Telos Corporation

Good day, and thank you for standing by. Welcome to the Telos Corporation first quarter 2026 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'll need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To answer your question, please press star 11 again. Please be advised that today's conference is being recorded. I'd now like to turn the conference over to your speaker for today, Alison Philip. Please go ahead.

Good morning. Thank you for joining us to discuss Telus Corporation's first quarter 2026 financial results. With me today is Mark Benza, Executive Vice President and CFO of Telus, and Mark Griffin, Executive Vice President of Security Solutions. Let me quickly review the format of today's presentation. Mark Benza will begin with remarks on our first quarter results and full year outlook. We will then open the line for Q&A, where Mark Griffin, Executive Vice President of Security Solutions, will also join us. The first quarter financial results were issued earlier today and are posted on the Telus 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 the comments made during this conference call and in our SEC filing. 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 first 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 Benzo.

Thank you, Allison, and good morning, everyone. Before we begin, I'd like to address our April 29th announcement regarding our chairman and CEO, John Wood. John is currently on a medical leave of absence and we wish him a full and speedy recovery. In the interim, Independent Director Fred Schofield has assumed the role of Chairman of the Board. In addition, the company's three Executive Vice Presidents, General Counsel Hutch Robbins, EVP of Security Solutions Mark Griffin, and I have jointly assumed John's responsibilities to ensure seamless continuity of operations. This interim leadership structure is functioning as intended, and our teams remain fully aligned and focused on execution. We continue to see strong engagement from our customers and partners, and program execution across the business remains uninterrupted. Our priorities for 2026 remain unchanged, delivering strong revenue growth, expanding adjusted EBITDA margins, generating robust cash flow, and continuing meaningful share repurchases. Our first quarter results reflect the continued transformation of Telos into a more scalable, profitable, and cash-generative business, and we made strong progress against each of these priorities during the quarter. With that, let's turn to slide three. We're pleased to report another strong quarter, with results exceeding the high end of our guidance range. Our outperformance was supported by strong TSA pre-check enrollment activity continued execution across our core programs, and the benefits of our ongoing efficiency initiatives. Total company revenue increased 56% year-over-year to $47.7 million, surpassing our guidance of $44 million to $45 million. Gap gross margin was 36.4%, and cash gross margin was 42.3%, both exceeding our expectations due to a favorable mix of higher margin revenue streams and continued operational discipline across the business. As a reminder, given the breadth of our revenue streams, Gross margins will fluctuate quarter to quarter based on mix. On operating expenses, our continued focus on cost discipline, including the restructuring plan approved in Q4, drove strong profitability. Adjusted operating expenses came in approximately $400,000 better than guidance and were down $1.2 million year over year. As a result, adjusted EBITDA exceeded the high end of our range, reaching $7.9 million versus guidance of $4.5 million to $5 million. Adjusted EBITDA margin was 16.5%, a significant increase from 1.2% in the prior year period. Turning to cash flow, strong cash generation, and disciplined working capital management remain key priorities. Operating cash flow was $8.7 million, and free cash flow was $6.4 million, representing a 13.4% free cash flow margin. This was our fifth consecutive quarter with a free cash flow margin above 12 percent. This reflects the increasing efficiency and scalability of our operating model, as well as disciplined company-wide working capital management. Our strong cash flow generation and liquid balance sheet provide us with flexibility to invest in growth initiatives while continuing to return capital to shareholders. During the quarter, we repurchased $2.2 million of stock or over 500,000 shares at an average price of $4.25 per share. Given the durability of our strong cash generation and our confidence in the long-term value of the business, we intend to accelerate repurchases in the second quarter. Our capital allocation priorities remain consistent. Invest in organic growth, maintain a strong balance sheet, and return capital to shareholders. With that, let's turn to slide four to discuss our second quarter guidance and full year outlook. For the second quarter, we expect revenue growth of 22% to 28% year-over-year, or $44 million to $46 million. We expect cash gross margin of approximately 39% and adjusted operating expenses to decline by roughly $1.3 million year-over-year. Adjusted EBITDA is expected to be between $5 million and $6 million, representing a margin of 11.4% to 13%. We also expect another quarter of strong cash flow, which we intend to deploy toward accelerated share repurchases. Turning to the full year, our first quarter performance reinforces our confidence in the trajectory of the business and positions us well against our full-year objectives. At the same time, in alignment with our usual measured approach to guidance, we are reaffirming our revenue and adjusted EBITDA outlook. We issued our full-year outlook less than two months ago, and while we are encouraged by the momentum we're seeing, it remains early in the year and we believe an additional quarter of performance will provide even greater visibility into full-year trends. Based on first quarter performance, we have updated certain assumptions within our full-year model, including raising the low end of our cash gross margin expectations to partially reflect the margin strength recognized during the first quarter. We will continue to evaluate our outlook as the year progresses and look forward to providing an update following second quarter results. Lastly, before I wrap up, I'd like to spend a few minutes on growth and new business opportunities. Since 2024, we have significantly grown our top line largely through new business wins. we continue to see strong customer engagement across our addressable markets and maintain a multi-billion dollar pipeline of potential opportunities where we believe our capabilities are well aligned with customer priorities. Currently, we have proposals outstanding representing nearly $500 million in total contract value. our government customers ultimately determine the final timing of awards and may modify award dates based on their own timelines and requirements. We currently expect the government to make award decisions on these opportunities during the second half of 2026. These submitted proposals span both our security solutions and secure networks segments with a heavy concentration in security solutions. Beyond these submissions, we will continue to actively develop and selectively advance additional opportunities from our pipeline. With that, let's wrap up on slide five. In summary, we delivered a strong start to the year with 56% revenue growth, a 16.5% adjusted EBITDA margin and a 13.4% free cash flow margin. Our second quarter guidance reflects continued momentum and we are focused on executing large programs while securing new business opportunities. In addition, disciplined cost management and working capital efficiency are translating growth into strong profitability and and cash flow. We also plan to continue returning capital to shareholders while maintaining a strong and flexible balance sheet. With that, Mark Griffin and I are happy to take questions. Operator, please open the line for Q&A. Thank you.