DLH Q2 2025 Earnings Call Transcript

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May 8, 2025

There are 5 speakers on the call.

Operator

Good morning, and welcome to the DLH Fiscal twenty twenty five Second Quarter Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Chris Witty, Investor Relations Advisor.

Operator

Please go ahead.

Speaker 1

Thank you, and good morning, everyone. On the call with me today is Zach Parker, President and Chief Executive Officer and Catherine John Bull, 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 twenty twenty five and beyond.

Speaker 1

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 ks 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.

Speaker 1

President and CEO, Zach Parker will speak next followed by CFO, Katherine Johnbold, 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.

Speaker 2

Thank you, Chris, and good morning, everyone. Welcome to our second quarter fiscal twenty twenty five 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, we have had they have continued to demonstrate what sets DLH apart.

Speaker 2

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 pay down, we've made significant progress this quarter as we reduced our debt by $15,300,000 from the previous quarter. As you may recall, we experienced some collection delays last quarter leading to an $11,500,000 of cash usage and a short term increase in our debt.

Speaker 2

This quarter by contrast, we generated strong operating cash of $14,500,000 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 twenty twenty six, 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 twenty twenty five.

Speaker 2

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 twenty twenty six, 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.

Speaker 2

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 service 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.

Speaker 2

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 $1,000,000,000 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.

Speaker 2

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. Applications of some of the 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 driver of digital transformation and 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.

Speaker 2

Our new business pipeline still remains very healthy with more than four times revenue in our qualified pipelines. We're estimating at $3,500,000,000 in opportunities of various sizes, various scope 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.

Speaker 2

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 EMH and our shareholders. With that, I'd now like to turn the call over to our Chief Financial Officer, Kathryn Johnbaugh. Kathryn? Thank you, Zach, and good morning, everyone.

Speaker 3

We're pleased to report our second quarter results for fiscal twenty twenty five. Turning to Slide seven, I'd like to provide a high level overview of some key financial metrics for the three months ended 03/31/2025. We reported revenue of $89,200,000 in the second quarter versus $101,000,000 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.

Speaker 3

In total, contraction due to small business set aside conversions including CMOP versus 2024 was approximately 11,800,000 in the quarter, accounting for our total decrease in revenue. We are under contract to manage five of the remaining CMOP locations through the October 2025, so beyond the current fiscal year and one location through the August. Award decisions for these services appear to be trending towards fiscal twenty twenty six and could extend further as procurement strategies are shaped by the policies of the new administration. We reported EBITDA of $9,400,000 for the second quarter versus $10,200,000 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.

Speaker 3

Notably, EBITDA as a percent of revenue was 10.5% in fiscal twenty twenty four. From a cash standpoint, we generated, excuse me, approximately $14,500,000 of operating cash during the quarter, as Zach mentioned, due to increased collections of receivables, leading to operating cash flow of $3,000,000 year to date versus $10,300,000 last year. True to form, we use this year's Q2 cash generation to pay down debt, as I'll discuss on Slide eight. Today, Q3 activities have continued the trend of clearing receivable backlogs in support of a current debt level today of $146,000,000 As you can see on Slide eight, we reduced debt by $15,300,000 during the quarter ending the period with $151,700,000 outstanding. Our delevering strategy and amended credit facility combined to deliver performance that puts us comfortably ahead of our debt covenants by approximately 80 basis points.

Speaker 3

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 twenty twenty six, 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 be we would have utilized approximately 50% to 55% of EBITDA to pay down debt.

Speaker 3

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 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.

Speaker 3

With that, I would now like to turn the call over to our operator to open the call questions.

Operator

Thank you. We will now begin the question and answer session. Our first question will come from Joe Gomes with NOBLE Capital. Please go ahead.

Speaker 4

Good morning, Catherine and Zach.

Speaker 3

Good morning, Joe. How are you, Humphrey?

Speaker 4

So I wanted to start out, I guess, just kind of the long running saga here with CMOP contracts. Good news is got them, it sounds like through, like you said, the end of this fiscal year. But 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 $34,000,000 of revenue. I haven't seen the Q yet, so I don't know what was in for the second quarter.

Speaker 4

I'm assuming it's somewhat less because of the last one less contract. But just trying to figure out for the rest of the year what contribution that might be able to have.

Speaker 3

Yes. We're expecting the quarterly run rate to be around 23 to 25 for the for the remaining locations that we expect to extend. And, you know, it is obviously helpful in terms of visibility, and you you deal with this more than More than that. I'm just trying to put your report out. But the visibility moving from the one month and three month arrangements to now a six month extension gives us a better assurance that the third and fourth quarter will have a revenue contribution from C.

Speaker 3

Ma somewhere between 2023 and 2025.

Speaker 4

Okay. Perfect. Thank you for that. And I know you mentioned some of the things that have been going on. I just I saw one article talking about over

Speaker 3

at

Speaker 4

the NIH where they were shutting down the long term women's health study. And was wondering, a, were you guys involved in study? And how much more of that NIH

Speaker 3

type

Speaker 4

of business do you think is potentially going to be impacted by some of these those efforts?

Speaker 2

Yeah, as you might imagine Joe, we spend a great deal of time with NIH. We're in a large number of those their operating divisions and pay very close attention to both signal and noise that's coming out with regard to them. We first of all to answer your question that was not work that we had been performing and so we've had no impact with regard to that. But they are 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 recent quarter. And so we that's still as well within our position.

Speaker 2

We still remain well within our position that we've 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. But you are hitting in the area where I think we have probably some of our risk exposure around the research side. And 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. And that has been a part of and continues to be from time to time a part of our book of business.

Speaker 2

And that's largely almost exclusively I should say in NIH for us. But we still continue to see our overall positive net positive including NIH from our waterfall that includes current contracts and business growth.

Speaker 3

I think some of the initial reaction of what the the things you see focused on is that 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 the understate communicated how relevant that was to scientific disease and health conditions management, that program was restored. And so we do think that there'll be some bit of a herky jerky kind of a or a little bit of maybe some initial responses made or decisions made that with the benefit of better context and information provided at the program level will 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 the really the core missions of a health organization. It'll be maybe some bumps here and there. And as I said, I'm sure there will be some mix in programs as we go.

Speaker 3

Materially, the programs that we're connected to, we see being a very limited impact from these initiatives of reduction.

Speaker 4

Okay. And one more for me, if I may. How

Speaker 2

far

Speaker 4

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?

Speaker 2

Yes, think it's going to probably be we'll see in our pipeline, we'll probably see it go through Q3. And I think it will settle out in terms of the opportunities that we have in our pipeline revenue wise, of course, that would be trailing. But there is still some pressure there. There's for some of the opportunities that have not 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.

Speaker 2

As Catherine said, work as DE and I is one of those factors. If they're unbundling some contracts, it doesn't make sense to unbundle it and get the efficiencies and the cost efficiencies of keeping it This administration is putting a halt on some of those. And so we think there's some potential upside around some of the things that coming from the previous administration were being set aside and are unbundled that there may be some cessation of that work. But 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 setting out revenue wise by Q4.

Speaker 4

Great. Thanks, Matt. I'll get back in queue.

Speaker 2

You bet.

Operator

There appears to be no further questions in the queue. It appears Joe Gomes has come back. So Joe Gomes, please go ahead.

Speaker 4

We'll do a couple of more.

Speaker 3

Fair game, right? So

Speaker 4

the $76,000,000 Navy award contract that you got out too long ago, I just wonder if you might be able to give us an update on how that is progressing?

Speaker 2

Yes, 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 a fully staffed upfront and just run it out accordingly. We don't see any dips but we do see continued expansion. There's 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 the software updates.

Speaker 2

And so some of those are coming on ship schedules vary and we're making sure we're responsive to that. And so 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 target some of those additional resources in the coming months. We also 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 FY twenty twenty six potentially. Those are still subject to change.

Speaker 2

The government's taking a look at some contract vehicles in which the right which the appropriate ones. We believe our vehicle might be appropriate one for them to do some new things coming out of the Department of Navy.

Speaker 4

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've got a couple of these large IDIQs, and you've talked about the $1,000,000,000 awards you think coming in the second half. Is most of that related to these IDIQs?

Speaker 4

Are we seeing some more RFPs being released under these vehicles?

Speaker 2

Yes, we are. We're continuing to see that. One of the more notable ones of course is the one we were awarded and announced beginning of this year, can see Oasis Plus that has continued to have some activity that's germane to our pipeline. And we do we are still seeing some continued commitments. In many cases the government they give you what we call heads ups.

Speaker 2

They'll ask for a request for information. So 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. We've seen I will say that this administration's one of the effects of this administration has been to provide more oversight before they release requesting 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.

Speaker 2

Some cases they want to make sure that a political appointee has eyes on a procurement before they commit to dollars. And that has slowed some things for our customers. And I would probably also add that as you may have seen in the headlines, a number of agencies and particularly within our targeted market has taken a large haircut already with regard to incentivize retirements and forced retirements, if you will, to the acquisition folks, the contract administration folks. And so that is affected also a delay in just about all types of contract actions. In some cases, even getting funding on contracts.

Speaker 2

We've not suffered from that materially, but we've had fewer companies that have. So things are slowing down as a function of this. So the thing I don't want to have folks as well as our folks panic on that. Just that they 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

Speaker 3

the future. Right. And it's really a point in time status right now, Joe, in the relatively short run, 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 civilian agencies. They probably would be less likely to happen in defense and intel. But I think in the civilian agencies, there's a general view that consolidating under the GSA is going to be helpful and make the procurement process more standard and more efficient.

Speaker 3

But getting from here to there is the challenge, right? So at this point in time right now, what we knew is a lot of our camera parts we've been used to engaging and working with in the agencies have been given a timeframe that they're exiting. And 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. So we certainly have to keep our eye on that ball on a daily basis and make sure that we're tracking where the paper is flowing to and with how the processes are changing. But I do think it's a noble goal of an outcome to simplify and shorten the procurement cycle.

Speaker 3

We all know how frustrating it is to wait on some of these things that seem to take quite a long time. So, so that's kind of the state of ability to get contracts awarded at the moment.

Speaker 4

Okay. Great. Thanks for that.

Speaker 2

You bet.

Operator

With 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.

Speaker 2

Thank you. And thank you all again to our shareholder community and interested investors. We appreciate you taking the time to hear our story. Catherine 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. Well, thank you all again and have a wonderful blessed and productive day.

Speaker 2

Bye for now.

Operator

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

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Key Takeaways

  • DLH reported Q2 FY2025 revenue of $89.2 M and EBITDA of $9.4 M, generated $14.5 M in operating cash, and paid down $15.3 M of debt, bringing mandatory debt payments through March 2026 a year ahead of schedule.
  • Revenue was pressured by $11.8 M from VA and DoD contracts converted to small‐business set‐asides, but DLH retains management of five CMOP sites through October 2025 with potential extensions into FY2026.
  • DLH’s new business pipeline remains robust, with over $1 billion in contracts under review and an estimated $3.5 billion in qualified opportunities, expecting key awards in the second half of FY2025.
  • A recent contract win with the U.S. Army Medical Research & Development Command will expand DLH’s advanced technology services in AI/ML, modeling & simulation, robotics engineering, clinical support and biostatistics.
  • Management sees stability from the continuing resolution and alignment with the administration’s focus on efficiency, cost cutting, and digital transformation, noting negligible impact from program terminations to date.
A.I. generated. May contain errors.
Earnings Conference Call
DLH Q2 2025
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