TLS · Research
Telos Grew Revenue 52 Percent on One Identity Program and Its Founder Filed His 13D Five Years Late
Telos Corporation reversed three years of decline on TSA PreCheck enrollment work, but owner cash was about 2% of revenue and the guide shows growth cresting.
- Owner cash after capex and all stock pay
- 2.2% of revenue
- Security Solutions share of revenue
- 90.8%
- Chief executive's Schedule 13D
- Filed 5.7 years late
1. Our call: Hold off, because one identity program carried the turnaround and the guide shows it cresting
Our call: Hold off. Telos Corporation sells security software and services, mostly to the U.S. federal government [1].
Its best-known product is Xacta, software that automates the paperwork agencies need before a system can be authorized to run [1]. Its growth engine since 2025, though, is Telos ID, which includes TSA PreCheck enrollment, FBI background check channeling and biometric services [1].
Revenue rose 52.2% in 2025 to $164.8M after three years of decline, driven by 94.9% growth in Security Solutions from the expansion of large Telos ID programs [1]. Second quarter 2026 revenue rose 33% to $47.7M [3].
But the third quarter guide of $49.2M to $50.6M is a decline of 2% to 4% from a year earlier, and the full-year top end was cut from $200M to $195M [3].
Telos is a Maryland corporation headquartered in Ashburn, Virginia, led by a U.S. executive team, and the proxy states that each director is a United States citizen [1][4]. About 90.1% of its 525 employees were in the United States at Dec 31, 2025, and roughly 309 held security clearances
2. A government-facing security vendor whose gate is a federal enrollment license
| Metric | Value |
|---|---|
| Recurring share of revenue | Not disclosed; firm fixed-price contracts were 78% of first half 2026 revenue [2] |
| Operating margin | 0.6%, operating income of $0.3M on $47.7M, second quarter 2026, our calculation [6] |
| Stock pay share of revenue | 18.3% in 2025 ($30.2M), 6.5% in the first half of 2026, our calculation [6][2] |
| API quality | 1 of 5, our scoring: Xacta integrates with cloud providers, but there is no broad developer platform [1] |
| Toll-gate score | 0 of 4 pass, 3 partial, 1 fail (section 2b) |
2b. Telos stands at a federal checkpoint, but the government owns the checkpoint
A gate is valuable when the owner holds the record others depend on and can price what passes through it. Telos sits at two federal checkpoints: the authorization paperwork for government systems through Xacta, and the enrollment of travelers and workers into TSA PreCheck and FBI background checks through Telos ID [1].
In both cases the rules, and the ultimate record, belong to the agency [1].
| Test | Result | Evidence |
|---|---|---|
| Owns the record | Partial | Xacta holds the compliance evidence agencies build for system authorizations, which is sticky once loaded; identity enrollment records flow to federal agencies that set the standard [1]. |
| Owns the connection | Partial | Telos holds designations as a TSA PreCheck enrollment provider, Aviation Channeling Services provider and FBI-approved Channeler, which few firms have, but the designations are granted by the government and can be shared or withdrawn [1]. |
| Prices close to outcomes | Partial | Firm fixed-price contracts were 78% of first half 2026 revenue, so Telos keeps the margin when enrollment volume rises, but it does not price on security outcomes [2]. |
| R&D on the gate vs features | Fail | Capitalized software spending fell from $14.6M in 2023 to $8.2M in 2025, and an $11.7M impairment in 2024 wrote off projects it stopped using [6][1]. |
3. Revenue fell for three years, then one program reversed it
The mix changed with the recovery. Security Solutions was 90.8% of 2025 revenue against 70.9% in 2024, and Secure Networks, the older network services business, fell to 9.2% [1].
Federal revenue from Secure Networks fell from $3.6M to $1.1M in the second quarter of 2026 [2].
Concentration is the cost of that mix. Federal customers were 92% of revenue in the first half of 2026, and federal Security Solutions revenue alone was $85.3M of $95.5M [2].
The 10-K credits the 2025 jump to the expansion of large programs in Telos ID, which means a small number of enrollment programs now drive most of the company [1].
Funded backlog, the company's term for remaining performance obligations, fell to $56.5M at Jun 30, 2026 from $68.8M at Dec 31, 2025, and about 98% of it converts within twelve months [2][1]. That is short visibility for a company guiding to growth [2]
4. The guide says growth peaks in the second quarter
On Aug 10, 2026 Telos guided full-year revenue to $187M to $195M, growth of 14% to 18%, trimming the top of the prior $187M to $200M range [3]. It raised adjusted earnings before interest, taxes, depreciation and amortization, a company measure that excludes stock pay, to $23.6M to $28.6M [3].
The third quarter guide of $49.2M to $50.6M compares with $51.4M a year earlier, the first expected year-over-year decline since the recovery began, our reading [3][6]. Management called for sequential growth, which is true against the second quarter's $47.7M but not against last year [3].
The company had already flagged a first quarter beat in an unusual way. On Apr 29, 2026, the same 8-K that disclosed the chief executive's medical leave said first quarter revenue would land above the top of guidance [9].
Telos posts third quarter results on Nov 9, 2026 [12].
5. Margins turned positive in 2026 mostly because stock pay fell
Operating losses were $40.3M in 2023, $55.9M in 2024 and $39.9M in 2025 [6]. In the first half of 2026 Telos earned operating income of $1.8M, its first positive first half since at least 2021 in company facts, our reading [6].
The swing came from cost, not just revenue. Operating expenses fell 25% in the second quarter, primarily because of lower stock pay [3].
Stock pay expense fell from $14.8M in the first half of 2025 to $6.2M in the first half of 2026 [2].
Gross margin is service-like. It was 37.0% in 2025 and 35.0% in the second quarter of 2026, reflecting labor, enrollment centers and pass-through costs rather than pure software [1][3].
Telos is a software and services hybrid, and the margin profile shows it [1][3].
6. Owner cash was negative for three years and turned barely positive
| Period | Operating cash | Capex and software | Stock pay | Owner cash | Share of revenue |
|---|---|---|---|---|---|
| 2023 | $1.6M | $15.5M | $24.4M | Minus $38.3M | Minus 26.3% [6] |
| 2024 | Minus $25.9M | $13.8M | $21.4M | Minus $61.1M | Minus 56.4% [6] |
| 2025 | $30.2M | $8.9M | $30.2M | Minus $8.9M | Minus 5.4% [6] |
| First half 2026 | $17.5M | $4.5M | $6.2M | $6.8M | 7.1% [2] |
| Twelve months to Jun 30, 2026 | $34.6M | $8.8M | $21.5M | $4.3M | 2.2% [2][6] |
Owner cash is our calculation: operating cash flow less purchases of property and equipment and capitalized software development, less stock pay expense [6][2]. The company's own free cash flow, which does not subtract stock pay, was $6.6M in the second quarter, a 13.9% margin [3].
Stock pay also costs cash through tax withholding. Telos paid $7.6M in the first half of 2026 to cover taxes on net-settled awards, more than the $6.9M it spent on buybacks [2].
Together those two lines used $14.5M, 83% of operating cash in the half, our calculation [2].
Shares outstanding were 74.74M on Aug 3, 2026, against 72.70M a year earlier and 64.63M in March 2021, so buybacks have not offset vesting, our calculation [6]. Holders approved 5,380,000 more plan shares at the 2026 meeting, about 7.2% of shares outstanding, our calculation [5]
7. The balance sheet is clean and small
Cash was $50.6M at Jun 30, 2026, down from $53.2M at Dec 31, 2025 [6]. There are no borrowings; finance lease obligations, including interest, were $8.3M at year end and a service agreement commits $10.0M [1].
The bank line shrank by design. On Dec 30, 2025 Telos cut its JPMorgan Chase revolving commitment to $15.0M, with up to $15.0M more available, extended maturity to Dec 30, 2026, and agreed to keep at least $5.0M of cash at the bank [11].
That line matures within weeks of our resolution window [11].
The buyback authorization was raised by $25.0M on Mar 12, 2026, leaving $43.2M at Jun 30, 2026, close to the company's entire cash balance [2]. Spending it would leave little cushion for a contract loss [2][6].
8. The main risks are program concentration, key-person risk and dilution
Program concentration. Telos ID programs drove the 2025 recovery, and the third quarter guide already shows a year-over-year decline [1][3].
Federal enrollment work is awarded through competitive bids and can be re-competed, shared with rivals or cut by budget actions [1].
Key-person risk. John B.
Wood has led Telos since 1994 with one break, and took a medical leave of uncertain duration on Apr 28, 2026 [4][9]. Three executives shared his duties until he returned on May 28, 2026, and the company named no successor [9][10].
Disclosure discipline. The chief executive's own Schedule 13D was due in November 2020 and filed on Jul 24, 2026, which the filing attributes to inadvertent administrative error [7].
A five-year lapse on the chairman's own ownership filing is a control question for the audit committee [7]
9. Telos wants to be the identity and compliance layer for regulated buyers
Management's strategy is to win a customer foothold with one solution and then sell the rest of the portfolio, from Xacta to identity to secure messaging [1]. The company is also building ONYX, a touchless fingerprint technology for mobile and enterprise authentication [1].
If it works, Telos turns federal enrollment scale into a commercial identity business and adds software margin on top [1]. Only 8% of first half 2026 revenue came from state, local and commercial customers, so that pivot has barely started [2].
If it does not, Telos remains a contractor whose results track a few federal programs [1][2].
10. Superintelligence helps Xacta's paperwork but threatens it too
Xacta's value is automating the evidence and documentation agencies need for system authorizations [1]. Superintelligence tools that read system configurations and assemble compliance packages could make that work faster for Telos customers, or let larger platform vendors fold it into their own clouds [1].
Identity enrollment is harder to displace because it requires physical biometric capture, federal designations and cleared staff [1]. That supports the Partial on owning the connection in section 2b, but it is a labor-heavy moat rather than a software one [1][3].
11. A founder-chairman, a Swiss trust and a small board
Vote control. Telos has one class of common stock and no controlling holder [4].
The largest is The JRP Settlement, a trust administered by Silex Trust Company Limited in Geneva, Switzerland, with 12.3% at Mar 10, 2026, including shares held by the estate of John R.C. Porter [4].
Shirley Porter is sole Protector and can replace the trustee; Brian Padgett, who administers the estate, and Oliver Hemmer and Ronan Kuczaj, who act for the trustee, share voting and investment power [4].
John B. Wood reported 9.1% in his Schedule 13D on Jul 24, 2026, including 1,402,018 shares held through JJJJJV, LLC, which he controls [7][4].
BlackRock, Inc. reported 5.4%, and all officers and directors held 14.9% as a group [4]. Wood's filing says he has no present plans to change control of the company [7].
Activists. Wynnefield Partners Small Cap Value LP filed Schedule 13D amendments on Telos in October and November 2020, around the company's listing; we found no Schedule 13D from any outside holder since [8].
12. The questions we would ask management, and the calls we are tracking
Question one: how much of 2025 and 2026 revenue comes from the largest Telos ID programs, and when are they re-competed? [1][2]
Question two: why does the third quarter guide fall year over year, and what replaces that revenue in 2027? [3]
Question three: what controls failed so that the chairman's ownership filing was five years late? [7]
Question four: what is the succession plan after the April 2026 medical leave? [9][10]
Question five: why does the free cash flow condition on executive awards ignore stock pay and tax withholding? That answer sets our conviction.
Prediction one: 2026 revenue lands inside the $187M to $195M guide (70%). [3]
Bottom line: a turnaround that rests on one identity program and one founder
Telos has net cash, positive operating income in 2026 and federal designations few rivals hold [2][1]. But owner cash was 2.2% of revenue, the recovery rests on Telos ID programs that the guide shows cresting, the founder took an unplanned leave, and his own ownership filing ran five years late [6][3][9][7].
We would move to Buy if commercial and state revenue reaches 20% with owner cash above 10% of revenue, and to Avoid if 2026 revenue misses the guide or backlog keeps shrinking. Our call: Hold off, conviction 2 of 5.
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