Telos Corp Stock

[Operator Instructions]

Please be advised that this conference is being recorded. I would now like to turn the conference over to your speaker today, Allison Phillipp. Please go ahead.

Good morning. Thank you for joining us to discuss Telos Corporation's third quarter 2026 financial results. With me today is Mark Griffin, President and CEO of Telos, and Mark Bendza, Executive Vice President and CFO of Telos. Let me quickly review the format of today's presentation. Mark Griffin will provide opening remarks on our operations and priorities, and Mark Bendza will discuss our third quarter results and full year outlook. We will then open the line for Q&A. The third 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, in the 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 in isolation from, GAAP results. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results, in our third 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 Griffin.

Thank you, Allison, and good morning, everyone. This is my first earnings call as CEO of Telos, and I'm honored by the Board's confidence. I'm grateful to John Wood for his leadership and for the partnership we have built over the past 35 years. As Executive Chairman, John will continue to provide valuable guidance on our product roadmap, customer relationships, and long-term sales strategy. Telos enters this next chapter with meaningful momentum. Since the beginning of the third quarter, we have announced new and expanded engagements across the Air Force Intelligence Community, the Office of Naval Intelligence, the National Archives and Records Administration, the Department of Health and Human Services, the Department of Commerce Inspector General, and the Department of State. These awards demonstrate that customers increasingly view Telos as a strategic partner managing cybersecurity risk, not simply as a provider of compliance software.

Organizations need continuous visibility into their security posture, the ability to integrate data from multiple security tools, and practical automation that helps their teams make faster and better informed risk decisions. Our Xacta platform is well positioned for this environment. Xacta 360 supports the governance and authorization lifecycle. Xacta.io brings together enterprise security data and enables continuous monitoring. And Xacta.ai applies artificial intelligence to automate manual activities and generate actionable insights. Together, these capabilities provide a more complete approach to cyber governance, risk, and compliance. Importantly, we are seeing Xacta adopted across defense, intelligence, and civilian agencies, often through expanded relationships with existing customers.

That customer intimacy combined with our deep mission knowledge and FedRAMP High authorization gives Telos a differentiated foundation for growth. We also see an opportunity to sharpen how we bring these capabilities to market. AI is most valuable when it is embedded in solutions that address a clearly defined customer problem. For Telos, that problem is helping security teams understand risk, sustain compliance, and protect mission-critical systems in increasingly complex environments.

As CEO, my priorities are straightforward: execute well for our customers, expand our market opportunities, continue improving operational performance, and translate our technology investments into durable, profitable growth. We will remain focused on building a more integrated product portfolio across cyber risk, identity, and related security services. I'm confident in the strength of our people, our customer relationships, and our technology. I look forward to working with our employees and partners to build on Telos' recent return to growth and deliver long-term value for shareholders. With that, I'll turn it over to Mark Bendza to review our third quarter.

Thank you, Griff, and good morning, everyone. We're pleased to report another strong quarter, highlighted by results that exceeded the high end of our guidance range, continued strong cash flow generation to fund share repurchases, and an increase in our full year guidance.

Let's turn to slide 3. Total company revenue grew 7% year-over-year to $55.2 million, exceeding our guidance range of $49.2 million to $50.6 million, driven by stronger-than-forecasted performance in Telos ID. GAAP gross margin was 37.9% and cash gross margin was 43.1%, both above our expectations, reflecting disciplined execution on fixed-price programs and revenue outperformance on higher-margin programs. Adjusted EBITDA exceeded the high end of our guidance range, reaching $10.6 million compared to guidance of $6 million to $6.8 million and representing the highest quarterly adjusted EBITDA since our IPO in 2020. Adjusted EBITDA margin was 19.2%. Cash flow from operations was $9.4 million, or a 17.1% margin. Free cash flow was $7.4 million, or a 13.4% margin, and represented the seventh consecutive quarter above 12%. During the quarter, we deployed $5.7 million to repurchase over 1.2 million shares at an average price of $4.59 per share.

Let's turn to slide 4 to discuss fourth quarter guidance. For the fourth quarter, we forecast revenue in a range of $47.5 million to $50 million, up 2% to 7% year-over-year. We expect cash gross margin to be approximately 43% to 44.5%, up year-over-year due to favorable revenue mix. Adjusted EBITDA is expected to be between $7 million and $8.8 million, representing a margin of 14.7% to 17.6%.

Let's turn to slide 5 to discuss our updated full year outlook. Based on our third quarter outperformance and fourth quarter guidance, we are raising our full year revenue guidance to a range of $198.2 million to $200.7 million, which brackets the top end of our original revenue guidance range of $187 million to $200 million. Our strong revenue performance compared to our original guidance is primarily the result of significant new business wins in our information assurance business and outperformance on TSA PreCheck transaction volumes.

We are also raising our adjusted EBITDA guidance to a range of $32.3 million to $34.1 million, significantly above our original guidance of $20.6 million to $28 million. The significant increase in adjusted EBITDA guidance is primarily the result of revenues at the top end of the range, higher cash gross margins on fixed-price programs, and better-than-expected revenue mix, partially offset by higher operating expenses.

Turning to 2027, as previously discussed on our second quarter earnings call, starting in the fourth quarter, we expect the resale of low-margin third-party software to begin phasing out. While this revenue stream contributes meaningful revenue, it carries only a single-digit gross margin and is not consistent with the margin profile we're building across the company. The phase-out of this revenue stream is forecasted to create a $32 million year-over-year revenue headwind in 2027 with only a modest profit impact.

The new business wins in our information assurance business that Griff discussed in his opening remarks represent $58 million of net new Xacta and professional services bookings in that business. We forecast those bookings will generate approximately $6 million of revenue in 2026 and $20 million of revenue in 2027 with normalized margins.

And lastly, together with our prime partners, we continue to make progress on the pending proposals that we've discussed on prior earnings calls. We still expect to hear award decisions in the coming months, which could contribute meaningfully to 2027 revenue and profits.

Let's turn to slide 6 to wrap up. The third quarter reflects the continued execution of our strategy. We're pleased with our year-to-date performance, confident in our updated full-year outlook, and remain focused on executing our strategy to drive profitable growth, generate steady cash flow, and create long-term value for our shareholders. With that, operator, please open the line for questions. Thank you.

Mark, this is Mark Griffin. And before we open up the line for questions, I wanted to have John Wood, Telos Executive Chairman, who has joined us by phone, say a few words. John?

Hey, Mark, thanks a lot. Hey, everybody. I just wanted to say thank you to all the shareholders for your participation today. I also wanted to spend just a couple of minutes to reflect on the decision that was made by Telos and me to move to an executive chairman function. You know, Mark and I have worked together for over 35 years. I've gotten to see him work in very difficult situations, very interesting situations, and really, really big opportunities. I personally believe we're at that stage where we have great big opportunities in front of us. And I asked Mark whether he'd be willing to take on the role of CEO because I was that sure he could do it for me.

As many of you know, I've been CEO for many, many years. And I unfortunately made this decision with a little bit of heartburn because it meant that I had to go deal with some personal issues. And one of those personal issues was my health. I've had to go to the hospital and deal with my heart and some other things. It's been a really big deal for me. So again, I'm not going anywhere. I plan on being a shareholder and continue to be a shareholder of size over the coming years. So again, thank you so much.

And what Mark is doing around identity as a service with TSA PreCheck and what we're doing around our AI activity with Xacta.ai is nothing short of a miracle in terms of the time it takes to get these jobs done. So anyway, best of luck, guys. I have complete faith in Mark, Mark Bendza, and the rest of the team, because I think they're really capable and they're really good and they've gotten us through the hard part. Now comes the fun part. Thanks, everybody. And I'll look forward to hearing from you in the future, and feel free to reach out anytime. But as it relates to day-to-day activities and getting to those hills that we need to take, Mark's the man. See you, guys. Thank you.

[Operator Instructions]

Our first question comes from Rudy Kessinger with D.A. Davidson.

Hey, guys. I wanted to dive into these new business wins, $58 million in new business wins. Could you share a bit more color on these wins, just with respect to how recurring they are in nature versus more one-time, project-oriented wins? Just trying to get a sense of that $20 million in revenue you expect for '27. Is that a recurring $20 million we should expect well into the future? Or is there any one-time kind of contract stuff in there?

Hey, Rudy, Mark Griffin. These are definitely recurring-type awards. So we put out press releases, as you know, and you saw the size and number of these. So these are customers who have Xacta, whether it be the base core product of Xacta 360 or the IO, and in many cases, they're adding the AI component to it. So they see the value and the efficiency that they're getting for these products. So you'll see these recurring or renewals coming up for the foreseeable future. So we're very proud of where the direction Xacta is going, but these aren't one-time deals.

Great. That's great to hear, and congrats on that. Is there any—Mark, is there any, I know you didn't give any preliminary outlook for '27, but just as we think about '27, we update our models here, you've got about a $30 million headwind from the wind down of the third-party software. You've got $20 million at least from new business wins. You have other potential new business wins you could win this quarter. How should we be thinking about 2027 revenue versus '26? Is it possible we could still see you grow the top line even with that $30 million headwind?

Yes. Yes, Rudy, I do think we have a really good shot of seeing growth even with that headwind. And the information assurance wins helped to offset a good chunk of that headwind. And those new wins are coming in at, as you can imagine, significantly better margins than the $30 million of revenue that's going away. And then, as you referenced, we have significant additional opportunities to add revenue through ongoing strength in information assurance new wins next year, as well as the other submitted proposals that we've talked about on prior earnings calls.

Okay. And then last one for me, just any updated color on maybe gross margins in the next year and what those might look like on a full-year basis, and particularly in the second half, once you renew the TSA PreCheck contract?

Yes. Yes, so we'll dive into more detail on the March earnings call, but just to reiterate a couple of things that I said on the last earnings call. The elimination of the IDEM's third-party software, that should give us about 600 basis points of gross margin lift on a full-year run-rate basis. And then in addition, TSA PreCheck in the second half of 2027, we're expecting about 400 basis points of sequential margin improvement from the first half of '27 to the second half of '27. So by the time we get to the second half, it could be as much as 10 percentage points of margin lift from those two items. Now, between now and then, of course, there's going to be a bunch of other puts and takes, but those are two notable items from a margin accretion perspective.

Okay. Thanks for taking my questions, guys. Congrats on the quarter, and Mark, congrats on the new CEO role as well.

Thanks, Rudy.

Our next question comes from Erik Suppiger with B. Riley Securities.

Yes. And to John, we wish you the very best, and congratulations, Mark, and congrats on a great quarter for getting out of the box. First off, on the $33 million, how much of that is falling into Q4 and then the rest all hit? Can you talk about how the trajectory is in '27?

Yes, so in terms of the year-over-year headwind, in each of the first and second quarters, there's about $7.5 million to $8.5 million of revenue headwind. And then in the third quarter next year, that steps up to closer to $10 million. And then in the fourth quarter, it's a little under $6 million.

Okay. Okay. And Mark, are there particular changes that you anticipate making in light of your position? Are there strengths that you bring or are there any strategic changes in strategy that you plan to implement any different than what had already been underway?

Hello, Eric. The current strategy and vision that we have in place is working for us currently. You've seen significant growth this year, the expansion as we continue to roll out sites and perform on TSA PreCheck. So the identity business is performing well. With the Xacta and the Xacta.ai component and the adoption we're now seeing from multiple agencies in the GRC market, things are working well. So no, no immediate changes. What John and I have worked together for 35 years putting in place is showing progress. We'll continue to refine and continue to look at additional AI adoption throughout the company. But right now, the cornerstones are the Telos ID business area and the Xacta areas where we're seeing great pickup right now. So we expect that growth momentum to continue into '27.

Very good. Thank you.

Our next question comes from Matthew Calitri with Needham & Company.

Hey, guys, this is Matt Calitri over at Needham. I'd like to echo my congrats to Mark and best wishes to John. I want to make sure I'm clear here. So the Xacta wins in the quarter, which is great to see, obviously, those are completely separate from the pipeline proposals we've talked about in past quarters?

Yes. Hello, Matt, Mark Griffin. Yes, they are separate from what we had referenced in previous quarters. So they are generated and won, but they are different than the pipeline that we previously talked about.

Okay, and so what does—well, I guess like you alluded to the FedRAMP authorization and some of the differentiation there. What exactly is driving that strength in Xacta, and what do you see in that pipeline continuing forward?

Primarily what we're seeing in that pipeline is efficiency, automation, not just process improvement. So it's the proliferation of the product building upon the Xacta 360 and the Xacta.io platform. And when you introduce AI, you get further efficiencies and manpower savings. And so the customers are seeing the value for this area, other than just pedestrian compliance software automation. And when you rack and stack our solution against the competitors, we're seeing customers themselves evaluate and think highly of the solution, which is signified by the recent contract wins. And the pipeline is still robust, and we'll see additional wins as we move forward.

Awesome. Thank you so much.

Our next question comes from Nehal Chokshi with Northland Capital Markets.

Congratulations on an astounding beat-and-raise quarter. Congratulations, Mark, and best wishes, John. Guys, it feels like every week you're putting out a press release announcing a new Xacta 360, IO, or AI win here. What's the catalyst here that appears to be driving this massive wave of wins?

Hello, Nehal, Mark Griffin. The catalyst is when we launched the AI product last year in the September timeframe, we had to educate and let the customers kick the tires on the solution and start seeing firsthand the value of it. And once we started, it started gaining excitement in the community and the users of the solution. And so it's taken a little bit of time to get these customers to embrace the solution, but once they did, they started issuing their RFPs and their quotes, and we started to respond to those, and the excitement around the product is continuing. So we have a few more opportunities that we hope land this year, and then the pipeline for 2027 is also full of opportunities. So initially, you go back to your current customer suite, and you show them the enhancements and the dashboards and the efficiencies they can gain by the tool. And once they start seeing that, and then the users start seeing how easy it is to adopt and implement and how much better it is than our competitors' solution, it kind of sells itself at that point.

Got it. That's fantastic. Just to be clear, that net new revenue, does that include value from renewal, or is that just purely upsell?

It's all new revenue.

Okay, got it. And then the implied incremental EBITDA margin that you're guiding for calendar '26 equates to a range of 78% to 96%. Can you help explain why it's so high? I mean, it's great, but we'd love to understand why it's so high.

It's primarily driven by—well, it's a couple of things. The incremental revenue itself is high-quality, high-margin revenue with really high incremental margins. And our OpEx is also down slightly year-over-year.

So as we think about how these wins layer into revenue for not just '27, but '28 and et cetera, right, is that the type of incremental EBITDA margins we should be thinking about from this incremental stream that's turning on?

I don't think I want to get into too much margin-level detail on a specific revenue stream, but I think what we've shown over the last couple of years is that we have a lot of operating leverage in our OpEx. And as we bring on the higher-margin revenue streams, we're able to book them at very attractive incremental adjusted EBITDA margins. So yes, so we feel really good about that. Obviously, there's maybe a lot of puts and takes between now and the end of next year, so I don't know that I can really isolate the variable fully. But yes, I think we've been showing that we can grow the top line at very attractive incremental margins.

Great. Thank you. Congratulations.

Thanks, Nehal.

This will conclude the question-and-answer session. I will now turn the call over to Mark Griffin for closing remarks.

Thank you, Operator, and thank you to everyone who joined us today. We are pleased with the progress Telos is making toward building a stronger, more profitable, and more cash-generative business. We are bringing together our capabilities across cybersecurity risk, identity, and related security services to address the evolving needs of our customers, and we see meaningful opportunities ahead. We remain focused on serving our customers, executing well, and building long-term value. I want to thank our employees, customers, partners, and shareholders for their continued support. Thank you.

Ladies and gentlemen, that concludes today's presentation. We thank you for your participation. You may now disconnect and have a wonderful day.

This live transcript is auto-generated without human intervention or review.

Good day and thank you for standing by. Welcome to the Telos Corporation's second quarter 2026 earnings conference call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker for today, Alison Phillips, Communications. Please go ahead.

Good morning. Thank you for joining us to discuss Telos Corporation's second quarter 2026 financial results. With me today is John Wood, Chairman and CEO of Telos, Mark Bendza, Executive Vice President and CFO of Telos, and Mark Griffin, Executive Vice President of Security Solutions. I will quickly review the format of today's presentation. Mark Bendza will begin with remarks on our second quarter results and full-year outlook. We will then open the line for Q&A where John Wood and Mark Griffin will also join us.

The second 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, in the 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 Telos'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 second 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 Bendza.

Thank you, Alison, and good morning everyone. We're pleased to report another strong quarter highlighted by results that exceeded the high end of our guidance range, strong cash flow generation, accelerated share repurchases, and a meaningful increase in our full-year profitability outlook. These results reflect the strength of our business and our continued ability to solve complex mission-critical challenges for our customers. Telos helps the world's most security-conscious organizations solve those challenges by combining proven cybersecurity, digital identity, and secure networking solutions, combined with deep mission expertise and a flexible approach to addressing unique customer requirements. Our solutions strengthen security, improve operational efficiency, accelerate compliance, and help customers adapt to an evolving threat landscape.

Let's turn to slide 3. Total company revenue increased 33% year-over-year to $47.7 million, exceeding our guidance range of $44 million to $46 million, driven by stronger-than-forecasted performance in Telos ID. GAAP gross margin was 35% and cash gross margin was 40.6%, both above our expectations, reflecting disciplined execution across large programs in Telos ID. As a reminder, given the diversity of our revenue streams, gross margins will fluctuate from quarter to quarter based on revenue mix.

Adjusted operating expenses declined by more than $800,000 year-over-year, but were approximately $500,000 above guidance assumptions, primarily reflecting higher TSA PreCheck marketing activity and incentive compensation accruals. Adjusted EBITDA exceeded the high end of our guidance range, reaching $6.9 million compared to guidance of $5 million to $6 million. Adjusted EBITDA margin expanded to 14.4%, up significantly from 1.1% in the prior year period.

Let's turn to slide 4 to discuss cash flow. Over the past few years, we have transformed Telos into an increasingly cash-generative business. Strong revenue growth, lower operating expenses, and disciplined working capital management have significantly improved our free cash flow margins while reducing quarter-to-quarter cash flow volatility. Operating cash flow for the second quarter was $8.8 million. Free cash flow totaled $6.6 million, representing a 13.9% free cash flow margin. This marks our sixth consecutive quarter with a free cash flow margin above 12%. During the quarter, we deployed $4.7 million to repurchase more than 1 million shares at an average price of $4.50 per share.

Let's turn to slide 5 to discuss our third quarter guidance. For the third quarter, we forecast revenue in a range of $49.2 million to $50.6 million, down slightly year-over-year due to unusually high non-recurring revenue associated with the startup of a new program in the comparable period of 2 years, last year. Excluding the year-over-year differential in non-recurring revenue, third quarter revenue guidance implies 6% growth at the midpoint. We expect cash gross margin to be approximately 37.5% to 38.5%, reflecting the anticipated effects of contingency reserves on fixed-price contracts and normal fluctuations in revenue mix. Adjusted operating expenses are expected to be approximately $400,000 lower than the prior year. Adjusted EBITDA is expected to be between $6 million and $6.8 million, representing a margin of 12.2% to 13.4%.

Let's turn to slide 6 to discuss our updated full-year outlook. Based on our strong first half execution, we are raising our full-year profitability outlook. We're increasing our adjusted EBITDA guidance to a range of $23.6 million to $28.6 million, up from our previous guidance of $20.6 million to $28 million. We're also raising our adjusted EBITDA margin outlook to 12.6% to 14.7%, representing an improvement of approximately 70 to 160 basis points versus our prior forecast. In addition, we are raising our full-year cash gross margin outlook to 39% to 40% up from our previous forecast of 38.2% to 39.5%, while lowering our adjusted operating expense forecast by approximately $1.3 million.

Our full-year revenue outlook is now $187 million to $195 million. Starting in the fourth quarter, we expect the resale of low-margin third-party software to begin phasing out. While this revenue stream contributes meaningful revenue, it carries only a single-digit gross margin and is not consistent with the margin profile we're building across the company. As a result, our revenue outlook is approximately $2.5 million lower at the midpoint than our previous guidance. Beyond 2026, the full run rate impact will be approximately $33 million of revenue per year, with only a modest impact on profit. Because this revenue stream carries a single-digit gross margin, eliminating it is expected to improve total company cash gross margin by over 600 basis points on a run rate basis, all else being equal.

In addition, we expect to realize approximately 400 basis points of additional cash gross margin accretion in the second half of 2027 after we complete the expense recognition of certain prior period investments in our TSA PreCheck program. Accordingly, we expect the combination of these 2 items to improve our cash gross margins by approximately 10 percentage points during the second half of next year, all else being equal.

Before I conclude, I'd like to spend a few minutes discussing growth and new business opportunities. On our last earnings call, we mentioned that we had submitted proposals representing nearly $500 million in total contract value and expected the government to make award decisions during the second half of 2026. We continue to expect award decisions in the second half of the year. Consistent with prior quarters, the timing of contract awards is determined by our government customers and may vary based on their priorities and procurement schedules. These opportunities span both our Security Solutions and Secure Network segments with a heavy concentration in Security Solutions. Beyond these submitted proposals, we continue to build a healthy pipeline while remaining disciplined in pursuing new opportunities that align with our strategic priorities.

Let's turn to slide 7 to wrap up. The second quarter reflects the continued execution of our strategy. We're delivering profitable growth, generating consistent free cash flow, and allocating capital in ways that we believe create long-term shareholder value. Looking ahead, we're encouraged by the opportunities in our pipeline as award decisions are made over the coming quarters. Overall, we're pleased with our first half performance, confident in our updated full-year outlook, and remain focused on executing our strategy to drive profitable growth, generate steady cash flow, and create long-term value for our shareholders. With that, operator, please open the line for questions.

[Operator Instructions] One moment while we compile the Q&A roster. First question will be coming from the line of [ Eric Slippinger ] of B. Riley. Please go ahead.

On the TSA PreCheck, any update on how your work with the post office is working? And then secondly, on the September quarter, the upcoming quarter, can you just discuss the kind of the nature of fiscal year-end spending? What are your expectations in terms of the health of the fiscal year-end budgets here?

Yes, hey, Eric, good morning. Thanks for the question. So this is Mark Bendza. I'll start. So first, on the TSA PreCheck program, the program is going really well. We're very pleased with it. First half market share is up significantly from the same period last year. We're expecting normal seasonality in the second half. Generally speaking, from what we've seen in the last couple of years, second half market tends to be lighter than the first half, so that's reflected in our guidance. But overall, very pleased with how that program is trending and how our market share is trending. I'll turn it to Mark Griffin to comment on postal service.

Hello, yes, you'll see in the very near future an additional couple sites with the post office that we're rolling out as part of the pilot. We're pleased with the progress we're making and we look forward to additional expansion there.

September end spending, government spending was the other question. Yes, that's right. Yes. So why don't I start and then Chris can supplement. So as we mentioned, we have a solid portfolio of proposals out pending. It's actually up a little bit from the last earnings call. Last earnings call, we were a little under $500 million total contract value. I'd say now we're a little over $500 million total contract value. Indications are still that awards on those opportunities should be decided sometime here in the second half, of course that's fully under the control of the customer.

But we're still expecting award decisions sometime here in the second half. I don't know, Mark, Chris, do you want to add to that? Yes. The award decisions still look solid in moving forward, so we still have quite a few in the pipeline that are expected to be awarded between now and the end of the government fiscal year, which is the end of September. But with the progress, it looks like, you know, Congress is making on extension of a budget, we hope to roll into the October timeframe with no lapse in additional award for the fourth quarter as well.

Okay, very good. Thank you.

Thank you. One moment for the next question. Next question is coming from the line of Matthew Calaturi of Needham & Company. Please go ahead.

I was hoping you guys could provide a little bit more color on that single-digit gross margin third-party software revenue. So understood on the margin profile, and great to see the profitability improvements you guys have been driving. But what exactly is that revenue like? Is it on the Security Solutions or on the network side? And like, how are you guys thinking about, uh, balancing growth and profitability here?

Yes, good morning Matt. Thanks for the question. Mark Bendza here. So that revenue stream is part of a much larger program within Security Solutions. There are multiple revenue streams within that program that were part of the overall when we bid for this program. Clearly that is not a revenue stream that we would otherwise pursue as a standalone revenue stream. It just doesn't align with the portfolio and the margin profile, the type of business we pursue. But because it was part of an overall program that aligned very well, the overall program aligned very well with our portfolio, that revenue stream came along with it when we won it. So that revenue stream will start to phase out in the fourth quarter.

Like I said, single-digit margin on that revenue stream. And we'll see a very meaningful cash gross margin accretion as a result of it. And then it will take, you know, because the revenue stream carries such a low gross margin, it will take relatively little additional revenue to fully offset the profit that would go away with that revenue. Does that answer your question, Matt?

Yes, yes, definitely. That makes a lot of sense. Thank you for that. Bendza, you had called out Telos ID as driving the strength in the quarter. Is there anything further you can share there of like what exactly, um, or was it broad-based strength or whatever? And is there, I know, obviously, by the nature of the name of it, there's not a ton you can share on the confidential IT security, but anything there to, like, kind of help us get an idea of how momentum is there?

Yes, in the quarter, you know, the beat above the top end of the revenue guide was primarily in our TSA PreCheck program and then our program with the Defense Manpower Data Center. Those are 2 large programs in the portfolio, both performed well relative to guidance. And then on gross margins, gross margins outperformed really as a result of just a terrific job our program managers are doing managing fixed-price contracts. Every quarter when we guide, we include in our guide some contingency on fixed-price programs. You have that in our third quarter guide as well. And then we have that in first quarter and second quarter, and then our program managers continue to do a great job managing the risk that we've added contingencies for into our guide, and so we've outperformed gross margins in part as a result of that for the last 2 quarters.

Excellent. Thanks so much.

Thank you. One moment for the next question. The next question is coming from the line of Bradley Clark of BMO Capital Markets. Please go ahead.

I just want to ask about some of the awards that, you know, remain to be determined in the later part of the year. What are some considerations or general puts and takes in these awards and how they may impact, you know, the overall pipeline, you know, growth heading into next year, either on the positive or the negative side?

Thanks for the question. Like we've talked about, it's a really solid portfolio of opportunities, both in magnitude, as well as how we are positioned on those opportunities. A lot of those opportunities are in the similar scope of work to the confidential IT security work that we've mentioned in the past, work performing for the federal government. So we do have some solid past performance history on that type of work. So we feel we're well positioned there. And given the timing of these opportunities, it's less of a P&L driver for this year, much more of an opportunity to drive P&L for next year.

Does that answer your question, Brad?

Yes, thank you.

Okay, great.

One moment for the next question, please. The next question will be coming from the line of Rudy Kessinger of D.A. Davidson. Please go ahead.

On the third-party software revenue, the $33 million. Was this part of the sector or was this separate? And when did this revenue start? I guess, was it $33 million the last several years or how long has it been in the numbers?

Yes, hey Rudy, Mark Bendza here. So yes, it is 1 of the revenue streams in that program.

And it really kicked in, I think it was... I want to say like second quarter of '25.

Okay. And so going forward, I guess, with that being out of DMDC, I'm just trying to get a sense of revenue concentration between PreCheck and that DMDC contract. I guess, so your expectation for '27 on DMDC, is it now more like adding $20 million to $30 million a year of revenue versus the prior, I think, $50 million to $75 million range. I'm just trying to get a sense of how large that contract will be with that third-party software revenue stripped out.

Yes, I'd rather not get into too much detail deconstructing individual programs, but what I can say is there's about $33 million of that single-digit margin software that will come out next year.

Okay, got it. And then lastly for me, just on PreCheck, I know you called out the upside in Telos ID, not specifically PreCheck, but just curious how the PreCheck program's been ramping, how PreCheck enrollments and renewal volumes that you guys are seeing and market share that you're getting, how that's tracking versus expectations.

Yes, program is doing great. So market share, as I mentioned earlier, is up significantly in the first half of this year compared to the comparable period last year. Last year we spent a lot of time and energy and management attention building out our network of enrollment locations. And this year we're spending much more time focused on productivity of those locations. And so in part as a function of those 2 things, both the ramp of the locations and the focus on productivity of those locations, we're seeing some pretty significant step-ups in market share year-over-year.

Got it. Congrats on the results in the quarter.

Thank you. One moment for the next question. The next question is coming from the line of Nehal Chokshi of Northland Capital Markets. Please go ahead.

Thank you guys for a strong quarter for the full year, a bit of a raise. Can you parse out the drivers of that? I think there's at least a couple here. The ongoing OpEx control, potentially the phasing out of that third-party software, and perhaps any other drivers I've missed.

Yes, so let's see, there's, well you kind of hit on them actually. Better visibility on OpEx, so we're lowering our OpEx assumption for the year. Cash gross margins are up due to outperformance in the first half, in particular, on a couple things. 1, mix, more favorable mix, and 2, outperformance on fixed-price contracts relative to contingencies we had in our guidance. Combined with taking out some of the lower margin revenue in the fourth quarter. A combination of all those things allowed us to take up our cash gross margin guidance. And then a very modest tweak at the midpoint of the revenue range, primarily driven by the elimination of low-margin software in the fourth quarter.

Okay, great. And just to be clear, the non-recurring revenue from 3Q '25, that they normalize out and would then say that, oh, revenue would be up, I'm sorry, from 3Q '25, if we take it out, normalize that, say, okay, the revenue guide would be up 6% year-over-year. Is that non-recurring revenue the same as the third-party software that's being phased out in the fourth quarter?

No, it's different actually. That was some short-term non-recurring revenue associated with the startup of a new program. So, it's a different revenue stream.

Got it. Okay. Got it. Okay. All right. All right. And then you are going down half a million Q-over-Q for Q3 versus a $2 million midpoint increase in... Presumably that's mix, but if there's anything else going on, please let us know.

The main driver there really is, we're guiding cash gross margin down in the third quarter. And it's really a function of a couple of things. It's 1, the contingency that I mentioned, the fixed-price contract, we put that in our guide every quarter and our program managers continue to outperform. We guided in both the first quarter and the second quarter, cash gross margins in the high 30s ended up coming in low 40s. Third quarter, you know, we're guiding again kind of high 30s, in part due to those contingencies. We'll see how that goes in the third quarter here.

But then also we do have some seasonal mix impact, in particular from TSA PreCheck that I mentioned earlier. We've been noticing in recent years that second quarter tends to be lighter than the first quarter, so we've embedded that in our guide. We'll see if that seasonality holds this year. Maybe it'll outperform this year. We'll see what the market does. But we wanted to make sure that we at least reflected that in the guide.

All right, great. And then as you pointed out, your free cash flow margin has significantly improved over the past 6 quarters, consistently above 12% or above 12%. And from what I understand, I think that's a premium free cash flow margin to your defense contracting peers. So a couple of questions behind this point. 1, what are the fundamental drivers of the premium free cash flow margins? Is it simply expense control or is this a reflection of something else, such as having migrated from being a cost-plus to a fixed-price contractor over the multiple decades that Telos has been in existence for?

Yes, it's a good question. I'd say there are a couple of drivers there. Our cash gross margin profile is much better than a lot of those companies that you're referring to and that's a function of in part years of investment in IP for some of our businesses. That's 1. 2, we shifted from much more of a cost-plus model to much more of a fixed-price model many years ago. And so we take more risk than some of those other companies and we are appropriately compensated for taking that risk.

And I say also, you know, more recently, you know, we've done a lot of work on right-sizing our cost base over the last 3, 4 years. I think we've gotten that to a much better place now. I'd also say we're much more of a capital-light business model than other folks. We carry a lot less PP&E than CapEx. And then lastly, we've done a ton of work in the last, call it year and a half, 2 years around working capital. Getting our collections aligned within the quarter with our payments, to suppliers and subcontractors. So there are a lot of things that went into driving those free cash flow margins to where they are today, and we're very pleased with them.

Great. So given this now proven premium free cash flow margin over peers, one would think that Telos becomes an attractive target to some of these larger peers. So what is Telos's, Telos Board's receptivity to this potential?

Yes, so that's a good question and we've been getting that question a lot lately, especially from investment bankers and sponsors. Listen, we're laser-focused on maximizing value for our shareholders, and I think you've seen that over the past, in particular, over the past couple of years. We've been able to create a lot of value organically. And I think that cash flow slide in the earnings deck that you referred to tells the story quite well. We've driven revenues higher, OpEx lower, excellent cash generation, consistent share repurchases, and we forecast those trends will continue. But if a change of control opportunity clearly represented a superior path to create value for our shareholders, we'd seriously consider it.

Great. Thank you very much.

Thank you. And there are no more questions in the queue. We will now turn the call back over to management for closing remarks. Please go ahead.

Thank you, Operator, and thank you everyone for joining us today. We're pleased with our first half performance, 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 addition, we hope to speak with many of you at the D.A. Davidson conference tomorrow, the BMO Technology and Innovation Leaders Conference on November 12th, and the Needham Virtual Tech Week on November 18th through 20th. Thank you.

This concludes today's program. Thank you so much for joining. You may now disconnect.

Good day, and thank you for standing by. Welcome to the Telos Corporation First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker for today, Allison Philipp, please go ahead.

Good morning. Thank you for joining us to discuss Telos Corporation's First Quarter 2026 Financial Results. With me today is Mark Bendza, Executive Vice President and CFO of Telos, and Mark Griffin, Executive Vice President of Security Solutions. Let me quickly review the format of today's presentation. Mark Bendza 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 Telos Investor Relations website. for 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 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 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 Bendza..

Thank you, Allison, and good morning, everyone. Before we begin, I'd like to address our April 29 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 Shawfield, has assumed the role of Chairman of the Board. In addition, the company's 3 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 3. 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.

GAAP 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%. 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 4 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 2 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 multibillion-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 time lines 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 [indiscernible] develop and selectively advance additional opportunities from our pipeline. With that, let's wrap up on Slide 5. 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 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.

[Operator Instructions] And our first question today is coming from the line of Matthew Calitri of Needham.

And great to see the the strength in security this quarter and see the press release quote that primarily the expansion has been a large program in Telos ID. Is there any more color you can give there on where you saw strength and I guess, just general market sentiment.

It's Mark Bendza 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 pre-check our DMDC program, which we also refer to as IT GEMS performed very well.

And the body of work that we referred 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. Yes. No, that's great to hear. And then I guess with the strength, like why not take up the guide here? And I know you mentioned like one extra quarter visibility still early in the year. Totally understand that. But like with the -- 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?

Yes. 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 Griffin and I have worked together for several years now. We've been attached at the [indiscernible] 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 and the performance we're announcing today. Regarding guidance, listen, it's a fair question, and 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, that said, we also want to remain disciplined about how we manage that outlook. And we issued full year guidance on March 16, that's less than 2 months ago. It's kind of peculiar aspect of the calendar. Fourth quarter earnings are announced unusually late in the quarter. And then first quarter earnings are reported 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. We feel it's only prudent to lock in an additional quarter of performance before we formally revise revenue and adjusted EBITDA estimates for the year. And if you look back to 2023 was the prior -- the previous year where we announced a full year outlook. And that year, 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 raise third quarter call, we beaten raise and then the final fourth quarter call would be begin. So it's an approach to a full year outlook that we think serves us well.

Awesome. And sorry, I should have led with this, but our thoughts are with John too, and wish him this per recovery.

Our next question is coming from the line of Erik Suppiger of B. Riely Securities.

Yes. 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? .

Yes. Erik, so on PreCheck, listen, your PreCheck is an important program for us. It's 1 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 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?

Sure. Yes. So seasonality typically we see enrollment as being seasonally lower in the second half. That's kind of the 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 exec in the quarter?

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

Sure, Eric. Mark Griffin. So we have currently sold and installed over 400 licenses of Exact AI. We initiated interest and adoption within our existing installed base and expect additional sales within the intelligence community, the federal civilian government and department award. 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 the 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 to date. .

Our next question is coming from the line of Nehal Chokshi of Northland.

Yes. Thank you. Congratulations on the great quarter. Our thoughts are ready with John, hoping him speed 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, do you feel like it has a higher probability of win rates than what you would typically assume for awards that are at that stage. Is that correct?

Yes. So Nehal, I think the way I would categorize it is a good chunk of 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 to our capabilities. And it's -- it's kind of a mission set that I would say is maybe a newer mission set for the government and 1 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 -- our current estimate is that these are awards that we'll heat 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 DMDC prime partner?

No. These are -- this is a different set of proposals.

Got it. Okay. Is there any bid that represents more than 10% of that $500 million of outstanding proposals that you expect to be awarded in [indiscernible]

Two that are around $90 million, and then there are a couple that are small, maybe around $3 million. And then the rest are in similar size of a few tens of millions.

Got it. And these are typically 5-year contracts that you're bidding on, correct?

These are a little shorter, typically. It's a mix, but the lion's share of them, I'd say, are like 2 years.

Got it. Okay. Great. My last question is now that you guys are at 500 stores on TSA pre-check -- is market share now at your maximal levels that you would expect? Or is there a lot more to go? And if so, how will we get there?

Yes. So there is more growth to be had in that program, I think, really a couple of ways. First, continuing to optimize volume in the locations that we have opened 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, 1 through University, 1 directly in an airport. Is there additional partnerships beyond those that you're contemplating?

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

Our next question is coming from the line of Rudy Kessinger of DA Davidson.

Great. 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 2 months since you gave the initial full year guide. Putting aside the fact that you didn't tweak the full year guide at all expect 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 contribute meaningful revenue upside this year? Or would anything awarded in the second half likely contribute revenue mostly in 2027.

Yes. Listen, we have a pretty substantial portfolio proposals that are submitted and pending award. If 1 or 2 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 of months. And so yes, 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 flow, just any color on expectations for the remainder of the year? And then with the increased pace of buybacks, I guess any kind of further details you can provide on that, maybe just relative to the pace of buybacks in Q1 or the 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. Yes. 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%. And -- so I would expect free cash flow margin 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.

And there are no more questions in the queue. I would like to turn the call back over to Mark Bendza 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, help us speak with many of you at the Needham Technology Conference on May 14 and the Northland Growth Conference on June 23. Thank you.

Thank you so much for joining today's program. You may now disconnect.

Good day, and thank you for standing by. Welcome to the Telos Corporation Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] 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 Wood, Chairman and CEO of Telos; Mark Bendza, Executive Vice President and CFO of Telos; and Mark Griffin, Executive Vice President of Security Solutions.

Let me quickly review the format of today's presentation. Mark Bendza 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 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 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 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. 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 million to $75 million to support our capital deployment activity.

With that overview, let's turn to Slide 3. 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 million to $46.3 million. 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 $1.5 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 noncash 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 reach 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 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 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 million 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 4 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 $164.8 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% 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%, 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 $21.3 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 5 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 million 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.

Thanks, Mark. Before I wrap up, I want to spend a few minutes on where we are as a business and where we're headed. As Mark noted, 2025 was an exceptional year financially, but the numbers reflect something much more fundamental, and that is the investments we've made in our people, our systems and our customer relationships are paying off. Our Security Solutions segment now represents over 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 data sets 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 betting 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're 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're 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're 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 $4.2 billion. 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'd like to wrap up on Slide #6. In summary, 2025 was a transformational year for Telos, 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 enabled us to drive further operating leverage and adjusted EBITDA margin expansion as we scale. In short, we believe our strong program edge execution and expense discipline are creating a business that is increasingly profitable, cash generative and positioned for the long-term value creation for our customers and our shareholders.

With that, we're happy to take questions.

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

[Operator Instructions] Our first question is going to come from the line of Zach Cummins with B. Riley Securities.

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's largely just driven by expansion with existing programs. So can you talk about maybe what's going on in the pipeline? It sounds 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'll turn it over to Mark Griffin for comments on the pipeline. So first, we're very encouraged by how our existing programs have evolved since November when we originally indicated $180 million of revenue in 2026. As we said in the script, we've grown the confidential IT security work that we're performing for the federal government. That's 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's a very encouraging development.

Second, our IT GEMS program continues to ramp. We will continue to ramp into 2026. There are revenue streams within that program, but we had a partial year of revenue last year. So we get a full annualization at this coming year in '26. And based on orders that we've received in that program since November, we're getting more and more visibility into how 2026 is shaping up for that program. So that's trending extremely well also.

And then lastly, on TSA PreCheck, transaction volumes have been trending very well for us since November as well as market share gains, so we've improved our outlook for that program as well. So the good news, as you said, that $187 million to $200 million is primarily a function of existing programs and is contingent on -- there's very little contingency in terms of additional new business go get to achieve those numbers. But regarding the pipeline, I'll turn it over to our Mark Griffin.

Look, Zach, as John mentioned, there is a significant value of the pipeline. The analysis that we've done to date, about 20% of that value that we talked about is in the first half of this year. That gives us a good line of sight on additional opportunities that we would then also bring into the year. So it's a mixture of the pipeline across the different business lines. The majority is still within the Security Solutions, but still supported by Secure Networks as well. So we're very bullish on the pipeline right now with a good chunk of it in the first half of this year from an award point of view.

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 kind of the key puts and takes on why we're seeing a little bit of compression in the assumed gross margin this year versus 2025?

Yes. So historically, I mean, if you look back over the last kind of 5 years, our weighted average gross margins are typically in the upper 30s. That's what you're seeing for 2026. But the year-over-year dilution in '26 is really driven by kind of a few key things. So first, the third-party hardware and software content on our IT GEMS program represents the lowest margin revenue streams in our portfolio. That revenue statement is growing year-over-year, as I indicated. And so you're 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 you're kind of getting some artificial gross margin pressure from that GAAP accounting phenomenon, that alone is a couple of hundred basis points into 2026.

And then 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. What I'll also point out is, although cash gross margins are forecasted to contract in 2026, adjusted EBITDA margins are forecasted to expand. And that's a function of, of course, top line growth, lower OpEx, all lining up nicely to drive adjusted EBITDA margin expansion.

Our next question comes from the line of Matt Calitri with Needham & Company.

This is Matt Calitri at Needham. 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 experienced, I'd say, very little to no revenue off in a typical year on Xacta renewals, generally speaking, year-over-year. So as we forecast from 1 year to the next, renewals tend to be kind of 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 [Technical Difficulty]

Yes. Matt, you're breaking up a little bit, but I believe your question was what are we seeing in terms of Xacta AI demand, attach rates, volume of conversations with new prospective customers.

So our plan -- this is John Wood. Our plan is to go after existing customers who already use Xacta to start with. And there, we're in the tens of millions of dollars of opportunities, several tens of millions of dollars of opportunities. And I think our customers are really excited because if they're able to see the kind of outcomes that we've 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.

Our next question comes from the line of Rudy Kessinger with D.A. Davidson.

Apologies if this might have been asked, I had to drop off for a bit here and jump back on. In the '26 guide for the revenue growth, how much of that revenue growth is tied to the one large DMDC contract?

The one large DMDC contract, I would say it's about -- let's call it -- well, relative -- let me say this way, relative to the $180 million that we mentioned in November, it's roughly, let's call it, 1/3 of the improvement from the November outlook.

Okay. That's a good way to think about it, I think. So there's certainly some new business win contribution in there. Okay. And then I guess for this year, I guess, as you look at the pipeline, I guess, realistic pipeline that you could potentially win this year in terms of revenue contribution this year or into '27? I guess what does that pipeline look like today? And how many large, highly likely deals do you have in that pipe?

Rudy, Mark Griffin. In 2026, we have -- that are supposed to be awarded in 2026. There are about 64 opportunities that are supposed to hit. 34 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 time frame. And so it's, again, based on the timing of that and the rollout of that, again, you're 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 in the improved EBITDA margins as well. At the same time, gross margin, even your cash gross margin continues to come under some pressure. It's 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 just how should we think about that line longer term?

Yes. So really, some of the commentary I've made in the past, and I'll reiterate today is that we do have a lot of different revenue streams and a lot of different margin profiles. And so quarter-to-quarter, year-to-year, total company gross margins will fluctuate based on mix. The margins that we're guiding for '26 on the surface, are in line with where margins have been over the last 5 or 6 years. Keep in mind, as I mentioned earlier, there's about 200 basis points of kind 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. So if you adjust for that, we're still in that kind of low 40s cash gross margin. So I think we're in a really good spot.

In terms of the reason the dilution that we've seen over the last kind of few quarters associated with the IT GEMS revenue mix, I'd say this year, we should pretty much be at the full dilutive effect of that revenue stream, that revenue stream will hit a full year run rate this year. Now quarter-to-quarter, year-to-year, that revenue stream can fluctuate up and down a little bit. It's just the nature of that revenue stream. But this will be the first year where we have a full run rate of that lowest margin revenue stream. Does that help to answer the question, Rudy?

Yes. Yes, it does.

And I'm 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, a decades-long track record of serving the world's most security-conscious organizations, Telos is a really strong foundation for the future. So again, thank you.

This concludes today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.

Good day, and thank you for standing by. Welcome to the Telos Corporation Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your first speaker today, Allison Phillipp, Director of Communications. Please go ahead.

Good morning. Thank you for joining us to discuss Telos Corporation's Third Quarter 2025 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. Mark will begin with remarks on our third quarter 2025 results. Next, John will discuss business highlights from the quarter. Then Mark will follow up with fourth quarter guidance before turning back to John to wrap up. We will then open the line for Q&A, where Mark Griffin, Executive Vice President of Security Solutions, will also join us.

The third 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 2025 and 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 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 in isolation from GAAP results. You can find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP results in our third 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. I'm pleased to say that we have a lot of good news to share again this quarter. Before we get into the details on the slides, let's run through the main points upfront. Our business has been scaling in a very meaningful way this year, leading the way our major programs in Telos ID layered on top of a strong base of recurring revenue streams with high renewal rates from sophisticated government and commercial customers throughout our information assurance, and secure communications portfolio.

Our operational and financial performance inflected in a very positive way in the first quarter of this year with a return to revenue growth, profitable adjusted EBITDA and strong cash flow. That trend accelerated in the second quarter and then stepped up significantly in the third quarter. Our third quarter results significantly exceeded expectations, and we're raising our outlook for the second half of 2025. Our updated outlook for the second half reflects higher revenue, adjusted EBITDA and adjusted EBITDA margin than previously indicated as well as a more favorable weighting of second half revenue to the third quarter. In addition, cash flow remains very strong, and we continued share repurchases in the third quarter. Lastly, we have a robust portfolio of existing programs that we forecast will deliver double-digit growth in revenue and adjusted EBITDA again next year, even before the addition of any new business wins through the end of 2026.

With that introduction, let's get into more detail beginning on Slide 3. Telos has again overdelivered on key financial metrics in the third quarter, exceeding both revenue and profit guidance. Revenue grew 116% in the quarter to $51.4 million, above our guidance range of $44 million to $47 million. Telos ID drove the outperformance above the top end of the guidance range. GAAP gross margin was 39.9%, and cash gross margin was 44.8%, both above our guidance range due to outperformance in all lines of business and also well above the gross margins that we reported in the second quarter. As I said last quarter, given the breadth of revenue streams in our portfolio, gross margins will naturally fluctuate within our historical range from quarter-to-quarter based on revenue mix. As you'll see in our fourth quarter guidance, we expect margins to mix lower sequentially next quarter.

Adjusted operating expenses in the third quarter were approximately $500,000 better than guidance due to ongoing cost discipline throughout the company. As a result of better than forecasted revenue, gross margin and operating expenses, adjusted EBITDA also exceeded the top end of our guidance range. Adjusted EBITDA was $10.1 million, above our guidance range of $4 million to $5.7 million. Adjusted EBITDA margin was 19.6%. And incremental adjusted EBITDA margin was 51.5%, or put differently for each dollar of revenue growth, $0.51 converted to adjusted EBITDA. Lastly, in part as a result of our company-wide working capital initiatives, we delivered another quarter of robust cash flow. Operating cash flow in the quarter was $9.1 million. Free cash flow was $6.6 million or a 12.8% free cash flow margin. And we deployed approximately $3.6 million to repurchase over 584,000 shares at a weighted average price of $6.23 per share. Since our fourth quarter 2024 earnings call, we've been saying that we expect significant year-over-year improvements in revenue, profit and cash flow for the full year 2025.

So let's turn to Slide 4 for a brief review of our year-over-year performance in the first 9 months of the year. We've discussed the business and programmatic drivers behind our year-over-year performance for the first 9 months in each of our quarterly narratives, so I won't repeat them here. But I do think it's worthwhile to quantify the pronounced step-up in our financial performance during that time period on a cumulative basis. Specifically, revenue grew 44%. Cash gross margin, although fluctuating quarter-to-quarter expanded 30 basis points to 43%. Incremental adjusted EBITDA margin was 56.1% or again, put differently for every dollar of revenue growth, $0.56 converted to adjusted EBITDA. Adjusted EBITDA grew by $20.3 million and moved from a loss in 2024 to a 9.2% positive margin in 2025. Free cash flow improved by nearly $40 million and moved from a cash burn position in 2024 to a 12.7% positive free cash flow margin in 2025. And lastly, we've deployed $7.6 million to repurchase 2.1 million shares at a weighted average price of $3.69 per share.

I will now turn it over to John for an overview of recent business highlights. John?

Thanks, Mark, and good morning, everyone. Let's turn to Slide 5. First, I'm thrilled to report that we launched our new Xacta.ai product in early October and have already secured our first enterprise customer. The Telos team is extremely excited about this new technology and the opportunities it presents for our company as well as for our customers. Xacta.ai is a powerful enterprise AI software capability added to our Xacta platform, which has already proved the proven solution for cyber risk management compliance for some of the world's most security-conscious organizations. The foundation of our unique approach to AI is our ability to seed our solution with over 25 years of cybersecurity expertise. The result is a solution with the capabilities to create a true force multiplier for organizations that strive to do more challenging security work with fewer resources.

Xacta.ai has the ability to provide users with smart insights that enable quick identification and resolution of potential compliance gaps. It also supports enhanced decision-making with actionable data to accelerate compliance initiatives. Finally, in real-world testing, we've documented potential improvements in efficiencies up to 93% across cyber governance, risk and compliance, or GRC tasks in addition to savings already realized from previous Xacta versions. Again, a true force multiplier for organizations that strive to do more with less in an increasingly complex cybersecurity environment. We plan to continue to evolve our platform and our AI capabilities with increased automation as well as the expected addition of new Agentic features to further enhance effectiveness and efficiency. We're very excited about the future for our Xacta platform given this recent leap forward in the development of our product.

Second, I'll provide a quick update on our TSA PreCheck program. I'm pleased to report that we have now achieved our stated objective of reaching 500 enrollment locations this year. We currently have 504 locations across 41 states and Puerto Rico. We're pleased with this progress that we've made on this rollout as we strive to provide a convenient solution for travelers across the country and to be a trusted partner on this important national security program. Going forward, we will continue to evaluate our enrollment location network for improvements in market coverage while working with the TSA to ensure we are offering an attractive option for our customers.

I'm now going to turn the call back to Mark, who's going to discuss fourth quarter guidance. Mark?

Thanks, John. Let's turn to Slide 6. For the fourth quarter, we forecast revenue to grow 67% to 76% year-over-year to a range of $44 million to $46.3 million. We forecast cash gross margin to be approximately 40% to 41%, lower sequentially due to normal quarterly fluctuations in revenue mix as described earlier.

We forecast adjusted EBITDA of $4 million to $5.7 million or an adjusted EBITDA margin of 9.1% to 12.3%. Overall, fourth quarter guidance reflects a stronger than previously forecasted second half, a more favorable weighting of second half revenue to the third quarter and potential for short-term administrative delays due to the federal government shutdown. Compared to our commentary on our last earnings call, at the midpoint of guidance, second half revenue is now forecasted to be higher by $5.6 million or 6%. Adjusted EBITDA is forecasted to be higher by $5.2 million or 54% and adjusted EBITDA margin is forecasted to be approximately 470 basis points higher.

Lastly, we'll provide further detail about our 2026 outlook on our fourth quarter earnings call in March. But in the meantime, we currently forecast that our portfolio of existing programs will deliver double-digit growth in revenue and adjusted EBITDA again next year, even before the addition of any new business wins through the end of 2026. We forecast existing programs will generate approximately $180 million of revenue, primarily driven by growth in Telos ID partially offset by contraction in secure networks. Additional upside revenue in 2026 would come from sales of our newly released Xacta.ai software and new program wins from our multibillion-dollar pipeline of new business opportunities.

With that, I'll turn it back to John.

Thanks, Mark. Let's turn to Slide 7. To recap, our business has continued to scale in a very meaningful way this year, largely due to programs in Telos ID. We achieved a 116% year-over-year revenue growth in the third quarter and significantly exceeded revenue and adjusted EBITDA guidance. We continue to produce robust cash flow, which funded additional share repurchases in the quarter.

We are very excited about the opportunities that our new Xacta.ai solution presents for our company and for our customers. We expect that year-over-year growth will continue into the fourth quarter and are pleased to report an improved second half outlook versus the outlook provided on our last earnings call in August. And finally, we look forward to another year of double-digit growth in 2026.

And with that, we're happy to take questions.

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

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

Congrats on the strong results here. Just starting with the outlook, Mark, I think you mentioned a little bit of a headwind potentially from the government shutdown in Q4. As that pertains to potential award decisions going into 2026. Any impact to some of those decisions getting pushed a little further to the right?

Yes. So a couple of things, Zach. In the fourth quarter, the impact of the government shutdown, I'd say is, at this point, appropriately captured in our range on both revenue and adjusted EBITDA line. I'd say what we're seeing in terms of government shutdown is there's a few things. First, awards are essentially stalled for the time being and generally sliding to the right. And then there's been various other administrative delays, things around things like collections on invoices or getting renewals executed or option [indiscernible] executed impact on the P&L has been relatively modest, but it's been more administrative delays like I described in the script. And then like I said, on the award side, generally awards being delayed for the time being. John and Mark, I don't know if there's anything you want to add to that?

No, I think that's a fair way of capturing it. They will hold off on awards until the governments turn back on, but it's not -- nothing has been taken off the table.

Yes. Pipeline into '26 is still substantial. There's a lot of opportunity in there. It's still a multibillion-dollar pipeline, with a good chunk of that expected to be awarded, say, over the next 6 months with several tens of millions of dollars of revenue opportunity in 2026 on top of the $180 million from pre-existing programs.

Understood. That's really helpful. And John, I just wanted to ask you a question about your new Xacta.ai products. It seems like it's getting pretty solid traction out the gate with one major enterprise-wide deployment. I believe press released that a few weeks ago. But can you just give us a sense of maybe the initial feedback that you've been getting from the product? And what are the plans in terms of trying to scale that as we move forward into 2026?

Well, the first thing we're going to do is -- and we've been doing this is really offer it into our installed base. So customers already see value out of Xacta by itself. But when you include a RAG, which allows you to reduce the hallucinations, if you will, within a large language model, it really makes it very, very simple or much more simple for a customer to implement their needs for security and compliance because essentially, the language model itself and the RAG together generate it for the customer. And it generates it in very, very quickly. I think our test results are something like up to 93% improvement in time.

Our next question comes from the line of Matthew [ Calitri ] of Needham & Company.

This is [ Matt Calitri ] over at Needham. And congrats on the strong results. Sticking on Xacta, what is the specific impact on the shutdown and broader pressure from continuing resolution been on conversations there? And how are you commuting the value proposition of the offering amidst the uncertainty?

So this shutdown will be behind us soon. I think the issue is during a shutdown sometimes your customer is just not there because they've been furloughed. So I think there's a piece of that that's there. The good news is that previously, we have been out in front of this before we even announced Xacta.ai, showing our customer base, our installed customer base, getting their feedback, and I think people are really excited about it, honestly, because it also means that when you use Xacta.ai, you don't need the same level of professional services as you have to have used in the past.

Yes. Maybe what I'll add to that is we had a first enterprise sale to a customer before the shutdown straight out of the gate when we launched the product. Several other large customers have been very interested. Those conversations have pushed to rise a little bit as a result of the shutdown, but good traction straight out of the gate.

Yes.

That's great to hear. And then are there any other hurdles to adoption there? Or do you think we can see an inflection of sorts once budgets open up?

I don't see anything that's going to hold back from people wanting to use Xacta.ai.

Our next question comes from the line of Bradley Clark of BMO Capital Markets.

Congrats on the results. On the TSA PreCheck program, you've reached your 500 location goals for 2025. And I want to understand a little bit more sort of the plan for going forward 2026 in terms of growth of this program through other new locations or you mentioned sort of evaluating your market position. And so I just want to take a step back and now that we've reached our enrollment location target, how are we thinking about growth of this program going forward?

Brad, thanks for the question. So we are now operating at scale in that program. We've been working towards our 500 locations for some time now. We've actually now exceeded that target. So in terms of our physical location and our IT infrastructure, we are now at scale nationwide. Now that we're up and running, we will continue to evolve that network of locations, continue to develop new partnerships, continue to find new and innovative ways to reach travelers and serve travelers. So this is really just the beginning. We're really excited to be at scale. And I think there's a lot of upside over the next few years in that program. Maybe Mark, Chris might have something to add.

Bradley, yes, as a TSA expansion program, as Mark indicated, we'll continue to look for those areas that are underserved, both from a location point of view, but also those customer bases. So as indicated in the script, we will continue to look for expansion in those areas to serve the -- not only TSA, but serve the community of enrollment and renewal populations as well. So we're very excited about the expansion capabilities, and it was a great achievement. We feel to get to our 500 locations, but we'll continue to look for enhancements and expansion from there.

Our next question comes from the line of Rudy Kessinger of D.A. Davidson.

Congrats on another nice quarter here. I'm trying to think the $180 million baseline for existing programs for next year, I'm just trying to size up how much you could potentially add on top of that because if you look at 2025 and the revenue you're going to do and take out the $70 million from existing programs, the $50 million to $75 million from DMDC and then PreCheck. It seems like the actual revenue you've got this year from new business programs was pretty minimal. And I think I heard you say, several tens of million potential revenue for next year. Just how -- when will you know that? Should those be wins that will be awarded within the next few months after the shutdown is over, like how much visibility do you add to that likelihood of those deals being awarded to you, et cetera?

Rudy, Mark Griffin. Yes, the pipeline that we have is still robust and growing. And so we've seen, even during the government shutdown, the pipeline is increasing and nothing is getting canceled at this point. As Mark indicated earlier, broadly speaking, awards are just paused and kind of moving to the right, but the portfolio in the pipeline between identity in some of the projects that we feel very confident on potentially can drop in the next few months, but more likely are probably positioned more into 2026 in the first half. And so we'll see some activity there that would add to that baseline that Mark talked about earlier.

Plus additional Xacta.ai software sales.

Right.

Okay. Got it. And then my second question was on Xacta.ai. I guess if you -- like is there an upsell potential to existing Xacta customers on Xacta.ai? And if so, like what would be the minimum uplift if you're able to get adoption of it?

Yes. I don't know if you heard me say earlier, Rudy, our primary target to start is our existing installed base. And in general, I would say a great deal of excitement by our customers in the release of Xacta.ai. Unfortunately, when the government shut down temporarily, put things on pause a little bit. But now that we're seeing our way to the end of that pause and the end of the shutdown, I think it will come break backs for us.

Our next question comes from the line of Nehal Chokshi of Northland Capital Markets.

Congrats on another strong results. The $180 million baseline for calendar '26 implies what percent of the annualized full run rates for your DMDC program and PreCheck?

Nehal, I'm not going to get into programmatic detail, but what I can tell you is that $180 million, so just do the math, that $180 million implies $17 million of growth at the midpoint of our 2025 guide. That $17 million is comprised roughly of $28 million of growth at Security Solutions, net of $11 million of contraction at Secure Networks and substantially all of that $28 million growth at Solutions is coming from Telos ID, which, as you know, is the business that contains those programs.

Okay. All right. And then you also say that the pipeline can bring tens of millions to revenue for calendar '26 above the $180 million baseline. Can you walk us through how you come to that range there?

Yes. So pipeline is roughly $5 billion right now, correct me, about 1/3 of that is over the next, say, 6 months, [indiscernible] to be ordered over the next 6 months. And so at that level of award opportunity, certainly several tens of millions of that represents revenue opportunity in 2026.

Okay. And when you say tens of million, that includes the pro rating of the awards being pushed out to the right from 4Q '25 to 1Q '26 in 2Q '26?

Yes.

And Nehal, it's several tens of millions.

Yes. That's the total opportunity set, right? So the point is there's ample opportunity above that $180 million between Xacta.ai and our traditional pipeline. It's just a matter of what comes in the door and when.

Can you remind us what has been your historical win rate of what's in your pipeline?

No. We don't disclose that externally.

Okay. All right. And then last question for me is that given the 60% incremental EBITDA margin in the current quarter and 20% EBITDA margin and 13% free cash flow margin, can you share any perspective on what's the sustainable free cash flow margin for Telos then?

It's probably a little too early to forecast free cash flow margins. But what I think I'll say is at that base $180 million of revenue, again, before any new business wins, the base $180 million of revenue, we would -- we've managed -- we're targeting managing our OpEx to kind of a low double-digit adjusted EBITDA margin. So call it, 10%, 11% or so adjusted EBITDA margin as additional growth comes in above that $180 million, that adjusted EBITDA margin will run higher. But we'll toggle between additional growth investments and higher adjusted EBITDA margin depending on what that additional revenue is, what the margin profile is of that additional revenue. So that adjusted EBITDA margin can start to give you an indication of where free cash flow can trend. But we expect a very -- another good year of free cash flow in 2026.

Okay. That's really helpful. Maybe just to further the -- what you're sort of giving color around with calendar '26 in terms of EBITDA margin? And then the potential, if you win the tens of millions of opportunity from the pipeline, would drive -- you would expect incremental EBITDA margin to be above that sort of 10% to 11% baseline EBITDA margin. But it doesn't sound like you would expect 60% incremental EBITDA margins, but it sounds like you would expect somewhere like what, in the 20%, 30% range?

Yes. It's a little premature to commit to that for 2 reasons. One, it depends on what that additional revenue is and what the incremental gross margins are on that revenue. And then also how much of that we decide to commit to additional growth investments. So my point simply is there is upside to that kind of 10%, 11% base adjusted EBITDA margin. And it's just going to depend on, again, the margin profile of that additional revenue and then how much of that we hold back for some growth investment.

I'm showing no further questions at this time. I'd now like to turn it back to John Wood for any further remarks.

Thank you very much, operator. First, I just want to say thank you to everybody for your ongoing support of the company. As shareholders, we certainly appreciate your staying behind the company. And obviously, we're going to continue to be intensely focused on executing our growth plans and continuing the same trend of year-over-year growth in the fourth quarter and into 2026. So finally, with our robust and recession-resistant end markets, well-funded customers and a decades-long track record of serving the world's most security-conscious organizations, Telos has a strong foundation for the future. Thanks a lot.

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