DLH Q1 2024 Earnings Call Transcript

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Provided by Quartr
February 1, 2024

There are 6 speakers on the call.

Operator

Good day, and welcome to the DLH Holdings Fiscal 20 24 First Quarter Earnings Conference Call. Please note today's event is being recorded. I would now like to turn the conference over to Chris Witty, Investor Relations Advisor. Please go ahead.

Speaker 1

Thank you, and good morning, everyone. On the call with me today is Zach Parker, President and Chief Executive Officer and Kathryn JohnBull, Chief Financial Officer. The company's earnings release and PowerPoint presentation are available on our website under the Investor page. I would now like to provide a brief Safe Harbor statement, which is also shown on Slide 3 of the presentation. This call may include forward looking statements that relate to the company's outlook for fiscal 2024 and beyond.

Speaker 1

These statements are subject to various risks and uncertainties, which could cause actual results and events to differ materially from such statements. Please refer to the risk factors contained in the company's annual report on Form 10 ks and in our other filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward looking statements. On today's call, we will be referencing both GAAP and non GAAP financial measures. A Reconciliation of our non GAAP results to our reported GAAP results is included in our earnings release and in the investor presentation on DLH's website.

Speaker 1

President and CEO, Zach Parker will speak next, followed by CFO, Catherine Donckel, after which we'll open it up for questions. With that, I'd now like to turn the call over to Zack. Please go ahead, Zack.

Speaker 2

Thank you, Chris, and good morning, everyone. Welcome to our 2024 First Quarter Conference Call. Once again, thanks to the dedication, collaboration In innovation of our talented DLH workforce, we're on track for another year of solid performance here at DLH. Their dedication to our customers' vital missions, combined with the organization's overriding commitment to performance excellence and improved results, continues to drive value for our DLH shareholders. We rely on our people to set very high standards of excellence each year as we continue to build a world class provider of emerging technology enabled solutions and services.

Speaker 2

They continue to rise to the challenge and we're very proud of their accomplishments. Now turning to Slide 4, I'll provide an overview of the quarter's financial results. We reported 1st quarter revenue of 97,900,000 and EBITDA of $11,100,000 while generating operating cash of $5,100,000 during the period. We also continue to delever the company, as Catherine will review momentarily, by paying off another $5,000,000 of debt ending the quarter with only $174,400,000 of total debt outstanding. With our organic growth, which has endured federal budget CR headwinds Due to the timing of new budget decisions, we continue to see some delays and business development opportunities.

Speaker 2

However, we remain confident in our ability to generate new business through our robust growth channels, both existing and new award contracts. Turning to Slide 5. Let me summarize a few key industry and environmental factors currently influencing our position in the market. First, as I just noted, the federal government is still operating under a continuing resolution, which typically slows down decision making, both on current IDIQ contracts and potential new business opportunities. The most recent resolutions keep the government running through March 1st with some departments funded through March 8.

Speaker 2

As a reminder, this is the 3rd set of stopgap measures that Congress has passed since September. And as a result, our clients have limited budget certainty, which is restricting their ability to make new awards. That said, remaining cautiously optimistic that both the recent and near term progress could result in funding flow for our major agencies through the remainder of fiscal 2024 paves in the way for efficient contract implementation and awards. We continue to build upon a strong pipeline of high value opportunities across our broad customer base, as well as key large multi award IDIQ platforms opening additional channels for the company. Our enhanced technical capabilities, highly credentialed workforce and science and technology platforms are ready to meet the evolving demands of our customers and to provide innovative value propositions.

Speaker 2

Our ability to attract and retain industry leading talent is critical to providing uninterrupted support for our clients' missions. DLH employees solve challenging complex problems and their program execution results unmatched in delivering customer satisfaction. So it was truly an honor to receive A great place to work certification, an award entirely based on what current employees say about their workforce. This achievement is assigned to customers, partners and prospective new hires alike that DLH creates an outstanding employee environment. Now turning to Slide 6.

Speaker 2

We have provided an overview of our business base illustrate the diverse set of customers we support. This broad customer base, which spans agencies within the federal military and civilian markets, offers many opportunities to deliver our differentiated services to an array of new and existing customers. Building a portfolio of work that supports mission critical programs that have traditionally received broad bipartisan support is a long standing strategic goal of our corporate and business development organization. 45% of our current business portfolio lies within the Department of Health and Human Services. Key clients under this umbrella include the Agency For Children and Families, Center For Disease Control and Prevention, and of course, the National Institute For Health.

Speaker 2

Our capabilities in research and development, Systems integration and big data analytics have allowed DLH to provide unmatched value to our HHS clients and penetrate new programs across the board. The VA comprises approximately 35% of our new revenue of our revenue via the Veterans Health Agent Administration. This includes our long standing CMOP operations and we have a long history of supporting the VA and we currently are looking forward to expanding our services inside the agency to deliver for those who so deserve our nation's excellence. And thirdly, today, defense agencies comprise roughly 17% of DLH revenue, including the work across broad array of programs in the Defense Health Agency and the military services. This book of business is poised to see substantial growth over the coming years As DoD looks to invest in health IT, digital transformation, data analytics, cybersecurity, AI enabled research and numerous health related platforms.

Speaker 2

Given that our client relationships spend decades, we can leverage this intimacy to shape customized solution and expand our contract portfolio through new business development opportunities as well as growth on existing programs. As government agencies continue to expand their commitment to cyber Security, data analytics, IT modernization, artificial intelligence and the like, all directly aligned with our strength, Our company's addressable markets continue to grow. Our innovative offerings remain in the sweet spot of agency technology upgrade initiatives, as evidenced by White House and federal agency strategic plans. By integrating our highly differentiated digital transformation capabilities with research domain expertise, this serves as a relatively unique platform to address broader range of solutions than ever before, helping our clients reach hire and perform even better every day. These will include exacting objectives of precision medicine, all of us studies and evaluations, strides initiatives for cloud security and many more.

Speaker 2

With that, I'd now like to turn the call over to our Chief Financial Officer, Kathryn JohnBull. Kathryn?

Speaker 3

Thank you, Zach, and good morning, everyone. We're pleased to report our Q1 results for fiscal 2024. Turning to Slide 8, I'd like to provide a high level overview of some key financial metrics for the 3 months ended December 31, 2023, compared to the prior year period. We reported revenue of 97.9% in the first quarter versus 72.7% in the prior year period, reflecting the addition of our strategic acquisition in December 2022. We reported EBITDA of $11,100,000 for the Q1 versus $8,100,000 last year as adjusted for corporate development costs supporting that acquisition and generated cash from operations of $5,100,000 compared to $8,000,000 in fiscal 2023, with the variance primarily related to vendor payment timing.

Speaker 3

This does not negatively impact our expectations cash flow generation this year nor planned debt reduction. Speaking of which, if you'll turn to Slide 9, I'll provide an update regarding our deployment the company's cash to reduce debt, strengthen the balance sheet and lower interest expense. We paid off approximately $5,000,000 of our higher interest rate floating rate debt in the 1st quarter, ending the period with $174,400,000 of total debt outstanding. As a reminder, approximately $6,000,000 of quarterly interest expense is non cash amortization of financing arrangement fees. Our cash generation ability reflects our focus on efficient and timely cash collections, resulting in day sales outstanding of 51 days for the period versus the industry peer group average of 61 days.

Speaker 3

We remain on track to reduce debt to between $153,000,000 $157,000,000 at the end of the fiscal year, resulting in a debt leverage ratio below 3.5x EBITDA by the end of the fiscal year. We will continue utilizing the favorable tax attributes of our acquisitions along with stock compensation deductions to minimize cash income tax payments going forward. This concludes my discussion of the financial statements. And with that, I would like turn the call over to our operator to open for questions.

Operator

Thank And today's first question comes from Joe Gomes with NOBLE Capital. Please go ahead.

Speaker 4

Good morning and thanks for taking my questions. Good morning, Joe. Good morning, Joe.

Speaker 3

Thank you for joining us.

Speaker 4

So I wanted to start off with the revenue line and kind of get a feel for what You guys were expecting going into the quarter, it's a little lighter than what we had expected. I The continuing resolution represents a headwind for you guys. But I just kind of wanted to get a little better feel for what you were expecting going into the quarter and what you think this means for the rest of the year?

Speaker 2

Yes. That's a great question, Joe. I would say it did turn out a little softer than what we had largely due to certain customers, certain of our customer sets that are really being throttled by the budget uncertainty. As you well know, we have a few very large $100,000,000 contracts that involve intramural and extramural scientific research around health challenges and we've just seen that For consecutive quarters, several quarters now that without budget certainty, there's been some reluctance to do some of the funding. So it's trailed what we've expected what we were really expecting for this year and then a couple of anomalies that just have some seasonality

Speaker 3

impacts. Right, right. That said, as Zach said, there has been some slowness in turning new orders as he's indicated. Although as you might expect, Q1 is historically a softer, lighter quarter just based on where it falls in the calendar and the impact of leave time around the holidays. So from that perspective, from our planning perspective, it's pretty in line, Though we are we do see some slowness in the orders that we expected to give us some lift exiting the quarter and coming into Q2.

Speaker 4

Okay. Thank you for that. If we take a look at the VA contracts that now have been extended into February, all this Kind of looks like a little bit shorter of an extension than you normally see. I think they're normally a little bit longer than the 2 months. And just Does that give us any or give you guys any insight as to what the VA might be planning here in the near or do you think these contracts are just as we've thought in the past continue to just be extended out?

Speaker 2

Yes. We as you well know, we and when we started out on what we referred to as bridge contracts, they were usually going At what we would call 6 months, they were really kind of a pairing of 2, 3 months bundled together, etcetera. As you And it is customary for the acquisition community and the federal government to as you get further along in these kind of extensions and you have procurements on the table right now to shorten the cycles in the event that they are able to make some progress on the awards. Having said that, though, we think there's nothing to really read into that. We still are really strongly believing that We see no material impact to FY 'twenty four's plan and results just based upon the timing and the potential evolution of the acquisition chain.

Speaker 4

Okay, great. And then on HHS, this quarter evidently we're not didn't need to break that out in the Q. So just wondering how that big contract performed in the first quarter compared to last year?

Speaker 3

Yes, very consistently. Because we've returned to a normal operating cadence as opposed to the variation that happened during the COVID challenges, We do have comparable results year to year from that program.

Speaker 4

Okay, great. And then one last one for me and I'll drop back in There was a nice drop in SG and A as a percent of revenues, Cap. And I just wondered, is that sustainable, is that a good number to use going forward? Or do you think that cost will begin to edge back up over the rest of the year?

Speaker 3

I do think that it's going to be a function of the timing of BD cost. And so given the congestion around RFPs getting issued, it's our G and A Costs incurred in the quarter were a little lighter than we expected. So that you get the both The good and the bad side of that coin, I guess, if you want to think about it that way, but we'd be happy to spend that money for the long term value it delivers in the company and our growth strategy. But I think I don't see that as our delivering permanent reduction in SG and A cost To scale yet, until we get on that track of that front end investment in business development and the yield on the back end in the form of awards that helps from modeling your outlook.

Speaker 4

Okay, great. Thanks for taking the questions. I'll get back in queue.

Operator

Our next question comes from Brian Kinstlinger with Alliance Global Partners. Please go ahead.

Speaker 5

Hi, good morning guys. Thanks for taking my questions.

Speaker 4

Can you talk about

Speaker 3

Hey, Brian. Thanks for joining.

Speaker 5

Hi, Catherine. Can you talk about the bookings And proposal submission trends, I joined the call late. If not from a quantitative perspective, then at least at a high level, have they each of them, have they been strengthening, have they been weakening, are they stable? Just high level discussions so we can understand the market conditions.

Speaker 2

Yes. I missed the first part. You said bookings and mostly on it?

Speaker 5

Proposal submissions?

Speaker 2

Yes. Yes. I think like Catherine said, the data that contributed to the softer SG and A is an indication of a little lighter than anticipated proposal development period. We there are a Proposal development period. We there are a number of programs that the government has issued that are continuing to extend to the right.

Speaker 2

Probably the most notable one that we've given color to is one of our large multiple award IDIQ contracts, of which will open up channels for us to bid a number of contracts and we refer to that one as the CIO SP4. We believe that Evidence indicates that the government is getting very, very close to resolving all of the protests that they've encountered over the last year now and that we should see an award in our minds potentially by the end of Q2 and which will create those bidding opportunities for us in Q3 and Q4. Some of those are going to be large term, Long term opportunities, some of those will be quick turnarounds. And so we've positioned ourselves to be able to do both as they come forward. But again, little disappointed that we haven't had the opportunity to bid on those as yet as The booking continues to slip to the right.

Speaker 2

But having said that, we are still continuing to develop Value propositions, we believe are going to be winning value propositions on some of our existing IDIQ contracts provided that the funding comes as well.

Speaker 5

So I'm curious in past coverage where I've covered some of the more defense related IT guys, the win rates were around 25% to 30%, 30% would be excellent. I'm not sure if it's similar for DLHC or not, but if it is, I'm wondering, are you casting a wide enough web outside of your existing book of business to drive growth? And if not, what can you do to increase that web to drive stronger growth. Well, you

Speaker 2

are actually a great straight man for us. Yes, so We have, as a result of some of the capabilities that came in at the end of last calendar year, In part with our acquisition and also with some key investments and hires that we have made, we have been very active over the last quarter to accelerate the diversification of our addressable market. So there are some agencies that we felt were a little far for us before that are now within our swim lanes. We've expanded our pipeline development in areas that are leveraging stronger cyber security or enhanced cyber Security calls are stronger health IT qualifications and our pipeline, new business pipeline is beginning to really reflect that. Those opportunities, of course, are things that we hope to see in this fiscal year to bid.

Speaker 2

And then, of course, we expect to exit very, very strong with the ability to get some of those awards in place. You're also very accurate with regard to our industry. We generally look at 30% win rate on new business has been very, Very good. We expect a lot higher than that as in close to 100 on our recompetes that we choose to stay in that business. But 30% would be an industry standard top of the line win rate.

Speaker 2

And we've and 20% is still good. We've had we also kind of bucket those into 3 areas. 1 is the multiple award IDIQs, GWACs as they call them, which generally have a 0 booking the way in which we treat them, but open up a huge opportunity for organic growth. And then we have small to medium sized bids, which had been our sweet spots in the prior stages before our last phase of the acquisitions. Those were again things ranging anywhere from $10,000,000 to $50,000,000 And then medium sized to larger being north of $50,000,000 and much like probably our last $700,000,000 win.

Speaker 2

So we're we kind of look at each of those as now we feel that we can swing to that some of those larger opportunities that before we had to partner with and we're now establishing those opportunities into

Speaker 3

And that's really the opportunity for productive use of that delay time. No one desires the delays that the industry is experiencing. But for us, particularly probably more so than most, It's an opportunity to really have the client call plans working and really raise awareness and really to your point, Open the aperture, not even that far adjacent from where we've been, but more so really for people who don't necessarily think of DLH certain capability sets because they haven't seen us there yet, but really having them understand how we have resonant in the company The breadth of capabilities that can really respond to new things and really giving those proof points and building awareness before the bid opportunities come out. So you never run out of ideas of how to raise profile and build awareness. So in some respects, we're I think making the best use of that delay time to really continue to improve our position for when the opportunity to bid comes in.

Speaker 5

Great.

Speaker 2

And that pipeline shaping activity will be in part reflecting the answer Catherine gave to Joe earlier, right? So we're doubling it down on the positioning opportunities, whether the RFPs come out or not from the customer, from which would lead to BNP investment on the SG and A side. So you'll see, we would expect that The next quarter's results will be more reflective of that portfolio expansion.

Speaker 5

Great. My last question revolves around the GRSI transaction. I'm curious, I don't know if you provide numbers or high level again, whichever. If you look at their 2023 revenue, is it growing over 20 did it grow over 2022? Did it shrink?

Speaker 5

Is The same. And then I'm curious, if you evaluated where you hope to be at this point in terms of revenue contribution again from the IT side. Are you where you would hope to be or is it more impacted as well by what's going on in the broader market and so maybe you're a little bit behind plan?

Speaker 2

Sure. We'll tag team that one. Great question. Yes. Regarding 'twenty two to 'twenty three and beyond, as you may recall, they first of all, they've that acquisition has delivered All that we have expected in terms of enhancing our competencies, our capabilities and channels for growth and expanding markets.

Speaker 2

So it's been very, very, very strong in that regard. You may also recall that in the existing book of business So they existed when we closed the acquisition December 8. There was still a fair amount of contracts that we considered

Speaker 4

that

Speaker 2

as to whether or not we would be able to retain that work within the GRS side. And most in most cases that would mean as a minimum, We would likely get 50% of any arrangements or 49% of any arrangements that we have with a small business partner. So those are starting to those the schedule and the timing of those have been a little bit different from what we had expected going forward. But they're obviously they're having what I fully anticipated the type of erosion in that market area, while the company is doing very good in the position that we've won a For those that we're not terribly optimistic on, but again, we're net in net terms in terms of it would have a net negative effect on the revenue. But that was all anticipated because it's those capabilities that allow us to win in the Unrestricted market that we saw the value and we're comfortable seeing some of that erosion for the small business set aside work.

Speaker 2

So Catherine, you want to add to that?

Speaker 3

Yes, absolutely right. So the strong EBITDA contributors were locked and really protected and have continued to deliver. There's been some erosion of the lower end work as Zach described, lower end from a just from a numbers perspective, no disrespect to the Work being performed and the customers being served, obviously. But from a growth perspective, to your second point, naturally, GRSI has been equally, if not more so, affected by the delays in decisions around particularly that large IDIQ that Zach mentioned, CIO SP4. They were, as many of you remember, we've talked about on former or prior calls, They are a scheduled order on CIO SP3.

Speaker 3

So unlike DLH, the heritage DLH, which really did not have the resident technical capabilities to bid on CIO SP3, but was preparing itself through its acquisition program to be credible in CIO SP4. In contrast, GRSI was on CIO SP3, but as a small business and they've obviously grown out of that. So they've kept the work they had, But their opportunity to really bring their expanded talents that they've built over time into the large scale operations that we expect as part of their forward opportunities that's been delayed. So the growth strategy for DRSI has that bit of an overhang that whole business and the industry is experiencing, but in terms of relevance to our journey ahead and really ability to contribute to our talents in addressing the market, they are everything we expected them to be.

Speaker 2

Yes, let me add a piece to that Our strategy was built was not just to come on those qualifications. We have been very, very In driving collaboration across the business, we really are looking at 1 plus 1 equaling 3. So we were not looking at existing business base and capabilities alone, what we have seen and what excites us most is the synergy of pursuit of these opportunities based upon our heritage NIH work as well, which is heavily based in the science and security side of the business with the IT aspects that came with the acquisition. When you put those together, you Some of the world renowned epidemiologists and research scientists together with the technology capabilities that came along with the acquisition, we are seeing Some innovations and opportunities to provide past performance references that the customer is not seeing very much on the competitive landscape. So We're excited about the synergy and what that has opened up in terms of not only value propositions, but cross agency selling.

Speaker 5

Okay.

Operator

Thank you. And as we have no further questions in the queue, I'd like to turn the conference back over to Zack Parker for any closing remarks.

Speaker 2

Well, thank you all. We really appreciate your continued We ask you to look forward to a couple of dates in the future where we'll meet you again in the not too distant Future, that's 1st of all, will be March 14, where we'll have our Annual Shareholders Meeting. We will actually physically be in New York. So come on by, Catherine and I and our Board of Directors would love to see you there. And also stay tuned, we will be participating in an Emerging Technology Investor Conference, largely from small caps, at the Alliance Global Partners events on February 7.

Speaker 2

You read the details on our website. And there we'll be disclosing a little bit more color around some of the technology evolution that the company has gone through and how we see that being a key part of driving value. So thank you very much and we'll look forward to hearing and seeing you soon. With that, have a blessed day. Bye for now.

Speaker 2

Take care.

Operator

Thank you. This concludes today's conference call.

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