Telos achieves 116% revenue growth in Q3 2025, exceeding guidance and raising outlook, driven by Telos ID and new Xacta AI product momentum.

OPERATOR - (00:01:30)

Good day and thank you for standing by. Welcome to the Telos Corporation third quarter 2025 earnings conference call. At this time all participants are in listen only mode. After the speaker's presentation there will be a question answer session. To ask a question during the session you will need to press Star one one on your telephone. You will then hear automated message. If I see your hand is raised to withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would like to hand the conference over to your first speaker today, Addison Phillips, Director of Communications. Please go ahead.

Addison Phillips - Director of Communications - (00:02:06)

Good morning. Thank you for joining us to discuss Telos Corporation's third quarter 2025 financial results. With me today is John Wood, Chairman and CEO of Telos and Mark Benza, Executive Vice President and CFO of Telos. Let me quickly review the format of today's presentation. Mark will begin with remarks on our third quarter 2025 results. Next, John will discuss business highlights from the quarter. Then Mark will follow up with fourth quarter guidance before turning back to John to wrap up. We will then open the line for Q and A. Mark Griffin, Executive Vice President, Security Solutions will also join us. The third quarter financial results were 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, I want to emphasize that some of our statements on this call, including all of those relating to 2025 and 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 third 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 website on under the Investor relations link. With that, I'll turn the call over to Mark.

Mark Benza - Executive Vice President and CFO - (00:04:42)

Thank you, Addison, and good morning everyone. I'm pleased to say that we have a lot of good news to share again this quarter. Before we get into the details on the slides, let's run through the main points up front. Our business has been scaling in a very meaningful way this year. Leading the way are major programs in Telos ID layered on top of a strong base of recurring revenue streams with high renewal rates from sophisticated government and commercial customers throughout our information assurance and secure communications portfolio. Our operational and financial performance inflected in a very positive way in the first quarter of this year with a return to revenue growth, profitable adjusted EBITDA and strong cash flow. That trend accelerated in the second quarter and then stepped up significantly in the third quarter. Our third quarter results significantly exceeded expectations and we're raising our outlook for the second half of 2025. Our updated outlook for the second half reflects higher revenue, adjusted EBITDA and adjusted EBITDA margin than previously indicated, as well as a more favorable weighting of second half revenue to the third quarter. In addition, cash flow remains very strong and we continued share repurchases in the third quarter. Lastly, we have a robust portfolio of existing programs that we forecast will deliver double digit growth in revenue and adjusted EBITDA again next year even before the addition of any new business wins through the end of 2026. With that introduction, let's get into more detail. Beginning on slide 3, Telos has again over-delivered on key financial Metrics in the third quarter, exceeding both revenue and profit guidance. Revenue grew 116% in the quarter to $51.4 million above our guidance range of 44 to $47 million. Telos ID drove the outperformance above the top end of the guidance range. GAAP gross margin was 39.9% and cash gross margin was 44.8%, both above our guidance range due to outperformance in all lines of business and also well above the gross margins that we reported in the second quarter. As I said last quarter, given the breadth of revenue streams in our portfolio, gross margins will naturally fluctuate within our historical range from quarter to quarter based on revenue mix. As you'll see in our fourth quarter guidance, we expect margins to mix lower sequentially next quarter. Adjusted operating expenses in the third quarter were approximately $500,000 better than guidance due to ongoing cost discipline throughout the company as a result of better than forecasted revenue, gross margin and operating expenses. Adjusted EBITDA also exceeded the top end of our guidance range. Adjusted EBITDA was $10.1 million, above our guidance range of 4 to $5.7 million. Adjusted EBITDA margin was 19.6% and incremental adjusted EBITDA margin was 51.5% or put differently, for each dollar of revenue growth, $0.51 converted to adjusted EBITDA. Lastly, in part as a result of our company wide working capital initiatives, we delivered another quarter of robust cash flow. Operating cash flow in the quarter was $9.1 million. Free cash flow was $6.6 million or a 12.8% free cash flow margin, and we deployed approximately $3.6 million to repurchase over 584,000 shares at a weighted average price of $6.23 per share. Since our fourth quarter 2024 earnings call, we've been saying that we expect significant year over year improvements in revenue, profit and cash flow for the full year 2025. So let's turn to slide 4 for a brief review of our year over year performance in the first nine months of the year. We've discussed the business and programmatic drivers behind our year over year performance for the first nine months in each of our quarterly narratives, so I won't repeat them here, but I do think it's worthwhile to quantify the pronounced step up in our financial performance during that time period on a cumulative basis. Specifically, revenue grew 44% cash gross margin, although fluctuating quarter to quarter, expanded 30 basis points to 43%. Incremental adjusted EBITDA margin was 56.1% or again put differently, for every dollar of revenue growth, $0.56 converted to adjusted EBITDA. Adjusted EBITDA grew by $20.3 million and moved from a loss in 2024 to a 9.2% positive margin in 2025. Free cash flow improved by nearly $40 million and moved from a cash burn position in 2024 to a 12.7% positive free cash flow margin in 2025. And lastly, we've deployed $7.6 million to repurchase 2.1 million shares at a weighted average price of $3.69 per share. I will now turn it over to John for an overview of recent business highlights.

John Wood - Chairman and CEO - (00:11:12)

John thanks Mark, and good morning everyone. Let's turn to Slide five first. I'm thrilled to report that we launched our new Xacta AI product in early October and have already secured our first enterprise customer. The Telos team is extremely excited about this new technology and the opportunities it presents for our company as well as for our customers. Xacta AI is a powerful enterprise AI software capability added to our Xacta platform, which has already proved the proven solution for cyber risk management compliance for some of the world's most security conscious organizations. The foundation of our unique approach to AI is our ability to seed our Solution with over 25 years of cybersecurity expertise. The result is a solution with the capabilities to create a true force multiplier. For organizations that strive to do more. Challenging security work with fewer resources. Xacta AI has the ability to provide users with smart insights that enable quick identification and resolution of potential compliance gaps. It also supports enhanced decision making with actionable data to accelerate compliance initiatives. Finally, in real world testing, we've documented potential improvements in efficiencies up to 93% across cyber governance, risk and compliance or GRC tasks in addition to savings already realized from previous Exacta versions. Again, a true force multiplier for organizations that strive to do more with less in an increasingly complex cybersecurity environment. We plan to continue to evolve our platform and our AI capabilities with increased automation as well as the expected addition of new agent features to further enhance effectiveness and efficiency. We're very excited about the future for our Xacta platform given this recent leap forward in the development of our product. Second, I'll provide a quick update on our TSA Precheck program. I'm pleased to report that we have now achieved our stated objective of reaching 500 enrollment locations this year. We currently have 504 locations across 41 states and Puerto Rico. We're pleased with this progress that we've made on this rollout as we strive to provide a convenient solution for travelers across the country and to be a trusted partner on this important national security program. Going forward, we will continue to evaluate our enrollment location network for improvements in market coverage while working with the TSA to ensure we are offering an attractive option for our customers. Now I'm going to turn the call back to Mark who's going to discuss fourth quarter guidance.

Mark Benza - Executive Vice President and CFO - (00:14:10)

Mark thanks John. Let's turn to slide 6. For the fourth quarter, we forecast revenue to grow 67% to 76% year over year to a range of 44 to $46.3 million. We forecast cash gross margin to be approximately 40% to 41% lower sequentially due to normal quarterly fluctuations in revenue mix as described earlier. We forecast adjusted EBITDA of 4 to $5.7 million or an adjusted EBITDA margin of 9.1% to 12.3%. Overall, fourth quarter guidance reflects a stronger than previously forecasted second half, a more favorable weighting of second half revenue to the third quarter, and potential for short term administrative delays due to the federal government shutdown,. Compared to our commentary on our last earnings call at the Midpoint of guidance, second half revenue is now forecasted to be higher by $5.6 million or 6%, adjusted EBITDA is forecasted to be higher by $5.2 million or 54% and adjusted EBITDA margin is forecasted to be approximately 470 basis points higher. Lastly, we'll provide further detail about our 2026 outlook on our fourth quarter earnings call in March, but in the meantime, we currently forecast that our portfolio of existing programs will deliver double digit growth in revenue and adjusted EBITDA again next year even before the addition of any new business wins. Through the end of 2026, we forecast existing programs will generate approximately $180 million of revenue, primarily driven by growth in Telos IV, partially offset by contraction in Secure Networks. Additional upside revenue in 2026 would come from sales of our newly released Xacta AI software and new program wins from our multi billion dollar pipeline of new business opportunities. With that, I'll turn it back to John.

John Wood - Chairman and CEO - (00:16:45)

Thanks Mark. Let's turn to Slide 7. To recap, our business has continued to scale in a very meaningful way this year, largely due to programs in Telos ID. We achieved a 116% year-over-year revenue growth in the third quarter and significantly exceeded revenue and adjusted EBITDA Guidance. We continue to produce robust cash flow which funded additional share repurchases in the quarter. We are very excited about the opportunities that our new Xacta AI solution presents for our company and for our customers. We expect that year-over-year growth will continue into the fourth quarter and are pleased to report an improved second half outlook versus the outlook provided on last earnings call in August. And finally, we look forward to another year of double digit growth in 2026. With that, we're happy to take Questions.

OPERATOR - (00:17:44)

Operator, Please open the line for Q&A.

UNKNOWN - (00:17:46)

Thank you.

OPERATOR - (00:17:48)

Thank you. At this time we'll conduct the question and answer session. As a reminder to ask the question, you'll need to press Star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster and our first question comes from the line of Zach Cummings of BYU Securities. Your line is now open.

Zach Cummings - Equity Analyst - (00:18:16)

Yep. Hi, Good morning Mark and John, congrats on the strong results here and appreciate you taking my questions. Just starting with the outlook. Mark, I think you mentioned a little bit of a headwind potentially from the government shutdown in Q4, as that pertains to potential award decisions going into 2026? Any impact to some of those decisions getting pushed a little further to the right?

Mark Benza - Executive Vice President and CFO - (00:18:43)

Yeah, so a couple things, Zach, in the fourth quarter, you know, the impact of the government shutdown I'd say is at this point appropriately captured in our range on both the revenue and adjusted EBITDA line. I'd say what we're seeing in terms of government shutdown is a few things. First, awards are essentially stalled for the time being and generally sliding to the right. And then there's been various other administrative delays, things around things like collections on invoices or getting renewals executed or option years executed. Impact on the P&L has been relatively modest, but you know, it's been more administrative delays like I described in the script. And then like I said on the award side, generally awards being delayed for the time being. John and Mark, I don't know if there's anything you want to add to that.

John Wood - Chairman and CEO - (00:19:59)

No, I think that's a fair way of capturing it. You know, they will hold off on awards until the government's turn back on, but it's not, nothing's been taken off the table.

Mark Benza - Executive Vice President and CFO - (00:20:12)

Yeah, pipeline into 26 is still substantial. A lot of opportunity in there. It's still a multi billion dollar pipeline with a good chunk of that expected to be awarded say over the next six months with several tens of millions of dollars of revenue opportunity in 2026 on top of the 180 from pre existing programs.

Zach Cummings - Equity Analyst - (00:20:44)

Understood, that's really helpful and just John, I just wanted to ask you a question about your new Xacta AI products. It seems like it's getting pretty solid traction out the gate with one major enterprise wide deployment. I believe you press released that a few weeks ago. But can you just give us a sense of maybe the initial feedback that you've been getting from the product and what are the plans in terms of trying to scale that as we move forward into 2026?

John Wood - Chairman and CEO - (00:21:12)

Well, the first thing we're gonna do is, and we've been doing this, is really offer it into our installed so customers already see value out of Xacta by itself. But when you include a rag. Which. Allows you to reduce the hallucinations, if you will, within a large language model, it really makes it very, very simple or much more simple for A customer to implement their needs for security and compliance. Because essentially the language model itself and the RAG (Retrieval-Augmented Generation) together generate it for the customer and it generates it in, you know, very, very quickly. I think on our test results are something like up to 93% improvement in time.

Zach Cummings - Equity Analyst - (00:22:08)

Understood. Well, thanks for taking my questions and congrats again on the strong results.

OPERATOR - (00:22:12)

Thank you. Thank you. One moment for our next question. Our next question comes from the line of Matthew Calidri of Needham Company. Your line is now open.

Matthew Calidri - Equity Analyst - (00:22:26)

Hey guys, this is Matthew Calidri over at Needham. Thanks for taking our questions and congrats on the strong results. Sticking on Xacta, what is the specific impact of the shutdown? Impact of the shutdown and broader pressure from continuing resolution? Been on conversations and how are you communing the value proposition of the offering amidst the uncertainty?

John Wood - Chairman and CEO - (00:22:49)

So this shutdown will be behind us soon. I think the issue is during a shutdown, sometimes your customer is just not there because they've been furloughed. So I think there's a piece of that that's there. The good news is that previously we had been out in front of this before we even announced exact AI, showing our customer base, our installed customer base, you know, getting their feedback. And I think people are really excited about it, honestly, because it also means that when you use exact AI, you don't need the same level of professional services as you have to have used in the past.

Mark Benza - Executive Vice President and CFO - (00:23:31)

Yeah, maybe. What I'll add to that is we had a first enterprise sale to a customer before the shutdown straight out of the gate when we launched the product. Several other large customers have been very interested. Those conversations have pushed it right. A little bit as a result of the shutdown, but good traction straight out of the gate.

Matthew Calidri - Equity Analyst - (00:24:00)

Yep. That's great to hear. And then are there any other hurdles. To adoption there or do you think we can see in slow of sorts once budgets open up?

John Wood - Chairman and CEO - (00:24:15)

I don't see anything that's going to hold back from people wanting to use exact AI. Awesome. That's great to hear. Thank you. You're welcome. Thank you.

OPERATOR - (00:24:29)

Thank you. One moment for our next question. Our next question comes from the line of Bradley Clark of BMO Capital Markets. The line is now open.

Bradley Clark - Equity Analyst - (00:24:41)

Hey, thanks for taking my question. Congrats on the results on the TSA PreCheck program. You've reached your 500 location goals for 2025. I really want to understand a little bit more sort of the plan for going forward 2026 in terms of growth of this program through other new locations. You mentioned sort of evaluating your market positioning. And so just want to take a step back and, you know, now that we've reached our enrollment location target, you know, how are we thinking about growth of this program going forward?

Mark Benza - Executive Vice President and CFO - (00:25:18)

Thank you, Abras. Thanks for the question. So we are now operating at scale in that program. We've been working towards our 500 locations for some time now. We've actually now exceeded that target. So in terms of our physical location and our IT infrastructure, we are now at scale nationwide. Now that we're up and running, you know, we will continue to evolve, evolve that network of locations, continue to develop new partnerships, continue to find new and innovative ways to reach travelers and serve travelers. So this is really just the beginning. We're really excited to be at scale. And, you know, I think there's a lot of upside over the next few. Years in that program.

Mark Griffin - Executive Vice President, Security Solutions - (00:26:21)

Maybe Mark Griffin might have something to add. Bradley? Yes, as a TSA expansion program, as Mark indicated, we'll continue to look for those areas that are underserved, both from a location point of view, but also those customer bases. So as indicated in the script, we will continue to look for expansion in those areas to serve not only tsa, but serve the community of enrollment and renewal populations as well. So we're very excited about the expansion capabilities and it was a great achievement, we feel, to get to our 500 locations. But we'll continue to look for enhancements and expansion from there.

OPERATOR - (00:27:11)

Thank you. One moment for our next question. Our next question comes on the line of Rudy Kissinger of VA Davidson. July is now open.

Rudy Kissinger - Equity Analyst - (00:27:23)

Hey guys, thanks for the questions and. Congrats on another nice quarter here. I'm trying to think, you know, the 180 million baseline for existing programs for next year. I'm just trying to size up how much you could potentially add on top of that, because look at 2025 and the revenue you're going to do. And they take out the 70 million from existing programs, the 50 to 75 from DMDC, and then PreCheck. It seems like the actual revenue you got this year from new business programs was pretty minimal. And I think I heard you say several tens of million potential revenue for next year. Just how when will you know that by should those be wins that will be awarded within the next few months after the shutdown is over? How much visibility do you have for that likelihood of those deals being awarded to you, et cetera? Hey, Rudy. Mark Griffin.

Mark Griffin - Executive Vice President, Security Solutions - (00:28:17)

Yes, the pipeline that we have is still robust and growing. And so we've seen even during the government government shutdown, The pipeline is increasing and nothing is getting canceled at this point. As Mark indicated earlier, broadly speaking, awards are just paused and kind of moving to the right, But the portfolio in the pipeline between Identity and some of the projects that we feel very confident on potentially can drop in the next few months. But more likely you're probably positioned more into the 2026 on the first half. And so we'll see some activity there that would add to that baseline that Mark talked about earlier.

Mark Benza - Executive Vice President and CFO - (00:28:59)

Plus, plus additional AI software sales.

Rudy Kissinger - Equity Analyst - (00:29:02)

Right, okay, got it. And then, and then my second question was on Xacta AI, I guess, if you like, is there an upsell potential to existing Xacta customers on Xacta AI? And if so, like, what would be the revenue uplifting for to get adoption of it?

John Wood - Chairman and CEO - (00:29:18)

Yeah, I don't know if you heard. Me say earlier, Rudy, our primary target. To start is our existing installed base. And in general, I would say a great deal of excitement by our customers on the release of Xact AI. Unfortunately, when the market, when the government shut down temporarily, it put things on pause a little bit. But now that we're seeing our way to the end of that pause and the end of the shutdown, I think it will come right back for us.

Rudy Kissinger - Equity Analyst - (00:29:50)

Great, thank you. Thanks for taking the questions again. Yep.

OPERATOR - (00:29:54)

Thank you. One moment for our next question. Our next question comes from the line of Naha Jokshi of North Korean Capital Markets. Your line is now open.

Naha Jokshi - Equity Analyst - (00:30:06)

Thank you. Congrats on the strong results. Absolutely. The 180 million baseline for calendar 26 implies what percent of the annualized full run rates for your DMDC program in precheck.

Mark Benza - Executive Vice President and CFO - (00:30:26)

I'm not going to get into programmatic detail, but what I can tell you is that 180. So just do the math. That 180 implies 17 million of growth at the midpoint of our 2025 guide. That 17 million is comprised roughly of 28 million of growth app security solutions, net of 11 million of contraction at Secure Networks. And substantially all of that 28 million growth app solutions is coming from Telos ID, which as you know, is the business that contains those programs.

Naha Jokshi - Equity Analyst - (00:31:08)

Okay, all right, thank you. And then you also stated that the pipeline can bring tens of millions of revenue for calendar 26 above the $180 million baseline. Can you walk us through how you come to that range there?

Mark Benza - Executive Vice President and CFO - (00:31:25)

Yeah. So pipeline is roughly $5 billion right now. Correct me wrong, about a third of that is over the next, say six months. Yes, said it will be awarded over the next six months. And so at that level of award opportunity, certainly several tens of millions of that represents revenue opportunity in 2026.

Naha Jokshi - Equity Analyst - (00:31:56)

Okay. And when you say tens of million, that includes the pro rating of the awards being pushed out to the right from 4Q25 to 1Q26 and 2Q26. Yes.

Mark Benza - Executive Vice President and CFO - (00:32:12)

And Nahal, it's several tens of billions. Yeah, that's the total opportunity set. Right. So the point is, you know, there's there, there's ample opportunity above that $180 million between Exacta AI and our traditional pipeline. It's just a matter of, you know, what, what comes in the door and when.

Naha Jokshi - Equity Analyst - (00:32:42)

Can you remind us what has been your historical win rate of what's in your pipeline?

Mark Benza - Executive Vice President and CFO - (00:32:47)

No, understood, it's, we don't disclose that external.

Naha Jokshi - Equity Analyst - (00:32:52)

Okay. All right, and then last question for me is that given the 60% incremental EBITDA margin of the current quarter and 20% EBITDA margin and 13% free cash flow margin, care to share any perspective on what's the sustainable free cash flow margin for telosin?

Mark Benza - Executive Vice President and CFO - (00:33:20)

Probably a little too early to forecast free cash flow margins, but what I think I'll say is at that base, at that base, 180 million of revenue again, before any new business wins that base, 180 million of revenue. And we would, we'd manage, we're targeting managing our operating expenses (OPEX) to kind of, you know, low double digit adjusted EBITDA, margin. So call it, you know, call it 10, 11% or so adjusted EBITDA, margin. As additional growth comes in above that 180, that adjusted EBITDA, margin will run higher. But we'll toggle between additional growth investments and higher adjusted EBITDA, margin depending on. What that additional revenue is, what the. Margin profile is with that additional revenue. So you know, that adjusted EBITDA margin can start to give you an indication of where free cash flow can trend. But we expect a very another good year of free cash flow in 2026.

Naha Jokshi - Equity Analyst - (00:34:37)

Okay, that's really helpful. Maybe just to further, you know, the what you're sort of giving color around with calendar 26 in terms of EBITDA margin. And then the potential, if you win the tens of millions of opportunity from the pipeline would drive you would expect incremental bits of margin to be above that sort of 10 to 11% baseline EBITDA margin. But it doesn't sound like you would expect 60% incremental EBITDA margins. But it sounds like you would expect somewhere like what in the 20, 30% range.

Mark Benza - Executive Vice President and CFO - (00:35:18)

Yeah, it's a little premature to commit to that for two reasons. One, it depends on what that additional revenue is and what the incremental gross margins are on that revenue and then also how much of that we decide to commit to additional growth investments. So my point simply is there is upside to that kind of 10, 11% base adjusted EBITDA margin. And it's just. Going to depend on again the margin profile, that additional revenue and then how much of that we hold back for some growth investment.

Naha Jokshi - Equity Analyst - (00:36:00)

Got it. Okay. Thank you very much. Yep. Thank you, Nihal.

OPERATOR - (00:36:05)

Thank you. I'm showing no further questions at this time. I'll now turn it back to John Wood for remarks.

John Wood - Chairman and CEO - (00:36:11)

Thank you very much, operator. First, I just want to say thank you to everybody for your ongoing support of the company. As shareholders, we certainly appreciate your staying supporting the company and obviously we're going to continue to be intensely focused on executing our growth plans and continuing the same trend of year over year growth in the fourth quarter and into 2026. So finally, with our robust and recession resistant end markets, well funded customers, and a decades long track record of serving the world's most security conscious organizations, Telos has a strong foundation for the future. Thanks a lot.

OPERATOR - (00:36:51)

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.