Telos (TLS) Q3 2024 earnings summary

Executive summary

• Q3 2024 revenue was $23.8M, near the top end of guidance but down 34% year-over-year, with Security Solutions contributing 77% and Secure Networks 23%.

• Security Solutions saw sequential growth, driven by TSA PreCheck® expansion to 173 locations and the DMDC contract ramp-up, while Secure Networks declined due to program completions.

• Restructuring actions in Q3 led to a $11.7M non-cash impairment and $1.4M restructuring charge, focusing resources on high-growth Security Solutions and discontinuing underperforming solutions.

• GAAP net loss widened to $28.1M, impacted by impairment losses and higher stock-based compensation; adjusted EBITDA loss was $4.1M, above guidance.

• DMDC program protest was resolved favorably, with revenue generation beginning; the DHS program protest is expected to resolve in Q4.

Financial highlights

• Q3 2024 gross margin was 13.2% GAAP (down from 36.0% YoY); adjusted gross margin was 37.8%; cash gross margin reached 44.0%, the highest since IPO.

• Adjusted EBITDA loss was $4.1M (margin -17.4%), outperforming guidance; adjusted net loss was $7.1M, with adjusted EPS of $(0.10).

• Free cash flow for Q3 was $(9.9)M, improved sequentially; cash and equivalents at quarter-end were $69.8M.

• Nine-month 2024 revenue was $81.9M (down from $104.3M YoY); nine-month free cash flow was $(24.9)M.

• Weighted average shares outstanding for Q3 2024: 72.3M.

Outlook and guidance

• Q4 2024 revenue guidance: $24.5M–$26.5M, representing 3%–11% sequential growth; adjusted EBITDA loss expected between $4.5M and $3.5M.

• Security Solutions revenue expected to grow low-teens% to low-20% sequentially, contributing over 80% of Q4 revenue.

• GAAP gross margin expected to expand 170–330 bps YoY; cash gross margin to expand 465–580 bps.

• 2025 expected to return to year-over-year revenue growth, with $60–$65M from existing business (excluding TSA PreCheck, DMDC, and DHS), and $60–$85M from DMDC and DHS at full run rate.

• TSA PreCheck® market share to ramp as 500 locations are rolled out by end of 2025; market size estimated at $200M.