Telos NASDAQ: TLS reported second-quarter 2026 revenue and adjusted EBITDA above its guidance range, citing stronger-than-expected performance in its Telos ID business, including TSA PreCheck and work with the Defense Manpower Data Center.
Revenue rose 33% year over year to $47.7 million, above the company’s forecast of $44 million to $46 million. GAAP gross margin was 35%, while cash gross margin reached 40.6%, both exceeding management’s expectations. Adjusted EBITDA totaled $6.9 million, above the company’s $5 million to $6 million guidance range and compared with an adjusted EBITDA margin of 1.1% in the prior-year quarter. The second-quarter adjusted EBITDA margin was 14.4%.
Executive Vice President and CFO Mark Bendza said the results reflected stronger Telos ID performance as well as execution on large programs. He said adjusted operating expenses declined more than $800,000 from a year earlier, although they were about $500,000 higher than the company’s guidance assumptions due primarily to higher TSA PreCheck marketing activity and incentive compensation accruals.
Cash Flow and Share Repurchases
Telos reported operating cash flow of $8.8 million and free cash flow of $6.6 million during the quarter, representing a free-cash-flow margin of 13.9%. Bendza said this was the company’s sixth consecutive quarter with a free-cash-flow margin above 12%.
The company repurchased more than 1 million shares for $4.7 million during the quarter, at an average price of $4.50 per share.
In response to an analyst question, Bendza attributed Telos’ cash generation to its gross-margin profile, years of investment in intellectual property, a shift toward more fixed-price work, cost-base reductions, a capital-light model, and efforts to improve working-capital management. He said the company has worked to align customer collections within the quarter with payments to suppliers and subcontractors.
Third-Quarter and Full-Year Outlook
For the third quarter, Telos forecast revenue of $49.2 million to $50.6 million. The range would be slightly below the prior-year period because the comparable quarter included unusually high, non-recurring revenue associated with the startup of a new program. Excluding that difference, the midpoint of the company’s third-quarter outlook implies 6% year-over-year growth, Bendza said.
Telos expects third-quarter cash gross margin of approximately 37.5% to 38.5% and adjusted EBITDA of $6 million to $6.8 million, for an adjusted EBITDA margin of 12.2% to 13.4%. The gross-margin outlook reflects contingency reserves on fixed-price contracts and anticipated changes in revenue mix, according to the company.
For the full year, Telos raised its adjusted EBITDA outlook to $23.6 million to $28.6 million from its prior range of $20.6 million to $28 million. It also raised its adjusted EBITDA margin forecast to 12.6% to 14.7%, an improvement of roughly 70 to 160 basis points from its previous outlook.
The company lifted its full-year cash gross-margin outlook to 39% to 40%, from 38.2% to 39.5%, and lowered its projected adjusted operating expenses by approximately $1.7 million. Full-year revenue is now expected to range from $187 million to $195 million.
Low-Margin Software Revenue to Phase Out
Beginning in the fourth quarter, Telos expects to begin phasing out resale revenue from low-margin third-party software. Bendza said the revenue stream is part of a larger Security Solutions program and carries a single-digit gross margin. He said it was included in the broader program won by Telos but is not a type of stand-alone business the company would otherwise pursue.
The reduced revenue contribution lowered the midpoint of the company’s full-year revenue outlook by approximately $2.5 million. Bendza said the full run-rate effect will be about $33 million of annual revenue with only a modest impact on profit.
Management expects removing the software resale stream to improve total company cash gross margin by more than 600 basis points on a run-rate basis, all else equal. Telos also expects roughly 400 basis points of additional cash gross-margin accretion in the second half of 2027 after it completes expense recognition related to certain prior-period TSA PreCheck investments. Together, those items are expected to improve cash gross margin by about 10 percentage points in the second half of 2027, all else equal.
TSA PreCheck and Contract Pipeline
Bendza said TSA PreCheck was performing well, with first-half market share “up significantly” from the same period a year ago. He said Telos spent much of last year building its enrollment-location network and has focused this year on improving the productivity of those locations. The company has factored normal second-half seasonality into its outlook, as it has observed that the second half has generally been lighter than the first half in recent years.
Mark Griffin, Telos’ executive vice president of Security Solutions, said the company expects to add a couple of U.S. Postal Service sites in the near future as part of its TSA PreCheck pilot.
Telos also said it has a growing portfolio of pending government proposals. Bendza said the company had submitted proposals representing slightly more than $500 million in total contract value, up from just under $500 million discussed during the previous earnings call. Management continues to expect award decisions in the second half of 2026, though the timing remains under the control of government customers.
Griffin said the company expects several awards between now and the end of the federal fiscal year in September. He added that Telos hopes Congress’ progress toward a budget extension will allow agencies to move into October without a lapse and support additional fourth-quarter awards. Bendza said the opportunities are expected to be a greater driver of profit and loss in 2027 than in 2026.
About Telos (NASDAQ:TLS)
Telos Corporation NASDAQ: TLS is a provider of cybersecurity, secure communications, and enterprise IT solutions designed to help organizations manage risk, accelerate mission delivery and maintain compliance. The company's core business activities encompass risk management and compliance automation, secure mobility, zero-trust architecture, cloud security, and identity and access management. Telos serves a diverse customer base that includes U.S. federal agencies, the Department of Defense, intelligence communities and select commercial enterprises.
Among its flagship offerings is the Xacta® platform, which automates assessment and authorization for IT systems and cloud environments, helping clients streamline compliance with NIST, FedRAMP and other frameworks.
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