Telos Corporation

Good day and thank you for standing by. Welcome to the Telos Corporation fourth quarter 2024 financial results conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Alison Philip, Director of Corporate Communications. Please go ahead.

Good morning. Thank you for joining us to discuss Pellos Corporation's fourth quarter and full year 2024 financial results. With me today is John Wood, Chairman and CEO of Pellos, and Mark Benza, Executive Vice President and CFO of Pellos. Let me quickly review the format of today's presentation. Mark will begin with remarks on our 2024 year-end results. Next, John will discuss business highlights from the quarter. Then, Mark will follow up with first quarter guidance before turning back to John to wrap up. We will then open the line for Q&A, where Mark Griffin, Executive Vice President of Security Solutions, will also join us. The fourth quarter and year-end 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's 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 fourth quarter and year-end financial 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 for the next year on our company website under the investor relations link. With that, I'll turn the call over to Mark.

Thank you, Alison, and good morning, everyone. Let's begin today on slide three. I'm pleased to report that Telos has delivered fourth quarter revenue near the top end of the guidance range and adjusted EBITDA above the top end of the guidance range. Total company revenue grew 11% sequentially to $26.4 million in the quarter compared to guidance of $24.5 million to $26.5 million. Security solutions revenue grew 20% sequentially to $21.9 million, or 83% of total company revenue, which was near the top end of our guidance range. During the fourth quarter, our large program with the Defense Manpower Data Center, or DMDC, successfully transitioned from the incumbent contractor and began to generate significant revenue for security solutions. Revenue from TSA PreCheck enrollments grew over 30% sequentially. Secure Networks delivered $4.5 million of revenue, or 17% of total company revenue, representing the top end of the guidance range. Secure Networks revenue declined sequentially as expected due to the ramp down of existing programs. Turning to margins. Gap gross margin expanded nearly 600 basis points year over year to 40.3%. And cash gross margin expanded nearly 900 basis points year over year to 47%. Fourth quarter cash gross margin of 47% was the company's highest quarter since the IPO in 2020. And full year 2024 cash gross margin of 43.7% was the company's highest since 2000. Gross margin expansion was primarily driven by the favorable mix shifts from our lower margin secure networks business to our higher margin security solutions business. Security solutions revenue grew from 50% of total company revenue in the fourth quarter of 2023 to 83% in 2024, and from 53% for the full year 2023 to 71% in 2024. As discussed on our last earnings call, during the third quarter of 2024, we discontinued the development and sale of selected solutions or parts of solutions that were not generating acceptable returns. These actions reduced our cost base and created new capacity for investment in our highest growth programs in order to maximize our operating leverage, incremental margins, and cash flow as we return to growth in 2025. Largely as a result of our third quarter cost actions, adjusted operating expenses, which include R&D and SG&A expense, excluding stock-based compensation, restructuring, and impairment expenses, declined sequentially by $2.4 million. When combined with higher cash gross profit, the reduction in operating expenses drove a sequential improvement in adjusted EBITDA from a $4.2 million loss in the third quarter to a $200,000 loss in the fourth quarter. Lastly, cash flow from operations was a $10.5 million outflow, and free cash flow was a $14.8 million outflow, reflecting a short-term buildup of working capital associated with high-growth programs and one-time CapEx investments in IT infrastructure expansion. We expect these dynamics to reverse and drive positive cash flow from operations and positive free cash flow in the first quarter of 2025. I will now turn it over to John for an overview of recent business highlights. John? Thanks, Mark, and good morning, everyone.