Telos(TLS) - 2025 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Revenue grew 26% in Q2 2025 to $36 million, exceeding guidance of $32.5 million to $34.5 million [8][10] - Adjusted EBITDA was approximately a $400,000 profit, compared to guidance of a loss between $2.1 million and $600,000 [10][12] - Operating cash flow in the quarter was $7 million, with free cash flow at $4.6 million, representing a 12.9% free cash flow margin [11][12] Business Line Data and Key Metrics Changes - Security Solutions accounted for approximately 90% of total company revenue, driving the outperformance [8][19] - Year-over-year revenue growth was primarily driven by an 82% increase in Security Solutions, partially offset by a contraction in secure networks [12][14] - Adjusted EBITDA improved by $3.3 million on a $7.5 million increase in revenue, indicating a 44% incremental adjusted EBITDA margin [12][14] Market Data and Key Metrics Changes - The TSA PreCheck program expanded to 415 enrollment centers across 40 states, a 43% increase since the last earnings call [15] - The company is targeting 500 enrollment locations by the end of 2025 [15] - The pipeline includes over 200 unique opportunities with an estimated contract value exceeding $4 billion, indicating strong future revenue potential [39] Company Strategy and Development Direction - The company is focused on scaling large programs within its Security Solutions segment, which is expected to drive significant revenue growth [21] - A commitment to expense discipline is enhancing operating leverage, contributing to substantial year-over-year growth in revenue, adjusted EBITDA, and cash flow [21] - The company plans to use free cash flow primarily for share repurchases while remaining open to opportunistic acquisitions [50] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the business outlook, forecasting significant year-over-year improvements in revenue, profit, and cash flow for the full year 2025 [11][12] - The company anticipates a sequential increase in revenue and adjusted EBITDA in the second half of the year [10][21] - Management highlighted the robust and recession-resistant markets they operate in, with well-funded customers [54] Other Important Information - The company resumed share repurchases, deploying $4 million to buy back approximately 1.5 million shares at a weighted average price of $2.69 per share [11] - The Xacta software solution received FedRAMP high authorization, reinforcing the company's position in the security solutions market [16] Q&A Session Summary Question: TSA PreCheck enrollments and market share - Management confirmed that enrollments are increasing alongside the ramp in locations, despite overall market renewals being down due to the five-year anniversary of COVID [26][30] Question: Drivers for sequential gross margin increase - Management indicated that gross margin fluctuations are due to a mix of revenue streams, with expectations for cash gross margin to be around 40% to 41% in the third quarter [31][32] Question: Confidential IT security work with the federal government - Management noted that while specifics cannot be disclosed, this work is a meaningful additional revenue stream, and there is a strong pipeline of opportunities expected to close in the second half of the year [38][39] Question: Impact of DHS changes on TSA PreCheck - Management does not anticipate negative effects on enrollment from recent DHS changes, as the speed through security remains a critical component of the TSA PreCheck program [46] Question: Capital allocation strategy and M&A - Management stated that the priority is to use free cash flow for share buybacks, while remaining open to opportunistic acquisitions, with a disciplined approach [50]