Financial Overview
Telos Corp (TLSRP.PFD) reported its fourth-quarter results, achieving revenues that were close to the upper limit of its guidance. The company’s total revenue saw a sequential increase of 11%, primarily driven by the strong performance of its Security Solutions segment, which itself grew by 20% sequentially. This segment accounted for 83% of the overall revenue, fueled by a notable rise in TSA PreCheck enrollments and contributions from the Defense Manpower Data Center program.
Margin Expansion
The company’s GAAP gross margin improved significantly, rising nearly 600 basis points year-over-year to reach 40.3%. Similarly, the cash gross margin expanded almost 900 basis points from the previous year, now standing at 47%, marking the highest quarterly performance since the company’s initial public offering in 2020.
TSA PreCheck Program Growth
Telos has successfully broadened its TSA PreCheck program, increasing the number of enrollment centers from 26 to 218 in 2024, with ambitions to expand to 500 locations by the end of the year. This expansion is expected to enhance the company’s market presence and financial performance.
Future Projections
Looking ahead to the first quarter of 2025, Telos anticipates positive cash flow from operations and free cash flow, driven by its high-growth programs and one-time capital expenditures. However, Secure Networks revenue is projected to decline sequentially due to the winding down of existing projects, making up only 17% of total company revenue.
Cash Flow Challenges
The company reported a cash outflow of $10.5 million from operations, along with a $14.8 million outflow in free cash flow, largely attributed to a temporary increase in working capital. Additionally, Telos is facing delays in government awards for single contracts due to changes in administration and shifts in immediate priorities.
Revenue Recognition Issues
The recognition of revenue for the DMDC and DHS programs may be impacted by the mix of third-party solutions being utilized, which tends to favor software over hardware. This shift could result in a decrease in expected revenue for these programs in 2025.
Management Insights
During a recent Q&A session, CEO John Wood addressed the impact of the new administration on single award programs, noting that while there are delays as opportunities are reviewed, the company is adapting by focusing on task orders from existing contracts. CFO Mark Bendza elaborated on revenue recognition for the DMDC and DHS programs, explaining how the software-heavy approach affects first-year revenue recognition but is expected to yield cash flow benefits upon order fulfillment.
Market Expectations
In terms of TSA PreCheck revenue, Bendza indicated that the company’s growth is tied to the number of operational enrollment sites. With 218 locations now active, Telos is positioned to capture a substantial portion of the $200 million market, with more potential as additional sites open.
Cash Flow Forecast for 2025
Looking ahead to the first quarter and the entirety of 2025, Bendza expressed optimism regarding cash flow, indicating that the first quarter would see benefits from working capital liquidation. For the full year, even if adjusted EBITDA remains break-even, Telos expects to generate positive free cash flow, aided by favorable working capital dynamics.
Conclusion
For further insights and details, the complete transcript of the earnings call is available for review.
