Good day, and thank you for standing by. Welcome to the Telos Corporation Q1 2026 Earnings Conference Call. At this time, all participants are under listen-only mode. After the speaker's presentation, there'll be a Q&A session. To ask a question during the session, you'll need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I'd now like to turn the conference over to your speaker for today, Allison Phillips. Please go ahead.
Good morning. Thank you for joining us to discuss Telos Corporation's Q1 2026 financial results. With me today is Mark Bendza, Executive Vice President and CFO of Telos, and Mark Griffin, Executive Vice President of Security Solutions. Let me quickly review the format of today's presentation. Mark Bendza will begin with remarks on our Q1 results and full year outlook. We will then open the line for Q&A where Mark Griffin, Executive Vice President of Security Solutions, will also join us. The Q1 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 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 filing. We do not undertake any duty to update any forward-looking statement. 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 Q1 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 Bendza.
Thank you, Allison, and good morning, everyone. Before we begin, I'd like to address our April 29th announcement regarding our Chairman and CEO, John Wood. John is currently on a medical leave of absence, and we wish him a full and speedy recovery. In the interim, Independent Director Fred Schaufeld has assumed the role of Chairman of the Board. In addition, the company's three Executive Vice Presidents, General Counsel Hutch Robbins, EVP of Security Solutions Mark Griffin, and I, have jointly assumed John's responsibilities to ensure seamless continuity of operations. This interim leadership structure is functioning as intended, and our teams remain fully aligned and focused on execution. We continue to see strong engagement from our customers and partners, and program execution across the business remains uninterrupted.
Our priorities for 2026 remain unchanged: delivering strong revenue growth, expanding adjusted EBITDA margins, generating robust cash flow, and continuing meaningful share repurchases. Our Q1 results reflect the continued transformation of Telos into a more scalable, profitable, and cash-generative business, and we made strong progress against each of these priorities during the quarter. With that, let's turn to slide three. We're pleased to report another strong quarter with results exceeding the high end of our guidance range. Our outperformance was supported by strong TSA PreCheck enrollment activity, continued execution across our core programs, and the benefits of our ongoing efficiency initiatives. Total company revenue increased 56% year-over-year to $47.7 million, surpassing our guidance of $44 million-$45 million.
GAAP gross margin was 36.4%, and cash gross margin was 42.3%, both exceeding our expectations due to a favorable mix of higher-margin revenue streams and continued operational discipline across the business. As a reminder, given the breadth of our revenue streams, gross margins will fluctuate quarter to quarter based on mix. On operating expenses, our continued focus on cost discipline, including the restructuring plan approved in Q4, drove strong profitability. Adjusted operating expenses came in approximately $400 thousand better than guidance and were down $1.2 million year-over-year. As a result, adjusted EBITDA exceeded the high end of our range, reaching $7.9 million versus guidance of four and a half million dollars to $5 million.
Adjusted EBITDA margin was 16.5%, a significant increase from 1.2% in the prior year period. Turning to cash flow, strong cash generation and disciplined working capital management remain key priorities. Operating cash flow was $8.7 million, Free Cash Flow was $6.4 million, representing a 13.4% Free Cash Flow margin. This was our fifth consecutive quarter with a Free Cash Flow margin above 12%. This reflects the increasing efficiency and scalability of our operating model as well as disciplined company-wide working capital management. Our strong cash flow generation and liquid balance sheet provide us with flexibility to invest in growth initiatives while continuing to return capital to shareholders.
During the quarter, we repurchased $2.2 million of stock, or over 500,000 shares, at an average price of $4.25 per share. Given the durability of our strong cash generation and our confidence in the long-term value of the business, we intend to accelerate repurchases in the Q2. Our capital allocation priorities remain consistent: invest in organic growth, maintain a strong balance sheet, and return capital to shareholders. With that, let's turn to slide four to discuss our Q2 guidance and full year outlook. For the Q2, we expect revenue growth of 22%-28% year-over-year, or $44 million-$46 million. We expect cash growth margin of approximately 39% and adjusted operating expenses to decline by roughly $1.3 million year-over-year.
Adjusted EBITDA is expected to be between $5 million and $6 million, representing a margin of 11.4%-13%. We also expect another quarter of strong cash flow, which we intend to deploy toward accelerated share repurchases. Turning to the full year, our Q1 performance reinforces our confidence in the trajectory of the business and positions us well against our full year objectives. At the same time, in alignment with our usual measured approach to guidance, we are reaffirming our revenue and adjusted EBITDA outlook. We issued our full year outlook less than two months ago, while we are encouraged by the momentum we're seeing, it remains early in the year and we believe an additional quarter of performance will provide even greater visibility into full year trends.
Based on Q1 performance, we have updated certain assumptions within our full year model, including raising the low end of our cash gross margin expectations to partially reflect the margin strength recognized during the Q1. We will continue to evaluate our outlook as the year progresses and look forward to providing an update following Q2 results. Lastly, before I wrap up, I'd like to spend a few minutes on growth and new business opportunities. Since 2024, we have significantly grown our top line largely through new business wins. We continue to see strong customer engagement across our addressable markets and maintain a multibillion-dollar pipeline of potential opportunities where we believe our capabilities are well-aligned with customer priorities. Currently, we have proposals outstanding representing nearly $500 million in total contract value.
Our government customers ultimately determine the final timing of awards and may modify award dates based on their own timelines and requirements. We currently expect the government to make award decisions on these opportunities during the H2 of 2026. These submitted proposals span both our Security Solutions and Secure Networks segments, with a heavy concentration in Security Solutions. Beyond these submissions, we will continue to actively develop and selectively advance additional opportunities from our pipeline. With that, let's wrap up on slide five. In summary, we delivered a strong start to the year with 56% revenue growth, a 16.5% adjusted EBITDA margin, and a 13.4% Free Cash Flow margin. Our Q2 guidance reflects continued momentum, and we are focused on executing large programs while securing new business opportunities.
In addition, disciplined cost management and working capital efficiency are translating growth into strong profitability and cash flow. We also plan to continue returning capital to shareholders while maintaining a strong and flexible balance sheet. With that, Mark Griffin and I are happy to take questions. Operator, please open the line for Q&A. Thank you.
Thank you. As a reminder, if you would like to ask a question, please press star one one on your telephone. You'll hear the automated message advising your hand is raised. We also ask that you please wait for your name and company to be announced before proceeding with your question. One moment while we compile the Q&A roster. Our first question today is coming from the line of Matthew Calitri of Needham. Please go ahead.
Hey, good morning, guys. Matthew Calitri on from Needham. Thank you for taking our questions. Great to see the strength in Security this quarter and see the press release quotes that primarily the expansion is due to large programs in Telos ID. Is there any more color you can give there on where you saw strength and I guess just general market sentiment?
Yeah. Hey, Matt, good morning. It's Mark Bendza speaking. Listen, we had a great quarter, clearly straight out of the gate for the year, across the company overall, both in terms of program execution as well as ongoing discipline around expense management. The larger programs that we were referring to primarily reside in our Telos ID business, and that cuts across a number of programs, including, we had a good quarter in TSA PreCheck, our DMDC program, which we also refer to as IT Gems, performed very well. The body of work that we refer to as confidential IT security work that we're performing for the federal government, that also had a good quarter.
Really, a broad-based, broad-based strength, both in terms of program management and expense management and also cash flow. Great quarter for cash flow as well.
Awesome. Yeah. No, no, that's great to hear. I guess with the strength, like why not take up the guide here? I know you mentioned like, want an extra quarter visibility still early in the year. Totally understand that. With John taking the medical leave of absence and is there any sort of like extra embedded conservatism in the guide or change in guidance philosophy with you guys taking the helm there?
Let me unpack that a little bit. First, with respect to John, first and foremost, you know, our focus is on supporting him and wishing him a full recovery. Operationally, the transition has been very smooth. Hutch and I have worked together for several years now. We've been attached at the hip for several years. For us it's, you know, business as usual in terms of working very closely together. Customer engagement, execution, employee alignment, all remain very strong. You know, we're not seeing any disruption in the business. You know, strategic priorities remain unchanged. We have our marching orders, and we're executing the plan. You're seeing that in the performance we're announcing today. Regarding guidance, listen, it's a fair question. It's something we put a lot of thought into.
We're very pleased with the Q1 performance across, you know, across the entire portfolio, as I was describing earlier. The Q1 positions us really well against our full year outlook. That said, we also want to remain, you know, disciplined about how we manage that outlook. We issued full year guidance on March 16th. That's less than two months ago. You know, it's kind of a peculiar aspect of the calendar. Q4 earnings are announced unusually late in the quarter, and then Q1 earnings are reported, you know, at the usual time. There's very little time that passes between the Q4 announcement where we set our initial outlook and Q1 guidance.
You know, we feel it's only prudent to lock in an additional quarter of performance before we formally revise revenue and adjusted EBITDA estimates for the year. If you look back to 2023 was the previous year where we announced a full year outlook. Q1 call, we had a big beat, and we reaffirmed. Q2 call, we beat and raised. Q3 call, we beat and raised. The final Q4 call, we beat again. You know, it's an approach to a full year outlook that we think serves us well.
Awesome. Thanks so much. Sorry, should have led with this, but our thoughts are with John too, and wishing him a speedy recovery. Thank you guys.
Thanks, Matt.
Thank you. One moment for the next question. Our next question is coming from the line of Eric Suppiger of B. Riley Securities. Your line is open.
Yeah, thanks for taking the question. Congrats on a good quarter, and please pass along our best wishes for John. Comment a little bit on the environment for the TSA PreCheck, if you would. Have increases in fuel prices and travel costs made any difference in terms of demand for enrollment, or do you think that's a risk? Then secondly, can you talk a little bit about what your expectations are for seasonality in that business?
Hey, Erik, and good morning. On PreCheck, listen, you know, PreCheck is an important program for us. It's one of, you know, several large programs within the company. We expect it to be an important growth driver for us for the year as it was in the quarter. No, we haven't, you know, we haven't seen any impact from higher fuel prices. As a matter of fact, enrollments are performing very well, year-over-year, both in the Q1 as well as so far here in the Q2.
Can you comment about seasonality in that business?
Sure. Seasonality, typically, we see enrollments as being seasonally lower in the H2. That's kind of a trend we've seen for the last couple of years. Our base case is we would expect that again this year.
Okay. Any comments about the software contribution from Xacta in the quarter?
Contribution was about flat year-over-year. I'll maybe turn to Mark, if he'd like to provide some comments on Xacta.ai and how we're trending there.
Sure, Erik. Mark Griffin. We have currently sold and installed over 400 licenses of Xacta.ai. We initiated interest and adoption within our existing install base and expect additional sales within the intelligence community, the federal civilian government and Department of War. To date, we have installed and operated live production pilots at multiple large intelligence community agencies, the Department of War elements and in the banking community. In addition, we have participated in numerous market surveys, demonstrations with both executives and cybersecurity matter experts within these stakeholder groups. In general, the response has been very strong, and we are anticipating numerous RFPs later in the year. We're bullish on the progress to date.
Very good. Thank you.
Thank you. One moment for the next question. Our next question is coming from the line of Nehal Chokshi of Northland. Your line is open.
Yeah. Thank you. Congratulations on a great quarter. Our thoughts are with John, hoping him a speedy recovery as well. Questions are on the pipeline. Given that you are signaling strong confidence in the business with the accelerating share buybacks, sounds like that's twofold. One, the core businesses are performing well. Is it fair to say that the $500 million of pipeline of award decisions that you expect to be made into 2026, you feel like has a higher probability of win rates than what you would typically assume for awards that are at that stage? Is that correct?
Yeah. Nehal, I think the way I would categorize it is, you know, a good chunk of those submitted and pending proposals are aligned to a body of work that we think we're, you know, well-positioned on. We have a good track record in, well aligned with our capabilities. It's kind of a mission set that I would say is maybe a newer mission set for the government and one that we've, you know, been involved in at a pretty early stage here with our prime partners and the government. We feel good about it. Of course, ultimately, the government controls the timing of awards.
You know, our current estimate is that these are awards that we'll hear decisions on in the H2. Ultimately, the government, of course, controls the timing.
When you refer to prime partners, this is inclusive of the DMDC prime partner?
No. This is a different set of proposals.
Got it. Okay. Is there any bid that represents more than 10% of that $500 million of outstanding proposals that you expect to be awarded in 2026?
There are two that are around $90 million, and then there are a couple that are small, maybe around $3 million. The rest are in a similar size of a few tens of millions.
Got it. These are typically 5-year contracts that you're bidding on, correct?
These are a little shorter, typically. Well, it's a mix, but the lion's share of them I'd say are, like, two years.
Got it. Okay, great. My last question is, now that you guys are at 500 stores on TSA PreCheck, is market share now at your maximal level that you would expect, or is there a lot more to go? If so, how will we get there?
Yeah. There's more growth to be had in that program, I think, really through a couple of ways. First, continuing to optimize volume in the locations that we have open today, and then also continuing to explore partnerships in other parts of the country.
Okay. You did announce a couple of new types of partnerships during the quarter, one through a university, one directly at an airport. Is there additional partnerships beyond those that you're contemplating?
Yes, we are contemplating others. There is another pilot that we have underway with, you know, a relatively modest number of locations that we're currently testing out with another partner.
Great. Thank you for taking my questions.
Okay, thanks.
Thank you. One moment for the next question. Our next question is coming from the line of Rudy Kessinger of D.A. Davidson. Please go ahead.
Great. Thanks for taking my questions. Mark Bendza, Well, firstly, certainly my thoughts are with John as well and wishing him a speedy recovery. Mark , you know, clearly understand your comments. It's been less than two months since you gave the initial full year guide. Putting aside the fact that you didn't tweak the full year guide at all, despite the Q1 upside, you know, it's pretty much implied in the H2 that Security Solutions growth dips into the high single-digit range, total revenue growth dips into the low single-digit range. What is the likelihood that some of those new business awards in the H2 would contribute meaningful revenue upside this year? Or would anything awarded in the H2 likely contribute revenue mostly in 2027?
Yeah. Hey, Rudy, good morning. Yeah, listen, you know, we have a pretty substantial portfolio of proposals that are submitted and pending award. You know, if one or two of those are awarded in the H2 and those programs, you know, start on time, there's a fair amount of revenue in a lot of those proposals that are pretty front-end loaded to the first couple months. Yeah, we could get some meaningful contribution from those proposals if they're awarded in the H2.
Got it. Okay. On Free Cash Flow, just any color on expectations for the remainder of the year. With the increased pace of buybacks, I guess any kind of, you know, further details you can provide on that, maybe just relative to the, you know, pace of buybacks in Q1 or the, you know, Q2 to Q4 last year. Should we maybe expect to bump back up to that kind of $4 million-$6 million range Q2 to Q4 last year or more or less? Just any further color would be appreciated.
Sure. Yeah. We did a Free Cash Flow margin of 13.4% this quarter. We did actually, coincidentally, 13.4% in the Q4 of last year. It's our fifth consecutive quarter over 12%. I would expect Free Cash Flow margin, you know, to continue in that kind of lower double digit margin level. We're currently managing to a cash balance of approximately $50 million, and we'll continue to do that. As we generate cash flow, our intention is to buy back stock with that Free Cash Flow while managing to approximately a $50 million cash balance.
Great. Thank you.
Thank you. There are no more questions in the queue. I would like to turn the call back over to Mark Bendza for closing remarks. Please go ahead.
Thank you, operator. Thanks to everyone for joining us today. We're pleased with our strong start to the year and believe our results reflect continued progress in building a more profitable, cash generative, and scalable business. We look forward to updating you next quarter. In the meantime, we hope to speak with many of you at the Needham Technology Conference on May 14th, and the Northland Growth Conference on June 23rd. Thank you.
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