DLH - Q1 2024
February 1, 2024
Transcript
Operator (participant)
Good day, and welcome to the DLH Holdings Fiscal 2024 First Quarter Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note today's event is being recorded. I would now like to turn the conference over to Chris Witty, investor relations advisor. Please go ahead.
Chris Witty (Investor Relations Advisor)
Thank you, and good morning, everyone. On the call with me today is Zach Parker, President and Chief Executive Officer, and Kathryn JohnBull, Chief Financial Officer. The company's earnings release and PowerPoint presentation are available on our website under the investor page. I would now like to provide a brief safe harbor statement, which is also shown on slide three of the presentation. This call may include forward-looking statements that relate to the company's outlook for fiscal 2024 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-K and in our other filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statement.
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 investment presentation on DLH's website. President and CEO, Zach Parker, will speak next, followed by CFO, Kathryn JohnBull. Afterwards, we'll open it up for questions. With that, I'd now like to turn the call over to Zach. Please go ahead, Zach.
Zach Parker (President and CEO)
Thank you, Chris, and good morning, everyone. Welcome to our 2024 first quarter conference call. Once again, thanks to the dedication, collaboration, and innovation of our talented DLH workforce, we're on track for another year of solid performance here at DLH. Their dedication to our customers' vital missions, combined with the organization's overriding commitment to performance, excellence, and improved results, continues to drive value for our DLH shareholders. We rely on our people to set very high standards of excellence each year, as we continue to build a world-class provider of emerging technology-enabled solutions and services. They continue to rise to the challenge, and we're very proud of their accomplishments. Now, turning to slide four, I'll provide an overview of the quarter's financial results.
We reported first quarter revenue of $97.9 million and EBITDA of $11.1 million, while generating operating cash of $5.1 million during the period. We also continued to delever the company, as Kathryn will review momentarily, by paying off another $5 million of debt, ending the quarter with only $174.4 million of total debt outstanding. With our organic growth, which has endured federal budget CR headwinds due to the timing of new budget decisions, we continue to see some delays in business development opportunities. However, we remain confident in our ability to generate new business through our robust growth channels, both existing and new award contracts.
Turning to slide five, let me summarize a few key industry and environmental factors currently influencing our position in the market. First, as I just noted, the federal government is still operating under a continuing resolution, which typically slows down decision-making, both on current IDIQ contracts and potential new business opportunities. The most recent resolutions keep the government running through March first, with some departments funded through March 8th. As a reminder, this is the third set of stopgap measures that Congress has passed since September, and as a result, our clients have limited budget certainty, which is restricting their ability to make new awards. That said, remaining cautiously optimistic that both the recent and near-term progress could result in funding flow for our major agencies through the remainder of fiscal 2024, paving the way for efficient contract implementation and awards.
We continue to build upon a strong pipeline of high-value opportunities across our broad customer base, as well as key large multi-award IDIQ platforms, opening additional channels for the company. Our enhanced technical capabilities, highly credentialed workforce, and science and technology platforms are ready to meet the evolving demands of our customers and to provide innovative value propositions. Our ability to attract and retain industry-leading talent is critical to providing uninterrupted support for our clients' missions. DLH employees solve challenging, complex problems, and their program execution results are unmatched in delivering customer satisfaction. So it was truly an honor to receive a Great Place to Work certification, an award entirely based on what current employees say about their workforce. This achievement is a sign to customers, partners, and prospective new hires alike that DLH creates an outstanding employee environment.
Now turning to slide six, we have provided an overview of our business base to illustrate the diverse set of customers we support. This broad customer base, which spans agencies within the federal, military, and civilian markets, offers many opportunities to deliver our differentiated services to an array of new and existing customers. Building a portfolio of work that supports mission-critical programs that have traditionally received broad bipartisan support is a long-standing strategic goal of our corporate and business development organization. 45% of our current business portfolio lies within the Department of Health and Human Services. Key clients under this umbrella include the Administration for Children and Families, Centers for Disease Control and Prevention, and of course, the National Institutes of Health.
Our capabilities in research and development, systems integration, and big data analytics have allowed DLH to provide unmatched value to our HHS clients and penetrate new programs across the board. The VA comprises approximately 35% of our revenue via the Veterans Health Administration. This includes our long-standing CMOP operations, and we have a long history of supporting the VA, and we currently are looking forward to expanding our services inside the agency to deliver for those who so deserve our nation's excellence. And thirdly, today, defense agencies comprise roughly 17% of DLH revenue, including the work across a broad array of programs in Defense Health Agency and the military services.
This book of business is poised to see substantial growth over the coming years as DOD looks to invest in health IT, digital transformation, data analytics, cybersecurity, and AI-enabled research, and numerous health-related platforms. Given that our client relationships span decades, we can leverage this intimacy to shape customized solutions and expand our contract portfolio through new business development opportunities, as well as growth on existing programs. As government agencies continue to expand their commitment to cybersecurity, data analytics, IT modernization, artificial intelligence, and the like, all directly aligned with our strength, our company's addressable markets continue to grow. Our innovative offerings remain in the sweet spot of agency technology upgrade initiatives, as evidenced by the White House and federal agency strategic plans.
By integrating our highly differentiated digital transformation capabilities with research, domain expertise, this serves as a relatively unique platform to address broader range of solutions than ever before, helping our clients reach higher and perform even better every day. These will include exacting objectives of precision medicine, All of Us studies and evaluations, STRIDES, initiatives for cloud security, and many more. With that, I'd now like to turn the call over to our Chief Financial Officer, Kathryn JohnBull. Kathryn?
Kathryn JohnBull (CFO)
Thank you, Zach, and good morning, everyone. We're pleased to report our first quarter results for fiscal 2024. 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, 2023, compared to the prior year period. We reported revenue of $97.9 million in the first quarter versus $72.7 million in the prior year period, reflecting the addition of our strategic acquisition in December 2022. We reported EBITDA of $11.1 million for the first quarter versus $8.1 million last year, as adjusted for corporate development costs supporting that acquisition, and generated cash from operations of $5.1 million compared to $8 million in fiscal 2023, with the variance primarily related to customer to vendor payment timing.
This does not negatively impact our expectations for cash flow generation this year, nor planned debt reduction. Speaking of which, if you'll turn to slide nine, I'll provide an update regarding our deployment of the company's cash to reduce debt, strengthen the balance sheet, and lower interest expense. We paid off approximately $5 million of our higher interest rate, floating rate debt in the first quarter, ending the period with $174.4 million of total debt outstanding. As a reminder, approximately $6 million of quarterly interest expense is non-cash amortization of financing arrangement fees. Our cash generation ability reflects our focus on efficient and timely cash collections, resulting in days sales outstanding of 51 days for the period versus the industry peer group average of 61 days.
We remain on track to reduce debt to between $153 million and $157 million at the end of the fiscal year, resulting in a debt leverage ratio of below 3.5x EBITDA by the end of the fiscal year. We will continue utilizing the favorable tax attributes of our acquisitions, along with stock compensation deductions, to minimize cash and income tax payments going forward.... This concludes my discussion of the financial statements. And with that, I would like to turn the call over to our operator to open for questions.
Operator (participant)
Thank you. If you would like to ask a question, please press star then one on your telephone keypad. If you're using a speakerphone, we ask that you please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. Once again, ladies and gentlemen, that's star then one if you have a question. Today's first question comes from Joe Gomes with Noble Capital. Please go ahead.
Joe Gomes (Senior Research Analyst)
Good morning, and thanks for taking my questions.
Kathryn JohnBull (CFO)
Good morning, Joe.
Zach Parker (President and CEO)
Good morning, Joe.
Kathryn JohnBull (CFO)
Thanks for joining us.
Joe Gomes (Senior Research Analyst)
So I wanted to start off with the revenue line and kind of get a feel for what you guys were expecting going into the quarter. It's a little lighter than what we had expected. I understand that, you know, the continuing resolution can, it represents a headwind for you guys. But I just kind of wanted to get a little better feel for what you were expecting going into the quarter and what you think-
Zach Parker (President and CEO)
Yeah.
Joe Gomes (Senior Research Analyst)
This means for the rest of the year.
Zach Parker (President and CEO)
Yeah, that's a great question, Joe. I would say it did turn out a little softer than what we had expected, largely due to certain customers, certain of our customer sets that are really being throttled by the budget uncertainty. As you well know, we have a few very large $100 million contracts that involve intramural and extramural scientific research around health challenges. And we've just seen that for you know, consecutive quarters, several quarters now, that you know, without budget certainty, there's been some reluctance to do some of the funding. So it's trailed what we were really expecting for this year. And then a couple of anomalies that just have some seasonality impacts.
Kathryn JohnBull (CFO)
Right. Right. That said, as Zach said, there has been some slowness in turning new orders, as he's indicated, although, as you might expect, Q1 is historically a softer, lighter quarter, just the way, just based on where it falls in the calendar and the impact of leave time around the holidays. So from that perspective, from our planning perspective, it's pretty in line, though, you know, though we are, we do see some slowness in the orders that we expected to give us some lift exiting the quarter and coming into Q2.
Joe Gomes (Senior Research Analyst)
Okay, thank you for that.
Kathryn JohnBull (CFO)
Mm-hmm.
Joe Gomes (Senior Research Analyst)
If we take a look at the VA contracts that now have been extended into February, although this kind of looks like a little bit shorter of an extension than you normally see. I think they're normally a little bit longer than the two months. And just does that give us any or give you guys any insight as to what the VA might be planning here in the near term? Or do you think these contracts are just as we've thought in the past, continue to just be extended out?
Zach Parker (President and CEO)
Yeah, we, as you well know, we, when we start out- started out on what we referred to as bridge contracts, they were usually going at, at what we would call six months. They were really kind of a pairing of, two, three months bundled together, et cetera. As usual, and it, and it is customary for, the acquisition community and the federal government to, as you get further along in these kind of extensions and you have procurements on the table right now, to shorten their cycles, in, in the event that, you know, they, they are, able to make some progress on the awards. Having said that, though, we think there's nothing to really read into that.
You know, we still are really strongly believing that we see no material impact to FY 2024's plan and results, just based upon the timing and the potential evolution of the acquisition chain.
Joe Gomes (Senior Research Analyst)
Okay, great. And then on HHS, you know, this quarter, evidently didn't need to break that out in the Q. So just wondering, you know, how that big contract performed in the first quarter compared to last year.
Kathryn JohnBull (CFO)
Yeah, very consistently, because we've returned to a normal operating cadence as opposed to the variation that happened during the COVID challenges, we do have comparable results year-to-year from that program.
Joe Gomes (Senior Research Analyst)
Okay, great. And then one last one from me, and I'll drop back in queue. There was a nice drop in SG&A as a percentage of revenues, and I just wondered: Is that sustainable? Is that a good number to use going forward, or do you think that cost will begin to edge back up over the rest of the year?
Kathryn JohnBull (CFO)
I do think that it's gonna be a function of the timing of BD costs, and so given the congestion around RFPs getting issued, it's our G&A costs incurred in the quarter were a little lighter than we expected. So that, you know, you get the good and the bad side of that coin, I guess, if you want to think about it that way. But, you know, we'd be happy to spend that money for the long-term value it delivers in the company and our growth strategy. But, I think, I don't see that as our delivering a permanent reduction in SG&A costs to scale yet.
Zach Parker (President and CEO)
... you know, until we get on that track of that front-end investment in business development and the yield on the back end in the form of awards. That helps from modeling your outlook.
Joe Gomes (Senior Research Analyst)
Okay, great. Thanks for taking the questions. I'll get back in queue.
Zach Parker (President and CEO)
Thank you for joining.
Operator (participant)
As a reminder, ladies and gentlemen, if you'd like to ask a question, please press star then one. Our next question comes from Brian Kinstlinger with Alliance Global Partners. Please go ahead.
Brian Kinstlinger (Director of Research and Sr. Technology Analyst)
Hi, good morning, guys. Thanks for taking my questions. Can you talk about-
Zach Parker (President and CEO)
Hey, Brian. Thanks for joining.
Brian Kinstlinger (Director of Research and Sr. Technology Analyst)
Thanks. Hi, Kathryn. Can you talk about the bookings and proposal submission trends? I joined the call late. If not from a quantitative perspective, then at least at a high level, have they, each of them, have they been strengthening? Have they been weakening? Are they stable? Just high-level discussion so we can understand the market conditions.
Zach Parker (President and CEO)
Yeah, now you, I missed the first part. You said the bookings and most of the other?
Brian Kinstlinger (Director of Research and Sr. Technology Analyst)
Proposal submissions.
Zach Parker (President and CEO)
Yeah. Yeah, I think like Kathryn said, the data that contributed to the softer SG&A is an indication of a little lighter than anticipated proposal development period. You know, there are a number of programs that the government has issued that are continuing to extend to the right. You know, probably the most notable one that we've given color to is one of our large multiple award IDIQ contracts, of which will open up channels for us to bid a number of contracts, and we refer to that one as the CIO-SP4.
We believe that the evidence indicates that the government is getting very, very close to resolving all of the protests that they've encountered over the last year now, and that we should see an award, you know, in our minds, potentially by the end of Q2, and which will create those bidding opportunities for us in Q3 and Q4. Some of those are gonna be long-term opportunities. Some of those will be quick turnarounds. So we've positioned ourselves to be able to do both, you know, as they come forward.
But again, a little disappointed that we haven't had the opportunity to bid on those as yet, as the booking continues to slip to the right. But having said that, we're still continuing to develop value propositions we believe are gonna be winning value propositions on some of our existing IDIQ contracts, provided that the funding comes as well.
Brian Kinstlinger (Director of Research and Sr. Technology Analyst)
So, I'm curious, in past coverage, where I've covered some of the more defense-related IT guys, the win rates were around 25%-30%. 30% would be excellent.
Zach Parker (President and CEO)
Mm-hmm.
Brian Kinstlinger (Director of Research and Sr. Technology Analyst)
I'm not sure if it's similar for DLHC or not, but if it is, I'm wondering, are you casting a wide enough web outside of your existing book of business to drive growth? And if not, what can you do to increase that, you know, that web to drive stronger growth?
Zach Parker (President and CEO)
Well, you are, you are actually a great straight man for us.
Brian Kinstlinger (Director of Research and Sr. Technology Analyst)
Oh.
Zach Parker (President and CEO)
Yeah, so as a result of some of the capabilities that came in at the end of last calendar year, in part with our acquisition and also with some key investments and hires that we have made, we have been very active over the last quarter to accelerate the diversification of our addressable market. So there's some agencies that we felt were a little far for us before, that are now within our swim lanes. We've expanded our pipeline development in areas that are leveraging stronger cybersecurity or enhanced cybersecurity quals, or stronger health IT qualifications. And our new business pipeline is beginning to really reflect that.
Those opportunities, of course, are things that we hope to see in the this fiscal year to bid. And then, of course, we expect to, you know, exit very, very strong with the ability to get some of those awards in place. You're also very accurate with regard to our industry. We generally look at thirty percent win rate on new business as being very, very good. We expect a lot higher than that, as in close to 100, on our recompetes that we choose to stay in that business. But thirty percent would be an industry standard top-of-the-line win rate. And we've and 20% is still good. We've had...
You know, we also kind of bucket those into three areas. One is the multiple award IDIQs, GWACs, as they call them, which generally have a zero booking the way in which we treat them, but open up a huge opportunity for organic growth. And then we have you know, small to medium-sized bids, which had been our sweet spots in the prior stages before our last phase of the acquisitions. Those were, again, things ranging anywhere from $10 million, you know, to $50 million, and then you know, medium-sized to larger being you know, north of $50 million and much like probably our last $600 million or $700 million dollar wins.
So we kind of look at each of those as now we feel that we can swing the bat on some of those larger opportunities that before we had to partner with. And we're now, you know, establishing those opportunities into our pipeline.
Kathryn JohnBull (CFO)
... And that's really the opportunity for productive use of that delay time. You know, no one desires the delays that the industry is experiencing, but for us, particularly, probably more so than most, it's an opportunity to really have the client call plans working and really raise awareness, and really, to your point, open the aperture, not even that far adjacent from where we've been, but more so really for people who don't necessarily think of DLH and certain capability sets because they haven't seen us there yet. But really, having them understand how we have resonance in the company that the, the breadth of capabilities that can really respond to new things, and really giving those proof points and building awareness before the bid opportunities come out.
So you never run out of ideas of how to raise profile and build awareness. So in some respects, we're, I think, making the best use of that delay time to really continue to improve our position for when the opportunity to bid comes in.
Brian Kinstlinger (Director of Research and Sr. Technology Analyst)
Great.
Zach Parker (President and CEO)
Yeah, and that pipeline shaping activity will be in part reflecting, you know, the answer that Kathryn gave to Joe earlier, right? So we're doubling it down on the positioning opportunities, whether the RFPs come out or not from the customer-
Brian Kinstlinger (Director of Research and Sr. Technology Analyst)
Mm-hmm.
Zach Parker (President and CEO)
from which would lead to B&P investment on that SG&A side. So you'll see, we would expect that, you know, the next quarter's results will be more reflective of that, of that portfolio expansion.
Brian Kinstlinger (Director of Research and Sr. Technology Analyst)
Great. My last question revolves around the GRSi transaction. I'm curious. I don't know if you provide numbers or high level, again, whichever. If you look at their 2023 revenue, is it growing over 2022? Did it grow over 2022? Did it shrink? Is it the same? And then I'm curious, if you evaluated where you hope to be at this point in terms of its revenue contribution, again, from the IT side, are you where you would hope to be, or is it more impacted as well by what's going on in the broader market, and so maybe you're a little bit behind plan?
Zach Parker (President and CEO)
Sure. We'll, we'll tag team that one. Great question. Yeah, regarding 2022 to 2023 and beyond, as you may recall, first of all, that acquisition has delivered all that we have expected in terms of enhancing our competencies, our capabilities and channels for growth in expanding markets. So it's been very, very, very strong in that regard.
You may also recall that, in the existing book of business, that they existed when we closed the acquisition December eighth, there was still a fair amount of contracts that we considered that had been small business set aside, and that was work that, you know, there's a degree of uncertainty as to whether or not we would be able to retain that work within the GRSi. And in most cases, that would mean, as a minimum, we would likely get 50% of any arrangements or 49% of any arrangements that we had with a small business partner.
So those are starting to, you know, the schedule and the timing of those have been a little bit different from what we had expected going forward, but they're obviously having what Kathryn and I fully anticipated, the type of erosion in that market area, while the company is doing very good in positioning that, we've won a couple of those that were, you know, we were not terribly optimistic on. But, again, it would net, net terms in terms of it would have a net negative effect on the revenue.
But that was all anticipated because it's those capabilities that allow us to win in the unrestricted market that we saw the value, and we're comfortable seeing some of that erosion for the small business set-aside work. So, Kathryn, you want to add to that?
Kathryn JohnBull (CFO)
Yeah, absolutely right. So the strong EBITDA contributors were locked and really protected and have continued to deliver. There's been some erosion of the lower end work, as Zach described. Lower end from a just from a numbers perspective, not no disrespect to the work being performed and the customers being served, obviously. But from a growth perspective, to your second point, you know, naturally, GRSi has been equally, if not more so, affected by the delays in decisions around particularly that large IDIQ that Zach mentioned, CIO-SP4. They were, as many of you remember, we've talked about on former or prior calls, they are a schedule holder on CIO-SP3.
So unlike DLH, the heritage DLH, which really did not have the relevant technical capabilities to bid on CIO-SP3, but was preparing itself through its acquisition program to be credible in CIO-SP4. In contrast, GRSi was on CIO-SP3, but as a small business, and they've obviously grown out of that. So they've kept the work they had, but their opportunity to really bring their expanded talents that they've built over time into the large scale operations that we expect as part of their forward opportunities, that's been delayed. So the growth strategy for GRSi has that bit of an overhang that the whole business and the industry is experiencing.
But in terms of relevance to our journey ahead and really ability to contribute to our talents in addressing the market, they are everything we expected them to be.
Zach Parker (President and CEO)
Yeah, let me add a piece to that, though. We, you know, our strategy was built, was not just to count on those qualifications. We have been very, very active in driving collaboration across the business. We really are looking at 1 + 1 equaling 3. So we were not looking at their existing business base and capabilities alone. What we have seen and what excites us most is the synergy of pursuit of these opportunities based upon our heritage, NIH work as well, which is heavily based in the science and security side of the business with the IT aspects that came with the acquisition.
When you put those together, you have some of the world-renowned epidemiologists and research scientists together with the technology capabilities that came along with the acquisition. We are seeing some innovations and opportunities to provide, you know, past performance references that the customer is not seeing very much on the competitive landscape. So we're excited about the synergy and what that has opened up in terms of not only value propositions, but cross-agency selling.
Brian Kinstlinger (Director of Research and Sr. Technology Analyst)
Okay. Thanks so much for your time.
Operator (participant)
Thank you.
Joe Gomes (Senior Research Analyst)
Take care, Brian.
Operator (participant)
Thank you. And as we have no further questions in the queue, I'd like to turn the conference back over to Zach Parker for any closing remarks.
Zach Parker (President and CEO)
Well, thank you all. We really appreciate your continued support and interest in DLH. We ask you to look forward to a couple of dates in the future where we'll meet you again, in the not too distant future. That's first of all will be March 14th, where we'll have our annual shareholders meeting. We will actually physically be in New York, so come on by. Kathryn and I and our board of directors would love to see you there. And also stay tuned. We will be participating in an emerging technology investor conference, largely for small caps at the Alliance Global Partners events on February seventh. You can read the details on our website.
And there we'll be disclosing a little bit more color around some of the technology evolution that the company has gone through and how we see that being a key part of driving value. So thank you very much, and we'll look forward to hearing and seeing you soon. With that, have a blessed day. Bye for now.
Joe Gomes (Senior Research Analyst)
Take care.
Operator (participant)
Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.