Telos (TLS) Q2 2026 Earnings Call Transcript

Telos (TLS) Q2 2026 Earnings Call Transcript

Motley Fool Transcribing, The Motley Fool

Mon, August 17, 2026 at 6:14 PM GMT+3 24 min read

• TLS -2.42%

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DATE

Monday, Aug. 10, 2026 at 9:30 a.m. ET

CALL PARTICIPANTS

• Director of Corporate Communications - Allison Phillipp

• Chairman and Chief Executive Officer - John Wood

• Executive Vice President and Chief Financial Officer - Mark Bendza

• Executive Vice President of Security Solutions - Mark D. Griffin

Full Conference Call Transcript

Operator: Good day, and thank you for standing by. Welcome to the Telos Corporation's second quarter 2026 Earnings Conference Call. At this time, After the speakers' presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press 1-1 on your telephone. You will then hear an automated message advising that your hand is raised. If you would like to remove yourself from the queue, please press 1-1 again. Please be advised that today's conference is being recorded. Would now like to turn the conference over to your speaker for today, Allison Phillipp, Director of Corporate Communications. Please go ahead.

Allison Phillipp: Good morning. Thank you for joining us to discuss Telos Corporation's second quarter 26 financial results. With me today is John Wood, Chairman and CEO of Telos; Mark Bendza, executive vice president and CFO of Telos and Mark D. Griffin, executive vice president of security solutions. Let me quickly review the format of today's presentation. Mark Bendza will begin with remarks on our second quarter results and full year outlook. We will then open the line for Q&A John Wood and Mark D. Griffin will also join us. The second quarter financial results 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, in the comments made during this conference call and in our SEC filings. We do not undertake any duty to update any forward looking statement.

In addition, during today's call, we will discuss non GAAP financial measures. Which we believe are useful as supplemental and clarifying measures. To help investors understand Telos' 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 site under the Investor Relations link.

With that, I will turn the call over to Mark Bendza.

Gary Mark Bendza: Thank you, Allison, and good morning, everyone. We are pleased to report another strong quarter. Highlighted by results that exceeded the high end of our guidance range, strong cash flow generation accelerated share repurchases, and a meaningful increase in our full year profitability outlook. These results reflect the strength of our business and our continued ability to solve complex mission critical challenges for our customers. Telos helps the world's most security conscious organizations solve those challenges by combining proven cybersecurity digital identity, and secure networking solutions. Combined with deep mission expertise and a flexible approach to addressing unique customer requirements. Our solutions strengthen security improve operational efficiency, accelerate compliance, and help customers adapt to an evolving threat landscape.

Let's turn to slide 3. Total company revenue increased 33% year over year to $47.7 million. Exceeding our guidance range of $44 million to $46 million driven by stronger than forecasted performance in Telos ID. GAAP gross margin was 35%. And cash gross margin was 40.6%. Both above our expectations. Reflecting disciplined execution across large programs in Telos ID. As a reminder, given the diversity of our revenue streams, gross margins will fluctuate from quarter to quarter, based on revenue mix. Adjusted operating expenses declined by more than $800 thousand year over year but were approximately $500 thousand above guidance assumptions. Primarily reflecting higher TSA precheck marketing activity and incentive compensation accruals.

Adjusted EBITDA exceeded the high end of our guidance range, reaching $6.9 million compared to guidance of $5 million to $6 million. Adjusted EBITDA margin expanded to 14.4%, up significantly from 1.1% in the prior year period. Let's turn to slide 4 to discuss cash flow. Over the past few years, we have transformed Telos into an increasingly cash generative business. Strong revenue growth, lower operating expenses, and disciplined working capital management have significantly improved our free cash flow margins while reducing quarter to quarter cash flow volatility. Operating cash flow for the second quarter was $8.8 million and free cash flow totaled $6.6 million. Representing a 13.9% free cash flow margin.

This marks our sixth consecutive quarter with a free cash flow margin above 12%. During the quarter, we deployed $4.7 million to repurchase more than 1 million shares at an average price of $4.50 per share. Let's turn to slide 5 to discuss our third quarter guidance. For the third quarter, we forecast revenue in a range of $49.2 million to $50.6 million. down slightly year over year due to unusually high nonrecurring revenue associated with the start up of a new program in the comparable period last year. Excluding the year over year differential in nonrecurring revenue, third quarter revenue guidance implies 6% growth at the midpoint. We expect cash gross margin to be 37.5% to 38.5%.

Reflecting the anticipated effects of contingency reserves on fixed price contracts and normal fluctuations in revenue mix. Adjusted operating expenses are expected to be approximately $400 thousand lower than the prior year. Adjusted EBITDA is expected to be between $6 million and $6.8 million representing a 12.2% to 13.4%. Let's turn to slide 6 to discuss our updated full year outlook. Based on our strong first half execution, we are raising our full year profitability outlook.

We are increasing our adjusted EBITDA guidance to a range of $23.6 million to $28.6 million up from our previous guidance of $20.6 million to $28 million We are also raising our adjusted EBITDA margin outlook to 12.6% to 14.7% representing an improvement of approximately 70 to 160 basis points versus our prior forecast. In addition, we are raising our full year cash gross margin outlook to 39% to 40% up from our previous forecast of 38.2% to 39.5%. While lowering our adjusted operating expense forecast by approximately $1.7 million Our full year revenue outlook is now $187 million to $195 million.

Starting in the fourth quarter, we expect the resale of low margin third party software to begin phasing out. While this revenue stream contributes meaningful revenue, it carries only a single digit gross margin. And is not consistent with the margin profile we are building across the company. As a result, our revenue outlook is approximately $2.5 million lower at the midpoint than our previous guidance. Beyond 2026, the full run rate impact will be $33 million of revenue per year with only a modest impact on profit.

Because this revenue stream carries a single digit gross margin, eliminating it is expected to improve total company cash gross margin by over 600 basis points on a run rate basis all else being equal. In addition, we expect to realize 400 basis points of additional cash gross margin accretion in the second half of 27, after we complete the expense recognition of certain prior period investments in our TSA PreCheck program. Accordingly, we expect the combination of these 2 items to improve our cash gross margins by approximately 10 percentage points during the second half of next year, all else being equal. Before I conclude, I would like to spend a few minutes discussing growth, and new business opportunities.

On our last earnings call, we mentioned that we had submitted proposals representing nearly $500 million in total contract value. And expected the government to make award decisions during the second half of 26. We continue to expect award decisions in the second half of the year. Consistent with prior quarters, the timing of contract awards is determined by our government customers and may vary based on their priorities and procurement schedules. These opportunities span both our security solutions and secure network segments. With a heavy concentration in security solutions. Beyond these submitted proposals, we continue to build a healthy pipeline while remaining disciplined in pursuing new opportunities that align with our strategic priorities.

Let's turn to slide 7 to wrap up. The second quarter reflects the continued execution of our strategy. We are delivering profitable growth generating consistent free cash flow, and allocating capital in ways that we believe create long term shareholder value. Looking ahead, we are encouraged by the opportunities in our pipeline as award decisions are made over the coming quarters. Overall, we are pleased with our first half performance. Confident in our updated full year outlook, and remain focused on executing our strategy to drive profitable growth generate steady cash flow, and create long term value for our shareholders. With that, operator, please open the line for questions.

Operator: Thank you. Please press 1-1 on your telephone. You will hear that automatic message advising that your hand is raised. You would like to remove yourself from the queue, press 1-1 again. We also ask that you wait for your name and company to be announced before proceeding with your question. 1 moment while we compile the Q&A roster. First question will be coming from the line of Erik Suppiger. Of B. Riley. Please go ahead.

Erik Suppiger: Yes. Thanks for taking the question. First off, on the on the TSA PreCheck, any update on how your work with the post office is, is working? And then secondly, on the September quarter come the upcoming quarter, can you just discuss the kind of the nature of fiscal year end spending? What are your what are your expectations in terms of the health of the fiscal year end budgets here?

Gary Mark Bendza: Yeah. Hey, Erik Good morning. Thanks for the question. So this is Mark Bendza. I will start. So first, on TSA PreCheck, program is going really well. We are very pleased with it. First off market share is up significantly from the same period last year. We are expecting normal seasonality in the second half. Generally speaking from what we have seen in the last couple of years. Second half market, tends to be lighter than the first half, so that is reflected in our guidance. But overall, very pleased with how that program is trending and how our market share is trending. I will turn it to Mark D. Griffin to comment on porkchips.

Mark D. Griffin: Hello. Yes. You will see in the Baird near future an additional couple sites with the post office that we are rolling out as part of the pilot. We are pleased with the progress we are making, and we look forward to additional expansion there. Spending September end spending, government spending was the was the other question. Is that right, Erik?

Erik Suppiger: Yep. that is right. Yep.

Gary Mark Bendza: Yeah. So why do not I start, and then Christina can supplement. So as we as we mentioned, we have a solid portfolio of proposals outstanding. it is actually up a little bit from last earnings call. Last earnings call, we were little under $500 million total contract value. I would say now we are a little over $500 million total contract value. Indications are still that awards on those opportunities. Should be decided sometime here in the second half. Of course, that is fully in the fully under the control of the customer. But we are still expecting reward decisions sometime here in the second half. I do not know. Mark, Christina, if you want to add to that.

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

Gary Mark Bendza: Okay. Very good. Thank you. Thanks, sir.

Operator: Thank you. 1 moment for the next question. Next question is coming from the line of Matthew Calitri. Of Needham and Company. Please go ahead.

Matthew Calitri: Hey, guys. This is Matthew Calitri over at Needham. Thank you for taking our questions. I was hoping you guys could provide a little bit more color on that single digit gross margin third party software revenue. So understood on the margin profile, and great to see the profitability improvements you guys have been driving. But what exactly is that revenue? Like, is it on the security solutions or on the network side? And, like, how are you guys thinking about balancing growth and profitability here?

Gary Mark Bendza: Yeah. Good morning, Matthew. Thanks for the question. Mark Bendza here. So that revenue stream is part of a much larger program. Within security solutions There are multiple revenue streams within that program that were part of, you know, the overall RFP when we bid for this program. Clearly, that is not a revenue stream that we would otherwise pursue as a stand alone revenue stream. It just it does not you know, align with the portfolio that we are developing and the margin profile, the type of business we pursue. But because it was part of an overall program, that aligns very well. The overall program aligns very well with our portfolio.

You know, that revenue stream came along with it when we won it. So that revenue stream will start to phase out in the fourth quarter Like I said, single digit margin on that revenue stream. And you know, we will see a very meaningful cash gross margin accretion as a result of it. And then it will take--you know, because the revenue stream because the revenue stream carries such a low gross margin, it will take you know, relatively little additional revenue to fully offset the profit that we would that would go away with that. Does that answer your question, Matthew?

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

Gary Mark Bendza: Yeah. In the quarter, you know, the beat above the top end of the revenue guide was primarily in our TSA PreCheck program and our program with the Defense Manpower Data Center. Those are those are 2 large programs in the portfolio. Both performed well relative to guidance. And then on gross margins, gross margins outperformed really as a as a result of just a terrific job our program managers are doing managing fixed price fixed price contracts. Every quarter when we guide, we include in our guide some contingency on fixed price programs. You have that in our sort of quarter guide as well.

And then, you know, we have that in first quarter and second quarter, and then our program managers continue to do a great job managing the risk that we have added contingencies for into our guide. And so we have outperformed gross margins in part as a result of that. For the last 2 quarters. Excellent. Thanks so much.

Operator: Thank you. 1 moment for the next question. The next question is coming from the line of Bradley Clark of B and Capital Markets. Please go ahead.

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

Gary Mark Bendza: Yes, Brad. Thanks for the question, Mark Bendza here. So you know, like we have talked about, it is a really solid portfolio of opportunities, both in magnitude as well as how we are positioned on those opportunities A lot of those opportunities are in the similar scope of work to the confidential IT security work that we have mentioned in the past. We are performing for the federal government. So we do have some solid past performance history on that on that type of work. So we feel we are well positioned there. And given the timing of these opportunities, you know, it is less of a P and l driver for this year.

Much more of an opportunity to drive p and l for next year. Did I answer your question, Brad? Yes. Thank you. Okay. Great.

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

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

Gary Mark Bendza: Yeah. Hey, Rudy. Mark Bendza here. So yes, it is 1 of the revenue streams in that program. And it really kicked in, I think it was I wanna say, like, second quarter of 25. Okay.

Rudy Kessinger: So going forward, I guess, with that being out of DMDC, I am just trying to get a sense of revenue concentration with between PreCheck and that DMDC CC contracted. I guess, to your expectation for 2027 on DMDC, is it now more like around a $20 million to $30 million a year of revenue versus the prior I think, $50 million to $75 million range. I am just trying to get a sense of how large that contract will be with that. Party software revenue stripped out.

Gary Mark Bendza: Yeah. I would rather not get into too much detail deconstructing individual programs. But what I can say is there is $33 million of that single digit margin software that will come out next year. Okay.

Rudy Kessinger: Got it. And then lastly, me, just on PreCheck, I know you called out--you have said Telos ID, not specifically PreCheck, but just curious how the PreCheck program's been ramping, how, you know, precheck enrollments and renewal volumes that you guys are seeing in market share that you are getting is tracking versus expectations?

Gary Mark Bendza: Yeah. Program's doing great. So market share, as I mentioned earlier, is up significantly in the first half of this year compared to the comparable period last year. Well, last year, we spent a lot of time and energy and management attention building out our network of enrollment locations. And this year, we are spending much more time focused on productivity of those locations. And so in part as a well, not in part, as a function of those 2 things, both the ramp of the locations and the focus on productivity of those locations, we are seeing some pretty significant step ups in market share year over year. Got it.

Thanks for my questions, guys, and congrats on the results in the quarter. Great. Thanks.

Operator: Thank you. 1 moment for the next question. The next question is coming from the line of Nehal Chokshi of Northland Capital Markets. Please go ahead.

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

Gary Mark Bendza: Yeah. So let's see. there is--well, you have kind of hit on them, actually. So we have better visibility on OpEx. So we are lowering our OpEx assumption for the year. Cash gross margins are up due to outperformance in the first half. In particular, on a couple things. 1, mix, more favorable mix, and 2, outperformance on fixed price contracts relative to contingencies we have in our guidance.

Combined with taking out some of the lower margin revenue in the fourth quarter, Combination of all those things allowed us to take up our cash gross profit cash gross margin rather, guidance, and then a very modest tweak at the midpoint of the revenue range primarily driven by the elimination of low margin software in the fourth quarter. Okay.

Nehal Chokshi: Great. And just to be clear, the nonrecurring revenue from Q2 2025, that is been normalized out. And would then say that, uh, revenue would be up I am sorry. From Q3 2025. If we take it out, normalize that, say, okay. The guy revenue guidance would be up 6% year over year. Is that nonrecurring revenue the same as the third party software that is being phased out in the fourth quarter?

Gary Mark Bendza: No. it is actually--it is different. That was some short term non revenue associated with the start up of a new program. it is a different it is a different revenue stream. Got it.

Nehal Chokshi: Okay. Alright. And then you are guiding down EBITDA $500 thousand quarter-over-quarter for Q3. Versus a $2 million midpoint increase in revenue. Presumably, that is mix. But if there is anything else going on, please let us know.

Gary Mark Bendza: The main driver there really is we are guiding cash gross margin down in the third quarter. And it is really a function of a couple of things. it is it is 1, the contingency that I mentioned in fixed price contracts you know, we put that in our guide every quarter. And our program managers continue to outperform. We guided in both the first quarter and the second quarter cash gross margins in the high 30s ended up coming in the low 40s. Third quarter, we are guiding again kind of high 30s. In part due to those contingencies. We will see how that goes in the third quarter here.

But then also, we do have some seasonal mix impact, in particular, from TSA PreCheck that I mentioned earlier, We have been noticing in recent years that second quarter tends to be lighter than the first quarter. So we have embedded that in our guide. We will see if that seasonality holds this year. Maybe it maybe it will outperform this year. We will see what the market does. But we wanted to make sure that we at least reflected that in the guidance.

Nehal Chokshi: Alright. Great. And then as you pointed out, your free cash flow margin has significantly improved over the past 6 quarters, consistently above 12% at or above 12%. And from what I understand, I think that premium free cash flow margin to your defense contract computers So a couple of questions behind this point. 1, what are the fundamental drivers of the premium free cash flow margin? It simply expense control, or is this a reflection of something else? Such as having migrated from being a cost plus to a fixed price contractor over the multiple decades that Telos has been in existence for.

Gary Mark Bendza: Yeah, it is a good question. I would say there are a couple of drivers there. First, our cash gross margin profile is much better than a lot of those companies that you are referring to. And that is a function of, in part, you know, years of investment in IP for some of our businesses. that is 1. 2, we shifted from we shifted from much more of a cost plus model to much more of a fixed price model many years ago. And so we take more risk than some of those other companies. And we are appropriately compensated for taking that risk.

And I would say also, you know, more recently, you know, we have done a lot of work on rightsizing our cost base. Over the last you know, 3, 4 years. And I think we have gotten that to a much better much better place now. I would also say we are much more of a capital light business model than other folks. So we carry a lot less PP and E and CapEx. And then lastly, we have done a ton of work the last call it, year and a half, 2 years around working capital. Getting our collections aligned within the quarter with our payments to suppliers and subcontractors.

So there are a lot of things that went into driving those free cash flow margins to where they are today. And we are very pleased with the results.

Nehal Chokshi: Great. So given this now proven premium free cash flow margin, appears 1 would think that Telos becomes an attractive target for some of these larger peers. So what is Telos's Telos-specific receptivity to this potential?

Gary Mark Bendza: Yeah. So that is a good question. And we have been getting that question a lot lately. You know, especially from investment bankers and sponsors. Listen, we are laser focused on maximizing value for our shareholders. And I think you know, you have seen that. Over the past in particular, over the past couple of years. We have been able to create a lot of value organically. And, you know, I think that cash flow slide and the earning deck that you referred to tells the story quite well. Yeah. We have driven revenues higher, OpEx lower, excellent cash generation, consistent share repurchases. And we forecast those trends will continue.

But if a change of control opportunity clearly represented a superior path, to create value for our shareholders, we would seriously consider. Great. Thank you very much. Okay. Thanks, Nehal.

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

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

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

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Telos (TLS) Q2 2026 Earnings Call Transcript was originally published by The Motley Fool