Hook / Quick Thesis
Telos (TLS) just delivered what looks like a real operational inflection: 3Q fiscal 2025 revenue climbed to $51.444M and gross profit jumped to $20.546M, lifting gross margin to roughly 40%. At the same time the company converted more revenue into cash, reporting $9.146M of operating cash flow for the quarter and shrinking the operating loss to just $2.468M. Those three datapoints - top-line acceleration, margin improvement and cash flow expansion - are the connective tissue of an early re-rating case.
The market still trades the stock like a small legacy systems firm rather than a margin-expanding, cash-generative security software business. Using the Q3 diluted/basic average share count of ~72.6M and the recent intraday price (~$5.78), implied market cap is approximately $420M. That valuation implies modest expectations relative to a run-rate revenue figure that is now easily north of $200M when annualized. For tactical investors willing to accept execution risk, TLS is a long with defined risk and asymmetric upside to prior multi-dollar highs and beyond.
What Telos Does and Why the Market Should Care
Telos sells software-based security and secure-network solutions across two operating segments: Security Solutions (cybersecurity, cloud and identity) and Secure Networks (enterprise security). The business mix is tilted toward Security Solutions, which typically carries higher gross margins and recurring revenue characteristics.
Why the market should take notice now:
- Sequential revenue acceleration: revenue moved from $30.616M (Q1 2025) to $35.968M (Q2 2025) to $51.444M (Q3 2025) - a clear upward trend within the year. That kind of quarter-to-quarter lift is uncommon without meaningful new contracts, seasonality or product uptake.
- Margin inflection: gross profit in Q3 was $20.546M, implying a gross margin around 40% on $51.444M of revenue (20.546 / 51.444). Management trimmed the operating loss to -$2.468M in Q3 from larger losses in prior quarters (-$9.022M in Q1; -$9.883M in Q2), pointing to expanding operating leverage.
- Cash generation is real: net cash flow from operating activities was $9.146M in the most recent quarter and has been positive and growing across the last three reported quarters ($6.106M in Q1; $6.95M in Q2; $9.146M in Q3).
In short: Telos is showing the three things I look for before recommending a tactical long - improving revenue growth, sustainable margin expansion, and strengthening operating cash flow.
Numbers to Anchor the Case
| Metric | Q1 2025 | Q2 2025 | Q3 2025 |
|---|---|---|---|
| Revenues | $30.616M | $35.968M | $51.444M |
| Gross Profit | $12.182M (≈39.8%) | $11.932M (≈33.2%) | $20.546M (≈40.0%) |
| Operating Income / (Loss) | $(9.022M) | $(9.883M) | $(2.468M) |
| Net Cash from Ops | $6.106M | $6.95M | $9.146M |
| Basic Average Shares | 72.715M | 73.163M | 72.58M |
Balance-sheet context: current assets were $102.832M versus current liabilities of $37.272M (Q3), giving a comfortable short-term liquidity position; noncurrent liabilities are modest at $7.334M and equity attributable to the parent stands at $119.675M.
Valuation anchor: using the Q3 basic average shares (~72.58M) and the recent price (~$5.78), implied market cap is roughly $420M. If you annualize the most recent quarter's revenue (Q3 revenue $51.444M x 4), you get an approximate run-rate revenue of $205.8M. That implies a P/S near ~2.0x on an annualized basis - a rough back-of-envelope metric that looks reasonable for a cyclically improving security-software operator with expanding margins and rising cash generation.
Trade Plan (Actionable)
Trade direction: Long (tactical)
- Entry: $5.20 - $5.80. If you miss the lower end, take a starter position near the current level and add on a pullback to the $5.20 area.
- Stop-loss: $4.80 (hard stop). This limits downside to roughly 15-18% from the entry band and sits below recent short-term support levels in the $4.95-$5.10 neighborhood.
- Targets (staged):
- Target 1: $7.50 (near recent multi-month highs and where multiple liquidity clusters sit).
- Target 2: $9.00 (extension target if margin recovery continues and new guidance or a material contract is announced).
- Position sizing: keep the initial position size modest (5-7% of risk capital) and pyramid into strength or on a second pullback; use the stop-loss to define maximum loss per trade.
Catalysts
- Quarterly results and guidance - further margin expansion or a narrower operating loss on the next reported quarter would validate the inflection thesis.
- New contract awards or renewals in Security Solutions or enterprise Secure Networks that increase recurring or high-margin revenue.
- Operational milestones: continued sequential increases in operating cash flow and evidence of sustainable gross-margin improvement.
- Commercial expansions tied to Telos' role as an official TSA PreCheck enrollment provider (company announced expansion of enrollment locations on 09/29/2025), which can lift revenue diversity and visibility.
Risks and Counterarguments
- One-off or lumpy revenue: The Q3 revenue jump could be driven by a single large contract or timing of a government program. If the lift is not repeatable, margins and cash flow could revert.
- Competition and pricing pressure: Cybersecurity and identity markets attract large incumbents and aggressive small players; sustaining margin expansion requires pricing discipline and differentiated IP.
- Execution risk on SG&A and R&D: SG&A remains elevated (Q3 SG&A ~$21.115M) and R&D investment is material; mis-execution here could blunt operating leverage and delay profitability.
- Macro and budget timing: A significant share of Telos' revenue sits in government and enterprise budgets that can be lumpy and subject to procurement cycles, which can produce volatile quarters.
- Counterargument: the improvement we see could simply be seasonality plus a timing benefit of collections or milestone billing; if so, the market could punish the stock on the next quarter if sequential momentum fades.
What Would Change My Mind
- I would reduce conviction materially if the next quarter shows revenue falling back below the $35M range or if operating cash flow drops meaningfully below the Q2 run rate (~$7M). A single-quarter margin reversal would also be a red flag.
- I would also be cautious if SG&A growth outpaces revenue growth for multiple quarters, indicating the company is spending to chase growth without payback in profitability.
Final Take
Telos' Q3 2025 results look like a classic early inflection: a sizable revenue increase, a sharp gross-margin improvement and strengthening operating cash flow, accompanied by a much smaller operating loss. The balance sheet is healthy, and implied valuation (roughly $420M market cap vs an annualized revenue run-rate north of $200M) does not appear demanding for a company moving to cash-positive operations.
This is a tactical long: the trade offers asymmetric upside to the $7.50 - $9.00 range if momentum continues, while a clear stop at $4.80 limits downside. Execution risk and revenue lumpiness are real - discipline on sizing and a tightly managed stop are essential. If Telos can string together another quarter of sequential revenue growth with operating leverage and cash-flow improvement, the market will likely re-rate the shares higher. If not, the stop will protect capital.
Disclosure: This is a trade idea for educational purposes and not financial advice. Confirm quotes and position sizes with your broker before acting.