Telos Corporation (NASDAQ: TLS) — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Telos provides cybersecurity, cloud, identity, and secure networking solutions; most revenue comes from U.S. government customers. Management described 2023 as a transition year focused on streamlining operations and rebuilding revenue through new business wins.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $32.9M | $55.8M | $68.1M | $106.0M |
| Gross profit / margin | $12.4M / 37.6% | $20.9M / 37.5% | $25.8M / 37.9% | $39.8M / 37.6% |
| Operating loss | $(9.5)M | $(14.0)M | $(22.4)M | $(30.4)M |
| Net loss | $(8.0)M | $(14.2)M | $(18.8)M | $(30.8)M |
| Basic and diluted loss per share | $(0.12) | $(0.21) | $(0.27) | $(0.45) |
Q2 revenue fell 41% year over year, mainly from lower volume on major Security Solutions programs and the expected wind-down of large Secure Networks programs. Gross margin was nearly unchanged. SG&A fell 38% in Q2, primarily due to lower stock-based compensation and labor costs, helping narrow the operating and net losses.
- Segments, Q2: Security Solutions revenue was $17.2M, down 44%; gross margin rose to 55.5% from 53.3%. Secure Networks revenue was $15.7M, down 37%; gross margin was 17.9% versus 18.0%.
- Cash flow, six months: Operating cash flow was $(4.2)M versus $8.1M provided a year earlier. Investing cash outflow was $8.5M, including $8.2M of capitalized software development; financing cash outflow was $3.2M. Cash, cash equivalents, and restricted cash declined $15.9M to $103.6M.
- Free cash flow (non-GAAP), six months: $(12.7)M versus $2.4M. Q2 was $(8.6)M versus $5.4M.
- Non-GAAP adjusted EBITDA: $(29,000) in Q2 versus $4.5M; $(0.9)M for six months versus $5.5M. These measures exclude, among other items, stock compensation and restructuring costs.
Liquidity, debt, and balance sheet
At June 30, 2023, cash and cash equivalents were $103.4M, working capital was $110.8M, and total assets were $216.9M. The company reported $12.1M of finance lease obligations. It had a $30M secured revolving facility, undrawn at quarter-end, with an uncommitted option for up to $30M of additional capacity; the company reported compliance with its covenants. The facility matures December 30, 2025.
Funded backlog was approximately $66.5M; Telos expects to recognize about 80% over the following 12 months. DoD represented 66% of Q2 revenue and 67% of first-half revenue. Federal customers accounted for 89% of first-half revenue.
Outlook, risks, and notable items
- No numerical revenue or earnings guidance was provided. Management cited federal budget uncertainty, possible continuing resolutions or shutdowns, and spending caps as factors that could delay awards or constrain customer spending.
- Management’s priorities include centralizing business development, adding talent, expanding strategic partnerships, and improving its opportunity portfolio and contract vehicles.
- The restructuring plan’s estimated total cost increased from $2.8M at year-end 2022 to $4.0M; $2.2M remained accrued at June 30. The plan is intended to align costs with lower business volume.
- A customer declined to renew a software delivery order. Telos transferred the related licenses to extinguish the associated financing obligation and recognized a $1.4M gain in first-half other income.
- Telos revised its 2022 interim statements for stock-based compensation expense that had been erroneously reversed. The revision increased the reported 2022 Q2 and first-half net losses by $1.9M and $3.5M, respectively; the company said there was no cash-flow impact and no material impact on previously issued interim statements.
- Goodwill was $17.9M and intangible assets were $37.8M. The company warned that its share price had fallen below book value per share in the first half and that sustained weakness or other negative factors could prompt an interim impairment analysis and potentially a significant charge.
- A securities class action was dismissed with prejudice in June 2023; no appeal was taken, and the dismissal is final. Government contract audits and investigations remain a general risk for the business.
- Management concluded disclosure controls were effective as of June 30, 2023; it reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether funded backlog converts to revenue as expected, and whether new awards offset the ongoing decline in major programs.
- Federal budget outcomes, contract timing, and the company’s high concentration in U.S. government and DoD customers.
- Cash burn and free cash flow, particularly in light of continued software-development investment and lower revenue.
- Whether cost reductions and restructuring improve profitability without impairing growth capacity.
- Potential goodwill or intangible-asset impairment, and the effect of stock-based compensation and share issuance on dilution.