Telos Corporation beats earnings expectations. Reported EPS is $-0.08, expectations were $-0.11. Telos Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and thank you for standing by. Welcome to the Telos Corporation First Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised, this conference is being recorded. I would now like to hand the conference over to your speaker today, Allison Phillipp. Please go ahead.
Allison Phillipp: Good morning. Thank you for joining us to discuss Telos Corporation's first quarter 2024 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 first quarter 2024 results. Next, John will discuss business highlights from the first quarter. Mark will follow this up with the second quarter guidance and insights on the financial outlook for the company before turning back to John to wrap up. We will then open the line for Q&A for Mark Griffin, Executive Vice President of Security Solutions, will also join us. The earnings press release was issued earlier today and is 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 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 earnings press release, 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 to 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 earnings press release 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 for the next year on our company website under the Investor Relations link. With that, I'll turn the call over to Mark.
Mark Bendza: Thank you, Allison, and good morning, everyone. Let's begin today on Slide 3. I am pleased to report that Telos has again over delivered on key financial metrics in the first quarter, exceeding both revenue and profit guidance. Overall, it was a straightforward quarter with better than guided performance across key financial metrics, leading to a meaningful beat on profit and cash flow. Let's get into some of the details. We delivered $29.6 million of revenue in the first quarter or approximately $600,000 above our guidance range of $28 million to $29 million. Security Solutions delivered $18.6 million of revenue, which was above the top end of our guidance range due to modest out-performance across all lines of business.
Secure Networks delivered approximately $11 million of revenue, in line with the top end of our guidance range. GAAP gross margin was 37%, above our guidance due to cost management on fixed price contracts and security solutions, better than expected utilization of direct labor and secure networks and a slightly better overall weighting of revenues to our higher margin security solutions business. Security Solutions generated approximately 63% of total company revenues in the first quarter of 2024 and versus 56% in the first quarter of 2023, a favorable variance that is expected to widen as the year progresses. Cash gross margin was a notable 42.2%, expanding 249 basis points year-over-year and representing our second highest quarter since our IPO in 2020.
Revenues and gross margins both above forecast resulted in gross profit above what was incorporated into our adjusted EBITDA guidance range. In addition, R&D and SG&A expenses were better than forecasted due to timing of spending and higher than forecasted capitalization of software development costs. As a result, adjusted EBITDA also exceeded the top end of our guidance range. Adjusted EBITDA was a $2.3 million loss compared to our guidance range of a $5.5 million loss to a $5 million loss. Lastly, cash flow from operations was a $350,000 outflow and free cash flow was a $3.6 million outflow. Free cash flow improved from a $4.1 million outflow in the first quarter of 2023. So overall, it was a clean quarter with solid execution throughout the portfolio.
I will now turn it over to John for an overview of business highlights. John?
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John Wood: Thanks, Mark, and good morning, everyone. Let's turn to Slide 4. As communicated on our last earnings call in March, Telos has teaming agreements in place with prime partners who in the first quarter received awards from the federal government worth up to $525 million to Telos Security Solutions business over five years. It's not uncommon for award decisions of this magnitude to be protested by incumbents or other bidders as part of a customary post award protest period provided by the government, and that's the case here. These awards have been protested, and finalization of the award is subject to resolution of the protest. Given the typical protest time table, resolution is expected in the second quarter and assuming a favorable outcome revenues are expected to ramp throughout the balance of the year.
We look forward to the conclusion of these protests as these awards represent pre-existing programs requiring a timely and smooth transition to ensure uninterrupted service to the federal government. Beyond these awards, it's important to highlight since 2023, we have won positions on five new several contract vehicles, including most recently, a vehicle through which the United States Marine Corps will procure modernized capabilities for telecommunications and network infrastructure at all required Marine Corps bases, post, camps and stations globally. In the aggregate, these five new contract vehicles provide Telos with market access to compete for new business opportunities that represent a $12 billion addressable market. We will continue to pursue additional contract vehicles that will further increase our access to new federal markets over time.
In addition, I'm pleased to report on several other key outcomes since our last earnings call. Our Xacta business has received new orders with the U.S. Air Force Services Center as well as a major technology company and a federal government customer. Additionally, the Xacta business has achieved renewals with several key customers including the U.S. 16th Air Force, the U.S. National Geospatial Intelligence Agency, the U.S. Defense Intelligence Agency, the U.S. Department of Energy, a professional services company and a leading cloud computing company. The company has received services renewals with the U.S. Department of Homeland Security, the U.S. Office of Naval Intelligence and a federal executive department. Our Automated Message Handling System business achieved a major contract renewal with a branch of the U.S. Armed Forces.
And finally, within our Telos ID business, transaction volumes in our TSA PreCheck program have sequentially ramped every quarter for the last four quarters, including the first quarter of 2024. We continue to work closely with TSA to ensure our preexisting enrollment locations are operating at the absolute highest possible standards necessary for a national security program of this magnitude before accelerating our rollout of additional on-site enrollment centers around the country. We opened two additional enrollment locations in April with more expected in the coming quarters. I will now turn the call over to Mark who will discuss second quarter guidance. Mark?
Mark Bendza: Thanks, John. Let's turn to Slide 5. For the second quarter, we expect revenue in a range of $25 million to $28 million and an adjusted EBITDA loss of $8 million to $6 million. We forecast Security Solutions revenue to be down high single digits to up mid-single digits percent year-over-year, primarily driven by a non-recurring perpetual license sale in the second quarter of 2023, offset by growth in TSA Precheck in 2024. We forecast secure networks revenue to decline low 40% to mid-30% year-over-year due to the ongoing reductions in backlog that we expect to persist sequentially throughout the year. Our second quarter guidance, combined with our first quarter reported revenue, implies first half revenue of $54.6 million to $57.6 million, and compares favorably with the approximately $55 million of first half revenue that we outlined in the 2024 modeling inputs provided in the appendix of our fourth quarter earnings presentation.
Overall, we expect total company revenue to return to sequential growth in the third or fourth quarter, subject to favorable resolution of protests. GAAP gross margin is expected to be down approximately 750 basis points to 425 basis points year-over-year. primarily due to higher amortization of capitalized software development costs in Security Solutions and a non-recurring perpetual license sale in the comparable period last year, partially offset by a more favorable revenue contribution from our higher-margin Security Solutions business in 2024. Cash gross margin is expected to be down 250 basis points to flat year-over-year. Cash below-the-line expenses, which adjust for capitalized software development costs, stock-based compensation, restructuring costs and D&A are forecast to be approximately $1.9 million to $2.1 million higher year-over-year, primarily due to investment in growth initiatives.
Lastly, our full year outlook is substantially unchanged. And we've made only minor adjustments to the full year modeling inputs provided in the appendix. And with that, I'll turn it back to John.
John Wood: Thanks, Mark. Let's turn to Slide 6. In summary, we once again exceeded expectations and delivered results above the high end of the guidance range on key financial metrics in the first quarter. We've made substantial progress on new business capture during the first quarter. And we expect Security Solutions and total company revenues to return to sequential growth in the third or fourth quarter, subject to favorable resolution of protests. And with that, we're happy to take questions.
Mark Bendza: Operator, please open the line for Q&A, and we ask the call participants to please be mindful of others in the queue by asking only one question. Thank you.
