DLH Q2 Earnings Call Highlights

Key Points

• Management said the federal procurement backdrop has stabilized after prior disruptions, with the fiscal 2026 budget complete, increased funding (notably in defense and intelligence), and a pickup in solicitations and RFP activity returning to market.
• Q2 revenue fell to $59.3 million from $89.2 million year-over-year largely due to transitions to small business set-aside contracts (primarily CMOP and Head Start); adjusted EBITDA declined to $5.3 million with a 9% adjusted EBITDA margin, while free cash flow was roughly $3.8 million.
• DLH reduced debt to $132.7 million and expects to convert about 50–55% of fiscal 2026 EBITDA into debt reduction, remaining ahead of mandatory repayments, and noted a two-year NIH sole-source extension plus returning pipeline activity—though protests could delay some awards.

DLH NASDAQ: DLHC executives told investors the federal budget environment has stabilized following a period of procurement disruption, and said the company is seeing bidding activity pick up as delayed solicitations return to market. Management also reported fiscal 2026 second-quarter results that reflected year-over-year revenue declines tied largely to program transitions to small business set-aside contracts, while highlighting adjusted EBITDA margin performance and ongoing debt reduction.

Management sees improving federal procurement backdrop

President and CEO Zach Parker said the fiscal 2026 budget cycle is complete and that DLH believes “the current federal funding environment is favorable,” citing increased funding capacity and improved budget visibility across key client agencies. Parker said several federal health agencies received fiscal 2026 funding increases versus fiscal 2025 levels, “reversing in part the previously proposed funding reductions outlined by the president’s request.” He also pointed to “significant budget increases” in defense and intelligence that he said align well with DLH’s capabilities and have bipartisan support.

Parker described last year’s environment as marked by budget uncertainty and reductions in federal contracting departments that “significantly slowed procurement activity across the government,” contributing to delays in deals DLH expected in fiscal 2025. He said some of those large procurements are “just now coming up for bid,” and the company is experiencing a “busy second half” responding to requests, with certain award decisions expected over the coming months depending on customer timelines and procurement processes.

He also said the administration has taken actions intended to simplify contracting and speed transaction timelines, including executive orders aimed at streamlining regulations and shifting some work from cost-reimbursement to fixed-price arrangements with performance metrics. Parker said these changes “align very well with DLH’s strategy and our heritage.”

Second-quarter results reflect set-aside transitions

Chief Financial Officer Kathryn JohnBull reported revenue of $59.3 million for the three months ended March 31, 2026, down from $89.2 million in the prior-year period. She said results reflected expansion on existing contracts but were offset by the conversion of certain programs to small business set-aside contracts and “certain government efficiency initiatives.”

JohnBull said the revenue contraction was “mostly due to small business set-aside initiatives,” primarily involving CMOP and Head Start, with the “remaining change” attributable to year-over-year contract completions and government efficiency initiatives.

Adjusted EBITDA was $5.3 million compared with $9.4 million a year earlier, with JohnBull attributing the decline primarily to lower revenue volumes. Adjusted EBITDA margin was 9% for the quarter, which JohnBull said reflected adjustments for the “timing and incremental cost impact” of cost-scaling initiatives implemented in the second quarter.

From a cash flow perspective, JohnBull said DLH generated approximately $3.8 million of free cash flow during the quarter. She contrasted that with the prior-year period, which she said included significant working capital build related to the transition of a CMOP location that restricted cash collections early in fiscal 2025.

Debt reduction and balance sheet priorities

JohnBull said debt declined to $132.7 million at quarter end from $136.6 million at the end of the previous quarter, calling it a resumption of the company’s deleveraging trend after a “typical seasonal uptick” in the first quarter. She said DLH expects to convert roughly 50% to 55% of fiscal 2026 EBITDA into debt reduction by year-end, and noted the company is ahead of its mandatory repayment schedule and in compliance with all financial covenants.

Parker also referenced debt reduction progress during his remarks, saying total debt is aligned with DLH’s fiscal 2026 plans.

Program transitions, NIH extension, and cost actions

During the Q&A session, management provided an update on the VA CMOP transition. In response to questions from Joe Gomes of Noble Capital, JohnBull said the company expects to “wrap up the transition of those contracts just before Memorial Day.” Parker said DLH remains committed to supporting veterans and has “irons in the fire” for other VA-related work, while also describing the set-aside shift and changes in acquisition approach as factors in DLH’s decisions regarding bids.

Parker also noted “late-breaking news” of a two-year sole-source extension for a contract supporting clinical research services at the National Institutes of Health. JohnBull said the contract would have gone through a normal recompete cycle at the end of its 10-year performance period, but NIH opted for a two-year sole-source bridge. She said the extension provides additional near-term “revenue visibility” and called public health a key part of DLH’s portfolio and market strategy.

Asked about whether additional cost scaling may be required, Parker said the company has taken “the significant actions” and believes it has “accomplished the material reductions that are necessary to right-size the business,” while continuing to evaluate areas such as real estate footprint and ensuring its cost structure remains competitive for bidding.

Outlook: pipeline activity returning amid budget debates

Looking ahead, Parker said DLH is encouraged by increased RFP activity and noted that multiple material solicitations the company had been anticipating have now come through, with bids submitted and decision processes expected to continue. He cautioned that protests can delay awards for larger procurements, but said DLH believes some decisions should occur within the fiscal year.

On the fiscal 2027 budget request, Parker said the proposal calls for “historic spending increases in the defense and intelligence sector,” partially offset by “unspecified reductions in federal health spending,” while emphasizing that the president’s request is an early step in the broader budget process. He said DLH will remain engaged with Congress, customers, and industry groups as the process advances.

Parker said DLH’s capabilities align with what he described as customer priorities, including digital modernization, integration of advanced technologies, interoperability, cybersecurity, cloud migration, and AI adoption. He highlighted DLH’s strategic pillars as science, research and development; digital transformation and cybersecurity; and systems engineering and integration, and said the company intends to compete in an “accelerated acquisition landscape” by leveraging speed, innovation, and agility.

About DLH NASDAQ: DLHC

DLH Holdings Corp. NASDAQ: DLHC is a provider of mission-driven professional services primarily to federal government agencies and select commercial clients. The company designs and delivers tailored solutions across a range of critical mission areas, including program and project management, consulting, technical assistance, and administrative support. Through its Healthcare Solutions offerings, DLH also specializes in supporting clinical and allied health staffing needs for federal health agencies and health systems.

Operating under its Federal Solutions segment, DLH partners with agencies such as the Department of Veterans Affairs, Department of Defense, Department of Homeland Security, and the Department of Health and Human Services.

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