Telos Corp Aktie

Good day, and thank you for standing by. Welcome to the Telos Corporation First Quarter 2026 Earnings Conference Call. [Operator Instructions] 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 Philipp, please go ahead.

Good morning. Thank you for joining us to discuss Telos Corporation's First Quarter 2026 Financial Results. With me today is 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 first quarter results and full year outlook. We will then open the line for Q&A, where Mark Griffin, Executive Vice President of Security Solutions will also join us. The first quarter financial results were issued earlier today and are posted on the Telos Investor Relations website. for this call is being simultaneously webcast.

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. 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, and the comments made during this conference call and in our SEC filings. We do not undertake any duty to update any forward-looking statements. In addition, during today's call, we will discuss non-GAAP financial measures which we believe are useful as supplemental and clarifying measures to help investors understand Telos' financial performance.

These non-GAAP financial measures should be considered in addition to and not as a substitute for or in isolation from GAAP results. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results in our first quarter results summary, and on the Investor Relations portion of our website. 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'll turn the call over to Mark Bendza..

Thank you, Allison, and good morning, everyone. Before we begin, I'd like to address our April 29 announcement regarding our Chairman and CEO, John Wood. John is currently on a medical leave of absence and we wish him a full and speedy recovery. In the interim, independent Director, Fred Shawfield, has assumed the role of Chairman of the Board. In addition, the company's 3 Executive Vice Presidents, General Counsel Hutch Robbins, EVP of Security Solutions, Mark Griffin and I have jointly assumed John's responsibilities to ensure seamless continuity of operations.

This interim leadership structure is functioning as intended and our teams remain fully aligned and focused on execution. We continue to see strong engagement from our customers and partners and program execution across the business remains uninterrupted. Our priorities for 2026 remain unchanged, delivering strong revenue growth expanding adjusted EBITDA margins, generating robust cash flow and continuing meaningful share repurchases.

Our first quarter results reflect the continued transformation of Telos into a more scalable, profitable and cash-generative business and we made strong progress against each of these priorities during the quarter. With that, let's turn to Slide 3. We're pleased to report another strong quarter with results exceeding the high end of our guidance range.

Our outperformance was supported by strong TSA pre-check enrollment activity, continued execution across our core programs and the benefits of our ongoing efficiency initiatives. Total company revenue increased 56% year-over-year to $47.7 million, surpassing our guidance of $44 million to $45 million.

GAAP gross margin was 36.4%, and cash gross margin was 42.3%, both exceeding our expectations due to a favorable mix of higher-margin revenue streams and continued operational discipline across the business. As a reminder, given the breadth of our revenue streams, gross margins will fluctuate quarter-to-quarter based on mix. On operating expenses, our continued focus on cost discipline, including the restructuring plan approved in Q4 drove strong profitability.

Adjusted operating expenses came in approximately $400,000 better than guidance and were down $1.2 million year-over-year. As a result, adjusted EBITDA exceeded the high end of our range, reaching $7.9 million versus guidance of $4.5 million to $5 million. Adjusted EBITDA margin was 16.5%, a significant increase from 1.2% in the prior year period.

Turning to cash flow. Strong cash generation and disciplined working capital management remain key priorities. Operating cash flow was $8.7 million. And free cash flow was $6.4 million, representing a 13.4% free cash flow margin. This was our fifth consecutive quarter with a free cash flow margin above 12%. This reflects the increasing efficiency and scalability of our operating model as well as disciplined company-wide working capital management.

Our strong cash flow generation and liquid balance sheet provide us with flexibility to invest in growth initiatives while continuing to return capital to shareholders. During the quarter, we repurchased $2.2 million of stock or over 500,000 shares at an average price of $4.25 per share. Given the durability of our strong cash generation and our confidence in the long-term value of the business, we intend to accelerate repurchases in the second quarter.

Our capital allocation priorities remain consistent: invest in organic growth, maintain a strong balance sheet and return capital to shareholders. With that, let's turn to Slide 4 to discuss our second quarter guidance and full year outlook. For the second quarter, we expect revenue growth of 22% to 28% year-over-year or $44 million to $46 million.

We expect cash gross margin of approximately 39% and adjusted operating expenses to decline by roughly $1.3 million year-over-year. Adjusted EBITDA is expected to be between $5 million and $6 million, representing a margin of 11.4% to 13%. We also expect another quarter of strong cash flow, which we intend to deploy toward accelerated share repurchases.

Turning to the full year. Our first quarter performance reinforces our confidence in the trajectory of the business and positions us well against our full year objectives. At the same time, in alignment with our usual measured approach to guidance, we are reaffirming our revenue and adjusted EBITDA outlook.

We issued our full year outlook less than 2 months ago. And while we are encouraged by the momentum we're seeing, it remains early in the year, and we believe an additional quarter of performance will provide even greater visibility into full year trends. Based on first quarter performance, we have updated certain assumptions within our full year model, including raising the low end of our cash gross margin expectations to partially reflect the margin strength recognized during the first quarter.

We will continue to evaluate our outlook as the year progresses and look forward to providing an update following second quarter results. Lastly, before I wrap up, I'd like to spend a few minutes on growth and new business opportunities. Since 2024, we have significantly grown our top line, largely through new business wins. We continue to see strong customer engagement across our addressable markets and maintain a multibillion-dollar pipeline of potential opportunities, where we believe our capabilities are well aligned with customer priorities.

Currently, we have proposals outstanding, representing nearly $500 million in total contract value. Our government customers ultimately determine the final timing of awards and may modify award dates based on their own time lines and requirements. We currently expect the government to make award decisions on these opportunities during the second half of 2026.

These submitted proposals span both our security solutions and secure networks segments, with a heavy concentration in security solutions. Beyond these submissions, we will continue to [indiscernible] develop and selectively advance additional opportunities from our pipeline. With that, let's wrap up on Slide 5. In summary, we delivered a strong start to the year, with 56% revenue growth, a 16.5% adjusted EBITDA margin and a 13.4% free cash flow margin.

Our second quarter guidance reflects continued momentum, and we are focused on executing large programs while securing new business opportunities. In addition, disciplined cost management and working capital efficiency are translating growth into strong profitability and cash flow. We also plan to continue returning capital to shareholders while maintaining a strong and flexible balance sheet.

With that, Mark Griffin and I are happy to take questions. Operator, please open the line for Q&A.

[Operator Instructions] And our first question today is coming from the line of Matthew Calitri of Needham.

And great to see the the strength in security this quarter and see the press release quote that primarily the expansion has been a large program in Telos ID. Is there any more color you can give there on where you saw strength and I guess, just general market sentiment.

It's Mark Bendza speaking. So listen, we had a great quarter, clearly straight out of the gate for the year across the company overall, both in terms of program execution as well as ongoing discipline around expense management. The larger programs that we were referring to primarily reside in our Telos ID business. And that cuts across a number of programs, including we had a good quarter in TSA pre-check our DMDC program, which we also refer to as IT GEMS performed very well.

And the body of work that we referred to as confidential IT security work that we're performing for the federal government. That also had a good quarter. So really a broad-based strength both in terms of program management and expense management and also cash flow, great quarter for cash flow as well.

Awesome. Yes. No, that's great to hear. And then I guess with the strength, like why not take up the guide here? And I know you mentioned like one extra quarter visibility still early in the year. Totally understand that. But like with the -- with John taking the medical leave of absence and is there any sort of like extra embedded conservatism in the guide or a change in guidance philosophy with you guys taking the helm there?

Yes. So let me unpack that a little bit. So first, with respect to John, first and foremost, our focus is on supporting him and wishing him a full recovery. Operationally, the transition has been very smooth. Hutch Griffin and I have worked together for several years now. We've been attached at the [indiscernible] for several years. And -- so for us, it's business as usual in terms of working very closely together.

Customer engagement, execution, employee alignment all remain very strong. We're not seeing any disruption in the business and strategic priorities remain unchanged. We have our marching orders, and we're executing the plan. You're seeing that and the performance we're announcing today. Regarding guidance, listen, it's a fair question, and it's something we put a lot of thought into. We're very pleased with the first quarter performance across the entire portfolio, as I was describing earlier.

The first quarter positions us really well against our full year outlook, that said, we also want to remain disciplined about how we manage that outlook. And we issued full year guidance on March 16, that's less than 2 months ago. It's kind of peculiar aspect of the calendar. Fourth quarter earnings are announced unusually late in the quarter. And then first quarter earnings are reported at the usual time.

So there's very little time that passes between the fourth quarter announcement where we set our initial outlook and first quarter guidance. We feel it's only prudent to lock in an additional quarter of performance before we formally revise revenue and adjusted EBITDA estimates for the year. And if you look back to 2023 was the prior -- the previous year where we announced a full year outlook. And that year, we set guidance on the fourth quarter call. First quarter call, we had a big beat and we reaffirmed second quarter call, we beat and raise third quarter call, we beaten raise and then the final fourth quarter call would be begin. So it's an approach to a full year outlook that we think serves us well.

Awesome. And sorry, I should have led with this, but our thoughts are with John too, and wish him this per recovery.

Our next question is coming from the line of Erik Suppiger of B. Riely Securities.

Yes. Congrats on a good quarter, and please pass along our best wishes for John. Comment a little bit on the environment for the TSA pre-check, if you would. Have increases in fuel prices and travel costs made any difference in terms of demand for enrollment? Or do you think that's a risk? And then secondly, can you talk a little bit about what your expectations are for seasonality in that business? .

Yes. Erik, so on PreCheck, listen, your PreCheck is an important program for us. It's 1 of several large programs within the company. We expect it to be an important growth driver for us for the year as it was in the quarter. No, we haven't seen any impact from higher fuel prices. As a matter of fact, enrollments are performing very well year-over-year, both in the first quarter as well as so far here in the second quarter.

Can you comment about seasonality in that business?

Sure. Yes. So seasonality typically we see enrollment as being seasonally lower in the second half. That's kind of the trend we've seen for the last couple of years. And our base case is we would expect that again this year.

Okay. And then any comments about the software contribution from exec in the quarter?

Contribution was about flat year-over-year. I'll maybe turn to Mark, if you like to provide some comments on exact AI and how we're trending there.

Sure, Eric. Mark Griffin. So we have currently sold and installed over 400 licenses of Exact AI. We initiated interest and adoption within our existing installed base and expect additional sales within the intelligence community, the federal civilian government and department award. So to date, we have installed and operated live production pilots at multiple large intelligence community agencies, the Department of War elements and in the banking community.

In addition, we have participated in numerous market surveys, demonstrations with both executives and cybersecurity matter experts within the stakeholder groups. In general, the response has been very strong, and we are anticipating numerous RFPs later in the year. So we're bullish on the progress to date. .

Our next question is coming from the line of Nehal Chokshi of Northland.

Yes. Thank you. Congratulations on the great quarter. Our thoughts are ready with John, hoping him speed recovery as well. Questions are on the pipeline. Given that you are signaling strong confidence in the business with accelerating share buybacks Sounds like that's twofold. One, the core businesses are performing well. But is it fair to say that the $500 million of pipeline of award decisions that you expect to be made in 2026, do you feel like it has a higher probability of win rates than what you would typically assume for awards that are at that stage. Is that correct?

Yes. So Nehal, I think the way I would categorize it is a good chunk of submitted and pending proposals are aligned to a body of work that we think we're well positioned on. We have a good track record in well aligned to our capabilities. And it's -- it's kind of a mission set that I would say is maybe a newer mission set for the government and 1 that we've been involved in at a pretty early stage here with our prime partners and the government.

So we feel good about it. Of course, ultimately, the government controls the timing of awards. And so -- our current estimate is that these are awards that we'll heat decisions on in the second half. But again, ultimately, the government, of course, controls the timing.

And when you refer to prime partners, this is inclusive of the DMDC prime partner?

No. These are -- this is a different set of proposals.

Got it. Okay. Is there any bid that represents more than 10% of that $500 million of outstanding proposals that you expect to be awarded in [indiscernible]

Two that are around $90 million, and then there are a couple that are small, maybe around $3 million. And then the rest are in similar size of a few tens of millions.

Got it. And these are typically 5-year contracts that you're bidding on, correct?

These are a little shorter, typically. It's a mix, but the lion's share of them, I'd say, are like 2 years.

Got it. Okay. Great. My last question is now that you guys are at 500 stores on TSA pre-check -- is market share now at your maximal levels that you would expect? Or is there a lot more to go? And if so, how will we get there?

Yes. So there is more growth to be had in that program, I think, really a couple of ways. First, continuing to optimize volume in the locations that we have opened today and then also continuing to explore partnerships in other parts of the country.

Okay. And you did announce a couple of new types of partnerships during the quarter, 1 through University, 1 directly in an airport. Is there additional partnerships beyond those that you're contemplating?

Yes. We are contemplating others. And there is another pilots that we have underway with a relatively modest number of locations that we're currently testing out another partner. .

Our next question is coming from the line of Rudy Kessinger of DA Davidson.

Great. Mark, well, firstly, certainly my thoughts for John as well and wishing him a speedy recovery. Mark, clearly, I understand your comments, it's been less than 2 months since you gave the initial full year guide. Putting aside the fact that you didn't tweak the full year guide at all expect to an upside. It's pretty much implied in the second half that Security Solutions growth dips into the high single-digit range.

Total revenue growth dips into the low single-digit range. What is the likelihood that some of those new business awards in the second half would contribute meaningful revenue upside this year? Or would anything awarded in the second half likely contribute revenue mostly in 2027.

Yes. Listen, we have a pretty substantial portfolio proposals that are submitted and pending award. If 1 or 2 of those are awarded in the second half. And those programs start on time. There's a fair amount of revenue in a lot of those proposals that are pretty front-end loaded to the first couple of months. And so yes, we could get some meaningful contribution from those proposals if they're awarded in the second half.

Got it. Okay. And then -- on free cash flow, just any color on expectations for the remainder of the year? And then with the increased pace of buybacks, I guess any kind of further details you can provide on that, maybe just relative to the pace of buybacks in Q1 or the Q2 to Q4 last year. Should we maybe expect to bump back up to that kind of $4 million to $6 million range Q2 to Q4 last year or more or less? Just any further color would be appreciated.

Sure. Yes. So we did a free cash flow margin of 13.4% this quarter. We did actually coincidentally 13.4% in the fourth quarter of last year. It's our fifth consecutive quarter over 12%. And -- so I would expect free cash flow margin to continue in that kind of lower double-digit margin level. And then we're currently managing to a cash balance of approximately $50 million, and we'll continue to do that. So as we generate cash flow, -- our intention is to buy back stock with that free cash flow while managing to approximately a $50 million cash balance.

And there are no more questions in the queue. I would like to turn the call back over to Mark Bendza for closing remarks. Please go ahead.

Thank you, operator, and thanks to everyone for joining us today. We're pleased with our strong start to the year 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 the meantime, help us speak with many of you at the Needham Technology Conference on May 14 and the Northland Growth Conference on June 23. Thank you.

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

Good day, and thank you for standing by. Welcome to the Telos Corporation Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Allison Phillipp. Please go ahead, ma'am.

Good morning. Thank you for joining us to discuss Telos Corporation's Fourth Quarter 2025 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 fourth quarter 2025 results and 2026 outlook. Next, John will follow up with concluding commentary. We will then open the line for Q&A, where Mark Griffin, Executive Vice President of Security Solutions will also join us.

The fourth 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.

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 and comments made during this conference call and in our SEC filings. We do not undertake any duty to update any forward-looking statements.

In addition, during today's call, we will discuss non-GAAP financial measures which we believe are useful as supplemental and clarifying measures to help investors understand Telos' financial performance. These non-GAAP financial measures should be considered in addition to and not as a substitute for or in isolation from GAAP results. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results, in our fourth 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'll turn the call over to Mark.

Thank you, Allison, and good morning, everyone. We have a lot of good news to share again this quarter. We're pleased to report another strong quarter and an exceptional finish to an incredibly strong 2025. Before turning to the slides, let me highlight three key takeaways for the quarter and the year.

First, we delivered significant revenue growth and exceeded our guidance across key financial metrics every quarter, including the fourth quarter. Second, our continued focus on disciplined program execution, rigorous operating expense management and working capital efficiency drove strong operating leverage, excellent incremental adjusted EBITDA margins and robust cash flow. Third, we returned capital to shareholders through share repurchases.

Looking ahead, large programs in Telos ID continue to ramp. And earlier this month, we expanded the confidential IT security work that we are performing for the federal government. Given this momentum, we remain well positioned for another year of double-digit revenue growth, adjusted EBITDA margin expansion, strong cash flow and additional share repurchases in 2026. Our Board of Directors recently increased our share repurchase authorization from $50 million to $75 million to support our capital deployment activity.

With that overview, let's turn to Slide 3. We delivered another quarter of strong execution and exceeded our guidance across key metrics. Revenue increased 77% year-over-year to $46.8 million exceeding our guidance range of $44 million to $46.3 million. This performance was primarily driven by strong execution in Telos ID and the ramp of large programs. We expect large programs in Telos ID to continue growing into 2026. As we continue to scale the business, our focus remains on program execution, combined with operating expense management.

During the fourth quarter, we approved a company-wide restructuring plan designed to further streamline operations and position the company for additional growth and adjusted EBITDA margin expansion in 2026. As a result of these actions, we expect adjusted operating expenses to decline in 2026, even as revenue continues to grow at a double-digit rate.

The restructuring plan resulted in a $1.5 million charge during the quarter including approximately $500,000 recorded in cost of sales. Separately, our review of intangible assets resulted in a $14.9 million noncash goodwill impairment within the Secure Networks segment. This chart represents a full write-off of the segment's goodwill and reflects the decline in contract backlog as several large programs reach their natural completion in recent periods. Secure Networks represent a meaningful portion of our business development pipeline and we continue to pursue new contracts in that segment. In total, these items resulted in a $16.4 million charge in the quarter.

Turning to gross margins. GAAP gross margin for the quarter was 35%. Excluding the $500,000 charge included in cost of sales, gross margin was 36%, while cash gross margin was 41.9%. Both metrics exceeded our guidance range, primarily reflecting performance in Telos ID. As a reminder, due to the diversity of our revenue streams, gross margins will naturally fluctuate depending on the mix of revenue recognized in a given quarter.

Turning to operating expenses and adjusted EBITDA, our focus on expense management translated into strong overall profitability. Adjusted operating expenses came in approximately $1 million better than our guidance assumptions. As a result of better-than-expected revenue, cash gross margin and operating expenses, adjusted EBITDA exceeded the high end of our guidance range. Adjusted EBITDA was $7.3 million compared to our guidance range of $4 million to $5.7 million. Adjusted EBITDA margin was 15.6%.

Turning to cash flow. Strong cash generation remains a priority. Operating cash flow in the quarter was $8 million. Free cash flow was $6.3 million representing a free cash flow margin of 13.4%. This performance reflects the success of our company-wide working capital initiatives as well as our revenue growth and gross margin profile.

Our strong cash generation when combined with our highly liquid balance sheet, provides flexibility to invest in growth initiatives while also continuing to return capital to shareholders.

Let's now turn to Slide 4 for a brief recap of our year-over-year performance for the full year 2025. We delivered an exceptional year in 2025 despite the challenging macro environment within the U.S. federal government. Revenue increased 52% to $164.8 million. Growth was driven by new program wins in both 2024 and 2025 as well as the continued ramp of our TSA PreCheck program. At the same time, we significantly improved the efficiency of our operating model. Cash operating expenses declined by $8 million or nearly 12% reflecting the impact of the expense management initiative we launched at the end of 2024. As a result, adjusted EBITDA was $18.1 million, representing a $27.8 million improvement year-over-year. Adjusted EBITDA margin expanded nearly 20 percentage points to 11%, and incremental adjusted EBITDA margin was 49.1%. In other words, for every dollar of revenue growth, the company generated more than $0.49 of additional adjusted EBITDA.

Cash generation also improved significantly. Free cash flow was $21.3 million, representing a $61 million improvement year-over-year, and free cash flow margin was 12.9%. Finally, we returned significant capital to shareholders. During the year, we deployed $13.6 million to repurchase approximately 4.3% of our outstanding shares at an average price of $4.38 per share. Our capital allocation priorities remain consistent, investing in organic growth, maintaining a liquid balance sheet and returning capital to shareholders.

With that, let's turn to Slide 5 to discuss our outlook for 2026. As we enter 2026, we expect the continued ramp of large programs and recent new business to drive another year of strong growth, adjusted EBITDA margin expansion and robust cash flow. For the year, we forecast revenue to grow 14% to 21% year-over-year to a range of $187 million to $200 million. Substantially, all of our forecast represents revenue from existing programs. The revenue range is primarily driven by the third-party hardware and software component of our IT [ GEMS ] program as well as the confidential IT security work that we are performing for the federal government. We forecast cash gross margin of approximately 37% to 39.5%, lower than 2025, primarily due to revenue mix and the timing of certain prepaid expense recognition in cost of sales. We forecast cash operating expenses to be approximately $1.5 million to $4 million lower year-over-year, reflecting the benefits of the expense management plan approved in the fourth quarter. Based on these assumptions, we forecast adjusted EBITDA of $20.6 million to $28 million, representing an adjusted EBITDA margin of 11% to 14%. Lastly, we forecast another year of robust cash flow and share repurchases.

Turning to the first quarter. We forecast revenue to grow 44% to 47% year-over-year to a range of $44 million to $45 million. We forecast cash gross margin to be over 39%. We forecast cash operating expenses to be approximately $1 million lower year-over-year, reflecting the expense management plan approved in the fourth quarter. We forecast adjusted EBITDA of $4.5 million to $5 million, representing an adjusted EBITDA margin of 10.2% to 11.1%. Lastly, we forecast another quarter of strong cash flow.

With that, I'll turn it over to John for concluding commentary.

Thanks, Mark. Before I wrap up, I want to spend a few minutes on where we are as a business and where we're headed. As Mark noted, 2025 was an exceptional year financially, but the numbers reflect something much more fundamental, and that is the investments we've made in our people, our systems and our customer relationships are paying off. Our Security Solutions segment now represents over 90% of total revenue, and the momentum there is strong.

Let me touch on a few areas. Starting with Xacta, our cyber governance, risk management and compliance platform, continues to be the standard for the most security-conscious organizations in the world. Demand for automated GRC solutions is growing as our customers recognize the value in incorporating machine-readable data sets for more actionable compliance and risk information on a continuous or ongoing basis. We are well positioned to capture that demand.

During the year, we launched Xacta AI, bringing meaningful AI-driven risk and compliance insights to our customers' complex environments. Our AI integration within the Xacta platform focuses on a novel and secure approach to utilize highly contextualized and enriched data sets resulting in high confidence, risk-focused recommendations and insights. Xacta AI saves customers' time and effort by delivering expert level guidance related to a customer's specific circumstances and their risk tolerance. To date, 400 Xacta AI licenses have been sold to two major federal government customers and the new prospect response has been very positive. We see Xacta AI as a meaningful differentiator as we compete for new business in 2026 and beyond.

Our Telos ID business remains a significant growth driver. Our TSA PreCheck enrollment program ramped nicely throughout the year, supported by strong travel demand. We also continue to expand our broader identity and biometric portfolio, including ID betting and aviation channeling services. Enrollment is a scale business and our biometric solutions now process millions of identity transactions annually across the nation. We are pleased with the progress we're making and have the potential for additional growth in these areas. Beyond these programs, earlier this month, we expanded the confidential IT security work that we're performing for the federal government.

Now turning to the broader market. Over 90% of our revenue comes from governments here and around the world. Our customer base spans the Department of War, the intelligence community, Department of Homeland Security, multiple civilian agencies and the Five Eyes nations. These customers are funded to address enduring national security and compliance missions. Cybersecurity, identity verification and secure communications are not discretionary line items for these organizations. They are indeed mission-critical. We recognize that the federal spending environment is receiving heightened scrutiny, and we're monitoring it closely. However, in general, the programs we support continue to be well funded, operationally essential and, in many cases, tied to mandated security and compliance requirements. That gives us confidence in the durability of our revenue base.

Our growth opportunities and pipeline are driven by strategic positioning and well-funded national security priorities, including the ever-changing cybersecurity threat environments, digital enterprise solutions and modernization of core infrastructures. Our pipeline remains strong at over $4.2 billion. We have seen a shift in awards to the right as a result of the government shutdown funding constraints and a more detailed review from the government of submitted bids. We expect additional award decisions on previously submitted bids over the course of 2026.

With that, I'd like to wrap up on Slide #6. In summary, 2025 was a transformational year for Telos, marked by strong revenue growth, significant adjusted EBITDA margin expansion and a dramatic improvement in cash generation. We successfully executed on large programs and secured new business. At the same time, our continued focus on cost management and working capital efficiency enabled us to convert growth into meaningful improvements in profitability and cash flow.

Importantly, we also returned capital to shareholders through our share repurchase program while maintaining a highly liquid and flexible balance sheet. As we enter 2026, the continued ramp of large programs and recent new business positions us well for another year of double-digit revenue growth. At the same time, the expense management plan approved in the fourth quarter enabled us to drive further operating leverage and adjusted EBITDA margin expansion as we scale. In short, we believe our strong program edge execution and expense discipline are creating a business that is increasingly profitable, cash generative and positioned for the long-term value creation for our customers and our shareholders.

With that, we're happy to take questions.

Operator, please open the line for Q&A. Thank you.

[Operator Instructions] Our first question is going to come from the line of Zach Cummins with B. Riley Securities.

Mark and John, congrats on the strong results to end the year. Mark, maybe just starting with the initial guidance for the year. It sounds like it's largely just driven by expansion with existing programs. So can you talk about maybe what's going on in the pipeline? It sounds like a few opportunities maybe were pushed to the right in terms of -- does that provide potential upside versus the initial guidance? Or what are some of the puts and takes when we think about your initial outlook?

Yes. So let me start, and maybe I'll turn it over to Mark Griffin for comments on the pipeline. So first, we're very encouraged by how our existing programs have evolved since November when we originally indicated $180 million of revenue in 2026. As we said in the script, we've grown the confidential IT security work that we're performing for the federal government. That's something that we started back in the third quarter of last year. That body of work continues to expand with the federal government. So that's a very encouraging development.

Second, our IT GEMS program continues to ramp. We will continue to ramp into 2026. There are revenue streams within that program, but we had a partial year of revenue last year. So we get a full annualization at this coming year in '26. And based on orders that we've received in that program since November, we're getting more and more visibility into how 2026 is shaping up for that program. So that's trending extremely well also.

And then lastly, on TSA PreCheck, transaction volumes have been trending very well for us since November as well as market share gains, so we've improved our outlook for that program as well. So the good news, as you said, that $187 million to $200 million is primarily a function of existing programs and is contingent on -- there's very little contingency in terms of additional new business go get to achieve those numbers. But regarding the pipeline, I'll turn it over to our Mark Griffin.

Look, Zach, as John mentioned, there is a significant value of the pipeline. The analysis that we've done to date, about 20% of that value that we talked about is in the first half of this year. That gives us a good line of sight on additional opportunities that we would then also bring into the year. So it's a mixture of the pipeline across the different business lines. The majority is still within the Security Solutions, but still supported by Secure Networks as well. So we're very bullish on the pipeline right now with a good chunk of it in the first half of this year from an award point of view.

Understood. And just my one follow-up question for Mark is around your gross margin assumptions for this year. I think you outlined it a bit in your script, but can you give us kind of the key puts and takes on why we're seeing a little bit of compression in the assumed gross margin this year versus 2025?

Yes. So historically, I mean, if you look back over the last kind of 5 years, our weighted average gross margins are typically in the upper 30s. That's what you're seeing for 2026. But the year-over-year dilution in '26 is really driven by kind of a few key things. So first, the third-party hardware and software content on our IT GEMS program represents the lowest margin revenue streams in our portfolio. That revenue statement is growing year-over-year, as I indicated. And so you're going to see some dilutive impact from the growth of that lower-margin revenue stream.

Second, as we discussed in prior periods, we have some expenses on our TSA PreCheck program, actually pretty meaningful expenses on the TSA PreCheck program that were prepaid over the last few years. And now that expense is being compressed and recognized through the P&L and through cost of sales in a relatively short period of time, especially in 2026. So you're kind of getting some artificial gross margin pressure from that GAAP accounting phenomenon, that alone is a couple of hundred basis points into 2026.

And then third, the rest of the portfolio is actually accretive year-over-year. Gross margins are expanding in the rest of the portfolio once you normalize for those two items that I just mentioned. What I'll also point out is, although cash gross margins are forecasted to contract in 2026, adjusted EBITDA margins are forecasted to expand. And that's a function of, of course, top line growth, lower OpEx, all lining up nicely to drive adjusted EBITDA margin expansion.

Our next question comes from the line of Matt Calitri with Needham & Company.

This is Matt Calitri at Needham. When we think about the strong revenue performance and guide for next year, is there any sort of framework you can provide on how much Xacta is contributing or the size of the cohort that will come up for renewal in 2026?

So our renewal rates are excellent, Matt. We experienced, I'd say, very little to no revenue off in a typical year on Xacta renewals, generally speaking, year-over-year. So as we forecast from 1 year to the next, renewals tend to be kind of a very low variable for us as we forecast our revenues in a typical year.

Okay. Great. And then what exactly are you seeing in terms of Xacta AI attach rates or [Technical Difficulty]

Yes. Matt, you're breaking up a little bit, but I believe your question was what are we seeing in terms of Xacta AI demand, attach rates, volume of conversations with new prospective customers.

So our plan -- this is John Wood. Our plan is to go after existing customers who already use Xacta to start with. And there, we're in the tens of millions of dollars of opportunities, several tens of millions of dollars of opportunities. And I think our customers are really excited because if they're able to see the kind of outcomes that we've seen in our testing, then they could see as much as a [ 90% ] reduction in the time and effort it takes to get to an authority to operate.

Our next question comes from the line of Rudy Kessinger with D.A. Davidson.

Apologies if this might have been asked, I had to drop off for a bit here and jump back on. In the '26 guide for the revenue growth, how much of that revenue growth is tied to the one large DMDC contract?

The one large DMDC contract, I would say it's about -- let's call it -- well, relative -- let me say this way, relative to the $180 million that we mentioned in November, it's roughly, let's call it, 1/3 of the improvement from the November outlook.

Okay. That's a good way to think about it, I think. So there's certainly some new business win contribution in there. Okay. And then I guess for this year, I guess, as you look at the pipeline, I guess, realistic pipeline that you could potentially win this year in terms of revenue contribution this year or into '27? I guess what does that pipeline look like today? And how many large, highly likely deals do you have in that pipe?

Rudy, Mark Griffin. In 2026, we have -- that are supposed to be awarded in 2026. There are about 64 opportunities that are supposed to hit. 34 of those, as I mentioned, are in the first half of the year, representing about 20% of the value of the pipeline. So -- we expect most of that is going to hit by the June time frame. And so it's, again, based on the timing of that and the rollout of that, again, you're probably talking about some modest revenue in 2026, but then ramping and building in 2027 as well.

Okay. And then last one for me. Clearly, the expense discipline has been great to see in the improved EBITDA margins as well. At the same time, gross margin, even your cash gross margin continues to come under some pressure. It's going to come down again this year as well. What strategies do you have in place to maybe help put a floor in that cash gross margin? Do you think that range you gave this year can be a floor? And just how should we think about that line longer term?

Yes. So really, some of the commentary I've made in the past, and I'll reiterate today is that we do have a lot of different revenue streams and a lot of different margin profiles. And so quarter-to-quarter, year-to-year, total company gross margins will fluctuate based on mix. The margins that we're guiding for '26 on the surface, are in line with where margins have been over the last 5 or 6 years. Keep in mind, as I mentioned earlier, there's about 200 basis points of kind of more accounting-oriented year-over-year dilution associated with that compressed expense recognition, which is well in excess of actual cash expense in cost of sales. So if you adjust for that, we're still in that kind of low 40s cash gross margin. So I think we're in a really good spot.

In terms of the reason the dilution that we've seen over the last kind of few quarters associated with the IT GEMS revenue mix, I'd say this year, we should pretty much be at the full dilutive effect of that revenue stream, that revenue stream will hit a full year run rate this year. Now quarter-to-quarter, year-to-year, that revenue stream can fluctuate up and down a little bit. It's just the nature of that revenue stream. But this will be the first year where we have a full run rate of that lowest margin revenue stream. Does that help to answer the question, Rudy?

Yes. Yes, it does.

And I'm showing no further questions at this time. And I would like to hand the conference back over to John Wood for any further remarks.

Thank you very much. I want to thank our shareholders for your ongoing support. With robust and recession-resistant markets, well-funded customers, a decades-long track record of serving the world's most security-conscious organizations, Telos is a really strong foundation for the future. So again, thank you.

This concludes today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.

Good day, and thank you for standing by. Welcome to the Telos Corporation Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your first speaker today, Allison Phillipp, Director of Communications. Please go ahead.

Good morning. Thank you for joining us to discuss Telos Corporation's Third Quarter 2025 financial results. With me today is John Wood, Chairman and CEO of Telos; and Mark Bendza, Executive Vice President and CFO of Telos.

Let me quickly review the format of today's presentation. Mark will begin with remarks on our third quarter 2025 results. Next, John will discuss business highlights from the quarter. Then Mark will follow up with fourth quarter guidance before turning back to John to wrap up. We will then open the line for Q&A, where Mark Griffin, Executive Vice President of Security Solutions, will also join us.

The third 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.

Before we begin, we want to emphasize that some of our statements on this call including all of those relating to 2025 and 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 and the comments made during this conference call and in our SEC filings. We do not undertake any duty to update any forward-looking statements.

In addition, during today's call, we will discuss non-GAAP financial measures, which we believe are useful as supplemental and clarifying measures to help investors understand Telos' financial performance. These non-GAAP financial measures should be considered in addition to and not as a substitute for or in isolation from GAAP results. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results in our third 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'll turn the call over to Mark.

Thank you, Allison, and good morning, everyone. I'm pleased to say that we have a lot of good news to share again this quarter. Before we get into the details on the slides, let's run through the main points upfront. Our business has been scaling in a very meaningful way this year, leading the way our major programs in Telos ID layered on top of a strong base of recurring revenue streams with high renewal rates from sophisticated government and commercial customers 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 a 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 EBITDA and adjusted EBITDA margin than previously indicated as well as a more favorable weighting of second half revenue to the third quarter. In addition, cash flow remains very strong, and we continued 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 EBITDA 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. Telos has again overdelivered 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 million 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 above our guidance range due to outperformance in all lines of business and 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 were approximately $500,000 better than guidance due to ongoing cost discipline throughout the company. As a result of better than forecasted revenue, gross margin and operating expenses, adjusted EBITDA also exceeded the top end of our guidance range. Adjusted EBITDA was $10.1 million, above our guidance range of $4 million to $5.7 million. Adjusted EBITDA margin was 19.6%. And incremental adjusted EBITDA margin was 51.5%, or put differently for each dollar of revenue growth, $0.51 converted to adjusted EBITDA. Lastly, in part as a result of our company-wide 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 per share. Since our fourth quarter 2024 earnings call, we've 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 9 months of the year. We've discussed the business and programmatic drivers behind our year-over-year performance for the first 9 months in 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 EBITDA margin was 56.1% or again, put differently for every dollar of revenue growth, $0.56 converted to adjusted EBITDA. Adjusted EBITDA grew by $20.3 million and moved from a loss in 2024 to a 9.2% positive margin in 2025. Free cash flow improved by nearly $40 million and moved from a cash burn position in 2024 to a 12.7% positive free cash flow margin in 2025. And lastly, we've 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 5. First, I'm thrilled to report that we launched our new Xacta.ai product in early October and have already secured our first enterprise customer. The Telos team is extremely excited about this new technology and the opportunities it presents for our company as well as for our customers. Xacta.ai is a powerful enterprise AI software capability added to our Xacta platform, which has already proved the proven solution for cyber risk management compliance for some of the world's most security-conscious organizations. The foundation of our unique approach to AI is our ability to seed our solution with over 25 years of cybersecurity expertise. The result is a solution with the capabilities to create a true force multiplier for organizations that strive to do more challenging security work with fewer resources.

Xacta.ai 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 in efficiencies up to 93% across cyber governance, risk and compliance, or GRC tasks in addition to savings already realized from previous Xacta versions. Again, a true force multiplier for organizations that strive to do more with less in an increasingly complex cybersecurity environment. We plan to continue to evolve our platform and our AI capabilities with increased automation as well as the expected addition of new Agentic features to further enhance effectiveness and efficiency. We're very excited about the future for our Xacta platform given this recent leap forward in the development of our product.

Second, I'll provide a quick update on our TSA PreCheck program. I'm 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's going to discuss fourth quarter guidance. Mark?

Thanks, John. Let's turn to Slide 6. For the fourth quarter, we forecast revenue to grow 67% to 76% year-over-year to a range of $44 million 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 $4 million to $5.7 million or an adjusted EBITDA margin of 9.1% 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'll provide further detail about our 2026 outlook on our fourth quarter earnings call in March. But in the meantime, 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 Telos ID partially offset by contraction in secure networks. Additional upside revenue in 2026 would come from sales of our newly released Xacta.ai software and new program wins from our multibillion-dollar pipeline of new business opportunities.

With that, I'll turn it back to John.

Thanks, Mark. Let's turn to Slide 7. To recap, our business has continued to scale in a very meaningful way this year, largely due to programs in Telos ID. 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 Xacta.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 an improved second half outlook versus 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.

[Operator Instructions] And our first question comes from the line of Zach Cummins of B. Riley Securities.

Congrats on the strong results here. Just starting with the outlook, Mark, I think you mentioned a little bit of a headwind potentially from the government shutdown in Q4. As that pertains 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, Zach. In the fourth quarter, the impact of the government shutdown, I'd say is, at this point, appropriately captured in our range on both revenue and adjusted EBITDA line. I'd say what we're seeing in terms of government shutdown is there's a few things. First, awards are essentially stalled for the time being and generally sliding to the right. And then there's been various other administrative delays, things around things like collections on invoices or getting renewals executed or option [indiscernible] executed impact on the P&L has been relatively modest, but it's been 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, I don't know if there's anything you want to add to that?

No, I think that's a fair way of capturing it. They will hold off on awards until the governments turn back on, but it's not -- nothing has been taken off the table.

Yes. Pipeline into '26 is still substantial. There's a lot of opportunity in there. It's still a multibillion-dollar pipeline, with a good chunk of that expected to be awarded, say, over the next 6 months with several tens of millions of dollars of revenue opportunity in 2026 on top of the $180 million from pre-existing programs.

Understood. That's really helpful. And John, I just wanted to ask you a question about your new Xacta.ai products. It seems like it's getting pretty solid traction out the gate with one major enterprise-wide deployment. I believe press released 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 is really offer it into our installed base. So customers already see value out of Xacta by itself. But when you include a RAG, which allows you to reduce the hallucinations, if you will, within a large language model, it really makes it very, very simple or much more simple for a customer to implement their needs for security and compliance because essentially, the language model itself and the RAG together generate it for the customer. And it generates it in very, very quickly. I think our test results are something like up to 93% improvement in time.

Our next question comes from the line of Matthew [ Calitri ] of Needham & Company.

This is [ Matt Calitri ] over at Needham. And congrats on the strong results. Sticking on Xacta, what is the specific impact on the shutdown and broader pressure from continuing resolution been on conversations there? And how are you commuting the value proposition of the offering amidst the uncertainty?

So this shutdown will be behind us soon. I think the issue is during a shutdown sometimes your customer is just not there because they've been furloughed. So I think there's a piece of that that's there. The good news is that previously, we have been out in front of this before we even announced Xacta.ai, 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 Xacta.ai, you don't need the same level of professional services as you have to have used in the past.

Yes. Maybe what 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 have pushed to rise a little bit as a result of the shutdown, but good traction straight out of the gate.

Yes.

That's great to hear. And then are there any other hurdles to adoption there? Or do you think we can see an inflection of sorts once budgets open up?

I don't see anything that's going to hold back from people wanting to use Xacta.ai.

Our next question comes from the line of Bradley Clark of BMO Capital Markets.

Congrats on the results. On the TSA PreCheck program, you've reached your 500 location goals for 2025. And I want to understand a little bit more sort of the plan for going forward 2026 in terms of growth of this program through other new locations or you mentioned sort of evaluating your market position. And so I just want to take a step back and now that we've reached our enrollment location target, how are we thinking about growth of this program going forward?

Brad, thanks for the question. So we are now operating at scale in that program. We've been working towards our 500 locations for some time now. We've actually now exceeded that target. So in terms of our physical location and our IT infrastructure, we are now at scale nationwide. Now that we're up and running, we will continue to evolve that network of locations, continue to develop new partnerships, continue to find new and innovative ways to reach travelers and serve travelers. So this is really just the beginning. We're really excited to be at scale. And I think there's a lot of upside over the next few years in that program. Maybe Mark, Chris might have something to add.

Bradley, yes, as a 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 customer bases. So as indicated in the script, we will continue to look for expansion in those areas to serve the -- not only TSA, but serve the community of enrollment and renewal populations 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'll continue to look for enhancements and expansion from there.

Our next question comes from the line of Rudy Kessinger of D.A. Davidson.

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 you're going to do and take out the $70 million from existing programs, the $50 million to $75 million from DMDC and then PreCheck. It seems like the actual revenue you've got this year from new business programs was pretty minimal. And I think I heard you say, several tens of million potential revenue for next year. Just how -- when will you know that? 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?

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 paused and kind of moving to the right, but the portfolio in the pipeline between identity in some of the projects that we feel very confident on potentially can drop in the next few months, but more likely are probably positioned more into 2026 in the first half. And so we'll see some activity there that would add to that baseline that Mark talked about earlier.

Plus additional Xacta.ai software sales.

Right.

Okay. Got it. And then my second question was on Xacta.ai. I guess if you -- like is there an upsell potential to existing Xacta customers on Xacta.ai? And if so, like what would be the minimum uplift if you're able to get adoption of it?

Yes. I don't know if you heard me say earlier, Rudy, our primary target to start is our existing installed base. And in general, I would say a great deal of excitement by our customers in the release of Xacta.ai. Unfortunately, when the government shut down temporarily, put things on pause a little bit. But now that we're seeing our way to the end of that pause and the end of the shutdown, I think it will come break backs for us.

Our next question comes from the line of Nehal Chokshi of Northland Capital Markets.

Congrats on another strong results. The $180 million baseline for calendar '26 implies what percent of the annualized full run rates for your DMDC program and PreCheck?

Nehal, I'm not going to get into programmatic detail, but what I can tell you is that $180 million, so just do the math, that $180 million implies $17 million of growth at the midpoint of our 2025 guide. That $17 million is comprised roughly of $28 million of growth at Security Solutions, net of $11 million of contraction at Secure Networks and substantially all of that $28 million growth at Solutions is coming from Telos ID, which, as you know, is the business that contains those programs.

Okay. All right. And then you also say that the pipeline can bring tens of millions to revenue for calendar '26 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, correct me, about 1/3 of that is over the next, say, 6 months, [indiscernible] to be ordered over the next 6 months. And so at that level of award opportunity, certainly several tens of millions of that represents revenue opportunity in 2026.

Okay. And when you say tens of million, that includes the pro rating of the awards being pushed out to the right from 4Q '25 to 1Q '26 in 2Q '26?

Yes.

And Nehal, it's several tens of millions.

Yes. That's the total opportunity set, right? So the point is there's ample opportunity above that $180 million between Xacta.ai and our traditional pipeline. It's just a matter of what comes in the door and when.

Can you remind us what has been your historical win rate of what's in your pipeline?

No. We don't disclose that externally.

Okay. All right. And then last question for me is that given the 60% incremental EBITDA margin in the current quarter and 20% EBITDA margin and 13% free cash flow margin, can you share any perspective on what's the sustainable free cash flow margin for Telos then?

It's probably a little too early to forecast free cash flow margins. But what I think I'll say is at that base $180 million of revenue, again, before any new business wins, the base $180 million of revenue, we would -- we've managed -- we're targeting managing our OpEx to kind of a low double-digit adjusted EBITDA margin. So call it, 10%, 11% or so adjusted EBITDA margin as additional growth comes in above that $180 million, that adjusted EBITDA margin will run higher. But we'll toggle between additional growth investments and higher adjusted EBITDA margin depending on what that additional revenue is, what the margin profile is of that additional revenue. So that adjusted EBITDA margin can start to give you an indication of where free cash flow can trend. But we expect a very -- another good year of free cash flow in 2026.

Okay. That's really helpful. Maybe just to further the -- what you're sort of giving color around with calendar '26 in terms of EBITDA margin? And then the potential, if you win the tens of millions of opportunity from the pipeline, would drive -- you would expect incremental EBITDA 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 what, in the 20%, 30% range?

Yes. It's a little premature to commit to that for 2 reasons. One, it depends on what that additional revenue is and what the incremental gross margins are on that revenue. And then also how much of that we decide to commit to additional growth investments. So my point simply is there is upside to that kind of 10%, 11% base adjusted EBITDA margin. And it's just going to depend on, again, the margin profile of that additional revenue and then how much of that we hold back for some growth investment.

I'm showing no further questions at this time. I'd now like to turn it back to John Wood for any further remarks.

Thank you very much, operator. First, I just want 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. So 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, Telos has 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.

Good day, and thank you for standing by. Welcome to the Telos Corporation Second Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to turn the conference over to your first speaker, Allison Phillipp. Please begin.

Good morning. Thank you for joining us to discuss Telos Corporation Second Quarter 2025 Financial Results. With me today is John Wood, Chairman and CEO of Telo and Mark Bendza, Executive Vice President and CFO of Telo.

Let me quickly review the format of today's presentation. Mark will begin with remarks on our second quarter 2025 results. Next, John will discuss business highlights from the quarter. Then Mark will follow up with third quarter guidance before turning back to John to wrap up. We will then open the line for Q&A where Mark Griffin, Executive Vice President of Security Solutions, 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.

Before we begin, we want to emphasize that some of our statements on this call, including all of those relating to 2025 company performance, plans and operations are forward-looking statements and are made under the safe harbor provisions of the federal securities laws.

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

We do not undertake any duty to update any forward-looking statements. 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 Telo'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.

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'll turn the call over to Mark.

Thank you, Allison, and good morning, everyone. Before we get into the details on the slides, I'd like to provide a brief overview of the good news that you will hear today. Our business has been scaling in a very meaningful way year-to-date. Leading the way our major long-term programs in security solutions such as the Defense Manpower Data Center or DMDC program and TSA PreCheck as well as additional confidential IT security work that we are now performing for the federal government.

These growth drivers are layered on top of a strong base of recurring revenue streams from sophisticated government and commercial customers throughout our security solutions portfolio. Our operational and financial performance inflected in a very positive way in the first quarter of this year, with a return to revenue growth, profitable adjusted EBITDA and strong cash flow. That trend accelerated in the second quarter and we're also forecasting a large sequential step-up in revenue and adjusted EBITDA in the second half.

In addition, given our confidence in the outlook for the business, and our strong cash flow generation in the first half of this year, we have resumed share repurchases. With that introduction, let's get into more detail beginning on Slide 3.

I'm pleased to report that Telos has again overdelivered on key financial metrics in the second quarter, exceeding both revenue and profit guidance. Revenue grew 26% in the quarter to $36 million, above our guidance range of $32.5 million to $34.5 million. Security Solutions delivered approximately 90% of total company revenue and drove the outperformance above the top end of the guidance range.

GAAP gross margin was 33.2%, and cash gross margin was 38.4%, both within our guidance range. Although gross margins were lower year-over-year due to revenue mix in the quarter, they were representative of typical margins for our portfolio over the past 5 years. 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 third quarter guidance, we expect margins to mix higher sequentially next quarter. Adjusted operating expenses in the second quarter were approximately $900,000 better than guidance due to ongoing cost discipline throughout the company. As a result of better than forecasted revenue and operating expenses, adjusted EBITDA also exceeded the top end of our guidance range.

Adjusted EBITDA was approximately a $400,000 profit compared to our guidance range of a $2.1 million loss to a $600,000 loss. Lastly, we delivered another quarter of robust cash flow. Operating cash flow in the quarter was $7 million. Free cash flow was $4.6 million or a 12.9% free cash flow margin. Free cash flow in the first half was $8.4 million or a 12.6% margin.

As a result of our strong cash generation in the first half, and our confidence in the outlook for the business, we resumed share repurchases in the second quarter. We deployed $4 million to repurchase approximately 1.5 million shares at a weighted average price of $2.69 per share. Since our fourth quarter 2024 earnings call, we've 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 second quarter and first half of the year. Year-over-year revenue growth was primarily driven by 82% growth in Security Solutions, partially offset by contraction in secure networks. Growth in Security Solutions was primarily driven by the successful transition of the DMDC program in the fourth quarter of 2024, and the ramp of TSA PreCheck enrollment volume.

GAAP gross profit grew 23% and adjusted EBITDA improved $3.3 million returning to a profit. It is worth noting that adjusted EBITDA improved by $3.3 million on a $7.5 million increase in revenue. That implies a 44% incremental adjusted EBITDA margin due to a combination of revenue growth and lower operating expenses. Cash flow performance was equally as encouraging. Free cash flow improved by $16 million to a positive $4.6 million. The significant year-over-year improvement in free cash flow was due to higher adjusted EBITDA, lower capitalized software development costs and an intensive company-wide focus on working capital management.

The same year-over-year revenue, profit and cash flow trends apply to the entire first half. Notably, incremental adjusted EBITDA margin was 71%. Free cash flow improved by over $23 million to a positive $8.4 million. Overall, we expect the trend of year-over-year growth in revenue and adjusted EBITDA to accelerate in the second half, and we expect to generate positive free cash flow for the full year.

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 5. First, I'll provide an update on our TSA PreCheck program. We have successfully expanded our nationwide network of enrollment centers to 415 locations across 40 states, including Puerto Rico. This represents a 43% increase in locations since our last earnings call in May.

We continue to target achieving 500 enrollment locations in 2025. We are pleased with the progress we have made on this rollout as we strive to provide a convenient solution for travelers across the country and be a trusted partner in this important national security program. In fact, as Mark has previously mentioned, we've made progress in several of the key areas of the Security Solutions portfolio as we're presently seeing several large programs ramp and scale. Additionally, we're very excited about the recent Federal Risk and Authorization Management Program, or FedRAMP, high authorization for our Xacta software solution.

This is a formal recognition that Telos' Xacta platform meets the most stringent standards for protecting highly sensitive government data in cloud environments. This milestone reinforces our role as a trusted partner in an increasingly complex and rapidly evolving security environment. We are proud to deliver solutions that help our customers accomplish their missions with the highest level of safety and security.

Finally, I will summarize the latest news on other business outcomes since our last earnings call. Our Xacta business has achieved new orders or renewals with several key customers, including the U.S. Department of the Treasury, the U.S. Air Force, the Defense Intelligence Agency, New Zealand Government Agency, the Virginia Department of Education, the National Archives and Record Administration and several other U.S. federal government customers. We also received a new order for cyber services from a Fortune 100 company in the technology sector as well as renewals from the U.S. Department of Homeland Security, the General Services Administration and several other U.S. federal government customers.

I'll now turn the call over to Mark, who will discuss third quarter guidance. Mark?

Thanks, John. Let's turn to Slide 6. For the third quarter, we forecast revenue to grow 85% to 98% year-over-year to a range of $44 million to $47 million. We forecast adjusted EBITDA of $4 million to $5.7 million or an adjusted EBITDA margin of 9.1% to 12.1%. We expect Security Solutions to generate approximately 90% of total company revenue. We forecast cash gross margin to be approximately 40% to 41% up sequentially from 38.4% in the second quarter due to normal quarterly fluctuations in revenue mix as described earlier.

Adjusted operating expenses are expected to be approximately $14.3 million, representing a $1.6 million reduction year-over-year. Lastly, we expect the fourth quarter to be similar to the third quarter.

With that, I'll turn it back to John.

Thanks, Mark. Let's turn to Slide 7. To review, our return to growth plan has taken hold, and we are exhibiting significant gains as large programs within our Security Solutions segment continue to rapidly scale. Our company-wide commitment to expense discipline is driving outstanding operating leverage and as a result in the second quarter and first half of 2025, the company delivered substantial year-over-year growth in revenue, adjusted EBITDA and cash flow. We've achieved free cash flow through the first 2 quarters of the year at 12.6% of revenue. This has enabled us to return cash to shareholders through share repurchases in the second quarter.

We also expect the upward trajectory in revenue and adjusted EBITDA to accelerate in the third quarter of the year. With that, we're happy to take questions.

Operator, please open the line for Q&A. Thank you. .

[Operator Instructions]. Our first question is going to come from the line of Nehal Chokshi with Northland Capital Markets.

Congratulations on spectacular results and guidance. I pretty hear is that you're seeing increasing TSA PreCheck enrollments despite what should be declining renewal volume usual 5-year anniversary of the Telos. So can you talk about how our enrollments per store that are currently open are going relative to the expectations to achieve a 33% targeted market share of TSA PreCheck enrollments?

Yes. Nathan. It's Mark Bendza here. Listen, at the beginning of the year, we said we were targeting 500 locations by the end of the year. We've been ramping really well towards that target. We ended last year with 203 locations. We're at 415 today. So we're on a really good trajectory there. You're right. On renewals, overall market renewals are down this year due to the 5-year anniversary of COVID. However, with the ramp in locations, new enrollments are a big driver of the year-over-year performance you're seeing for the entire company. .

I won't get into that granular detail on the program around exact number of transactions per location. But needless to say, enrollments are up along with the ramp in locations.

Enrollments consistent with the number of locations or enrollments are up per location? Just wanted to get that clarification. .

Enrollment overall are ramping with locations.

Got it. Okay. And then you talked about how gross margin will be going up sequentially. What's the -- and I understand that there is variability from quarter-to-quarter and likely it's mix. But what is that mix driver there that will be driving that gross margin up sequentially?

Yes. So as we've talked about in the past, we have -- we really have a breadth of revenue streams across our portfolio. And each of those revenue streams come with different margin profiles. We have a really wide range of margin profiles depending on the revenue stream, so it can fluctuate quarter-to-quarter, and I would expect it to fluctuate from quarter-to-quarter. If you look back over the last 5 years, our weighted average cash gross margin is somewhere around 38% that ramped pretty high last year as our lower-margin revenue streams came down. We're looking at 40% and higher in the third quarter and the fourth quarter as well. So full year should look really good relative to history. But yes, it will fluctuate quarter-to-quarter. I mean next -- in the third quarter, it's a combination of the different growth drivers that we have going on right now in Telos ID. Those key programs and the different revenue streams within those key programs.

Okay. And is it fair to say that it's largely due to mix shift within the DMDC contract?

That is part of it, but that's not all of it.

Next question is going to come from the line of Rudy Kessinger with D.A. Davidson..

In the prepared remarks, I think you had mentioned additional confidential IT security work the federal government as contributing to some of the Security Solutions revenue growth any additional commentary you could provide on that in regards to size and scale and what kind of revenue generation you're seeing today versus what you could see in the future?

And then also any large deals in the pipeline that you're expecting to close in the second half of this year that could contribute meaningful revenue for next year?

Yes, it's Mark Bendza here. So on the confidential work, unfortunately, we're not at liberty to say too much about that. In terms of the size, I would say, it's a nice additional revenue stream for the portfolio. I can't quantify it for you, unfortunately. But it's relatively meaningful. On the pipeline, I'll pass it over to Mark Griffin.

Rudy, Telos has a strong pipeline with over 200 unique opportunities, representing an estimated contract value of over $4 billion. 69 of these opportunities are new within the last quarter, and we feel award pace will be weighted towards Q4 this year and Q1 of next for many of the more significant opportunities. Our growth opportunities are driven by strategic positioning and well-funded national security priorities, including the ever-changing cyber security threat environments, digital enterprise solutions and modernization of core infrastructure.

The majority in total contract value is weighted toward our security solutions business, which is exactly where we want our future growth to be centered. We believe we have the right ingredients for success, are very confident in our growth trajectory and are laser-focused on our future profitability and sustainability.

Great. And then maybe just one quick follow-up, if I could. You had some strong positive net working capital changes in the first half. Just that led to significant free cash flow outperformance related to EBITDA. How should those dynamics trend in the second half?

Yes. So overall, free capital, I expect to be robust in the second half as well. In terms of net working capital, over the next I don't know, a number of quarters, I would expect the working capital tailwind to moderate and more of the cash flow coming from higher adjusted EBITDA. But the net effect of all that is, I would expect continued robust free cash flow. .

Next question is going to come from the line of Zach Cummins with B. Riley Securities.

Congrats on the strong results here. First question is just on TSA PreCheck. With the changes from the DHS allowing just a regular security line to maintain the [indiscernible] on throughout the process. do you imagine that having any sort of impact to the appetite for new renewals or anything along that line? Just curious on your insight there.

Zach, Mark Griffin. No, we don't feel as though that will have any negative effect on enrollment at this point. In fact, in some ways, it's increasing visibility of the program. And remember, the speed through the line is still their most critical component, which TSA PreCheck offers.

Understood. That's helpful. And just in terms of CNBC, Mark, I know it can really fluctuate in terms of mix around software products versus hardware products that are being purchased. I mean, now that you've had the program and [ framed ] for going on a year now, are you starting to get a better sense of visibility into those orders on the third-party side?

Yes. Generally, yes, I'd like to get the full calendar year under our belt to really get a feel for what the mix looks like. Overall, I'd say the mix is more weighted to software than hardware. But overall, this is a really good program for us. And along with a couple of other drivers, one of the really important drivers behind the year-over-year improvement in the financials.

Understood. And final question for me is just given the strong free cash flow in the first half this year and expect to be that sustained going forward, how should we think about your capital allocation strategy and maybe specifically to M&A?

Yes. So good question. I'd say organically, we're in a great spot right now. Things are going really well. As we've been talking about here on the call and in our materials, top line growth is excellent this year. Cash gross margins are healthy. Our flow-through to adjusted EBITDA is working very well due to OpEx discipline. And we're converting profit to cash at very high rates. And then we're returning that capital to shareholders through buybacks.

So I'd say the priority is to use free cash flow to drive additional buybacks over time. That being said, we'll continue to look at say more opportunistic tuck-in acquisitions that they come across our desk. But we'll be very disciplined on that front.

And then lastly, if a more transformational M&A opportunity or say a change of control transaction would lock in the most value for our shareholders in a very obvious way. We take a serious look at that as well.

This will conclude today's question-and-answer session. And I would like to hand the conference back over to John Wood for any further remarks.

Well, thank you. I want to thank our shareholders for your ongoing support. And we're going to continue to be intensely focused on executing our plan and are pleased our efforts have enabled positive outcomes for the company and our shareholders during the first half of the year. .

We look forward to continuing the trend of year-over-year growth throughout the remainder of 2025. And I'll just end with, we have robust and recession-resistant markets, well-funded customers and decades-long track record of serving the world's most security-conscious organizations. As a result, we believe Telos is a strong foundation for the future. Thank you.

This concludes today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.

Thank you.