Q4 2024 Telos Corp Earnings Call
Okay.
Good day and thank you for standing by welcome to the <unk> Corporation fourth quarter 2024 financial results Conference call.
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I would now like to hand, the conference over to Alison Philips Director of corporate Communications. Please go ahead.
Good morning, Thank you for joining us to discuss <unk> Corporation's fourth quarter and full year 2024 financial results.
John: With me today is John <unk>, Chairman and CEO of Pillows, and Mark <unk> Executive Vice President and CFO of color.
John: Let me quickly review the format of today's presentation.
Mark: Mark will begin with remarks on our 2024 year end results.
Mark: Next John will discuss business highlights from the quarter.
Mark: Then mark will follow up with first 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 solution will also join us.
Mark: The fourth quarter and year end financial results were issued earlier today and are posted on <unk> Investor Relations Web site, where this call is being simultaneously webcast.
Mark: Additionally, we have provided presentation slides on our Investor Relations website.
Mark: Before we begin we want to emphasize that some of our statements on this call, including all of those relating to 2025 company performance plans and operations are forward looking statements and are made under the safe Harbor provisions of the federal Securities laws.
Mark: These statements are based on current expectations and assumptions that are subject to risks and uncertainties.
Mark: 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.
Mark: We do not undertake any duty to update any forward looking statements.
Mark: In addition, during today's call, we will discuss non-GAAP financial measures, which we believe are useful as supplemental on clarifying measures to help investors understand tell us with financial performance.
Mark: These non-GAAP financial measures should be considered in addition to and not as a substitute for or in isolation from GAAP results.
Mark: You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results in our fourth quarter and year end financial results summary.
Mark: And on the Investor relations portion of our website.
Mark: Please also note the financial comparisons are year over year, unless otherwise specified.
A webcast replay of this call will be available for the next year on our company website under the Investor Relations link.
Mark: With that I'll turn the call over to Mark.
Mark: Thank you Alison and good morning, everyone.
Speaker Change: Let's begin today on slide three.
Speaker Change: I am pleased to report that Tullow tubs delivered fourth quarter revenue near the top end of the guidance range.
Speaker Change: And adjusted EBITDA above the top end of the guidance range.
Speaker Change: Total company revenue grew 11% sequentially to $26 $4 million in the quarter.
Speaker Change: <unk> guidance of $24 5 million to $26 $5 million.
Speaker Change: Security solutions revenue grew 20% sequentially to $21 9 million or 83% of total company revenue.
Speaker Change: Which was near the top end of our guidance range.
Speaker Change: During the fourth quarter, our large program with the defense manpower data center or <unk>.
Speaker Change: Successfully transitioned from the incumbent contractor.
Speaker Change: And began to generate significant revenue for security solutions.
Speaker Change: In addition revenue from TSA pre check enrollments grew over 30% sequentially.
Speaker Change: Secure networks delivered $4 $5 million of revenue or 17% of total company revenue representing the top end of the guidance range.
Speaker Change: Secure networks revenue declined sequentially as expected due to the ramp down of existing programs.
Speaker Change: Turning to margins GAAP gross margin expanded nearly 600 basis points year over year to 43% and.
Speaker Change: Cash gross margin expanded nearly 900 basis points year over year to 47%.
Speaker Change: Fourth quarter cash gross margin of 47% was the company's highest quarter since the IPO in 2020.
Speaker Change: And full year 2024 cash gross margin of 43, 7% was the company's highest since 2000.
Speaker Change: Gross margin expansion was primarily driven by the favorable mix shifts from our lower margin secured networks business to our higher margin security solutions business.
Speaker Change: Security solutions revenue grew from 50% of total company revenue in the fourth quarter of 2023% to 83% in 2024.
Speaker Change: And from 53% for the full year 2023 to <unk>, 71% in 2024.
Speaker Change: As discussed on our last earnings call during the third quarter of 2024, we discontinued the development and sale of selected solutions or parts of solutions that were not generating acceptable returns.
These actions reduced our cost base and created new capacity for investments in our highest growth programs in order to maximize our operating leverage incremental margins and cash flow as we returned to growth in 2025.
Speaker Change: Largely as a result of our third quarter cost actions.
Speaker Change: Adjusted operating expenses, which include R&D and SG&A expense, excluding stock based compensation restructuring and impairment expenses.
Speaker Change: Declined sequentially by $2 4 million.
Speaker Change: When combined with higher cash gross profit.
Speaker Change: The reduction in operating expenses drove a sequential improvement in adjusted EBITDA from a $4 $2 million loss in the third quarter to a $200000 loss in the fourth quarter.
Speaker Change: Lastly, cash flow from operations was $10 $5 million outflow and free cash flow was $14 $8 million outflow, reflecting a short term buildup of working capital associated with high growth programs.
Speaker Change: And one time capex investments and infrastructure expansion.
Speaker Change: We expect these dynamics to reverse and drive positive cash flow from operations and positive free cash flow in the first quarter of 2025.
Speaker Change: I will now turn it over to John for an overview of recent business highlights John.
John: Thanks, Mark and good morning, everyone.
Speaker Change: Let's turn to slide four.
Speaker Change: First I'll provide an update on our TSA pre check program.
Speaker Change: We made significant progress expanding our nationwide network of enrollment centers, providing a convenient solution to travelers and gaining market share in this important national security program throughout 2024.
Speaker Change: We increased our enrollment centers from 26 locations at the beginning of 2024 to 218 locations in key markets across the United States today.
Speaker Change: And as we've said in the past, we do not expect a linear monthly pace of opening new enrollment centers.
Speaker Change: We will have phases, when we open larger a larger number of locations followed by quarters. When we opened fewer locations and during which we together with the TSA will assess the operations of our enrollment centers before resuming a higher pace of Rollouts.
We opened a total of 177 new locations in the second third and fourth quarters of 2024 before moderating the pace of openings with 15, new locations. So far in 2025.
Speaker Change: We expect to resume a higher pace of rollout in the coming weeks or months and continue to target 500 locations sometime around the end of the year.
Speaker Change: TSA pre check fruit grew quickly into our single largest program by revenue.
Speaker Change: During 2024, and we expect the program to deliver significant growth again this year.
Speaker Change: Next I'll provide an update on the two key program wins that we have previously previously discussed over our last several earnings calls.
Speaker Change: We have successfully transitioned the defense manpower data center or <unk> program and are now generating revenue.
Speaker Change: This program along with TSA pre check enrollments was a key source of our sequential growth in the fourth quarter.
Speaker Change: We look forward to a full year of successful operations on this program in 2025.
Speaker Change: As we expect it to be a major driver of revenue growth for the company.
Speaker Change: Additionally, we were pleased to report that the stop work order on the program with the department of Homeland security or DHS was lifted in January.
Speaker Change: We expect to begin generating revenue on this program later in 2025.
Speaker Change: We're thrilled with the positive outcomes on both these program awards and look forward to providing high quality services to these critical customers.
Over the next several years.
Speaker Change: Finally, I'll provide the latest news on other business outcomes since our last earnings call.
Speaker Change: Our exact businesses achieved new orders with several customers, including the office of Naval intelligence. The U S Department of energy a U S. Federal government agency as well as a key renewal with a U S federal government customer in the intelligence community.
Speaker Change: We also received a new order for cyber services from a fortune 100 company in the technology sector.
Speaker Change: The automated message handling system, our aim Hs business achieved key renewals from our UK government Department in the U S Federal government customer and the intelligence community.
Speaker Change: Regarding our new business pipeline on our previous call. We indicated we had submitted several bids and we're working on additional opportunities that totaled nine figures of total contract value to tell us.
Speaker Change: As a result of the recent change in administration and uncertainty around near term priorities and objectives.
Speaker Change: We're experiencing some delays in the timing of awards from the government on single Awards.
Speaker Change: Over we are not seeing similar delays on task orders available via the various active contract vehicles. We have won over the last couple of years.
Speaker Change: Accordingly, we are re prioritizing task orders on our contract vehicles over single awards.
Speaker Change: And our currently vetting and responding to task orders at a rapid pace.
Speaker Change: We remain optimistic of our positioning and the competitiveness on our outstanding and upcoming bids.
Mark: I'll now turn the call over to Mark who will discuss first quarter guidance Mark.
Mark: Thanks, John Let's turn to slide five.
Mark: For the first quarter, we expect revenue to grow 7% to 15% sequentially to a range of $28 $2 million to $30 2 million.
And we forecast an adjusted EBITDA loss of $1 8 million to $800000.
Mark: Sequential revenue growth will be driven by security solutions.
Mark: We forecast security solutions to grow high single digit percent to mid teens percent sequentially driven.
Mark: Driven by our new program with the defense manpower data center and the ongoing ramp of TSA pre check enrollments.
Mark: Security solutions is forecasted to contribute approximately 84% of total company revenue.
Mark: We anticipate secure networks revenue to be comparable to the fourth quarter.
Mark: GAAP gross margin is expected to expand by 150 basis points to 215 basis points year over year, primarily due to the favorable mix shift from our lower margin secured networks business to our higher margin security solutions business.
Cash gross margin is forecasted to expand by 260 basis points to 285 basis points year over year for the same reason.
Mark: Cash operating expenses, which include R&D and SG&A adjusted for stock based compensation restructuring expenses, depreciation and amortization impairment and capitalized software development costs are forecasted to be approximately $1 million lower year over year due to lower spending.
Mark: As a result of the restructuring plan that we implemented during the third quarter of 2024, partially offset by investments in our highest growth programs.
Mark: We're pleased to report that we expect to generate positive cash flow during the first quarter.
Mark: Turning to the full year 2025.
Mark: The structure of the revenue framework that we outlined on prior earnings calls has not changed.
Mark: We forecast a return to year over year revenue growth.
Mark: Revenue for the full year will be comprised of several key components.
Mark: First we expect our existing business, excluding TSA pre check in the DMD and DHS programs that we won in the first quarter of 2024 to.
Mark: To generate approximately $70 million in 2025, representing an increase from the previously estimated $60 million to $65 million.
Mark: This increase in estimates reflects higher expected revenues on various contracts across the portfolio due to a combination of scope expansion and contract extensions.
Mark: Second we estimate the <unk> DHS programs could recognize approximately $50 million to $75 million of revenue representing a decrease from the previously estimated $60 million to $85 million.
Mark: The change in estimates reflects the time phasing of revenue recognition during the first year of the program.
Mark: Time phasing in the first year will be driven by the ultimate mix of third party solutions that are recognized as revenue when orders are filled.
Mark: Versus solutions that are recognized as revenue over a period of performance.
Mark: The mix of gross revenue recognition and net revenue recognition will impact the range as well.
Mark: Third we are targeting a pro rata share of the TSA pre check enrollment market. After we complete the rollout of our 500 locations at full capacity for a full calendar year.
Mark: We believe the entire TSA pre check market is approximately a $200 million market on a net revenue basis in a typical year based on our current pricing structure.
Mark: Although we do not expect to achieve our pro rata market share in 2025, we expect TSA pre check revenues to ramp along with our enrollment centers during the year.
Mark: Enrollment and revenue represented approximately 70% of the total $200 million TSA pre check market in 2024.
Mark: Renewal revenue comprised the other 30%.
John: And lastly, John discussed, our new business pipeline and business development activities any new business wins. During 2025, we will have the potential to contribute additional revenue during the year.
And with that I'll turn it back to John.
Thanks, Mark, let's turn to slide six.
John: In summary revenue grew 11% sequentially to $26 4 million.
John: And adjusted EBITDA improved sequentially by $4 million to.
John: Two a $200000.
John: Our loss.
John: Additionally, we achieved our highest full year cash gross margins since 2000.
John: We successfully assumed full operational control of our scope on the <unk> program and look forward to a full year of operations and the accompanying revenue growth in 2025.
John: We continue to ramp our network of TSA pre check enrollment locations and are targeting 500 locations sometime around the end of the year.
John: We expect 7% to 15% sequential revenue growth and positive cash flow in the first quarter of 2025 and.
John: And we are forecasting significant improvements in revenue profit and cash flow for the full year.
John: And with that we're happy to take questions.
John: Operator, please open the line for Q&A. Thank you.
John: As a reminder, if you'd like to ask a question at this time. Please press star one one on your telephone and wait for your name to be announced.
John: Draw. Your question. Please press star one again.
Zach Cummins: Our first question comes from Zach Cummins with B Riley's Securities.
John: Hi, good morning.
Speaker Change: Mark and John Congrats on a solid results in Q4.
Speaker Change: John I just wanted to ask with the change in administration. It sounds like you've had some impact on single award type of programs.
Speaker Change: Just curious maybe what you've heard from some of your partners.
Speaker Change: And just how you're framing the year just given all the moving parts here in early 2025.
Speaker Change: So in general Zac and thank you for your question.
Speaker Change: In general the company really is focused on delivering salute.
Speaker Change: Solutions that help optimize performance for our customers.
Speaker Change: In terms of automation and so forth and so I would say the new administration in general is positive for Telos, having said that at the at the customer level.
Speaker Change: We are seeing single awards being.
Speaker Change: Held back while the administration sort of reviews those opportunities. That's why we're focused on the task orders that we have from existing contract vehicles.
Mark: Understood and my follow up question geared towards Mark.
Speaker Change: Helpful to get a little bit more detail in terms of the 2025 framework just in terms of the New awards.
Speaker Change: You outlined with DMD and DHS.
Speaker Change: Is it largely just accounting issues as we think about that ramping up in the first year or can you just go a little bit more into the nuances of that for revenue recognition in the first years of those awards.
Speaker Change: Yes, it's a good question Zack so yes, there is no change in our expectations around the total value of third party content that we would integrate into that program.
Speaker Change: The difference is the mix of that third party content as we're getting deeper into the program. What we're seeing is that.
Speaker Change: The mix is more weighted to software than it is to hardware.
Speaker Change: Now hardware content.
Speaker Change: It's pretty straightforward in terms of revenue recognition you recognize essentially the full value of the order at the time. The order is still to be recognized as revenue the full value of the order. It's time to order it is filled with software.
Speaker Change: It's a mix some software will be recognized full value at the time. The order is still other types of software would be recognized over a period of performance stay over a one year period of performance of our one year license or maintenance contracts.
Speaker Change: So in the first year on some of these orders we will see a partial year of revenue recognition rather than a full year and then in 2006, you will see the full year of revenue recognition. The other important point is that.
Speaker Change: It looks like from a cash perspective.
Speaker Change: For the most part we will see the full benefit.
Speaker Change: The full cash flow benefit at the time the order is filled so.
Speaker Change: That's one of the reasons why where.
Speaker Change: We're bullish on cash in the quarter and the year.
Speaker Change: Cash flow.
Speaker Change: Cash flow should outperform the P&L so to speak in 2025.
Speaker Change: Understood. That's helpful well, thanks for taking my questions and best of luck with the rest of the quarter.
Speaker Change: Thanks Jack.
Speaker Change: As a reminder to ask a question that is star one one.
Speaker Change: Our next question comes from Rudy Kessinger with D. A davidson.
Speaker Change: Hey, guys. Thanks for taking my questions, Marc if I think about TSA pre check.
Speaker Change: $200 million market opportunity, 70% coming from enrollment you have 218 locations or I guess, you've got about 45% of the rollout if we just do the numbers they're.
Speaker Change: That would imply if youre getting that one third share at this 218 locations you should be running about $21 million in annual revenue from enrollment plus some from renewals understanding it's going to take longer to get those one third share on the renewal side is that the right way to think.
Speaker Change: Ballpark about where TSA revenue is running currently.
Speaker Change: So the framework you've laid out yes. It is the right way.
Speaker Change: Think about it of course over the course of 2024 on an average basis, we have far fewer.
Speaker Change: Locations open than we do now.
Speaker Change: And then over the course of this year.
Speaker Change: Those locations will ramp.
Speaker Change: Okay and then.
Speaker Change: I am curious on cash flow I know it says some slides here you guys mentioned this should be positive in Q1.
Speaker Change: How much of that is maybe just driven by <unk>.
Speaker Change: <unk> Q1 collections and then for the full year you just made a comment there cash.
Speaker Change: Should outpace I guess P&L like how should we think about free cash flow potential for the full year.
Speaker Change: Yes, so in the first quarter there is they're in.
Speaker Change: The benefit in terms of the fourth quarter working capital build up that will be liquidating in the first quarter.
Speaker Change: In terms of the overall year.
Speaker Change: I would think about it.
Speaker Change: Adjusted EBITDA breakeven.
Speaker Change: For the year, it's probably somewhere around let's say $1 55 $160 million of revenue somewhere around there depending on mix.
Speaker Change: Got it even adjusted EBITDA.
Speaker Change: At a breakeven adjusted EBITDA. This year I would expect us to be positive free cash flow at a breakeven adjusted EBITDA level. So what that means is.
Speaker Change: Youre going to have let's say a breakeven adjusted EBITDA.
Speaker Change: Going to subtract from that about $10 million of capitalized software.
Speaker Change: You're going to add about $2 million of interest income.
Speaker Change: That would imply roughly $8 million of negative free cash flow before changes in working capital.
I would say the change in working capital.
Speaker Change: Should be enough in 2025 to get us to two positive free cash flow. So the change in working capital should be better than $8 million at that hypothetical.
Speaker Change: Breakeven adjusted EBITA level, yes that makes sense.
Speaker Change: That's very very helpful breakdown I appreciate that.
Speaker Change: And by the way, that's just another way of saying our breakeven level of revenues.
Speaker Change: Four.
Speaker Change: The level of revenues required for breakeven free cash flow should be lower than the level of revenues required to breakeven on adjusted EBITDA.
Speaker Change: Got it thank you.
John: This will conclude today's question and answer session I will now turn the call back to John <unk> for closing remarks.
John: Well our shareholders for your ongoing support with the encouraging news on our DMD CNR TSA pre check programs, we look forward to significant improvements in revenue growth profit and cash flow in 2025.
John: I look forward to 2025 and I remain excited about the long term outlook for the company.
John: With robust and recession resistant markets, well funded customers and a decades long track our track record of serving the world's most security conscious organizations tell us as a strong foundation for the future.
John: <unk>.
John: This concludes today's conference call. Thank you for participating.
John: You may now disconnect.
John: Sure.
John: Okay.
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John: At this time all participants are in a listen only mode.
John: After the Speakers' presentation, there'll be a question and answer session.
John: To ask a question during the session you'll need to press star one one on your telephone.
John: We'll then hear an automated message advising your hand is raised to win.
Speaker Change: Draw. Your question. Please press star one 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 Alison Philips Director of corporate Communications. Please go ahead.
Speaker Change: Good morning, Thank you for joining us to discuss <unk> Corporation's fourth quarter and full year 2024 financial results.
John: With me today is John <unk>, Chairman and CEO of pillows and Martha.
Speaker Change: Deputy Vice President and CFO of Polo.
Speaker Change: Let me quickly review the format of today's presentation.
Mark: Mark will begin with remarks on our 2024 year end results.
Mark: John will discuss business highlights from the quarter.
Mark: Then mark will follow up with first 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 fourth quarter and year end financial results were issued earlier today and are posted on the Investor Relations Web site, 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, including all of those relating to 2025 company performance plans and operations 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.
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.
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 I'm clarifying measures to help investors understand <unk> 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 fourth quarter and year end financial results summary.
Speaker Change: And on the Investor relations portion of our website.
Speaker Change: Please also note the financial comparisons are year over year, unless otherwise specified.
Mark Griffin: 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.
Mark Griffin: Thank you Alison and good morning, everyone.
Mark Griffin: Let's begin today on slide three.
Mark Griffin: I am pleased to report that <unk> delivered fourth quarter revenue near the top end of the guidance range.
Mark Griffin: And adjusted EBITDA above the top end of the guidance range.
Mark Griffin: Total company revenue grew 11% sequentially to $26 $4 million in the quarter.
Mark Griffin: <unk> guidance of $24 5 million to $26 $5 million.
Mark Griffin: Security solutions revenue grew 20% sequentially to $21 9 million or 83% of total company revenue, which was near the top end of our guidance range.
Mark Griffin: During the fourth quarter, our large program with the defense manpower data center or <unk>.
Mark Griffin: Successfully transitioned from the incumbent contractor.
Mark Griffin: And began to generate significant revenue for security solutions.
Mark Griffin: In addition revenue from TSA pre check enrollments grew over 30% sequentially.
Mark Griffin: Secure networks delivered $4 $5 million of revenue or 17% of total company revenue representing the top end of the guidance range.
Mark Griffin: Secure networks revenue declined sequentially as expected due to the ramp down of existing programs.
Mark Griffin: Turning to margins GAAP gross margin expanded nearly 600 basis points year over year to 43% and.
Mark Griffin: And cash gross margin expanded nearly 900 basis points year over year to 47%.
Mark Griffin: Fourth quarter cash gross margin of 47% was the company's highest quarter since the IPO in 2020.
Mark Griffin: And full year 2024 cash gross margin of 43, 7% was the company's highest since 2000.
Mark Griffin: Gross margin expansion was primarily driven by the favorable mix shifts from our lower margin secured networks business to our higher margin security solutions business.
Mark Griffin: Security solutions revenue grew from 50% of total company revenue in the fourth quarter of 2023.
Mark Griffin: 83% in 2024.
Mark Griffin: And from 53% for the full year 2023 to <unk>, 71% in 2024.
Mark Griffin: As discussed on our last earnings call during the third quarter of 2024, we discontinued the development and sale of selected solutions or parts of solutions that were not generating acceptable returns.
Mark Griffin: These actions reduced our cost base and created new capacity for investments in our highest growth programs in order to maximize our operating leverage incremental margins and cash flow as we returned to growth in 2025.
Mark Griffin: Largely as a result of our third quarter cost actions adjusted operating expenses, which include R&D and SG&A expense.
Mark Griffin: Excluding stock based compensation restructuring and impairment expenses.
Declined sequentially by $2 $4 million.
Mark Griffin: When combined with higher cash gross profit the reduction in operating expenses drove a sequential improvement in adjusted EBITDA from a $4 $2 million loss in the third quarter to a $200000 loss in the fourth quarter.
Mark Griffin: Lastly, cash flow from operations was $10 $5 million outflow and free cash flow was $14 $8 million outflow.
Mark Griffin: Reflecting a short term buildup of working capital associated with high growth programs, and one time capex investments and infrastructure expansion.
Mark Griffin: We expect these dynamics to reverse and drive positive cash flow from operations and positive free cash flow in the first quarter of 2025.
Mark Griffin: I will now turn it over to John for an overview of recent business highlights John Thanks.
John: Thanks, Mark and good morning, everyone.
Mark Griffin: Let's turn to slide four.
Mark Griffin: First I'll provide an update on our TSA pre check program.
Mark Griffin: We made significant progress expanding our nationwide network of enrollment centers, providing a convenient solution to travelers and gaining market share in this important <unk>.
Mark Griffin: National Security program throughout 2024.
Mark Griffin: We increased our enrollment centers from 26 locations at the beginning of 2024 to 218 locations in key markets across the United States today.
Mark Griffin: As we said in the past, we do not expect a linear monthly pace of opening new enrollment centers we.
Mark Griffin: We will have phases, when we open larger a larger number of locations followed by quarters. When we opened fewer locations and during which we together with the TSA will assess the operations of our enrollment centers before resuming a higher pace of Rollouts.
Mark Griffin: We opened a total of 177 new locations in the second third and fourth quarters of 2024 before moderating the pace of openings with 15, new locations. So far in 2025.
Mark Griffin: We expect to resume a higher pace of rollout in the coming weeks and months and continue to target 500 locations sometime around the end of the year.
TSA pre check fruit grew quickly into our single largest program by revenue during.
Mark Griffin: During 2024, and we expect the program to deliver significant growth again this year.
Mark Griffin: Next I'll provide an update on the two key program wins that we have previously previously discussed over our last several earnings calls.
Mark Griffin: We have successfully transitioned the defense manpower data center or <unk> program and are now generating revenue.
Mark Griffin: This program along with TSA pre check enrollments was a key source of our sequential growth in the fourth quarter.
Mark Griffin: We look forward to a full year of successful operations on this program in 2025, as we expect it to be a major driver of revenue growth for the company.
Mark Griffin: Additionally, we were pleased to report that the stop work order on the program with the department of Homeland security or DHS was lifted in January.
Mark Griffin: We expect to begin generating revenue on this program later in 2025.
Mark Griffin: We're thrilled with the positive outcomes on both these program awards and look forward to providing high quality services to these critical customers.
Over the next several years.
Mark Griffin: Finally, I will provide the latest news on other business outcomes since our last earnings call.
Mark Griffin: Our exact businesses achieved new orders with several customers, including the office of Naval intelligence. The U S Department of energy a U S. Federal government agency as well as a key renewal with the U S Federal government customer in the in the intelligence community.
Mark Griffin: We also received a new order for cyber services from a fortune 100 company in the technology sector.
The automated message handling system, our aim Hs business achieved key renewals from our UK government Department in the U S Federal government customer in the intelligence community.
Mark Griffin: Regarding our new business pipeline on our previous call. We indicated we had submitted several bids and we're working on additional opportunities that totaled nine figures of total contract value to tell us.
Mark Griffin: As a result of the recent change in administration and uncertainty around near term priorities and objectives.
We're experiencing some delays in the timing of awards from the government on single Awards.
Mark Griffin: We are not seeing similar delays on task orders available via the various active contract vehicles. We have won over the last couple of years.
Mark Griffin: Accordingly, we are re prioritizing task orders on our contract vehicles over single awards.
Mark Griffin: And are currently betting in responding to task orders at a rapid pace.
Mark Griffin: We remain optimistic of our positioning and competitiveness on our outstanding and upcoming bids.
Mark Griffin: I'll now turn the call over to Mark who will discuss first quarter guidance Mark.
Mark Griffin: Thanks, John Let's turn to slide five.
For the first quarter, we expect revenue to grow 7% to 15% sequentially to a range of $28 $2 million to $30 $2 million.
Mark Griffin: We forecast an adjusted EBITDA loss of $1 8 million to $800000.
Mark Griffin: Sequential revenue growth will be driven by security solutions.
Mark Griffin: We forecast security solutions to grow high single digit percent to mid teens percent sequentially driven by our new program with the defense manpower data center and the ongoing ramp of TSA pre check enrollments.
Mark Griffin: Security solutions is forecasted to contribute approximately 84% of total company revenue.
Mark Griffin: We anticipate secure networks revenue to be comparable to the fourth quarter.
Mark Griffin: GAAP gross margin is expected to expand by 150 basis points to 215 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 Griffin: Cash gross margin is forecasted to expand by 260 basis points to 285 basis points year over year for the same reason.
Mark Griffin: Cash operating expenses, which include R&D and SG&A adjusted for stock based compensation restructuring expenses, depreciation and amortization impairment and capitalized software development costs are forecasted to be approximately $1 million lower year over year due to lower spending.
Mark Griffin: As a result of the restructuring plan that we implemented during the third quarter of 2024, partially offset by investments in our highest growth programs.
Mark Griffin: We're pleased to report that we expect to generate positive cash flow during the first quarter.
Mark Griffin: Turning to the full year 2025.
Mark Griffin: The structure of the revenue framework that we outlined on prior earnings calls has not changed.
We forecast a return to year over year revenue growth.
Mark Griffin: Revenue for the full year will be comprised of several key components.
Mark Griffin: First we expect our existing business, excluding TSA pre check in the DMD and EHS programs that we won in the first quarter of 2024 to.
Mark Griffin: To generate approximately $70 million in 2025, representing an increase from the previously estimated 60 million to $65 million.
Mark Griffin: This increase in estimates reflects higher expected revenues on various contracts across the portfolio due to a combination of scope expansion and contract extensions.
Mark Griffin: Second we estimate the <unk> DHS programs could recognize approximately $50 million to $75 million of revenue representing a decrease from the previously estimated $60 million to $85 million.
Mark Griffin: The change in estimates reflects the time phasing of revenue recognition during the first year of the program.
Mark Griffin: Time phasing in the first year will be driven by the ultimate mix of third party solutions that are recognized as revenue when orders are filled.
Mark Griffin: Versus solutions that are recognized as revenue over a period of performance.
Mark Griffin: The mix of gross revenue recognition and net revenue recognition will impact the range as well.
Mark Griffin: Third we are targeting a pro rata share of the TSA pre check enrollment market. After we complete the rollout of our 500 locations at full capacity for a full calendar year.
We believe the entire TSA pre check market is approximately a $200 million market on a net revenue basis in a typical year based on our current pricing structure.
Mark Griffin: Although we do not expect to achieve our pro rata market share in 2025, we expect TSA pre check revenues to ramp along with our enrollment centers during the year.
Mark Griffin: Enrollment revenue represented approximately 70% of the total $200 million TSA pre check market in 2024.
Mark Griffin: Renewal revenue comprised the other 30%.
John: And lastly, John discussed, our new business pipeline and business development activities.
John: Any new business wins during 2025, we will have the potential to contribute additional revenue during the year.
John: And with that I'll turn it back to John.
John: Thanks, Mark, let's turn to slide six.
John: In summary revenue grew 11% sequentially to $26 4 million and.
John: And adjusted EBITDA improved sequentially by $4 million.
John: Two a $200000 loss.
John: Additionally, we achieved our highest full year cash gross margins since 2000.
John: We successfully assumed full operational control of our scope on the <unk> program and look forward to a full year of operations and the accompanying revenue growth in 2025.
John: We continue to ramp our network of TSA pre check enrollment locations and are targeting 500 locations sometime around the end of the year.
John: We expect 7% to 15% sequential revenue growth and positive cash flow in the first quarter of 2025.
John: We are forecasting significant improvements in revenue.
John: And cash flow for the full year and with that we're happy to take questions.
John: Operator, please open the line for Q&A. Thank you.
Speaker Change: As a reminder, if you'd like to ask a question at this time. Please press star one one on your telephone and wait for your name to be announced.
John: To withdraw your question. Please press star one again.
Speaker Change: Our first question comes from Zach Cummins with B Riley Securities.
Zach Cummins: Hi, Good morning, Mark and John Congrats on a solid results in Q4.
Zach Cummins: John I just wanted to ask with the change in administration. It sounds like you've had some impact on single award type of programs. Just curious maybe what you've heard from some of your partners.
Zach Cummins: And just how you're framing the year just given all the moving parts here in early 2025.
Speaker Change: So in general Zac and thank you for your question.
Speaker Change: In general the company really is focused on delivering.
Speaker Change: Solutions that help optimize performance for our customers.
Speaker Change: In terms of automation and so forth and so I would say the new administration in general is positive for Telos, having said that at the at the customer level.
Speaker Change: We are seeing single awards being.
Speaker Change: Held back while the administration sort of reviews those opportunities. That's why we're focused on the task orders that we have from existing contract vehicles.
Speaker Change: Understood.
Speaker Change: My follow up question geared towards Mark.
Speaker Change: Helpful to get a little bit more detail in terms of the 2025 framework just in terms of the New awards.
Speaker Change: You outlined with DMD and DHS.
Speaker Change: Is it largely just accounting issues as we think about that ramping up in the first year or can you just go a little bit more into the nuances of that for revenue recognition in the first years of those awards.
Zach Cummins: Yes, it's a good question Zack so so yes, there is no change in our expectations around the total value of third party content that we would integrate into that program.
Zach Cummins: The difference is the mix of that third party content as we're getting deeper into the program. What we're seeing is that.
Zach Cummins: The mix is more weighted to software than it is to hardware.
Zach Cummins: Now hardware content.
Zach Cummins: It's pretty straightforward in terms of revenue recognition you recognize essentially the full value of the order at the time. The order is still to be recognized as revenue the full value of the order at the time of the order it's filled with software.
Zach Cummins: It's a mix some software will be recognized full value at the time. The order is still other types of software would be recognized over a period of performance. They over a one year period of performance of our one year license or maintenance contracts.
Zach Cummins: So in the first year on some of these orders we will see a partial year of revenue recognition rather than a full year and then in 2006 Youll see the full year of revenue recognition. The other important point is that.
Zach Cummins: It looks like from a cash perspective.
Zach Cummins: The most part we will see the full benefit.
Zach Cummins: The full cash flow benefit at the time the order is filled so.
Zach Cummins: That's one of the reasons why.
Zach Cummins: We're bullish on cash in the quarter and the year.
Zach Cummins: Cash flow.
Zach Cummins: Cash flow should outperform the P&L so to speak in 2025.
Zach Cummins: Understood. That's helpful well, thanks for taking my questions and best of luck with the rest of the quarter.
Zach Cummins: <unk>.
Speaker Change: As a reminder to ask a question that is star one one.
Speaker Change: Our next question comes from Rudy Kessinger with D. A davidson.
Rudy Kessinger: Hey, guys. Thanks for taking my questions, Marc if I think about TSA pre check.
Rudy Kessinger: $200 million market opportunity, 70% coming from enrollment you have 218 locations I guess, you've got about 45% of the rollout if we just do the numbers there.
Speaker Change: Evident apply if youre getting that one third share at this 218 locations you should be running about $21 million in annual revenue from an enrollment plus some from renewals understanding it's going to take longer to get those one third share on the renewal side is that the right way to think all.
Rudy Kessinger: Ballpark about where TSA revenues is running currently.
Rudy Kessinger: So the framework you've laid out yes. It is the right way.
Think about it of course over the course of 2024 on an average basis, we have far fewer.
Rudy Kessinger: Locations open than we do now.
Rudy Kessinger: And then over the course of this year.
Rudy Kessinger: Those locations will ramp.
Rudy Kessinger: Okay and then.
Speaker Change: I am curious on cash flow I know it says in slides here you guys mentioned that should be positive in Q1 just.
How much of that is maybe just driven by strong Q1 collections and then for the full year you just made a comment there cash.
Speaker Change: Outpace I guess P&L like how should we think about free cash flow potential for the full year.
Speaker Change: Yes, so in the first quarter. There is there is.
Speaker Change: The benefit in terms of the fourth quarter working capital build up that will be liquidating in the first quarter.
Speaker Change: In terms of the overall year.
Speaker Change: Well I would think about it.
Speaker Change: Adjusted EBITDA breakeven.
Speaker Change: For the year, it's probably somewhere around let's say $1 55 $160 million of revenue somewhere around there depending on mix.
Speaker Change: Got it even adjusted EBITDA.
Speaker Change: I had a breakeven adjusted EBITDA. This year I would expect us to be positive free cash flow at a breakeven adjusted EBITDA level. So what that means is.
Speaker Change: Youre going to have let's say breakeven adjusted EBITDA.
Speaker Change: Going to subtract from that about $10 million of capitalized software.
Speaker Change: You're going to add about $2 million of interest income.
Speaker Change: That would imply roughly $8 million of negative free cash flow before changes in working capital.
Speaker Change: I would say the change in working capital.
Speaker Change: Should be and not in 2025 to get us to two positive free cash flow. So the change in working capital should be better than $8 million at that hypothetical.
Speaker Change: Breakeven adjusted EBITA level, yes that makes sense.
Speaker Change: That's very very helpful breakdown I appreciate that.
Speaker Change: And by the way, that's just another way of saying our breakeven level of revenue.
Speaker Change: Four.
Speaker Change: The level of revenues required for breakeven free cash flow should be lower than the level of revenues required to breakeven on adjusted EBITDA.
Speaker Change: Got it thank you.
John: This will conclude today's question and answer session I will now turn the call back to John <unk> for closing remarks.
Speaker Change: Well our shareholders for your ongoing support with the encouraging news on our DMD CNR TSA pre check programs, we look forward to significant improvements in revenue growth profit and cash flow in 2025.
Speaker Change: Look forward to 2025 and I remain excited about the long term outlook for the company.
Speaker Change: With robust and recession resistant markets, well funded customers and a decades long track our track record of serving the world's most security conscious organizations tell us as a strong foundation for the future.
Speaker Change: <unk>.
Speaker Change: This concludes today's conference call. Thank you for participating.
Speaker Change: May now disconnect.