Telos Corporation

Good day and thank you for standing by. Welcome to the TELUS Corporation second quarter 2025 earnings 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 will need to press star 1 1 on your telephone. You will then hear an automated message advising you 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 turn the conference over to your first speaker, Allison Phillips. Please begin.

Good morning. Thank you for joining us to discuss Telus Corporation's second quarter 2025 financial results. With me today is John Wood, Chairman and CEO of Telus, and Mark Benza, Executive Vice President and CFO of Telus. Let me quickly review the format of today's presentation. Mark will begin with remarks on our second quarter 2025 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&A where Mark Griffin, Executive Vice President of Security Solutions, will 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 filing. We do not undertake any duty to update any forward-looking statement. 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.

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 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 million, above our guidance range of $32.5 to $34.5 million. 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. 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 $2.1 million loss to a $600,000 loss. Lastly, we delivered another quarter of robust cash flow. Operating cash flow in the quarter was $7 million. Free cash flow was $4.6 million or a 12.9% free cash flow margin. Free cash flow in the first half was $8.4 million 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 million to repurchase approximately 1.5 million shares at a weighted average price of $2.69 per share. Since our fourth quarter 2024 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 DMDC program in the fourth quarter of 2024 and the ramp of TSA PreCheck enrollment volume. GAAP gross profit grew 23%. and adjusted EBITDA improved $3.3 million, returning to a profit. It is worth noting that adjusted EBITDA improved by $3.3 million on a $7.5 million 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 million to a positive $4.6 million. The significant year-over-year improvement in free cash flow was due to higher adjusted EBITDA, lower capitalized software development costs, 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 million to a positive $8.4 million. 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?