TELOS CORP Q3 FY2024 earnings call

• TSA PreCheck Program: Continued rapid expansion of enrollment centers, reaching 173 locations in the past three months and aiming for 500 locations by 2025.
• DMDC Program: Protest resolved in favor of Telos, and the program is ramping up to generate revenue.
• DHS Program: Protest expected to be resolved in the fourth quarter.
• Other Business Outcomes: Xacta received new orders and renewals, cyber services were renewed, the automated message handling system had high renewal rates, and the secure networks business secured a new contract with the United States Army.

In the third quarter, Telos Corporation had two main segments. Security Solutions delivered $18.3 million, which is 77% of total revenue. It grew 3% sequentially due to double-digit sequential growth in Telos ID from the ongoing ramp of the TSA PreCheck program. Secure Networks delivered $5.5 million, accounting for 23% of total revenue. It declined sequentially and year-over-year as expected due to the ramp down of existing programs but has new contract vehicles and a large pipeline of new business opportunities.

For the fourth quarter, revenue is expected to be in the range of $24.5 million to $26.5 million (3%-11% sequential growth), with an adjusted EBITDA loss of $4.5 million to $3.5 million. Security Solutions is expected to drive sequential growth, while Secure Networks will decline. In 2025, the company forecasts a return to year-over-year revenue growth. Existing business (excluding certain programs) is projected to generate $60 million to $65 million, DMDC and DHS programs could generate $60 million to $85 million, and TSA PreCheck revenues are expected to ramp with 500 locations by the end of 2025.

• Protest Outcomes: Uncertainties around the resolution and revenue recognition of the DHS program.
• New Business Wins: Contingencies in winning and executing new business opportunities, including protests and timing of awards.
• Margin Fluctuations: Variability in margin profile depending on revenue streams, with some programs dilutive to cash gross margins.

Q: Review DMDC contract details and margin profile A: On the DMDC contract, there's a base service revenue stream (~$25M) and variable third-party hardware/software. Blended margin profile is dilutive to cash gross margins, with some revenue buckets accretive and others dilutive.

Q: Restructuring actions and margin uplift A: The company discontinued advanced cyber-analytics and ghost solutions with no revenue headwind. It's shifting resources to higher return opportunities to maximize margins with program ramps.

Q: Risk in 2025 revenue projections A: Uncertainties in protest resolutions, revenue recognition timing, and variability in third-party hardware/software revenue.

Q: TSA PreCheck market share and revenue A: Currently capturing market share based on opened locations, on track to pro rata share with 500 locations by 2025.

Q: DMDC contract value and realization A: The DMDC contract is $485M total, with base services and variable components. Best estimate is $60M-$85M annually, with DHS contributing a small portion.

Q: Air Force contract and 2025 revenue A: Task orders from Air Force infrastructure contract are bid at task level, not quantified in current guidance, but expect fair share over time.

Q: Free cash flow and 2025 A: Rule of thumb $200M revenue for free cash flow breakeven, with focus on moving resources to maximize benefits of program ramps.