Good day, and thank you for standing by. Welcome to the Telos Corporation Third Quarter 2025 Earnings Conference Call. 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 with 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.

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 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.

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.

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.

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 collections on invoices or getting renewals executed or option extensions executed; the 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 government turns back on, but nothing has been taken off the table.

Yes. The 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 there was a press release 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 retrieval-augmented generation (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 simpler 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 very, very quickly. I think our test results are something like up to a 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 the continuing resolution been on conversations there? And how are you communicating 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 the right 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 in 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 the 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, and 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 and also those customer bases. So as indicated in the script, we will continue to look for expansion in those areas to serve not only TSA but also 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 have 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 and some of the projects that we feel very confident on can potentially 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 there's a great deal of excitement by our customers in the release of Xacta.ai. Unfortunately, when the government shutdown 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 back strong 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, and is anticipated 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 millions, 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 the 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 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 opportunities 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.