DLH Q2 2024 Earnings Call Transcript

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Provided by Quartr
May 2, 2024

There are 5 speakers on the call.

Operator

Fiscal 20 24 Second Quarter Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to hand the call over to Chris Witty, Investor Relations Advisor.

Operator

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 Downfall, 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 JohnBull, 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 Q2 conference call. We remain on track for solid performance midway through the fiscal year. We would not be where we are today without the tremendous support and passion of our strong workforce who remain laser focused on serving our customers and they are dedicated to growing the company and instilling excellence in everything that they do. I would once again like to thank them for executing in a way that led to another great quarter of operating results, setting the stage for a bright future for DLH.

Speaker 2

Turning to Slide 4, I'll provide an overview of our financial results. We reported 2nd quarter revenue of $101,000,000 and EBITDA of $10,200,000 while generating operating cash of $5,200,000 during the period, which translates to more than $10,000,000 of cash flow year to date. This serves to underscore the cash generating ability of our enterprise as well as the sound working capital management, as Catherine will review in a moment. We also continued to delever the company, paying down $3,600,000 of debt and ending the period with $170,800,000 of total debt outstanding. Overall, we had a sound financial quarter that showed growth in key strategic markets and strong cash generation laying the foundation for solid results going forward.

Speaker 2

Turning to Slide 5, I'd like to summarize important elements of our current positioning and outlook. 1st, increased our backlog sequentially from the end of Q1, up over $80,000,000 to 736,000,000 dollars We won several awards this past quarter, including 2 key recompetes that bolster our technology front at the National Institute of Health and provide an ample opportunity to expand our presence with this and other customers. The first provides IT services at the National Institute on Drug Abuse, the leading federal agency supporting scientific research on drug use and addiction, a growing problem in the United States and a priority for our federal government. This award extends a partnership that began with our first contract with that customer in 2014. The contract value is approximately $23,000,000 of which approximately $10,000,000 is for recurring services and the balance of $13,000,000 for potential service expansion.

Speaker 2

Through the contract, we will help manage the agency's advanced clinical research informatics system, enabling sharing of data and resources in real time, a competency which we look to expand into adjacent markets. In addition, we won a contract to expand our IT services with the National Cancer Institute, the largest organization within the National Institute of Health and the government's principal agency for cancer research, training and health information dissemination. This award utilized the contract which we announced last year with the Center For Biomedical Informatics and Information Technology, a multiple award highly competed contract. We are providing scientific computing and data analytics services to support the agency's research mission. The contract has a base value, including all option periods, of approximately 52,000,000 dollars over 5.5 years, but it also has provisions for an additional 86,000,000 dollars in optional IT services, which, if fully exercised, will bring the total value to 138,000,000 dollars This award is a great example of the ongoing demand for our company's unique skill sets and integrated services as we'll be handling a broad range of requirements from hardware configuration, software management strategies, connectivity, platform integration, engineering and much more.

Speaker 2

We look forward to continuing our support of these and other NIH programs for years to come. These contract wins are illustrative of the value DLH brings to our customers, and we expect similar momentum during the second half of fiscal twenty twenty four. As we continue to invest and reshape our portfolio with business development activities and respond to a variety of active pipeline opportunities. I'd also like to comment on our legacy VA CMOP contracts, which are currently proceeding through the procurement process. As previously announced, the VA issued RFPs for medical logistics and pharmacy services for the 8 CMOP bids, and these procurements were set aside for prime contractors that were service disabled veteran owned small businesses.

Speaker 2

As such, we partnered with a highly qualified small business to bid this work as part of a joint venture. While these bids are evaluated, we continue to operate as the prime contractor for all CMOP locations. In late February, we were informed that the VA had made an initial award decision for 1 of the 8 to the Chelmsford location, awarding the contract to a small business that is unaffiliated with our joint venture. However, that award remains subject to the completion of the VA's acquisition process, and I believe that our joint venture remains a viable contender for that work. While the VA continues to evaluate the 8 separate procurements, We have been awarded a sole source IDIQ contract with a $200,000,000 ceiling value to continue the VA CMOP operations at all locations.

Speaker 2

This remains dynamic with the initial tasking having a period of performance through July 31 this year with the potential for additional orders beyond the initial tasking. Overall, we see a wide array of opportunities across our core targeted markets in the coming quarters, including through the multiyear large IDIQ contracts that we've discussed in the past, some of which are now starting to define specific task orders and some of which we expect the government to make decisions on later this year. Given the government is fully funded now through the remainder of the fiscal year, it is a time of healthy and heightened bid activity across the agencies that we serve. Our applications, research and development, digital transformation capabilities and our highly credentialed workforce, along with our strong agency relationships are anticipated to drive continued growth this year and beyond. Even with the CMOP uncertainty, the future of DLH looks tremendously bright.

Speaker 2

We have continued to build our new business pipeline, which aligns with federal budget priorities and our expanded capabilities in digital transformation and cybersecurity and its role their role in enhancing science, research and development and readiness activities. With that, I'd now like to turn the call over to our Chief Financial Officer, Kathryn JohnBull.

Speaker 3

Kathryn? Thank you, Zach, and good morning, everyone. We're pleased to report our 2nd quarter results for fiscal 2024. Turning to Slide 7, I'd like to provide a high level overview of some key financial metrics for the 3 months ended March 31, 2024. We reported revenue of $101,000,000 in the 2nd quarter versus $99,400,000 in the prior year period.

Speaker 3

We saw expansion within our public health and enterprise IT management portfolios, partially offset by the impact from turnover of certain small business set aside awards in our national security program area. We reported EBITDA of $10,200,000 for the 2nd quarter versus $10,500,000 last year and generated cash from operations of $10,300,000 year to date compared with $6,900,000 in fiscal 2023 reflecting improved cash collections. This resulted in day sales outstanding of 50 days, which represents a decrease of 11 days over the comparable period in fiscal 2023. Our EBITDA for the quarter was in line with last year, even given approximately $1,000,000 in aggregate of CMOP procurement related legal costs and strategic positioning expenses. Now if you turn to Slide 8, I'll provide an update regarding our deployment of the company's cash to reduce debt, strengthen the balance sheet and lower interest expense.

Speaker 3

We paid off approximately $3,600,000 of our higher interest floating rate debt during the quarter, ending the period with $170,800,000 of total debt outstanding. Approximately $400,000 of quarterly interest expense is non cash amortization of financing arrangement fees. We remain on track to reduce debt to between $153,000,000 $157,000,000 at the end of the fiscal year as we expect debt payments to accelerate in the second half of the fiscal year. The debt reduction is expected to result in a leverage ratio below 3.5 times, providing further cash savings and earnings expansion through reduced interest expense. This concludes my discussion of financial statements.

Speaker 3

With that, I would now like to turn the call over to our operator to open for questions.

Operator

And our first question will come from Joe Gomes of NOBLE Capital. Please go ahead.

Speaker 4

Good morning and thanks for taking the questions.

Speaker 2

Hey, Joe. Hey, good morning, Joe.

Speaker 4

So on the national security contracts So on the national security contracts that were awarded to small businesses, any way to size that? And then how much more of that, if any, is at risk?

Speaker 2

Yes, Joe, great question. As you may recall, we during the end of 2022, early part of 2023, we did discuss it with the acquisition that we completed with GRSI that there were some opportunities, some of the programs had previously been awarded in a small business environment. And so we did expect to have some runoff of those when they came around for recompetition. And that accounts for largely what you have seen thus far in that which Catherine has referred to. We still have a couple or a few of those that are still pending.

Speaker 2

We expect most of those decisions this fiscal year. And we'll have some degree of certainty as to what that conversion rate will look like. As you know, some of these contracts, we can we would generally if we're to recompete those, we will recompete them generally as a subcontractor position, which potentially affords us 49% of retention of those contract values. So we'll keep you all informed as to how those progress downstream.

Speaker 4

Okay. Thanks for that, Zach. And on the G and A, you mentioned some of the legal cost increased driving some of the increase in G and A. Do you see that continuing going forward? Or should G and A drop back down to the more historical type of a run rate?

Speaker 3

Well, we do see it continuing, albeit likely at a lower level of consumption. However, I think our even withstanding that our G and A rate for the quarter was not particularly out of line. I think our Q1 was perhaps a little bit of an outlier to the favorable. If you look at that, if you look at the percent of G and A costs in Q1, it was really a function of our getting the operating leverage we expected to get post the integration of activities from the GRSI acquisition and not yet having fully as is always our model redirected those costs to really position the company for growth. Really the emphasis now and Zach will go into this more as he talks about growth in the rest of this call and upcoming quarters.

Speaker 3

But really as we've talked about before, our strategy for growth, it's working well to have each of the parties pursuing their own portfolios and really continuing to support their current customers and continuing to grow their independent lines business. Where we're positioning and really investing is really the cross selling opportunities and really integrating the company and really making sure that we're pulling the capabilities up to pursue

Speaker 2

opportunities that would not have

Speaker 3

been viable for the capabilities up to pursue opportunities that would not have been viable for any of the independent parts of the company. And so we do expect to continue that in the out quarters and that is a bit of a backfill to some of the operating leverage savings we've achieved.

Speaker 4

Okay. And on the VA contract, I mean, congrats on getting extended once again. But I don't know, Zach, if you can provide any more color as to what the VA's thinking is. They just seem to change gears at the drop of a moment's notice. And just trying to see if we can get a little better understanding of their whole thinking and process here.

Speaker 4

Like you said, the funded now is through the end of this fiscal year and then potentially through October of 25, which seems to be a long time for them to have to make a decision on these contracts. But we know this has happened in the past. So just any other insight you can give would be greatly appreciated.

Speaker 2

Sure. Thank you for the question, Joe. And again, yes, you're correct. As you may recall, this procurement cycle with recompetes for us started back in November of 2016. And in fairness to the VA acquisition community, there was really heightened degree of commitment and new approaches associated with the Kingdom Warrior decisions that forced the VA and various acquisition shops to take a look at the appropriate acquisition strategies.

Speaker 2

And over the years, the VA has had 2 versions, if you will, of this acquisition. And of course, each was set back in large part due to a protest. And so this is really we're currently in this phase where it again yet again is another approach where we've had which by location and it is combined both the medical logistics and pharmacy. So it is kind of a first time for them in this arena with it being exclusively set aside. And the way in which the process works is that, first, the VA is required to do a thorough evaluation of the set aside environment and then make a determination around market best value interest to the government.

Speaker 2

And should they determine that awarding in a small business environment, set aside environment is not in their best interest, then they must restart a new acquisition. So it's in large part driven by the formalized acquisition regulations that evolved from that law. And they're doing their best to try to get an acquisition strategy that will first evaluate the small business opportunities, take a look at what risks associated with that. If that is suitable, then continue with the awards. And if not, then reopen it to an unrestricted environment.

Speaker 2

So we'll this is therefore first attempt at this new model of bundling and we'll see how it yields in the future.

Speaker 4

Thanks for that insight, Zach. And if you were to lose 1 or more of the 8 contracts, how quickly can you get rid of the costs that are associated with serving those contracts?

Speaker 2

Yes, great question. We have, as you might imagine, over the years, continued to model various scenarios that align with the new acquisition strategies, right? And of course, this strategy, which came out in the procurement phase last year, we have taken a look at that. We have so we do have some step down approaches and plans to execute them. It's going to be a function, Joe, of how many of them are awarded in a given time period, right?

Speaker 2

Every indication is they would not award all 7 or 8 concurrently, so that they can manage the phase in process, which is ranging from 60 to 90 days in those solicitations. So, if they were to do that, if you think about it, we would have various models that would have a scale down associated with the range of contracts. But we feel very comfortable that we will within a full operating quarter be able to hit a pretty quick reduction and to be able to operate efficiently with regard to our EBITDA margin basis.

Speaker 3

Yes. I mean, as a services business, of course, our components of our costs are the direct cost of performing the contracts. So those are and that is by far and away the majority of the cost and naturally that scales of the contract moves the cost move with it. There's also of course costs running any particular part of our operation that is distinct to that operation and CMOP as we've described before is a very large scale deceptively complex. I mean we think of it as it's fulfillment of prescriptions and of course it is.

Speaker 3

But it's complex in terms of the deployment of the workforce in response to variable demand. And so there is an infrastructure supporting that particular operation in a unique way and that is of course scalable as the effort the volume of business scales. And then there of course the corporate cost of running the overall business. So as Zach suggests, the scaling will be I expect to be very well aligned with the timing of the revenue volume changes and then we have to address the impact to the corporate infrastructure costs. But we're as Jack said, we model this regularly and we are prepared for this as an outcome even as we continue to support VA as a key customer and something that we've invested in helping their outcomes be strong and the operation continue to improve.

Speaker 4

Okay. One more for me and I'll get back in queue. Zach, you guys haven't talked about the InfiniByte product here lately. I was wondering if you could give us kind of an update and how that is going out and being accepted?

Speaker 2

Great straight man, Joe. I appreciate that. Our federal government is really stepping up this activity with regard to security and cybersecurity across all agencies. Recently, in the last year, the White House has issued cybersecurity guidelines, implementing regulations being formed. There's a strong, strong commitment to execution of sound cybersecurity principles as well as major commitment to cloud modernization for programs.

Speaker 2

We're starting to see those and we're hearing more from those agencies met with some of the highest levels in the leadership on the federal government just earlier this week in that regard. So we believe that our InfiniByte solution still offers a very, very highly secure differentiating capability since we are one of the certified FedRAMP certified companies. So it still remains, we think, a strong differentiator as we start to see those cybersecurity and information assurance opportunities coming down the pipeline. It is an area, Joe, where we have a strong campaign. It obviously was bolstered with the capabilities that we have brought in, both with the works that we're doing, the cybersecurity mission engineering work that we're doing for the Navy and complemented by some exacting high security up to and including 0 trust architecture that we're doing within NIH in driving some of their transitions for the biomedical research community.

Speaker 2

So we're really excited about how we think InfiniBiTE both complements and gives us a breadth and a capability that's somewhat unique and we're looking to include that in our value propositions for these new bid backlogs that are finally starting to uncork a little bit with some budget certainty with some of these customers.

Speaker 3

But that would be a great example, Joe, of what we talked about earlier in this call about the cross selling opportunities.

Speaker 2

Yes.

Speaker 4

Okay. Great. Thanks for taking the questions. I appreciate it and nice strong quarter. Look forward to seeing how the second half of the year unfolds.

Speaker 3

We do too.

Operator

This concludes our question and answer session. I'd like to turn the call back over to Zach Parker for any closing remarks.

Speaker 2

Thank you, Andrea, and thank you all for your attention today. Please stay tuned over the coming quarter. Catherine and I will be providing some additional color around our pipelines, new business as well as update on our current and organic on contract growth opportunities at some upcoming investor conferences. Thank you all for your support and have a blessed day. Bye for now.

Operator

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.

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Earnings Conference Call
DLH Q2 2024
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