Telos Corporation (TLS) Q3 2025 Earnings Call Transcript

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Overview

The earnings call reveals exceptional financial performance, with revenue and EBITDA significantly exceeding guidance. Positive feedback on new product Xacta.ai, robust pipeline, and strategic share repurchases enhance sentiment. Despite government shutdown impacts, long-term prospects remain strong. Together, these factors indicate a strong positive outlook for the stock.

Key Financial Performance

Revenue Revenue grew 116% in the quarter to $51.4 million, above our guidance range of $44 million to $47 million. The growth was driven by Telos ID's performance.

GAAP Gross Margin GAAP gross margin was 39.9%, above the guidance range due to outperformance in all lines of business.

Cash Gross Margin Cash gross margin was 44.8%, above the guidance range due to outperformance in all lines of business and well above the gross margins reported in the second quarter.

Adjusted Operating Expenses Adjusted operating expenses in the third quarter were approximately $500,000 better than guidance due to ongoing cost discipline throughout the company.

Adjusted EBITDA Adjusted EBITDA was $10.1 million, above the guidance range of $4 million to $5.7 million. Adjusted EBITDA margin was 19.6%, with incremental adjusted EBITDA margin at 51.5%.

Operating Cash Flow Operating cash flow in the quarter was $9.1 million, driven by company-wide working capital initiatives.

Free Cash Flow Free cash flow was $6.6 million, representing a 12.8% free cash flow margin.

Share Repurchases Approximately $3.6 million was deployed to repurchase over 584,000 shares at a weighted average price of $6.23 per share.

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Operating Highlights

Launch of Xacta.ai: Telos launched its new Xacta.ai product in early October 2025 and secured its first enterprise customer. Xacta.ai is an enterprise AI software capability added to the Xacta platform, designed to enhance cybersecurity compliance and risk management. It offers smart insights, accelerates compliance initiatives, and improves efficiencies by up to 93% in governance, risk, and compliance tasks.

Expansion of TSA PreCheck program: Telos achieved its goal of reaching 500 enrollment locations for the TSA PreCheck program, with 504 locations now operational across 41 states and Puerto Rico. This expansion aims to provide a convenient solution for travelers and strengthen the company's partnership with TSA.

Revenue growth: Revenue grew 116% year-over-year in Q3 2025 to $51.4 million, exceeding the guidance range of $44 million to $47 million. This growth was driven by Telos ID programs and recurring revenue streams.

Improved profitability: Adjusted EBITDA reached $10.1 million in Q3 2025, surpassing the guidance range of $4 million to $5.7 million. Adjusted EBITDA margin was 19.6%, with incremental adjusted EBITDA margin at 51.5%.

Cash flow and share repurchases: Operating cash flow was $9.1 million, and free cash flow was $6.6 million in Q3 2025. The company repurchased approximately 584,000 shares for $3.6 million at an average price of $6.23 per share.

Focus on AI and cybersecurity: The launch of Xacta.ai reflects Telos' strategic shift towards leveraging AI to enhance cybersecurity solutions. The company plans to evolve the platform with increased automation and new features to improve efficiency and effectiveness.

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Risk or Challenges

Federal Government Shutdown: Potential short-term administrative delays due to the federal government shutdown could impact operations and revenue in the fourth quarter.

Revenue Mix Fluctuations: Normal quarterly fluctuations in revenue mix are expected to lower cash gross margins sequentially in the fourth quarter.

Secure Networks Contraction: Revenue contraction in the secure networks segment is anticipated to partially offset growth in other areas in 2026.

Market Coverage Optimization: The company plans to continue evaluating its TSA PreCheck enrollment location network for improvements in market coverage, which could pose logistical and operational challenges.

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Guidance & Outlook

Revenue Growth: Telos forecasts revenue growth of 67% to 76% year-over-year for the fourth quarter, with revenue expected to range between $44 million and $46.3 million. For 2026, the company anticipates double-digit revenue growth driven by existing programs, primarily Telos ID, and additional upside from new business opportunities and the Xacta.ai software.

Adjusted EBITDA: For the fourth quarter, adjusted EBITDA is forecasted to range between $4 million and $5.7 million, with an adjusted EBITDA margin of 9.1% to 12.3%. For 2026, double-digit growth in adjusted EBITDA is expected, supported by existing programs and potential new business wins.

Cash Gross Margin: Fourth quarter cash gross margin is forecasted to be approximately 40% to 41%, reflecting normal fluctuations in revenue mix.

Xacta.ai Product Launch: The newly launched Xacta.ai software is expected to contribute to revenue growth in 2026. The product offers enhanced cybersecurity compliance capabilities and has already secured its first enterprise customer.

TSA PreCheck Program: The company has achieved its goal of 500 enrollment locations in 2025 and plans to continue optimizing its network for better market coverage.

2026 Revenue and Program Outlook: Telos forecasts approximately $180 million in revenue from existing programs in 2026, with growth primarily driven by Telos ID. Additional revenue upside is expected from Xacta.ai and new program wins from a multibillion-dollar pipeline of opportunities.

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Shareholder Return Plan

Share Repurchase: In the third quarter, Telos Corporation deployed approximately $3.6 million to repurchase over 584,000 shares at a weighted average price of $6.23 per share. Cumulatively, since the fourth quarter of 2024, the company has spent $7.6 million to repurchase 2.1 million shares at a weighted average price of $3.69 per share.

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Key Q&A

Q:What is the impact of the government shutdown on Q4 and future award decisions?

A:The impact of the government shutdown is captured in the revenue and adjusted EBITDA range. Awards are stalled and sliding to the right, with administrative delays like collections on invoices and renewals. However, the pipeline into 2026 remains substantial, with a multibillion-dollar pipeline and tens of millions of dollars in revenue opportunities expected in 2026.

Q:What is the initial feedback on the new Xacta.ai product and plans for scaling it?

A:The initial feedback on Xacta.ai has been positive, with a major enterprise-wide deployment and up to 93% improvement in time for customers. The focus is on offering it to the installed base, leveraging its ability to reduce hallucinations in large language models and simplify security and compliance needs.

Q:What is the impact of the government shutdown on Xacta.ai and its adoption?

A:The shutdown has delayed some customer conversations as customers were furloughed. However, there is excitement about Xacta.ai, and it reduces the need for professional services. The first enterprise sale occurred before the shutdown, and other large customers have shown interest.

Q:What are the plans for the TSA PreCheck program after reaching 500 locations?

A:The program is now operating at scale with over 500 locations. The focus is on evolving the network, developing new partnerships, and finding innovative ways to serve travelers. Expansion will target underserved areas and customer bases.

Q:What is the potential revenue growth above the $180 million baseline for 2026?

A:The pipeline is robust, with $5 billion in opportunities, and 1/3 expected to be awarded in the next 6 months. This could bring several tens of millions in revenue for 2026 above the $180 million baseline. However, the exact timing and awards depend on the shutdown resolution.

Q:Is there upsell potential for Xacta.ai among existing Xacta customers?

A:Yes, the primary target for Xacta.ai is the existing installed base, which has shown excitement about the product. The government shutdown has temporarily paused some activities, but adoption is expected to pick up post-shutdown.

Q:What is the sustainable free cash flow margin for Telos?

A:At the $180 million revenue baseline, the target is a low double-digit adjusted EBITDA margin (10%-11%). Additional growth above this baseline could increase the margin, but it depends on the revenue's margin profile and growth investments.

Q:What is the historical win rate for Telos' pipeline?

A:The company does not disclose its historical win rate externally.

Q:What is the expected incremental EBITDA margin for 2026?

A:The base adjusted EBITDA margin is 10%-11%. Incremental EBITDA margin for additional revenue depends on the revenue's gross margin and growth investments. It is expected to be higher than the base margin but not as high as 60%.

Q:Review of Unclear Management Responses

A:Management avoided providing specific details on the historical win rate for the pipeline and the exact sustainable free cash flow margin. Additionally, they did not commit to a specific incremental EBITDA margin for 2026, citing variability in revenue profiles and growth investments.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

TLS Transcript

Telos Corporation (TLS) Q3 2025 Earnings Call Transcript

Positive11-10

Telos Corporation (TLS) Q2 2025 Earnings Call Transcript

Positive8-11

The company demonstrated strong financial performance with revenue exceeding guidance, positive adjusted EBITDA, and robust cash flow. The share repurchase program and optimistic guidance further enhance the positive outlook. While some uncertainties remain, such as specific transaction numbers for TSA PreCheck and confidential IT security work, the overall sentiment is positive with expected revenue growth and strategic expansions.

Telos Corporation (NASDAQ:TLS) Q1 2025 Earnings Call Transcript

Unknown5-10

The earnings call reveals mixed signals: while revenue and EBITDA show improvements, DMDC margins are dilutive. TSA PreCheck's expansion and strong security solutions are positive, but competitive pressures and regulatory challenges persist. The lack of guidance on cash flow and margin details raises concerns. Despite a positive revenue outlook, the absence of a share repurchase program and unclear management responses temper enthusiasm. Overall, the sentiment is neutral, reflecting balanced positives and negatives.

Telos Corporation (TLS) Q1 2025 Earnings Call Transcript

Unknown5-9

The earnings call reveals mixed signals: strong revenue growth in Security Solutions and better-than-expected adjusted EBITDA, but significant risks from competitive pressures, regulatory issues, and supply chain challenges. The lack of a share repurchase program and unclear guidance on cash flow and margins further complicate the outlook. While positive elements exist, such as increased cash flow and revenue growth, uncertainties and competitive pressures balance them, resulting in a neutral sentiment.

TLS Slides

Telos Q1 2025 slides: revenue exceeds guidance, positive EBITDA achieved

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Telos Q2 2025 slides: Revenue surges 26%, shares jump on strong Q3 guidance

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TLS Report

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