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Good day, and thank you for standing by. Welcome to the Telos Corporation Fourth Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' 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 Phillipp. 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 B. Wood, Chairman and CEO of Telos Corporation; G. Mark Bendza, Executive Vice President and CFO of Telos Corporation; and Mark D. Griffin, Executive Vice President of Security Solutions. Let me quickly review the format of today's presentation. Mark 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 Griffin, 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 Corporation Investor Relations website and this call is being simultaneously webcast. Additionally, we have provided presentation slides on our Investor Relations website. Before we begin, I 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 statements. In addition, during today's call, we will discuss non-GAAP financial measures, which we believe are supplemental and clarifying measures to help investors understand Telos Corporation’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 will 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 are 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. Second, 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 Telos 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 $50,000,000 to $75,000,000 to support our capital deployment activity. With that overview, let us 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 $46,800,000, exceeding our guidance range of $44,000,000 to $46,300,000. This performance was primarily driven by strong execution in Telos ID and the ramp of large programs. We expect large programs in Telos 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 $1,500,000 charge during the quarter, including approximately $500,000 recorded in cost of sales. Separately, our review of intangible assets resulted in a $14,900,000 noncash goodwill impairment within the Secure Networks segment. This charge 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 represents 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 $16,400,000 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 Telos 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 adjusted EBITDA, our focus on expense management translated into strong overall profitability. Adjusted operating expenses came in approximately $1,000,000 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 $7,300,000, compared to our guidance range of $4,000,000 to $5,700,000. Adjusted EBITDA margin was 15.6%. Turning to cash flow, strong cash generation remains a priority. Operating cash flow in the quarter was $8,000,000. Free cash flow was $6,300,000, 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 us 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% to $164,800,000. 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 $8,000,000, or nearly 12%, reflecting the impact of the expense management initiative we launched at the end of 2024. As a result, adjusted EBITDA was $18,100,000, representing a $27,800,000 improvement year over year. Adjusted EBITDA margin expanded nearly 20 percentage points to 11%, and incremental adjusted EBITDA margin was 49.1%. In other words, for every dollar of revenue growth, the company generated more than $0.49 of additional adjusted EBITDA. Cash generation also improved significantly. Free cash flow was $21,300,000, representing a $61,000,000 improvement year over year, and free cash flow margin was 12.9%. Finally, we returned significant capital to shareholders. During the year, we deployed $13,600,000 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 us 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 $187,000,000 to $200,000,000. 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 $1,500,000 to $4,000,000 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 $20,600,000 to $28,000,000, 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 $44,000,000 to $45,000,000. We forecast cash gross margin to be over 39%. We forecast cash operating expenses to be approximately $1,000,000 lower year over year, reflecting the expense management plan approved in the fourth quarter. We forecast adjusted EBITDA of $4,500,000 to $5,000,000, representing an adjusted EBITDA margin of 10.2% to 11.1%. Lastly, we forecast another quarter of strong cash flow. With that, I will turn it over to John for concluding commentary.

Thanks, Mark. Before I wrap up, I want to spend a few minutes on where we are as a business and where we are headed. As Mark noted, 2025 was an exceptional year financially, but the numbers reflect something much more fundamental, and that is the investments we have made in our people, our systems, and our customer relationships are paying off. Our 90% of total revenue, and the momentum there is strong. Let me touch on a few areas. Starting with Xacta, our cyber governance, risk management, and compliance platform continues to be the standard for the most security-conscious organizations in the world. Demand for automated GRC solutions is growing as our customers recognize the value in incorporating machine-readable data sets for more actionable compliance and risk information on a continuous or ongoing basis. We are well positioned to capture that demand. During the year, we launched Xacta AI, bringing meaningful AI-driven risk and compliance insights to our customers' complex environments. Our AI integration within the Xacta platform focuses on a novel and secure approach to utilize highly contextualized and enriched datasets, resulting in high-confidence, risk-focused recommendations and insights. Xacta AI saves customers time and effort by delivering expert-level guidance related to a customer's specific circumstances and their risk tolerance. To date, 400 Xacta AI licenses have been sold to two major federal government customers, and the new prospect response has been very positive. We see Xacta AI as a meaningful differentiator as we compete for new business in 2026 and beyond. Our Telos ID business remains a significant growth driver. Our TSA PreCheck enrollment program ramped nicely throughout the year, supported by strong travel demand. We also continue to expand our broader identity and biometric portfolio, including ID vetting and aviation channeling services. Enrollment is a scale business, and our biometric solutions now process millions of identity transactions annually across the nation. We are pleased with the progress we are making and have the potential for additional growth in these areas. Beyond these programs, earlier this month, we expanded the confidential IT security work that we are performing for the federal government. Now turning to the broader market, over 90% of our revenue comes from governments here and around the world. Our customer base spans the Department of War, the intelligence community, Department of Homeland Security, multiple civilian agencies, and the Five Eyes Nations. These customers are funded to address enduring national security and compliance missions. Cybersecurity, identity verification, and secure communications are not discretionary line items for these organizations. They are indeed mission critical. We recognize that the federal spending environment is receiving heightened scrutiny and we are monitoring it closely. However, in general, the programs we support continue to be well funded, operationally essential, and in many cases tied to mandated security and compliance requirements. That gives us confidence in the durability of our revenue base. Our growth opportunities and pipeline are driven by strategic positioning and well-funded national security priorities, including the ever-changing cybersecurity threat environments, digital enterprise solutions, and modernization of core infrastructures. Our pipeline remains strong at over $4,200,000,000. We have seen a shift in awards to the right as a result of the government shutdown, funding constraints, and a more detailed review from the government of submitted bids. We expect additional award decisions on previously submitted bids over the course of 2026. With that, I would like to wrap up on slide number six. In summary, 2025 was a transformational year for Telos Corporation, marked by strong revenue growth, significant adjusted EBITDA margin expansion, and a dramatic improvement in cash generation. We successfully executed on large programs and secured new business. At the same time, our continued focus on cost management and working capital efficiency enabled us to convert growth into meaningful improvements in profitability and cash flow. Importantly, we also returned capital to shareholders through our share repurchase program while maintaining a highly liquid and flexible balance sheet. As we enter 2026, the continued ramp of large programs and recent new business positions us well for another year of double-digit revenue growth. At the same time, the expense management plan approved in the fourth quarter enables us to drive further operating leverage and adjusted EBITDA margin expansion as we scale. In short, we believe our strong program execution and expense discipline are creating a business that is increasingly profitable, cash generative, and positioned for long-term value creation for our customers and our shareholders. With that, we are happy to take questions.

Operator, please open the line for Q&A. Thank you.

Thank you. Star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Our first question is going to come from the line of

Hi. Good morning, Mark and John. Congrats on the strong results to end the year. Mark, maybe just starting with the initial guidance for the year. It sounds like it is largely driven by expansion with existing programs. So can you talk about what is going on in the pipeline—like a few opportunities maybe were pushed to the right—in terms of does that provide potential upside versus the initial guidance, or what are some of the puts and takes when we think about your initial outlook?

Yes. So let me start, and maybe I will turn it over to Mark Griffin for his comments on the pipeline. First, we are very encouraged by how our existing programs have evolved since November when we originally indicated $180,000,000 of revenue in 2026. As I said in the script, we have grown the confidential IT work that we were performing for the federal government. That is something that we started back in the third quarter of last year. That body of work continues to expand with the federal government, so that is a very encouraging development. Second, our IT GEMS program continues to ramp and will continue to ramp into 2026. There are revenue streams within that program that we had a partial year of revenue last year, so we are going to have full annualization this coming year in 2026. Based on orders that we have received in that program since November, we are getting more and more visibility into how 2026 is shaping up for that program. So that is trending extremely well also. Lastly, on TSA PreCheck, transaction volumes have been trending very well for us since November as well as market share gains. So we have improved our outlook for that program as well. The good news, as you said, is that $187,000,000 to $200,000,000 is primarily a function of existing programs and there is very little contingency in terms of additional new business go-get to achieve those numbers. Regarding the pipeline, I will turn it over to Mark.

Hello,

Understood. And just my one follow-up question for Mark is around your gross margin assumptions for this year. I think you outlined it a bit in your script, but can you give us the key puts and takes on why we are seeing a little bit of compression in the assumed gross margin this year versus 2025?

Yes. Historically, if you look back over the last five years, our weighted average gross margins are typically in the upper 30s. That is what you are seeing for 2026. The year-over-year dilution in 2026 is really driven by a few key things. First, the third-party hardware and software on our IT GEMS program represents the lowest margin of revenue streams in our portfolio. That revenue stream is growing year over year, and so you are going to see some dilutive impact from the growth of that lower-margin revenue stream. Second, as we discussed in prior periods, we have some expenses on our TSA PreCheck program—actually, pretty meaningful expenses on the TSA PreCheck program—that were prepaid over the last few years, and now that expense is being compressed and recognized through the P&L and through cost of sales in a relatively short period of time, especially in 2026. So we are getting some artificial gross margin pressure from that GAAP accounting phenomenon. That alone is a couple hundred basis points into 2026. Third, the rest of the portfolio is actually accretive year over year. Gross margins are expanding in the rest of the portfolio once you normalize for those two items that I just mentioned. I will also point out that although cash gross margins are forecasted to contract in 2026, adjusted EBITDA margins are forecasted to expand, and that is a function of top-line growth and lower OpEx all lining up nicely to drive adjusted EBITDA margin expansion.

Understood. Thanks for taking my questions, and best of luck with the rest of the quarter.

Thanks,

Thank you. One moment for our next question. Our next question comes from the line of Matt Cliche with Needham and Company. Your line is open. Please go ahead.

Hey. Good morning, guys. This is Matt Cliche over at Needham. Thanks for taking our questions. When we think about the strong revenue performance and guide for next year, is there any sort of framework you can provide on how much Xacta is contributing or the size of the cohort that will come up for renewal in 2026?

So our renewal rates are excellent, Matt. We experience, I would say, very little to no revenue loss in a typical year on Xacta renewals, generally speaking, year to year. So as we forecast from one year to the next, renewals tend to be a very low variable for us as we forecast our revenues in a typical year.

Okay. Great. And then what exactly are you seeing in terms of Xacta AI attach rates or momentum? What are you hearing from the agency side?

Matt, you were breaking up a little bit, but I believe your question was what are we seeing in terms of Xacta AI demand, attach rate, and volume of conversations with new prospective customers. Our plan is to go after existing customers who already use Xacta to start with, and there we are in the tens of millions of dollars of opportunities—several tens of millions of dollars of opportunities. I think our customers are really excited because if they are able to see the kind of outcomes that we have seen in our testing, then they could see as much as a 90% reduction in the time and effort it takes to get to an Authority to Operate.

That is great. Thank you so much. Sorry for the connectivity issues there too.

No problem. Thanks for your question.

Thank you. One moment for our next question. Our next question comes from the line of Rudy Kessinger with D.A. Davidson. Your line is open. Please go ahead.

Hey, guys. Thanks for taking my questions, and apologies if this might have been asked. I had to drop off for a bit here and jump back on. In the 2026 guide, the revenue growth, how much of that revenue growth is tied to the one large DMDC contract?

The one large CNBC contract—I would say relative to the $180,000,000 that we mentioned in November, it is roughly a third of the improvement from the November outlook.

Okay. That is a good way to think about it, I think. So there certainly is some new business win contribution in there. Okay. And then for this year, as you look at the pipeline—realistic pipeline that you could potentially win this year in terms of revenue contribution this year or into 2027—what does that pipeline look like today, and how many large highly likely deals do you have in that pipe?

Hey, Rudy. In 2026, we have, supposed to be awarded in 2026, about 64 opportunities that are supposed to hit. Thirty-four of those, as I mentioned, are in the first half of the year, representing about 20% of the value of the pipeline. So we expect most of that is going to hit by the June timeframe, and based on the timing of that and the rollout of that, you are probably talking about some modest revenue in 2026 but then ramping and building in 2027 as well.

Okay. And then last one for me. Clearly, the expense discipline has been great to see and the improved EBITDA margins as well. At the same time, gross margin, even your cash gross margin, continues to come under pressure. It is going to come down again this year as well. What strategies do you have in place to maybe help put a floor in that cash gross margin? Do you think that range you gave this year can be a floor? And how should we think about that line longer term?

Yes. Some of the commentary I have made in the past, and I will reiterate today, is that we do have a lot of different revenue streams and a lot of different margin profiles. Quarter to quarter, year to year, total company gross margins will fluctuate based on mix. The margins that we are guiding for 2026, on the surface, are in line with where margins have been over the last five or six years. Keep in mind, as I mentioned earlier, there are about 200 basis points of more accounting-oriented year-over-year dilution associated with that compressed expense recognition, which is well in excess of actual cash expense in cost of sales. If you adjust for that, we are still in that low 40s cash gross margin. So I think we are in a really good spot. In terms of the recent dilution that we have seen over the last few quarters associated with the IT GEMS revenue mix, I would say this year, we should pretty much be at the full dilutive effect. Does that help to answer your question?

Yes. Yes, it does. Thank you.

Okay. Thank you. I am showing no further questions at this time, and I would like to hand the conference back over to John Wood for any further remarks.

Thank you very much. I want to thank our shareholders for your ongoing support. With robust and recession-resistant markets, well-funded customers, and a decades-long track record of serving the world's most security-conscious organizations, Telos Corporation has a really strong foundation for the future. So, again, thank you. This concludes today's