Details on the nature of the single-digit gross margin third-party software revenue, its segment, and how Telos ID drove strength in the quarter.

The low-margin software revenue is part of a larger program within Security Solutions, not a standalone offering. It will phase out in Q4, leading to meaningful cash gross margin accretion. Telos ID's strength came from the TSA PreCheck program and the DMDC contract, both outperforming guidance, and strong management of fixed-price contracts. “So that revenue stream is part of a much larger program within Security Solutions. There are multiple revenue streams within that program that were part of the overall when we bid for this program, clearly that is not a revenue stream that we would otherwise pursue as a standalone revenue stream.”

What are the considerations for the pending government contract awards and their impact on the overall pipeline and growth heading into next year?

The pending awards represent a solid portfolio, particularly in confidential IT security where Telos has strong past performance. These opportunities are more of a P&L driver for next year (FY27) than for the current year, providing a strong foundation for future growth. “Given the timing of these opportunities, it's less of a P&L driver for this year year, much more of an opportunity to drive P&L for next year.”

Clarification on when the $33 million third-party software revenue started, its impact on DMDC revenue concentration, and how the PreCheck program is ramping.

The $33 million third-party software revenue stream started in Q2 2025. Management declined to deconstruct individual programs further but confirmed the $33 million impact for next year. PreCheck is doing great, with market share significantly up due to network build-out and focus on location productivity. “Yes, hey Rudy, Mark Bender here. So yes, it is one of the revenue streams in that program. And it really kicked in, I think it was... I want to say like second quarter of 2025.”

TLS

Telos (TLS) Q2 FY26 earnings call: guidance and Q&A

Earnings call· Jun 2026 (Q2 FY26)· Information Technology· Aug 10, 2026

Source: earnings call transcript

Executive summary

Telos Corporation Q2 FY26 — Strong Profitability and Cash Flow

Telos delivered a strong second quarter, surpassing revenue and adjusted EBITDA guidance, driven by robust performance in Telos ID and disciplined execution. The company demonstrated consistent cash flow generation and strategically decided to phase out a low-margin software revenue stream, which is expected to significantly improve future gross margins. Management remains focused on profitable growth and capital allocation, with a substantial pipeline of government opportunities pending award decisions.

Highlights

Total company revenue increased 33% year over year to $47.7 million, exceeding guidance of $44 million to $46 million.
Adjusted EBITDA exceeded the high end of guidance ($5 million to $6 million), reaching $6.9 million.
Adjusted EBITDA margin expanded significantly to 14.4% from 1.1% in the prior year period.
Operating cash flow was $8.8 million, and free cash flow totaled $6.6 million, representing a 13.9% free cash flow margin, marking the sixth consecutive quarter above 12%.
Raised full-year Adjusted EBITDA guidance to $23.6 million-$28.6 million (from $20.6 million-$28 million) and cash gross margin outlook to 39%-40% (from 38.2%-39.5%).

Concerns

Third quarter revenue forecast of $49.2 million to $50.6 million is down slightly year over year due to unusually high non-recurring revenue in the comparable prior period.
Adjusted operating expenses were approximately $500,000 above guidance assumptions, primarily due to higher TSA PreCheck marketing activity and incentive compensation accruals.
Full-year revenue outlook lowered by $2.5 million at the midpoint to $187 million-$195 million due to the strategic phasing out of low-margin third-party software.

Guidance & targets

Category	Target	Timeline	Confidence
Q3 FY26 Revenue	$49.2M-$50.6M high materiality	Q3 · FY26	High
Q3 FY26 Cash Gross Margin	37.5%-38.5% medium materiality	Q3 · FY26	High
Q3 FY26 Adjusted Operating Expenses	approximately $400,000 lower than prior year medium materiality	Q3 · FY26	High
Q3 FY26 Adjusted EBITDA	$6M-$6.8M high materiality	Q3 · FY26	High
FY26 Adjusted EBITDA	$23.6M-$28.6M high materiality	FY26	High
FY26 Adjusted EBITDA Margin	12.6%-14.7% high materiality	FY26	High
FY26 Cash Gross Margin	39%-40% high materiality	FY26	High
FY26 Adjusted Operating Expense Forecast	lowered by approximately $1.3M medium materiality	FY26	High
FY26 Revenue	$187M-$195M high materiality	FY26	High
Low-margin third-party software revenue impact	approximately $33M per year medium materiality	Beyond FY26	High
Cash Gross Margin Accretion from Software Exit	over 600 basis points high materiality	Run rate	High
Cash Gross Margin Accretion from TSA PreCheck	approximately 400 basis points high materiality	H2 2027	High
Total Cash Gross Margin Accretion	approximately 10 percentage points high materiality	H2 2027	High

Segment performance

Segment	Revenue	YoY	QoQ	Margin
TSA PreCheck Program Program is going well, market share is up significantly. Normal seasonality expected in H2. Expense recognition of prior period investments to complete in H2 2027, leading to 400 bps cash gross margin accretion. Market share: up significantly from prior year period	—	—	—	—

Orderbook & backlog

Submitted proposals total contract value over $500M Q2 FY26

up from a little under $500M last call

Expected award decisions in H2 2026; primarily a P&L driver for FY27.

Deals & partnerships

US Post Office Pilot program for additional TSA PreCheck enrollment sites

Rolling out additional sites as part of the pilot, with progress being made and looking forward to additional expansion.

Risks & headwinds

Timing of government contract awards H2 FY26

Award decisions for over $500M in proposals are expected in H2 2026, but timing is determined by government customers and may vary.

Mitigation:Management continues to build a healthy pipeline and remains disciplined in pursuing opportunities.

Contingency reserves on fixed price contracts Q3 FY26

Cash gross margin guidance for Q3 FY26 (37.5%-38.5%) reflects anticipated effects of contingency reserves.

Mitigation:Program managers are doing a terrific job managing the risk, leading to outperformance in prior quarters.

Seasonality in TSA PreCheck market H2 FY26

Second half market tends to be lighter than the first half, reflected in Q3 guidance.

Mitigation:Guidance has embedded this normal seasonality; market share is significantly up year-over-year.

What to watch in Q3 FY26

Government contract award decisions

Next quarter / H2 FY26

Current Over $500M in proposals pending

Target Award decisions for H2 2026 opportunities

Why it matters

These awards are expected to be a significant P&L driver for FY27 and indicate future growth trajectory.

Indications are still that awards on those opportunities. should be decided sometime here in the second half of course that's fully in the fully under the control of the customer.

Find out whether TLS delivers this. Inve re-checks your case every morning.

Q&A highlights

Update on TSA PreCheck, particularly the Post Office partnership, and expectations for fiscal year-end government spending in Q3.

TSA PreCheck is performing well with significantly increased market share, and the Post Office pilot is expanding. The company has over $500 million in pending government proposals, with award decisions still expected in H2, which will primarily impact next year's P&L. Congress's progress on budget extension is hoped to prevent lapses in Q4 awards.

“Yes, hey, Eric, good morning. Thanks for the question. So this is Mark Benza. I'll start. So first, on TSA PreCheck, program The program is going really well. We're very pleased with it. First class market share is up significantly from the same period last year.”

asked by Eric Slippinger · answered by Unknown Speaker

3 min read 6 chapters

Detailed narrative

Strong Q2 Performance and Profitability

Telos reported a strong second quarter, with total revenue reaching $47.7 million, a 33% year-over-year increase, surpassing the high end of guidance. This performance was primarily driven by Telos ID, particularly the TSA PreCheck program and the Defense Manpower Data Center (DMDC) contract.

Adjusted EBITDA significantly exceeded expectations at $6.9 million, leading to a substantial expansion in adjusted EBITDA margin to 14.4% from 1.1% in the prior year. The company's disciplined execution on fixed-price contracts also contributed to outperforming gross margin expectations.

Strategic Portfolio Optimization

Management announced a strategic decision to phase out a low-margin third-party software resale business starting in Q4 FY26. While this stream contributes approximately $33 million in annual revenue, it carries only a single-digit gross margin, which is inconsistent with the company's desired margin profile.

This move is expected to improve total company cash gross margin by over 600 basis points on a run-rate basis. The full-year revenue outlook was adjusted downwards by $2.5 million at the midpoint to reflect this change, but with only a modest impact on profit.

Consistent Cash Flow Generation

Telos continued its trend of strong cash flow generation, reporting $8.8 million in operating cash flow and $6.6 million in free cash flow for the quarter, equating to a 13.9% free cash flow margin. This marks the sixth consecutive quarter with a free cash flow margin above 12%.

The company attributes this to improved cash gross margins, lower operating expenses, and disciplined working capital management, including better alignment of collections and payments. This capital-light business model and shift to fixed-price contracts contribute to its premium free cash flow margins compared to defense contract peers.

Government Contract Pipeline and Timing

The company maintains a healthy pipeline of government opportunities, with submitted proposals representing over $500 million in total contract value, an increase from the previous quarter. These opportunities are concentrated in Security Solutions and Secure Network segments, with a strong emphasis on confidential IT security work where Telos has solid past performance.

While award decisions are expected in the second half of 2026, the timing remains at the discretion of government customers. These awards are anticipated to be a significant P&L driver for FY27 rather than the current fiscal year.

TSA PreCheck Program Momentum

The TSA PreCheck program is performing well, with market share significantly up year-over-year. Following efforts to build out its network of enrollment locations last year, the company is now focused on improving the productivity of these sites. A pilot program with the Post Office for additional enrollment sites is progressing, with further expansion expected.

Normal seasonality is anticipated in the second half of the year, with typically lighter market activity, which has been factored into guidance.

Capital Allocation and Shareholder Value

Telos deployed $4.7 million to repurchase over 1 million shares at an average price of $4.50 per share during the quarter, demonstrating its commitment to returning capital to shareholders. Management emphasized its laser focus on maximizing shareholder value through organic growth, strong cash generation, and consistent share repurchases.

The company indicated it would seriously consider a change of control opportunity if it presented a superior path to value creation for shareholders.

Summary of the company's earnings call; see how call summaries are prepared. Not investment advice.