DLH Q1 2025 Earnings Call Transcript

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February 6, 2025
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Operator

Good day, and welcome to the DLH Holdings Corp. Fiscal twenty twenty five First 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 also note this event is being recorded.

Operator

I would now like to turn the conference over to Chris Witty, Investor Relations Advisor. Please go ahead.

Chris Witty
Chris Witty
Managing Director - Investor Relations at DLH

Thank you, and good morning, everyone. On the call with me today is Zack Parker, President and Chief Executive Officer and Katherine 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 three of the presentation. This call may include forward looking statements that relate to the company's outlook for fiscal twenty twenty five and beyond.

Chris Witty
Chris Witty
Managing Director - Investor Relations at DLH

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.

Chris Witty
Chris Witty
Managing Director - Investor Relations at DLH

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 Zach. Please go ahead, Zach.

Zachary Parker
Zachary Parker
President & CEO at DLH

Thank you, Chris, and good morning, everyone. Welcome to our first quarter conference call. As we begin fiscal twenty twenty five, I'd like to take a moment to thank our talented employees for being so dedicated to the future of DLH during this transformational time in our country's history. It is your thorough dedication and commitment to excellence that allows us to succeed. Even as industry conditions change, your steadfast passion for our customers' critical missions drives DLH toward a bright future.

Zachary Parker
Zachary Parker
President & CEO at DLH

Now turning to Slide four, I'll provide an overview of our financial results. Performance excellence and accelerating organic growth remain our highest priorities as a company, and recent developments illustrate the strength of our transformed new business pipeline. Our recent award to provide C6ISR and advanced IT services to the Navy, expands our information warfare systems engineering portfolio, covering from Norfolk, Virginia to San Diego, California. This recent award has been key to our organic growth campaign of opportunities, particularly those that leverage intelligence, surveillance expertise and mission critical readiness related services to our clients. We remain confident about our long term vision bearing fruit in this and in near term fiscal years as our bidding posture with our strategic clients has really been strong.

Zachary Parker
Zachary Parker
President & CEO at DLH

A new administration brings both challenges and opportunities, but we have always based our portfolio of business around enduring programs, which obtain broad bipartisan support in Congress. And I'm happy to say this continues to be the case. Our services and solutions are focused on improving technology utilization, enhancing productivity and efficiency for our clients that has been at the core of all that we do. These are values directly aligned with this administration's stated priorities. And overall, our initial assessment of this administration's impact on DLH's current book of business and future opportunities still remains at neutral to slightly positive.

Zachary Parker
Zachary Parker
President & CEO at DLH

And we still have that belief as we look for the long view. To date, we have not had any material impact from the recent executive orders. We reported first quarter revenue of $90,800,000 and EBITDA of 9,900,000 representing an EBITDA margin of 11% on revenue. While we used cash during the quarter due to short term growth in receivables and increased our debt accordingly, we expect strong cash flow in the fiscal second quarter and a continuation of our deleveraging strategy, as Catherine will review in a moment. Slide five provides a snapshot of our go forward growth strategy as reviewed last quarter.

Zachary Parker
Zachary Parker
President & CEO at DLH

While the company will likely continue to feel the effects of small business set aside unbundling of contracts in the coming quarters, our growth is squarely focused on the opportunities which leverage our digital transformation, cyber security, research and development and systems engineering capabilities. We have a strong pipeline of qualified and well positioned bids. We anticipate half a dozen or so of those to be awarded this year. Our qualified pipeline has several opportunities with contract values in excess of $100,000,000 and more. This should substantially offset the eventual small business set aside erosion.

Zachary Parker
Zachary Parker
President & CEO at DLH

As I mentioned, our focus on differentiating technology and innovation is yielding results, both expanding our footprint for the existing customers, as well as opening new channels for growth, such as through new contract vehicles, the multiple award IDIQs, our platform for generating new business has never been stronger. Slide six serves as illustrative example, case study of how we expect to leverage our existing work and broaden capabilities to win new business in the near term and long term. Each step in the process provides a new building block for which we can establish franchise programs across the health and readiness marketplace. This graphic illustrates a growth campaign of selected opportunities that pull together attributes from across our company's capability sets. The opportunities vary by total contract value and customer, but each requires the differentiated capabilities and solution that DLH can offer.

Zachary Parker
Zachary Parker
President & CEO at DLH

We remain well positioned for organic growth going forward and believe the federal marketplace offers opportunities to expand our technology powered solutions. We remain focused on accelerating the company's top line, leveraging our credentialed personnel, highly enhanced capabilities, and over time, we'll more than make up for any of again the small business set aside erosions. We continue to believe the best is yet to come and are building a stronger DLH to serve the needs and challenges of our clients. With that, I'd like to turn the call over to Catherine JohnBull, our Chief Financial Officer. Catherine?

Kathryn Johnbull
Kathryn Johnbull
CFO at DLH

Thank you, Zack, and good morning, everyone. We're pleased to report our first quarter results for fiscal twenty twenty five. Turning to Slide eight, I'd like to provide a high level overview of some key financial metrics for the three months ended 12/31/2024. We reported revenue of $90,800,000 in the first quarter versus $97,900,000 in the prior year period, reflecting contributions from recent contracts awards offset by the conversion of certain VA and DOD programs to small business set aside contracts, as well as service delivery timing on key HHS contracts. Revenue contraction due to small business set aside conversions within our DoD portfolio was approximately $5,000,000 in the quarter.

Kathryn Johnbull
Kathryn Johnbull
CFO at DLH

This amount is comprised of approximately $3,500,000 of non labor lower margin pass through revenue from a contract that was unbundled in this past quarter and approximately $1,500,000 from the winding down of acquired small business contracts in the prior year period. While we remain focused on winning new programs that bode well for future growth, small business set aside conversion headwinds are likely to impact our results for the upcoming quarters. A second CMOG site has transitioned to a small business contractor as of 01/31/2025. This location averaged approximately $7,000,000 in revenue per quarter over the last twelve months. We are under contract to perform services at the remaining locations through at least April and we reported EBITDA of $9,900,000 for the first quarter versus $11,100,000 last year.

Kathryn Johnbull
Kathryn Johnbull
CFO at DLH

EBITDA was down primarily due to the lower overall revenue level, offset in part by reductions in certain variable indirect costs as we scale the business. From a cash standpoint, we used approximately $11,500,000 of operating cash during the quarter versus cash generation of $5,100,000 last year first quarter. As a reminder, the prior year period was positively impacted by delayed payments from the fourth quarter of fiscal twenty twenty three, making it an unusual comparison. In addition, our first quarter collections this year were impacted by collection delays on one significant account, which has already begun clearing in the second quarter. We anticipate Q2's cash generation to more than offset the first quarter shortfall and therefore lead to a reduction in debt.

Kathryn Johnbull
Kathryn Johnbull
CFO at DLH

Turning to Slide nine, we ended the quarter with total debt of $167,000,000 versus $154,600,000 at the start of the fiscal year, reflecting those short term borrowings. As a current update, debt today is slightly under $161,000,000 As I mentioned a moment ago, we anticipate utilizing approximately 50% to 55% of EBITDA to pay down debt during the remainder of fiscal twenty twenty five. As always, using cash to delever the company is a top priority going forward. Our amended credit facility continues to provide excellent financial flexibility as we navigate through the changing business climate this year. It provides enhanced borrowing capacity to satisfy short term working capital needs, as well as our others our strategic focus on new business initiatives.

Kathryn Johnbull
Kathryn Johnbull
CFO at DLH

We will continue to invest in organic growth and believe our portfolio of technology powered solutions puts us at the table for more programs than ever before. As Zack previously mentioned, our pipeline of qualified new business opportunities now stands at approximately $4,000,000,000 representing a diverse mix of existing and new customers with budgets and priorities expected to be aligned with the new administration. This concludes my discussion of the financial statements. And with that, I would now like to turn the call back to our operator to open up for questions.

Operator

Thank you. We will now begin the question and answer session. And our first question will be from Joe Gomes from NOBLE Capital. Please go ahead.

Joe Gomes
Senior Research Analyst at Noble Capital Markets

Good morning, Zack and Catherine. Thank you for taking my questions.

Kathryn Johnbull
Kathryn Johnbull
CFO at DLH

Hey, Joe.

Zachary Parker
Zachary Parker
President & CEO at DLH

Good morning, Joe.

Kathryn Johnbull
Kathryn Johnbull
CFO at DLH

Thanks for joining us.

Joe Gomes
Senior Research Analyst at Noble Capital Markets

I wanted to start out. You mentioned in your remarks and in the press release probably like four specific items for the revenue decline, what recompetes that were lost for the small business set asides, just the small business transitions, some non strategic projects winding down. And Kathy, you talked a little bit about some of the numbers. I just wonder if you could kind of rank or give a percentage of those items that impacted the revenues. What was the greatest down to what was the least impactful?

Kathryn Johnbull
Kathryn Johnbull
CFO at DLH

Yes, sure, Joe. Happy to do that. So the key impact or the most significant impact to the quarter was derived from the unbundling of one of our recompetes. As we've shared in prior calls, the prior administration had a commitment to small business set aside and really ran contrary to the couple decades long practice of consolidating contracts under a prime contractor that would really, number one, drive integration efficiencies from the program and secondarily, really transfer from the government to that prime contractor the performance risk of really trying to manage a series of contractors. But even though that was a couple decades trend, nonetheless, the prior administration really provided a mandate that certain things be unbundled.

Kathryn Johnbull
Kathryn Johnbull
CFO at DLH

And so we experienced that in the quarter that one of our DoD programs was unbundled. And as we mentioned in our comments in the call, largely that was derived from subcontractors we had on our team where we were assuming that integration responsibility. So that's why it had less of an impact to our gross margin delivery because it's relatively low volume, low margin work. Secondarily, there as we've talked about on a number of calls, there was a tail of small business revenue that we acquired. And sometimes those tails take a long time to run out.

Kathryn Johnbull
Kathryn Johnbull
CFO at DLH

But throughout the quarters of 2024, we mentioned some of those small business acquired contracts that we're wrapping up. But as a comparison point, quarter to year over year in the first quarter, that transition hadn't really started much until later quarters of $24,000,000 So that was about $1,500,000 that was present in Q1 of '20 '20 '4 million dollars exiting throughout Q2 and 2 to $4,000,000 of $2,024,000,000 dollars and not present in Q1 of twenty twenty five. So the year over year comparison is impacted by about $1,500,000 Thirdly, there's about $1,500,000 related to winding down or having completed the exit from international work, which is, of course, getting a lot of attention these days in the headlines. Without commentary to the merits of that work, we made a business assessment a couple of years ago that that work international work was a distraction for us. You can't really do that work.

Kathryn Johnbull
Kathryn Johnbull
CFO at DLH

You have to be either all in or all out. And the work that we had there was a limited number of contracts that we viewed as really not our appropriate, not our focus, not strategic to us. And so we have made a decision to exit and that exit has also been taking place throughout the quarters of 2024. So year over year in Q1, you see about $1,500,000 variation from that.

Zachary Parker
Zachary Parker
President & CEO at DLH

And there'll be a tail of it this quarter.

Kathryn Johnbull
Kathryn Johnbull
CFO at DLH

Right.

Kathryn Johnbull
Kathryn Johnbull
CFO at DLH

That's right.

Zachary Parker
Zachary Parker
President & CEO at DLH

Basically gone.

Kathryn Johnbull
Kathryn Johnbull
CFO at DLH

We'll wrap up the exit on that probably in the May time frame. And then finally, there was about $2,000,000 of just timing of services we would have expected to perform in Q1 that slipped into Q2 and we expect to pick it back up in Q2.

Joe Gomes
Senior Research Analyst at Noble Capital Markets

Okay, great. Thank you for that overview. It was very good. Just I know in the 'twenty three, 'twenty four, you guys did win some seats at the table, so to speak, on some large IVI queues. Are we starting to see a steady stream of task orders come out from those?

Joe Gomes
Senior Research Analyst at Noble Capital Markets

Or are we still waiting for those to kind of ramp up?

Zachary Parker
Zachary Parker
President & CEO at DLH

Yes. Great point, Joe. Yes. It's interesting that you mentioned those because what we did find was one of those opportunities was large IDIQs, the way in which it was awarded by the government was replacing a previous contract, but they were gapped, right? And during that gap period, the government moved that work to a different vehicle and many of those contracts were three year contracts, right?

Zachary Parker
Zachary Parker
President & CEO at DLH

And many of those are now coming back around for competition. And some of that work is that was moved while there was GAAP was moved to a vehicle called Oasis. And of course, we just recently won Oasis. So we are now finding some of those opportunities that we had anticipated bidding now on the other contract vehicle, DHA Omnibus specific, that we are now looking at and bidding on Oasis. It's fortunate timing wise for us that we Oasis just finally made that award decision and we were successful.

Zachary Parker
Zachary Parker
President & CEO at DLH

And so right out of the gate, we've got some of the bids we've been posturing for to bid over the course of the next few months. So yes, we're excited to now have that Oasis IDIQ for work that we're anticipating on the other vehicles. But the good news is now we can prime those opportunities rather than having to take a back seat to someone else on Oasis.

Joe Gomes
Senior Research Analyst at Noble Capital Markets

Great. And then one of the things that we talked about in previously, but I haven't really heard a whole lot about lately is your InfiniByte cloud product. I I was wondering if you could just kind of give us an update on that product.

Zachary Parker
Zachary Parker
President & CEO at DLH

Yes. No, great question. We are in the process first of all InfiniByte cloud happens to be our FedRAMP and FedRAMP marketplace opportunity capability. That platform we have built and designed for large scale data analytics services around largely around health and healthcare solutions. With the advent of our expanded capabilities with cloud that came in with our acquisition, that we completed integration in ending in 'twenty three, we've now been taking a look at InfiniBand Cloud two point zero.

Zachary Parker
Zachary Parker
President & CEO at DLH

And so we're in that process right now. We expect we're doing some investment as we speak to expand the versatility of that platform. InfiniBand cloud happens to be designed for the most secure type programs and projects in order to that are required by the federal government. It is not suited for lower level security items. And so we've got a team that is developing, again, a very broad cloud based platform to expand our InfiniByte offering.

Zachary Parker
Zachary Parker
President & CEO at DLH

So we're pretty excited about that. We think it will continue to give us some great versatility. It needs to evolve because as you probably know, the cybersecurity environment and public health security environment is evolving, and folks are leveraging a variety of tools that still must also be managed in a secure environment. The government is very concerned as industry around how do you leverage tools such as AIML while also operating in a secure environment. And so we're leaning forward to evolve InfiniByte so that it can operate in tomorrow's environment.

Kathryn Johnbull
Kathryn Johnbull
CFO at DLH

And there's a heavy overlap between if you follow the issuing of the CMMC, the Cyber Maturity Model regulations in late October, there's a pretty good overlap, not entirely not 100%, but pretty darn close between FedRAMP and CMMC. So we think that gives us a good head start on that credential that we expect to start making its way into contracts.

Joe Gomes
Senior Research Analyst at Noble Capital Markets

Okay. And then one more for me. Again, in the press release, you talked about the little about 800,000 increase in SG and A, reflecting investments in organic growth. It sounds like some of that was could have been right here for the INFINITIBITE we just talked about. Anything else, Pradeep, that you could point out?

Zachary Parker
Zachary Parker
President & CEO at DLH

Not a lot that we can disclose very much. As we talk about our organic growth path, differentiators are very important. Infini by cloud and secure cloud capabilities is a very material one. We're also doing some development. We'll share some more at our upcoming annual meeting.

Zachary Parker
Zachary Parker
President & CEO at DLH

But we're developing some additional cybersecurity capabilities, systems engineering, modeling simulation capabilities, and we're bringing on the appropriate type of talent across the business to help us deliver that. So we're going to continue to, as Catherine and I have said over the recent quarters, to make sure that we're accelerating our organic growth profile, making sure we're investing to ensure that twenty five and twenty six can realize those in a differentiating way. And so you elevate your win probability not by just building a larger qualified pipeline, but a better positioned qualified pipeline. So we continue to make those investments for organic differentiators.

Joe Gomes
Senior Research Analyst at Noble Capital Markets

Great. I'll get back in queue. Thank you for taking the questions.

Operator

All right. We'll move back to Mr. Gomes for his follow-up from Noble Capital. Please go ahead.

Joe Gomes
Senior Research Analyst at Noble Capital Markets

Thanks again. I'll ask a couple of more here. You bet. On CMOP,

Joe Gomes
Senior Research Analyst at Noble Capital Markets

just want to make sure

Joe Gomes
Senior Research Analyst at Noble Capital Markets

I'm understanding everything here. So there was seven that you had under your belt that you were still servicing, that you are still servicing. I think four of those who had to have their bids last year, three of them haven't yet to, I guess, go out for bid or have their timetable set. I was wondering of those, how many have you partnered with to bid on? And what are you thinking in terms of the capability of your partner winning any of these awards?

Zachary Parker
Zachary Parker
President & CEO at DLH

Well, we remain in the very competition sensitive environment there, Joe. I can tell you that we have not bid all of them. Our partner has been a small business and we've worked collaboratively to make sure that the big backlog on CMOP is one that our small business partner feels very, very comfortable and competent that they have the bandwidth to execute with our support. And so I can tell you that we have not we're not bidding all of those that are remaining. And but we do believe it will be a very material if we're successful, if our partner is successful, it will still be a material retention of business for us.

Zachary Parker
Zachary Parker
President & CEO at DLH

But it will be, again, as a subcontractor at best, and one in which we'll evaluate the win probabilities once they start to issue have some final RFPs. They're not the VA, I say that because the VA is not done with that acquisition in any way, shape or form. Any and all of those that are still remaining outside of exclusive of, as Catherine indicated, Chicago that we call highs, any of those are still subject to have RFP changes and amendments that could lead us to even changing our bid posture on those. So it remains fluid, Joe, until the government makes some of those decisions. The good news is Sakai the VA now has is moving forward with their new leadership.

Zachary Parker
Zachary Parker
President & CEO at DLH

The new administration and the Doge community has recently met with the VA. We anticipate as per usual that we will have an opportunity to have an executive visit by the new secretary and probably within the next couple of weeks. And this new administration still could put their finger on the acquisition and the approach. So it remains so fluid and so competition sensitive. And we've got to respect the nondisclosure agreement that we have with our prime partner.

Joe Gomes
Senior Research Analyst at Noble Capital Markets

Fair enough. And then one more. I think we're still operating under a continuing resolution. You guys seeing any impact from that on the business?

Zachary Parker
Zachary Parker
President & CEO at DLH

Well, we're fortunate right now, I was capturing to give you some of the details as far as what we have in the way of contracts and miles, etcetera. But we do anticipate that we'll be in a CR mode, Joe. And that's I've spent last week, this past week with many of our peer companies as the Professional Services Council Leadership Summit. We're anticipating that in the coming months there will be quite a bit of impact with regard to the longer term budget. We still not only we have the CR, we've got some caps that have to be resolved, some of those ratios of the caps from DoD to civilian.

Zachary Parker
Zachary Parker
President & CEO at DLH

We've got a debt limit ceiling that was pointed to the right coming up, which always holds an imminent potential for shutdown for any duration. So we expect a lot of noise over the coming quarter or so at the executive level. The good news is we try to make sure we manage that signal to noise ratio, right? And what we see in terms of stability of that signal is that fortunately most of, if not all of our programs are appropriated already, which means there will be continuity against some of the potentials of shutdown. We also are expecting that everything that we have in our pipeline remains pretty solid and supported by both sides of the aisle, right?

Zachary Parker
Zachary Parker
President & CEO at DLH

As you see, we have a lot of defense, military health, health and health in areas that again are also remain really quite strong on both sides of the aisle. So the veteran community, as you well know, as long as this tail continues to run out, both of these administrations are very supportive of veteran health and the sort of work that we do. So we feel pretty good about the impact of CRs. Most of the business we have in our pipeline, new business pipeline are recurring work. So they're not subject to the restrictions of new business awards.

Zachary Parker
Zachary Parker
President & CEO at DLH

So as long as we can have customers that are focused on the acquisitions and the commitment to their awards, we feel really pretty confident that we won't see any material erosion associated with budget constraints.

Joe Gomes
Senior Research Analyst at Noble Capital Markets

Great. Thanks for that, Zack. That's it for me. Thank you very much again.

Zachary Parker
Zachary Parker
President & CEO at DLH

You bet, Jeff.

Kathryn Johnbull
Kathryn Johnbull
CFO at DLH

Appreciate it.

Zachary Parker
Zachary Parker
President & CEO at DLH

Thank you.

Operator

And ladies and gentlemen, this concludes today's question and answer session. I would like to return the conference back to Zack Parker for any concluding remarks.

Zachary Parker
Zachary Parker
President & CEO at DLH

Once again, I'd like to thank you for your support and interest in DLH. And I look forward to chatting with you next month as we have our annual shareholder meeting. And until then, be blessed and have a wonderful productive day. Bye for now.

Operator

And thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Executives
    • Chris Witty
      Chris Witty
      Managing Director - Investor Relations
    • Zachary Parker
      Zachary Parker
      President & CEO
    • Kathryn Johnbull
      Kathryn Johnbull
      CFO
Analysts
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