DLH Holdings Corp. (NASDAQ:DLHC) Q1 2025 Earnings Call Transcript

DLH Holdings Corp. (NASDAQ:DLHC) Q1 2025 Earnings Call Transcript February 6, 2025

Operator: Good day, and welcome to the DLH Holdings Corp. Fiscal 2025 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. I would now like to turn the conference over to Chris Witty, Investor Relations Advisor. Please go ahead. Thank you, and good morning, everyone.

Chris Witty: On the call with me today is Zachary Parker, President and Chief Executive Officer, and Kathryn JohnBull, Chief Financial Officer. 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 2025 and beyond. 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. President and CEO, Zachary Parker, will speak next followed by CFO, Kathryn JohnBull, after which we’ll open it up for questions. With that, I’d now like to turn the call over to Zachary Parker. Please go ahead, Zachary.

Zachary Parker: Thank you, Chris. And good morning, everyone. Welcome to our first quarter conference call. As we begin fiscal 2025, 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. Now turning to slide four, I’ll provide an overview of our financial results. You know, 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. A new administration brings both challenges and opportunities, but we have always based our portfolio of business around enduring programs which obtained broad bipartisan support in Congress.

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. And we still have that belief as we look for the long view. To date, we have not had any material impact on the recent executive orders. We reported first quarter revenue of $90.8 million and EBITDA of $9.9 million representing an EBITDA margin of 11% on revenue. While we used cash during the quarter due to short-term growth in receivables and an increase in debt accordingly, we expect strong cash flow in the upcoming quarters, as Kathryn will review in a moment.

Slide five provides a snapshot of our go-forward growth strategy as reviewed last quarter. 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, cybersecurity, 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 million and more. This should substantially offset the eventual small business set-aside erosion. As I mentioned, our focus on differentiating technology and innovation is yielding results.

Both expanding our footprint with 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 an 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, but each requires the differentiated capabilities and solutions that DLH can offer.

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 credentials, 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 Kathryn JohnBull, our Chief Financial Officer. Kathryn?

Kathryn JohnBull: Thank you, Zachary, and good morning, everyone. We’re pleased to report our first quarter results for fiscal 2025. Turning to slide eight, I’d like to provide a high-level overview of some key financial metrics. For the three months ended December 31, 2024, we reported revenue of $90.8 million in the first quarter versus $97.9 million in the prior year period. Reflecting contributions from recent contract 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 million in the quarter. This amount is comprised of approximately $3.5 million of non-labor lower margin pass-through revenue from a contract that was unbundled in this past quarter, and approximately $1.5 million 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 CMOP site has transitioned to a small business contractor as of January 31, 2025. This location averaged approximately $7 million 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 expect to provide services on these locations while the customer continues to execute its procurement strategy. We reported EBITDA of $9.9 million for the first quarter versus $11.1 million last year. 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 $11.5 million of operating cash during the quarter versus cash generation of $5.1 million last year’s first quarter. As a reminder, the prior year period was positively impacted by delayed payments from the fourth quarter of fiscal 2023, 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. Turning to slide nine, we ended the quarter with total debt of $167 million versus $154.6 million at the start of the fiscal year, reflecting those short-term borrowings.

As a current update, debt today is slightly under $161 million. As I mentioned a moment ago, we anticipate utilizing approximately 50-55% of EBITDA to pay down debt during the remainder of fiscal 2025. 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 other strategic focus on new business initiatives. We will continue to invest in organic growth and believe our strong portfolio of technology-powered solutions puts us at the table for more programs than ever before. As Zachary previously mentioned, our pipeline of qualified new business opportunities now stands at approximately $4 billion, 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.

Q&A Session

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: Good morning, Zachary and Kathryn. Thank you for taking my question.

Zachary Parker: Hey, Joe. Good morning, Joe. Thanks for joining us.

Joe Gomes: So I wanted to start out. You mentioned in your remarks and in the press release, you know, probably like four specific items for the revenue decline, what recompete that for loss for the small business set-aside. You know, there’s just a small business transitions, some nonstrategic projects winding down. And, Kathryn, you talked a little bit about some of the numbers. I just wonder if you could kind of rank or give a, you know, percentage of those items that impacted the revenues, you know, what was the greatest down to what was the, you know, least impactful?

Kathryn JohnBull: Yeah. 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 recompete. As we’ve shared in prior calls, the prior commitment to small business set-aside and, you know, really ran contrary to the couple decades-long practice of consolidating contracts under a prime contractor that would really, number one, drive in 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, you know, even though that was a couple decades trend, nonetheless, the prior administration really provided a mandate that certain things be unbundled.

And so we experienced that in a 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 sort of, you know, we were assuming that integration responsibility. So that’s why it has less of an impact on our gross margin delivery because it’s relatively low volume, low margin work. Secondarily, 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 roll out. But throughout the quarters of 2024, we mentioned some of those small business acquired contracts that were wrapping up. But as a comparison point, quarter to quarter year over year in the first quarter, that transition hadn’t really started much until later quarters of 2024.

So that was about a million and a half that was present in Q1 of 2024 exiting throughout Q2 and to the fourth of 2024, and not present in Q1 of 2025. So the year-over-year comparison is impacted by about a million and a half dollars. Thirdly, there’s about a million and a half 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, in a distraction for us. You can’t really do that work. You know, 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 a $1.5 million variation from that.

Zachary Parker: And there’ll be a tail of it this quarter. That’s right. Basically gone. We’ll wrap up the exit from that probably in the May time frame.

Kathryn JohnBull: Yep. And then finally, there was about $2 million 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: Okay, great. Thank you for that overview. It was very good. I just I know, you know, in the 2023, 2024, you know, you guys did win some seats at the table, so to speak, on some large IDIQs. Are we starting to see a steady stream of task orders come out from those? Are we still waiting for those to kind of ramp up?

Zachary Parker: Yeah. Great point, Joe. Yeah. I think it is 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? And many of those are now coming back around for competition. And some of that work was moved while there was a gap 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 vehicle contract vehicle, DHA specific.

That we are now looking at embedding on Oasis. It’s fortunate timing-wise for us that we Oasis just finally made that award decision, and we were successful. And until you know, 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, yeah, 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: Great. And then one of the things that we talked about, you know, in previously, but we haven’t really heard a whole lot about lately is your InfiniBite cloud product. Was wondering if you could just kind of give us an update on that product.

Zachary Parker: Yeah. No. Great question. Yeah. We are in the process. Yeah. First of all, it’s been about 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 health care solutions. With the advent of our expanded capabilities with cloud that came in with our acquisition that we completed integration in ending in 2023. We’ve now been taking a look at InfiniBand cloud 2.0. And so we’re in that process right now. We 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, you know, lower-level security items. And so we’ve got a team that is developing, again, a very broad cloud-based platform to expand our InfiniBite offering. 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 all 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 InfiniBite so that it can operate in tomorrow’s environment.

Kathryn JohnBull: 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 a hundred percent, 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: Okay. And then one more for me. You know, again, in the press release, you talk about, you know, the little about an $800,000 increase in SG&A, you know, reflecting investments in organic growth. It sounds like some of that was could have been right here for the InfiniBite we just talked about. Anything else that you could point out?

Zachary Parker: Oh, no. No. Not a lot that we can have disclosed very much, you know, as we talk about our organic growth path, differentiators are very important. InfiniBand and Secure Cloud capabilities is a very material one. We’re also building some development. We’ll share some more at our upcoming annual meeting. But we’re developing some additional cybersecurity capabilities, systems engineering, modeling simulation capabilities, and we’re bringing on the appropriate type of talent, you know, across the business to help us deliver that. So we’re going to continue to, you know, as Kathryn 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 2025 and 2026 can realize those in a differentiating way.

And 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: Great. I’ll get back in queue. Thank you for taking the time.

Operator: Alright. We’ll move back to Mr. Gomes for his follow-up for Noble Capital. Please go ahead.

Joe Gomes: Thanks again. I’ll ask a couple more here. You bet. On CMOP, just want to make sure I’m understanding everything here. So there were seven that you had under your belt that you were still servicing that you are still servicing, I think four of those 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, you know, how many have you partnered with to bid on? You know? And what are you thinking in terms of the capability of your partner winning any of these awards?

Zachary Parker: Well, we are so we remain, you know, in the very competition-sensitive environment there, Joe. I can tell you that we have not bid all of them. You know, 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, you know, so I can tell you that we have not we’re not bidding all of those that are remaining. But we do believe it’ll be a very material, you know, if we’re successful, if our partner is successful, it’ll still be a material retention of business for us. But it’ll be, again, as a subcontractor, at best, and one in which, you know, we’ll evaluate the win probabilities once they start to issue, you know, have some final RFPs. You know, 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 in scattered indicated Chicago that we call Hines. 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, you know, makes some of those decisions. The good news is, some you know, the VA now has is moving forward with their new leadership. 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 in probably within the next couple of weeks. And this new administration, you know, still could put their finger on the acquisition and the approach.

So it remains so fluid and so competition-sensitive. And, you know, we’ve got to respect the non-disclosure agreement that we have with our prime partner.

Joe Gomes: 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: Well, we’re fortunate right now, and I’ll let Kathryn give you some of the details as far as what we have and we have contracts in mind, etcetera. But we do anticipate that we’ll be in a CRM mode, Joe, and that, you know, it’s you know, 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, you know, within the coming months, there’ll be quite a bit of impact with regard to the longer-term budget. You know, we’re still we not only do 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, we’ve got a debt limit ceiling that was punted to the right coming up.

Which always had holes in the imminent potential for a 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, if not all of our programs are appropriated already. Which means there’ll 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? It’s 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 long as we can have customers that are the restrictions of new business awards. So focused on the acquisitions, and the commitment to their awards feel really pretty confident that we won’t see any material erosion associated with.

Joe Gomes: Great. Thanks for that, Zachary. That’s it for me. Thank you very much again.

Zachary Parker: You bet, Joe. Appreciate it. Thank you.

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

Zachary Parker: 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.