Image source: The Motley Fool.
DATE
Monday, August 11, 2025 at 1:30 p.m. ET
CALL PARTICIPANTS
Chief Executive Officer — John Wood
Chief Financial Officer — Mark Benza
Executive Vice President, Security Solutions — Mark Griffin
Investor Relations Officer — Allison [last name not stated]
Need a quote from a Motley Fool analyst? Email [email protected]
TAKEAWAYS
Revenue-- $36 million in revenue for Q2 2025, up 26% year-over-year; exceeding the guidance range of $32.5 million to $34.5 million, driven primarily by security solutions.
Security Solutions Revenue Mix-- Accounted for approximately 90% of total company revenue in Q2 2025, with segment revenue growing 82% year-over-year, and performance led by large federal programs including DMDC and TSA PreCheck.
GAAP Gross Margin-- 33.2% GAAP gross margin in Q2 2025; within historical range but lower year-over-year due to revenue mix.
Cash Gross Margin-- 38.4% cash gross margin in Q2 2025, also within guidance and historical range of the last five years.
Adjusted EBITDA-- Adjusted EBITDA was approximately a $400,000 profit in Q2 2025, compared to a prior year loss in Q2 2024 and above the guidance range of a $2.1 million loss to a $600,000 loss.
Operating Cash Flow-- Operating cash flow was $7 million in Q2 2025.
Free Cash Flow-- Free cash flow was $4.6 million in Q2 2025, or a 12.9% margin; first half free cash flow was $8.4 million, or a 12.6% margin, reflecting improved adjusted EBITDA, lower capitalized software development cost, and working capital management.
Operating Expenses-- Adjusted operating expenses were $900,000 lower than guidance in Q2 2025, reflecting ongoing cost discipline.
Share Repurchases-- $4 million was used to repurchase approximately 1.5 million shares at a weighted average price of $2.69 per share during Q2 2025.
TSA PreCheck Program Expansion-- The nationwide network increased to 415 centers across 40 states and Puerto Rico, up 43% since the last earnings call in May 2025; target for 2025 is 500 locations.
FedRAMP High Authorization-- Xacta software platform achieved FedRAMP High authorization, confirming compliance with high government cloud security standards.
Xacta Contract Wins-- New orders and renewals secured with major clients including the US Department of Treasury, US Air Force, Defense Intelligence Agency, and international and state agencies.
Pipeline Overview-- Over 200 unique opportunities in the pipeline, with an estimated contract value of more than $4 billion; 69 new opportunities were added in Q2 2025.
Q3 Guidance-- Revenue is forecast to grow 85%-98% year-over-year to a range of $44 million to $47 million in Q3 2025; adjusted EBITDA guidance is $4 million to $5.7 million (margin of 9.1%-12.1%) in Q3 2025.
Q3 Cash Gross Margin Outlook-- Cash gross margin (non-GAAP) is expected to improve sequentially to 40%-41% in Q3 2025, up from 38.4% in Q2 2025.
Q3 Operating Expenses Outlook-- Adjusted operating expenses are forecast to be approximately $14.3 million in Q3 2025.
Capital Allocation-- Current priority cited as continuing share buybacks, with a disciplined approach to M&A; focus remains on organic growth.
SUMMARY
Management delivered guidance and results that substantively surpassed prior ranges, detailing continued momentum across large federal programs including DMDC and TSA PreCheck. Recent FedRAMP High authorization for Xacta was cited as a significant credential advancing the company’s positioning with highly sensitive government cloud contracts. Robust free cash flow enabled the company to resume share repurchases in Q2 2025. Management highlighted a pipeline exceeding $4 billion in total contract value as of Q2 2025 and pointed to sequential improvements in both revenue mix and profit margins in upcoming quarters, specifically referencing Q3 and Q4 2025.
Griffin stated, "award pace will be weighted toward Q4 this year and Q1 of next for many of the more significant opportunities," suggesting upcoming contract decisions may impact forward results timing.
Management indicated that free cash flow is expected to remain "robust" in the second half of 2025, though the working capital tailwind may moderate, shifting the source of cash generation toward higher adjusted EBITDA.
Benza explained that TSA PreCheck enrollments are ramping with the increase in locations, maintaining momentum despite lower market renewals.
Management noted the mix within the Defense Manpower Data Center contract is now more weighted to software than hardware, improving order visibility.
Griffin said, "No negative impact from DHS security line policy changes on TSA PreCheck enrollments is currently expected."
INDUSTRY GLOSSARY
FedRAMP: The Federal Risk and Authorization Management Program; a US government-wide program providing a standardized approach to security assessment, authorization, and continuous monitoring for cloud products and services.
DMDC: Defense Manpower Data Center; a US Department of Defense program managing military personnel, manpower, and security data.
Xacta: Telos’ enterprise cyber risk management and security compliance automation platform used for risk assessments and meeting regulatory requirements.
TSA PreCheck: A US government expedited screening program managed by the Transportation Security Administration for trusted travelers at airports.
Full Conference Call Transcript
Mark will begin with remarks on our second quarter 2025 results. Next, John will discuss business highlights from the quarter. Then Mark will follow-up with third quarter guidance before turning back to John to wrap up. We will then open the line for Q&A. Mark Griffin, Executive Vice President of Security Solutions, will also join us. The second 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, we want to emphasize that some of our statements on this call, including all of those relating to 2025 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 and the comments made during this conference call and in our SEC filings. We do not undertake any duty to update any forward-looking statements.
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, in isolation from, GAAP results. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results, in our second 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 under the Investor Relations link. With that, I'll turn the call over to Mark.
Mark Benza: Thank you, Allison, and good morning, everyone. Before we get into the details on the slides, I'd like to provide a brief overview of the good news that you will hear today. Our business has been scaling in a very meaningful way year to date. Leading the way are major long-term programs and security solutions, such as the Defense Manpower Data Center or DMDC program, and TSA PreCheck as well as additional confidential IT security work that we are now performing for the federal government. These growth drivers are layered on top of a strong base of recurring revenue streams from sophisticated government and commercial customers throughout our security solutions 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 we're also forecasting a large sequential step up in revenue and adjusted EBITDA in the second half. In addition, given our confidence in the outlook for the business and our strong cash flow generation in the first half of this year, we have resumed share repurchases. With that introduction, let's get into more detail beginning on slide three. I'm pleased to report that Telos has again over-delivered on key financial metrics in the second quarter, exceeding both revenue and profit guidance.
Revenue grew 26% in the quarter to $36 million, above our guidance range of $32.5 million to $34.5 million. Security solutions delivered approximately 90% of total company revenue and drove the outperformance above the top end of the guidance range. GAAP gross margin was 33.2%, and cash gross margin was 38.4%, both within our guidance range. Although gross margins were lower year-over-year due to revenue mix in the quarter, they were representative of typical margins for our portfolio over the past five years. 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 third quarter guidance, we expect margins to mix higher sequentially next quarter. Adjusted operating expenses in the second quarter were approximately $900,000 better than guidance due to ongoing cost discipline throughout the company. As a result of better than forecast revenue and operating expenses, adjusted EBITDA also exceeded the top end of our guidance range. Adjusted EBITDA was approximately a $400,000 profit compared to our guidance range of a $2.1 million loss to a $600,000 loss. Lastly, we delivered another quarter of robust cash flow. Operating cash flow in the quarter was $7 million, and free cash flow was $4.6 million, or a 12.9% free cash flow margin.
Free cash flow in the first half was $8.4 million, or a 12.6% margin. As a result of our strong cash generation in the first half and our confidence in the outlook for the business, we resumed share repurchases in the second quarter. We deployed $4 million to repurchase approximately 1.5 million shares at a weighted average price of $2.69 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 four for a brief review of our year-over-year performance in the second quarter and first half of the year.
Year-over-year revenue growth was primarily driven by 82% growth in security solutions, partially offset by contraction in secure networks. Growth in security solutions was primarily driven by the successful transition of the DMDC program in 2024 and the ramp of TSA PreCheck enrollment volume. GAAP gross profit grew 23%, and adjusted EBITDA improved $3.3 million, returning to a profit. It is worth noting that adjusted EBITDA improved by $3.3 million on a $7.5 million increase in revenue. That implies a 44% incremental adjusted EBITDA margin due to a combination of revenue growth and lower operating expenses. Cash flow performance was equally as encouraging. Free cash flow improved by $16 million to a positive $4.6 million.
The significant year-over-year improvement in free cash flow was due to higher adjusted EBITDA, lower capitalized software development cost, and an intensive company-wide focus on working capital management. The same year-over-year revenue, profit, and cash flow trends apply to the entire first half. Notably, incremental adjusted EBITDA margin was 71%, and free cash flow improved by over $23 million to a positive $8.4 million. Overall, we expect the trend of year-over-year growth in revenue and adjusted EBITDA to accelerate in the second half, and we expect to generate positive free cash flow for the full year. I will now turn it over to John for an overview of recent business highlights.
John Wood: Thanks, Mark, and good morning, everyone. Let's turn to Slide five. First, I'll provide an update on our TSA PreCheck program. We have successfully expanded our nationwide network of enrollment centers to 415 locations across 40 states, including Puerto Rico. This represents a 43% increase in locations since our last earnings call in May. We continue to target achieving 500 enrollment locations in 2025. We are pleased with the progress we have made on this rollout as we strive to provide a convenient solution for travelers across the country and be a trusted partner in this important national security program.
In fact, as Mark previously mentioned, we've made progress in several of the key areas of the security solutions portfolio as we're presently seeing several large programs ramp and scale. Additionally, we're very excited about the recent federal risk and authorization management program or FedRAMP high authorization for our Xactis software solution. This is a formal recognition that Telos' Xactis platform meets the most stringent set standards for protecting highly sensitive government data in cloud environments. This milestone reinforces our role as a trusted partner in an increasingly complex and rapidly evolving security environment. We are proud to deliver solutions that help our customers accomplish their missions with the highest level of safety and security.
Finally, I will summarize the latest news on other business outcomes since our last earnings call. Our Xacta business has achieved new orders or renewals with several key customers, including the US Department of Treasury, the US Air Force, the Defense Intelligence Agency, a New Zealand government agency, the Virginia Department of Education, the National Archives and Record Administration, and several other US federal government customers. We also received a new order for cyber services from a Fortune 100 company in the technology sector, as well as renewals from the US Department of Homeland Security, the General Services Administration, and several other US federal government customers. I'll now turn the call over to Mark who will discuss third quarter guidance.
Mark Benza: Thanks, John. Let's turn to Slide six. For the third quarter, we forecast revenue to grow 85% to 98% year-over-year, to a range of $44 million to $47 million. We forecast adjusted EBITDA of $4 million to $5.7 million, or an adjusted EBITDA margin of 9.1% to 12.1%. We expect security solutions to generate approximately 90% of total company revenue. We forecast cash gross margin to be approximately 40% to 41%, up sequentially from 38.4% in the second quarter due to normal quarterly fluctuations in revenue mix as described earlier. Adjusted operating expenses are expected to be approximately $14.3 million, representing a $1.6 million reduction year-over-year. Lastly, we expect the fourth quarter to be similar to the third quarter.
With that, I'll turn it back to John.
John Wood: Thanks, Mark. Let's turn to slide seven. To review, our Return to Growth plan has taken hold and we are exhibiting significant gains as large programs within our 2025. The company delivered substantial year-over-year growth in revenue, adjusted EBITDA, and cash flow. We've achieved free cash flow through the first two quarters of the year at 12.6% of revenue. This has enabled us to return cash to shareholders through share repurchases in the second quarter. We also expect the upward trajectory in revenue and adjusted EBITDA to accelerate in the third quarter of the year. With that, we're happy to take questions. Operator? Please open the line for Q&A. Thank you.
Operator: Thank you. Press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. Our first question is going to come from the line of Nehal Chokshi with Northland Capital Markets. Your line is open. Please go ahead.
Nehal Chokshi: Thank you, and congratulations on spectacular results and guidance. It's great to hear that you're seeing increasing TSA PreCheck enrollments despite what should be declining renewal volume due to the five-year anniversary of the COVID falloff. So can you talk about how our enrollments per score that are currently open are going? Relative to the expectations to achieve the 33% targeted market share of TSA PreCheck enrollments?
Mark Benza: Yeah. Hey, Nehal. Thanks. And it's Mark Benza here. So listen, at the beginning of the year, we said we were targeting 500 locations by the end of the year. We've been ramping really well towards that target. We ended last year with 203 locations. We're at 415 today, so we're on a really good trajectory there. You're right. On renewals, overall market renewals are down this year due to the five-year anniversary of COVID. However, with the ramp in location, you know, new enrollments are a big driver of the year-over-year performance you're seeing for the entire company. I won't get into that granular detail on the program around, you know, exact number of transactions per location.
But needless to say, you know, enrollments are, you know, up along with the ramp in locations.
Nehal Chokshi: Enrollments are up consistent with the number of locations or enrollments are up per location? Just wanted to get that clarification.
Mark Benza: Enrollments overall are ramping with locations.
Nehal Chokshi: Got it. Okay. And then you talked about how gross margin will be going up sequentially. What's the and I understand that there's variability from quarter to quarter. And likely, it's mix. But what is that mix driver there that will be driving that gross margin up? Sequentially?
Mark Benza: Yeah. So, you know, as we've talked about in the past, you know, we have you know, we really have a breadth of revenue streams across our portfolio. And each of those revenue streams come with, you know, different margin profiles. We have a really wide range of margin profiles depending on the revenue stream. So it can fluctuate quarter to quarter, and I would expect it to fluctuate from quarter to quarter. If you look back over the last five years, you know, our weighted average cash gross margin is somewhere around 38%. That ramped, you know, pretty high last year as our lower margin revenue streams came down.
We're looking at, you know, 40% and higher in the third quarter and the fourth quarter as well. So full year should look really good relative to history. But, yeah, it will you know, it'll fluctuate quarter to quarter. I mean, next in the third quarter, it's a combination of the different growth drivers that we have going on right now in Telos ID. So those key programs and the different revenue streams within those key programs.
Nehal Chokshi: Okay. And is it fair to say that it's largely due to mix shift within the DMDC contract?
Mark Benza: That is part of it. But that's not all of it.
Nehal Chokshi: Okay. Great. I'll save the floor for the time being. Thank you.
Mark Benza: Alright. Thanks a lot. Thank you. One moment for our next question.
Operator: Our next question is going to come from the line of Rudy Kessinger with D.A. Davidson. Your line is open. Please go ahead.
Rudy Kessinger: Hey, great. Thanks for taking my questions. In the prepared remarks, I think you'd mentioned additional confidential IT security work with the federal government as contributing to some of the security solutions revenue growth. Any additional commentary you could provide on that in regards to, you know, size and scale and, you know, what kind of revenue generation you're seeing today versus what you could see in the future? And then also, any large, you know, deals in the pipeline that you're expecting to close in the second half of this year that could contribute meaningful revenue for next year?
Mark Benza: Yeah. Hey, Rudy. It's Mark Benza here. So on the confidential work, unfortunately, we're not at liberty to say too much about that. In terms of, you know, the size, I would say, you know, it's a nice additional revenue stream for the portfolio. I can't quantify it for you, unfortunately. But, you know, it's relatively meaningful. On the pipeline, I'll pass it over to Mark Griffin.
Mark Griffin: Hello, Rudy. Telos has a strong pipeline with over 200 unique opportunities representing an estimated contract value of over $4 billion. Sixty-nine of these opportunities are new within the last quarter, and we feel award pace will be weighted toward Q4 this year and Q1 of next for many of the more significant opportunities. Our growth opportunities are driven by strategic positioning and well-funded national security priorities, including the ever-changing cybersecurity threat environments, digital enterprise solutions, and modernization of core infrastructure. The majority and total contract value is weighted toward our security solutions business, which is exactly where we want our future growth to be centered.
We believe we have the right ingredients for success, are very confident in our growth trajectory, and are laser-focused on our future profitability and sustainability.
Rudy Kessinger: Great. Thanks. And then maybe just one follow-up, if I could. You had some strong positive net working capital changes in the first half. Just that led to significant free cash flow outperformance relative to EBITDA. How should those dynamics trend in the second half?
Mark Benza: Yeah. So overall, free cash flow is expected to be robust in the second half as well. In terms of working capital, you know, over the next, I don't know, number of quarters, I would expect the working capital tailwind to moderate and more of the cash flow coming from higher adjusted EBITDA. But the, you know, the net effect of all that is I would expect continued robust free cash flow.
Rudy Kessinger: Great. Thank you.
Operator: Thank you. And one moment for our next question. Our next question is going to come from the line of Zach Cummins with B. Riley Securities. Your line is open. Please go ahead.
Zach Cummins: Yep. Hi. Good morning. Thanks for taking my questions, and congrats on the strong results here. First question is just on TSA PreCheck. With the changes from the DHS that allow just a regular security line to maintain keeping their shoes on throughout the process, do you imagine that having any sort of impact on the appetite for new renewals or anything along that line? Just curious on your insight there.
Mark Griffin: Hello, Zach. No. We don't feel as though that will have any negative effect on enrollment at this point. In fact, in some ways, it's increasing visibility of the program. Remember, the speed through the line is still their most critical component, which TSA PreCheck offers.
Zach Cummins: Understood. That's helpful. And then just in terms of DMDC, Mark, I know it could really fluctuate in terms of mix around software products versus hardware products that are being purchased. I mean, now that you've had the program and ramped it for going on a year now, are you starting to get a better sense of visibility into those orders on the third-party side?
Mark Benza: Yeah. Generally, yes. I'd like to get the full calendar year under our belt to really get a feel for what the mix looks like. But, you know, overall, I'd say the mix is more weighted to software than hardware. But overall, you know, this is a really good program for us, along with a couple of other drivers. You know, one of the really important drivers behind the year-over-year improvement in the financials.
Zach Cummins: Understood. And final question for me is just given the strong free cash flow in the first half of this year and expect to be that sustained going forward. How should we think about your capital allocation strategy and maybe specifically to M&A?
Mark Benza: Yeah. So, good question. You know, listen. I'd say organically, we're in a great spot right now. You know, things are going really well. As we've been talking about here on the call and in our materials, top-line growth is excellent this year. Cash gross margins are healthy. Our flow through to adjusted EBITDA is working very well due to OpEx discipline. And we're converting profit to cash at very high rates. And then we're returning that capital to shareholders through buybacks. So I'd say the priority is to use free cash flow to drive additional buybacks over time. That being said, we'll continue to look at, say, more opportunistic tuck-in acquisitions as they come across our desk.
But we'll be very disciplined on that front. And then, you know, lastly, if a more transformational M&A opportunity or, say, a change of control transaction would lock in the most value for our shareholders in a very obvious way, yeah, we'd take a serious look at that as well.
Zach Cummins: Understood. Well, thanks for taking my questions, and best of luck with the rest of the quarter.
Mark Benza: Alright. Thanks, Zach.
Operator: Thank you. This will conclude today's question and answer session, and I would like to hand the conference back over to John Wood for any further remarks.
John Wood: Well, thank you. I want to thank our shareholders for your ongoing support. And we're going to continue to be intensely focused on executing our plan and are pleased our efforts have enabled positive outcomes for the company and our shareholders during the first half of the year. We look forward to continuing the trend of year-over-year growth throughout the remainder of 2025. And I'll just end with, you know, we have robust and recession-resistant markets, well-funded customers, and a decades-long track record of serving the world's most security-conscious organizations. As a result, we believe Telos is a strong foundation for the future.
Mark Benza: Thank you.
Operator: This concludes today's conference call. Thank you for participating, and you may now disconnect. Everyone have a great day.
John Wood: Thank you.