Telos Corporation (TLS) Earnings

Management highlights

- Interim Leadership Transition: Chairman and CEO John Wood is on an ongoing medical leave of absence. Independent Director Fred Schofield has assumed the role of Board Chairman, and three Executive VPs (Hutch Robbins, Mark Griffin, and Mark Benza) are jointly handling CEO responsibilities. The interim structure is operating smoothly with no disruptions to business operations, customer engagement, or program execution, and 2026 strategic priorities remain unchanged. - Overall Financial Performance: Q1 2026 results exceeded the high end of management's prior guidance range, driven by strong TSA PreCheck enrollment, solid execution across core programs, and ongoing company-wide efficiency initiatives. This marked the fifth consecutive quarter with a free cash flow margin above 12%, demonstrating the improving scalability and efficiency of Telos' operating model. - Capital Allocation: During Q1 2026, Telos repurchased $2.2 million of common stock (over 500,000 shares at an average price of $4.25 per share). The company will accelerate share repurchases in Q2 2026, leveraging strong ongoing cash generation. Capital allocation priorities remain: invest in organic growth, maintain a strong liquid balance sheet, and return excess capital to shareholders. Management targets a steady cash balance of approximately $50 million, with all excess free cash flow deployed to repurchases. - New Business Pipeline: Telos holds a multi-billion dollar total pipeline of potential opportunities, with $500 million in total contract value of currently outstanding proposals. Most pending awards are concentrated in the Security Solutions segment, spanning both security solutions and secure networks. Two of the outstanding bids are valued at approximately $90 million each, with the rest ranging from ~$3 million to tens of millions of dollars, and most contracts have a 2-year term. Award decisions are expected in the second half of 2026, though timing is controlled by government customers. - Product Development: Xacta AI has been installed in live production pilots at multiple large intelligence community agencies, Department of War elements, and private banking clients, with strong stakeholder feedback. Management expects multiple relevant RFPs for Xacta AI to be released later in 2026. For TSA PreCheck, Telos now operates 500 enrollment locations, and continues testing new partnership models (including university and airport on-site pilots) to drive further growth.

Guidance

- Q2 2026 Guidance: Management expects 22% to 28% year-over-year revenue growth, equal to $44 million to $46 million in total revenue. Cash gross margin is projected to be approximately 39%, adjusted operating expenses are expected to decline ~$1.3 million year-over-year, and adjusted EBITDA is projected between $5 million and $6 million (representing an 11.4% to 13% adjusted EBITDA margin). Strong free cash flow generation is expected, with excess cash to be used for accelerated share repurchases. - Full Year 2026 Guidance: Management reaffirms the prior full-year revenue and adjusted EBITDA guidance, issued less than two months prior to the call. The decision to maintain guidance reflects a deliberate approach to wait for an additional quarter of performance data to gain more full-year visibility, consistent with the company's prior guidance framework. Management increased the lower end of the full-year cash gross margin expectation to reflect the stronger-than-expected margin performance in Q1 2026. Any potential upward revision to full-year guidance will be considered after Q2 2026 results are available. - Pipeline Revenue Timing: If pending proposals are awarded in the second half of 2026, a meaningful portion of contract revenue could be recognized in 2026, as many of the contracts have front-loaded revenue in the first few months of performance.

Segment performance

The transcript does not break out separate financial performance metrics, absolute revenue values, or revenue contribution percentages for Telos' individual product segments (Security Solutions, Secure Networks, Telos ID, Xacta AI). Consolidated total company revenue for Q1 2026 was $47.7 million, a 56% year-over-year increase. Overall GAAP gross margin was 36.4%, cash gross margin was 42.3%, adjusted EBITDA was $7.9 million with an adjusted EBITDA margin of 16.5%, operating cash flow was $8.7 million, and free cash flow was $6.4 million with a 13.4% free cash flow margin. Xacta AI software contribution was roughly flat year-over-year in Q1 2026, with over 400 licenses sold and installed to date. Strength in the quarter was concentrated in the Telos ID business, spanning TSA PreCheck, the DMDC/IT GEMS program, and confidential federal IT security work.

Risks & headwinds

- Timing of government contract awards: All award timing for the $500 million outstanding proposal pipeline is controlled by government customers, who may modify award timelines based on their own internal requirements, which could push revenue recognition into later periods than currently expected. - Quarterly gross margin volatility: Gross margins fluctuate quarter-over-quarter based on the mix of revenue streams, so Q1 2026's above-expected margin may not be sustained in subsequent quarters. - Impact of potential demand shocks: While no impact has been seen to date, higher fuel and travel costs could potentially reduce demand for TSA PreCheck enrollment. - TSA PreCheck seasonality: Enrollment is seasonally weaker in the second half of the year, a trend that management expects to repeat in 2026. - Uncertainty around interim leadership: While the transition has been smooth to date, the extended absence of the CEO could create unforeseen operational disruptions.

Analyst Q&A

• Q: Analyst asks for additional detail on Q1 strength across the business, and whether the decision to maintain full-year guidance includes extra conservatism tied to the CEO's medical leave and interim leadership change. /

  A: Management confirms broad-based strength across Telos ID programs, including TSA PreCheck, DMDC/IT GEMS, and confidential federal security work, paired with solid cost discipline. Operationally, the interim leadership transition has been completely smooth with no disruptions to strategy, customer engagement, or execution. Guidance is maintained because the initial full-year outlook was issued less than two months prior, and management follows a deliberate process of waiting for an additional quarter of performance to update full-year estimates, consistent with past practice.

• Q: Analyst asks if higher fuel and travel costs have impacted TSA PreCheck demand, what seasonal trends are expected, and how Xacta AI performed in the quarter. /

  A: Management reports no visible impact from higher fuel prices on TSA PreCheck enrollment, which is growing strongly year-over-year in both Q1 and early Q2. Seasonally, enrollment is typically lower in the second half of the year, and this trend is expected to hold in 2026. For Xacta AI, over 400 licenses are sold and installed, with successful live pilots at multiple government and private sector clients, strong positive feedback from stakeholders, and expected RFPs for additional deployments later in 2026.

• Q: Analyst asks if the $500 million pending proposal pipeline has higher than typical win probability, and if there is further growth potential for TSA PreCheck beyond the current 500 locations. /

  A: Management notes most pending proposals are in mission areas where Telos has an early foothold, strong existing experience, and good positioning, though final award decisions rest with the government. TSA PreCheck still has room for growth: Telos will continue to optimize volume at existing locations and expand through new partnership models, with an additional pilot currently underway with a new partner.

• Q: Analyst asks if awards in H2 2026 would contribute revenue in 2026 or mostly push to 2027, and what free cash flow and share repurchase levels to expect for the rest of the year. /

  A: Management confirms many pending contracts have front-loaded revenue, so meaningful 2026 revenue contribution is possible if awards are completed on schedule in H2. Free cash flow margin is expected to remain in the lower double-digit range (consistent with the 13.4% margin achieved in Q1 and Q4 2025). Telos will maintain a target cash balance of ~$50 million, so all excess free cash flow will be used for share repurchases.