DLH - Earnings Call - Q2 2025

Transcript

Operator (participant)

Good morning and welcome to the DLH Fiscal 2025 Second 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 a touch-tone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Chris Witty, an 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 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. 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, Chris, and good morning, everyone. Welcome to our Second Quarter Fiscal 2025 Conference Call. I'm pleased for the opportunity to report our financial results and several important accomplishments for the second quarter. First, let me acknowledge that our truly skilled team throughout this year and throughout this period have continued to do a fantastic job. Throughout this period of significant disruption in the government services industry, they have continued to demonstrate what sets DLH apart, and that is the delivery of innovative solutions, strong capability, and efficiencies in the commitment to our customers and their passion for our collective missions. Now, turning to slide four, I'll provide an overview of our financial results. Our performance this quarter was in line with our expectations and on par with the performance in Q1 for revenue and EBITDA.

With respect to cash flow generation and debt paydown, we've made significant progress this quarter as we reduced our debt by $15.3 million from the previous quarter. As you may recall, we experienced some collection delays last quarter, leading to $11.5 million of cash usage and a short-term increase in our debt. This quarter, by contrast, we generated strong operating cash of $14.5 million and concurrently reduced debt, as Kathryn will further describe in a moment. Throughout the first quarter of Q3, we have continued—I'm sorry, throughout the first half of the quarter, we have continued to reduce debt and expect that trend to continue throughout the balance of the fiscal year. As of today, we have made all mandatory debt payments through March of 2026, a year ahead of schedule.

We continue to benefit from the support of our bank group as they provide additional financial flexibility with the November 2024 amendment to our credit facility as we navigate the recovery from the unbundling and rebidding of certain contracts now set aside for small business entities that were set in motion by the previous administration. At the same time, the continuing resolution from March has provided an element of stability in terms of overall budget parameters for the remainder of fiscal 25. Congress is now working to define the longer-term spending priorities through budget reconciliation with the hope of having a blueprint in the coming months. This administration has recently released the skinny budget for fiscal 2026, discretionary budget requests providing some insight into future initiatives and priorities. We pay very, very close attention to these documents and to these positions.

While certain details are still yet to come, we are very excited about the alignment of our advanced capabilities and our new business pipeline with the current administration's goals and policies. We continue to believe that there is a sustained demand for our capabilities despite a rather noisy macro environment that includes some uncertainty on some government programs, budget-cutting initiatives, and factors tied to tariffs and other macro issues. Thus far, we have seen negligible impact to DLH from program terminations. Our technology-powered solutions businesses remain in high demand for our customers, as evidenced by our recent win to continue providing research and development and advanced technology services to include artificial intelligence and machine learning, modeling and simulation, robotics engineering, clinical support, biostatistics, and more to the U.S. Army's Medical Research and Development Command. This work highlights our ability to deliver advanced solutions at the nexus of science and technology.

As the fiscal year enters its second half, we're engaged in a heightened level of bid activity, illustrating ongoing demand for unique applications that can improve performance outcomes, enhance readiness, and deliver solutions with the cost efficiencies. With more than $1 billion in contracts now under review, we expect award decisions in the second half of the fiscal year that would position us well for 2026 and beyond. Turning to slide five, I'd like to go a bit deeper and provide additional color on what we currently see as the outlook under this new administration. The left column identifies some of the administration's stated priorities: a focus on promoting efficiency, cutting costs, ensuring accountability, and lowering regulatory hurdles. In a nutshell, the administration is focused on getting things done faster with less red tape at a lower price.

This includes modernizing health data systems and surveillance capabilities for early outbreak detection and response while investing in healthy lifestyle initiatives, even as we reduce spending elsewhere. Application of some of the technologies of digital transformation that we have just described, including our most recent win, really positions us well to thrive in the marketplace where these initiatives are valued. As a leading provider of digital transformation and cybersecurity, systems engineering and integration, and science, research, and development services, we have significant experience leveraging technology to enhance program effectiveness, drive innovation, and result in cost efficiencies. By leveraging these interconnected capabilities, DLH can bid on complex, high-value work. This is consistent with our strategy of continuing to move up the margin scale in this very large market. Our new business pipeline still remains very healthy with more than four times revenue in our qualified pipelines.

We're estimating at $3.5 billion in opportunities of various sizes, various scopes across each of our market areas. With the increased bid activities starting Q3 and a robust roster of bidding opportunities for the remaining fiscal year, we are highly encouraged about our new business prospects. Our company remains strong in a position for organic growth, our number one corporate priority. We will leverage our unique capabilities to continue to expand and penetrate across new programs and agencies. We'll continue to invest in the future, and with our track record of success, world-class capabilities, and strong cash flow, we look forward to what the future will bring to DLH and our shareholders. 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 second quarter results for fiscal 2025. Turning to slide seven, I'd like to provide a high-level overview of some key financial metrics for the three months ended March 31, 2025. We reported revenue of $89.2 million in the second quarter versus $101 million in the prior year period, reflecting contributions from recent contract awards and business delivery timing offset by the conversion of certain VA and DOD programs to small business set-aside contracts as discussed in the past. Notably, our revenue was nearly in line sequentially with Q1 levels, even though we finished the quarter with one less CMOP site under management. That means our key technology services revenue grew over first-quarter results.

In total, revenue contraction due to small business set-aside conversions, including CMOP, versus 2024 was approximately $11.8 million in the quarter, accounting for our total decrease in revenue. We are under contract to manage five of the remaining CMOP locations through the end of October 2025, so beyond the current fiscal year, and one location through the end of August. Award decisions for these services appear to be trending towards mid-fiscal 2026 and could extend further as procurement strategies are shaped by the policies of the new administration. We reported EBITDA of $9.4 million for the second quarter versus $10.2 million last year. EBITDA was down primarily due to the lower overall revenue level, partially offset by managing indirect support costs as we scale the business. Notably, EBITDA as a percent of revenue was 10.5% this year versus 10.1% in fiscal 2024.

From a cash standpoint, we generated, excuse me, approximately $14.5 million of operating cash during the quarter, as Zach mentioned, due to increased collections of receivables, leading to operating cash flow of $3 million year-to-date versus $10.3 million last year. True to form, we used this year's Q2 cash generation to pay down debt, as I'll discuss on slide eight. To date, Q3 activities have continued the trend of clearing receivable backlogs in support of a current debt level today of $146 million. As you can see on slide eight, we reduced debt by $15.3 million during the quarter, ending the period with $151.7 million outstanding. Our deleveraging strategy and amended credit facility combined to deliver performance that puts us comfortably ahead of our debt covenants by approximately 80 basis points.

We believe our credit facility provides sufficient capital to support our robust bid pipeline and subsequent revenue growth, as Zach discussed. As I mentioned earlier, we are contracted with at least five of the CMOP locations through October, possibly longer. Decisions on those sites, including some we have bid with our small business partner, may be made in fiscal 2026, although we are not yet certain on exact timing. We are mindful of substantial changes in the contract administration resources at our customers, which have been proposed by the administration and which we are actively monitoring to protect invoice approval and cash flow generation. Assuming a successful implementation of that change within our customer agencies, we expect that by the end of the fiscal year, we would have utilized approximately 50%-55% of EBITDA to pay down debt.

While we navigate through the various puts and takes that are a normal part of each transition to a new administration, we continue to believe the company is on a sound financial footing and, most importantly, has a portfolio of high-value-added technology-enabled applications that remain in demand across the agencies we support. With bid activity accelerating as we near the end of the government's fiscal year, we believe there is ample room to increase bookings even as we face the headwinds of uncertainty and program set-asides we have discussed in the past. The key to our success is to expand our market presence by providing unique, comprehensive solutions that can make federal programs more efficient, more effective, and impactful to the soldiers, veterans, and citizens they serve. Given our capabilities and highly credentialed workforce combined with our strong pipeline of new business opportunities, we are well-positioned to do just that.

That concludes my discussion of the financial statements. With that, I would now like to turn the call over to our operator to open the floor 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. If you are using a speakerphone, 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. Our first question will come from Joe Gomes with NOBLE Capital. Please go ahead.

Joe Gomes (Senior Research Analyst)

Good morning, Kathryn, Zach.

Zach Parker (President and CEO)

Good morning,

Kathryn Johnbull (CFO)

Joe.

Zach Parker (President and CEO)

How are you, my friend?

Joe Gomes (Senior Research Analyst)

One of the, to start out, I guess it's kind of the long-running saga here with CMOP contracts. Good news is we got them, sounds like, through, like you said, the end of this fiscal year. The one that you've lost, I guess, kind of figure out where are we on a revenue run rate on those contracts? Let's do the back half of this year. The first quarter, you did about $34 million of revenue. I haven't seen the Q yet, so I don't know what was in for the second quarter. I'm assuming it's somewhat less because of the one less contract. Just trying to figure out for the rest of the year what contribution that might be able to have.

Kathryn Johnbull (CFO)

Yeah, we're expecting the quarterly run rate to be around $23-$25 for the remaining locations that we expect to extend. It is obviously helpful in terms of visibility. If you deal with this more than many. I'm just trying to put your report out. The visibility moving from the one-month and three-month arrangements to now a six-month extension gives us better assurance that the third and fourth quarter will have a revenue contribution from CMOP somewhere between $23 and $25.

Joe Gomes (Senior Research Analyst)

Okay. Perfect. Thank you for that. I know you mentioned some of the things that have been going on. I saw one article talking about over at the NIH where they were shutting down a long-term women's health study. I am wondering, A, were you guys involved in that study? How much more of that NIH type of business do you think is potentially going to be impacted by some of these dogged efforts?

Zach Parker (President and CEO)

Yeah, as you might imagine, Joe, we spend a great deal of time with NIH. We're in a large number of their operating divisions, and they pay very close attention to both the signal and the noise that's coming out with regard to them. First of all, to answer your question, that was not work that we had been performing. And so we have no impact with regard to that. The administration has been sending their signals with regard to their priorities going forward, both in terms of budget as well as actions that have been taken in the recent quarter. That still is well within our position. We still remain well within our position that we have described over the last couple of quarters that we feel overall that the budgetary impact of the new administration will be neutral to slightly positive to us overall.

You are hitting in the area where I think we have probably some of our risk exposure around the research side. That is the funding that will continue to go forward that may have been funded in some cases by research grants. This administration has taken a very tough position on grant-funded studies and research. That has been a part of and continues to be from time to time a part of our book of business. That is largely almost exclusively, I should say, in NIH for us. We still continue to see an overall positive net positive, including NIH, from our waterfall that includes current contracts and new business growth.

Kathryn Johnbull (CFO)

I think some of the initial reaction of the things you see focused on, as the one that you mentioned suggests, it got a bit swept up in some of the maybe AI-enabled kind of identification of programs and their affiliation with the DEI and the political overhangs, if you will. My understanding of that program specifically is that once communicated how relevant that was to scientific disease and health conditions management, that program was restored.

We do think that there'll be some bit of a hurry-jerky kind of a or a little bit of a maybe some initial responses made or decisions made that will, with the benefit of better context and information provided at the program level, help protect those programs that are really related to the overall MAHA objectives of studying and delivering healthier lifestyles through studies of chronic conditions and lifestyle management and disease conditions and surveillance of really the core missions of a health organization. There will be some bumps here and there. As Zach said, I'm sure there will be some nicks in programs as we go. Materially, the programs that we're connected to, we see being of very limited impact from these initiatives of reduction.

Joe Gomes (Senior Research Analyst)

Okay. And one more for me, if I may? How far through are we with the small business set-asides and the loss of existing acquired small business? When do we think that that's kind of going to peter out as being something to call out on the quarterly calls?

Zach Parker (President and CEO)

Yeah, I think it's going to probably be we'll see in our pipeline. We'll probably see it go through Q3. I think it'll settle out in terms of the opportunities that we have in our pipeline. Revenue-wise, of course, that would be trailing. There is still some pressure there. For some of the opportunities that have not, well, some that have already been in motion and some that have not been awarded. This administration has taken some actions to stop some acquisitions that have been going forward in a manner that's not consistent with their strategy, as Kathryn said, working at DEI as one of those factors. If they're unbundling some of the contracts, it doesn't make sense to unbundle it and get the efficiencies and the cost efficiencies of keeping it bundled. This administration is putting halt on some of those.

We think there's some potential upside around some of the things that, coming from the previous administration, were being set aside and/or unbundled, that there may be some cessation of that work. For us right now, I think as we look at our book of business as we have it today, we see that largely running out in the Q3 timeframe and subbing out revenue-wise by Q4.

Joe Gomes (Senior Research Analyst)

Great. Thanks for that. I'll get back in queue.

Operator (participant)

Again, if you have a question, please press star, then one. At this time, we will pause momentarily to assemble our roster. There appears to be no further questions in the queue. Nope. It appears Joe Gomes has come back. So Joe Gomes, please go ahead.

Joe Gomes (Senior Research Analyst)

We'll do a couple more.

Kathryn Johnbull (CFO)

They're getting ready.

Joe Gomes (Senior Research Analyst)

The $76 million Navy Award contract that you got out too long ago, I just wondered if you might be able to give us an update on how that is progressing.

Zach Parker (President and CEO)

Yeah, it's continuing to grow. We are continuing to phase in certain aspects of that work. I think we may have said before it was not going to be fully staffed upfront and just run it out accordingly. We don't see any dips, but we do see continued expansion. Some of it is tied to programs and certain platforms that we will receive the command and control systems that we're managing and continuing to do software updates. Some of those are coming on. Ship schedules vary, and we're making sure we're responsive to that. And so if we do anticipate that some of the work, and particularly, I believe, up in Norfolk, Virginia, with the Navy's presence up there, we expect to start to level off with us, and tighten some of those additional resources in the coming months.

We also have had some work out in the Pacific side associated with that contract out in the San Diego area. That level of effort, still, I believe we still have some potential growth there in the early part of FY26, potentially. Those are still subject to change. The government's taking a look at some contract vehicles and which are the appropriate ones. We believe our vehicle might be an appropriate one for them to do some new things coming out of the Department of Navy.

Joe Gomes (Senior Research Analyst)

Okay. And then one last one. We've talked about this in the past, and I think we're starting to see some more additional movement here. You got a couple of these large IDIQs, and you talked about the billion awards, you think, coming in the second half. Is most of that related to these IDIQs? Are we seeing some more RFPs being released under these vehicles?

Zach Parker (President and CEO)

Yes, we are. We're continuing to see that. One of the more notable ones, of course, is when we were awarded and announced at the beginning of this year, it's the OASIS+ that has continued to have some activity that's germane to our pipeline. We are still seeing some continued commitments. In many cases, the government, they give you what we call heads-ups. They'll ask for a request for information. It's not quite an RFP, but once they do issue those RFIs, it's an indicator to us that sometime within the coming months, they may issue those RFPs. I will say that this administration's, one of the effects of this administration has been to provide more oversight before they release requests for proposals or even allow the contracts folks to award contracts.

So while they haven't canceled any material ones for us, it has had an effect of slipping things to the right of late. It's just because of the administrative process of going up higher in the organization. In some cases, they want to make sure that a political appointee has eyes on a procurement before they commit the dollars. That has slowed some things for our customers. I would probably also add that, as you may have seen in the headlines, a number of agencies, and particularly within our market, have taken a large haircut already with regard to incentivized retirements and forced retirements, if you will, to the acquisition folks, the contract administration folks. That has affected also a delay in just about all types of contract actions, in some cases even getting funding on contracts.

We've not suffered from that materially, but we've had peer companies that have. Things are slowing down as a function of this. I don't want to have folks, as well as our folks, panic on that. It's just that things seem to be sliding to the right just because of the reduced resources. We're hopeful that with some implementation of some new best practices, that will be mitigated in the future.

Kathryn Johnbull (CFO)

Right. It's really a point-in-time status right now, Joe, as in the relatively short run, I think the administration's goals of simplifying procurement, consolidating procurement. There's a whole lot out there in the executive orders around consolidating contract activities, particularly for domestic or civilian agencies. It probably would be less likely to happen in defense and intel. I think in the civilian agencies, as a general view, that consolidating under the GSA is going to be helpful and make the procurement process more standard and more efficient. Getting from here to there is the challenge, right? At this point in time right now, what we know is a lot of our counterparts we've been used to engaging and working with in the agencies have been given a timeframe that they're exiting.

Unclear how many of them are going to end up at GSA and how many of them are going to how that's all going to roll out. We certainly have to keep our eye on that ball on a daily basis and make sure that we're tracking where the papers flow into and how the processes are changing. I do think it's a noble goal as an outcome to simplify and shorten the procurement cycle. We all know how frustrating it is to wait on some of these things that seem to take quite a long time. That's kind of the state of ability to get contracts awarded at the moment.

Joe Gomes (Senior Research Analyst)

Okay. Great. Thanks for that.

Zach Parker (President and CEO)

You bet.

Operator (participant)

There's no further questions in the queue. This will conclude today's question and answer session. I would like to turn the conference back over to Mr. Parker for any closing comments.

Zach Parker (President and CEO)

Thank you. Thank you all again to our shareholder community and interested investors. We appreciate you taking the time to hear our story. Kathryn and I, again, do remain available over the coming weeks to be available to add any clarity that you might need as we move forward in this journey together. I want to thank you all again and have a wonderful, blessed, and productive day. Bye for now.

Operator (participant)

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