Earnings call transcript: Telos Corp Q2 2025 Surpasses Revenue Expectations

Telos Corp reported a robust Q2 2025 performance, achieving $36 million in revenue, which exceeded its guidance range and marked a 26% increase year-over-year. The company’s adjusted EBITDA turned positive at $400,000, defying expectations of a loss. According to InvestingPro data, Telos maintains a strong liquidity position with more cash than debt on its balance sheet, though the company’s overall financial health score remains classified as weak. This positive financial outcome spurred a significant 43.55% surge in Telos’ stock price during pre-market trading.

Key Takeaways

• Telos Corp’s Q2 2025 revenue exceeded expectations with a 26% year-over-year growth.
• The company achieved a positive adjusted EBITDA of $400,000, surpassing guidance for a loss.
• Telos’ stock price rose by 43.55% in pre-market trading.
• Expansion in TSA PreCheck centers and significant new contracts were highlighted.
• The Security Solutions segment experienced substantial growth.

Company Performance

Telos Corp demonstrated strong performance in Q2 2025, with revenue growth significantly outpacing its guidance. The company’s strategic focus on expanding its TSA PreCheck centers and securing high-profile contracts contributed to its positive results. This quarter marks a turnaround from previous periods of financial challenges, positioning Telos for continued growth.

Financial Highlights

• Revenue: $36 million, a 26% year-over-year increase.
• Adjusted EBITDA: $400,000 profit, compared to guidance for a loss.
• Free cash flow: $4.6 million, representing a 12.9% margin.

Earnings vs. Forecast

Telos Corp’s Q2 2025 results surpassed forecasts, with revenue exceeding the upper end of its guidance by $1.5 million. The adjusted EBITDA of $400,000 was a notable improvement over the anticipated loss, reflecting effective cost management and operational efficiency.

Market Reaction

Following the earnings announcement, Telos Corp’s stock experienced a significant increase of 43.55% in pre-market trading, reflecting investor optimism. InvestingPro analysis suggests the stock is currently fairly valued, with analysts maintaining a bullish consensus and setting price targets up to $7.00. This surge places the stock comfortably within its 52-week range of $1.83 to $4.82, indicating renewed confidence in the company’s growth trajectory.

Outlook & Guidance

Looking forward, Telos Corp projects Q3 2025 revenue between $44 million and $47 million, suggesting continued robust growth. The company anticipates adjusted EBITDA to range from $4 million to $5.7 million, further solidifying its financial recovery and strategic growth initiatives.

Executive Commentary

John Wood, CEO, emphasized Telos’ strong market position, stating, "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." Mark Griffin, EVP Security Solutions, added, "We believe we have the right ingredients for success and are very confident in our growth trajectory."

Risks and Challenges

• Continued EPS losses, despite operational improvements.
• The challenge of maintaining growth momentum in a competitive market.
• Dependence on government contracts, which can be subject to budgetary constraints.
• Potential supply chain disruptions affecting project timelines.
• Macroeconomic factors that could impact customer spending.

Q&A

During the earnings call, analysts inquired about Telos’ TSA PreCheck enrollment strategies, revenue mix, and gross margin fluctuations. The company also addressed its capital allocation strategy, highlighting a focus on strategic investments and share repurchases.

Full transcript - Telos Corp (TLS) Q2 2025:

Conference Operator: Good day, and thank you for standing by. Welcome to the TELUS Corporation Second Quarter twenty twenty five Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers’ presentation, there will be a question and answer session. Please be advised that today’s conference is being recorded.

I would now like to turn the conference over to your first speaker, Allison Phillips. Please begin.

Allison Phillips, Investor Relations, TELUS Corporation: Good morning. Thank you for joining us to discuss TELUS Corporation’s second quarter twenty twenty five financial results. With me today is John Wood, chairman and CEO of TELUS, 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 second quarter twenty twenty five 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 and A where Mark Griffin, executive vice president of security solutions, 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, in 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 TELUS’ 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 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, Executive Vice President and CFO, TELUS Corporation: Thank you, Alison, 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 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 TELUS 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 $36,000,000 above our guidance range of $32,500,000 to $34,500,000 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. 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 forecasted 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 $2,100,000 loss to a $600,000 loss. Lastly, we delivered another quarter of robust cash flow.

Operating cash flow in the quarter was $7,000,000 Free cash flow was $4,600,000 or a 12.9% free cash flow margin. Free cash flow in the first half was 8,400,000 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 $4,000,000 to repurchase approximately 1,500,000.0 shares at a weighted average price of $2.69 per share. Since our fourth quarter twenty twenty four 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 BMDC program in the 2024 and the ramp of TSA PreCheck enrollment volume. GAAP gross profit grew 23% and adjusted EBITDA improved $3,300,000 returning to a profit. It is worth noting that adjusted EBITDA improved by $3,300,000 on a $7,500,000 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 $16,000,000 to a positive $4,600,000 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%.

Free cash flow improved by over $23,000,000 to a positive $8,400,000 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, Chairman and CEO, TELUS Corporation: John? 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 four fifteen 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 has 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 Xacta software solution.

This is a formal recognition that TELUS’ Xacta platform meets the most stringent 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 Exacta business has achieved new orders or renewals with several key customers including the U.

S. 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,

Mark Benza, Executive Vice President and CFO, TELUS Corporation: as

John Wood, Chairman and CEO, TELUS Corporation: 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?

Mark Benza, Executive Vice President and CFO, TELUS Corporation: 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 $44,000,000 to $47,000,000 We forecast adjusted EBITDA of $4,000,000 to $5,700,000 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 $14,300,000 representing a $1,600,000 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, Chairman and CEO, TELUS Corporation: 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 Security Solutions segment continue to rapidly scale. Our company wide commitment to expense discipline is driving outstanding operating leverage and, as a result, in the second quarter and 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.

Mark Benza, Executive Vice President and CFO, TELUS Corporation: Operator, please open the line for Q and A. Thank you.

Conference Operator: Thank you. Our first question is going to come from the line of Neil Chokshi with Northland Capital Markets. Your line is open. Please go ahead.

Neil Chokshi, Analyst, Northland Capital Markets: Thank you and congratulations on spectacular results and guidance. It’s great to hear that you’re seeing increasing TSA PreCheck enrollments despite what

Unnamed Analyst, Analyst: should be declining renewal volume due to the

Neil Chokshi, Analyst, Northland Capital Markets: five year anniversary of the COVID fall off. 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 pre check enrollments?

Mark Benza, Executive Vice President and CFO, TELUS Corporation: Yeah. Hey, Hal. Thanks. It’s Mark Bensa 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 two zero three locations. We’re at four fifteen 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 locations, 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.

Neil Chokshi, Analyst, Northland Capital Markets: Enrollments are up consistent with the number of locations or enrollments are up per location? Just wanted to get that clarification.

Mark Benza, Executive Vice President and CFO, TELUS Corporation: Enrollments overall are ramping with locations.

Neil Chokshi, Analyst, Northland Capital Markets: 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, Executive Vice President and CFO, TELUS Corporation: 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, our weighted average cash gross margin is somewhere around 38%.

That ramped pretty high last year as our lower margin revenue streams came down. We’re looking at 40% and higher in the third quarter and the fourth quarter as well. So full year should look really good relative to relative to history. But yeah, it will, you know, it’ll fluctuate quarter to quarter. I mean, in the third quarter, it’s a combination of the different growth drivers that we have going on right now in TELUS ID, those key programs and the different revenue streams within those key programs.

Neil Chokshi, Analyst, Northland Capital Markets: Okay. And is it fair to say that’s largely due to mix shift within the DMDC contract?

Mark Benza, Executive Vice President and CFO, TELUS Corporation: That is part of it, but that’s not all of it.

Unnamed Analyst, Analyst: Okay. Great. I’ll save the floor for the time being. Thank you.

Mark Benza, Executive Vice President and CFO, TELUS Corporation: Alright. Thanks, Naho.

Conference Operator: Thank you. One moment for our next question. Our next question is gonna come from the line of Rudy Kessinger with D. A. Davidson.

Your line is open. Please go ahead.

Rudy Kessinger, Analyst, D.A. Davidson: Hey. Great. Thanks for taking my questions. In the prepared remarks, I I think you’d mentioned additional confidential IT security work with 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 deals in the pipeline that you’re expecting to close in the second half this year that could contribute meaningful revenue for next year?

Mark Benza, Executive Vice President and CFO, TELUS Corporation: Yeah. Hey, Brady. It’s Mark Tenza 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 it’s relatively meaningful. On the pipeline, I’ll pass it

Mark Griffin, Executive Vice President of Security Solutions, TELUS Corporation: over to Mark Griffin. Hello Rudy. TELUS has a strong pipeline with over 200 unique opportunities representing an estimated contract value of over $4,000,000,000.69 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 infrastructures. The majority and total contract value is weighted toward our security solutions businesses, 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, Analyst, D.A. Davidson: Great. Thanks. And then maybe just one quick 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, Executive Vice President and CFO, TELUS Corporation: Yeah. So overall, free cash flow I expect to be robust in the second half as well. In terms of net working capital, 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, Analyst, D.A. Davidson: Great. Thank you.

Conference Operator: Thank you. And one moment for our next question. Next question is going to come from the line of Zach Cummins with B. Riley Securities. Your line is open.

Please go ahead.

Unnamed Analyst, Analyst: 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 allowing just a regular security line to maintain keeping their shoes on throughout the process, do you imagine that having any sort of impact to the appetite for new renewals or anything along that line? Just curious on your insight there.

Mark Griffin, Executive Vice President of Security Solutions, TELUS Corporation: Hello, Zach, Mark Griffin. 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. And remember, the speed through the line is still their most critical component, which TSA PreCheck offers.

Unnamed Analyst, Analyst: Understood. That’s helpful. And then just in terms of BNDC, 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, Executive Vice President and CFO, TELUS Corporation: 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. Overall, I’d say the mix is more weighted to software than hardware. But overall, this is a really good program for us and along with a couple of other drivers, one of the really important drivers behind the year over year improvement in the financials.

Unnamed Analyst, Analyst: 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 and A?

Mark Benza, Executive Vice President and CFO, TELUS Corporation: Yeah, so good question. Know, I’d say organically we’re in a great spot right now. You know, things are going really well. You know, as we’ve been talking about here on the call and in our materials, you know, 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, you know, we were converting profit to cash at very high rates. And then, you know, 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. You know, that being said, we’ll continue to look at say, you know, opportunistic tuck in acquisitions that they come across our desk.

But we’ll be very disciplined on that front. And then, you know, if a more transformational M and A opportunity or say a change of control transaction would lock in the most value for our shareholders in a very obvious way, you know, we take a serious look at that as well.

Unnamed Analyst, Analyst: Understood. Well, thanks for taking my questions, and best of luck with the rest

Rudy Kessinger, Analyst, D.A. Davidson: of the quarter.

Mark Benza, Executive Vice President and CFO, TELUS Corporation: All right. Thanks, Zach.

Conference 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, Chairman and CEO, TELUS Corporation: Well, thank you. I wanna thank our shareholders for your ongoing support. And we we’re gonna 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 decades long track record of serving the world’s most security conscious organizations.

As a result, we believe TELUS has a strong foundation for the future. Thank you.

Conference Operator: This concludes today’s conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.

John Wood, Chairman and CEO, TELUS Corporation: Thank you.

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