TELOS CORP Q3 FY2025 earnings call

• Launched Xacta.ai in early October, secured first enterprise customer, with potential efficiencies up to 93% in cyber governance tasks. Plan to evolve Xacta platform with AI capabilities and automation.
• Achieved 504 enrollment locations for TSA PreCheck program across 41 states and Puerto Rico, exceeding the 500 location objective for 2025. Will continue to evaluate location network for improvements.
• Portfolio of existing programs forecasted to deliver double-digit growth in revenue and adjusted EBITDA in 2026 even before new business wins.

In the third quarter, Telos Corporation achieved significant financial growth. Revenue grew 116% to $51.4 million, surpassing the guidance range of $44 million to $47 million. Telos ID was the driver of this outperformance. GAAP gross margin was 39.9% and cash gross margin was 44.8%, both above guidance. Adjusted EBITDA was $10.1 million, exceeding the guidance range of $4 million to $5.7 million, with an adjusted EBITDA margin of 19.6%. Operating cash flow was $9.1 million, free cash flow was $6.6 million (12.8% free cash flow margin), and the company repurchased over 584,000 shares for approximately $3.6 million.

• Fourth quarter revenue forecast: 67%-76% y-o-y growth to $44 million to $46.3 million. Cash gross margin expected to be 40%-41%, lower sequentially due to revenue mix. Adjusted EBITDA forecast: $4 million to $5.7 million (9.1%-12.3% margin).
• Second half outlook improved with higher revenue, adjusted EBITDA, and margin than previously indicated. 2026 outlook expects double-digit growth from existing programs and new business opportunities, including Xacta.ai sales and new program wins from pipeline.

• Potential impact from federal government shutdown on award decisions and administrative delays, which are captured in the fourth quarter guidance range. Awards stalled and sliding to the right, with administrative delays affecting collections and renewals.

Q: Congrats on the strong results. Any impact from government shutdown on award decisions going into 2026?

A: Impact of shutdown captured in guidance range. Awards stalled and sliding to the right, administrative delays affecting some tasks, but pipeline still substantial.

Q: Feedback on Xacta.ai initial deployment?

A: Initial enterprise sale, customers excited as it reduces need for professional services, test results show up to 93% efficiency improvement.

Q: Plan for TSA PreCheck program growth after reaching 500 locations?

A: Continue to evolve location network, develop partnerships, look for underserved areas to expand service.

Q: Potential revenue from pipeline above $180 million baseline for 2026?

A: Pipeline is robust, awards paused but moving to the right, some tens of millions of revenue opportunity in 2026.

Q: Sustainable free cash flow margin for Telos?

A: Too early to forecast, but at $180 million base revenue, targeting low double-digit adjusted EBITDA margin, with upside from additional growth depending on revenue margin profile