Good day, thank you for standing by. Welcome to Telos Corporation Third Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded.

I would now like to turn the conference over to your first speaker today, Allison Phillipp. Please go ahead..

Good morning. Thank you for joining us to discuss Telos Corporation’s third quarter 2023 financial results. With me today is John Wood, Chairman and CEO of Telos; and Mark Bendza, Executive Vice President and CFO of Telos. Let me quickly review the format of today’s presentation.

John will begin with brief remarks on our third quarter 2023 results and Telos’ strategic priorities, then Mark will cover the financials in more details and discuss guidance for the fourth quarter and full year 2023 as well as providing high level comments on 2024, before turning it back to John to wrap up.

Then we will open the line for Q&A where Mark Griffin, Executive Vice President of Security Solutions will also join us. The earnings press release was issued earlier today and is 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 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 earnings press release 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 useful as supplemental and clarifying measures to help investors understand Telos' financial performance.

These non-GAAP financial measures should be considered in addition to and not as a substitute for or isolation from GAAP results. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results in our earnings press release 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 for the next year on our company website under the Investor Relations link. With that, I will turn the call over to John..

Thank you, Allison, and good morning, everyone. Let's begin today on Slide 3. I am pleased to report that Telos has again over delivered on all key financial metrics in the third quarter. Mark will discuss the details of our financial performance later in the call.

At the high level, we delivered $36.2 million of revenue in the third quarter above our guidance range of $30 million to $34 million. Gross margin was 36% above our guidance range of 30.4% to 34.2%. Adjusted EBITDA was $1.3 million loss and was above the top-end of our guidance range of negative $8 million to negative $6 million.

Lastly, we have returned to positive cash flow from operations this quarter.

Many factors enabled our team to achieve these results, including better-than-expected performance from key programs and security solutions like TSA PreCheck, strong program management and Secure Network to support margin performance, and management of operating expenses to support profitability while also funding growth investments.

With three quarters complete, we have successfully managed 2023 to better than originally expected results year-to-date. Given this performance and our outlook for the remainder of the year, we are again in a position to raise our full year guidance on all metrics. Now let's turn to Slide 4 to discuss our recent business highlights and updates.

First and foremost, I am pleased to announce that Telos in close coordination with TSA achieved the formal launch of our TSA PreCheck program in the third quarter. Telos' official TSA PreCheck enrollment website is operational, and the website address is in our earnings presentation and press release.

Our capability to process TSA PreCheck renewals is fully operational, and our capability to process new enrollments will continue to ramp-up as we onboard physical sites across the country over the next several quarters.

We look forward to steadily growing this offering in the coming quarters and years into a long-term, steady, value-creating program for Telos. Beyond TSA PreCheck, we continue to achieve high renewal rates with our Xacta customer base, both in government and commercial sectors.

Government customers included the National Geospatial-Intelligence Agency, the Federal Bureau of Investigation, the U.S. State Department, the Defense Intelligence Agency, the Social Security Administration, the U.S. Environmental Protection Agency, and a classified customer.

Commercial customers included Zscaler, Ernst & Young, stackArmor, and a large confidential customer in the technology sector. We were also awarded renewals for Cyber Services at the Defense Health Agency, the General Service Administration, and the U.S. Department of Homeland Security.

Additionally, we secured new award for our automated message handling system with the Joint Crypto Logic Mission Simulation Program through the National Security Agency. Lastly, the Secure Networks team obtained a new contract with the U.S. Air Force for a new secure network installation building on our three decades long relationship with the U.S.

Air Force. I'll now turn the call over to Mark Bendza, who will discuss the third quarter 2023 financial results, guidance for the fourth quarter and full year 2023, and a preliminary outlook for 2024.

Mark?.

Pre-existing programs and pending new business opportunities. Starting with pre-existing programs, as communicated on our second quarter earnings call in August. there is a 2024 revenue headwind of approximately a few tens of millions of dollars embedded in our pre-existing programs, inclusive of growth from TSA PreCheck.

These headwinds need to be backfilled with new business wins late this year or early next year. The ultimate size of the headwinds embedded in pre-existing programs will primarily depend on the performance of TSA PreCheck.

In particular, the pace and timing of opening new enrollment locations and annual fluctuations in overall market transaction volume. Turning to pending new business opportunities.

Again, as communicated on our second quarter earnings call in August, new business award decisions tend to be seasonally weighted to late in the calendar year or early the following calendar year.

We are currently awaiting final award decisions on numerous pending new business proposals, representing approximately $610 million of total contract value and approximately $115 million of potential 2024 revenue.

The ultimate revenue contribution realized in 2024 from pending new business opportunities will depend on win rates, and program start dates.

Approximately 85% or nearly $100 million of potential 2024 revenue from pending new business opportunities is concentrated in two long-term recurring revenue opportunities in Security Solutions with award decisions anticipated before March of 2024.

There may also be additional opportunities to generate revenue from task orders on new contract vehicles in Secure Networks over the course of 2024. Lastly, turning to gross margin.

Substantially all pending new business opportunities reside in Security Solutions and substantially the entire revenue headwind on pre-existing programs resides in Secure Networks. Accordingly, Security Solutions revenue could represent as much as 70% to 80% of total company revenue in 2024.

The overall company gross margin profile in 2024 is expected to be roughly comparable to 2023, as the margin benefit of higher revenue contribution from our higher margin Security Solutions segment will be offset by margin contraction and each of Security Solutions and Secure Networks in part as a result of higher amortization of capitalized software to cost of sales and revenue mix within each segment.

With that, I will pass it back to John who will wrap on Slide 8..

Thanks, Mark. Let's move to Slide 8. In summary, we exceeded quarterly expectations and delivered results above the high end of the guidance range on all financial metrics. Our TSA PreCheck program formally launched this quarter and was a key factor in our over performance.

We look forward to steadily growing this offering into an important source of recurring revenue in the coming quarters and years.

We raised full year guidance for the second consecutive quarter as we continue to focus on managing 2023 to better than originally expected results through high margin new business wins, program management, cost discipline, implementation of our restructuring and reinvestment in growth.

As we look ahead, the potential revenue opportunity for 2024 is encouraging, as we eagerly await the outcome of pending new business opportunities in security solutions. Lastly, our balance sheet remains highly liquid and a competitive advantage, well positioned to support the company both operationally and strategically.

And with that, we're happy to take any questions. Operator, please open the line for Q&A and we ask the call participants to please be mindful of others in the queue by asking only one question. Thank you. .

[Operator Instructions] Our first question comes from the line of Zach Cummins with B. Riley Securities. .

Yes. Hi, good morning, Mark and John. Congrats on the solid quarter here and appreciate the additional color around the puts and takes for 2024. Just to that point, I mean, it seems like the opportunity is really concentrated in two large programs within security solutions.

So John, can you go ahead and handicap how you're feeling about your chances of, of winning in each of these engagements? And kind of give us a sense of how you're progressing through kind of the decision process at this point. .

Yes, I think these are two opportunities that customers that we've known well for a long time. And I feel good about the potential of the outcomes for sure. Zach. I'll also mention that, so we mentioned task orders and other contract vehicles. You know, we have, when we go after contracts, there're really two types of contracts.

One has, one contract vehicle has a financial amount for sure per year. And these are the two contracts we're talking about. But other contracts have a significant amount of ceiling.

So previously we had a contract called Net Sense, which had a lot of ceiling on it, and over the course of roughly 18 to 20 years, we did about 1.6 billion or $1.5 billion on that contract. So we're really pursuing both kinds of contracts. We're emphasizing these two because they're, they have financial certainty around them. .

Understood. Well, thanks for taking my question and best of luck with the year end. .

One moment for our next question. This question comes on the line of Rudy Kessinger with D.A. Davidson. .

Thanks for taking my questions, or question.

On TSA PreCheck, can you give any color about how much it contributed in the quarter? Where are you trending on your market share on renewals and also on with new enrollments, how many sites are you up to? What do you think you will be fully rolled out? And just again, what's kind of the timeline you are thinking of to get the full one-third market share?.

It is Mark Bendza here. So I will try to give some color there. Keep in mind, we are not really going to be giving a lot of detail on PreCheck financial performance. We don't really do that at any other program. So we are not going to go into a lot of detail on this call or future calls on future financial performance.

But what I will say is that, we feel we are off to a good start here. The performance on PreCheck was the single largest driver of our beat in the quarter. The market overall is currently trending very well, both on new enrollment and renewals. What we are seeing is that the market is quite a bit bigger today than it was as from the pre-COVID highs.

New enrollments, for example, are approximately double what they were during the pre-COVID highs. So we are pleased so far, with how that program is ramping for us. Like I said, it is a single largest peak in the quarter. And we are encouraged by what we are seeing so far. On more operational aspects of the program, let me turn it over to Mark Griffin..

Yes, thank you. Your question was, how many sites we currently have, that's 26 sites. I wanted to remind everyone that, our ability to ramp to the full complement of sites that we have talked about will occur by the end of 2024.

We also wanted to remind everybody that, our experience level in ramping sites is shown in the effort and work we did on the 2020 census.

Also, the sites that we have at over 100 facilities in the aviation security space at airports, and also our experience at the DoD where we have well over 100 biometric sites that were deployed on numerous contracts.

So our ability to ramp quickly and expeditiously with our partner, Office Depot, we are confident that, that will progress very rapidly as we move forward..

[Operator Instructions]. This question comes from the line of Alex Henderson with Needham. .

I was hoping you could talk about, what is in the contracts, a little bit. Is it Xacta? Is it AMHS? What's going on within the mix of what you are trying to sell to these customers? And I was hoping you could give us any update on the goes to while you are at it..

Hi, Alex. This is John. So broadly speaking, the vast majority of everything we are bidding on is inside of our Security Solutions segment.

And it's a combination of different capabilities that we deliver from cybersecurity services to identity applications, you know, those are the kind of things that we're focusing on these days, which we think has a, which we think we're well positioned for.

And, you know, ghost, we see as becoming more of a feature of some of the capabilities that we have out there where we're able to, you know, hide what we're doing, if you will, from people that are interested in finding out what we're up to. So I would say the vast majority of everything we're doing is security solutions. .

So no mention of XACT in that,.

No XACT would be a component as well. So anytime we can and Alex, and I think I've said this previously, anytime we can, we're going to be bundling our security solutions together, which gives us, you know, a differentiated offering to our customers. .

Thank you. One moment for our next question. This question comes on the line of Nehal Chokshi with Northland Capital Markets. .

Yes, thank you and congratulations on the second straight quarter, and raise and as well as from TSA initial ramp here. My question is on the initial view on CY ‘24, especially the swings of those two contracts.

In order for them to contribute up to a hundred million dollars in calendar ‘24, what would be the presumption of those contract start times?.

Start time would be around Q1, late Q1. Late Q1, early Q2, Nehal. .

Okay. And, and when you say an 115 million of total of calendar ‘24 revenue contribution from the various contracts are up and then 610 million of total contract value, that implies you're basically talking about average five year duration for these contracts that are in their mature phase of the pipeline. .

I think that's fair. However, when you look at our complete pipeline, our complete pipeline is well in excess of $3 billion and that pipeline can range from a couple years to 10-year kind of contracts. .

Okay.

Within that pipeline, the remaining 2.4 billion, how much of that do you think will be awarded sometime in calendar ‘24 that could start to ramp within calendar ‘25?.

I don't know that off the top of my, of my head.

Do you know that off the top of your head?.

I don't know that answer off the top of my head. I would say that the what we're giving you in terms of the dollars of $600 million, those have been submitted and those are pending award. So we're giving you what, if you will, the tail end of the pipeline. There will be a continuous input of additional opportunities into the pipeline each quarter.

So I would expect that that pipeline to continue to mature and as it matures, you know, we'll continue to update the market. .

Thank you. I'm showing no further questions at this time and would now like to turn the call back to John Wood for closing remarks. .

Thank you, operator. First of all, I just want to thank our shareholders for your ongoing support. We had a second consecutive quarter of raising our full year outlook and that's a testament to my team's unwavering commitment to delivering for our customers and our shareholders in 2023 and beyond.

We have made good progress during '23 to rebuilding our core revenue base through we have had really strong renewal rates on our existing business. We have cultivated and centralized a very productive business development and new business development pipeline. And we have continued to invest in really solid future growth opportunities.

And the basic point I want to make is, we are really just getting started.

With robust recession-resistant end markets and well-funded customers and decades long track records of serving some of the world's most security conscious organizations, we think Telos is a really strong foundation for the future and we just want to thank you again for your support. Thanks a lot everybody..

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect..