. Then you have pre-check.

Mark Griffin: being worth up to $525 million over five years, which could mean as much as $100 million or more in a given year. But for now, we're modeling that at somewhere around $60 to $85 million in a typical year.

Mark Griffin: And that's kind of in the, you know, mid to high 30% cash gross margins.

Mark Benza: We've outlined previously that we believe that the market is approximately a 200 million plus dollar market. We think we can get to approximately our pro-rata market share once we are fully ramped. And so you can, you know, back into an assumption for what pre-check revenues could be next year as we continue to ramp up our enrollment locations to approximately 500 by the end of the year.

Zach Cummins: And then just shifting over to TSA free check. I mean, great to see nearly tripling your year about locations here in recent months.

Mark Griffin: Then you have pre-check. We've outlined previously that we believe that market is approximately a 200 million plus dollar market.

Zach Cummins: I mean, can you can you talk about any new learning as you're really starting to expand out the footprint? Kind of how are these new locations performing versus maybe some of the ones that were there near the start of the program when you started ramping? Sure. If we were to interpolate the run rate of enrollments, they're going through the current footprint and we look and we blow that out against the 500 that we have coming, you know, that we're going to be bringing forward through 2025. I think we'll get to the market share that we talked about previously that with you and the other investors. But our one third market share we think we'll get to.

Mark Griffin: We think we can get to approximately our pro-rata market share once we are fully ramped.

Mark Griffin: And so you can, you know, back into an assumption for what pre-check revenues could be next year as we continue to ramp our enrollment location to approximately 500 by the end of the year, to 500 by approximately the end of the year.

Mark Benza: And you could think of that as. You know, that's probably a kind of a middle. 50% cash gross margin revenue stream. And then, of course, any new business that comes in over the course of the government buying season, which is typically late in the calendar year or early in the following calendar year. A little, you know, certainly too early to give any sort of a forecast there, but, you know, our BD teams are busy with proposals ramping up here to be submitted over the next several months, and then hopefully, we'll have an update for you sometime early next year and how that plays out. I'll look to Mark and see if, okay, Mark doesn't have anything. I think I've covered it. So, does that answer your question, Zach?

Mark Griffin: And you could think of that as...

Mark Griffin: You know, that's probably a kind of a mid-

Mark Griffin: 50% cash gross margin revenue stream, and then, of course, any new business that comes in over the course of the government buying season, which is typically late in the calendar year or early the following calendar year.

Zach Cummins: Understood and then a question for me, maybe you're towards mark any sort of changes to key assumptions we should be thinking about going into 2025. Obviously timeline of the protests is a key factor to this but just curious on maybe other factors that you're seeing when it comes to potentially new business pipeline. Yeah, so Zach, it's Mark Benzer here.

Mark Griffin: It's certainly too early to give any sort of a forecast there, but our BD teams are busy with proposals ramping here to be submitted over the next several months.

Mark Griffin: And then hopefully we'll have an update for you sometime early next year on how that plays out.

Mark Griffin: I'll look to Mark and see if, okay, Mark doesn't have anything. I think I've covered it. So does that answer your question, Zach?

Zach Cummins: Yep, very helpful. Thanks for that, Mark, and I'll go ahead and pass the line. So, thanks so much for taking my questions.

Mark Benza: Why don't I start and then if Mark Griffin has something to supplement with jump in? So I think of 2025 as having a few key components here to build up a forecast for 2025. There's the core business we have today excluding precheck and excluding the programs that are under protest. That core business next year will generate somewhere around 60 to 65 million of revenues at high 40% cash growth margins. Then you have the protested programs that we're talking about.

Mark Griffin: Yep, very helpful. Thanks for that, Mark, and I'll go ahead and pass the line. So thanks so much for taking my questions. Thanks, Dan. Sure.

Rudy Kessinger: Our next question will come from the line of Rudy Kessinger with D.A. Davidson.

Speaker Change: Our next question will come from the line of Rudy Kessinger with DA Davidson.

Rudy Kessinger: Hey guys, TSA PreCheck. Could you share what your current market share is?

Rudy Kessinger: Hey guys, TSA PreCheck, could you share what your current market share is?

John Wood: No, Rudy, we're not going to give that detail, but what I will say is that we are very pleased with the level of productivity we're currently seeing out of our pre-existing new enrollment location. And, as John indicated, we're targeting a pro-rata market share when we're fully ramped up at $500,000.

Speaker Change: No, Rudy, we're not going to give that detail, but what I will say is that we are very pleased with the level of productivity we're currently seeing out of our pre-existing new enrollment locations.

Speaker Change: and John indicated we're targeting a pro rata market share when we're fully ramped at 500 locations.

Rudy Kessinger: I guess if you think you can get a third at 500, are you tracking towards that given the number of locations you pulled out today?

Mark Benza: We've previously talked about those programs being worked up to 525 million dollars over five years, which could mean as much as 100 million or more in a given year. But for now we're modeling that at somewhere around 60 to 85 million dollars in a typical year and that's kind of in the mid to high 30% cash growth margins.

Rudy Kessinger: I guess if you think you can get a third at 500, I guess are you tracking towards that given the number of locations you pulled out today?

John Wood: I guess if you're targeting a one-third market share once you get the five-year location, if we were to extrapolate, you know, based on how many locations you have today, are you tracking towards that one-third market share with your existing footprint? Yes.

Rudy Kessinger: Sorry, will you repeat that for me?

Speaker Change: I guess if you're targeting a one-third market share once you get the five-year location.

Speaker Change: We're to extrapolate, you know, based on how many locations you have today. Are you tracking towards that one-third market share with your existing footprint? Yes, that's exactly what I was trying to say earlier. Yep, based on the sample set we have even today, yes, we feel like we are on track.

Zach Cummins: Then you have precheck. We've outlined previously that we believe that market is approximately a 200 million plus dollar market. We think we can get you approximately our pro rata market share once we are fully ramped and so you can back into an assumption for what precheck revenues could be next year as we continue to ramp our enrollment locations to approximately 500 by the end of the year to 500 by approximately the end of the year.

Rudy Kessinger: That's exactly what I was trying to say earlier. Yeah, based on the sample set we have even today, yes, we feel like we are on target. Okay, and then on the core business. You said the core business. You guys did over $65 million in a quarter. And I know you've had a lot of one-time programs, but it seems like all we've heard in the last couple years is contracts coming to completion with no new contracts of size starting.

Speaker Change: Okay, and then on the core business, you said the core business should be fixed.

Speaker Change: I mean, you guys did, a couple years ago, over $65 million in a quarter. And I know you've had a lot of one-time programs, but it seems like all we've heard in the last couple of years is contracts coming to completion and no new contracts of size starting. So

Rudy Kessinger: Why does the core business, X PreCheck, and X are Two Potential Large Contracts, if these protests get resolved, why is the core business continuing to shrink? I mean, I could go back five years in my model. In 2018, you guys did twice that amount. Where are you guys missing the mark in your core business? It's in the...

Zach Cummins: And you can think of that as you know that's probably a kind of a mid 50% cash growth margin revenue stream. And then of course any new business that comes in over the course of the government buying season, which is typically late in the calendar year or early the following calendar year. A little you know certainly too early to give any sort of a forecast there, but you know our BD teams are busy with proposals ramping here to be committed over the next several months.

Speaker Change: Why does the core business, X PreCheck, and X with two potential large contracts, if these protests get resolved, why is the core business continuing to shrink? I mean, I could go back five years in my model. In 2018, you guys did twice that amount.

John Wood: It's in the, really what's happening is it's in the secure network side of that business. The other side of it, the security solutions side, is growing, and will be growing quite nicely. So that's the side of the business that we have a bunch of additional bids on, and that's the business that has been really largely contracted out.

Speaker Change: where are you guys missing the mark in your core business?

Speaker Change: It's really what's happened is it's in the secure network side of that business. The other side of the business, security solutions, will be growing quite nicely, I think, Rudy.

Rudy Kessinger: So, that's the side of the business that we have a bunch of additional bids in on, and that's the business that has been really largely contracted.

Rudy Kessinger: Okay, that's it for me. Thank you.

Zach Cummins: And then hopefully we'll have an update for you sometime early next year and how that plays out. I'll look to Mark and I think that's covered it. So to answer your questions, Zach. Yeah, very helpful. Thanks for that, Mark, and I'll go ahead and pass the line. So thanks so much for taking my questions. Thank you.

Rudy Kessinger: Okay, that's it for me. Thank you.

Alex Henderson: Our next question will come from the line of Alex Henderson with Needham.

Speaker Change: Our next question will come from the line of Alex Henderson with Needham. Great.

Alex Henderson: Great, and I appreciate that we've gone from a single question per analyst to more of an open mic process. Thanks for doing that.

Alex Henderson: I appreciate that we've gone from the single question per analyst to more of an open mic process. Thanks for doing that.

Rudy Kessinger: Our next question will come from the line of Rudy Kessinger with DA Davidson.

Alex Henderson: I just wanted to...

Rudy Kessinger: Hey guys, I'm TSA Precheck. Could you share with your current market shares? No, Rudy, we're not going to give that detail, but what I will say is that we are very pleased with the level of productivity we're currently seeing out of our pre-existing new enrollment locations. I'm going to indicate that we're targeting a pro-rata market share when we're fully ramped at 500 locations. I guess if you think you can get a third at 500, I guess you're tracking towards that to the number of locations you've rolled out today.

Alex Henderson: talk a little bit about the mechanics around the perlocation on the TSA, how does that

Alex Henderson: I just wanted to talk a little bit about the mechanics around the perlocation of the TSA. What is the kind of expectation on a per-site location in terms of revenue? How long does it take for a site to open to actually reach normalized revenues?

Speaker Change: What is the kind of expectation on a per-site location?

Speaker Change: um

Speaker Change: In terms of revenue, how long does it take for a site to open to actually reach normalized revenues?

Mark Griffin: Hello Alex, this is Mark Griffin. What we're seeing today is that as we open, we're getting significant and acceptable volume almost day one after we open, so we're working very closely with TSA on the locations and the strategic locations of where we're allowed to place sites. But really, we're seeing that volume and that adoption of those sites because of the convenience of our locations with Office Depot. They're very acceptable and welcomed by the communities that they serve.

Speaker Change: Hello, Alex, Mark Griffin. What we're seeing today is as we open...

Speaker Change: We're getting significant and acceptable volume almost day one after we open, so we're working very closely with TSA on the locations and the strategic locations of where we're allowed to place sites.

Rudy Kessinger: Sorry, Rudy, repeat that for me. I guess if you're targeting a 1-third market share once you get to 500 locations, we're too extrapolate based on how many locations you have today. Are you tracking towards that 1-third market share with your existing footprint? Yeah, that's exactly what I was trying to say earlier. Based on the sample set we have in 2008. Yeah, we feel like we are on track. Okay, and then on the quarter business, you said the core business should be 65 million next year.

Speaker Change: But really we're seeing that volume and that adoption of those sites because of the convenience of our locations with Office Depot. They're very acceptable and welcomed by the communities that they serve.

Alex Henderson: Okay, so it's fairly... fairly rapid within the quarter that they opened that they hit normalized revenues. Can you talk about the mechanics around the timeline for opening them?

Speaker Change: Okay, so it's a, it's fairly...

Speaker Change: fairly rapid within a quarter, within the quarter that they open, that they hit normalized revenues. Can you talk about the mechanics around the timeline for opening them? 500 by the end of 25, is it a hundred a quarter? Is it...

Rudy Kessinger: I mean, you guys did a couple of years ago over 65 million in a quarter. And I know you've had a lot of one-time programs, but it seems like all we've heard in the last couple of years is contracts coming to completion and no new contracts of size starting. So why did the core business X pre-check and X is to potential large contracts each protest get resolved? Why is the core business continuing to shrink?

Speaker Change: you know, heavily skewed to the first half because they're already set up and ready to go. What's the shape of that, you know, opening curve?

Mark Griffin: So Mark Griffin again, what you've seen based on the performance for the last quarter is that this is a ramp, and what you'll continue to see is, as the cadence and the acceleration of the schedule that TSA has approved for us, you'll see an increase in that schedule throughout the balance of this year and into next. So an increase on the ramp.

Rudy Kessinger: I mean, I go back five years in my model in 2018, you guys did twice that amount. So where are you guys missing the mark in your core business? It's in the really what's happening is it's in the secure network side of that business. The other side of the security solutions is growing. It will be growing quite nicely. So that's the side of the business that we have a bunch of additional things in on. And that's the business that has been really largely contracting.

Speaker Change: So Mark Griffin, again, what you've seen based on the last performance for the last quarter is it is a ramp.

Speaker Change: And what you'll continue to see is as the cadence and the acceleration of the schedule that TSA has approved for us.

Speaker Change: You'll see an increase in that schedule throughout the balance of this year and into next. An increase in the ramp. Yeah, increase in the ramp cadence on a weekly basis.

Speaker Change: Typically, we open on a weekly basis, and that's what you see posted to TSA's website. It's what we not only announce in a press release, but also in the case that we open. So it is weekly.

Rudy Kessinger: Okay, that's it for me. Thank you.

Alex Henderson: Our next question will come from the line of Alex Henderson with Needham. Great. And I appreciate that we've gone from the single question per analyst to more of an open mic process. Thanks for doing that. I just wanted to talk a little bit about the mechanics around the per location on the TSA. How does that feather in? What is the kind of expectation on a per site location in terms of revenue? How long does it take for a site to open to actually reach normalized revenue?

Speaker Change: primarily, and what you'll see is an increase in the store volume that we open throughout the balance of this year and into next to get to the 500 sites.

Alex Henderson: So is it reasonable to think that it's... If we just used a straight line of... 500 less which we've already got, divided by six quarters, then we get a general sense of the mechanics around it then?

Speaker Change: If we just used a straight line of...

Speaker Change: 500 less what you've already got divided by six quarters that we get a general sense of the mechanics around it then? Yes, I would, yes. Okay, and then I wanted to

Mark Griffin: Yes, I would. Yes.

Alex Henderson: Okay, and then I wanted to... To go back to the closure conversation, are there any contracts that are going to roll off in the back half of the year that we should be aware of, or in 2025 that we should be aware of, and what would be the timing of those?

Speaker Change: To go back to the closure conversation, is there any contracts that are going to roll off in

Speaker Change: The back half of the year that we should be aware of, or in 2025 that we should be aware of, and what would be the timing of those?

Mark Griffin: Hello, Alex, Mark Griffin. What we're seeing today is as we open, we're getting significant and acceptable volume, almost day one after we open. So we're working very closely with TSA on the locations and the strategic locations of where we're allowed to place sites. But really we're seeing that volume and that adoption of those sites because of the convenience of our locations with Office Depot, they're very acceptable and welcome to buy the communities that they serve. So it's fairly rapid within the quarter that they open that they hit normalized revenues.

Mark Benza: Yeah, Mark Benz will give you that detail, but I think he sort of handled that earlier, but Mark, please go through that. Yeah, Alex, it's a good question, and it was embedded in the numbers that I commented on earlier.

Speaker Change: Yeah, Mark Benz will give you that detail, but I think he's...

Speaker Change: not the director.

Alex Henderson: So there are two pieces to that. First, there's the second half of 24 versus the first half. You will see a meaningful step down in revenues and secure networks from the first half to the second half. That was something we previewed on prior earnings calls. And then next year, yes, embedded in the $60 million to $65 million of revenue on the core business, excluding prechecks. That includes further step-down in secure networks prior to New Business Wins.

Mark Benz: You will see a meaningful step down in revenues and secure networks from the first half to the second half.

Speaker Change: That was something we previewed on prior earnings calls. And then next year, yes, embedded in the $60 to $65 million of revenue on the core business excluding pre-check.

Mark Griffin: Can you talk about the mechanics around the timeline for opening 500 by the end of 25? Is it 100 a quarter? Is it heavily skewed to the first half because it's already set up and ready to go? What's the shape of that opening curve? So Mark Griffin, again, what you've seen based on the last performance, if it's the last quarter, is a ramp and what you'll continue to see is as the cadence and the acceleration of the schedule that TSA has approved for us, you'll see an increase in that schedule throughout the bounce of this year and into next.

Speaker Change: That includes further step down in secure network prior to new business wins. Yeah, the real question there isn't, you know, I mean, yeah, you gave me that detail, but what's the timing of it?

Mark Benza: Yeah, the real question there isn't, you know, yeah, you gave me that detail, but what's the timing of it? I mean, which quarters do they end in? We're forecasting a quarterly model; we need to know when things end.

Speaker Change: I mean, which quarters do they end in?

Speaker Change: We're forecasting a quarterly model. We need to know when things end.

Alex Henderson: Yeah, so approximately the midpoint of the year.

Speaker Change: Yeah, so...

Speaker Change: Approximately midpoint of the year.

Alex Henderson: So most of this is around the end of the second quarter when it rolls off. Yeah. Okay. That's helpful. Thank you very much. And can you just explain why you increased the estimate for capitalization and the size of the OPEX spending that was timing-wise shifted out?

Speaker Change: So most of this is around the end of the second quarter is when it rolls off.

Speaker Change: Yeah. Okay. That's helpful. Thank you very much. And could you just explain why you increased the estimate for capitalization and the size of the OPEX spending that was timing-wise shifted out?

Mark Griffin: So an increase in the ramp cadence on a weekly basis. So typically we open on a weekly basis and that's what you see posted to TSA's website is what we not only announce in a press release but also in the cadence that we open. So it is weekly primarily and what you'll see is an increase in the store volume that we open throughout the balance of this year and into next to get to the 500 site.

Mark Benza: Yeah, so you'll see the OpEx spend step up a bit in the second half, largely driven by TSA PreCheck and the investment we're making there and the ramp of TSA PreCheck, as well as some additional spend on our growth initiatives within business development.

Speaker Change: Yeah, so you'll see the OPEX spend step up a bit in the second half, largely driven by TSA PreCheck and the investment we're making there and the ramp of TSA PreCheck, as well as some additional spend on our growth initiatives within business development.

Mark Griffin: So is it reasonable to think that it's if we just used a straight line of 500 less what you've already got divided by six quarters that we get a general sense of the mechanics around it then? Yes, I would. Yes. Okay.

Alex Henderson: Yeah, the question was, why was the capitalization shifted out or reduced, and what was the magnitude of the timing issues that were shifted out?

Speaker Change: Yeah, the question was why was the capitalization shifted out or reduced and what was the magnitude of the timing issues that were shifted out?

Mark Benza: The timing was more on the OpEx side, not so much on the capitalization side, Alex.

Alex Henderson: And then I wanted to go back to the closure conversation. Is there any contracts that are going to roll off in the back half of the year that we should be aware of or in 2025 that we should be aware of and what would be the timing of those? Yeah, Mark, Mark Benz will give you that detail but I think he sort of handled that earlier but Mark please go to. Yeah, Alex, it's a good question and it was embedded in the numbers that I commented on earlier.

Alex Henderson: The timing was more on the OPEX side, not so much on the capitalization side, Alex. No, those are two separate items that you called out for the reason why you beat on the OPEX. And I'm asking, what was the reasoning for the CAPEX?

Alex Henderson: Now I know those are two separate items that you called out for the reason why you beat on the OPEX. And I'm asking what was the reasoning for the CAPEX? the capitalization increase, and second, what was the magnitude of the push-out of the timing, which we should then expect in 3Q to normalize.

Speaker Change: And second, what was the magnitude of the push out of the timing, which we should then expect in 3Q to normalize?

Mark Benza: So on capitalization, really, we have a couple of key buckets on the R&D spend. One is on the exhaustive side, the other is on the TSA pre-check side, and it's just the cadence of those two projects and the timing of the spend and the associated capitalization hours. It's really just those two items. And then the OPEX, I think the OPEX I've already addressed.

Speaker Change: So on the capitalization, really, we have a couple of key buckets on the R&D spend. One is on the exhaustive side. The other is on the TSA pre-check side. And it's just the cadence of those two projects and the timing of the spend and the associated capitalization hours.

Alex Henderson: So there's two pieces to that. So there's the second half of 24 versus the first half. You will see a meaningful step down in revenues and secure networks from the first half of the second half. That was something we previewed on prior earnings calls. And then next year yes. Embedded in the 60 to 65 million of revenue on this on the core business excluding pre-check. Mark. That includes further step down in secure network prior to new business wins.

Speaker Change: It's really just those those two items. And then the OPEX, I think the OPEX I've already addressed.

Alex Henderson: Thanks, I'll see you on the floor.

Speaker Change: Thanks. I'll cede the floor.

Nehal Chokshi: Our next question will come from the line of Nehal Chokshi with Northland Capital Markets.

Speaker Change: Our next question will come from the line of Nehal Chokshi with Northland Capital Markets.

Nehal Chokshi: Yeah, thank you. Program number one, described in the slide deck, when does that incumbent's contract expire? I think it's in.

Speaker Change: Yeah, thank you. Program number one described in the slide deck, when does that incumbents contract expire?

John Wood: I think it's in September.

Speaker Change: I think it's in September .

Alex Henderson: The real question there is, you gave me that detail, but what's the timing of it? I mean, which quarters do they end in? We're forecasting a quarterly model, we need to know when things end. Yeah, so approximately mid-point of the year. So most of this is around the end of the second quarter, is when it rolls off? Yes. Okay, that's helpful. Thank you very much.

John Wood: And that's why you're relatively confident that they will not have an incentive to submit yet another protest. Correct. And when did you learn that the incumbent submitted a subsequent protest for Program Number One?

Speaker Change: Okay.

Speaker Change: And that's why you're relatively confident that they will not have an incentive to submit yet another protest.

Speaker Change: Correct.

Nahal Chokshi: And when did you learn that the incumbent submitted a subsequent protest for Program Number One? I'm sorry, Nehal, can you repeat the question?

Nehal Chokshi: I'm sorry, Nehal, can you repeat the question?

Nehal Chokshi: When did Telos learn that the incumbent for Program No. 1 submitted a subsequent protest?

Nehal: When did Telos learn that the incumbent for Program No. 1 submitted a subsequent protest?

John Wood: When do we learn about the subsequent protest? I don't remember; do you remember? Thank you. Bye now.

Mark Benza: And can you just explain why you increased the estimate for capitalization and the size of the op-x spending that was timing-wise shifted out? Yeah, so you'll see the op-x spend step up a bit in the second half, largely driven by TSA pre-check and the investment we're making there and the ramp of TSA pre-check. As well as some additional spend on our growth initiatives within business development.

Mark Griffin: Nehal Winn. This is Mark Griffin. Nehal Winn was published on GAO at the same time that most of the prime knew as well.

Nehal: I don't remember the number.

Mark Griffin: Nehal, when was Mark Griffin, when it was published on GAO at the same time that most of the crime knew as well?

Nehal Chokshi: And then on the 1Q24 earnings call, you guys had cited data that overturning an award decision is around 5% as a guide to..., you know, how low the magnitude of the risk is that the awards would be resolved, resolved unfavorably for Telos. Do you still believe that that historical data is a good guide to slicing the risk? I do. I also think it's notable that

Mark Griffin: Okay.

Speaker Change: And then on the 1Q24 earnings call, you guys had cited data that overturning an award decision is around 5% as a guide to

Speaker Change: you know, how low the magnitude of the risk is that the awards would be resolved.

Mark Benza: Yeah, the question was, why was the capitalization shifted out or reduced? And what was the magnitude of the timing issues that were shifted out? The timing was more on the op-x, not so much on the capitalization side out. No, no, those are two separate items that you called out for the reason why you beat on the op-x.

Speaker Change: resolved unfavorably for Telos. Do you guys still believe that that historical data is a good guide to slicing the risk? I do. I also think it's notable that on the first protest

John Wood: I do. I also think it's notable that on the first protest... the customer re-awarded the program to our prime partner.

Speaker Change: The customer re-awarded the program to our prime partner after the protest. So that's also a good fact as far as I'm concerned.

Mark Benza: And I'm asking what was the reasoning for the capitalization increase? And second, what was the magnitude of the push out of the timing and which we should then expect in 3Q to normalize? So on the capitalization, really, we have a couple of key buckets on the R&D spend. One is on the exacta side, the other is on the TSA pre-check side. And it's just the cadence of those two projects and the timing of the spend and the associated capitalization out. That's really just those two items. And then the op-x, I think the op-x have already addressed.

John Wood: All right. OK. And then, what percent of that $200 million TSA pre-check market is done on-site versus an online renewal? Eighty percent is...

Speaker Change: Okay, cool.

Speaker Change: And then what percent of that $200 million TSA pre-check market is done on-site versus an online renewal? 80% is, we estimate the market to be 80% on-site and 20% renewal online.

John Wood: 80% is, we estimate the market to be 80% on-site and 20% renewal online.

Nehal Chokshi: Alright, thank you very much. Thank you, Nehal.

Speaker Change: Okay.

John Wood: This will conclude today's question and answer session. I will now turn the call back to John Wood for his closing remarks.

Speaker Change: This will conclude today's question and answer session. I will now turn the call back to John Wood for closing remarks.

John Wood: Well, everybody, I just want to thank our shareholders for your ongoing support. You know, we're very pleased with the progress that we made in the second quarter on pre-check, and we're going to keep ramping this program to full operating capacity as soon as possible, and it remains a huge priority for my team. We're saying we're going to get it done by the end of 2025. I'm hoping we'll get it done earlier, but as we're saying, for the purposes of the street, the end of 2025.

John Wood: Well, everybody, I just want to thank our shareholders for your ongoing support. You know, I'm, you know, we're very pleased.

Mark Benza: Thanks, I'll see you before.

Nahal Chakshi: Our next question will come from the line of Nahal Chakshi with Northland Capital Markets. Yeah, thank you. Program number one, just right in the slide deck.

John Wood: with the progress that we've made in the second quarter on pre-check.

John Wood: And we're going to continue ramping this program to full operating capacity as soon as possible.

John Wood: and it remains a huge priority for my team.

Speaker Change: We're saying we're going to get it done by the end of 2025. I'm hoping we'll get it done earlier, but we're saying for purposes of the street in the 2025.

Nahal Chakshi: When does that encompass contract expire? I think it's in September. Okay. And that's why you're relatively confident that they will not have an incentive to submit yet another protest. Correct. Okay.

John Wood: Additionally, we look forward to growth from our new business awards that we communicated previously, and obviously, we have to get through the protest process, which I feel confident we will, and these contracts have the potential to significantly and obviously positively impact our financial performance in a big way in 2025. Finally, our team remains very focused on expanding our pipeline and driving new business capture to enable additional growth for the company beyond what the programs that we already have in place can do for us. So, in general, I remain very excited about the outlook for the company and just thank everyone for their time and for their investments. Thank you.

Speaker Change: Additionally, we look forward to growth from our new business awards that we communicated previously.

Speaker Change: And obviously, we have got to get through the whole protest process, which I feel confident we will.

Speaker Change: And these projects have the potential to significantly and obviously positively impact our financial performance in a big way in 2025. And finally, you know, our team remains very focused on expanding our pipeline.

Nahal Chakshi: And when did you learn that the incumbent submitted a subsequent protest for program number one? I'm sorry, Nahal. Can you repeat the question? Yeah, when did tell us learn that the incumbent for program number one? The better the subsequent protest. When we learn the subsequent protest. I don't remember. Nehal went, this Mark Griffin went, it was published on GAO at the same time that most of the crime do as well. Okay.

Speaker Change: and driving new business capture to enable additional growth for the company beyond what the programs that we already have in place can do for us. So, in general, I remain very excited about the outlook for the company and just thank everyone for their time and for their investments. Thank you.

Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.

Speaker Change: This concludes today's conference call. Thank you for participating. You may now disconnect.

Nahal Chakshi: And then on the 1Q24 earnings call, you guys have cited data that overturning the word decision is around 5%, as a guide to how low the magnitude of risk is that the awards would be resolved unfavorable for Telos. Do you guys still believe that that historical data is a good guide to slicing the risk? I do. I also think it's notable that on the first protest, the customer re-awarded the program to our crime partner after the protest, so that's also a good fact as far as I'm concerned. Okay. Cool.

Nahal Chakshi: And then what percent of that 200 million TSA pre-check market has done on-site versus an online renewal? 80% is, we have state the market to be 80% on site and 20% renewal online. Okay. Great. All right. Great.

Speaker Change: Hello, everyone.

Nahal Chakshi: Thank you very much. Thank you, Nehal.

Speaker Change: Hello, I'm Allison, I'm Allison, I'm Allison, I'm I'm Allison, I'm Allison, I'm Allison, I'm

Operator: This will conclude today's question and answer session.

John Wood: I will now turn the call back to John Wood for closing remarks. Well, I just want to thank our shareholders for your ongoing support. You know, we're very pleased with the progress that we've made in the second quarter on pre-check. And we're going to keep continuing ramping this program to full operating capacity as soon as possible. And it remains there's a huge priority for my team. We're saying we're going to get it done by the end of 2025.

John Wood: I'm hoping we'll get it done earlier, but as we're saying for purposes of the street in the 2025. Additionally, we look forward to growth from our new business awards that we communicated previously. And obviously, we have to get through the process, which I feel confident we will. And these contracts have the potential to significantly and obviously positively impacts our financial performance in a big way in 2025. And finally, you know, our team remain very focused on expanding our pipeline and driving new business captured to enable additional growth to the company beyond what the program that we already have in place can do for us.

Speaker Change: Hello, I'm Allison, I'm Allison, I'm Allison, I'm I'm Allison, I'm Allison, I'm Allison, I'm

Speaker Change: Allison Phillipp, a.k.a. The Woodpecker This is a story about a woodpecker and a woodpecker and a woodpecker and a woodpecker and a woodpecker Music Music Music Music Music

Speaker Change: Thank you!

Speaker Change: Please Subscribe, Like, Comment & Share

Speaker Change: Thank you very much for watching this video.

John Wood: So in general, I remain very excited about the outlook for the company and just thank everyone for their time and for their investments.

Operator: Thank you.

Operator: This concludes today's conference call. Thank you for participating.

Operator: You may now disconnect. [inaudible] He's got a lot of work to do. He's got a lot of work to do, got a lot of work to do. He's got a lot of work to do. [inaudible] got a lot of work to do. He's got a lot of work to do. [inaudible] got a lot of work to do. He's got a lot of work to do. [inaudible] a lot of work to do. He's got a lot of work to do.

Operator: [inaudible] John Deere, John Deere, John Deere, John Deere, John Deere, Good day, and thank you for standing by.

Operator: Welcome to the Telos Corporation's second quarter 2024 financial results conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star-1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star-1-1 again. Please be advised that today's conference is being recorded.

Allison Phillipp: Let me quickly review the format of today's presentation. Mark will begin with remarks on our second quarter 2024 results. Next, John will discuss business highlights from the second quarter. Then, Mark will follow up with third quarter guidance 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 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 broadcast. Additionally, we have provided presentation slides on our investor relations website.

Allison Phillipp: 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 security's laws. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results can 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 FCC filing. We do not undertake any duty to update any forward-looking statements.

Allison Phillipp: 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 an isolation from GAAP results. You can find additional disclosures regarding these non-GAAP measures, including reconciliation with comparable GAAP results in our earnings press release and on the investor relations portion of our websites. Please also note that financial comparisons are year over year unless otherwise specified.

Allison Phillipp: The webcast replay of this call will be available for the next year on our company website under the investor relations link.

Mark Benza: With that, I'll turn the call over to Mark. Thank you, Allison, and good morning, everyone.

Mark Benza: Let's begin today on slide three. I'm pleased to report that Telos has again over-delivered on key financial metrics in the second quarter, exceeding both revenue and profit guys. We delivered $28.5 million of revenue in the second quarter or approximately $500,000 above our guidance range of $25 million to $28 million. First half revenues were $58.1 million and were comfortably ahead of the $55 million dollars of first half 2024 revenues that we forecasted in our fourth quarter 2023 earnings presentation.

Mark Benza: Returning to the second quarter, security solutions delivered $17.9 million of revenues which was approximately in line with the top end of our guidance range due to strong performance across the portfolio. Secure networks delivered $10.6 million of revenue exceeding the top end of our guidance range and representing the entirety of the revenue fee for the company. The outperformance and secure networks was driven by excellent program management on a program that ended up scheduled in the quarter.

Mark Benza: Gap gross margin was 34.1 percent above our guidance range of 30 percent to 33.3 percent due to better than forecasted mix within security solutions and strong margin performance on multiple secure networks programs that ended up scheduled in the quarter partially offset by higher amortization. Security solutions generated nearly 63 percent of total company revenues in the second quarter of 2024 versus 52 percent in the second quarter of 2023, a favorable variance that is expected to widen in the second half.

Mark Benza: Cash gross margin was 42 percent expanding 326 basis points year over year and representing one of our highest margin quarters since our IPO in 2020. Revenues and gross margins both above forecast resulted in gross profit above what was incorporated into our Adjusted EBITDA guidance range. In addition, R&D and SGNA expenses were better than forecasted due to lower cash expenses including timing of some expenditures and higher than forecasted capitalization of software development costs.

Mark Benza: As a result, Adjusted EBITDA also exceeded the top end of our guidance range. Adjusted EBITDA was a $2.9 million loss compared to our guidance range of an $8 million loss to a $6 million loss. Lastly, cash flow from operations was an $8 million outflow and free cash flow was an $11.3 million outflow. The year over year decline in free cash flow was in line with the year over year decline in adjusted EBITDA.

John Wood: I will now turn it over to John for an overview of recent business highlights. John? Thanks Mark and good morning everyone, let's turn to slide 4.

John Wood: I'd like to begin with our recent progress on TSA pre-check program. I'm pleased to report we have successfully and significantly accelerated the expansion of our network of enrollment centers in the second quarter. Our footprint has nearly tripled in size from 28 locations as of our last earnings call to 83 locations today, today. Additionally, it's important to point out that we have focused our expansion in key markets geographically distributed across 23 states around the country.

John Wood: These states comprise approximately 70% of the population of the United States. TSA pre-check is well-entracted to becoming our single largest program in 2024. We plan to build on this progress and continue the growth of our footprint in the coming quarters with the expectation of reaching 500 locations in 2025. Most importantly, we are thrilled to be working with TSA to effectively grow this important national security program and provide this critical service to the community of U.S, travelers.

John Wood: Next, I'd like to provide an update on the status of the program word protests discussed on our prior earnings calls. As previously communicated, Telos has teen agreements in place with prime partners who in the first quarter received two new program awards from the federal government worth up to $525 million in the aggregate to tell security solutions business over five years. Also, as previously communicated, it is not uncommon for award decisions of this magnitude to be protested by incumbents or other bidders as part of a customary post-award protest period provided by the government.

John Wood: And that is the case here. Both awards have been protested in finalization of the awards as subject to resolution of the protests. As of today, both programs remain under protest. The protests on the first program as expected was resolved by the government accountability office or GAO by the end of June. The award was re-evaluated and re-awarded to our prime partner. We believe the government has shown confidence in our collective team for this program by awarding it to our prime partner a second time. An incumbent on this program has since submitted a subsequent protest on the re-award. This new protest is expected to be resolved by the GAO at the end of September based on their process time table.

John Wood: Separately, the award on the second program remains under protest directly with the customer or what is referred to as an agency level protest. Resolution on this protest is expected in the fourth quarter. Although we're not able to communicate a firm and definitive timeline for the final completion of the protest, we currently anticipate middle impact on 2025 revenue potential for these programs if both protests are favorably resolved by the end of 2024.

John Wood: In addition, I'd like to report on several other business outcomes since our last earnings call. Our executive business has received a new orders with the New Zealand government, five-nine and a Fortune 100 technology company. The executive business has also achieved renewals with several key customers, including the government publishing office, the National Endowment for the Arts, the National Archives, several other US government customers, and a Fortune 100 company in the technology sector.

John Wood: The company has received new cyber services orders from a commercial state technology company and a federal government customer. Finally, our automated message handling system business achieved new orders from the New Zealand Defense Force as well as renewals from the Federal Aviation Administration, several other US government customers, and a foreign government customer.

Mark Benza: I'll now turn the call back to Mark, who will discuss third quarter guidance. Mark? Thanks, John.

Mark Benza: Let's turn to slide five. For the third quarter, we expect revenue in a range of $22 million to $24 million, and an adjusted EBITDA loss of $8 million to $6.5 million. The third quarter guidance includes a revenue reduction of approximately $7 million compared to our prior internal forecast as a result of the extended protests that John described earlier. Accordingly, we forecast security solutions revenue to be down mid-teens to high single digits per cent year over year, primarily driven by a short-term customer program in the second half of 2023 that is not reoccurring in 2024, and revenue fluctuations in various TELOSID programs partially offset by year-over-year growth in TSA precheck.

Mark Benza: We forecast secure networks revenue to decline high 60 percent to mid-60 percent year over year due to the completion of programs and resulting step-down in revenues during the second half that we previewed in our prior two earnings presentations. GAP gross margin is expected to be down approximately 475 basis points to 275 basis points a year over year, primarily due to a short-term high-margin customer program in the second half of 2023 that will not reoccur in 2024.

Mark Benza: Partially offset by a more favorable revenue contribution from our higher margin security solutions business in 2024. Cash gross margin is expected to be down 75 basis points to up 50 basis points year over year. Cash below the line expenses, which adjusts for capitalized software development costs, stock-based compensation, restructuring costs in DNA, are forecast to be slightly lower year-over year. We continue to assess opportunities to reduce our cost base in order to maximize our operating leverage, incremental margins, and cash flow as we return to growth in 2025.

Mark Benza: Mark. Our guidance does not include any restructuring charges that could result from additional cost actions. Lastly, we expect the fourth quarter to be similar to the third quarter, with potential for modest sequential growth, if protests are favorably resolved early in the fourth quarter.

John Wood: And with that, I'll turn it back to John. Thank, Mark.

John Wood: Let's turn to slide six. In summary, we once again exceeded expectations and delivered results above the high end of the guidance range on key financial metrics in the second quarter. Additionally, we expanded our network of TSA pre-section enrollment locations to 83, nearly tripling our footprint since the last earnings call. We continue to expect we'll reach 500 locations in 2025.

John Wood: Finally, we look forward to the conclusion of the protests on the new business awards to our prime partners, and we expect mental impact on the 2025 revenue potential for these programs to both are favorably resolved by the end of 24.

John Wood: And with that, we're happy to take questions.

Operator: Operator, please open the line for Q&A. Thank you. As a reminder, if you'd like to ask a question at this time, please press star 1-1 on your touchtone telephone, and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by when we compile the Q&A roster.

Zach Cummins: Our first question will come from the line of Zach Cummins with B-Reilly securities. Hi, good morning, Mark and John. Congrats on the solid quarter and appreciate you taking my questions.

Zach Cummins: John, I wanted to start off with the protest process. I mean, appreciate all the additional insight that you gave us on both the programs, but can you give us a sense of maybe the size of each of these opportunities? Is it meaningfully different from one to the other? Sure. Sure, Zach. Thanks for that for the question. The first opportunity is 90% of the total of the 525 million. The second opportunity is about 10%. Got it. That's helpful.

Zach Cummins: And I've just curious in terms of the timeline, I mean, is there a window where there's eventually closes where you can't keep protesting? It feels like if it's been re-awarded already, I guess it just feels odd that they can keep protesting, especially on the first award. Well, it is a tactic that Cummins tend to use to try to extend out their runway of revenues as long as they can. You know, they can't bring back new topics. So my confidence level remains very high that we'll get through this process within the time frame that we talked about on the call earlier. Got it.

Zach Cummins: And then just shifting over to PSI pre-check, I mean, great to see nearly tripling your amount of locations here in recent months. I mean, can you can you talk about any new learning as you're really starting to expand out the footprint? Kind of how are these new locations performing versus maybe some of the ones that were there near the start of the program when you started ramping? Sure, if we were to interpolate the run rate of enrollments, they're going through the current footprint and we blow that out against the 500 that we have coming, you know, that we're going to be bringing forward through 2025, I think we'll get to the market chair that we talked about previously that with you and the other investors.

Zach Cummins: I'm sure we think we'll get to understood and then a question for me may maybe get towards mark any sort of changes to key assumptions we should be thinking about going into 2025, obviously timeline of the protests is a key factor to this, but just curious on maybe other factors that you're seeing when it comes to potentially new business pipeline beyond TSA precheck expansions and these protests. Yeah, so Zach, it's Mark Benzer here, why don't I start and then if Mark Griffin has something to supplement with, he'll jump in.

Zach Cummins: So I think that 2025 is having a few key components, you're to build up a forecast for 2025. But there's the core business we have today excluding precheck and excluding the programs that are under protest. That core business next year will generate somewhere around 60 to 65 million of revenues at high 40% cash gross margins. Then you have the protestive programs that we're talking about, we've previously talked about those programs being worked up to $525 million over five years, which could mean as much as $100 million or more in a given year, but for now we're modeling that at somewhere around 60 to 85 million dollars in a typical year.

Zach Cummins: And that's kind of in the mid to high 30% cash gross margins. Then you have precheck, we've outlined previously that we believe that market is approximately a $200 million plus market. We think we can get you approximately our crew at a market share once we are fully ramped. And so you can back into an assumption for what precheck revenues could be next year as we continue to ramp our enrollment location to approximately 500 by the end of the year to 500 by approximately the end of the year. And you can think of that as, you know, that's probably kind of a mid 50% cash gross margin revenue stream.

Mark Benza: And then of course any new business that comes in over the course of the government buying season, which is typically late in the calendar year or early the following calendar year. A little, you know, certainly too early to give any sort of a forecast there, but you know our BD teams are busy with proposals ramping here to be submitted over the next several months. And then hopefully we'll have an update for you sometime early next year and how that plays out. I'll look to Mark and see if, okay, Mark doesn't have anything to, I think that's covered it.

Zach Cummins: So did they answer your questions, Zach? Yep, very helpful. Thanks for that, Mark, and I'll go ahead and pass the line. So thanks so much for taking my questions.

Operator: Thank you.

Rudy Kessinger: Our next question will come from the line of Rudy Kessinger with DA Davidson.

Rudy Kessinger: Hey guys, I'm TSA Precheck. Could you share with your current market shares? No, Rudy, we're not going to give that detail, but what I will say is that we are very pleased with the level of productivity we're currently seeing out of our pre-existing new enrollment location. We're targeting a pro-rata market share when we're fully ramped at 500 locations. I guess if you think you can get a third at 500, I guess you're tracking towards that given the number of locations you've rolled out today.

Rudy Kessinger: Sorry, would you repeat that for me? I guess if you're targeting a 1-third market share once you get the 500 locations, we're too extrapolate based on how many locations you have today. Are you tracking towards that 1-third market share with your existing footprint? Yes, that's exactly what I was trying to say. Based on the sample set we have in today, we share why we are on track. Okay, and then on the quarter business, you said the core business should be 665 million next year.

Rudy Kessinger: I mean, you guys did a couple of years ago, over 65 million in a quarter. And I know you've had a lot of one time programs, but it seems like all we've heard the last couple of years is contracts coming to completion and no new contracts of size starting. So, why did the core business x3 check and x2 potential large contracts each protest get resolved? Why is the core business continuing to shrink?

Rudy Kessinger: I mean, I could go back five years in my model 2018, you guys did twice that amount. So, where are you guys missing the mark in your core business? It didn't really, what's happened is it's in the secure network side of that business. The other side of business security solutions will be growing quite nicely. So, that's the side of business that we have a bunch of additional things in on. And that's the business that has been really largely contracting.

Rudy Kessinger: Okay, that's it for me. Thank you.

Alex Henderson: Our next question will come from the line of Alex Henderson with Needham.

Alex Henderson: Great, and I appreciate that we've gone from the single question per analyst to more of an open mic process. Thanks for doing that. I just wanted to talk a little bit about the mechanics around the per location on the TSA. How does that feather in? What is the kind of expectation on a per site location in terms of revenue? How long does it take for a site to open to actually reach normalized revenue?

Mark Griffin: Hello Alex, Mark Griffin. What we're seeing today is as we open, we're getting significant and acceptable volume, almost day one after we open. So, we're working very closely with TSA on the locations and the strategic locations of where we're allowed to place sites, but we're really we're seeing that volume and that adoption of those sites because of the convenience of our locations with Office Depot. They're very acceptable and welcome to buy the communities that they serve. Okay, so it's fairly, fairly rapid within a quarter, within the quarter that they open, that they hit normalized revenues.

Mark Griffin: Can you talk about the mechanics around the timeline for opening them? 500 by the end of 25, is it 100 a quarter? Is it heavily skewed to the first half because it's already set up and ready to go? What's the shape of that opening curve? So Mark Griffin, again, what you've seen based on the last performance, if it's the last quarter, is it is a ramp and what you'll continue to see is as the cadence and acceleration of the schedule that TSA has approved for us, you'll see an increase in that schedule throughout the balance of this year and into next.

Mark Griffin: Right, so is it reasonable to think that it's if we just used a straight line of 500 less what you've already got divided by six quarters that we get a general sense of the mechanics around it then? Yes, I would. Yes.

Mark Benza: Okay, and then I wanted to go back to the closure conversation. Is there any contracts that are going to roll off in the back half of the year that we should be aware of or in 2025 that we should be aware of and what would be the timing of those? Yeah, Mark Benz will give you that detail but I think he sort of handled that earlier but Mark, please go through that.

Mark Benza: Yeah, it's a good question and it was embedded in the numbers that I commented on earlier. So there's two pieces to that. So there's the second half for 24 versus the first half. You will see a meaningful step down in revenues and secure networks from the first half of the second half. That was something we previewed on prior earnings calls. And then next year, yes, embedded in the 60 to 65 million of revenue on the core business excluding pre-check.

Mark Benza: Mark. That includes further step down in secure network prior to new business wins. The real question there is, you gave me that detail, but what's the timing of it? I mean, which quarters do they end in? We're forecasting a quarterly model. We need to know when things end. Yeah, so approximately mid-point of the year. So most of this is around the end of the second quarter, is when it rolls off. Yes. Okay, that's helpful. Thank you very much.

Mark Benza: Can you just explain why you increased the estimate for capitalization and the size of the OPEC spending that was timing-wise shifted out? Yeah, so you'll see the OPEC spend step up a bit in the second half, largely driven by TSA pre-check, and the investment we're making there and the ramp of TSA pre-check, as well as some additional spend on our growth initiatives within business development.

Mark Benza: Yeah, the question was, why was the capitalization shifted out or reduced, and what was the magnitude of the timing issues that were shifted out? The timing was more on the OPEC, not so much on the capitalization side out. No, no, those are two separate items that you called out for the reason why you beat on the OPEC.

Mark Benza: And I'm asking, what was the reasoning for the capitalization increase, and second, what was the magnitude of the push out of the timing and which we should then expect in 3Q to normalize? So on the capitalization, really, we have a couple of key buckets on the R&D spend, one is on the exhaustive side, the other is on the TSA pre-check side. And it's just the cadence of those two projects and the timing of the spend and the associated capitalization out, that's really just those two items. And in the OPEC, I think the OPEC's have already addressed.

Mark Benza: Thanks, I'll see you before.

Nahal Chakshi: Our next question will come from the line of Nahal Chakshi with Northland capital markets. Yeah, thank you. Program number one, just writing a slide deck.

Nahal Chakshi: When does that encompass contract expire? I think it's in September. Okay. And that's why it was relatively confident that they will not have an incentive to submit yet another protest. Correct.

Nahal Chakshi: And when did you learn that they encompass the embedded subsequent protest for program number one? I'm sorry, Nahal. Can you repeat the question? Yeah, when did tell us learn that they encompass for program number one, the embedded subsequent protest? When did we learn the subsequent protest? I don't remember. Nehal, Mark Griffin, when it was published on GAO at the same time that most of the crime did as well. Okay. And then on the 1Q24 earnings call, you guys have cited data that over turning the word decision is around 5% as a guide to how low the magnitude of risk is that the awards would be resolved unfavorable for Telos.

Nahal Chakshi: Do you guys still believe that that historical data is a good guide to slicing the risk? I do. I also think it's notable that on the first protest, the customer re-awarded the program to our prime partner after the protest, so that's also a good fact as far as I'm in search.

Nahal Chakshi: Okay. Cool. And then what percent of that 200 million TSA pre-check parking has done on-site versus an online renewal? 80% is, we have to say the mark to be 80% on site and 20% renewal online. Okay. Great. All right. Great. Thank you very much. Thank you, Nehal.

John Wood: This will conclude today's question and answer session. I will now turn the call back to John Wood for closing remarks. Well, I just want to thank our shareholders for your ongoing support. You know, we're very pleased with the progress that we've made in the second quarter on pre-check. And we're going to continue ramping this program to full operating capacity as soon as possible. And it remains there's a huge priority for my team.

John Wood: We're saying we're going to get it done by the end of 2025. I'm hoping we'll get it done earlier, but as we're saying for purposes of the street in the 2025. Additionally, we look forward to growth from our new business awards that we communicated previously. And obviously, we have got to get through the whole process process, which I feel confident we will. And these contracts have the potential to significantly and obviously positively impacts our financial performance in a big way in 2025.

John Wood: And finally, you know, our team remained very focused on expanding our pipeline and driving new business capture to enable additional growth to the company beyond what the program that we already have in place can do for us.

John Wood: So in general, I remain very excited about the outlook for the company and just thank everyone for their time and for their investments.

Operator: Thank you.

Operator: This concludes today's conference call. Thank you for participating.

Operator: You may now disconnect.

Q2 2024 Telos Corp Earnings Call

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