Telos Corporation (NASDAQ: TLS) — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Telos provides cybersecurity, cloud, identity, and secure-networking solutions. Federal customers generated 91% of Q3 revenue; the U.S. Department of Defense represented 61%.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $36.2m | $63.6m | $104.3m | $169.5m |
| Gross profit / margin | $13.0m / 36.0% | $20.9m / 32.9% | $38.9m / 37.2% | $60.7m / 35.8% |
| Operating loss | ($9.7m) | ($8.8m) | ($32.1m) | ($39.2m) |
| Net loss | ($8.7m) | ($8.5m) | ($27.4m) | ($39.2m) |
| GAAP loss per share | ($0.12) | ($0.13) | ($0.40) | ($0.58) |
| Adjusted EBITDA (non-GAAP) | ($1.3m) | $8.6m | ($2.1m) | $14.1m |
Q3 revenue fell about 43% year over year, and nine-month revenue fell about 38%. Management attributed the decline to completed programs and lower revenue on ongoing major programs. Gross margin improved overall, but gross profit declined with lower sales. SG&A fell 24% in Q3 and 29% for the nine months, primarily from lower compensation costs, including reduced stock-based compensation and restructuring-related cost actions.
Cash, liquidity, and obligations
- Cash and cash equivalents were $100.0m at September 30, down from $119.3m at December 31, 2022. Working capital was $106.6m.
- Nine-month operating cash flow was negative $3.4m, versus positive $20.1m a year earlier. Investing outflow was $12.3m, including $12.0m of capitalized software development; financing outflow was $3.7m. Free cash flow, a non-GAAP measure, was negative $15.7m.
- The company had a $30m secured revolving credit facility, with an uncommitted option for up to $30m additional capacity; no amount was drawn. It reported compliance with facility covenants. Finance lease obligations totaled $11.7m. Other financing obligations were extinguished during the period.
- Funded backlog/remaining performance obligations were approximately $79m; Telos expected to recognize about 84% within 12 months. Management said cash and revolver access should meet needs for the next 12 months, while noting this is not assured.
Changes, outlook, and risks
- Security Solutions revenue declined 39% in Q3; gross margin eased to 47.3% from 48.0%. Secure Networks revenue declined 47%, but gross margin improved to 22.3% from 17.2%, attributed to program management and the wind-down of lower-margin programs.
- The filing provides no specific revenue or earnings guidance. Management described 2023 as a transition year focused on streamlining operations and rebuilding revenue through new business wins.
- A federal continuing resolution funded the government through November 17, 2023, restricting new contracts and program acceleration. Appropriations uncertainty, potential shutdowns, and spending limits could delay awards or reduce customer spending. Federal-customer concentration also exposes revenue and receivables to government contracting and collection risks.
- Management disclosed that the stock price had fallen below book value per share during the first three quarters. A sustained decline or other adverse conditions could trigger interim goodwill impairment testing; a resulting charge could be significant. A $0.3m impairment was recorded for a software-development project in Q3.
- A $1.4m gain on early extinguishment of financing obligations contributed to nine-month other income. The company also revised 2022 interim financial information for previously understated stock-based compensation expense; it stated the prior-period error was not material and did not affect cash flows.
- A securities class-action lawsuit was dismissed with prejudice, and the dismissal became final. The filing also notes that government-contract audits or investigations could result in penalties, suspension, or debarment, though management did not identify claims expected to materially harm the company.
Key facts for investors to verify
- Whether revenue stabilizes after completed programs and lower activity on major contracts, and whether funded backlog converts on schedule.
- Whether cost reductions and improved Secure Networks margins can offset ongoing revenue declines; note that Q3 adjusted EBITDA turned negative year over year.
- Cash burn, software-development investment, and liquidity relative to the company’s stated 12-month needs.
- Federal budget and contract-award developments, including effects of continuing resolutions or a shutdown.
- Goodwill and intangible-asset impairment indicators, and the effects of stock-based compensation and share issuance on dilution.