Telos Corporation

Good day and thank you for standing by. Welcome to the TELUS Corporation fourth 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 this session, you will need to press star 11 on your telephone. You will then hear an automated message advising you your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Allison Phillips. Please go ahead, ma'am.

Good morning. Thank you for joining us to discuss Telos Corporation's fourth quarter 2025 financial results. With me today is John Wood, Chairman and CEO of Telos, Mark Benza, Executive Vice President and CFO of Telos, and Mark Griffin, Executive Vice President of Security Solutions. So let me quickly review the format of today's presentation. Mark Benza will begin with remarks on our fourth quarter 2025 results and 2026 outlook. Next, John will follow up with concluding commentary. We will then open the line for Q&A, where Mark Rippon, Executive Vice President of Security Solutions, will also join us. The fourth 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 2026 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 and comments made during this conference call and in our SEC filings. 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'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 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, Allison, and good morning, everyone. We have a lot of good news to share again this quarter. We're pleased to report another strong quarter and an exceptional finish to an incredibly strong 2025. Before turning to the slides, let me highlight three key takeaways for the quarter and the year. First, we delivered significant revenue growth and exceeded our guidance across key financial metrics every quarter, including the fourth quarter. Our continued focus on disciplined program execution, rigorous operating expense management, and working capital efficiency drove strong operating leverage, excellent incremental adjusted EBITDA margins, and robust cash flow. Third, we returned capital to shareholders through share repurchases. Looking ahead, large programs in TELUS ID continue to ramp. And earlier this month, we expanded the confidential IT security work that we are performing for the federal government. Given this momentum, we remain well positioned for another year of double-digit revenue growth, adjusted EBITDA margin expansion, strong cash flow, and additional share repurchases in 2026. Our board of directors recently increased our share repurchase authorization from $50 million to $75 million to support our capital deployment activity. With that overview, let's turn to slide three. We delivered another quarter of strong execution and exceeded our guidance across key metrics. Revenue increased 77% year over year to $46.8 million, exceeding our guidance range of $44 to $46.3 million. This performance was primarily driven by strong execution in TELUS ID and the ramp of large programs. We expect large programs in TELUS ID to continue growing into 2026. As we continue to scale the business, our focus remains on program execution combined with operating expense management. During the fourth quarter, we approved a company-wide restructuring plan designed to further streamline operations and position the company for additional growth and adjusted EBITDA margin expansion in 2026. As a result of these actions, we expect adjusted operating expenses to decline in 2026, even as revenue continues to grow at a double-digit rate. The restructuring plan resulted in a $1.5 million charge during the quarter including approximately $500,000 recorded in cost of sales. Separately, our review of intangible assets resulted in a $14.9 million non-cash goodwill impairment within the secure networks segment. This chart represents a full write-off of the segment's goodwill and reflects the decline in contract backlog as several large programs reached their natural completion in recent periods. Secure networks represent a meaningful portion of our business development pipeline, and we continue to pursue new contracts in that segment. In total, these items resulted in a $16.4 million charge in the quarter. Turning to gross margins, GAAP gross margin for the quarter was 35%. Excluding the $500,000 charge included in cost of sales, gross margin was 36%, while cash gross margin was 41.9%. Both metrics exceeded our guidance range, primarily reflecting performance in TELUS ID. As a reminder, due to the diversity of our revenue streams, gross margins will naturally fluctuate depending on the mix of revenue recognized in a given quarter. Turning to operating expenses and the justity of the dots, Our focus on expense management translated into strong overall profitability. Adjusted operating expenses came in approximately $1 million better than our guidance assumptions. As a result of better than expected revenue, cash gross margin, and operating expenses, adjusted EBITDA exceeded the high end of our guidance range. Adjusted EBITDA was $7.3 million, compared to our guidance range of $4 to $5.7 million. Adjusted EBITDA margin was 15.6%. Turning to cash flow, strong cash generation remains a priority. Operating cash flow in the quarter was $8 million. Free cash flow was $6.3 million, representing a free cash flow margin of 13.4%. This performance reflects the success of our company-wide working capital initiatives as well as our revenue growth and gross margin profile. Our strong cash generation, when combined with our highly liquid balance sheet, provides flexibility to invest in growth initiatives while also continuing to return capital to shareholders. Let's now turn to slide four, for a brief recap of our year-over-year performance for the full year 2025. We delivered an exceptional year in 2025 despite the challenging macro environment within the U.S. federal government. Revenue increased 52 percent to $164.8 million. Growth was driven by new program wins in both 2024 and 2025 as well as the continued ramp of our TSA PreCheck program. At the same time, we significantly improved the efficiency of our operating model. Cash operating expenses declined by $8 million, or nearly 12 percent, reflecting the impact of the expense management initiative we launched at the end of 2024. As a result, adjusted EBITDA was $18.1 million, representing a $27.8 million improvement year over year. Adjusted EBITDA margin expanded nearly 20 percentage points to 11 percent. And incremental adjusted EBITDA margin was 49.1 percent. In other words, for every dollar of revenue growth, the company generated more than 49 cents of additional adjusted EBITDA. Cash generation also improved significantly. Free cash flow was $21.3 million, representing a $61 million improvement year over year. And free cash flow margin was 12.9%. Finally, we returned significant capital to shareholders. During the year, we deployed $13.6 million to repurchase approximately 4.3% of our outstanding shares at an average price of $4.38 per share. Our capital allocation priorities remain consistent, investing in organic growth, maintaining a liquid balance sheet, and returning capital to shareholders. With that, let's turn to slide five to discuss our outlook for 2026. As we enter 2026, we expect the continued ramp of large programs and recent new business to drive another year of strong growth, adjusted EBITDA margin expansion, and robust cash flow. For the year, we forecast revenue to grow 14 to 21% year over year to a range of $187 million to $200 million. Substantially, all of our forecast represents revenue from existing programs. The revenue range is primarily driven by the third-party hardware and software component of our IT GEMS program, as well as the confidential IT security work that we are performing for the federal government. We forecast cash gross margin of approximately 37% to 39.5%, lower than 2025, primarily due to revenue mix, and the timing of certain prepaid expense recognition in cost of sales. We forecast cash operating expenses to be approximately $1.5 to $4 million lower year over year, reflecting the benefits of the expense management plan approved in the fourth quarter. Based on these assumptions, we forecast adjusted EBITDA of $20.6 million to $28 million representing an adjusted EBITDA margin of 11% to 14%. Lastly, we forecast another year of robust cash flow and share repurchases. Turning to the first quarter, we forecast revenue to grow 44% to 47% year-over-year to a range of $44 million to $45 million. We forecast cash gross margin to be over 39%, We forecast cash operating expenses to be approximately $1 million lower year over year, reflecting the expense management plan approved in the fourth quarter. We forecast adjusted EBITDA of $4.5 million to $5 million, representing an adjusted EBITDA margin of 10.2% to 11.1%. Lastly, we forecast another quarter of strong cash flow. With that, I'll turn it over to John for concluding commentary.