DLH Q3 2026 Earnings Call Transcript

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July 30, 2026

Key Takeaways

  • Neutral Sentiment: Third-quarter revenue was $44.2 million, including $38 million from technology-powered solutions; management expects fourth-quarter revenue at a similar level following the transition of the VA CMOP program to small-business contractors.
  • Positive Sentiment: DLH completed most of its cost-scaling initiatives, eliminating approximately $3.3 million in third-quarter and one-time costs. Management expects gross margins to return toward 20% and G&A to normalize at roughly $4.5 million–$5 million per quarter.
  • Positive Sentiment: The company generated $4.2 million of third-quarter free cash flow and reduced debt to $128.7 million; mandatory term-loan payments are nearly nine months ahead of schedule and the company remains in compliance with its covenants.
  • Positive Sentiment: Management cited improved clarity in federal procurement activity, with more previously delayed bids now being issued. DLH also won a Navy IDIQ contract that could provide access to NAVAIR modernization and technology-services task orders.
  • Positive Sentiment: Management continues to target a 9%–10% adjusted EBITDA margin, which it believes can be reached with modest growth through contract expansions and new awards, although timing remains dependent on government procurement decisions.
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Earnings Conference Call
DLH Q3 2026
00:00 / 00:00

Transcript Sections

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Operator

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 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, the Investor Relations Advisor. Please go ahead.

Chris Witty
Chris Witty
Investor Relations Advisor at DLH

Thank you. Good morning, everyone. On the call with me today is Kathryn JohnBull, President and Chief Executive Officer, and Steve Oroho, 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 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.

Chris Witty
Chris Witty
Investor Relations Advisor at DLH

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 CEO Kathryn JohnBull will speak next, followed by CFO Steve Oroho, after which we'll open it up for questions. I'd like to now turn the call over to Kathryn. Please go ahead, Kathryn.

Kathryn JohnBull
President and CEO at DLH

Thank you, Chris. 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 long-standing 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.

Kathryn JohnBull
President and CEO at DLH

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.

Kathryn JohnBull
President and CEO at DLH

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.

Kathryn JohnBull
President and CEO at DLH

As we had 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.

Kathryn JohnBull
President and CEO at DLH

By aligning indirect costs with expected revenue volumes, we believe DLH is well-positioned to compete for organic growth opportunities. We continue to prioritize de-leveraging 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.

Kathryn JohnBull
President and CEO at DLH

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 highly credentialed 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 de-leveraging 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.

Kathryn JohnBull
President and CEO at DLH

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?

Steve Oroho
Steve Oroho
CFO at DLH

Thank you, Kathryn, and good morning, everyone. Before I begin, I would like to echo Kathryn'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, I'd first like to provide a high-level overview of some key financial metrics for the three months ended June 30th, 2026. We reported third quarter revenue of $44.2 million, reflecting the transition of certain contracts within our portfolio to small business contractors. As Kathryn 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 volumes to deliver at a similar level. The company implemented cost scaling initiatives to align its operating structure with this anticipated revenue level.

Steve Oroho
Steve Oroho
CFO at DLH

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 Kathryn 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 eight. 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 de-leveraging 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.

Steve Oroho
Steve Oroho
CFO at DLH

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

Operator

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one 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 two. At this time, we will pause momentarily to assemble our roster. The first question comes from Joe Gomes with Noble Capital. Please go ahead.

Joe Gomes
Joe Gomes
Analyst at Noble Capital

Good morning, Kathryn and Steve.

Kathryn JohnBull
President and CEO at DLH

Hey, Joe. How are you?

Joe Gomes
Joe Gomes
Analyst at Noble Capital

Morning. Doing okay. Thank you. Want to start at, you talked about with CMOP finally done, where the technology-powered solution revenue level's going to be, and you've made some cost-scaling initiatives. If we were to look at that, call it, $160 million of annualized revenue today-

Joe Gomes
Joe Gomes
Analyst at Noble Capital

What kind of gross margin does that support? Where, as a percent of revenue, where we see the G&A expense level these days?

Steve Oroho
Steve Oroho
CFO at DLH

Yes. Thank you, Joe. Appreciate that question. From a gross margin standpoint, we do expect to return to some historical levels of about 20%. 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. With that, we do expect to return to that 20% gross margin level. From a G&A perspective, we're expecting that to return on a quantum basis of about $4.5 million-$5 million. I believe, which will be roughly 11%-12% of revenue go forward.

Joe Gomes
Joe Gomes
Analyst at Noble Capital

Okay. Thanks for that, Steve. On the IDIQs, I guess, obviously congrats on the Navy win. That's a nice big feather in the cap there. As we sit here today, 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? How many additional IDIQ programs are out there that the company's looking at to bid on to try and become part of the awardees?

Kathryn JohnBull
President and CEO at DLH

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 CIO-SP4 as a vehicle in the civilian side of the business. 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? 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.

Kathryn JohnBull
President and CEO at DLH

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. 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. They're using it in a very focused and specific way.

Kathryn JohnBull
President and CEO at DLH

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 wholesale competition from 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. The strategy's obviously, clearly very different in those two paths. 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.

Joe Gomes
Joe Gomes
Analyst at Noble Capital

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

Kathryn JohnBull
President and CEO at DLH

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 in flux, if you will, in more so on the CDC side of the house. Although, even that has been of recent showing strength through the OASIS vehicle. Just given the political headwinds and the leadership headwinds of CDC, I think we have a more cautious view about how quickly that would convert to revenue opportunities. 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.

Kathryn JohnBull
President and CEO at DLH

From that perspective, that's really the basis of our comments. As compared to last year, I would never represent that it's returned to normal as in a few years ago. Certainly as compared to this time last year, the visibility is much stronger.

Joe Gomes
Joe Gomes
Analyst at Noble Capital

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

Steve Oroho
Steve Oroho
CFO at DLH

Joe, the thing with that definitely is the goal. I think what we're working to do is, you'll see a march up to that as, I think you hit on it, as operating leverage expands. We believe that we could achieve that level with a modest level of growth over the coming quarters, which obviously, we're using our current vehicle that Kathryn 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. We see those as our most near-term opportunities to capture some additional volume, return to that level of profitability on a margin basis.

Joe Gomes
Joe Gomes
Analyst at Noble Capital

Great. Thanks for that, Steve. I'll get back in queue. Thank you.

Operator

Thank you.

Kathryn JohnBull
President and CEO at DLH

Thanks, Joe.

Operator

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, I'll turn it back to Kathryn JohnBull for any closing remarks.

Kathryn JohnBull
President and CEO at DLH

Thank you, Drew. 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. 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, or as Joe referenced. We think we're well on the path to accomplishing that. 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. With that, I wish you a very fine rest of your day.

Operator

Thank you.

Kathryn JohnBull
President and CEO at DLH

Thank you.

Operator

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

Executives
    • Chris Witty
      Chris Witty
      Investor Relations Advisor
    • Steve Oroho
      Steve Oroho
      CFO
Analysts
    • Kathryn JohnBull
      President and CEO at DLH
    • Joe Gomes
      Analyst at Noble Capital
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