TELUS (TLS) Q3 2025: Security Solutions Revenue Jumps 82% as Program Scale Drives Margin Upside
Security Solutions now delivers 90% of TELUS revenue, with major federal programs and a disciplined cost structure driving a sharp inflection in profitability and cash flow. Large contract ramps, especially in government identity and cyber, underpinned a 26% revenue surge and a return to positive adjusted EBITDA. With free cash flow accelerating and a robust $4 billion pipeline, management signals further upside as high-visibility programs scale through year-end.
Summary
- Security Solutions Dominance: Federal program ramps now anchor nearly all growth and margin.
- Operating Leverage Emerges: Cost discipline and mix shift drive sharp cash flow and profit inflection.
- Pipeline Visibility Builds: $4 billion in contract opportunities signal strong multi-year tailwinds.
Performance Analysis
Revenue expanded 26% year over year, driven almost entirely by Security Solutions, which now accounts for approximately 90% of total company revenue. This surge reflects the successful transition and scaling of the Defense Manpower Data Center (DMDC, federal identity management) contract and TSA PreCheck (airport security enrollment) program, both cited as key growth drivers. Secure Networks, the legacy segment, continued to contract, underscoring TELUS’s pivot toward higher-value, recurring government security work.
Margin performance was mixed but improving, as GAAP gross margin landed at 33.2% and cash gross margin at 38.4%. While these were lower year over year due to revenue mix, they remain consistent with the company’s historical range and are expected to rise sequentially as higher-margin streams scale. Adjusted EBITDA turned positive, beating guidance by a wide margin, and free cash flow reached $4.6 million (12.9% margin), with first-half free cash flow at $8.4 million. This cash generation enabled a $4 million share repurchase in the quarter, reflecting both confidence and capital discipline.
- Security Solutions Scale: 82% segment growth, now 90% of revenue, reflects program ramp and portfolio mix shift.
- Operating Expense Control: Ongoing cost discipline delivered $900,000 in savings versus plan.
- Cash Conversion Strength: Free cash flow improved $16 million YoY, driven by EBITDA gains and working capital management.
The company’s incremental adjusted EBITDA margin hit 44% on new revenue, demonstrating strong flow-through from top-line growth to profit. Management expects these trends to accelerate in the second half, with margin and cash flow tailwinds persisting as large contracts mature.
Executive Commentary
"Our business has been scaling in a very meaningful way year to date. Leading the way are major long-term programs and security solutions, such as the Defense Manpower Data Center, or DMDC program, and TSA PreCheck, as well as additional confidential IT security work that we are now performing for the federal government."
Mark Benza, Executive Vice President and CFO
"Our return to growth plan has taken hold, and we are exhibiting significant gains as large programs within our security solutions segment continue to rapidly scale. Our company-wide commitment to expense discipline is driving outstanding operating leverage and, as a result, in the second quarter and first half of 2025, the company delivered substantial year-over-year growth in revenue, adjusted EBITDA, and cash flow."
John Wood, Chairman and CEO
Strategic Positioning
1. Security Solutions as Core Engine
Security Solutions now anchors the business model, with federal identity, cyber, and IT modernization contracts driving nearly all growth. The DMDC and TSA PreCheck programs are scaling rapidly, and confidential federal work adds further diversification and resilience. This pivot away from legacy Secure Networks solidifies TELUS’s status as a trusted partner to government agencies with high recurring revenue visibility.
2. Margin Management and Operating Leverage
Disciplined cost control and portfolio mix optimization have boosted incremental EBITDA margins and cash conversion. Management’s focus on OPEX discipline, combined with a shift toward higher-margin software and services, is translating revenue gains into outsized profit and free cash flow improvements. The company expects gross margin to improve further as program mix evolves in the back half of the year.
3. Robust Pipeline and Contract Visibility
The pipeline stands at over $4 billion in estimated contract value, with 200+ unique opportunities and 69 new deals added last quarter. Award timing is weighted toward Q4 and Q1, with the majority of value centered in Security Solutions. This backlog underpins multi-year growth and signals enduring demand for TELUS’s core competencies in national security, cyber, and digital identity.
4. Capital Allocation and Shareholder Returns
Free cash flow generation enabled a $4 million share buyback, and management reiterated a focus on returning capital to shareholders while maintaining flexibility for opportunistic M&A. The current stance is organic-first, with tuck-in acquisitions or transformational deals only pursued if they clearly unlock shareholder value.
5. Regulatory and Technology Barriers
FEDRAMP High Authorization for the Xacta platform elevates TELUS’s competitive positioning in highly regulated federal cloud environments. This credential signals best-in-class data security and opens doors to additional sensitive government workloads, reinforcing the company’s moat in an environment where compliance is a key differentiator.
Key Considerations
This quarter marks a strategic inflection as TELUS’s business model shifts decisively toward federal security solutions, with operational execution and pipeline strength supporting a multi-year growth thesis.
Key Considerations:
- Program Ramp Scale: Large federal contracts (DMDC, TSA PreCheck) are now the primary revenue and margin drivers.
- Portfolio Mix Evolution: Secure Networks’ decline is offset by higher-margin, recurring security work.
- Operating Leverage: Cost discipline and margin expansion are translating revenue into cash flow at high rates.
- Pipeline Depth: Backlog of $4 billion+ provides multi-year growth visibility, with awards weighted to near-term quarters.
- Capital Deployment Discipline: Buybacks prioritized, with M&A only considered for clear value creation.
Risks
Federal contract concentration heightens exposure to government budget cycles, award timing, and regulatory shifts. While program ramps are robust, quarterly revenue and margin can fluctuate with contract mix and milestone delivery. Management’s commentary on margin variability and the confidential nature of some contracts introduces visibility risk. Competitive intensity in federal IT security remains high, and any delays or disruptions in major programs could materially impact results.
Forward Outlook
For Q3 2025, TELUS guided to:
- Revenue of $44 million to $47 million (85% to 98% YoY growth)
- Adjusted EBITDA of $4 million to $5.7 million (margin 9.1% to 12.1%)
- Cash gross margin of 40% to 41%, up sequentially
For full-year 2025, management expects:
- Continued acceleration in revenue and adjusted EBITDA growth
- Positive free cash flow for the full year
Management highlighted:
- Further margin expansion as program mix shifts toward higher-value streams
- Pipeline conversion and award timing as key drivers for Q4 and Q1
Takeaways
TELUS’s shift to Security Solutions is now fully reflected in both revenue and profit, with large federal programs and disciplined execution driving a sharp inflection in cash flow and returns to shareholders.
- Federal Program Scale: The DMDC and TSA PreCheck ramps are not only driving top line but also delivering operating leverage and higher cash conversion, validating the strategic pivot.
- Disciplined Capital Allocation: Buybacks and organic-first investment approach provide downside protection and flexibility, with M&A only as a secondary lever.
- Pipeline as Growth Catalyst: The $4 billion pipeline and contract visibility support a durable multi-year growth narrative, though revenue recognition will remain lumpy due to contract mix.
Conclusion
TELUS has delivered a decisive inflection in growth and profitability as Security Solutions becomes the company’s clear engine. Federal contract scale, margin discipline, and a robust pipeline position the company for sustained upside, though investors must monitor contract mix variability and government funding cycles as key risk factors.
Industry Read-Through
TELUS’s pivot and execution highlight the ongoing transformation in government IT and security markets, where recurring revenue from identity, cyber, and compliance-driven contracts is displacing legacy network-centric business. Vendors with FEDRAMP credentials, cost discipline, and program delivery track records are best positioned to capture share as federal agencies modernize and prioritize security. Other security and IT services firms should note the margin and cash flow uplift achievable from disciplined portfolio focus and operational leverage, particularly as public sector budgets remain robust and digital identity adoption accelerates.