Telos Corporation (TLS) Q3 2026 earnings review
Telos wins $58 million in orders, while profit beats plan
Telos Corporation, a cybersecurity and identity contractor for the US government, broke a six-quarter drought in new contract awards while posting its highest profit since going public. Third-quarter revenue rose 7% to $55 million, beating the company's plan for a seventh straight quarter on expanding identity programs and TSA PreCheck airport enrollments. Management raised its full-year sales and profit outlook, and its new fourth-quarter forecast sits well above what the prior full-year plan pointed to by our math.
| Revenue | $55.2M +7.3% from a year ago (~16% underlying by our math) |
|---|---|
| Net new cyber risk orders | $58M expected to bring ~$20M of 2027 revenue |
| Adjusted EBITDA | $10.6M 19.2% of sales; beat $6.0–6.8M plan |
| Full-year revenue outlook | Raised $8.5M middle of the range: 21% growth |
⚖️ Verdict: 🟢 Bullish
The story got better because Telos won $58 million of new orders for its Xacta cyber risk software and services, which management forecasts will bring in about $20 million of revenue in 2027. That single win replaces nearly two-thirds of the $33 million in low-margin software resales the company is phasing out starting next quarter. One caution: employee stock grants still outpaced share buybacks, pushing the diluted share count up 1% from a year ago and keeping profit per share excluding one-offs unchanged.
The question now is whether Telos can win enough of its remaining proposal pipeline to replace the last $13 million of exiting software sales and return to underlying growth in 2027. Either the third-quarter orders mark the start of delayed federal contracts finally converting, or the company still faces a smaller revenue drop next year alongside higher margins. Fourth-quarter award announcements and the initial 2027 outlook next quarter will settle it.
🐂 Bull Case
New Cyber Risk Orders Cover Most of the 2027 Revenue Exit
Telos plans to stop reselling low-margin software from other vendors starting in the fourth quarter, a move that will remove about $33 million of annual sales after 2026. Investors needed to see new contract awards replace those lost sales after federal procurement delays pushed decisions back for six straight quarters.
The federal security contractor broke that drought this quarter. Telos announced that its "Information Assurance business has secured $58 million of net new Xacta and professional services orders that are forecasted to generate approximately $20 million of Revenue in 2027." Xacta is the company's software platform for managing cyber risk and compliance.
These orders matter because they replace nearly two-thirds of the exiting software resale stream before 2027 begins, and they carry higher software and service margins. The win also revives growth in the Xacta product line after flat performance earlier this year. However, one quarter of orders only eases the concern around award delays rather than ending it, because about $13 million of the 2027 revenue exit still needs backfilling from the remaining proposal pipeline.
What to watch: fourth-quarter contract award announcements and the initial 2027 revenue outlook next quarter. Another $25 million to $30 million of multi-year awards would fully cover the remaining revenue gap.
Identity Programs Lift Gross Margin Past Cautious Plans
Telos sells identity and biometric services through Telos ID, which includes TSA PreCheck airport security enrollment. Management had planned for third-quarter cash gross margin—gross profit before non-cash depreciation and stock pay—to drop to between 37.5% and 38.5% because of reserves for fixed-price contracts.
Instead, cash gross margin reached 43.1%, beating the middle of the company's plan by 5.1 percentage points. GAAP gross margin fell 2.0 percentage points from a year ago to 37.9% as cost of sales in Security Solutions rose 7.5 percentage points of revenue, lapping one-time program start-up revenue from last year. Lower selling, general and administrative expenses—down 13.2 percentage points of revenue on falling stock pay—more than offset that dip.
- Q3 revenue: $55.2 million, up 7.3% from a year ago (up about 16% on an underlying basis by our math)
- Q3 Adjusted EBITDA (earnings before interest, taxes, depreciation, amortization and stock pay): $10.6 million, vs $6.0–6.8 million planned
- Q4 Adjusted EBITDA outlook: $7.0–8.8 million, vs $2.9–7.1 million implied by the prior full-year plan by our math
The company credited the beat and full-year raise to "strength in TSA PreCheck ® volumes, and margin outperformance on large programs". Beating its own plan for a seventh straight quarter shows management sets conservative targets, and the higher fourth-quarter outlook confirms margins are holding up as the low-margin software exit begins.
What to watch: fourth-quarter cash gross margin against the third quarter's 43.1% reading. A rise toward the mid-40s would show the software resale phase-out is lifting profitability as planned.
Free Cash Flow Tops 12% of Sales for a Seventh Quarter
Telos has shifted from burning cash two years ago to generating steady cash from its security programs. Third-quarter operating cash flow reached $9.4 million, and free cash flow—operating cash minus equipment purchases and capitalized software development—rose 11.9% from a year ago to $7.4 million. That represents 13.4% of revenue, marking a seventh straight quarter above 12%.
The Virginia-based contractor used that cash to step up share buybacks, spending $5.7 million in the quarter to repurchase more than 1.2 million shares at an average price of $4.59. Over the first nine months of 2026, free cash flow totaled $20.4 million, up from $15.0 million a year earlier, giving the business funding to buy back shares while keeping cash above $51 million.
What to watch: fourth-quarter free cash flow conversion as accounts receivable—which absorbed $5.7 million of cash this quarter—are collected. Collecting those bills should keep the full-year free cash flow margin above 13%.
🐻 Bear Case
Employee Stock Grants Still Outpace Share Buybacks
Telos celebrated its "Highest Quarterly Profit Since IPO" and highlighted its accelerated share repurchases in the earnings release. GAAP net income swung to $4.4 million from a $2.1 million loss a year ago because stock-based compensation fell from $9.4 million to $3.0 million.
Beneath that headline, share buybacks are still not shrinking the share count for shareholders. Over the first nine months of 2026, the company spent $12.6 million buying back stock and another $7.6 million paying employee taxes on vesting shares, consuming nearly all $20.4 million of its free cash flow. Yet diluted shares used to calculate profit per share excluding one-offs still rose 1.2% from a year ago to 76.5 million.
- Basic share count: 74.2 million, up 2.3% from 72.6 million a year ago
- Diluted share count (excluding one-offs): 76.5 million, up from 75.6 million a year ago
- Profit per share (excluding one-offs): $0.09, unchanged from $0.09 a year ago despite 7.3% revenue growth
Because the share count grew while Adjusted EBITDA rose only 4.7%, profit per share excluding one-offs did not grow at all from a year ago. In addition, Telos includes $0.7 million of accrued bonuses in its stock-pay add-back that it can still choose to pay in cash.
What to watch: diluted share count in the fourth quarter. A drop below last year's 75.6 million level would prove buybacks are finally reducing dilution rather than just offsetting employee stock grants.
Secure Networks Shrinks 80% as Legacy Programs End
Telos operates two reporting segments: Security Solutions, which houses cyber compliance and identity services, and Secure Networks, which builds secure communications infrastructure. While Security Solutions grew 16.6% from a year ago "primarily due to the expansion of large programs in Telos ID", Secure Networks is nearly gone.
Secure Networks sales fell 79.6% from a year ago to $1.0 million, down from $5.0 million in the third quarter of 2025, as older government contracts wrapped up without replacement wins. That contraction cut 7.7 percentage points from total company revenue growth this quarter by our math, and left Security Solutions generating 98.2% of total sales. The business now depends almost entirely on one segment.
What to watch: whether Secure Networks stabilizes near $1 million per quarter or winds down completely in 2027. Once it reaches zero, the drag on company growth stops, but Telos loses all business diversification.
Risks this quarter didn't answer
The third-quarter earnings release left four standing risks and watch items without new data.
- Remaining 2027 revenue gap: the $58 million Xacta win provides about $20 million in 2027, leaving roughly $13 million of the $33 million software resale exit still to be won from the broader proposal pipeline; fourth-quarter award disclosures will test this.
- Concentration in large Telos ID programs: the release again grouped all growth into large Telos ID programs without sizing the Defense Manpower Data Center contract or confidential security work; the quarterly Form 10-Q filing may offer customer concentration percentages.
- Chief executive succession: chief executive John Wood has been on medical leave since April 2026 with no update in the release on a permanent appointment; board announcements will settle this.
- 2025 restructuring completion: the release showed zero restructuring charges, but the remaining cash severance balance (which stood at $0.7 million in June) is only readable in Note 2 of the upcoming Form 10-Q filing.
💲 Other KPIs
Total contract liabilities—cash customers have paid upfront for services Telos has not yet delivered—rose 24.6% from $13.7 million a year ago by our math, outpacing 7.3% revenue growth. The balance dipped $1.0 million from the second quarter's $18.1 million as the company recognized revenue from earlier billings.
Uncollected customer bills rose 16.2% from $20.4 million a year ago and climbed $5.7 million from the second quarter's $18.0 million. That build in receivables grew more than twice as fast as third-quarter sales and reduced operating cash flow by $5.7 million during the period.
Cash on the balance sheet increased by $1.1 million from the second quarter's $50.6 million, even after the security group spent $5.7 million on share buybacks and $0.5 million on finance leases. Total finance lease debt fell to $6.1 million from $6.6 million three months earlier.
🔮 Guidance
Raised against the prior implied range. The plan calls for 2% to 7% growth from a year ago (4.2% at the middle of the range), slowing from 7.3% in Q3 as low-margin software resales begin phasing out. By our math, that is 6.9% above what the old full-year plan implied. Telos has beaten its quarterly sales midpoint by an average of 9.5% over the last four quarters; if the pattern holds, Q4 revenue would reach $53.4 million.
Raised. Management lifted the middle of the full-year range by $8.45 million to 21.0% growth (20% to 22% stated), more than reversing last quarter's $2.5 million trim. Across four quarters of updates, the middle of the range moved by $0.0 million, -$2.5 million, and now +$8.45 million. With $150.7 million already booked in the first nine months, the target is well within reach.
Raised against the prior implied range. The forecast points to $7.9 million at the middle of the range, up 8.3% from a year ago but down 25.3% from the third quarter's seasonal peak. By our math, the new midpoint is 58.8% higher than the $5.0 million implied by the prior full-year plan. Over the last four quarters, the company beat its profit midpoint by 51.5% on average; if the pattern holds, Q4 would reach $12.0 million.
Raised. The middle of the range jumped $7.1 million to $33.2 million, representing 83.1% growth from 2025. It is the second raise this year and much larger than the first: $0.0 million in Q1, +$1.8 million in Q2, and +$7.1 million in Q3. Because the group has already earned $25.3 million through September, the full-year outlook looks achievable.
New. The fourth-quarter plan puts the profit margin at 16.15% at the middle of the range, down from 19.2% in the third quarter on slower winter airport enrollment volumes, but up from 15.6% in the fourth quarter of last year.
Raised. The full-year margin plan moved up 3.0 percentage points at the middle of the range to 16.65%, up from 11.0% in 2025 and reflecting third-quarter outperformance on large identity contracts.
❓ Key Questions
Did the $58 million Xacta win come from the $500 million bid pipeline?
Investors need to know if these new Information Assurance orders were part of the $500 million proposal book management tracked last quarter, and how many bids remain awaiting government decisions to cover the rest of the 2027 software exit.
Why are Modeling Assumptions Missing from the Q4 Outlook?
Prior quarters included detailed forward modeling tables for cash gross margin, operating expenses, stock-based compensation and share counts. Those lines did not appear in the third-quarter release; management should provide the fourth-quarter cash gross margin and stock-pay targets on the call.
When Will Buybacks Actually Reduce the Diluted Share Count?
Telos spent $20.3 million on share buybacks and employee tax withholdings in the first nine months of 2026, yet diluted shares still rose by nearly 1 million from a year ago. Management should state whether 2027 equity grants will slow enough for buybacks to shrink the share count.
How Much Revenue Sits in Each Major Telos ID Program?
Security Solutions now makes up 98.2% of revenue, driven by Telos ID. Without a breakdown between TSA PreCheck, the Defense Manpower Data Center contract and confidential programs, investors cannot measure contract renewal risk.