Q3 2025 Telos Corp Earnings Call
Throughout our information assurance and secure communications portfolio.
Our operational and financial performance inflected in a very positive way in the first quarter of this year.
With the return to revenue growth.
Profitable adjusted EBITDA and strong cash flow.
That trend accelerated in the second quarter and then stepped up significantly in the third quarter.
Our third quarter results, significantly, exceeded expectations. And we're raising our outlook for the second half of 2025.
Our updated outlook for the second half, reflects higher Revenue.
Adjusted Ava and adjusted Eva margin.
Than previously indicated.
As well as a more favorable waiting of second, half Revenue to the third quarter.
We continue to share repurchases in the third quarter.
Lastly, we have a robust portfolio of existing programs that we forecast will deliver double-digit growth in revenue and adjusted ibida. Again next year, even before the addition of any new business wins through the end of 2026,
With that introduction. Let's get into more detail. Beginning on slide 3.
We over-delivered on key financial metrics in the third quarter, exceeding both revenue and profit guidance.
Revenue grew 116% in the quarter to 51.4 million.
Above our guidance range of 44 to 47 million.
Telos ID, drove the outperformance above the top end of the guidance range.
Gaap, gross margin was 39.9%.
And cash, gross margin was 44.8%.
Both are above our guidance range, due to outperformance in all lines of business. They are also well above the gross margins that we reported in the second quarter.
As I said, last quarter, given the breadth of revenue streams in our portfolio. Gross margins will naturally fluctuate within our historical range from quarter to quarter based on Revenue mix.
As you'll see in our fourth quarter guidance, we expect margins to mix lower sequentially next quarter.
Adjusted operating expenses in the third quarter or approximately 500,000 dollars better than guidance due to ongoing cost disciplines throughout the company.
As a result of better than forecasted Revenue, gross margin and operating expenses.
Adjusted. I also exceeded the top end of our guidance range.
Adjusted. I thought it was $10.1 million.
Above our guidance range of 4 to $5.7 million.
Adjusted to the margin was 19.6%.
And incremental adjusted, even the margin was 51.5%, or put differently, for each dollar of revenue growth, 51 cents converted to adjusted EBITDA.
Lastly, in part as a result of our companywide working capital initiatives, we delivered another quarter of robust cash flow.
Operating cash flow in the quarter was 9.1 million.
Free cash flow was 6.6 million or a 12.8% free. Cash flow margin.
And we deployed approximately 3.6 million to repurchase over. 584,000 shares at a weighted average price of 6.23 cents per share.
Since our fourth quarter 2024 earnings call, we have been saying that we expect significant year-over-year improvements in revenue, profit, and cash flow for the full year 2025.
So, let's turn to slide 4 for a brief review.
Of our year-over-year performance in the first nine months of the year.
We've discussed the business and programmatic drivers behind our year-over-year performance for the first nine months and each of our quarterly narratives, so I won't repeat them here.
But I do think.
It's worthwhile to quantify the pronounced step up in our financial performance during that time period on a cumulative basis.
Specifically Revenue, grew 44%.
Cash gross margin, although fluctuating quarter to quarter, expanded 30 basis points to 43%.
Incremental adjusted IBA margin was 56.1% or again, put differently for every dollar of Revenue growth. 56 cents, converted to adjusted. EBA
Adjusted EBA grew by $20.3 million and moved from a loss in 2024 to a 9.2% positive margin in 2025.
To a 12, 7% positive free cash flow margin in 2025.
Free cash flow improved by nearly 40 million dollars and moved from a cash burn position in 2024.
And lastly, we deployed $7 $6 million to repurchase $2 1 million shares at a weighted average price of $3 69 per share.
I will now turn it over to John for an overview of recent business highlights John.
Thanks, Mark and good morning, everyone.
Let's turn to slide five first.
I'm thrilled to report that we launched our new exactly AI product in early October.
Have already secured our first enterprise customer.
The Telus team is extremely excited about this new technology and the opportunities it presents for our company as well as for our customers.
Exactly AI as a powerful enterprise AI software capability added to our executive platform, which has already proved the proven solution for cyber risk management compliance for some of the world's most security conscious organizations.
A foundation of our unique approach to AI is our ability to exceed our solution with over 25 years of cyber security expertise.
The result is a solution with the capabilities to create a true force multiplier organizations that strive to do more challenging security work with fewer resources.
Exactly and it has the ability to provide users with smart insights that enable quick identification and resolution of potential compliance gaps.
It also supports enhanced decision, making with actionable data to accelerate compliance initiatives.
Finally in real World testing, we've documented potential improvements and efficiencies up to 93% across cyber governance risk and compliance or Trc packs in.
In addition to savings already realized from previous exact diversions.
Again, a true force multiplier for organizations that strive to do more with less in an increasingly complex cyber security environment.
We plan to continue to evolve our platform and our AI capabilities with increased automation as well as the expected addition of new agenda features to further enhance the effectiveness and efficiency.
We're very excited about the future for our exact platform given this recent leap forward in the development of our product.
Second I'll provide a quick update on our TSA pre check program.
I am pleased to report that we have now achieved our stated objective of reaching 500 enrollment locations. This year.
We currently have 504 locations across 41 states and Puerto Rico.
We're pleased with this progress that we've made on this rollout as we strive to provide a convenient solution for travelers across the country and to be a trusted partner on this important national security program.
Going forward, we will continue to evaluate our enrollment location network for improvements in market coverage, while working with the TSA to ensure we are offering an attractive option for our customers.
I'm now going to turn the call back to Mark who is going to discuss fourth quarter guidance Mark. Thanks.
Thanks, John.
Let's turn to slide six.
For the fourth quarter, we forecast revenue to grow 67% to 76% year over year to a range of 44 to $46 $3 million.
We forecast cash gross margin to be approximately 40% to 41%.
Lower sequentially due to normal quarterly fluctuations in revenue mix as described earlier.
We forecast adjusted EBITDA of four to $5 $7 million or an adjusted EBITDA margin of nine 1% to 12, 3%.
Overall fourth quarter guidance reflects a stronger than previously forecasted second half.
A more favorable weighting of second half revenue to the third quarter and potential for short term administrative delays due to the federal government shutdown.
Compared to our commentary on our last earnings call.
At the midpoint of guidance second half revenue is now forecasted to be higher by $5 $6 million or 6%.
Adjusted EBITDA is forecasted to be higher by $5 2 million or 54%.
And adjusted EBITDA margin is forecasted to be approximately 470 basis points higher.
Lastly, we will provide further detail about our 2026 outlook on our fourth quarter earnings call in March.
But in the meantime, we.
We currently forecast that our portfolio of existing programs will deliver double digit growth in revenue and adjusted EBITDA again next year, even before the addition of any new business wins through the end of 2026.
We forecast existing programs will generate approximately $180 million of revenue, primarily driven by growth in Telerik Ivy.
Partially offset by contraction in secure networks.
Additional upside revenue in 2026 would come from sales of our newly released exactly AI software and.
And new program wins from our multibillion dollar pipeline of new business opportunities.
With that I'll turn it back to Jonathan.
Thanks, Mark, let's turn to slide seven.
To recap our business has continued to scale in a very meaningful way this year largely due to programs and tell us.
We achieved a 116% year over year revenue growth in the third quarter.
And significantly exceeded revenue and adjusted EBITDA guidance.
We continue to produce robust cash flow, which funded additional share repurchases in the quarter.
We are very excited about the opportunities that our new exact AI solution presents for our company and for our customers.
We expect that year over year growth will continue into the fourth quarter and are pleased to report improved second half outlook first the outlook provided on our last earnings call in August.
And finally, we look forward to another year of double digit growth in 2026.
And with that we're happy to take questions.
Operator, please open the line for Q&A. Thank you.
Thank you at this time, we will conduct a question answer session.
To ask a question you will need to press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
Please stand by while we compile the Q&A roster.
Yes.
And our first question comes from the line of Zach Cummins of Bofa Securities. Your line is now open.
Yes, hi, good morning, Mark and John Congrats on the strong results here and I. Appreciate you taking my questions just starting with the outlet Mark I think you mentioned a little bit of a headwind potentially from from the government shutdown in Q4.
Does that pertain to potential award decisions going into 2026 any impact to some of those decisions getting pushed a little further to the right.
Yes, so a couple of things in.
In the fourth quarter.
Yeah.
The impact of the government shutdown I would say is at this point appropriately captured in our in our range on both the revenue and adjusted EBITDA line.
I'd say, what we're seeing in terms of government shutdown.
A few with a few things first.
Words are essentially stalled for the time being and generally sliding to the right.
And then theres been various other administrative delays things around things like.
Collections on on invoices or.
Getting.
Renewals executed or option years executed.
The impact on the P&L, it's been relatively modest but it's been.
It's more administrative delays like I described in the script.
And then like I said on the award side generally awards.
Being delayed for the time being.
John and Mark and ill just add to that no I think thats, a fair way of capturing it.
They will hold off on awards until the government turn back on.
Nothing has been taken off the table.
Yes pipeline wanting to 'twenty six 'twenty six is still high.
Substantially there's a lot of opportunity in there.
It's still a multibillion dollar pipeline.
With a good chunk of that.
<unk> to be awarded.
Say over the next six months with several tens of millions of dollars.
Revenue opportunity in 2026 on top ups.
The 180 from pre existing programs.
Understood that's really helpful and.
John I just wanted to ask you your question about your new exactly.
So it seems like it's getting.
Pretty solid traction out of the gate with one major enterprise wide deployment.
<unk> press release that a few weeks ago, but can you just give us a sense of maybe the initial feedback that you've been getting from the product and what are the plans in terms of trying to scale that as we move forward into 2026.
Well the first thing we're going to do is and we've been doing this.
You know really offered into our installed base.
So customers are you see value out of exactly by itself, but when you. When you include a rag.
Which allows you to reduce the.
The hallucinations, if you will with no large language model. It really makes it very very simple are much more simple for a customer to implement their their needs for security and compliance because essentially the language model itself and the rag together generated.
For the customer and it generates it in.
<unk>.
Very very quickly.
I think on Alright, alright.
Our test results are something like up to 93%.
Improvement in time.
Understood well, thanks for taking my questions and congrats again on the strong results.
Thanks.
Thank you one moment for our next question.
Our next question comes from the line of Matthew <unk> of Needham <unk> Company. Your line is now open.
Hey, guys. This is Matt Greek yogurt and Needham Thanks for taking our questions and congrats on the strong results.
Sticking on an exact number.
What are the specific impact on the shutdown in broader pressure from continuing resolution.
Conversations there and how are you <unk> the value proposition of the offer.
I missed the uncertainty.
So.
This shutdown will be behind us soon I think the issue is during a shutdown sometimes your customers just not there.
Because they've been they've been furloughed.
I think there is a clear is that there is a piece of that that's there. The good news is that previously we had been out in front of us before we even announced exact AI showing.
Showing our customer base, our installed customer base.
Getting their feedback and I think people are really excited about it honestly.
Because it also means that when you use exact AI you don't need the same level of.
Professional services is you have to it's used in the past.
Yes, maybe I'll add to that is we had a.
First enterprise sale to a customer before the shutdown straight out of the gate when we launched the product.
Several other large customers have been very interested.
Those conversations pushed to the right a little bit as a result of the shutdown.
Good good traction straight out of the gate.
That's great to hear.
And then are there any other hurdles to adoption there or do you think we can see inflection that sorry, it's one.
Once budgets open up.
I don't see.
I don't see anything thats going to hold back from people wanting to use exact AI.
That's great Okay. Thank you.
Youre welcome. Thank you.
Thank you for our next question.
Our next question comes from the line of <unk> <unk> of BMO capital markets. Your line is now open.
Hi, Thanks for taking my question Congrats on the results on the TSA pre K program.
500 location goals.
2025, and I really want to understand a little bit more.
The plan for going forward 2020, and the <unk>.
Out of that program.
Other new location, you mentioned sort of.
Evaluating marketing market positioning and I just wanted to take a step back and now that we've got.
Enrollment location target how are we thinking about growth of this program going forward. Thank you.
Hey, Brad Thanks for the question so.
We are now operating at scale and that program, we've been working towards our 500 locations for some time now.
Actually now exceeded that target so in terms of our physical location in our it infrastructure. We are now at scale nation.
Nationwide.
Now that we're up and running.
We will we will continue.
Two yes.
Balls.
Yes, Walt that network of locations continue to develop.
New new partnerships.
You need to find new and innovative ways to.
Reach travelers and serve travelers.
So this is really this is really just the beginning we're really excited to be at scale and.
I think theres I think theres a lot of upside over the next few years and that program, maybe mark Christian might have something to add.
Yes.
TSA expansion program as Mark indicated.
We'll continue to look for those areas that are underserved.
Both from a location point of view, but also those of those customer basis. So.
As indicated in the script, we will continue to look for expansion in those areas to serve not only TSA, but serve the community of enrollment and renewal.
<unk> as well so we're very excited about the expansion capabilities.
And it was a great achievement, we feel to get to our 500 locations.
But we will continue to look for enhancements and expansion from there.
Okay.
Thank you for our next question.
Our next question comes from the line of Woody Kissinger of D. A Davidson your line is now open.
Yes, thanks for the questions and congrats on another nice quarter here.
I'm trying to think the $180 million baseline for existing programs for next year I'm, just trying to size up how much you could potentially add on top of that because if you look at 2025 and the revenue youre going to do and I take out the $70 million from existing programs. The 50 to 75 from <unk> in the pre check.
It seems like the actual revenue you've got this year from new business programs was pretty minimal and I think I heard you.
Several tens of millions of potential revenue for next year just how.
When will you know that that should should those be wins that will be awarded within the next few months. After the shutdown is over like how much visibility do you add to that.
Likelihood of those deals being awarded to you et cetera.
Hey, Rudy Mark Griffin, Yes, the pipeline that we have is still robust and growing and so we've seen even during the government shutdown. The pipeline is increasing and nothing is getting canceled at this point.
As Mark indicated earlier broadly speaking awards are just pausing.
And kind of moving to the right, but the.
The portfolio and the pipeline between <unk>.
Identity and some of the projects that we feel very confident on.
Potentially can drop in the next few months, but more likely you are probably positioned more into 2026 on the first half.
So we will see some activity there that would add to that baseline that mark talked about earlier.
Plus plus additional AI software sales right.
Okay got it and then my second question was on the back to AI.
If you like is there an upsell potential to existing exact to customers on exact AI and if so like what would be the revenue uplift is critical to get adoption of it yeah. I don't know if you heard earlier <unk> heard me say earlier Rudy our primary targets start is our existing installed base.
And in General I would say.
Great deal of excitement by our customers on the release of exact AI. Unfortunately, when the market when the government shut down temporarily.
To put things on pause a little bit, but now that we're seeing our way to the end of that pause at the end of the shutdown.
It will come at break bags for us.
Great. Thank you thanks for taking my questions guys.
Yes.
Thank you one moment for our next question.
Okay.
Our next question comes from the line of Noah <unk> of Northland Capital markets. Your line is now open.
Thank you congrats on the strong results.
Thanks.
Absolutely.
The 180 million baseline for calendar 'twenty six imply.
Implies what percent of the annualized full run rates for your D. M D C program and pre check.
Okay.
I'm not going to get into programmatic detail, but what I can tell you is.
That one is sort of just do the math, but that 180 implies.
But.
$17 million of growth at the midpoint of our 2025 died.
At 17 million is comprised roughly.
$28 million of growth of our security solutions.
Net of $11 million of contraction at secured networks.
Substantially all of that $28 million gross op solutions is coming from <unk>, which is the business that contained to those programs.
Okay.
Alright, thank you.
And then you also say that the pipeline can bring tens of millions in revenue for calendar 'twenty six above the $180 million baseline can you walk us through how you come to that.
Range there.
Yes, so pipeline is roughly $5 billion right now.
That's more correction on about a third of that is over the next say six months yes.
So those will be awarded over the next six months.
And so at that level of award opportunity yes.
Certainly sir.
<unk> 10.
Millions of that represents revenue opportunity in 2026.
Okay.
When you say tens of million dollars that includes the kroll rating of <unk>.
<unk>.
Awards being pushed out to the right from four to 25 to <unk> 26, and <unk> 26, yes.
And.
Its several tens of billions.
Yes, that's the total opportunity set right. So the point is.
Sure.
Yes, there is.
There is ample opportunity.
That $180 million between exactly.
Traditional.
Pipeline.
It's just a matter of.
What what comes in the door and win.
Can you remind us what has been your historical win rate.
What's in your pipeline.
Got it.
It's both.
Okay Alright.
And then last question from me is that.
Given the 60% incremental EBITDA margin of the current quarter and 20%.
Margin and 13% free cash flow margin.
Care to share any perspective on what's the sustainable free cash flow margin for <unk>.
It's probably a little too early to say.
Forecast free cash flow margins.
Well I think I'll say is.
Yes.
Base.
$880 million of revenue again, before any new business wins.
From $8 million of revenue.
<unk>.
We would.
We manage we're targeting managing our opex.
Yes.
Low double digit adjusted EBITDA margins, so call it call it 10% to 11% or so adjusted EBITDA margin.
Additional.
Growth comes in above that 180.
That adjusted EBITDA margin will will run higher but.
Toggle between.
Additional growth investments.
Higher adjusted EBITDA margin and Jan.
What that additional revenue is what the margin profile is that additional revenue.
Adjusted EBITDA margin you can start to give you an indication of where free cash flow control, but we expect a very.
Another good year.
Free cash flow in 2026.
Okay. That's really helpful. Maybe just to further.
The.
What you are sort of giving color around with calendar 'twenty six in terms of a better margin.
And then the potential.
You win the tens of millions of opportunity from the pipeline.
Would drive.
You would expect that incremental margin to be above that sort of 10% to 11% baseline EBITDA margin.
But it doesn't sound like you would expect 60% incremental EBITDA margins.
But it sounds like you would expect.
Somewhere like 20%, 30% range.
Yes, it's a little premature to commit to that for two reasons one it depends on what that additional revenue is and what the incremental gross margins are on the on that revenue and then also how much of that we decided to commit to additional growth investment so.
My point my point simply as areas there is upside.
To that kind of 10, 11% Jeff.
Adjusted EBITDA margin.
And it's just going to depend on again the margin profile of that additional revenue in that how much of that.
Hold back for for some growth investments.
Got it okay. Thank you very much.
Thank you.
Thank you I'm showing no further questions at this time I would like to turn it back to John <unk> remarks.
Thank you very much operator first I just wanted to say thank you to everybody for your ongoing support of the company.
As shareholders. We certainly appreciate your staying behind the company and obviously, we're going to continue to be intensely focused on executing our growth plans.
And continuing the same trend of year over year growth in the fourth quarter and into 2026.
Finally, with our robust and recession resistant end markets, well funded customers and a decades long track record of serving the world's most security conscious organizations.
All of Us as a strong foundation for the future. Thanks a lot.
Thank you for your participation in today's conference. This does conclude the program you may now disconnect.
Okay.
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