Telos Q2 2026 Earnings Call Transcript

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August 10, 2026

Key Takeaways

  • Positive Sentiment: Second-quarter results exceeded guidance: revenue rose 33% year over year to $47.7 million, while adjusted EBITDA reached $6.9 million with a 14.4% margin.
  • Positive Sentiment: Telos generated $6.6 million in free cash flow, a 13.9% margin and its sixth consecutive quarter above 12%; it also repurchased more than 1 million shares for $4.7 million.
  • Positive Sentiment: Management raised full-year adjusted EBITDA guidance to $23.6 million-$28.6 million, increased cash gross-margin guidance to 39%-40%, and lowered expected operating expenses by approximately $1.7 million.
  • Negative Sentiment: Full-year revenue guidance was reduced to $187 million-$195 million as Telos phases out roughly $33 million of annual low-margin third-party software resale revenue, although management expects the move to improve run-rate cash gross margin by more than 600 basis points.
  • Neutral Sentiment: The company has more than $500 million in total contract value under proposal, with award decisions expected in the second half of 2026; timing remains dependent on government procurement schedules and budgets.
AI Generated. May Contain Errors.
Earnings Conference Call
Telos Q2 2026
00:00 / 00:00

There are 9 speakers on the call.

Operator

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 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 morning. Thank you for joining us to discuss Telos Corporation's second quarter 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 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. 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. Additionally, we have provided presentation slides on our investor relations website.

Speaker 1

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 1

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. 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

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 networking 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.

Speaker 2

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. 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.

Speaker 2

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. 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 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%. 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 2

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. 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%-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%-13.4%. Let's turn to slide 6 to discuss our updated full year outlook. Based on our strong first half execution, we are raising our full year profitability outlook.

Speaker 2

We're 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. We're also raising our adjusted EBITDA margin outlook to 12.6%-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 gross margin outlook to 39%-40%, up from our previous forecast of 38.2%-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 the fourth quarter, 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 gross margin and is not consistent with the margin profile we're building across the company.

Speaker 2

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

Speaker 2

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 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. 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 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. Let's turn to slide seven to wrap up. The second quarter reflects the continued execution of our strategy.

Speaker 2

We're delivering profitable growth, generating consistent free cash flow, and allocating capital in ways that we believe create long-term shareholder value. 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, 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.

Operator

Thank you. As a reminder, if you would like to ask a question, please press star one one 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 star one one 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 Eric Zafinger of B. Riley. Please go ahead.

Speaker 3

Yeah, thanks for taking the question. First off, on the TSA PreCheck, any update on how your work with the Post Office is working? Then, secondly, on the September 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

Yeah. Hey, Eric. 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. First-half market share is up significantly from the same period last year. We are expecting normal seasonality in the second half. Generally speaking, from what we have seen in the last couple of years, second half market tends to be lighter than the first half, 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 to comment on corporate sales.

Speaker 4

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 2

Spending. September end spending, government spending was the other question. Is that right, Eric?

Speaker 3

Yeah, that's right. Yeah.

Speaker 2

Yeah. So why don't I start, and then Griff can supplement. As we mentioned, we have a solid portfolio of proposals outstanding. It's actually up a little bit from the 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 second half. Of course, that's fully under the control of the customer. But we're still expecting award decisions sometime here in the second half. I don't know, Mark Griff, do you want to add to that?

Speaker 4

Yes. The award decisions still look solid in moving forward, so 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 award for the fourth quarter as well.

Speaker 3

Okay. Very good. Thank you.

Speaker 2

Thanks, Eric.

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 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 2

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

Speaker 2

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 the fourth quarter. 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.

Speaker 2

Then it will take, 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 5

Yeah. Definitely. That makes a lot of sense. Thank you for that. Then 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? And is there, 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 2

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 third quarter guide as well. We have that in 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. So, we've outperformed gross margins in part as a result of that for the last two quarters.

Speaker 5

Excellent. Thanks so much.

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.

Speaker 6

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 2

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. And 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 6

Yes. Thank you.

Speaker 2

Okay, great.

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 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 this $33 million the last several years, or how long has it been in the numbers?

Speaker 2

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 second quarter of 2025.

Speaker 7

Yeah. 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 do not know, $20 million-$30 million a year of revenue versus the prior, I think, $50 million-$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 2

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. Lastly for me, just on TSA PreCheck, I know you brought up the upside in Telos ID, not specifically TSA PreCheck, but just curious how the TSA PreCheck program's been ramping, how TSA PreCheck enrollments and renewal volumes that you guys are seeing and market share that you're getting, how that's tracking versus expectations.

Speaker 2

Yeah. Program's 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. Last year, we spent a lot of time and energy and management attention building out our network of enrollment locations. This year we're spending much more time focused on productivity of those locations. 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 my questions, guys, and congrats on the results in the quarter.

Speaker 2

Agreed. Thanks.

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 8

All right, great. Thank you. Congrats on a strong quarter. For the full year 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've missed.

Speaker 2

Yeah, Nehal. So let's see. Well, you've kind of hit on them, actually. So, we have better visibility on OpEx, so we're lowering our OpEx assumption for the year. Cash gross margins are up due to outperformance in the first half, 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 fourth quarter, 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 fourth quarter.

Speaker 8

Okay, great. And just to be clear, the non-recurring revenue from 2Q 2025, if we normalize out and would then say that, oh, revenue would be up, I'm sorry, from 3Q 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's being phased out in the fourth quarter?

Speaker 2

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

Speaker 8

Got it. Okay. All right. Then you are guiding down EBITDA, half a million Q-over-Q for Q3 versus a $2 million midpoint increase in revenue. Presumably, that's mix, but if there's anything else going on, please let us know.

Speaker 2

The main driver there really is we're guiding cash gross margin down in the third quarter. It's really a function of a couple of things. It's, one, the contingency that I mentioned in fixed-price contracts. We've put that in our guide every quarter, and our program managers continue to outperform. We guided in both the first quarter and the second quarter cash gross margins in the high 30s, ended up coming in in the low 40s. Third quarter, 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 also, we do have some seasonal mix impacts, in particular from TSA PreCheck that I mentioned earlier. 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.

Speaker 2

We'll see if that seasonality holds this year. 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 8

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's a premium free cash flow margin to your defense contract peers. A couple of questions behind this point. One, what are the fundamental drivers of the premium free cash flow margins? 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 2

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, 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. 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 over the last three, four years. 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 2

We carry a lot less PP&E than CapEx. Lastly, we've done a ton of work in the last, call it year and a half, two 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're very pleased with the results.

Speaker 8

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 2

Yeah. 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, and I think you've seen that over the past, in particular, over the past couple of years. We've been able to create a lot of value organically. 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, 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'd seriously consider it.

Speaker 8

Great. Thank you very much.

Speaker 2

Okay. Thank you.

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 2

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. 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 on November 18 through 20. Thank you.

Operator

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

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