• Revenue: $23.8 million, near the top end of the guidance range of $22 million to $24 million.
• Security Solutions Revenue: $18.3 million, representing 77% of total revenue, with 3% sequential growth.
• Secure Networks Revenue: $5.5 million, representing 23% of total revenue, declined sequentially and year-over-year.
• GAAP Gross Margin: 13.2%, impacted by a $5.7 million impairment and restructuring charge.
• Adjusted Gross Margin: 37.3%, expanded 130 basis points year-over-year.
• Cash Gross Margin: 44%, expanded 250 basis points year-over-year.
• Adjusted EBITDA: $4.1 million loss, better than guidance of $8 million to $6.5 million loss.
• Cash Flow from Operations: $7.1 million outflow.
• Free Cash Flow: $9.9 million outflow.
• Enrollment Locations: Expanded from 83 to 173 locations, with a target of 500 locations by 2025.

• Warning! GuruFocus has detected 4 Warning Signs with TLSRP.PFD.

Release Date: November 12, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• Telos Corp (TLSRP.PFD) delivered revenue near the top end of the guidance range and adjusted EBITDA above the top end of the guidance range.
• The TSA PreCheck program is a significant growth driver, with the company expanding its enrollment centers from 83 to 173 locations, aiming for 500 by 2025.
• The Defense Manpower Data Center (DMDC) program, worth up to $485 million over five years, has resolved its protest in favor of Telos and is currently generating revenue.
• Security solutions revenue grew 3% sequentially, driven by double-digit growth in Telos ID.
• Telos Corp has a large pipeline of new business opportunities, particularly in secure networks, with a total pipeline value of approximately $4.1 billion.

Negative Points

• Secure networks revenue declined sequentially and year-over-year due to the ramp down of existing programs.
• The company took a $13.1 million charge in the quarter, impacting GAAP gross margin.
• Restructuring actions led to the discontinuation of certain solutions that were not generating acceptable returns.
• Adjusted EBITDA was a $4.1 million loss, although better than guidance, it still represents a financial loss.
• The Department of Homeland Security (DHS) program, worth up to $40 million, is still under protest, creating uncertainty in revenue realization.

Q & A Highlights

Q: Can you review the DMDC contract with up to $485 million? What factors determine the contract's final value? A: Mark Bendza, CFO, explained that the DMDC contract includes a base services revenue stream of approximately $25 million, with the remainder from third-party hardware and software integration. This can fluctuate, leading to a typical annual revenue estimate of $60 million to $85 million, though it could exceed $100 million in some years.

Q: Can you provide more details on the restructuring actions taken in late Q3 and early Q4? A: John Wood, CEO, stated that Telos discontinued its advanced cyber analytics and Ghost solutions due to insufficient sales. Mark Bendza added that these solutions had minimal current revenues, and the restructuring aimed to reallocate resources to higher-return opportunities.

Q: What is the size and potential of the pipeline for secure networks going into the key buying season? A: Mark Bendza noted that Telos has around 20 opportunities, with a third already submitted, totaling nine figures in contract value. Mark Griffin added that the overall pipeline is approximately $4.1 billion, encompassing 245 opportunities.

Q: How does the current TSA PreCheck market share compare to expectations, and what is the revenue potential? A: Mark Bendza indicated that Telos is capturing the expected market share based on current locations. As they expand to 500 locations, they anticipate achieving a pro rata market share of enrollments, aligning with their revenue projections.

Q: What are the risks associated with the projected $60 million to $85 million revenue from the DMDC and DHS programs? A: Mark Bendza highlighted that $2 million to $8 million of this range depends on the resolution of the DHS protest. The remaining revenue is variable, based on third-party hardware and software needs, but Telos has a high degree of visibility into the base services revenue.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.