Q2 2026 Telos Corp Earnings Call

August 10, 2026

Operator: Good day, and thank you for standing by. Welcome to the Telos Corporation's Q2 2026 earnings conference call. At this time, all participants are under the listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising that your hand is raised. If you would like to remove yourself from the queue, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker for today, Allison Phillipp, Director of Corporate Communications. Please go ahead.

Operator: G ood day, and thank you for standing by. Welcome to the Telos Corporation's Q2 2026 earnings conference call. At this time, all participants are under the listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising that your hand is raised. If you would like to remove yourself from the queue, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker for today, Allison Phillipp, Director of Corporate Communications. Please go ahead.

Speaker #1: Good day, and thank you for standing by. Welcome to the Telos Corporation's second quarter 2026 earnings conference call. At this time, all participants are under the listen-only mode.

Speaker #1: After this speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to press *11 on your telephone.

Speaker #1: You will then hear an automated message advising that your hand is raised. If you would like to remove yourself from the queue, please press star 11 again.

Speaker #1: Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker for today, Allison Phillipp, Director of Corporate Communications.

Speaker #1: Please go ahead.

Speaker #2: Good morning. Thank you for joining us to discuss Telos Corporation's second quarter 2026 financial results. With me today are John Wood, Chairman and CEO of Telos; Mark Bendza, Executive Vice President and CFO of Telos; and Mark Griffin, Executive Vice President of Security Solutions.

Allison Phillipp: Good morning. Thank you for joining us to discuss Telos Corporation's Q2 2026 financial results. With me today is John Wood, Chairman and CEO of Telos, Mark Bendza, Executive Vice President and CFO of Telos, and Mark Griffin, Executive Vice President of Security Solutions. Let me quickly review the format of today's presentation. Mark Bendza will begin with remarks on our Q2 results and full year outlook. We will then open the line for Q&A, where John Wood and Mark Griffin will also join us. The Q2 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 #2: Let me quickly review the format of today's presentation. Mark Bendza will begin with remarks on our second quarter results and full-year outlook. We will then open the line for Q&A where John Wood and Mark Griffin will also join us.

Speaker #2: The second quarter financial results were issued earlier today and are posted on the Telos Investor Relations website, where this call is being simultaneously webcast.

Speaker #2: Additionally, we have provided presentation slides on our investor relations website. Before we begin, we want to emphasize that some of our statements on this call, including all of those relating to 2026 company performance, plans, and operations, are forward-looking statements and are made under the Safe Harbor provisions of the federal securities laws.

Allison Phillipp: Before we begin, we want to emphasize that some of our statements on this call, including all of those relating to 2026 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. We do not undertake any duty to update any forward-looking statement. 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's 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.

Speaker #2: These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially for various reasons, including the factors described in today's financial results summary, in the comments made during this conference call, and in our SEC filings.

Speaker #2: We do not undertake any duty to update any forward-looking statement. 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’s financial performance.

Speaker #2: 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 second quarter results summary and on the investor relations portion of our website.

Allison Phillipp: You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results in our Q2 results summary and on the investor relations portion of our website. Please also note that financial comparisons are year-over-year unless otherwise specified. The webcast replay of this call will be available on our company website under the Investor Relations link. With that, I will turn the call over to Mark Bendza.

Speaker #2: Please also note that financial comparisons are year-over-year unless otherwise specified. The webcast replay of this call will be available on our company website under the Investor Relations link.

Speaker #2: With that, I'll turn the call over to Mark Bendza.

Speaker #3: Thank you, Allison. And good morning, everyone. We're pleased to report another strong quarter, highlighted by results that exceeded the high end of our guidance range, strong cash flow generation, accelerated share repurchases, and a meaningful increase in our full-year profitability outlook.

Mark Bendza: Thank you, Allison, and good morning, everyone. We are pleased to report another strong quarter, highlighted by results that exceeded the high end of our guidance range, strong cash flow generation, accelerated share repurchases, and a meaningful increase in our full-year profitability outlook. These results reflect the strength of our business and our continued ability to solve complex mission-critical challenges for our customers. Telos helps the world's most security-conscious organizations solve those challenges by combining proven cybersecurity, digital identity, and Secure Networks solutions, combined with deep mission expertise and a flexible approach to addressing unique customer requirements. Our solutions strengthen security, improve operational efficiency, accelerate compliance, and help customers adapt to an evolving threat landscape. Let's turn to slide 3. Total company revenue increased 33% year over year to $47.7 million, exceeding our guidance range of $44 million to $46 million, driven by stronger than forecasted performance in Telos ID.

Speaker #3: These results reflect the strength of our business and our continued ability to solve complex, mission-critical challenges for our customers. Telos helps the world’s most security-conscious organizations solve those challenges by combining proven cybersecurity, digital identity, and secure networking solutions with deep mission expertise and a flexible approach to addressing unique customer requirements.

Speaker #3: Our solutions strengthen security, improve operational efficiency, accelerate compliance, and help customers adapt to an evolving threat landscape. Let's turn to Slide 3. Total company revenue increased 33% year over year to $47.7 million.

Speaker #3: Exceeding our guidance range of $44 million to $46 million, driven by stronger-than-forecasted performance in Telos ID. GAAP gross margin was 35%, and cash gross margin was 40.6%, both above our expectations, reflecting disciplined execution across large programs in Telos ID.

Mark Bendza: GAAP gross margin was 35%, and cash gross margin was 40.6%, both above our expectations, reflecting disciplined execution across large programs in Telos ID. As a reminder, given the diversity of our revenue streams, gross margins will fluctuate from quarter to quarter based on revenue mix. Adjusted operating expenses declined by more than $800,000 year over year, but were approximately $500,000 above guidance assumptions, primarily reflecting higher TSA PreCheck® marketing activity and incentive compensation accruals. Adjusted EBITDA exceeded the high end of our guidance range, reaching $6.9 million, compared to guidance of $5 million to $6 million. Adjusted EBITDA margin expanded to 14.4%, up significantly from 1.1% in the prior year period. Let's turn to slide 4 to discuss cash flow. Over the past few years, we have transformed Telos into an increasingly cash-generative business.

Speaker #3: As a reminder, given the diversity of our revenue streams, gross margins will fluctuate from quarter to quarter based on revenue mix. Adjusted operating expenses declined by more than $800,000 year over year, but were approximately $500,000 above guidance assumptions.

Speaker #3: This was primarily due to higher TSA PreCheck marketing activity and incentive compensation accruals. Adjusted EBITDA exceeded the high end of our guidance range, reaching $6.9 million compared to guidance of $5 million to $6 million.

Speaker #3: Adjusted EBITDA margin expanded to 14.4%, up significantly from 1.1% in the prior-year period. Let's turn to slide 4 to discuss cash flow. Over the past few years, we have transformed Telos into an increasingly cash-generative business.

Mark Bendza: Strong revenue growth, lower operating expenses, and disciplined working capital management have significantly improved our free cash flow margins while reducing quarter-to-quarter cash flow volatility. Operating cash flow for Q2 was $8.8 million, and free cash flow totaled $6.6 million, representing a 13.9% free cash flow margin. This marks our sixth consecutive quarter with a free cash flow margin above 12%. During the quarter, we deployed $4.7 million to repurchase more than 1 million shares at an average price of $4.50 per share. Let's turn to slide 5 to discuss our Q3 guidance. For Q3, we forecast revenue in a range of $49.2 million to $50.6 million, down slightly year over year due to unusually high non-recurring revenue associated with the startup of a new program in the comparable period last year.

Speaker #3: Strong revenue growth, lower operating expenses, and disciplined working capital management have significantly improved our free cash flow margins, while reducing quarter-to-quarter cash flow volatility.

Speaker #3: Operating cash flow for the second quarter was $8.8 million, and free cash flow totaled $6.6 million, representing a 13.9% free cash flow margin. This marks our sixth consecutive quarter with a free cash flow margin above 12%.

Speaker #3: During the quarter, we deployed $4.7 million to repurchase more than 1 million shares at an average price of $4.50 per share. Let's turn to slide 5 to discuss our third-quarter guidance.

Speaker #3: For the third quarter, we forecast revenue in a range of $49.2 million to $50.6 million, down slightly year over year due to unusually high non-recurring revenue associated with the startup of a new program in the comparable period last year.

Speaker #3: Excluding the year-over-year differential in non-recurring revenue, third-quarter revenue guidance implies 6% growth at the midpoint. We expect cash gross margin to be approximately 37.5% to 38.5%.

Mark Bendza: Excluding the year-over-year differential and non-recurring revenue, Q3 revenue guidance implies 6% growth at the midpoint. We expect cash gross margin to be approximately 37.5% to 38.5%, reflecting the anticipated effects of contingency reserves on fixed-price contracts and normal fluctuations in revenue mix. Adjusted operating expenses are expected to be approximately $400,000 lower than the prior year. Adjusted EBITDA is expected to be between $6 million and $6.8 million, representing a margin of 12.2% to 13.4%. Let's turn to slide 6 to discuss our updated full-year outlook. Based on our strong H1 execution, we are raising our full-year profitability outlook. We are increasing our adjusted EBITDA guidance to a range of $23.6 million to $28.6 million, up from our previous guidance of $20.6 million to $28 million.

Speaker #3: Reflecting the anticipated effects of contingency reserves on fixed-price contracts and normal fluctuations in revenue mix, adjusted operating expenses are expected to be approximately $400,000 lower than the prior year.

Speaker #3: Adjusted EBITDA is expected to be between $6 million and $6.8 million, representing a margin of 12.2% to 13.4%. Let's turn to slide 6 to discuss our updated full-year outlook.

Speaker #3: Based on our strong first-half execution, we are raising our full-year profitability outlook. We're increasing our adjusted EBITDA guidance to a range of $23.6 million to $28.6 million.

Speaker #3: Up from our previous guidance of $20.6 million to $28 million. We're also raising our adjusted EBITDA margin outlook to 12.6% to 14.7%, representing an improvement of approximately 70 to 160 basis points versus our prior forecast.

Mark Bendza: We are also raising our adjusted EBITDA margin outlook to 12.6% to 14.7%, representing an improvement of approximately 70 to 160 basis points versus our prior forecast. In addition, we are raising our full-year cash growth margin outlook to 39% to 40%, up from our previous forecast of 38.2% to 39.5%, while lowering our adjusted operating expense forecast by approximately $1.7 million. Our full-year revenue outlook is now $187 million to $195 million. Starting in Q4, we expect the resale of low-margin third-party software to begin phasing out. While this revenue stream contributes meaningful revenue, it carries only a single-digit growth margin and is not consistent with the margin profile we are building across the company. As a result, our revenue outlook is approximately $2.5 million lower at the midpoint than our previous guidance.

Speaker #3: In addition, we are raising our full-year cash gross margin outlook to 39% to 40%, up from our previous forecast of 38.2% to 39.5%, while lowering our adjusted operating expense forecast by approximately $1.7 million.

Speaker #3: Our full-year revenue outlook is now $187 million to $195 million. Starting in the fourth quarter, we expect the resale of low-margin, third-party software to begin phasing out.

Speaker #3: While this revenue stream contributes meaningful revenue, it carries only a single-digit gross margin and is not consistent with the margin profile we're building across the company.

Speaker #3: As a result, our revenue outlook is approximately $2.5 million lower at the midpoint than our previous guidance. Beyond 2026, the full run-rate impact will be approximately $33 million of revenue per year, with only a modest impact on profit.

Mark Bendza: Beyond 2026, the full run rate impact will be approximately $33 million of revenue per year, with only a modest impact on profit. Because this revenue stream carries a single-digit growth margin, eliminating it is expected to improve total company cash growth margin by over 600 basis points on a run rate basis, all else being equal. In addition, we expect to realize approximately 400 basis points of additional cash growth margin accretion in H2 2027 after we complete the expense recognition of certain prior period investments in our TSA PreCheck® program. Accordingly, we expect a combination of these two items to improve our cash growth margins by approximately 10 percentage points during H2 of next year, all else being equal. Before I conclude, I would like to spend a few minutes discussing growth and new business opportunities.

Speaker #3: Because this revenue stream carries a single-digit gross margin, eliminating it is expected to improve total company cash gross margin by over 600 basis points on a run-rate basis.

Speaker #3: All else being equal. In addition, we expect to realize approximately 400 basis points of additional cash gross margin accretion in the second half of 2027, after we complete the expense recognition of certain prior-period investments in our TSA PreCheck program.

Speaker #3: Accordingly, we expect a combination of these two items to improve our cash gross margin by approximately 10 percentage points during the second half of next year, all else being equal.

Speaker #3: Before I conclude, I'd like to spend a few minutes discussing growth and new business opportunities. On our last earnings call, we mentioned that we had submitted proposals representing nearly $500 million in total contract value.

Mark Bendza: On our last earnings call, we mentioned that we had submitted proposals representing nearly $500 million in total contract value and expected the government to make award decisions during H2 2026. We continue to expect award decisions in H2 of the year. Consistent with prior quarters, the timing of contract awards is determined by our government customers and may vary based on their priorities and procurement schedules. These opportunities span both our Security Solutions and Secure Networks segments with a heavy concentration in Security Solutions. Beyond these submitted proposals, we continue to build a healthy pipeline while remaining disciplined in pursuing new opportunities that align with our strategic priorities. Let's turn to slide 7 to wrap up. Q2 reflects the continued execution of our strategy.

Speaker #3: And expected the government to make award decisions during the second half of 2026. We continue to expect award decisions in the second half of the year.

Speaker #3: Consistent with prior quarters, the timing of contract awards is determined by our government customers and may vary based on their priorities and procurement schedules.

Speaker #3: These opportunities span both our Security Solutions and Secure Network segments, with a heavy concentration in Security Solutions. Beyond these submitted proposals, we continue to build a healthy pipeline while remaining disciplined in pursuing new opportunities that align with our strategic priorities.

Speaker #3: Let's turn to slide 7 to wrap up. The second quarter reflects the continued execution of our strategy. We're delivering profitable growth, generating consistent free cash flow, and allocating capital in ways that we believe create long-term shareholder value.

Mark Bendza: We are delivering profitable growth, generating consistent free cash flow, and allocating capital in ways that we believe create long-term shareholder value. Looking ahead, we are encouraged by the opportunities in our pipeline as award decisions are made over the coming quarters. Overall, we are pleased with our H1 performance, confident in our updated full-year outlook, and remain focused on executing our strategy to drive profitable growth, generate steady cash flow, and create long-term value for our shareholders. With that, operator, please open the line for questions.

Speaker #3: Looking ahead, we're encouraged by the opportunities in our pipeline as award decisions are made over the coming quarters. Overall, we're pleased with our first-half performance.

Speaker #3: We remain confident in our updated full-year outlook and are focused on executing our strategy to drive profitable growth, generate steady cash flow, and create long-term value for our shareholders.

Speaker #3: With that, operator, please open the line for questions.

Speaker #1: Thank you. As a reminder, if you would like to ask a question, please press star 1-1 on your telephone. You'll hear an automatic message.

Operator: Thank you. As a reminder, if you would like to ask a question, please press *11 on your telephone. You will hear that automatic message advising that your hand is raised. If you would like to remove yourself from the queue, press *11 again. We also ask that you wait for your name and company to be announced before proceeding with your question. One moment while we compile the Q&A roster. First question will be coming from the line of Erik Suppiger of B. Riley. Please go ahead.

Speaker #1: Advising that your hand is raised. If you would like to remove yourself from the queue, please press star 11 again. We also ask that you wait for your name and company to be announced before proceeding with your question.

Speaker #1: One moment while we compile the Q&A roster. The first question will be coming from the line of Eric Zupinger of B. Riley. Please go ahead.

Speaker #2: Yeah. Thanks for taking the question. First off, on the TSA PreCheck, any update on how your work with the post office is working? And then secondly, on the September quarter, the upcoming quarter, can you just discuss the kind of the nature of fiscal year-end spending?

Erik Suppiger: Yeah. Thanks. Taking the question. First off, on the TSA PreCheck®, any update on how your work with the Post Office is working? Secondly, on the September quarter, the upcoming quarter, can you just discuss kind of the nature of fiscal year-end spending? What are your expectations in terms of the health of the fiscal year-end budgets here?

Speaker #2: What are your expectations in terms of the health of the fiscal year-end budgets here?

Speaker #3: Yeah. Hey, Eric, good morning. Thanks for the question. So, this is Mark Bendza. I'll start. So first, on TSA PreCheck, the program is going really well.

Mark Bendza: Yeah. Hey, Erik. Good morning. Thanks for the question. This is Mark Bendza. I will start. First on TSA PreCheck®, program is going really well. We are very pleased with it. H1 market share is up significantly from the same period last year. We are expecting normal seasonality in the H2. Generally, from what we have seen in the last couple years, H2 markets tend to be lighter than the H1, so that is reflected in our guidance, but overall, very pleased with how that program is trending and how our market share is trending. I will turn it to Mark Griffin in the comments on corporate sales.

Speaker #3: We're very pleased with it. First off, market share is up significantly from the same period last year. We're expecting normal seasonality in the second half.

Speaker #3: Generally speaking, from what we've seen in the last couple of years, the second half market tends to be lighter than the first half. So that's reflected in our guidance.

Speaker #3: But overall, very pleased with how that program is trending and how our market share is trending. I'll turn it over to Mark Griffin to comment on focuses.

Speaker #4: Hello. Yes, you'll see in the very near future an additional couple of sites with the Post Office that we're rolling out as part of the pilot.

Mark Griffin: Hello. Yes. You will see in the very near future an additional couple sites with the Post Office that we are rolling out as part of the pilot. We are pleased with the progress we are making, and we look forward to additional expansion there.

Speaker #4: We're pleased with the progress we're making, and we look forward to additional expansion there.

Speaker #3: Spending—September end spending, government spending was the other question. Is that right, Eric?

John B. Wood: spending. September-end spending, government spending was the other question. Is that right, Erik Suppiger?

Speaker #2: Yeah. That's right. Yeah.

Erik Suppiger: Yeah, that's right. Yeah.

Speaker #3: Yeah, so why don't I start, and then Griffin can supplement. As we mentioned, we have a solid portfolio of proposals outstanding—actually, up a little bit from the last earnings call.

John B. Wood: Yeah. Why don't I start, and then Chris can supplement. As we mentioned, we have a solid portfolio of proposals outstanding. It's actually up a little bit from last earnings call. Last earnings call, we were a little under $500 million total contract value. I'd say now we're a little over $500 million total contract value. Indications are still that awards on those opportunities should be decided sometime here in the H2. Of course, that's fully under the control of the customer. But we're still expecting award decisions sometime here in the H2. I don't know, Mark Bendza or Chris, do you want to add to that?

Speaker #3: Last earnings call, we were a little under $500 million in total contract value. I'd say now we're a little over $500 million in total contract value.

Speaker #3: Indications are still that awards on those opportunities should be decided sometime here in the second half. Of course, that's fully under the control of the customer.

Speaker #3: But we're still expecting award decisions sometime here in the second half. I don't know, Mark Griffin, do you want to add to that?

Mark Griffin: Yes. The award decision still looks solid in moving forward. We still have quite a few on the pipeline that are expected to be awarded between now and the end of the government fiscal year, which is the end of September. But with the progress it looks like Congress is making on extension of a budget, we hope to roll into the October timeframe with no lapse and additional awards for the Q4 as well.

Speaker #4: Yes, the award decision still looks solid for moving forward. We still have quite a few in the pipeline that are expected to be awarded between now and the end of the government fiscal year, which is the end of September.

Speaker #4: But with the progress it looks like Congress is making on the extension of a budget, we hope to roll into the October timeframe with no lapse in additional awards for the fourth quarter as well.

Speaker #2: Okay. Very good. Thank you.

Erik Suppiger: Okay. Very good. Thank you.

John B. Wood: Thanks, Erik.

Speaker #3: Thanks, Eric.

Speaker #1: Thank you. One moment for the next question. Next question is coming from the line of Matthew Calatry of Needham & Company. Please go ahead.

Operator: Thank you. One moment for the next question. Next question is coming from the line of Matthew Calitri of Needham & Company. Please go ahead.

Speaker #5: Hey, guys. This is Matt Coetzee over at Needham. Thank you for taking our question. I was hoping you could provide a little bit more color on that single-digit gross margin, third-party software revenue.

Matt Calitri: Hey, guys. This is Matt Calitri over at Needham. Thank you for taking our questions. I was hoping you guys could provide a little bit more color on that single-digit gross margin third-party software revenue. Understood on the margin profile and great to see the profitability improvements you guys have been driving, but what exactly is that revenue? Is it on the Security Solutions or on the network side, and how are you guys thinking about balancing growth and profitability here?

Speaker #5: So, understood on the margin profile, and great to see the profitability improvements you guys have been driving. But what exactly is that revenue? Is it on the Security Solutions or on the Network side?

Speaker #5: And how are you guys thinking about balancing growth and profitability here?

Speaker #3: Yeah, good morning, Matt. Thanks for the question. Mark Bendza here. So, that revenue stream is part of a much larger program within Security Solutions.

John B. Wood: Yeah. Good morning, Matt. Thanks for the question. Mark Bendza here. That revenue stream is part of a much larger program within Security Solutions. There are multiple revenue streams within that program that were part of the overall RFP when we bid for this program. Clearly, that is not a revenue stream that we would otherwise pursue as a standalone revenue stream. It just doesn't align with the portfolio that we're developing and the margin profile, the type of business we pursue. But because it was part of an overall program that aligns very well, the overall program aligns very well with our portfolio, that revenue stream came along with it when we won it. That revenue stream will start to phase out in Q4. Like I said, single-digit margin on that revenue stream.

Speaker #3: There are multiple revenue streams within that program that were part of the overall RFP when we get to this program. Clearly, that is not a revenue stream that we would otherwise pursue as a standalone revenue stream.

Speaker #3: It just doesn't align with the portfolio that we're developing, and the margin profile is the type of business we pursue. But because it was part of an overall program, that aligns very well.

Speaker #3: The overall program aligns very well with our portfolio. That revenue stream came along with it when we wanted, so that revenue stream will start to phase out in the fourth quarter.

Speaker #3: Like I said, single-digit margin on that revenue stream. And we'll see a very meaningful cash gross margin accretion as a result of it. And then it will take because the revenue stream because the revenue stream carries such a low gross margin, it will take relatively little additional revenue to fully offset the profit that we would go away with that revenue stream.

John B. Wood: We'll see a very meaningful cash gross margin accretion as a result of it. Because the revenue stream carries such a low gross margin, it will take relatively little additional revenue to fully offset the profit that would go away with that revenue stream. Does that answer your question, Matt?

Speaker #3: Does that answer your question, Matt?

Speaker #5: Yeah, yeah, definitely. That makes a lot of sense. Thank you for that. And then you had called out Telos ID as driving the strength in the quarter.

Matt Calitri: Yeah, definitely. That makes a lot of sense. Thank you for that. You had called out Telos ID as driving the strength in the quarter. Anything further you can share there of what exactly, or was it broad-based strength or whatever? I know obviously by the nature of the name of it, there's not a ton you can share on the confidential IT security, but any there to help us get an idea of how momentum is there?

Speaker #5: Is there anything further you can share there regarding what exactly drove the results? Was it broad-based strength, or something specific? And I know, obviously, by the nature of the name, there’s not a ton you can share on the confidential IT security side.

Speaker #5: But is there anything there to kind of help us get an idea of how much momentum is there?

Speaker #3: Yeah. In the quarter, the beat above the top end of the revenue guide was primarily in our TSA PreCheck program, and then our program with the Defense Manpower Data Center. Those are two large programs in the portfolio.

Mark Bendza: Yeah. In the quarter, the beat above the top end of the revenue guide was primarily in our TSA PreCheck® program and then our program with the Defense Manpower Data Center. Those are two large programs in the portfolio. Both performed well relative to guidance. On gross margins, gross margins outperformed really as a result of just a terrific job our program managers are doing managing fixed price contracts. Every quarter when we guide, we include in our guide some contingency on fixed price programs. You have that in our Q3 guide as well. We have that in Q1 and Q2, and then our program managers continue to do a great job managing the risk that we've added contingencies for into our guide. We've outperformed gross margins in part as a result of that for the last two quarters.

Speaker #3: Both performed well relative to guidance. And then on gross margins, gross margins outperformed, really as a result of just a terrific job our program managers are doing managing fixed-price contracts.

Speaker #3: Every quarter, when we provide guidance, we include some contingency for fixed price programs. You can see that in our third quarter guidance as well.

Speaker #3: And then we have that in the first quarter and second quarter. And then our program managers continue to do a great job managing the risk that we've added contingencies for into our guide.

Speaker #3: And so, we've outperformed gross margins in part as a result of that for the last two quarters.

Speaker #5: Excellent. Thanks so much.

Matt Calitri: Excellent. Thanks so much.

Speaker #1: Thank you. One moment for the next question. The next question is coming from the line of Bradley Clark of Ahead.

Operator: Thank you. One moment for the next question. The next question is coming from the line of Bradley Clark of BMO Capital Markets. Please go ahead.

Bradley Clark: Hi. Thanks for the question. I just want to ask about some of the awards that remain to be determined in the later part of the year. What are some considerations or general puts and takes in these awards and how they may impact the overall pipeline growth heading into next year, either on the positive or the negative side?

Speaker #6: Hi. Thanks for the question. I just want to ask about some of the awards that remain to be determined in a later part of the year.

Speaker #6: What are some considerations or general puts and takes in these awards, and how they may impact the overall pipeline growth heading into next year, either on the positive or negative side?

John B. Wood: Yeah, Brad. Thanks for the question. Mark Bendza here. So, like we've talked about, it's a really solid portfolio of opportunities, both in magnitude as well as how we are positioned on those opportunities. A lot of those opportunities are in the similar scope of work to the confidential IT security work that we've mentioned in the past we're performing for the federal government. So we do have some solid past performance history on that type of work. So we feel we're well-positioned there. Given the timing of these opportunities, it's less of a P&L driver for this year, much more of an opportunity to drive P&L for next year. Did that answer your question, Brad?

Speaker #3: Yeah. Brad, thanks for the question. Mark Bendza here. So, like we've talked about, it's a really solid portfolio of opportunities, both in magnitude as well as how we are positioned on those opportunities.

Speaker #3: A lot of those opportunities are in a similar scope of work to the confidential IT security work that we've mentioned in the past that we're performing for the federal government.

Speaker #3: So, we do have some solid past performance history on that type of work, so we feel we're well positioned there. And given the timing of these opportunities, it's less of a P&L driver for this year and much more of an opportunity to drive P&L for next year.

Speaker #3: Does that answer your question, Brad? Okay, great.

Bradley Clark: Yes. Thank you.

John B. Wood: Okay, great.

Speaker #1: One moment for the next question, please. The next question will be coming from the line of Rudy Kessinger of D.A. Davidson. Please go ahead.

Operator: One moment for the next question, please. The next question will be coming from the line of Rudy Kessinger of D.A. Davidson. Please go ahead.

Speaker #7: Great, thanks for taking my questions, guys. On the third-party software revenue—the $33 million—was this part of the DMDC contract, or was this separate?

Rudy Kessinger: Great. Thanks for taking my questions, guys. On this third-party software revenue, this $33 million, was this part of the DMDC contract or was this separate? When did this revenue start? I guess, was it $33 million the last several years, or how long has it been in the numbers?

Speaker #7: And when did this revenue start? I guess, was it $33 million for the last several years, or how long has it been in the numbers?

Speaker #3: Yeah. Hey, Rudy. Mark Bendza here. So yes, it is one of the revenue streams in that program. And it really kicked in—I think it was, I want to say, second quarter of 2025.

John B. Wood: Yeah. Hey, Rudy. Mark Bendza here. Yes, it is one of the revenue streams in that program. It really kicked in, I think it was, I want to say like Q2 of 2025.

Speaker #7: Okay. And so, going forward, I guess, with that being out of DMDC, I'm just trying to get a sense of revenue concentration between PreCheck and that DMDC contract.

Rudy Kessinger: Okay. Going forward, I guess with that being out of DMDC, I am just trying to get a sense of revenue concentration between TSA PreCheck and that DMDC contract. I guess, your expectation for 2027 on DMDC, is it now more like, I don't know, $20 million to $30 million a year of revenue versus the prior, I think $50 million to $75 million range? I am just trying to get a sense of how large that contract will be with that third-party software revenue stripped out.

Speaker #7: I guess, to your expectation for '27 on DMDC, is it now more like, I don't know, $20 to $30 million a year of revenue versus the prior, I think, $50 to $75 million range?

Speaker #7: I'm just trying to get a sense of how large that contract will be with that third-party software revenue stripped out.

Speaker #3: Yeah, I'd rather not get into too much detail deconstructing individual programs, but what I can say is there's about $33 million of that single-digit margin software that will come out next year.

John B. Wood: Yeah, I would rather not get into too much detail deconstructing individual programs, but what I can say is there is about $33 million of that single-digit margin software that will come out next year.

Speaker #7: Okay, got it. And then lastly from me, just on PreCheck. I know you called out you upset the TELOS ID, not specifically PreCheck, but just curious how the PreCheck program's been ramping, how PreCheck enrollments and renewal volumes that you guys are seeing, and market share that you're getting, how that's tracking versus expectations.

Rudy Kessinger: Okay, got it. Lastly for me, just on TSA PreCheck, I know you brought up the upload to Telos ID, not specifically TSA PreCheck, but just curious how the TSA PreCheck program has been ramping, how TSA PreCheck enrollments and renewal volumes that you guys are seeing and market share that you are getting, how that is tracking versus expectations.

Speaker #3: Yeah, the program is doing great. So, market share, as I mentioned earlier, is up significantly in the first half of this year compared to the comparable period last year.

John B. Wood: Yeah. Program's doing great. Market share, as I mentioned earlier, is up significantly in the H1 of this year compared to the comparable period last year. Last year, we spent a lot of time and energy and management attention building out our network of enrollment locations. This year, we are spending much more time focused on productivity of those locations. In part as a function of those two things, both the ramp of the locations and the focus on productivity of those locations, we are seeing some pretty significant step-ups in market share year-over-year.

Speaker #3: Last year, we spent a lot of time, energy, and management attention building out our network of enrollment locations. This year, we're spending much more time focused on the productivity of those locations.

Speaker #3: And so, in part—well, not in part—as a function of those two things, both the ramp of the locations and the focus on productivity of those locations, we’re seeing some pretty significant step-ups in market share year over year.

Speaker #7: Got it. Thanks for answering my question, guys. And congrats on some strong results in the quarter.

Rudy Kessinger: Got it. Thanks for my questions, guys, and congrats on the results in the quarter.

Speaker #3: All right, Rudy. Thanks.

John B. Wood: All right, Rudy. Thanks.

Speaker #1: Thank you. One moment for the next question. The next question is coming from the line of Nihal Cholsky of Northland Capital Markets. Please go ahead.

Operator: Thank you. One moment for the next question. The next question is coming from the line of Nehal Chokshi of Northland Capital Markets. Please go ahead.

Speaker #6: All right, great. Thank you. Congrats on a strong quarter. For the full year, a bit of a raise—can you parse out the drivers of that?

Nehal Chokshi: All right, great. Thank you. Congrats on a strong quarter. For the full year adjusted EBITDA raise, can you parse out the drivers of that? I can think of at least a couple here. The ongoing office control, potentially the phasing out of that third-party software, and perhaps any other drivers I have missed.

Speaker #6: I can think of at least a couple here: the ongoing office control, potentially the phasing out of that third-party software, and perhaps any other drivers I've missed.

Speaker #3: Yeah, Nihal. So, let's see. Well, you've kind of hit on them, actually. We have better visibility on OPEX, so we're lowering our OPEX assumption for the year.

John B. Wood: Well, you have kind of hit on them actually. We have better visibility on OpEx, so we are lowering our OpEx assumption for the year. Cash gross margins are up due to outperformance in the H1, in particular, on a couple things. One, mix, more favorable mix, and two, outperformance on fixed price contracts relative to contingencies we had in our guidance. Combined with taking out some of the lower margin revenue in the Q4. A combination of all those things allowed us to take up our cash gross profit, cash gross margin rather, guidance. And then a very modest tweak at the midpoint of the revenue range, primarily driven by the elimination of low-margin software in the Q4.

Speaker #3: Cash gross margins are up due to outperformance in the first half, in particular on a couple of things. One, a more favorable mix. And two, outperformance on fixed-price contracts relative to contingencies.

Speaker #3: We had that in our guidance. Combined with taking out some of the lower-margin revenue in the fourth quarter, a combination of all those things allowed us to take up our cash gross profit—cash gross margin, rather—guidance.

Speaker #3: And then a very modest tweak at the midpoint of the revenue range, primarily driven by the elimination of low-margin software in the fourth quarter.

Speaker #7: Okay. Great.

Nehal Chokshi: Okay, great. Just to be clear, the non-recurring revenue from Q3 2025, if we normalize out and would then say that, revenue would be up, I am sorry, from Q3 2025, if we take that out, normalize that, say, okay, the revenue guidance would be up 6% year over year. Is that non-recurring revenue the same as the third-party software that is being phased out in the Q4?

Speaker #6: And just to be clear, the non-recurring revenue from Q2 '25, that's when you normalize out and would then say that, oh, revenue would be up—I'm sorry, from Q3 '25.

Speaker #6: If we take that out and normalize that, let's say the revenue guidance would be up 6% year-over-year. Is that non-recurring revenue the same as the third-party software that's being phased out in the fourth quarter?

John B. Wood: No. It is different, actually. That was some short-term, non-recurring revenue associated with the startup of a new program. It is a different revenue stream.

Speaker #3: No, it's different actually. That was some short-term, non-recurring revenue associated with the startup of a new program, so it's a different revenue stream.

Speaker #6: Got it. Okay. All right. And then you are guiding down EBITDA, half a million for Q3 versus a $2 million midpoint increase in revenue.

Nehal Chokshi: Got it. Okay. All right. You are guiding down EBITDA half a million USD Q over Q for Q3 versus a 2 million USD midpoint increase in revenue. Presumably, that is mix, but if there is anything else going on, please let us know.

Speaker #6: Presumably, that's mix, but if there's anything else going on, please let us know.

John B. Wood: The main driver there really is we are guiding cash gross margins down in Q3, and it is really a function of a couple of things. It is one, the contingency that I mentioned in fixed price contracts. We put that in our guide every quarter, and our program managers continue to outperform. We guided in both Q1 and Q2, cash gross margins in the high 30s ended up coming in the low 40s. Q3, we are guiding again kind of high 30s, in part due to those contingencies. We will see how that goes in Q3 here. But then also, we do have some seasonal mix impact, in particular from TSA PreCheck that I mentioned earlier. We have been noticing in recent years that Q2 tends to be lighter than Q1, so we have embedded that in our guide.

Speaker #3: The main driver there really is we’re guiding cash gross margin down in the third quarter, and it’s really a function of a couple of things.

Speaker #3: It's one— the contingency that I mentioned in fixed-price contracts. We put that in our guide every quarter, and our program managers continue to outperform.

Speaker #3: We guided in both the first quarter and the second quarter cash gross margins in the high 30s, but they ended up coming in in the low 40s in the third quarter.

Speaker #3: We're guiding again kind of high 30s, in part due to those contingencies. We'll see how that goes in the third quarter here. But then also, we do have some seasonal mix impact, in particular from TSA PreCheck that I mentioned earlier.

Speaker #3: We've been noticing in recent years that second quarter tends to be lighter than the first quarter, so we've embedded that in our guide. We'll see if that seasonality holds this year.

John B. Wood: We will see if that seasonality holds this year. Maybe it will outperform this year. We will see what the market does. But we wanted to make sure that we at least reflected that in the guidance.

Speaker #3: Maybe it’ll outperform this year. We’ll see what the market does. But we wanted to make sure that we at least reflected that in the guidance.

Speaker #6: All right, great. And then, as you pointed out, your free cash flow margin has significantly improved over the past six quarters, consistently at or above 12%.

Nehal Chokshi: All right, great. As you pointed out, your free cash flow margin has significantly improved over the past six quarters, consistently at or above 12%. From what I understand, I think that is a premium free cash flow margin to your defense contract peers. So a couple of questions behind this point. One, what are the fundamental drivers of the premium free cash flow margin? Is it simply expense control, or is this a reflection of something else, such as having migrated from being a cost plus to a fixed price contractor over the multiple decades that Telos has been in existence for?

Speaker #6: And from what I understand, I think that the premium free cash flow margin to your defense contract compares to a couple of questions behind this point.

Speaker #6: First, what are the fundamental drivers of the premium free cash flow margin? Is it simply expense control, or is this a reflection of something else?

Speaker #6: Such as having migrated from being a cost-plus to a multiple decades that Telos has been in existence for?

Speaker #3: Yeah, it's a good question. I'd say there are a couple of drivers there. First, our cash gross margin profile is much better than a lot of those companies that you're referring to.

John B. Wood: Yeah, it is a good question. I would say there are a couple of drivers there. First, our cash gross margin profile is much better than a lot of those companies that you are referring to, and that is a function of, in part, years of investment in IP for some of our businesses. That is one. Two, we shifted from much more of a cost-plus model to much more of a fixed-price model many years ago, and so we take more risk than some of those other companies, and we are appropriately compensated for taking that risk. I would say also, more recently, we have done a lot of work on right-sizing our cost base over the last 3, 4 years. I think we have gotten that to a much better place now. I would also say we are much more of a capital-light business model than other folks.

Speaker #3: And that's a function of, in part, years of investment in IP for some of our businesses. That's one. Two, we shifted from much more of a cost-plus model to much more of a fixed-price model many years ago.

Speaker #3: And so, we take more risk than some of those other companies, and we are appropriately compensated for taking that risk. I'd say also, more recently we've done a lot of work on right-sizing our cost base.

Speaker #3: Over the last three or four years, and I think we've gotten that to a much better place now. I'd also say we're much more of a capital-light business model than other folks.

Speaker #3: So we carry a lot less PP&E and CapEx. And then lastly, we've done a ton of work in the last, call it, year and a half, two years, around working capital.

John B. Wood: We carry a lot less PP&E and CapEx. Then lastly, we have done a ton of work in the last, call it year and a half, 2 years, around working capital. Getting our collections aligned within the quarter with our payments to suppliers and subcontractors. There are a lot of things that went into driving those free cash flow margins to where they are today, and we are very pleased with the results.

Speaker #3: Getting our collections aligned within the quarter with our payments to suppliers and subcontractors. So, there are a lot of things that went into driving those free cash flow margins to where they are today.

Speaker #3: And we're very pleased with the results.

Speaker #6: Great. So, given this now proven premium free cash flow margin appears, one would think that Telos becomes an attractive target to some of these larger peers.

Nehal Chokshi: Great. Given this now proven premium free cash flow margin to peers, one would think that Telos becomes an attractive target to some of these larger peers. What is Telos board's receptivity to this potential?

Speaker #6: So, what is TELOS Sports' receptivity to this potential?

John B. Wood: Yeah. That is a good question, and we have been getting that question a lot lately, especially from investment bankers and sponsors. Listen, we are laser-focused on maximizing value for our shareholders, and I think you have seen that in particular over the past couple of years. We have been able to create a lot of value organically. I think that cash flow slide in the earnings deck that you referred to tells the story quite well. We have driven revenues higher, OpEx lower, excellent cash generation, consistent share repurchases, and we forecast those trends will continue. But if a change of control opportunity clearly represented a superior path to create value for our shareholders, we would seriously consider it.

Speaker #3: Yeah, so that's a good question, and we've been getting that question a lot lately, especially from investment bankers and sponsors. Listen, we're laser-focused on maximizing value for our shareholders.

Speaker #3: And I think you've seen that, in particular, over the past couple of years. We've been able to create a lot of value organically.

Speaker #3: And I think that cash flow slide in the earnings deck that you referred to tells the story quite well. We've driven revenues higher, opex lower, excellent cash generation, and consistent share repurchases.

Speaker #3: And we forecast those trends will continue. But if a change of control opportunity clearly represented a superior path to create value for our shareholders, we'd seriously consider it.

Speaker #6: Great. Thank you very much.

Nehal Chokshi: Great. Thank you very much.

Speaker #3: Okay. Thanks, Neil.

John B. Wood: Thank you, Noah.

Speaker #1: Thank you. There are no more questions in the queue. We will now turn the call back over to management for closing remarks. Please go ahead.

Operator: Thank you. There are no more questions in the queue. We will now turn the call back over to management for closing remarks. Please go ahead.

Speaker #3: Thank you, operator. And thanks to everyone for joining us today. We're pleased with our first-half performance and believe our results reflect continued progress in building a more profitable, cash-generative, and scalable business.

John B. Wood: Thank you, operator, and thanks to everyone for joining us today. We are pleased with our H1 performance and believe our results reflect continued progress in building a more profitable, cash generative, and scalable business. We look forward to updating you next quarter. In addition, we hope to speak with many of you at the D.A. Davidson conference tomorrow, the BMO Technology and Innovation Leaders Conference on 12 November, and the Needham Virtual Tech Week on 18 November through 20 November. Thank you.

Speaker #3: We look forward to updating you next quarter. In addition, we hope to speak with many of you at the D.A. Davidson Conference tomorrow, the BMO Technology and Innovation Leaders Conference on November 12, and the Needham Virtual Tech Week from November 18 through 20.

Speaker #3: Thank you.

Operator: This concludes today's program. Thank you so much for joining. You may now disconnect.

Q2 2026 Telos Corp Earnings Call

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