DLH Q3 2025 Earnings Call Transcript

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Provided by Quartr
August 7, 2025

Key Takeaways

  • Negative Sentiment: Revenue declined to $83.3 M in Q3 FY25 from $100.7 M a year ago, driven by unbundling, VA/DoD small business set‐asides, and narrower project scopes.
  • Negative Sentiment: Additional layers of funding review and cuts to government acquisition staff have slowed RFP flow and new contract awards, stalling pipeline conversion.
  • Positive Sentiment: Strong cost management and working capital discipline generated $9.5 M in operating cash, reduced debt by $9.4 M to $142.3 M, and placed the company a year ahead on mandatory debt payments.
  • Positive Sentiment: DLH’s capabilities in AI, cybersecurity, and systems integration align with federal spending priorities, and upcoming acquisition reforms are expected to accelerate contract awards.
  • Neutral Sentiment: Strategic priorities to delever, protect existing revenue, and preserve margins aim to position DLH for medium‐term growth, particularly in FY26.
AI Generated. May Contain Errors.
Earnings Conference Call
DLH Q3 2025
00:00 / 00:00

There are 4 speakers on the call.

Operator

Good day, and welcome to the DLH Holdings Fiscal twenty twenty five Third Quarter Earnings Conference Call. All participants will be in a 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 turn the conference over to Mr.

Operator

Chris Witty, Investor Relations Advisory. Please go ahead, sir.

Speaker 1

Thank you, and good morning, everyone. On the call with me today is Zach Parker, President and Chief Executive Officer and Catherine John Bull, 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.

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 SEC. 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, Katherine 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,

Speaker 2

Thank you, Chris, and welcome everyone. Welcome to our third quarter conference call. And I'm pleased to have the opportunity to report on our financial results and provide an update about the current environment and an outlook. First and foremost, I'd like to begin by thanking our stellar employees for their steadfast dedication to our customers' missions. It's been a tumultuous period as we entered fiscal twenty twenty six for technical companies, solution companies like us.

Speaker 2

Yet our employees continue to rise to the occasion, leading with innovative and productive projects and solutions supporting our customers with excellent results. Their performance is why I'm so confident about the future of DLH. Now if you'll turn to Slide four, I'll provide an overview of our Q3 results. Starting with revenue, our anticipated erosion from our previously discussed unbundling and small business set aside from the prior administration is continuing on plan. I'm also pleased that how effectively our team has managed through this period and Catherine will give some added color to that a little bit later.

Speaker 2

The new administration has added layers of funding review and approval cycles that has slowed our revenue stream and this is from work from our existing contracts. That being compounded by the effect of, you know, both of those two features has tremendously stalled the flow of new business growth for DLH. This, of course, will be as reflective relative to prior quarters. Our pipeline conversion has been slowly has been impacted and slowed. RFP flow over the recent quarter too has been slowed.

Speaker 2

Our delivery of proposals and material proposals, That's things like over 25 and over 100,000,000, much lower than anticipated and the same for contract awards. However, having said that, I've had I've had an opportunity along with some of my industry colleagues to have met with appropriate influencers on the hill. And I really feel optimistic that anticipated changes will be productive and on their way soon. And I'll discuss this a little greater a little bit later. With respect to margin delivery, cash flow generation and debt paydown, we've made significant progress again this period.

Speaker 2

Our operating expenses continued to decrease as we scaled operations to meet the changing revenue volume and protect margin delivery while we prioritize our investments continue to prioritize our investment in growth initiatives. We reduced debt by $9,400,000 compared with Q2. Our debt to close the quarter was $142,300,000 and we are a year ahead of our mandatory debt payments. We expect to continue to aggressively deploy capital to pay down debt, manage our leverage and strengthen our balance sheet. The reconciliation bill, the fiscal twenty twenty five budget bill, and fiscal twenty twenty six White House budget request combined to give greater clarity about the administration's spending priorities in the years ahead.

Speaker 2

This will help our customers. We are pleased that DLH's capabilities continue to align with the federal government's demand and believe that funding increases for our services in core areas of focus, which include technology, integration, cyber security, artificial intelligence and machine learning and the like will continue to provide opportunities for the company's growth organically. I will speak to this in further depth on the following slide. The fusion of DLA's technology and research expertise is continuing to make mission critical impact for our customers and we see more opportunities in the near term. Solutions that we have developed and deployed through our internal R and D program along with collaboration with military health agencies gives us reason to believe that our top technology programs seen by our government peers are well received.

Speaker 2

Such applications leveraging technology spend in AI, robotics engineering, unmanned aircraft and automation demonstrate the crucial lifesaving impact of the work carried out by our staff of data scientists, engineers, technologists, etcetera to have such positive impact upon our citizens, our service members and our veterans. Our unique combination of advanced technology and world class scientific expertise continues to provide tremendous value for our customers and targeted growth. And we firmly believe that our company's experience and expertise will continue to open new doors, expand our book of business as we go forward. Now, let's turn to slide five for a further review of the current federal spending outlook. As you can see, we continue to believe that our core competencies and capabilities align very well with the federal technology initiatives.

Speaker 2

And we expect that the current administration's priorities will lead to new business opportunities and contract wins for us in the medium and long term. The marketplace remains dynamic as the federal workforce is being reshaped, procurements are being reshuffled based on the administration's priorities and certain departments and programs have undergone significant changes. Our strategic actions this year focusing on operational agility, financial flexibility and technology differentiation have proven effective in these market conditions. This approach has allowed us to navigate industry challenges and strengthen our long term position. We remain tremendously committed to our organic growth initiatives and we are confident in our strategy to increase this revenue and margin delivery in the quarters to come given some of the anticipated changes by this administration.

Speaker 2

As mentioned before, recent weeks have brought increased clarity to the programs and initiatives that have been prioritized by the administration, modernizing federal technology, maximizing efficiencies, integrating artificial intelligence and machine language and bolstering cybersecurity while keeping America at leading edge are consistent thought lines. The enacted budget for the remainder of fiscal twenty twenty five and the administration's fiscal twenty twenty six budget and the One Big Beautiful Bill Act provide increased funding for each of these initiatives. I mentioned earlier that anticipated changes seem to support a positive outlook for DLH. This is largely attributed to some of the acquisition reforms that are in motion that will drive priority shifts in the way in which the client buys. And this administration is really committed to accelerating the speed of delivery on these type of new opportunities and contracts.

Speaker 2

We believe this provides significant opportunity for DLH. Our company has strong legacy of making programs more efficient for customers through the integration of cutting edge technologies, producing millions of dollars in cost savings to the government. Federal investment in AI and AML, systems integration, cloud computing, software development, research and development, data analytics and other advances have aligned with what we have been building over the last two and three years and continue to invest in for near term opportunities. While we believe the upcoming quarters will have steady procurement activity, the realignment of the customers contracting resources may cause again contract awards to slip to future periods. To navigate the market dynamics, our goals are simple and threefold.

Speaker 2

First, we'll continue to delever the company. Second, we're going to do everything we can to protect our revenue base and focus on new business and organic growth with key opportunities that drive and deliver value for our business line. And finally, we're going to continue to preserve our margin delivery through proactive scaling initiatives. And as we move past these challenges created by short term market dynamics, we believe the company is very, very well poised to once again become that growth enterprise that leverages its unique capabilities through differentiation and improve the governance mission and the lives of those that it touches. With that, I'd now like to turn the call over to our Chief Financial Officer, Catherine John.

Speaker 2

Catherine?

Speaker 3

Thanks, Zach, and good morning, everyone. We're happy to have you join us for our third quarter results for fiscal twenty twenty five. Turning to Slide seven, I'd like to provide a high level overview of some key financial metrics for the three months ended 06/30/2025. We reported revenue of $83,300,000 in the third quarter versus $100,700,000 in the prior year period. The change in revenue volume reflects contributions from recent contract awards, offset by the expected conversion of certain VA and DoD programs to small business contractors, which accounts for decreases of 8,500,000 and $3,200,000 respectively.

Speaker 3

Additionally, government efficiency initiatives narrowed the scope of some of our work resulting in a $2,200,000 decrease. As a reminder, we are under contract to manage five of the remaining CMOP locations through the October, while one location, Leavenworth, Kansas is expected to transition to a new contractor on August 31. This site represents approximately $10,000,000 in annualized revenue. Award decisions for the remaining five sites could extend beyond our current period of performance as procurement strategies are shaped by the policies of the new administration. We reported EBITDA of $8,100,000 for the third quarter versus versus $10,000,000 last year, primarily due to the lower overall revenue.

Speaker 3

We have successfully navigated our key management priority of appropriately scaling operating costs to changes in business volume, while preserving the resources necessary for growth. EBITDA as a percentage of revenue was 9,700,000.0 this year versus 10% in fiscal twenty twenty four. From a cash standpoint, we generated approximately $9,500,000 of operating cash during the quarter, as Zach mentioned, due to increased collections of receivables and sound working capital management. We noted a reduction in day sales outstanding to forty six days from fifty two days at the end of Q2. Year to date, our operating cash flow was $12,500,000 versus $14,900,000 last year and we again used Q3 cash generation to delever the company.

Speaker 3

As you can see on Slide eight, we reduced debt by $9,400,000 during the quarter ending the period with 142,300,000.0 debt outstanding. At this point, we've made all mandatory term debt payments through 06/30/2026, a year ahead of schedule, and we remain on track to convert approximately 50% to 55% of EBITDA to pay down debt this fiscal year. Given our strong record of using cash flow to delever the company and strengthen the balance sheet, combined with the liquidity provided by our $50,000,000 revolver, we continue to believe we have sufficient capital to pursue and support a busy pipeline of opportunities. We remain well ahead of our debt covenants supporting our positive outlook for the future. This concludes my discussion of the financial statements.

Speaker 3

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

Operator

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

Speaker 2

Good morning, Kathy.

Speaker 3

Hey, good morning, Joe.

Speaker 2

Hello, Joe. Joe, I think you're breaking up.

Speaker 3

Yes, you may have cut off just a bit.

Operator

It seems, yes, Mr. Gomez, his line has disconnected. Again, if you would like to ask a question, please press star then 1. Mister Gomez, if you are listening, you can press it as well to rejoin. Again, to ask a question, please press star then 1.

Speaker 2

Operator, you indicated that he disconnected? Yes. Chuck? Mhmm. Okay.

Speaker 2

Just give him a moment.

Speaker 3

Yep. There we go. Alright. Let's let's proceed, perhaps he'll join us.

Operator

Yes, ma'am. Once again, if anyone wants to ask a question, please press star then 1.

Speaker 2

While we're waiting for Joe, let me add a little color to a couple of comments that we had in the in the opening presentation. One in particular is, of course, the continued evolution of our small set aside business that was largely initiated during the previous during the Biden administration. Most notable one for us of course has been our VA support for the not only pharmacy programs. That as Catherine indicated continues to move down the small business set aside path. We've been working very closely with the customer to effect smooth transitions.

Speaker 2

It has been a little bit slower than we had anticipated last year for that erosion. But by and large, we do see pretty heavy activity on that throughout the remainder of this quarter. And we'll certainly keep you posted on that. Same time, some of the other contracts that were unbundled, we've those two that those that we anticipated as we entered fiscal year twenty twenty five have continued pretty much on track. As I indicated earlier, we did we were expecting to have some of that offset by our new business pipeline with the anticipated RFPs flows from what the government was indicating and our customers were indicating before.

Speaker 2

And again, just want to mention that that has slowed materially this last quarter. And again, many of those are attributed to administration factors. One factor that I did not specifically indicated is that there were a large number of cuts in the government as Catherine indicated, but it was largely due to contract acquisition people. So it's those folks that put together the RFPs, those folks that evaluate the contractors proposals and then those that award those contracts with a number of that workforce participants cut through administration activities. There's just been gaps in resources to able to move that along.

Speaker 2

I will say that both through court action and some initiatives from our agencies, some of those are being recalled. We've seen some of that in some of our agencies over the last month. And so we're hoping to see that the stability start to measurably come back with regard to the resources that the government needs to move these solicitations and contracts forward. So we're optimistic that some of that return will have some positive impact to our industry's pipeline, but particularly for those areas that we are focused. Any luck with Joe in return?

Operator

No. Not at all.

Speaker 3

Some good problem. Yeah. He's tried a couple of times to get back in. But

Speaker 2

Okay. Alright. Well, if there are no further, further questions, I think we'll want to take this time to certainly thank those that have participated in our session today. We continue to feel really, really strong about the outlook of DLH. We think that we have a good grasp on the areas that are transitioning from the government.

Speaker 2

We've got good level of engagement with the decision makers and influencers and feel very, very optimistic that as we exit 2025, we'll have some good news in Q4 with regard to the positioning for a very, very strong recovery in 2026. With that, I'll turn it back over to the operator and we'll look forward to seeing everyone again soon. Have a blessed day.

Operator

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

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