Q3 2024 Telos Corp Earnings Call
Speaker Change: Good day, and thank you for standing by. Welcome to the Telos Corporation 3rd Quarter 2024 Earnings Call. 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 will need to press star one, one on your telephone.
Speaker Change: and then you will hear an automated message advising you that your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's session is being recorded. I would now like to hand the conference over to your first speaker today, Allison Phillips. Allison, you have the floor.
Allison Phillips: Good morning. Thank you for joining us to discuss Pellis Corporation's third quarter 2024 financial results.
Speaker Change: With me today is John Wood, Chairman and CEO of Telos, and Mark Benza, Executive Vice President and CFO of Telos.
Speaker Change: Let me quickly review the format of today's presentation. Mark will begin with remarks on our third quarter 2024 results.
Next, John will discuss business highlights from the quarter.
Speaker Change: Then, Mark will follow up with fourth quarter guidance before turning back to John to wrap up.
Speaker Change: We will then open the line for Q&A, where Mark Griffin, Executive Vice President of Security Solutions, will also join us.
Speaker Change: The third quarter financial results were issued earlier today and are 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.
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 financial results summary, 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 statements.
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 Telus's 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.
Speaker Change: You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results, in our third quarter financial results summary on the Investor Relations portion of our website.
Speaker Change: Please also note that financial comparisons are year-over-year unless otherwise specified.
Speaker Change: 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.
Thank you, Allison, and good morning, everyone.
Let's begin today on slide 3.
Speaker Change: I'm pleased to report that TELUS has delivered revenue near the top end of the guidance range.
Speaker Change: and the Justity Bida'a above the top end of the guidance range.
Speaker Change: We delivered 23.8 million dollars of revenue in the quarter compared to guidance of 22 million dollars to 24 million dollars
Speaker Change: Security Solutions delivered $18.3 million or 77% of total revenue, which was in line with the top end of our guidance range due to strong performance across the portfolio relative to forecast.
Speaker Change: Security Solutions revenue grew 3% sequentially due to double-digit sequential growth in Telos ID, primarily as a result of the ongoing ramp of our TSA PreCheck program.
Speaker Change: DMVC is the large program award that was under protest earlier this year and has since been resolved and is currently generating revenue.
Speaker Change: Secure Networks delivered 5.5 million dollars or 23% of total revenue in line with guidance.
Speaker Change: Secure Networks revenue declined sequentially and year-over-year as expected due to the ramp down of existing programs.
Speaker Change: As previously reported, Secure Networks has gained access to new contract vehicles in recent quarters and has cultivated a large pipeline of new business opportunities that we are currently pursuing to replenish the backlog.
Speaker Change: Turning to margins, as we mentioned on our last earnings call, 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: As we also stated on our last earnings call, our guidance does not include any charges that could result from such actions.
Speaker Change: During the quarter, we assess our cost structure and investment priorities to reduce costs and reallocate resources to support large programs that are currently ramping in security solutions.
Speaker Change: As a result, we discontinued the development and sale of selected solutions or parts of solutions that were not generating acceptable returns.
Speaker Change: The restructuring, as well as an assessment of our intangible assets, resulted in an $11.7 million non-cash impairment of capitalized software assets, including $5.3 million in cost of sales.
Speaker Change: and the $1.4 million restructuring charge including $400,000 in cost of sales.
Speaker Change: In total, we took a $13.1 million charge in the quarter, $5.7 million of which was recorded in cost of sales and impacted GAAP gross margin.
Gap gross margin was 13.2 percent.
Speaker Change: Excluding the 5.7 million dollar impairment and restructuring charge and cost of sales, gross margin expanded 130 basis points year over year to 37.3 percent and was above the top end of our guidance range.
Speaker Change: In addition, cash gross margin expanded 250 basis points year-over-year to 44%.
Speaker Change: Cash Gross Margin was above our guidance range and was also the company's highest cash gross margin since the IPO in 2020.
Speaker Change: Strong revenue, cash gross margin over performance, and cost reductions resulted in an adjusted EBITDA above the top end of the guidance range.
Speaker Change: Majesty Vidal was a $4.1 million loss compared to guidance of an $8 million loss to a $6.5 million loss.
Speaker Change: Lastly, cash flow from operations and free cash flow both improved sequentially.
Speaker Change: Cash flow from operations was a $7.1 million outflow, and free cash flow was a $9.9 million outflow.
Speaker Change: I'm going to now turn the call over to John for an overview of recent business highlights. John?
John Wood: Thanks, Mark, and good morning, everyone. Let's turn to slide four.
John Wood: We continue to make steady progress on the TSA Pre-Check Program.
Speaker Change: As Mark previously indicated, this program is the main driver for the sequential growth in the third quarter in our TELUS ID business, and it remains well on track to becoming our single largest program in 2024.
Speaker Change: We have continued to successfully accelerate the expansion of our network of enrollment centers by more than doubling our footprint from 83 to 173 locations over the past three months.
Speaker Change: Additionally, it's important to point out that we continue to prioritize our expansion and key markets geographically distributed across 29 states around the country.
Speaker Change: These states comprise approximately 79% of the population of the United States.
Speaker Change: 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.
Speaker Change: 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.
Next.
Speaker Change: I'd like to provide an update on the status of the program award protests discussed in our prior earnings calls.
Speaker Change: The first program is with the Defense Manpower Data Center, or DMDC.
Speaker Change: It's within the United States Department of Defense and is worth up to $485 million to TELOS over five years.
Speaker Change: As expected, the protest on this program was resolved in favor of TELOS and our prime partner by the end of September and we are currently generating revenues as the program operations ramp.
Speaker Change: We look forward to working with our partner to provide exceptional support to our customer on this program for years to come.
Speaker Change: The second program is with the Department of Homeland Security, or DHS.
Speaker Change: This program with DHS is worth up to $40 million to TELOS, over five years, and as previously communicated, we expect this protest to be resolved in the fourth quarter.
Speaker Change: In addition, I'd like to report on several other business outcomes since our last earnings call.
Speaker Change: Our Exacta business has received new orders with several new customers.
including the United States Air Force Office of Special Investigations.
as well as renewals from the Social Security Administration.
The Federal Bureau of Investigation
the Defense Intelligence Agency, INFOR, Siemens, and other key customers.
Speaker Change: We received renewals for cyber services from the General Services Administration, the Defense Health Agency, and other government customers.
Speaker Change: The automated message handling system business continues to achieve high renewal rates with its customer base.
Speaker Change: In particular, this quarter, the business realized renewals from the Department of Homeland Security, the Department of the Treasury, and several other government customers.
Speaker Change: Finally, we received a new contract with the United States Army in our Secure Networks business.
Speaker Change: I'll now turn the call over to Mark who will discuss fourth quarter guidance. Mark?
Thanks, John. Let's turn to slide 5.
Mark: For the fourth quarter, we expect revenue to grow 3% to 11% sequentially, to a range of $24.5 million to $26.5 million.
Sequential revenue growth will be driven by security solutions.
Mark: We forecast security solutions to grow low teens to low 20% sequentially.
driven by the accelerating ramp of TSA pre-check enrollments.
Mark: and our new program with the Defense Manpower Data Center, or DMDC, that I mentioned earlier.
Mark: We expect Secure Networks revenues to decline sequentially in the fourth quarter due to the steady decline in backlog in advance of new business wins that would typically be awarded in the fourth quarter of 2024 and the first quarter of 2025.
Mark: As previously mentioned, Secure Networks has gained access to new contract vehicles in recent quarters and has cultivated a large pipeline of new business opportunities that we are pursuing to replenish the backlog for 2025 and beyond.
Mark: As a result of forecasted strong sequential growth in security solutions in the fourth quarter, combined with a sequential decline in secure networks, we expect security solutions to contribute over 80% of total company revenues in the fourth quarter.
Mark: Gap gross margin is expected to expand by 170 basis points to 330 basis points year-over-year, primarily due to the favorable mix shift from our lower margin secure networks business to our higher margin security solutions business.
Mark: Cash gross margin is expected to expand by 465 basis points to 580 basis points year-over-year for the same reason.
Mark: Cash Below the Line Expenses, which adjusts for capitalized software development costs.
stock-based compensation, restructuring costs, and DNA.
Mark: Our forecast to be approximately $4 million lower year-over-year due to lower incentive compensation expense and the benefits of cost actions taken in the third quarter.
Mark: Lastly, we will provide further detail about our 2025 outlook on our fourth quarter earnings call in March. But in the meantime, the 2025 revenue drivers that we outlined on prior earnings calls have not changed.
We forecast a return to year-over-year revenue growth in 2025.
Revenues in 2025 will be comprised of several key components.
Mark: First, we expect our existing business, excluding TSA PreCheck and the DMDC and DHS programs
Mark: to generate approximately $60 million to $65 million of revenue in 2025.
Mark: Assuming the DHS protest is resolved in our favor, the DMDC and DHS programs could generate over $100 million of revenue in some years, but for modeling purposes, we're assuming a more modest $60 million to $85 million in a typical year at full run rate.
Mark: We believe we have potential to achieve the typical year run rate in 2025.
Mark: Third, we are targeting a pro-rata market share of the TSA pre-check market after we complete the rollout of our 500 enrollment locations and those locations mature into productive sites for a full calendar year.
Mark: We expect to complete the rollout of our 500 enrollment locations by the end of 2025, and we believe the TSA PreCheck market is approximately a $200 million market based on our current pricing structure.
Mark: Although we do not expect to achieve a pro-rata market share in 2025, we expect TSA pre-check revenues to ramp as we continue to roll out our enrollment locations over the course of next year.
Mark: And lastly, we have a large pipeline of new business opportunities, especially in secure networks, and will be submitting proposals during the fourth quarter government buying season.
Mark: Any new business wins during the fourth quarter of 2024 or the first quarter of 2025 will have the potential to contribute revenue next year.
And with that, I'll turn it back to John.
Thanks, Mark. Let's turn to slide 6.
John Wood: In summary, we delivered revenues near the top end of the guidance range and exceeded guidance on adjusted EBITDA.
John Wood: Additionally, we are thrilled the protest on the DMDC program was resolved in our favor. We are now generating revenues on this program as we ramp operations. I look forward to working with our partner to provide exceptional support to our customer for years to come.
John Wood: We've continued rapid expansion of our network of TSA PreCheck enrollment locations to 173, more than doubling our footprint since the last earnings call. We continue to expect we'll reach 500 locations in 2025.
John Wood: Finally, with this recent positive news, we expect to achieve sequential revenue growth in the fourth quarter and with that we're happy to take questions.
Operator, please open the line for Q&A.
Speaker Change: Thank you. At this time we will conduct a question-and-answer session. As a reminder, to ask a question you will need to press star 1 1 on your 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 question-and-answer roster.
Our first question comes from Bradley Clark with BMO.
Bradley, please go ahead with your question.
Speaker Change: Yeah, hi, thanks for taking my question, and congrats on the protest resolutions. Can you just review the DMDC contract with up to $485 million? What are some of the puts and takes around, you know, what ultimately determines how much that contract...
Speaker Change: can be given the, you know, the 485 ceiling. Like, what are the factors that determine where you land below that ceiling?
WNW.com.
Speaker Change: Yeah, so Brad, it's Mark Benzey here. So on that program there is, you know, there are a couple of different revenue streams there.
There's a base services revenue stream which is a
Speaker Change: recurring revenue stream that we have a high level of visibility into. That's approximately $25 million.
Speaker Change: That revenue stream can fluctuate quarter to quarter and year to year.
Speaker Change: So overall for modeling purposes we're calling it 60 to 85 million dollars a year but in any given year
you can be over $100 million in total.
Speaker Change: Our best estimate at this point on a low year would be about $60 million. Now, in those numbers, I tend to lump together DMVC and DHS, DHS is a small piece of that. Of the 60 to 85 that I quote, we're only including about two to eight.
Speaker Change: in that range for DHS, which is the smaller program of the two.
Speaker Change: Okay, thank you. And then can you remind us of the margin profile of this work compared to the remainder of your security solutions business?
Speaker Change: Yeah, so the margin profile varies quite a bit depending on which revenue stream I don't want to get into the details of the market profile for each revenue stream, but overall on a blended basis
Speaker Change: I think those two programs combined, I describe it as being dilutive to cash gross margins.
Now, in my prepared remarks, I talked about buckets of...
Speaker Change: of Revenue for 2025. Some of those are accretive to margins, some of those are dilutive to margins.
Speaker Change: I'd say we're probably going to be a couple hundred basis points lower on cash gross margin. So slightly lower on cash gross margin, but of course on a significantly higher revenue basis.
Okay, thank you. Sure.
Standby for our next question.
Speaker Change: Our next question comes from Zach Cummins with B. Reilly. Zach, go ahead with your question.
Zach Cummins: Thanks. Good morning, Mark and John. Thanks for taking my question.
Zach Cummins: I really wanted to focus on the restructuring actions that you decided to take here in late Q3, early Q4. Can you give us a little more detail on maybe some of the business lines that are going away and potentially how this could result in maybe more of a margin uplift when we look at the revenue ramp next year?
John Wood: Sure. Hey Zach, it's John. So the two solutions that we ended up deciding not to continue selling are advanced cyber analytics and our ghost solution.
John Wood: Basically, we just weren't seeing the uptick in sales that we wanted to, and as a result, we just decided, let's fail quickly and move on.
Thank you.
Current Revenues
John Wood: And those two solutions are effectively, I'd say, de minimis at this point. So there will be no revenue headwind as a result of that decision.
John Wood: Really, as we looked at the portfolio, and we have these very substantial programs in hand that we are ramping quickly,
John Wood: We wanted to maximize the benefit of operating leverage, incremental margins, and cash flows heading into 2025 as a result of the ramp of those programs that we have in hand.
John Wood: So we took a hard look at the overall portfolio to identify where we could be shifting resources from higher-risk, lower-return opportunities to the lower-risk, higher-return opportunities that we have in hand.
Thank you for watching!
Speaker Change: Understood. And my one follow-up question is just around the pipeline going into key buying season, especially for secure networks. Do you give us a sense of
Speaker Change: Maybe the size of some of these opportunities that you're bidding on and confidence in securing some of this business as you go through the award process here in the next couple of quarters.
Speaker Change: Yeah, so maybe I'll start and then Mark Griffin and John can supplement. So, you know, we have a pretty meaningful portfolio of opportunities that are either already submitted or that we're currently working on.
Speaker Change: You can think of it as, you know, somewhere around 20 opportunities or so. About a third of those are already submitted. The balance are in process.
Speaker Change: In total, you're looking at nine figures of total contract value to TELUS.
Speaker Change: You know, there's potential for, you know, a couple tens of millions or more of revenue in 2025.
Speaker Change: But again, there's a lot of contingencies around that. It's what proportion do we win? Are they protested? When do they start? So on and so forth. So a little early to try to give direction on what that number is for next year or to guide it. We'll do that in March.
Speaker Change: But it's a pretty solid portfolio of opportunities that are actively in process. Let me see if Mark Griffin or John have anything to add.
Speaker Change: This is Mark Griffin, I don't have anything to add other than the total portfolio right now of the pipeline is around $4.1 billion and it represents about 245 opportunities of which what Mark indicated was a subset of that.
That's good. I agree with that.
Thank you very much.
Speaker Change: Understood. Well thanks for taking my questions and best of luck with the rest of the quarter. Thank you, Zach. Standby for our next question.
Speaker Change: Our next question comes from Rudy Kessinger with DA Davidson. Rudy, go ahead with your question.
Rudy Kessinger: Hey, thanks for taking my questions, guys. Mark, so, you know...
Rudy Kessinger: If I go back a year ago, you know, in your Q3 call last year, at that point in time, you guys said you believed you had a total 2024 potential revenue opportunity that exceeded $200 million. And obviously, you know, you guys fell well short of that this year.
Rudy Kessinger: You're kind of painting a picture. I know you're not giving a number, but with the pieces you gave, you're kind of painting a picture of, you know, ballpark $150 million issue of revenue for next year. I guess I'm just curious.
Rudy Kessinger: What risk lies within that kind of number, and in particular on the two large programs, the 60 to 85 million, how are you getting to that 60 to 85 million? And what's the risk that, you know, a year from now?
Rudy Kessinger: Those contracts are only doing 30 to 40 million next year.
Speaker Change: Yeah Rudy, good question. The big difference between last year and this year, last year our comments, and we were clear about this on the call, but last year our comments
Speaker Change: were based on the $625 million of proposals that we had submitted.
Speaker Change: And we won a good chunk of those proposals in March, and then they were protested and they slid to the right for the lion's share of this year. And now in the fourth quarter, we're just starting to generate revenues on this program. So that was a big driver of that Delta, but a really good outcome.
Speaker Change: on the new business wins relative to what we had submitted at the time of that call. And then, of course, the risk for revenue recognition in 2024 ended up being around the protest. Now, fast forward to today.
Speaker Change: The revenue growth that we're talking about for next year, these are programs that are one in hand that we're currently generating revenues on and ramping.
As we talk about the 60 to 85.
Speaker Change: I would describe it in this way, of the 60-85, there's 2-8 million
Speaker Change: In the DHS program, which is still under protest, I think we said on the last call and on this one as well, that we're expecting that to be resolved in the fourth quarter.
Speaker Change: based on feedback that we've received. So that two to eight million, the protest needs to be resolved, and then of course there's a range there depending on how much share of that program we get from quarter to quarter, year to year, but we think that can range from two to eight.
Speaker Change: For the balance of the revenue of 60-85, we have a high degree of visibility into 25 million of it.
And then the balance is...
Speaker Change: We think we have a pretty good understanding of what that revenue stream would look like in a typical year, given that 2025 would be the first full year of execution on that program.
You know, we don't have
Speaker Change: multiple years of history on this overall scope of work. Of course, we have decades of history on this program on a smaller scope of work. This is a significantly bigger scope of work.
Speaker Change: to use that as a basis for the 60 to 85, but relative to the 100 million that it could be in any given year, we think 60 to 85 is a, you know, pretty prudent haircut on the total potential.
Thanks for the question.
Speaker Change: It does. That's very helpful, Culler, bringing it out there. I appreciate that. I also wanted to ask on pre-check.
Speaker Change: The ramp has certainly picked up in locations. I know you're saying...
you know, get to the 500 locations, that's your...
Speaker Change: not going to have full one-third market share for the full year. But I guess I'm curious, you know, with the locations you have now...
Speaker Change: We assumed you were getting one-third market share with your currently live locations, but that would indicate about 22, 23 million of annualized pre-check revenue today. I'm curious, are you getting one-third market share at those existing 170-ish locations?
Speaker Change: Are you seeing yourselves get to one third market share with some of the locations you rolled out, you know earlier this year?
Speaker Change: Yeah we don't have data on the catchment area around each of those locations but I can answer in a different way.
based on the average location that we have open.
currently.
and when you extrapolate that out to 500 locations
We are currently capturing.
Speaker Change: The portion of overall market share that we would expect based on the locations we have open today.
Speaker Change: As the same level of productivity and the locations we have open today holds as we roll out to 500, we should be on track to capture a pro-rata market share of enrollments.
Okay, that's helpful. Thank you, Mark. Yep.
Standby for our next question.
Speaker Change: Our next question comes from Nehal Chotsky with Northland Capital Markets. Nehal, go ahead with your question.
Nehal Chotsky: Thank you. And congrats on the solid bottom line results and guidance here. It's good to see that. Of this DNDC $485 million total contract value,
Nehal Chotsky: Is there any portion of that $485 million that may not be realized over the course of that five years? Or is that $60 million dollar low point simply a reflection of timing of subcontracted revenue?
So what's a 485?
Nehal Chotsky: 125 is the base services revenue that I described as having a high level of visibility.
Nehal Chotsky: The difference between the 125 and the 485 is the third party hardware and software that we integrated into the overall solution.
Uhm?
Nehal Chotsky: The amount of that over the five years, you know, we'll have to see.
Bye
Speaker Change: Our best estimate is that the two combined shouldn't be less than $60 million in a typical year, and it could be approximately $100 million in some peak years.
Speaker Change: Got it. It's really going to be driven by the needs and the demands of the program.
Speaker Change: So what I would say is that, you know, unlike other contract vehicles that we have, this is a single award contract.
Speaker Change: one of the largest biometric applications in the government. It's really the program that drives the Common Access Card, among other things, which gets you access to all the military bases and all the military networks around the world. So this particular contract is very important to the customer, and it's very important to the mission.
and we've had a relationship with this customer since 1995.
Speaker Change: This one we know very, very well. I think it's actually our longest.
serving customer that we have as a company.
Speaker Change: So, this customer understands emissions, and just by way of color, we have something like 40 18-wheelers of equipment coming our way, so there's all kinds of...
different things that we're doing for this customer.
Speaker Change: Thanks for that color John. And then you also announced being named one of 20 vendors of a I think like a 13 billion base infrastructure management IDIQ contract for Air Force.
Speaker Change: Is that revenue from that award expected in calendar 25, is that part of your calendar 25 build up that you talked about, Mark?
Speaker Change: So Nihal, any future task orders and revenues that would come from that?
Nihal Chotsky: that would come from that vehicle, that would be included in the bucket of new business wins that I referred to that I did not quantify.
Speaker Change: But it's not included in any of the quantified buckets that I listed.
Speaker Change: and the reason for that Nahal is that each of in this in this particular case
Speaker Change: This contract is competed at the task order level by those 23 or four bidders of which we are one.
Speaker Change: We would expect to get our fair share of this of this work over time given that you know, we've done Tremendous amount of work with the Air Force previously on another contract we had called net fence
Speaker Change: where we were able to deliver something like 1.6 billion dollars worth of values to the Air Force doing essentially the same kind of stuff.
Speaker Change: Yeah, and just to be clear, has there been any material task orders from this new contract vehicle been issued yet?
Speaker Change: Hello Nahal, Mark Griffin. The task orders are just coming out now. The government's released I believe
Speaker Change: The playing field was announced, so we're in the process now of bidding on those and we expect some resolution shortly on hopefully awards.
Speaker Change: Okay and then for counter 25 you know what you're basically talking about is
Speaker Change: What's your confidence level that you will be a material positive free cash flow and what kind of free cash flow do you think that could be?
Speaker Change: So I'm not going to, you know, I'm not going to comment directly on free cash flow, but what I will say is this, Nihal.
Speaker Change: me and my management team are compensated on two things. One is on revenue growth and the other is on being free cash flow positive.
Speaker Change: In the hall, I guess what I'll add to that is, in the past we've talked about, just as a rule of thumb,
Speaker Change: Approximately $200 million of revenue being free cash flow break-even and $165 million of revenue being adjusted to keep it that break-even.
Speaker Change: Some of these revenue streams we have ramping, in particular the TSA pre-check is a very favorable working capital profile. So the pre-capsule break-even point is probably lower than 200 now, and we think we are on a good path to get there.
Speaker Change: dollars for a break even rate, which might be too high to be.
Speaker Change: Yeah, Nahal, I don't want to get on a slippery slope to guiding 25 on this call, but we feel, you know...
Speaker Change: My earlier comments around the restructuring and the movement of resources that I've talked about I thought my point about investment growth and free cash flow was pretty good You know, the actions that we took were all towards
Speaker Change: moving resources towards these programs in a way that would allow us to maximize the benefit of that v-shaped recovery on revenue in 2025. So we'll say more on the March call in terms of P&L details beyond what I said here.
Thank you.
Thank you for taking all my questions. You're welcome.
Speaker Change: This concludes the question and answer session. I would now like to turn it back to John Wood for closing remarks.
John Wood: I want to thank our shareholders for your ongoing support and I'm very pleased with the recent positive news on our program award with the Defense Manpower Data Center and the continued progress with the TSA PreCheck program. Both these programs are key components of our future growth plans.
John Wood: Furthermore, we are focused on replenishing secure networks backlog through the recently won new contract vehicles and a large cultivated pipeline of new business opportunities.
John Wood: Finally, the team continues to pipeline and driving new business capture to enable additional growth for the company.
John Wood: Based on all of this, I look forward to 2025 and I remain excited about the long-term outlook for the company.
John Wood: With robust and recession-resistant end markets, well-funded customers, and decades-long track record of serving the world's most security conscious organizations, TELUS is a strong foundation for the future.
Thank you, everybody.
Speaker Change: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Take care.
Thanks for watching!
and the
Thanks for watching!
[music]
Thanks for watching!
Speaker Change: The New York City, the New York City, is the largest city in the world.
Speaker Change: Good day, and thank you for standing by. Welcome to the Telos Corporation 3rd Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode.
Speaker Change: And then you will hear an automated message advising you that your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's session is being recorded. I would now like to hand the conference over to your first speaker today, Allison Phillips. Allison, you have the floor.
Allison Phillips: Good morning. Thank you for joining us to discuss TELUS Corporation's third quarter 2024 financial results.
Allison Phillips: With me today is John Wood, Chairman and CEO of Telos, and Mark Benza, Executive Vice President and CFO of Telos.
Allison Phillips: Let me quickly review the format of today's presentation. Mark will begin with remarks on our third quarter 2024 results.
Next, John will discuss business
Allison Phillips: Then, Mark will follow up with fourth quarter guidance before turning back to John to wrap up.
Allison Phillips: We will then open the line for Q&A, where Mark Griffin, Executive Vice President of Security Solutions, will also join us.
Allison Phillips: The third quarter financial results were issued earlier today and are posted on the Telos Investor Relations website where this call is being simultaneously webcast.
Allison Phillips: Additionally, we have provided presentation slides on our investor relations website.
Allison Phillips: 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.
Allison Phillips: Actual results could materially differ for various reasons including the factors described in today's financial results summary and the comments made during this conference call and in our SEC filings.
Allison Phillips: We do not undertake any duty to update any forward-looking statements.
Allison Phillips: 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 Telus's financial performance.
Allison Phillips: These non-GAAP financial measures should be considered in addition to, and not as a substitute for, or in isolation from, GAAP results.
Allison Phillips: You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results, in our third quarter financial results summary on the Investor Relations portion of our website.
Allison Phillips: Please also note that financial comparisons are year-over-year unless otherwise specified.
Allison Phillips: 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.
Thank you, Allison, and good morning, everyone.
Let's begin today on slide 3.
Allison Phillips: I'm pleased to report that TELUS has delivered revenue near the top end of the guidance range and necessity above the top end of the guidance range.
Allison Phillips: We delivered $23.8 million of revenue in the quarter compared to guidance of $22 million to $24 million.
Allison Phillips: Security Solutions delivered $18.3 million, or 77% of total revenue, which was in line with the top end of our guidance range due to strong performance across the portfolio relative to forecast.
Allison Phillips: Security Solutions revenue grew 3% sequentially due to double-digit sequential growth in Telos ID, primarily as a result of the ongoing ramp of our TSA PreCheck program.
Allison Phillips: We expect sequential growth in our security solutions business to accelerate in the fourth quarter, as our large program with the Defense Manpower Data Center, or DMDC, begins to ramp.
Allison Phillips: DMVC is the large program award that was under protest earlier this year and has since been resolved and is currently generating revenue.
Allison Phillips: Secure Networks delivered 5.5 million dollars or 23% of total revenue in line with guidance.
Allison Phillips: Secure networks revenue declined sequentially and year-over-year as expected due to the ramp down of existing programs.
Allison Phillips: As previously reported, Secure Networks has gained access to new contract vehicles in recent quarters and has cultivated a large pipeline of new business opportunities that we are currently pursuing to replenish the backlog.
Allison Phillips: Turning to margins, as we mentioned on our last earnings call, 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.
Allison Phillips: As we also stated on our last earnings call, our guidance does not include any charges that could result from such actions.
Allison Phillips: During the quarter, we assess our cost structure and investment priorities to reduce costs and reallocate resources to support large programs that are currently ramping in security solutions.
Allison Phillips: The restructuring, as well as an assessment of our intangible assets, resulted in an $11.7 million non-cash impairment of capitalized software assets.
including 5.3 million dollars in cost of sales.
Allison Phillips: and the $1.4 million restructuring charge, including $400,000 in cost of sales.
Allison Phillips: In total, we took a $13.1 million charge in the quarter, $5.7 million of which was recorded in cost of sales and impacted GAAP gross margin.
Gap gross margin was 13.2 percent.
Allison Phillips: Excluding the $5.7 million impairment and restructuring charge and cost of sales, gross margin expanded 130 basis points year over year to 37.3% and was above the top end of our guidance range.
Allison Phillips: In addition, cash gross margin expanded 250 basis points year-over-year to 44 percent.
Allison Phillips: Cash Gross Margin was above our guidance range and was also the company's highest cash gross margin since the IPO in 2020.
Allison Phillips: Strong revenue, cash gross margin over performance, and cost reductions resulted in an adjusted EBITDA above the top end of the guidance range.
Allison Phillips: Ajasthiti Vidal was a 4.1 million dollar loss compared to guidance of an 8 million dollar loss to a 6.5 million dollar loss.
Allison Phillips: Lastly, cash flow from operations and free cash flow both improved sequentially.
Allison Phillips: Cash flow from operations was a $7.1 million outflow, and free cash flow was a $9.9 million outflow.
John Wood: I'm going to now turn the call over to John for an overview of recent business highlights. John?
John Wood: Thanks, Mark, and good morning, everyone. Let's turn to slide four.