Business context and reporting period
Telos Corporation (Nasdaq: TLS) provides cybersecurity, cloud security and enterprise security solutions, primarily to U.S. government customers. This Form 10-Q covers the quarter and six months ended June 30, 2021; results are unaudited. Telos reports as one operating segment.
Financial results and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $52.6 million | $48.6 million | $108.3 million | $87.6 million |
| Gross profit / margin | $20.6 million / 39.1% | $17.6 million / 36.2% | $34.9 million / 32.2% | $29.8 million / 34.0% |
| Operating income (loss) | $(18.6) million | $5.1 million | $(32.1) million | $5.5 million |
| Net income (loss) attributable to Telos | $(18.7) million | $0.3 million | $(33.5) million | $(2.0) million |
| Adjusted EBITDA (non-GAAP) | $4.2 million | $6.4 million | $5.7 million | $8.2 million |
Q2 revenue grew 8.1%. Services revenue was $47.6 million and product revenue was $4.9 million. For the first half, revenue increased 23.7%. Federal customers generated $50.0 million of Q2 revenue and $103.4 million for the first half.
Cash and cash equivalents were $131.0 million at June 30, 2021, versus $106.0 million at year-end 2020. Working capital was $139.7 million, compared with $105.2 million. Current assets were $178.4 million and current liabilities $38.7 million. Total liabilities were $55.4 million, including $15.0 million in finance lease obligations; the former senior term loan and subordinated debt had been repaid in 2020.
For the first half, operating cash flow was $(5.8) million, investing cash flow $(4.7) million and financing cash flow $35.5 million. Financing included $64.3 million of net follow-on offering proceeds, partly offset by $26.9 million to repurchase warrants and $1.3 million to repurchase shares. Capitalized software development costs were $3.7 million.
Material changes versus the prior comparable period
- Q2 Secure Networks revenue rose 48.6% to $21.4 million, while Security Solutions revenue fell 8.8% to $31.2 million. The six-month pattern was similar: Secure Networks revenue rose 108.0% to $54.3 million, while Security Solutions declined 12.2% to $54.0 million.
- Management attributed the Security Solutions decline mainly to the wind-down of a U.S. Census Bureau contract; Secure Networks growth reflected DoD contracts, particularly Secure Mobility.
- Gross margin expanded in Q2 but narrowed for the six-month period, which management attributed to stock-based compensation and contract mix.
- SG&A increased to $39.1 million in Q2 and $67.0 million for the first half. Stock-based compensation was $21.3 million for Q2 and $35.0 million for the first half, a principal driver of GAAP operating and net losses. Adjusted EBITDA excludes this expense and is a non-GAAP measure.
- Interest expense declined substantially after debt repayment and preferred-stock conversion in 2020. First-half 2021 other expense of $1.0 million included a legal settlement.
Outlook, risks and unusual items
Management reported $152.7 million of funded backlog at June 30, 2021, up from $127.7 million at December 31, 2020. It expects approximately 68.9% to be recognized as revenue in 2021 and 26.6% in 2022, with the remainder thereafter. The filing does not provide a clear formal full-year revenue or earnings guidance figure. Management stated it expects available funds and operating cash generation to meet liquidity needs for the next 12 months, though this is not assured.
Management sees potential demand support from federal cybersecurity modernization, cloud adoption and ongoing cyber threats. Risks include uncertain federal appropriations, potential continuing resolutions or spending constraints, changes in customer demand, contract and delivery-order variability, and COVID-19-related effects on customers, employees and suppliers. Management noted that federal budgets and procurement decisions remain uncertain; substantially all revenue is from U.S. customers.
On May 5, 2021, Telos settled the Hamot/Siegel indemnification dispute for $1.0 million, paid May 12; the settlement concluded the open matters described in the filing. On July 30, 2021, after quarter-end, Telos acquired Diamond Fortress Technologies assets for an undisclosed cash amount and hired seven employees; purchase accounting was still being finalized. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether Secure Networks growth and the Census-related decline in Security Solutions continue, and how contract mix affects margins.
- The amount, timing and conversion of funded backlog into revenue; backlog is not a guarantee of future revenue.
- The sustainability of profitability excluding stock-based compensation, given the large GAAP losses and non-GAAP adjustments.
- Operating cash generation and working-capital trends, particularly receivables and unbilled receivables, which rose to $39.4 million and $27.4 million, respectively.
- The financial impact and integration progress of the Diamond Fortress Technologies acquisition once consideration and accounting are disclosed.