DLH - Earnings Call - Q1 2025

Transcript

Operator (participant)

Good day, and welcome to the DLH Holdings Corp. Fiscal 2025 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 touchtone phone. To withdraw your question, please press star, then two. 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.

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 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-K 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 Zach 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 Zach. Please go ahead, Zach.

Zach Parker (President and CEO)

Thank you. Excuse me. 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. Performance, excellence, and accelerating organic growth remain our highest priorities as a company. 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 obtain 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.

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. 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 $90.8 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, we increased our debt accordingly. We expect strong cash flow in the fiscal second quarter and a continuation of our key leveraging strategy, 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 that should substantially offset the eventual small business set-aside erosion. As I mentioned, our focus on differentiating technology and innovation is yielding results. By 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 and customer, 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 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 Kathryn JohnBull, our Chief Financial Officer. Kathryn.

Kathryn JohnBull (CFO)

Thank you, Zach, 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 12 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, 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 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 Zach 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. With that, I would now like to turn the call back to our operator to open up for questions.

Operator (participant)

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your touch-tone phone. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Our first question will be from Joe Gomes from Noble Capital. Please go ahead.

Joe Gomes (Senior Research Analyst)

Good morning, Zach and Kathryn. Thank you for taking my questions.

Kathryn JohnBull (CFO)

Hey, Joe.

Zach Parker (President and CEO)

Good morning, Joe.

Kathryn JohnBull (CFO)

Thanks for joining us.

Joe Gomes (Senior Research Analyst)

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. Kathryn, 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 (CFO)

Yeah, sure, Joe. Happy to do that. The key impact or the most significant impact of 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 of 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. Even though that was a couple of decades' trend, nonetheless, the prior administration really provided a mandate that certain things be unbundled. We experienced that in the quarter that one of our DoD programs was unbundled.

As we mentioned in the comments in the call, largely that was derived from subcontractors we had on our team where we were assuming that integration responsibility. That is why it had less of an impact to our gross margin delivery because it is relatively low volume, low margin work. Secondarily, as we have talked about on a number of calls, there was a tail of small business revenue that we acquired. Sometimes those tails take a long time to run out. Throughout the quarters of 2024, we mentioned some of those small business acquired contracts that we are wrapping up. As a comparison point, year-over-year in the first quarter, that transition had not really started much until later quarters of 2024.

That was about $1.5 million that was present in Q1 of 2024, exiting throughout Q2 and Q2 to Q4 of 2024, and not present in Q1 of 2025. The year-over-year comparison is impacted by about $1.5 million. Thirdly, there's about $1.5 million 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. You have to be either all in or all out.

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. We have made a decision to exit, and that exit has also been taking place throughout the quarters of 2024. Year-over-year in Q1, you see about $1.5 million variation from that.

Zach Parker (President and CEO)

There'll be a tail of it this quarter.

Kathryn JohnBull (CFO)

Right. That's right.

Zach Parker (President and CEO)

Basically gone.

Kathryn JohnBull (CFO)

We'll wrap up the exit from that probably in the May timeframe. 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 (Senior Research Analyst)

Okay, great. Thank you for that overview. It was very good. I know in the 2023, 2024, 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?

Zach Parker (President and CEO)

Yeah. Great point, Joe. Yeah. 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? During that gap period, the government moved that work to a different vehicle. Many of those contracts were three-year contracts, right? Many of those are now coming back around for competition. Some of that work that was moved while it was gapped was moved to a vehicle called OASIS. Of course, we just recently won OASIS. We are now finding some of those opportunities that we had anticipated bidding now on the other contract vehicle, DHA Omnibus, to be specific, that we are now looking at and bidding on OASIS.

It's fortunate timing-wise for us that OASIS just finally made that award decision, and we were successful. 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. Yeah, we're excited to now have that OASIS IDIQ for work that we're anticipating on the other vehicles. 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)

Great. One of the things that we talked about previously, but I haven't really heard a whole lot about lately, is your InfiniBite Cloud product. I just wonder if you could just kind of give us an update on that product.

Zach Parker (President and CEO)

Yeah. No, great question. Yeah. We are in the process. First of all, InfiniBite Cloud happens to be our FedRAMP and FedRAMP Marketplace capability. That platform we have built and designed for large-scale data analytics services 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 2023, we've now been taking a look at InfiniBite Cloud 2.0. We are in that process right now. We expect that we're doing some investment as we speak to expand the versatility of that platform. InfiniBite Cloud happens to be designed for the most secure type programs and projects that are required by the federal government. It is not suited for lower-level security items. We've got a team that is developing, again, a very broad cloud-based platform to expand our InfiniBite offering.

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. Folks are leveraging a variety of tools. It 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. We're leaning forward to evolve InfiniBite so that it can operate in tomorrow's environment.

Kathryn JohnBull (CFO)

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 100%, but pretty darn close between FedRAMP and CMMC. 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)

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

Zach Parker (President and CEO)

Not a lot that we can disclose very much. As we talk about our organic growth path, differentiators are very important. InfiniBite 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. 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. We're going to continue to, as Kathryn and I have said over the recent quarters, 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. You elevate your win probability not by just building a larger qualified pipeline, but a better positioned qualified pipeline. We're continuing to make those investments for organic differentiators.

Joe Gomes (Senior Research Analyst)

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

Zach Parker (President and CEO)

You bet you.

Operator (participant)

If you would like to ask a question, please press star, then one. If you would like to ask a question, please press star, then one. All right. We'll move back to Mr. Gomes for his follow-up from Noble Capital. Please go ahead.

Joe Gomes (Senior Research Analyst)

Thanks again. I'll ask a couple more here.

Zach Parker (President and CEO)

You bet.

Joe Gomes (Senior Research Analyst)

On CMOP, just want to make sure I'm understanding everything here. 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, how many have you partnered with to bid on? What are you thinking in terms of the capability of your partner winning any of these awards?

Zach Parker (President and CEO)

We remain in a 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 bid 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. I can tell you that we are not bidding all of those that are remaining. We do believe it'll be very material if we're successful, if our partner is successful. It'll still be a material retention of business for us. It'll be, again, as a subcontractor at best, and one in which we'll evaluate the win probabilities once they start to issue some final RFPs.

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 Kathryn 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. It remains fluid, Joe, until the government makes some of those decisions. The good news is the VA now is moving forward with their new leadership. The new administration and the DoD community have 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 probably within the next couple of weeks. This new administration still could put their finger on the acquisition and the approach.

It remains still fluid and competition-sensitive. We have to respect the non-disclosure agreement that we have with our prime partner.

Joe Gomes (Senior Research Analyst)

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

Zach Parker (President and CEO)

We're fortunate right now. Kathryn gave you some of the details as far as what we have in the way of contracts and miles, etc. We do anticipate that we'll be in a CR mode, Joe. I spent last week, this past week, with many of our peer companies as a Professional Services Council leadership summit. We're anticipating that over the coming months, there'll be quite a bit of impact with regard to the longer-term budget. 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 holds an imminent potential for a shutdown for any duration. 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? 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? As you see, we have a lot of defense, military health, health, and health in areas that, again, also remain really quite strong on both sides of the aisle. 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. We feel pretty good about the impact of CRs.

Most of the business we have in our pipeline, new business pipeline, are recurring work. They are not subject to the restrictions of new business awards. 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 will not see any material erosion associated with budget constraints.

Joe Gomes (Senior Research Analyst)

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

Zach Parker (President and CEO)

You bet, Joe.

Kathryn JohnBull (CFO)

Appreciate it.

Zach Parker (President and CEO)

Thank you.

Operator (participant)

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

Zach Parker (President and CEO)

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

Operator (participant)

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