TELOS CORP (TLS)·Q4 2024 Earnings Summary

Executive Summary

• Revenue of $26.4M came in near the top end of company guidance, with GAAP gross margin at 40.3% and cash gross margin at 47.0%—the highest quarterly cash gross margin since the 2020 IPO; adjusted EBITDA improved to a $0.2M loss, above the top end of guidance. Security Solutions grew to 83% of revenue, driving margin expansion. Positive cash flow is guided for Q1 2025, with sequential revenue growth of 7%–15%.
• Mix shift to higher‑margin Security Solutions and cost actions taken in Q3 (restructuring, portfolio pruning) drove sequential improvement in profitability; TSA PreCheck became the largest program and the DMDC program transitioned and began generating revenue.
• Near‑term headwind: year-over-year revenue declined versus Q4 2023 due to Secure Networks runoff, though margins expanded YoY from 34.3% to 40.3%. Working capital build and one‑time IT capex drove negative operating and free cash flow in Q4, but management expects reversal and positive cash generation in Q1.
• 2025 framework updated: “core” business raised to ~$70M (from $60–$65M), DMDC/DHS revised to ~$50–$75M (from $60–$85M) on first‑year revenue recognition mix; TSA PreCheck still targeting ~500 locations around year‑end. Management notes delays in some single‑award government decisions amid administration transition, prioritizing task orders in the interim.

What Went Well and What Went Wrong

What Went Well

• Security Solutions strength and mix shift: Security Solutions grew 19.6% sequentially in Q4 to $21.9M and reached 83% of revenue, driving YoY GAAP gross margin expansion to 40.3% and cash gross margin to 47.0%.
• TSA PreCheck execution and scaling: “TSA PreCheck grew quickly into our single largest program by revenue during 2024,” with enrollment centers expanded from 26 at the start of 2024 to 218 by the call; targeting ~500 locations around YE25.
• Cost discipline delivered P&L leverage: Adjusted OpEx declined by ~$2.4M sequentially, improving adjusted EBITDA from a $4.2M loss in Q3 to a $0.2M loss in Q4; Q4 margins landed at/above guidance ranges.

What Went Wrong

• Year-over-year revenue decline: Q4 revenue fell to $26.4M from $41.1M YoY, reflecting Secure Networks runoff despite stronger mix and margins.
• Cash outflows in Q4: Cash from operations (-$10.5M) and free cash flow (-$14.8M) were negative due to working capital build and one-time IT infrastructure capex; management expects reversal in Q1.
• Timing of awards: Management cited delays in single-award government decisions due to administration transition, shifting focus toward task orders; Secure Networks revenue was guided to be comparable to Q4 in Q1.

Financial Results

Quarterly trend (oldest → newest):

YoY snapshot:

Segment breakdown (oldest → newest):

Cash flow KPIs (oldest → newest):

Operational KPIs (timeline):

Notes:

• Q3 2024 GAAP GM includes impairment and restructuring in cost of sales; adjusted gross margin was 37.8% vs GAAP 13.2%.

Guidance Changes

Why changes:

• DMDC/DHS reduction reflects first‑year revenue recognition mix skewing more to software recognized over time; cash flow timing remains favorable at order fill.

Earnings Call Themes & Trends

Management Commentary

• “Fourth quarter cash gross margin of 47% was the company's highest quarter since the IPO in 2020 and full year 2024 cash gross margin of 43.7% was the company's highest since 2000.”
• “TSA PreCheck grew quickly into our single largest program by revenue during 2024… We increased our enrollment centers from 26… to 218… and continue to target 500 locations sometime around the end of the year.”
• “We have successfully transitioned the [DMDC] program and are now generating revenue… [DHS] stop work order… was lifted in January. We expect to begin generating revenue… later in 2025.”
• “Adjusted operating expenses… declined sequentially by $2.4 million… [driving] improvement in adjusted EBITDA from a $4.2 million loss in the third quarter to a $200,000 loss in the fourth quarter.”
• On DMDC revenue recognition: “Mix is more weighted to software… some recognized over a period of performance… In the first year… we'll see a partial year of revenue recognition rather than a full year… cash flow should outperform the P&L.”

Q&A Highlights

• Revenue recognition nuance for DMDC: First‑year software mix drives partial‑year revenue recognition; cash collected up front supports stronger cash flow vs P&L in 2025.
• TSA PreCheck revenue math: Management affirmed the framework of a ~$200M market with ~70% from enrollments and Telos targeting a pro‑rata share once fully ramped; current run‑rate reflects fewer sites earlier in 2024 and ongoing ramp.
• Cash flow trajectory: At breakeven adjusted EBITDA (~$155–$160M revenue, mix‑dependent), free cash flow should be positive given working capital dynamics; CFO expects 2025 working capital to more than offset ~$(8)M implied drag at EBITDA breakeven.
• Macro/government timing: With a change in administration, single awards are seeing timing delays; Telos is prioritizing task orders on existing vehicles to sustain momentum.

Estimates Context

• Wall Street consensus (S&P Global) for TLS Q4 2024 revenue/EPS/EBITDA was unavailable at the time of this analysis due to data access limits. We therefore benchmarked results to company guidance only (revenue near top end; margins and adjusted EBITDA above the top end). We will refresh consensus comparisons when S&P data access is restored.

Key Takeaways for Investors

• Mix shift is doing the heavy lifting: Security Solutions at 83% of revenue expanded GAAP and cash margins despite lower YoY revenue; this remains the core driver of profitability inflection.
• TSA PreCheck scale is the 2025 swing factor: Locations rose from 83 (Aug) to 218 (Mar); targeting ~500 around YE25, with management indicating productivity supports pro‑rata share in a ~$200M market. Execution pace and site productivity are key watch items.
• DMDC provides multi‑year visibility but P&L timing is lumpy: First‑year software mix tempers 2025 P&L vs cash; focus on cash generation (guided positive in Q1) and order flow cadence.
• Secure Networks remains a headwind near term: Program runoff continues; management is prioritizing task orders while awaiting single‑award timing normalization under the new administration.
• Cost base reset is gaining traction: Portfolio pruning and OpEx discipline drove sequential EBITDA improvement; incremental revenue should drop through more efficiently in 2025.
• 2025 framework shifts: “Core” business raised to ~$70M while DMDC/DHS revised to $50–$75M on revenue recognition phasing; monitor subsequent updates as the year progresses.
• Trading setup: Near‑term catalysts include Q1 positive cash flow delivery, TSA PreCheck rollout cadence, and DHS revenue onset; risks include government award timing and execution on enrollment site productivity.

Supporting Press Releases (Q4 context)

• TSA PreCheck expansion to 188 locations as of Dec 16, 2024, highlighting ongoing rollout pace into Q4.
• Q4/FY24 earnings announcement (logistics for IR materials).

Appendix: Cross-Reference Checks

• Q4 2024 8-K 2.02 (Ex. 99.2): full financials, segment data, non‑GAAP reconciliations, cash flow metrics, and Q1 2025 guidance.
• Q4 2024 earnings call: qualitative drivers, guidance framework updates, TSA and DMDC/DHS commentary, cash flow mechanics, and government timing dynamics.
• Prior quarters for trend analysis: Q3 2024 8-K and call, Q2 2024 8-K and call.