TELOS CORP Q2 FY2025 earnings call

• Business scaling with major long-term programs like DMDC, TSA PreCheck, and confidential IT security work for the federal government.
• Return to revenue growth, profitable adjusted EBITDA, and strong cash flow in the first half, with acceleration in the second quarter.
• Resumed share repurchases due to strong cash flow generation.
• TSA PreCheck expanded to 415 locations across 40 states (43% increase since last earnings call) with target of 500 locations by 2025.
• FedRAMP High Authorization for Xacta software solution, recognizing its ability to protect highly sensitive government data in cloud environments.
• Xacta software received new orders/renewals from key customers including U.S. Department of the Treasury, U.S. Air Force, etc.

Security Solutions contributed approximately 90% of total company revenue. In the second quarter, revenue grew 26% to $36 million. GAAP gross margin was 33.2% and cash gross margin was 38.4%. Year-over-year, Security Solutions grew 82%, driving the revenue growth. Adjusted operating expenses were better than guidance, leading to adjusted EBITDA exceeding the top end of the guidance range.

• Third quarter revenue forecast: $44 million to $47 million (85%-98% y-o-y growth).
• Third quarter adjusted EBITDA forecast: $4 million to $5.7 million (adjusted EBITDA margin 9.1%-12.1%).
• Security Solutions expected to generate ~90% of total company revenue.
• Cash gross margin forecast: 40%-41% sequentially higher than second quarter's 38.4%.
• Adjusted operating expenses expected to be ~$14.3 million, a $1.6 million reduction year-over-year.
• Fourth quarter expected to be similar to the third quarter.

• Forward-looking statements are subject to risks and uncertainties, including factors that could materially differ from current expectations, as described in SEC filings and the call.
• Non-GAAP financial measures should be considered in addition to GAAP results.

Q: Congratulations on spectacular results and guidance. Can you talk about TSA PreCheck enrollments relative to 33% targeted market share and gross margin mix driver?

A: Mark Bendza mentioned TSA PreCheck is on track to 500 locations, enrollments are ramping with locations. Gross margin mix is due to different revenue stream margin profiles across the portfolio, with third quarter and beyond expected to have higher margins due to growth drivers.

Q: Commentary on confidential IT security work, pipeline, and net working capital?

A: Mark Bendza said confidential work is a meaningful revenue stream but can't quantify. Mark Griffin mentioned over 200 unique opportunities with ~$4 billion contract value, 69 new in last quarter, weighted towards Q4 and Q1 next. Net working capital tailwind expected to moderate, but robust free cash flow expected to continue.

Q: Impact of DHS shoe policy on TSA PreCheck, DMDC mix visibility, and capital allocation?

A: Mark Griffin said shoe policy won't negatively impact enrollment. Mark Bendza noted DMDC mix is more weighted to software than hardware, and capital allocation is focused on organic growth, share repurchases, with consideration of M&A opportunistically