Telos Corporation (TLS) Q2 2026 Earnings Call Summary

1Key Financial Results and Metrics

Revenue: Increased 33% year-over-year to $47.7 million, exceeding guidance of $44 million to $46 million.

Gross Margin: GAAP gross margin at 35%; cash gross margin at 40.6%, both above expectations.

Adjusted Operating Expenses: Decreased by over $800,000 year-over-year but were approximately $500,000 above guidance due to increased marketing and compensation costs.

Adjusted EBITDA: Reached $6.9 million, surpassing guidance of $5 million to $6 million, with an adjusted EBITDA margin of 14.4%, up from 1.1% in the prior year.

Cash Flow: Operating cash flow was $8.8 million; free cash flow totaled $6.6 million, representing a 13.9% free cash flow margin.

Share Repurchases: $4.7 million spent to repurchase over 1 million shares at an average price of $4.50.

2Strategic Updates and Business Highlights

Telos continues to focus on cybersecurity, digital identity, and secure networking solutions, emphasizing its ability to address complex challenges for security-conscious organizations.

The TSA PreCheck program and the Defense Manpower Data Center (DMDC) contract were highlighted as key drivers of revenue growth.

The company is transitioning away from low-margin third-party software revenue, which is expected to phase out in Q4 2026, improving overall cash gross margins.

3Forward Guidance and Outlook

Q3 2026 Guidance: Revenue expected in the range of $49.2 million to $50.6 million, with cash gross margin projected at 37.5% to 38.5%. Adjusted EBITDA is forecasted between $6 million and $6.8 million.

Full Year 2026 Outlook: Adjusted EBITDA guidance raised to $23.6 million to $28.6 million (up from $20.6 million to $28 million). Full year revenue outlook adjusted to $187 million to $195 million.

The company anticipates a significant improvement in cash gross margins in 2027 due to the elimination of low-margin revenue streams.

4Bad News, Challenges, or Points of Concern

The company expects a decline in revenue year-over-year for Q3 due to the absence of nonrecurring revenue from a new program started in the previous year.

The transition away from low-margin third-party software may result in short-term revenue impacts, but is expected to enhance profitability in the long run.

There is uncertainty regarding the timing of government contract awards, which are subject to customer priorities and procurement schedules.

5Notable Q&A Insights

TSA PreCheck Program: Management reported strong performance and increased market share, with expectations for normal seasonal fluctuations in the second half of the year.

Third-Party Software Revenue: This revenue stream is part of the DMDC contract and has been in place since Q2 2025. It carries a single-digit gross margin and will be phased out, positively impacting overall margins.

Future Contract Awards: The company has a solid pipeline of proposals exceeding $500 million in total contract value, with expectations for award decisions in the second half of 2026.

Cash Flow Drivers: Management highlighted the shift to fixed-price contracts and improved working capital management as key factors driving enhanced free cash flow margins. Overall, Telos Corporation reported a strong quarter with significant revenue growth and improved profitability metrics, while also navigating challenges related to contract awards and transitioning away from low-margin revenue streams.