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.

Thank you. As a reminder, if you would like to ask a question, please press star 11 on your telephone. You'll hear the automated message advising your hand is raised. We also ask that you please wait for your name and company to be announced before proceeding with your question. One moment while we compile the Q&A roster. And our first question today is coming from the line of Matthew Calatree of Needham. Please go ahead.

Matthew Calatree Hey, good morning, guys. Matt Calatree on from Needham. Thank you for taking our questions. And great to see the strength and and security this quarter and see the press release quotes that primarily the expansion is due to large programs and Telus ID. Is there any more color you can give there on where you saw strength and I guess just general market sentiment?

Yeah. Hey, Matt. Good morning. It's Mark Benson speaking. So listen, we had a great quarter, clearly straight out of the gate for the year across the company overall. both in terms of program execution as well as ongoing discipline around expense management. The larger programs that we were referring to primarily reside in our Telos ID business, and that cuts across a number of programs, including we had a good quarter in TSA PreCheck, our DMDC program, which we also refer to as IT GEMS, performed very well, and the body of work that we refer to as confidential IT security work that we're performing for the federal government, that also had a good quarter.

So really a broad-based strength, both in terms of program management and expense management, and also cash flow. Great quarter for cash flow as well.

Awesome. Yeah, no, that's great to hear. Um, and then I guess with the strength, like why not take up the guide here? Um, and, and I know you, you mentioned like one, an extra quarter visibility still early in the year. Totally understand that. But like with the, with, with John taking the medical leave of absence and is there any sort of like extra embedded conservatism in the guide or a change in guidance philosophy with you guys taking the helm there?

Yeah, so let me unpack that a little bit. So first with respect to John, first and foremost, our focus is on supporting him and wishing him a full recovery. Operationally, the transition has been very smooth. Hutch Griff and I have worked together for several years now. We've been attached at the head for several years and So for us, it's business as usual in terms of working very closely together. Customer engagement, execution, employee alignment all remain very strong. We're not seeing any disruption in the business and strategic priorities remain unchanged. We have our marching orders and we're executing the plan. You're seeing that in the performance we're announcing today. Regarding guidance, listen, it's a fair question. It's something we put a lot of thought into. We're very pleased with the first quarter performance across the entire portfolio, as I was describing earlier. The first quarter positions us really well against our full year outlook. But that said, we also want to remain disciplined about how we manage that outlook. And we issued full year guidance on March 16th, that's less than two months ago. It's kind of a peculiar aspect of the calendar Fourth quarter earnings are announced unusually late in the quarter, and then first quarter earnings are reported, you know, at the usual time. So there's very little time that passes between the fourth quarter announcement, where we set our initial outlook, and first quarter guidance. So, you know, we feel it's only prudent to lock in an additional quarter performance before we formally revise revenue and adjust the EBITDA estimates for the year. And if you look back to 2023, it was the previous year where we announced a full year outlook. And that year, you know, we set guidance on the fourth quarter call. First quarter call, we had a big beat and we reaffirmed. Second quarter call, we beat and raised. Third quarter call, we beat and raised. And then the final fourth quarter call, we beat again. So, you know, it's an approach to a full year outlook that we think, we think serves us well.

Awesome. Thanks so much. And sorry, I should have led with this, but our thoughts are with John, too, and wish him a speedy recovery. So thank you, guys.

Thanks, Matt. Thank you. One moment for the next question. Our next question is coming from the line of Eric Spiker of B Reilly Securities. Your line is open.

Yeah, thanks for taking the question. Congrats on a good quarter, and please pass along our best wishes for John. Comment a little bit on the environment for the TSA pre-check, if you would. Have increases in fuel prices and travel costs made any difference in terms of demand for enrollment, or do you think that's a risk? And then secondly, can you talk a little bit about what your expectations are for seasonality in that business?

Yeah. Hey, Eric, and good morning. So on PreCheck, PreCheck is an important program for us. It's one of several large programs within the company. We expect it to be an important growth driver for us for the year, as it was in the quarter. No, we haven't. You know, we haven't seen any impact from higher fuel prices. As a matter of fact, enrollments are performing very well year over year, both in the first quarter as well as so far here in the second quarter.

Can you comment about seasonality in that business?

Oh, sure, yeah. So seasonality typically... We see enrollment as being seasonally lower in the second half. That's kind of a trend we've seen for the last couple of years, and our base case is we would expect that again this year.

Okay. And then any comments about the software contribution from Xacta in the quarter?

Contribution was about flat year over year. I'll maybe turn to Mark if you'd like to provide some comments on Exacta AI and how we're trending there.

Sure, Eric. Mark Griffin. So we have currently sold and installed over 400 licenses of Exacta AI. We initiated interest and adoption within our existing stall base and expect additional sales within the intelligence community, the federal civilian government, and Department of War. So to date, we have installed and operated live production pilots at multiple large intelligence community agencies, the Department of War elements, and in the banking community. In addition, we have participated in numerous market surveys, demonstrations with both executives and cybersecurity matter experts within these stakeholder groups. In general, the response has been very strong, and we are anticipating numerous RFPs, later in the year. So we're bullish on the progress today.

Very good. Thank you.

Thank you. One moment for the next question. Our next question is coming from the line of Nihal Shokchat of Northland. Your line is open.

Yeah, thank you. Congratulations on the great quarter. Our thoughts are with John, hoping him a speedy recovery as well. Questions are on the pipeline. Given that you are signaling strong confidence in the business with accelerating share buybacks, sounds like that's twofold. One, the core businesses are performing well, but is it fair to say that The $500 million of pipeline of award decisions that you expect to be made in 2026, you feel like has a higher probability of win rates than what you would typically assume for awards that are at that stage. Is that correct?

Yeah. So, Nahal, I think the way I would categorize it is, you know, a good chunk of the submitted and pending proposals are aligned to a body of work that we think we're well positioned on, we have a good track record in, well aligned with our capabilities and it's kind of a mission set that I would say is maybe a newer mission set for the government and one that we've been involved in at a pretty early stage here with our Prime Partners and the government. So we feel good about it. Of course, ultimately, the government controls the timing of awards. And so, you know, our current estimate is that these are awards that we'll hear decisions on in the second half. But again, ultimately, the government, of course, controls the timing.

And when you refer to Prime Partners, THIS IS INCLUSIVE OF THE GMDC PRIME PARTNER?

NO. THIS IS A DIFFERENT SET OF PROPOSALS.

GOT IT. OKAY. IS THERE ANY BID THAT REPRESENTS MORE THAN 10% OF THAT $500 MILLION OF OUTSIDERN PROPOSALS THAT JUST HAVE TO BE AWARDED IN 2H26?

THERE ARE TWO THAT ARE AROUND $90 MILLION. then there are a couple that are that are small uh maybe around three million and then uh the rest are in in a you know similar similar size a few tens of millions right and these are typically five-year contracts that you're bidding on correct uh these are a little shorter typically uh it well It's a mix, but the lion's share of them I'd say are like two years.

Got it. Okay, great. My last question is now that you guys are at 500 stores on TSA PreCheck, is market share now at your maximal level that you would expect, or is there a lot more to go? And if so, how will we get there?

Yeah, so there's more growth to be had in that program, I think, really through a couple of ways. First, continuing to optimize volume in the locations that we have open today, and then also continuing to explore partnerships in other parts of the country.

Okay, and you did announce a couple of new types of partnerships during the quarter, one through a university, one directly at an airport. Is there additional partnerships beyond those that you're contemplating?

Yes, we are contemplating others, and there is another pilot that we have underway with a relatively modest number of locations that we're currently testing out with another partner.

Thank you for taking my questions. Okay, thanks.

Thank you. One moment for the next question. Our next question is coming from the line of Rudy Kessinger of DA Davidson. Please go ahead.

Great. Thanks for taking my questions. Mark, well, firstly, certainly my thoughts for John as well and wishing him a speedy recovery. Mark, clearly I understand your comments. It's been less than two months since you gave the initial full-year guide. Putting aside the fact that you didn't tweak the full-year guide at all, especially to an upside, it's pretty much implied in the second half that security solutions growth dips into the high single-digit range. Total revenue growth dips into the low single-digit range. What is the likelihood that some of those new business awards in the second half would it contribute meaningful revenue upside this year, or would anything awarded in the second half likely contribute revenue, mostly in 2027?

Yeah, hey, Rudy, good morning. So, yeah, listen, you know, we have a pretty substantial portfolio of proposals that are submitted and pending award. You know, if one or two of those are awarded in the second half, and those programs start on time. There's a fair amount of revenue in a lot of those proposals that are pretty front-end loaded to the first couple months. And so, yeah, we could get some meaningful contribution from those proposals if they're awarded in the second half.

Got it. Okay. And then on free cash flows, just any color on expectations for the remainder of the year. And then with the increased pace of buybacks, I guess any kind of, you know, further details you can provide on that, maybe just relative to the, you know, pace of buybacks in Q1 or the, you know, Q2 to Q4 last year. Should we maybe expect to bump back up to that kind of $4 million to $6 million range Q2 to Q4 last year or more or less? Just any further color would be appreciated.

Sure. Yeah. So we did a free cash flow margin of 13.4% this quarter. We did actually coincidentally 13.4% in the fourth quarter of last year. It's our fifth consecutive quarter over 12%. So I would expect a free cash flow margin, you know, to continue in that kind of lower double digit margin level. And then we're currently managing to a cash balance of approximately $50 million, and we'll continue to do that. So as we generate cash flow, our intention is to buy back stock with that free cash flow while managing to approximately a $50 million cash balance.

Great. Thank you.

Thank you. And there are no more questions in the queue. I would like to turn the call back over to Mark Benzel for closing remarks. Please go ahead.

Thank you, operator, and thanks to everyone for joining us today. We're pleased with our strong start to the year and believe our results reflect continued progress in building a more profitable, cash-generative, and scalable business. We look forward to updating you next quarter. In the meantime, we hope to speak with many of you at the Needham Technology Conference on May 14th and the Northland Growth Conference on June 23rd. Thank you.

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