Telos Corporation (Nasdaq: TLS) — FY 2020 Form 10-K
Reporting period: Year ended December 31, 2020. This is an annual report, not a standalone fourth-quarter filing. Telos provides cybersecurity, cloud security, identity and enterprise security products and services, primarily to U.S. federal agencies. The company completed its IPO in November 2020.
Financial results and liquidity
| Metric | 2020 | 2019 | Change / context |
|---|---|---|---|
| Revenue | $179.9 million | $159.2 million | Up 13.0% |
| Gross profit / margin | $62.4 million / 34.7% | $52.3 million / 32.9% | Margin improved 1.8 percentage points |
| Operating income / margin | $0.3 million / 0.2% | $5.0 million / 3.2% | Lower despite revenue growth |
| Net income (loss), consolidated | $6.8 million | $(2.1) million | 2020 included a $14.0 million gain on preferred-stock redemption |
| Net income (loss) attributable to Telos | $1.7 million | $(6.4) million | Includes allocation to non-controlling interest in 2020 and 2019 |
| Cash from operating activities | $(2.1) million | $11.8 million | Cash flow weakened materially |
| Cash and cash equivalents | $106.0 million | $6.8 million | Increase principally reflects IPO proceeds |
| Working capital | $105.2 million | $2.9 million | Current assets were $144.1 million; current liabilities were $38.9 million |
Revenue was predominantly services ($161.2 million) and federal ($171.7 million, or 95.4% of total). Firm-fixed-price contracts generated 84.3% of 2020 revenue. Management says recurring revenue exceeded 85% in each of the last three years. Funded backlog was $127.7 million at year-end, with approximately 92.4% expected to be recognized in 2021.
Telos reported no senior term loan or subordinated debt at year-end after using IPO proceeds to repay them. Finance lease obligations were $15.6 million and operating lease obligations were $1.6 million. The company reported total assets of $183.8 million and total liabilities of $56.7 million.
Material changes versus 2019
- Security Solutions revenue rose to $117.3 million from $101.9 million, supported by Telos ID Census work and a government Telos Ghost contract. Secure Networks revenue increased to $62.6 million from $57.3 million.
- Gross margin improved, but operating income fell to $0.3 million as selling, general and administrative expenses increased 31.3% to $62.1 million. The increase included higher bonuses, outside services and labor costs.
- Operating cash flow shifted from $11.8 million provided to $2.1 million used. Investing cash outflow was $7.5 million, including $6.7 million of capitalized software development costs.
- The IPO generated approximately $272.8 million in net proceeds. Telos used proceeds for the preferred-stock conversion, the purchase of the remaining Telos ID interest, and repayment of debt. Telos ID became wholly owned in November.
Outlook, risks and unusual items
- Management did not provide a quantified revenue or earnings forecast. It said it expects operating cash generation to meet liquidity needs for the next 12 months and anticipates approximately $5.2 million in 2021 capital expenditures.
- Telos plans an approximately 300% increase in 2021 sales and marketing investment compared with 2020, including added quota-carrying sales staff and expanded partner channels. This is a planned investment, not a revenue-growth guarantee.
- Management cited opportunities in the 10-year TSA PreCheck enrollment and CMS contracts; PreCheck services were expected to launch in early 2021. The filing also warns these and other large contracts may not meet forecasts or could be delayed or disrupted.
- Key risks include heavy federal-government dependence, appropriations and contract-renewal uncertainty, competitive bidding and fixed-price cost-overrun exposure, reliance on cloud providers including AWS and Microsoft, cyber and data-security incidents, and COVID-19 effects on customers, suppliers and contract execution.
- A pending claim seeks $2.54 million in indemnification of legal fees. Telos denies liability and says the outcome cannot reasonably be determined; a hearing was scheduled for May 2021. Management said other ordinary-course litigation was not expected to have a material adverse effect.
- The $14.0 million preferred-stock redemption gain materially affected reported 2020 earnings. Adjusted EBITDA, a non-GAAP measure, was $11.4 million versus $10.0 million in 2019; it should not be treated as a substitute for GAAP results or cash flow.
Most important facts for investors to verify
- Whether funded backlog converts to revenue as expected, and whether unfunded options and renewals are exercised.
- Revenue concentration and performance of major federal programs, particularly the TSA PreCheck and CMS contracts.
- Whether planned sales and marketing investment produces growth and margin improvement without further weakening operating cash flow.
- Underlying earnings excluding the preferred-stock redemption gain, and the drivers of low operating income despite higher revenue and gross margin.
- Cash requirements, lease obligations, and the status and potential exposure of the $2.54 million indemnification claim.