DLH Holdings Corp. (DLHC) Q3 2026 Earnings Call Transcript

Good morning and welcome to the DLH Holdings Fiscal 2026 Third 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 1 on a touch-tone phone. To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Chris Witte, the Investor Relations Advisor. Please go ahead.

Thank you and good morning, everyone. On the call with me today is Catherine John Bull, President and Chief Executive Officer, and Steve Oroho, Chief Financial Officer. The company's earnings release and PowerPoint presentations 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 2026 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'll be referencing both GAAP and non-GAAP financial measures. A reconciliation of our non-GAAP results to our reported GAAP result is included in our earnings release and in the investor presentation on DLH's website. President and CEO Catherine John Bull will speak next, followed by CFO Steve Orajo, after which we'll open it up for questions. With that, I'd like to now turn the call over to Catherine. Please go ahead, Catherine.

Thank you, Chris, and good morning, everyone. I'm pleased to discuss our third quarter results, the current operating environment, and our outlook in my new role as CEO. Turning to slide four, I'll begin with an overview of the quarter and our priorities going forward. On June 30, the company announced a series of planned leadership transitions. We thank Zach Parker for his 16 years of leadership and are grateful that DLH will continue to benefit from his industry knowledge, strategic perspective, and longstanding relationships through his service on the board and as a consultant supporting selected strategic growth pursuits. Steve and I are honored to lead DLH in our new roles. Our priorities to investors, customers, and employees are clear. Disciplined execution for our customers, organic growth, and employee development. We believe the leadership team is well positioned to advance the company's strategy and create value for customers and shareholders alike. Our success in the current market will rely on our highly credentialed workforce and technical capabilities. I'll expand on these priorities later in the presentation. Organic growth continues to be our number one corporate priority. As we discussed last quarter, we believe that the government procurement markets have demonstrated improved clarity and stability in recent months. This marks a significant improvement to the contracting environment through fiscal 2025 and earlier in the year. When government shutdowns, budget uncertainty, and large reductions to federal agency contracting departments significantly slowed procurement activity across government agencies. Numerous key deals and large procurements that we had been tracking for fiscal 2025 are just now coming up for bid. We are encouraged by the increase in bidding activity and are experiencing a busy end to the fiscal year, responding to procurement requests. We expect certain award decisions over the coming quarters subject to customer timelines and procurement processes. The growth opportunities available to DLH are exemplified by the Multiple Award Indefinite Delivery Indefinite Quantity, or IDIQ, contract to provide a full range of logistics information technology services to the U.S. Navy, which was awarded to the company in June. Through task orders to be competed under this contract, DLH will have the opportunity to implement agile development processes and adaptable architecture to enable continuous systems modernization, integration, sustainment, and migration for Naval Air Systems Command, known as NAVAIR, a new customer for DLH. As we discussed at our annual meeting in March, maintaining a robust suite of IDIQ vehicles is vital for our company as government procurement strategies evolve. These vehicles give our customers flexible, streamlined contracting options. Our proposal-ready posture and agile response capabilities enable the company to compete effectively in accelerated procurement environments. This quarter, the VA CMOP program completed its transition to small business set-aside contractors. With the conclusion of this legacy program, we expect revenue moving forward will be generated exclusively through our technology-powered solutions. Accordingly, the company completed its cost scaling initiatives at the end of the quarter. As Steve will discuss in more detail shortly, adjusted EBITDA reflects the impact of those initiatives had they been realized for the full 90-day period. By aligning indirect costs with expected revenue volumes, we believe DLH is well-positioned to compete for organic growth opportunities. We continue to prioritize deleveraging our balance sheet. Total debt was reduced to $128.7 million, aligned with our debt reduction plans for fiscal 2026, as outlined in previous quarters. Mandatory payments are nearly nine months ahead of schedule. Turning to slide five, I would like to provide further color on our leadership transition and how the management team intends to advance the company's strategy and compete for new business opportunities, all in service of creating value for our shareholders. This transition will be marked not by overhaul, but by clarity and sharp focus on what DLH does best. Growth remains priority number one for our leadership team, with near-term focus on contract expansion and smaller singles and doubles level opportunities. We intend to aggressively compete for contract opportunities while keeping a disciplined new business pipeline. We will continue to lean on our technical expertise to execute on our government customers' crucial missions. For this, we rely on our deep and haughty credential talent pool, which spans each of our capability areas and includes hundreds of technologists and researchers. For decades, government agencies have come to DLH in search of innovation, cost savings, scientific excellence, and mission know-how. That has not changed. Of course, financial strength is the basis on which our platform can grow. DLH will continue to emphasize deleveraging the balance sheet and strengthening operating performance. Reestablishing a competitive cost structure, which reflects the scale of our current business, was key to these efforts. At this time, cost reductions are materially complete, and we expect that the company is competitive at its current scale. A simplified enterprise built on execution and value is one that we believe will serve us well in our strategic initiatives. Overall, we remain competitively positioned to succeed over the coming years, and we expect to vie for the high-value organic growth opportunities that our company was assembled to compete for. With that, I'd now like to turn the call over to our Chief Financial Officer, Steve Oroho. Steve?

Thank you, Catherine, and good morning, everyone. Before I begin, I would like to echo Catherine's sentiments. I am grateful for this opportunity to serve DLH in this new role and excited by our outlook. I am pleased to report on our third quarter results for fiscal 2026. Turning to slide seven, at first I'd like to provide a high-level overview of some key financial metrics for the three months ended June 30, 2026. We reported third quarter revenue of $44.2 million, reflecting the transition of certain contracts within our portfolio to small business contractors. As Catherine indicated, we are moving forward with a business base composed exclusively of technology-powered solutions, which delivered revenue of $38 million in the quarter. We anticipate fourth-quarter revenue volume to deliver at a similar level. The company implemented hot-scaling initiatives to align its operating structure with its anticipated revenue level. These initiatives resulted in approximately $3.3 million of eliminated and one-time costs during the third quarter. While we expect a small tail of actions in the fourth quarter, as Catherine noted, we consider these cost-scaling actions materially complete. Adjusted EBITDA was $3.4 million, representing 7.7% of revenue for the quarter, after adjusting the timing and incremental costs associated with the scaling initiatives. From that EBITDA, we generated $4.2 million of free cash flow during the quarter, which was predominantly deployed to reduce debt. Now, turning to slide 8, debt was $128.7 million at the end of the quarter, compared with $132.7 million at the end of the prior quarter, continuing our disciplined deleveraging trend. Given the timing and nature of the costs associated with the scaling initiatives implemented at the end of the third quarter, we expect debt levels to remain relatively stable through fiscal year-end. Beginning in fiscal 2027, however, we expect to further realize the benefits of these actions and will continue our focus on debt reduction. We remain well ahead of our mandatory term loan repayment schedule and are in full compliance with all financial companies. With that, I would like to turn the call over to our operator to open it to questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're 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 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Joe Gomes with Noble Capital. Please go ahead. Good morning, Catherine and Steve.

Hey, Joe, how are you?

Good morning. Doing okay. Thank you. So I kind of want to start it. You talked about, you know, with CMOP finally done, where the, you know, the technology-powered solution revenue level is going to be, and you've made some cost-scaling initiatives. So, if we were to look at that, you know, call it, you know, $160 million of annualized revenue today, what kind of gross margin does that support? And, you know, where kind of as a percent of revenue where we see the G&A expense level these days?

Thank you, Joe. I appreciate that question. And so from a gross margin standpoint, we do expect, you know, to return to some historical levels of, you know, about 20 percent. And what gets a little bit lost in the contract cost line items was that some of the scaling initiatives did impact changes to our operation management layer, basically flattening the organization and allowing for some more of that profit generated from our programs. to flow to the bottom line. So, with that, we do expect to return it to, you know, 20% gross margin level. And then from a G&A perspective, you know, we're expecting that to return on a, you know, on a quantum basis of about $4.5 to $5 million. So, I believe, which would be roughly 11 to 12% of revenue go forward. Okay. Thanks for that, Steve.

And then on the IDIQs, I guess, Obviously, congrats on the Navy win. That's a nice big feather in the cap there. But as we sit here today, you know, how many of these IDIQ contracts are we currently on? What number of them or percentage of them are currently putting out RFPs for work? And, you know, how many additional IDIQ programs are out there that, you know, the company is looking at to bid on to try and become part of the awardees?

Yeah, I definitely think it's fair to think of the IDIQ strategy from the government's procurement side as a bit in flux, though, gaining clarity. You probably remember us talking many times over the years about our pursuit of CIOSP4 as a vehicle in the civilian side of the business. And the government has, a few months ago, announced that it's just canceling that outright, which obviously we weren't thrilled to hear. But it does focus them on thinking about, okay, instead of that, where are we going? And kind of the shorthand answer is for more generic or more widespread services, they're going to tend to go over the GSA schedule, which we have, and we already have that in place and have that as a vehicle to us. And for things that are more specialized and requiring a deeper understanding of the government's needs, they're going to use the small set of IDIQs that have relatively smaller levels of participation. So, for example, one that we're seeing with an IDIQ we won in early 2023, and it's been kind of quiet since then. But suddenly now we see maybe close to a dozen opportunities moving there, and there's only eight holders of that IDIQ. So they're using it in a very focused and specific way. So I say all that to say we are encouraged to see some pretty significant sorting out of their strategy for procurement. and how they're going to distinguish what's going into the broad open market for, you know, wholesale competition from, you know, whosoever will versus which ones they're going to steer over to these IDIQs that are much more focused and with a much more controlled set of competitors. So, the strategy is obviously clearly very different in those two paths, and so we welcome the fact that that is taking shape and that it's resulting in some things that have been fairly quiet for quite a long period of time, finally getting some good order flow.

Okay, kind of following up on that, Kath, but on the agencies that you're dealing with, are they, any of them exhibiting materially different procurement trends, you know, and which of those agencies currently offer the strongest, you know, spending outlook for the next, let's call it, year to two years?

Yeah, I would say the stability is much stronger, for example, in the civilian side of the business in NIH and HHS than, for example, right now it still seems to be fairly inflexed, if you will, more so on the CDC side of the house, although even that has been of recent showing strength through the OASIS vehicle. But just given the political headwinds and the leadership headwinds of CDC, it's a little – I think we have a more cautious view about how quickly that would convert to revenue opportunities. But, you know, there are definitely areas of both sides of the business, civilian and defense, that are taking shape and giving clarity and actually getting RFPs issued that we can respond to. So, from that perspective, that's really the basis of our comments that, you know, as compared to last year, I would never represent that it's returned to normal, as in a few years ago. But certainly as compared to this time last year, the visibility is much stronger.

Okay. And then one last one for me, and I'll get back in queue. I know you always had that goal of that, you know, 9% to 10% adjusted EBITDA margin. Is that still kind of the goal, and is there a certain revenue level that you need to hit to get back to there?

Yeah, Joe, thank you. That definitely is the goal, and I think what we're working to do is you'll see a march up to that as you think you hit on it, as operating leverage expands. And, you know, we believe that we're – we can achieve that level with a modest level of growth over the coming quarters, which obviously we're using our current vehicle that Catherine described, as well as our current portfolio of contracts as ways to get some near-term volume increases through on-contract growth, convincing customers to increase scope on the contracts we do have. So we see those as our most near-term opportunities to capture some additional volume and, you know, return to that level of profitability on a margin basis.

Great. Thanks for that, Steve. I'll get back in queue. Thank you. Thank you. Again, if you have a question, please press star then one. At this point, there appears to be no further questions in the queue, so I'll turn it back to Catherine Johnbowl for any closing remarks.

Thanks, Drew. So, thank you all for taking the time to join us this morning and to hear about our near-term strategies for reestablishing scale and the historical accomplishments of having gotten our costs scaled to the level of our current revenue volume. So we think those two, really those are the two key toggles we have to really return to the target levels of EBITDA delivery, as you described, as Joe referenced. And we think we're well on the path to accomplishing that. So we appreciate the steadfast support and the sustaining interest, and we look forward to being able to continue to fill you in on our progress in the upcoming quarters. And with that, I wish you a very fine rest of your day.

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