DLH Holdings Corp. Q2 FY2025 Earnings Call

Good morning and welcome to the DLH Fiscal 2025 Second Quarter Earnings Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Chris Witty, our Investor Relations Advisor. Please go ahead.

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 3 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.

Thank you Chris, and good morning everyone. Welcome to our second quarter fiscal 2025 Conference Call. I'm pleased with 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, amid a 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, and the commitment to our customers and their passion for our collective missions. Now, turning to Slide 4. 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 pay down, 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 half, 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 2025. 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 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 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 that 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 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 5. 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 technologies of digital transformation that we have just described, including our most recent win, really position us well to thrive in the marketplace where these initiatives are valued. As a leading provider of digital transformation in cyber-security, 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 4 times revenue in our qualified pipeline. We're estimating $3.5 billion in opportunities of various sizes and scope across each of our market areas. With the increased bid activities starting in 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 and positioned 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?

Thank you Zach, and good morning everyone. We're pleased to report our second quarter results for fiscal 2025. Turning to Slide 7, I'd like to provide a high-level overview of some key financial metrics for the 3 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 5 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 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 8. Today, Q3 activities have continued the trend of clearing receivable backlogs in support of the current debt level today of $146 million. As you can see on Slide 8, we reduced debt by $15.3 million during the quarter, ending the period with $151.7 million outstanding. Our de-levering 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 5 of the CMOP locations through October, possibly longer. Decisions on those sites, including some we have bid with our small business partners, 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% to 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. And 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 call for questions.

Our first question will come from Joe Gomes with NOBLE Capital. Please go ahead.

Good morning, Kathryn, Zach.

Good morning Joe.

I wanted to start out, I guess just kind of long-running saga here with CMOP contracts. Good news is we got them, sounds like through, like you said, at the end of this fiscal year. But the one that you've lost, I guess, kind of figure out where we are on a revenue run rate on those contracts, it's through 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 it has been for the second quarter. I'm assuming it's somewhat less because of the one less contract. But just trying to figure out for the rest of the year, what contribution that might be able to have?

Yes. We're expecting the quarterly run rate to be around $23 million to $25 million for the remaining locations that we expect to extend. And it is obviously helpful in terms of visibility, and you deal with this more than I do. But the visibility moving from the 1-month and 3-month arrangements to now a 6-month extension gives us better assurance that the third and fourth quarter will have a revenue contribution from CMOP, somewhere between $23 million and $25 million.

Thank you for your insights. I came across an article mentioning the NIH's decision to shut down a long-term women's health study. I would like to know if you were involved in that study and how much more of the NIH-related business you believe might be affected by these developments.

Yes. As you might imagine, Joe, we spend a great deal of time with NIH. We're in a large number of those divisions and pay very close attention to both the signals and noise that are coming out with regard to them. First of all, to answer your question, that was not work that we have been performing. And so we had no impact in regard to that. But the administration has been sending their signals with regard to their priorities going forward, both in terms of budget and actions that have been taken in the recent quarter. And so we 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 for us overall. But 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. The administration has taken a very tough position on grant-funded studies and research. And that has been a part of our book of business. And that's largely, almost exclusively in NIH for us. But we still continue to see overall positive net impact, including NIH from our waterfall that includes current contracts and new business growth.

I believe that some of the initial reactions you mentioned seem to have been influenced by the AI-enabled identification of programs and their connections to diversity, equity, and inclusion, as well as some political concerns. My understanding is that once it was clearly communicated how relevant the program was to managing scientific diseases and health conditions, it was reinstated. We anticipate there will be some ups and downs, and possibly some initial responses that, with better context and information at the program level, will help safeguard those initiatives that align with the overall goals of promoting healthier lifestyles through research on chronic conditions and lifestyle management. There may be a few challenges along the way, and as Zach indicated, we expect some programs will overlap. However, we view the programs we are associated with as being minimally affected by these reduction initiatives.

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 wrapped up as being something to call out on the quarterly calls?

I believe we will likely see developments in our pipeline through the third quarter. The opportunities available to us should become clearer over time. Revenue-wise, this will naturally follow behind. However, there is still some pressure, as certain opportunities have yet to be awarded. The current administration has taken steps to halt some acquisitions that do not align with their strategy, such as the focus on diversity, equity, and inclusion. If they are separating some contracts, it unnecessarily undermines the efficiencies gained from keeping them bundled. This administration is suspending certain initiatives, which may present some potential upside from previous efforts that are being reconsidered or separated. Looking at our current book of business, we anticipate most activity to conclude by the end of the third quarter, with revenue impact expected in the fourth quarter.

Great, thanks for that. I'll get back in queue.

There appear to be no further questions in the queue. Joe Gomes has returned. Joe Gomes, please proceed.

We'll do a couple more. So, the $76 million Navy award contract that you got not too long ago. I was just wondering if you might be able to give us an update on how that is progressing?

Yes. It's continuing to grow. We continue 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 will receive the command and control systems that we're managing and continuing to do the software updates. So some of those are coming on, ship schedules vary, and we're making sure we're responsive to that. We anticipate that some of the work and particularly, I believe Norfolk, Virginia, with the Navy's presence up there, we expect to start leveling off with us identifying the targets and move those additional resources in the coming months. We also have had some work out in the Pacific side associated with that contract down in the San Diego area. That level of effort, still, I believe we still have some potential growth there, in the early part of FY 2026 potentially. Those are still subject to change. The government is taking a look at some contract vehicles and which are the appropriate ones. We believe our vehicle might be the appropriate one for the new things coming out of the Department of Navy.

Okay. And then one last one. We 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've talked about $1 billion awards you think coming in the second half. Is it most of that related to these IDIQs? Are we seeing some more RFPs being released under these vehicles?

Yes, we are. We're continuing to see that. One of the more notable ones, of course, is that when we were awarded and announced at the beginning of this year is the OASIS+ that has continued to have some activity that is pertinent to our pipeline. We are still seeing some continued commitments. In many cases, the government gives what we call 'heads up'. They'll ask for a request for information, so it's not quite an RFP, but once they do issue those RFIs, it serves as an indicator to us that sometime within the coming months, they will issue those RFPs. We've observed that this administration has provided more oversight before they release requests for proposals or even allow the contract folks to award contracts. So, while they haven't canceled any material wins for us, it has had an effect of slipping things to the right of late, just because of the administrative process of going higher in the organization. In some cases, they want to make sure that our political appointee has eyes on procurement before they commit to dollars. That has caused some delays for our customers. I also want to add that, as you may have seen in the headlines, a number of agencies in particular within our market have faced a large exodus already with regard to incentivized retirements and forced retirements of contract administration personnel. And so that has also delayed just about all types of contract actions, in some cases even getting funding on contracts. We have not suffered materially from that, but we know of peer companies that have. So things are slowing down as a function of this situation. I don't want to create panic. It just seems that things are sliding to the right due to reduced resources. We're hopeful that with the implementation of some new best practices, these delays will be mitigated in the future.

Right. And it's really a point in time status right now, Joe. In the relatively short run, I think the administration's goals of simplifying procurement, consolidating procurement, there's a lot out there in the executive orders around consolidating contract activities, particularly for the civilian agencies. This could likely happen in defense and intel too. But I think in the civilian agencies, there is a general view that consolidating under the GSA is going to be helpful to make the procurement process more standard and efficient. But getting from here to there is the challenge. So at this point in time, we know that many of our counterparts we have been engaging and working with have been given a time frame to exit. It remains unclear how many of them will end up at GSA, and how that's all going to roll out. We need to keep our eye on that ball daily and ensure we are tracking where the paper is flowing to and how the processes are changing. However, I do think it's a noble goal to simplify and shorten the procurement cycle. We all know how frustrating it is to wait on processes that seem to take quite a long time. So, that's kind of the state of availability to get contracts awarded at the moment.

Great, thanks for that.

There are 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.

Thank you, and thank you all again to our shareholder community and interested investors. We appreciate you taking the time to hear our story. Kathryn and I do remain available over the coming weeks to provide 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.

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