Q1 2025 Telos Corp Earnings Call
Yes.
Unknown Executive: Good day and thank you for standing by.
Speaker Change: Good day and thank you for standing by welcome to the Telos Corporation first quarter 2025 earnings call. At this time all participants are in a listen only mode. Please be advised that today's conference is being recorded after the speaker's presentation there'll be a question and answer session to ask a question. Please press star one.
Unknown Executive: Welcome to the Telos Corporation first quarter 2025 earnings call. At this time, all participants are in a listen only mode. Please be advised that today's conference is being recorded.
Unknown Executive: After the speaker's presentation, there will be a question and answer session.
Unknown Executive: To ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again.
Alison Philips: One on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again I would now like to hand, the conference over to your speaker today, Alison Philips director of corporate Communications.
Allison Phillipp: I would now like to hand the conference over to your speaker today, Allison Phillipp, Director of Corporate Communication. Good morning. Thank you for joining us to discuss Telos Corporation's first quarter 2025 financial results.
Alison Philips: Good morning.
Alison Philips: Thank you for joining us to discuss <unk> Corporation's first quarter 2025 financial results.
Allison Phillipp: With me today is John Wood, Chairman and CEO of Telos, and Mark Benza, Executive Vice President and CFO of Telos.
Speaker Change: With me today is John Wood, Chairman and CEO of Pillows, and Mark Bender Executive Vice President and CFO of Palo.
Allison Phillipp: Let me quickly review the format of today's presentation. Mark will begin with remarks on our first quarter 2025 results. Next, John will discuss business highlights from the quarter. Then, Mark will follow up with second quarter guidance before turning back to John to wrap up.
Alison Philips: Let me quickly review the format of today's presentation.
Alison Philips: Mark will begin with remarks on our first quarter 2025 result.
Alison Philips: Next John will discuss business highlights from the quarter.
John Wood: Then mark will follow up with second quarter guidance before turning back to John to wrap up.
Allison Phillipp: We will then open the line for Q&A, where Mark Griffin, Executive Vice President of Security Solutions, will also join us.
Speaker Change: 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 first quarter financial results were issued earlier today and are 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.
Speaker Change: The first quarter financial results were issued earlier today and are posted on our Investor Relations website, where this call is being simultaneously webcast.
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, 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. 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, in the comments made during this conference call, and in our SEC filings.
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 provision of the federal Securities laws.
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 todays financial results summary.
Speaker Change: Comments made during this conference call and in our SEC filings, we do not undertake any duty to update any forward looking statements.
Allison Phillipp: 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 first quarter results summary 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 supplemental and clarifying measures to help investors understand tell us its 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.
Speaker Change: Our first quarter results summary, and on the Investor Relations portion of our website.
Allison Phillipp: Please also note that financial comparisons are year over year unless otherwise specified.
Speaker Change: Please also note the financial comparisons are year over year, unless otherwise specified.
Allison Phillipp: The webcast replay of this call will be available on our company website under the investor relations link.
Speaker Change: The webcast replay of this call will be available 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. Let's begin today on slide three. I'm pleased to report that Telos has again over-delivered on key financial metrics in the first quarter, exceeding both revenue and profit guidance. Overall, it was a straightforward quarter with better than guided performance across revenue, gross margin, operating expenses, and adjusted EBITDA. Total company revenue grew 16% sequentially to $30.6 million and included growth from both Security Solutions and Secure Network. Security Solutions grew 18% sequentially to $25.8 million, and Secure Networks grew 8% sequentially to $4.8 million.
Mark: With that I'll turn the call over to Mark.
Mark: Thank you Alison and good morning, everyone.
Mark: Let's begin today on slide three.
Mark: I'm pleased to report that Telus has again over delivered on key financial metrics in the first quarter exceeding both our revenue and profit guidance.
Mark: Overall, it was a straightforward quarter with better than guided performance across revenue gross margin operating expenses and adjusted EBITDA.
Mark: Total company revenue grew 16% sequentially to $30 6 million and included growth from both security solutions and secure networks.
Mark: Security solutions grew 18% sequentially to $25 $8 million.
Mark: Secure networks grew 8% sequentially to $4 8 million.
Mark Benza: Security Solutions Revenue exceeded guidance, partially due to outperformance on high-growth programs. Gap gross margin was 39.8% and cash gross margin was 45.3%, both exceeding guidance due to more favorable mix. Adjusted operating expenses, excluding depreciation and amortization, were approximately $800,000 better than guidance, primarily due to lower-than-forecasted non-labor costs across multiple cost centers. As a result, Adjusted Ibada also exceeded the top end of our guidance. Adjusted EBITDA was a $362,000 profit compared to our guidance range of a $1.8 million loss to an $800,000 loss. Lastly, cash flow from operations was a positive $6.1 million and free cash flow was a positive $3.8 million.
Mark: Security solutions revenue exceeded guidance, partially due to outperformance on high growth programs.
Mark: GAAP gross margin was 39, 8% and cash gross margin was 45, 3% both exceeding guidance due to more favorable mix.
Mark: Adjusted operating expenses, excluding depreciation and amortization were approximately $800000 better than guidance, primarily due to lower than forecasted non labor costs.
Mark: Cross multiple cost centers.
Mark: As a result, adjusted EBITDA also exceeded the top end of our guidance range.
Mark: Adjusted EBITDA was a $362000 profit.
Mark: <unk> to our guidance range of a $1 $8 million loss to an $800000 loss.
Mark: Lastly, cash flow from operations was a positive $6 $1 million and free cash flow was a positive $3 8 million.
Mark Benza: On our last earnings call, we said we were forecasting significant year-over-year improvements in revenue, profit, and cash flow for the full year 2025. So let's turn to slide four for a brief review of our year-over-year performance in the first quarter of the year. Revenue grew 3% year-over-year due to 39% growth in security solutions, partially offset by contraction in secure networks. Growth in Security Solutions was primarily driven by the successful transition of the Defense Manpower Data Center, or DMDC, program in the fourth quarter of 2024 and the ramp of TSA pre-check enrollment volume. Secure networks contracted due to the completion and ramp down of multiple programs over the past several quarters.
Mark: On our last earnings call. We said, we were forecasting significant year over year improvements in revenue profit and cash flow for the full year 2025.
Mark: So, let's turn to slide four for a brief review of our year over year performance in the first quarter of the year.
Mark: Revenue grew 3% year over year due to 39% growth in security solutions, partially offset by contraction in secure networks.
Mark: Growth in security solutions was primarily driven by the successful transition of the defense manpower data center or <unk> program in the fourth quarter of 2024, and the ramp of TSA pre check enrollment volume.
Mark: Secure networks contracted due to the completion and ramp down of multiple programs over the past several quarters.
Mark Benza: Gap Gross Margin Expanded 278 Basis Points and Cash Gross Margin expanded 313 basis points. both primarily due to the favorable mixed shift from secure networks to security solutions. Security Solutions revenue increased from 63% of total company revenue in the first quarter of 2024. to 84% of revenue in the first quarter of 2025. as a result of revenue growth and gross margin expansion. Gap gross profit increased by $1.2 million and cash gross profit increased by $1.4 million.
Mark: GAAP gross margin expanded 278 basis points.
Mark: And cash gross margin expanded 313 basis points.
Mark: Both primarily due to the favorable mix shifts from secure networks to security solutions.
Mark: Security solutions revenue increased from 63% of total company revenue in the first quarter of 2024 to.
Mark: 284% of revenue in the first quarter of 2025.
Speaker Change: As a result of revenue growth.
Mark: And gross margin expansion.
Mark: GAAP gross profit increased by $1 $2 million.
Mark: Cash gross profit increased by $1 4 million.
Mark Benza: Turning to operating expenses. During the third quarter of 2024, we implemented a restructuring and cost reduction plan in order to maximize our operating leverage as we return to growth in 2025. In part as a result of that plan, adjusted operating expenses, excluding depreciation and amortization, declined by $1.3 million year over year. Higher cash gross profit combined with lower adjusted operating expenses. drove a Justity Vida higher by $2.7 million. And lastly, cash flow from operations increased by $6.5 million and free cash flow increased by $7.4 million due to higher adjusted EBITDA. Lower capitalized software development costs.
Mark: Turning to operating expenses.
Mark: During the third quarter of 2024, we implemented a restructuring and cost reduction plan in order to maximize our operating leverage as we return to growth in 2025.
Mark: In part as a result of that plan adjusted operating expenses, excluding depreciation and amortization declined by $1 $3 million year over year.
Mark: Higher cash gross profit combined with lower adjusted operating expenses drove adjusted EBITDA higher by $2 $7 million.
Mark: And lastly, cash flow from operations increased by $6 $5 million and free cash flow increased by $7 $4 million due to higher adjusted EBITDA.
Mark: Lower capitalized software development costs.
Mark Benza: and Favorable Working Capital Dynamics. Overall, we expect the trend of year-over-year growth in revenue, adjusted EBITDA, and cash flow to accelerate in the second half of 2025.
Mark: And favorable working capital dynamics.
Mark: Overall, we expect the trend of year over year growth in revenue.
Mark: Adjusted EBITDA and cash flow to accelerate in the second half of 2025.
John Wood: I will now turn it over to John for an overview of recent business highlights.
Mark: I will now turn it over to John for an overview of recent business highlights John Thanks.
John Wood: John. Thanks, Mark. And good morning, everyone. Let's turn to slide five.
John Wood: Thanks, Mark and good morning, everyone, let's turn to slide five.
John Wood: First, I'll provide an update on our TSA pre-check program. We continue to make progress expanding our national network of enrollment centers, providing a convenient solution for travelers, and gaining enrollment market share on this important national security program. The pace of our rollout has increased since our last earnings call in March, and 73 new locations have been added over the past nine weeks. We currently have 291 locations in key markets across the United States. As we said in the past, we do not expect a linear monthly pacing of opening new enrollment centers. We will have phases when we open a larger number of locations, followed by quarters when we open fewer locations, and during which we, together with the TSA, will assess the operations of our enrollment centers before resuming a higher pace of rollout.
John Wood: First I'll provide an update on our TSA pre check program.
John Wood: We continue to make progress expanding our national network of enrollment centers, providing a convenient solution for travelers and gaining enrollment market share on this important national security program.
John Wood: The pace of rollout has increased since our last earnings call in March and 73, new locations have been added over the past nine weeks.
John Wood: We currently have 291 locations in key markets across the United States.
John Wood: As we said in the past, we do not expect a linear monthly pacing of opening new enrollment centers.
John Wood: We will have phases, when we open a larger number of locations followed by quarters. When we open up 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.
John Wood: However, we continue to target achieving 500 enrollment locations sometime around the end of 2025.
John Wood: However, we continue to target achieving 500 enrollment locations sometime around the end of 2025.
John Wood: Next I will provide a quick update on the program with DMVC. The program is ranting on schedule and we continue to expect it to be a major source of revenue growth for the company over the next several quarters.
John Wood: Next I'll provide a quick update on the program with <unk>.
John Wood: The program is ramping on schedule and we continue to expect it to be a major source of revenue growth for the company over the next several quarters.
John Wood: Finally, I will summarize the latest news on other business outcomes since our last earnings call. Our executive business has achieved new orders with several customers, including Infor and a U.S. federal government customer, as well as renewals from the U.S. 16th Air Force, the Office of Naval Intelligence, a New Zealand government agency, a leading cloud provider, and several other federal government customers. We also received a new order for cyber services from a Fortune 100 company in the technology sector. The Automated Message Handling System, or AMHS, business has achieved key renewals from the United States Marine Corps, the Defense Information Systems Agency, and the U.S.
John Wood: Finally, I will summarize the latest news on other business outcomes since our last earnings call.
John Wood: Or is that the business has achieved new orders with several customers, including in four and a U S. Federal government customer as well as renewals from the U S. 16th Air Force. The office of Naval Intelligence on New Zealand Government agency, a leading cloud provider and several other federal government customers.
John Wood: Yeah.
John Wood: We also received a new order for cyber services from a fortune 100 company in the technology sector.
John Wood: The automated message handling system or MHS business has achieved key renewals from the United States Marine Corps. The defense information systems agency in the U S Special operations command.
John Wood: Special Operations Department.
Mark Benza: I'll now turn the call back to Mark, who will discuss second quarter guidance. Mark? Thanks, John. Let's turn to slide 6. For the second quarter, we expect revenue to grow 14% to 21% year over year to a range of $32.5 million to $34.5 million. We forecast security solutions revenue to grow low 60% to low 70% year over year, primarily due to growth in DMDC and TSA pre-check enrollment. We forecast secure networks revenue to contract to low 70% to mid 60% year over year due to the completion of programs over the past several quarters. Gap gross margin is expected to be approximately 32% to 33.5% and cash gross margin is expected to be approximately 38% to 39.5% down from last year due to rapid growth of lower margin programs in security solutions and the completion of higher margin programs in secure networks.
John Wood: I'll now turn the call back to Mark who will discuss second quarter guidance Mark Thanks, John Let's turn to slide six.
Mark: For the second quarter, we expect revenue to grow 14% to 21% year over year to a range of $32 5 million to $34 5 million.
We forecast security solutions revenue to grow low 60% to low 70% year over year, primarily due to growth in <unk>.
Mark: TSA pre check enrollments.
Mark: We forecast secure networks revenue to contract low 70% to mid 60% year over year due to the completion of programs over the past several quarters.
Mark: GAAP gross margin is expected to be approximately 32% to 33, 5% and cash gross margin is expected to be approximately 38% to 39, 5% down from last year due to rapid growth of lower margin programs and security solutions.
Mark: <unk> and the completion of higher margin programs and secure networks.
Mark Benza: Cash operating expenses, which adjust for capitalized software development costs, stock-based compensation, restructuring costs, and DNA, are forecast to be approximately $1 million to $1.3 million lower year over year, primarily due to cost reduction initiatives in 2024. We forecast an adjusted event loss of $2.1 million to $600,000.
Mark: Cash operating expenses, which adjust for capitalized software development costs stock based compensation restructuring costs and DNA are forecast to be approximately $1 million to $1 $3 million lower year over year, primarily due to cost reduction initiatives.
Mark: In 2024.
Mark: We forecast, an adjusted EBITDA loss of $2 $1 million to $600000.
Mark Benza: Lastly, our full year outlook is unchanged. Revenue for the full year will be comprised of several key components. First, we expect our existing business, excluding TSA PreCheck and the DMDC and DHS programs that we won in the first quarter of 2024, to generate approximately $70 million of revenue in 2025. Second, we estimate the DMDC and DHS programs could recognize approximately $50 million to $75 million of revenue. Third, we expect TSA pre-check enrollment revenue to ramp along with our enrollment centers during the year. And lastly, any new business wins during 2025 will have the potential to contribute additional revenue during the year.
Mark: Lastly, our full year outlook is unchanged.
Mark: Revenue for the full year will be comprised of several key components.
Mark: First we expect our existing business, excluding TSA pre check.
Mark: <unk> and DHS programs that we won in the first quarter of 2024.
Mark: To generate approximately $70 million of revenue in 2025.
Mark: Second we estimate that the MDC and DHS programs could recognize approximately $50 million to $75 million of revenue.
Mark: Third we expect TSA pre check enrollment revenue to ramp along with our enrollment centers during the year.
Mark: And lastly, any new business wins during 2025, we will have the potential to contribute additional revenue during the year.
John Wood: And with that, I'll turn it back to John. Thanks, Mark. Let's turn to slide six. In summary, we're pleased to have delivered on key financial metrics in the first quarter with 16% sequential revenue growth, positive adjusted EBITDA, and positive cash flow. Additionally, we're thrilled with the progress from the DMDC program. The program continues to ramp successfully and remains a key source of revenue growth in 2025. We are excited to be able to deliver mission-critical offerings to this important U.S. government customer. We continue to make progress on the expansion of our TSA pre-check enrollment network and have added a significant number of new locations since our last earnings call.
Jonathan: With that I'll turn it back to Jonathan.
Jonathan: Thanks, Mark, let's turn to slide six.
Jonathan: In summary, we're pleased to have over delivered on key financial metrics in the first quarter was 16% sequential revenue growth positive adjusted EBITDA and positive cash flow.
Jonathan: Additionally, we're thrilled with the progress on the DMD program. The program continues to ramp successfully and remains a key source of revenue growth in 2025.
Jonathan: We are excited to be able to deliver mission critical offerings to this important U S government customer.
Jonathan: We continue to make progress on the expansion of our TSA pre check enrollment network.
Jonathan: And have added a significant number of new locations since our last earnings call.
John Wood: For the second quarter, we're forecasting 14% to 21% year-over-year revenue growth primarily driven by substantial growth in security solutions, partially offset by contraction in secure networks.
Jonathan: For the second quarter, we're forecasting 14% to 21% year over year revenue growth, primarily driven by substantial growth in security solutions, partially offset by contraction secure networks.
John Wood: Finally, we expect year-over-year growth in revenue, adjusted EBITDA, and cash flow to accelerate in the second half of 2020.
Jonathan: Finally, we expect year over year growth in revenue adjusted EBITDA and cash flow to accelerate in the second half of 2025.
Unknown Executive: With that, we're happy to take Operator, please open the line for Q&A. Thank you. As a reminder, to ask a question, please 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.
Jonathan: With that we're happy to take questions.
Jonathan: Operator, please open the line for Q&A. Thank you.
Jonathan: Thank you as a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
Jonathan: <unk>.
Jonathan: Yes.
Zach Cummins: Our first question comes from Zach Cummins with B. Reilly Securities. You may proceed.
Speaker Change: Our first question comes from Zach Cummins with B Riley Securities You May proceed.
Zach Cummins: Hi, good morning, Mark and John. I appreciate giving me the opportunity to ask questions and congrats on the solid start to the year. Mark, I appreciate the reaffirmed outlook, essentially.
Zach Cummins: Hi, good morning, Mark and John.
Speaker Change: Great.
Speaker Change: Given me the opportunity to ask questions and congrats on a solid start to the year.
Speaker Change: Mark I appreciate the reaffirmed outlook essentially just curious if theres been any changes on the new business front first part of the question there.
Zach Cummins: I'm just curious if there's been any changes on the new business front. First part of the question there, and second part is, can you give us a better sense of what the margin profile for DMDC looks like as that continues to go through the early stages of the ramp right now?
Speaker Change: <unk> Park is can you give us a better sense of what the margin profile for <unk>. It looks like as that continues to go through the early stages of the ramp right now.
Mark Benza: Yeah, hey Zach, good morning.
Speaker Change: Yes. Good morning, it's Mark here I will start.
Mark Benza: So it's Mark Benzie here. I will start on the DMDC margin profile, and then I'll turn it over to Mark Griffin regarding new business. So DMVC is a large program. It's going to generate substantial revenue and revenue growth for us this year and then into 2026. It's also a complex program and there's multiple revenue streams within that program and they have very different margin profiles. But on balance, on a blended basis, I. That program will be diluted. to over the course of the year. So revenues will ramp significantly from the first quarter to the second quarter.
Speaker Change: CNBC margin profile and I'll turn it over to Mark Griffin regarding new business.
Speaker Change: So D C.
Mark Griffin: As a large program, it's going to generate substantial revenue and revenue growth for us This year and then into 'twenty six.
Speaker Change: It's also a comp.
Speaker Change: Flex program and there is multiple revenue streams within that program.
Speaker Change: We have very different margin profiles.
Speaker Change: But on balance on a blended basis.
Speaker Change: Hi.
Speaker Change: That program will be dilutive.
Speaker Change: <unk> overall margins are not going to get into program specific.
Speaker Change: Margin details, but it will be dilutive to overall <unk>.
Speaker Change: Margins.
Speaker Change: And.
Speaker Change: As that program ramps sequentially over the course of this year.
Speaker Change: Going to primarily be the lower margin revenue streams that will ramp and so you will see margin contraction sequentially over the course of this over the course of the year. So revenues will ramp significantly from the first quarter to the second quarter margins will contract.
Mark Benza: Margins will contract and then operating expenses will be relatively flattish, maybe a little higher in the second half. And then year over year, you're going to overall revenue adjusted EBITDA and cash flow that year-over-year variance to improve from the first half of the So let me pause there and see if that answers that part of the question.
Speaker Change: And then operating expenses will be relatively flattish, maybe a little higher in the second half.
Speaker Change: And then year over year Youre going to see overall.
Speaker Change: Revenue adjusted EBITDA and cash flow that year over year variance to improve from the first half for the second half.
Speaker Change: So let me pause there and see if that answers that part of the question.
Zach Cummins: Yeah, yeah, very, very helpful on that front.
Speaker Change: Yes, yes, that's very helpful on that front and just curious about any kind of incremental new business. This year that maybe is flowing into the model.
Mark Griffin: And just curious about any kind of incremental new business this year that maybe is flowing into the model.
Mark Griffin: Sure, I'll turn it over to Mark Griffin. Hello, Zach. The business pipeline still remains over $4 billion, with several hundred opportunities that we're working on. The award dates for those opportunities still are scattered between this quarter and next quarter and end of the year. So any incremental growth that we see from awards this year will be single digit kind of opportunities. But the pipeline is still very robust and we're still very pleased with how it's going out.
Speaker Change: Sure I'll turn it over to Margaret Hello, Zack.
Margaret: The business pipeline still remains.
Speaker Change: Over $4 billion with.
Margaret: With several hundred opportunities that we're working on.
Margaret: The award dates for those opportunities still are scattered between this quarter and next quarter and ended the year. So any incremental growth that we see from awards this year.
Margaret: <unk> will be single digit kind of opportunities, but the pipeline is still very robust and we're still very pleased with how its filling out so.
Zach Cummins: So. Equivalent to what it was last earnings call, just a different mix on some of the opportunities that we see both on the IA front, the ID front, and secure network front. Got it.
Margaret: It's equivalent to what it was last earnings call.
Margaret: Just a different <unk>.
Margaret: Mix on some of the opportunities that we see both on the.
Margaret: IAA front, the IV front and secure networks.
Mark Griffin: And just in terms of my last question is around TSA precheck. Obviously, the pace of the roll rollout has been a little bit slower to start this year. So just curious on the performance of your existing footprint and the visibility that you have in terms of rolling out to that 500 target with the TSA here towards the end of the year. Yeah, so pre-check is going to be a really important driver of our financials this year. We feel good about it, especially in terms of cash generation. I think you saw in the first quarter a very significant turnaround in cash flow.
Margaret: Got it and.
Margaret: Just in terms of my last question is around TSA pre Jack obviously, the pace of the roll rollout, it's been up a little bit slower to start this year. So.
Margaret: Just curious on the performance of your existing footprint.
Margaret: The visibility that you have in terms of rolling out to that 500 target.
Margaret: With the TSA here towards the end of the year.
Margaret: Yeah. So.
Margaret: Pre tax is going to be a really important driver of our financials. This year, we feel good about it especially in terms of cash generation.
Margaret: I think you saw in the.
Margaret: First quarter.
Margaret: A significant turnaround in cash flow.
Mark Griffin: Overall, for the full year, I think you'll see cash flow step up significantly year over year, and in part, that's due to performance on TSA pre-check. So we're feeling good about its contribution to the economics for the year.
Margaret: Overall for the full year, I think you'll see cash flow step up significantly.
Margaret: Year over year and.
Margaret: In part that's due to performance on a pre tax.
John we're feeling good about it.
Margaret: Contribution to the economics for the year.
Margaret: Yes.
Margaret: Sure.
Margaret: Hello.
Margaret: Yes.
Zach Cummins: Great. Well, thanks for taking my questions. Really appreciate it. And best of luck with the rest of the quarter.
Great well, thanks for taking my questions I really appreciate it.
Zack Cummins: Good luck with the rest of the quarter. Thank you Zack.
Unknown Executive: Thank you, Zach. Thank you.
Rudy Kessinger: Our next question comes from Rudy Kessinger with DA Davidson. You may proceed. Hey guys, thanks for taking my question. And really following on Zach's question, Mark, I know you don't want to get into maybe specifics on the margin profile, but.
Zack Cummins: Thank you. Our next question comes from Rudy Kessinger with D. A Davidson you May proceed.
Rudy Kessinger: Hey, guys. Thanks for taking my question.
Speaker Change: And really following on <unk> question market I know you don't want to get into specifics on the margin profile, but.
Rudy Kessinger: If you put it a little bit more bluntly than Zach, if I look at your Q2 midpoint of your guidance versus Q1 results, it's negative 31% incremental cash gross margins, negative 59% incremental EBITDA margins. Um... So I guess, I guess. Could you tell us? Low 30s? Mid 30s? Like where should we kind of plug those? And specifically on the DMDC revenues of 50 to 75 million, what would that revenue be if it was being recognized on a net basis instead of on a gross basis? Thank you.
Speaker Change: Put it a little bit more bluntly that Zach if I look at your Q2 midpoint of your guidance versus Q1 result was negative 31% incremental cash gross margins negative 59% incremental EBITDA margins.
Speaker Change: So I guess I guess.
Speaker Change: Could you tell us.
Speaker Change: So our clients throughout the year cash gross margins like where could they be by year end.
Speaker Change: Would they be.
Speaker Change: Low <unk> mid <unk>, like where should we kind of plug those and specifically on the <unk> revenues at $50 million to $75 million, what would that revenue be if it was being recognized on a net basis instead of on a gross basis. Thank you.
Mark Benza: Yeah, sure, Rudy. So first half to second half, if we talk cash gross margins, I'd say you're going to see approximately, now this is going to depend on mix, there are various things that can move this answer, depending on mix. But I would say from first half to second half, you'll probably see cash gross margins step down a little bit. call it roughly 600 basis points. We have some other higher margin revenue streams elsewhere in the portfolio that could come into the second half that will offset some of that dilution.
Speaker Change: Sure Randy.
Speaker Change: So first half to second half as we talk cash gross margins.
Speaker Change: I would say youre going to see approximately now.
Speaker Change: This is going to depend on mix there are various things that can move that to answer.
Speaker Change: Depending on mix, but I would say from first half to second half Youll, probably see cash gross margin step down.
Speaker Change: Call it roughly 600 basis points.
Speaker Change: We have some other higher margin revenue streams elsewhere in the portfolio that could come into the second half that will offset some of that dilution.
Mark Benza: But as a base case, you know, think of it as around 600 basis points of sequential cash gross margin dilution from the first half to the second half. And that will – that will be driven by two things. It's the lower margin revenue streams in DMVC and then an accounting nuance that we've talked about in the past, which is how we're recognizing some of our costs on TSA pre-check. So we have some costs that from a gap basis is ramping to cost of sales and TSA pre-check. But there's not a corresponding increase in cash expense, actually cash outflow expense.
Speaker Change: As a base case think of it at around 600 basis points.
Speaker Change: Sequential cash gross margin dilution from the first half to the second half and that will.
Speaker Change: That will be driven by <unk>.
Speaker Change: The lower margin revenue streams, and the MVC and then an accounting nuance that we've talked about in the past, which is how we're recognizing.
Speaker Change: Some of our costs on on TSA.
Speaker Change: Pre tax.
Speaker Change: We have some costs that from a GAAP basis.
Speaker Change: Is ramping through cost of sales and TSA project.
Speaker Change: But theres not be a corresponding increase in cash expense actually cash outflow expense. So thats one of the reasons why youll see cash flow.
Mark Benza: So that's one of the reasons why you'll see cash flow meaningfully outperform what you would expect relative to your adjustment.
Speaker Change: Meaningfully outperform what you would expect relative to adjusted EBITDA.
Rudy Kessinger: That's helpful.
Unknown Executive: Thank you.
Speaker Change: That's helpful. Thank you.
Unknown Executive: Thank you, and as a reminder, to ask a question, please press star 1-1 on your telephone.
Speaker Change: Thank you and as a reminder to ask a question. Please press star one on your telephone.
Nehal Chokshi: Our next question comes from Nehal Chokshi with Northern Capital Markets, you may proceed. Yeah, thank you. Nice results. And I think a positive guidance from my perspective here. So you had positive free cash flow this quarter. That's great. Sounds like that's largely being driven by TSA PreCheck.
Speaker Change: Our next question comes from new haul trucks, you with Northern capital markets. You May proceed.
Speaker Change: Yes. Thank you.
Speaker Change: Nice results.
Speaker Change: Sure.
Speaker Change: I think a positive guidance from my perspective here.
Speaker Change: Yes.
Speaker Change: So you had positive free cash flow this quarter, that's great. It sounds like that's largely being driven by TSA pre check.
Nehal Chokshi: And then trying to bridge to your commentary that you expect year-to-year growth in cash flow in the second half of 2025, does that mean that 2 to 25 free cash flow will be negative? Yeah, Nehal, so I'm not guiding 2Q free cash flow simply because it's very much going to be driven by working capital at the end of 2Q. So I can tell you the first two months of the quarter, I expect to be positive, slightly positive. The third month of the quarter, it's really going to come down to the mundane details of working capital collections versus payments in the last kind of one to two weeks of June versus the one to two weeks of July.
Speaker Change: And then trying to bridge to your commentary that you expect year over year growth.
Speaker Change: Cash flow in the second half of 2025.
Does that mean that $2 25 free cash flow will be negative.
Speaker Change: Yes.
Speaker Change: I'm not guiding to.
Speaker Change: <unk> Q3 cash.
Speaker Change: Because it's very much going to be driven by.
Speaker Change: Working capital at the end of <unk>. So I can tell you the FERC.
Speaker Change: First two months of the quarter.
Speaker Change: <unk> to be.
Speaker Change: I expect to be positive slightly positive.
Speaker Change: The third month of the quarter, it's really going to come down to the mundane details of working capital.
Speaker Change: Alexian versus payments in the last kind of one to two weeks of June versus the one to two weeks of July and that that Delta could really.
Nehal Chokshi: And that delta could really push working capital positive or negative, and then it'll just reverse in July. But that being said, second quarter of last year, we burned $11 million of free cash flow. I think relative to last year, we're going to be in a very good place. just like you saw in the first quarter. And so Nehal, that's the truth throughout the year. Yeah, okay. You mean, meaning the first two months versus the third month of the quarter in terms of free cash flow generating characteristics? Is that what you're saying? That's true. No, what we're saying is that we expect to be from a year over year point of view, we expect to be way better than last year.
Speaker Change: Push working capital positive or negative and then I will just reverse.
Speaker Change: In July so.
Speaker Change: But that being said second quarter of last year, we burned $11 million of free cash flow I think relative to last year, we're going to be in a very different places.
Speaker Change: Just like this quarter.
Speaker Change: Okay.
Speaker Change: That's true throughout the year.
Yes, you mean, meaning the.
Speaker Change: First two months versus the third month of the quarter in terms of free cash flow generating characteristics is that what youre, saying thats true.
Speaker Change: No what we're saying is that we expect to be.
Speaker Change: From a year over year point of view, we expect to be.
Speaker Change: Way better than last year.
Nehal Chokshi: Yep, I'm pretty confident. I'm on a free castle base. Understood.
Speaker Change: Yes, I'm, sorry, Scott on a free cash flow understood.
Nehal Chokshi: And let's see, pre-cash flow for calendar 24 was... Negative 40 million, given where you were for 1Q25 and where things seem to be trajecting. What are your expectations for the full year? Will it actually be positive?
Speaker Change: And.
Speaker Change: Free cash flow for calendar 'twenty four.
Speaker Change: As.
Speaker Change: Negative $40 million.
Speaker Change: Given where you were for $1 25, and where things seem to be suggesting.
Speaker Change: Great.
Speaker Change: What are your expectations for the full year will it actually be positive.
Nehal Chokshi: Yeah, so I'm not guiding full year cash flow. But one of the things that I walked through On the last call is that we expect free cash flow to outperform adjusting the dock. in part. due to some favorable working capital dynamics, as well as. The pretty significant chunk of expense recognition running through cost of sales on pre-check that will not have a corresponding cash out. Okay. All right. Great. And then just on the quarter here, You note that outperformance comes from both security solutions and security networks, secure networks. From a dollar basis, which one was the bigger outperformer?
Speaker Change: Yeah. So.
Speaker Change: So I.
Speaker Change: Im not guiding.
Speaker Change: Full year cash flow, but one of the things that I walked through.
Speaker Change: On the last call is that we expect free cash flow to outperform adjusted EBITDA.
Speaker Change: And part.
Speaker Change: Due to some favorable working capital dynamics as well as.
Speaker Change: The.
Speaker Change: Pretty significant chunk of expense recognition running through cost of sales on pre check that will not have a corresponding cash outflow.
Speaker Change: Okay.
Speaker Change: Alright, great and then just on the quarter here.
Speaker Change: You'll note that outperformance comes from both security solutions and security networks security networks.
Speaker Change: From a dollar basis, which one was the bigger outperformer.
Mark Benza: Solutions.
Speaker Change: Our solutions.
Mark Benza: Security would that primarily have been driven by TSA pre-check then? I'd say both of the growth programs. So at the end of the day, I'm a great chef.
Speaker Change: Security is so would that be.
Speaker Change: It would have primarily been driven by TSA pre chetan.
Speaker Change: I'd say both of the growth programs.
Speaker Change: So at the end of the <unk> project.
Mark Benza: Okay, and are you seeing any rollover and renewal activity given that we're coming to the, that we are past the five year anniversary here? Yeah, the renewal market will contract overall market will contract pretty meaningfully. This year, and we did see that in the first quarter, as expected.
Speaker Change: Okay and are you seeing any rollover and renewal activity given that we're coming to the.
Speaker Change: That we are past the five year anniversary here.
Speaker Change: Yes, the renewable market.
Speaker Change: No.
Speaker Change: Traps overall market.
Speaker Change: We will contract pretty meaningfully.
Speaker Change: This year.
Speaker Change: And we did see that in the first quarter as expected.
Nehal Chokshi: Okay, great. Fantastic results given that dynamic.
Speaker Change: Okay, great fantastic results given that dine.
Unknown Executive: Thank you.
Speaker Change: Dynamic thank you.
Speaker Change: Thank you.
Unknown Executive: This will conclude today's question and answer session.
Speaker Change: Thank you. This will conclude today's question and answer session I will now turn the call back to John Woods for any closing remarks.
John Wood: I will now turn the call back to John Wood for any closing remarks. Well, first of all, I just want to thank our shareholders for, you know, your ongoing support. And, you know, we continue to make progress in the first quarter. We executed our plan, demonstrated year-over-year growth and key financial metrics. And we look forward to continuing the trend of year-over-year growth throughout 2025. You know, we have very robust and recession resistant markets and well-funded customers and a decades-long track record of serving the world's most security conscious organizations. So from our perspective, Telos has a very strong foundation for the future.
John Wood: Well first of all I just want to thank our shareholders for your ongoing support.
John Wood: And we continue to make progress in the first quarter, we executed our plan demonstrated year over year growth in key financial metrics.
John Wood: We look forward to continuing the trend of year over year growth throughout 2025.
John Wood: We have very robust and recession resistant markets.
John Wood: Well funded customers in a decades long track record of serving the world's most security conscious organizations.
John Wood: From our perspective tells us a very strong foundation for future. So thank you very much for participating.
John Wood: So thank you very much for participating. Thank you.
Unknown Executive: This concludes the conference. Thank you for your participation. You may now disconnect. Thanks for watching!
John Wood: Thank you. This concludes the conference. Thank you for your participation you may now disconnect.
John Wood: Okay.
John Wood: [music].
John Wood: Okay.
John Wood: Okay.
John Wood: Yes.
John Wood: [music].