This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
Operator
Hello and welcome to the DLH Holding Corp Fiscal 2024 Second 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 your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to hand the call over to Chris Witte, Investor Relations Advisor. Please go ahead.
spk04
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 forelooking statements that relate to the company's outlook for fiscal 2024 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 statement. 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 Catherine Johnball, 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.
Zach Parker
Thank you, Chris, and good morning, everyone. Welcome to our 2024 second quarter conference call. We remain on track for solid performance midway through the fiscal year. We would not be where we are today without the tremendous support and passion of our strong workforce who remain laser focused on serving our customers and they are dedicated to growing the company and instilling excellence in everything that they do. I would once again like to thank them for executing in a way that led to another great quarter of operating results, setting the stage for a bright future for DLH. Turning to slide four, I'll provide an overview of our financial results. We reported second quarter revenue of $101 million and EBITDA of $10.2 million, while generating operating cash of $5.2 million during the period. which translates to more than 10 million of cash flow year to date. This serves to underscore the cash generating ability of our enterprise, as well as the sound working capital management, as Catherine will review in a moment. We also continued to deliver the company, paying down 3.6 million of debt and ending the period with 170.8 million of total debt outstanding. Overall, we had a sound financial quarter that showed growth in key strategic markets and strong cash generation laying the foundation for solid results going forward. Turning to slide five, I'd like to summarize important elements of our current positioning and outlook. First, we increased our backlog sequentially from the end of Q1 up over 80 million to 736 million. We won several awards this past quarter, including two key re-competes that bolster our technology front at the National Institute of Health and provide an ample opportunity to expand our presence with this and other customers. The first provides IT services at the National Institute on Drug Abuse the leading federal agency supporting scientific research on drug use and addiction, a growing problem in the United States and a priority for our federal government. This award extends a partnership that began with our first contract with that customer in 2014. The contract value is approximately $23 million, of which approximately $10 million is for recurring services and the balance of $13 million for potential service expansions. Through the contract, we will help manage the agency's advanced clinical research informatics system, enabling sharing of data and resources in real time, a competency which we look to expand into adjacent markets. In addition, we want a contract to expand our IT services with the National Cancer Institute, the largest organization within the National Institute of Health, and the government's principal agency for cancer research, training, and health information dissemination. This award utilized the contract which we announced last year with the Center for Biomedical Informatics and Information Technology, a multiple award, highly-competed contract. We are providing scientific, computing, and data analytics services to support the agency's research mission. The contract has a base value, including all option periods, of approximately $52 million over five and a half years, but it also has provisions for an additional $86 million in optional IT services, which, if fully exercised, will bring the total value to $138 million. This award is a great example of the ongoing demand for our company's unique skill sets and integrated services as we'll be handling a broad range of requirements from hardware configuration, software management strategies, network connectivity, platform integration, engineering, and much more. We look forward to continuing our support of these and other NIH programs for years to come. These contract wins are illustrative of the value DLH brings to our customers, and we expect similar momentum during the second half of fiscal 2024 as we continue to invest and reshape our portfolio with business development activities and respond to a variety of active pipeline opportunities. I'd also like to comment on our legacy VA CMOP contracts, which are currently proceeding through the procurement process. As previously announced, the VA issued RFPs for medical logistics and pharmacy services, for the eight CMOP bids and these procurements were set aside for prime contractors that were service-disabled, veteran-owned small businesses. As such, we partnered with a highly qualified small business to bid this work as part of a joint venture. While these bids are evaluated, we continue to operate as the prime contractor for all CMOP locations. In late February, we were informed that the VA had made an initial award decision for one of the eight to the Chelmsford location, awarding the contract to a small business that is unaffiliated with our joint venture. However, that award remains subject to the completion of the VA's acquisition process, and I believe that our joint venture remains a viable contender for that work. While the VA continues to evaluate the eight separate procurements, we have been awarded a sole source IDIQ contract with a $200 million ceiling value to continue the VA CMOP operations at all locations. This remains dynamic with the initial tasking having a period of performance through July 31st of this year with a potential for additional orders beyond with the, beyond the initial tasking. Overall, we see a wide array of opportunities across our core targeted markets in the coming quarters, including through the multi-year large IDIQ contracts that we've discussed in the past, some of which are now starting to define specific task orders, and some of which we expect the government to make decisions on later this year. Given the government is fully funded now through the remainder of the fiscal year, it is a time of healthy and heightened bid activity across the agencies that we serve. Our wide array of applications, research and development, digital transformation capabilities, and our highly credentialed workforce, along with our strong agency relationships, are anticipated to drive continued growth this year and beyond. Even with the CMOP uncertainty, the future of DLH looks tremendously bright. We have continued to build our new business pipeline, which aligns with federal budget priorities, and our expanded capabilities in digital transformation and cybersecurity, and its role, their role, in enhancing science, research and development, and readiness activities. With that, I'd now like to turn the call over to our Chief Financial Officer, Catherine Johnville. Catherine?
Catherine Johnville
Thank you, Zach, and good morning, everyone. We're pleased to report our second quarter results for fiscal 2024. Turning to slide seven, I'd like to provide a high-level overview of some key financial metrics for the three months ended March 31st, 2024. We reported revenue of 101 million in the second quarter versus 99.4 million in the prior year period. We saw expansion within our public health and enterprise IT management portfolios partially offset by the impact from turnover of certain small business set-aside awards in our national security program area. We reported EBITDA of $10.2 million for the second quarter versus $10.5 million last year and generated cash from operations of $10.3 million year-to-date compared with $6.9 million in fiscal 2023, reflecting improved cash collections. This resulted in day sales outstanding of 50 days, which represents a decrease of 11 days over the comparable period in fiscal 2023. Our EBITDA for the quarter was in line with last year, even given approximately $1 million in aggregate of CMOP procurement related legal costs and strategic positioning expenses. Now if you'll turn to slide eight, I'll provide an update regarding our deployment of the company's cash to reduce debt, strengthen the balance sheet, and lower interest expense. We paid off approximately 3.6 million of our higher interest floating rate debt during the quarter, ending the period with 170.8 million of total debt outstanding. Approximately 0.4 million of quarterly interest expense is non-cash amortization of financing arrangement fees. We remain on track to reduce debt to between 153 and 157 million at the end of the fiscal year, as we expect debt payments to accelerate in the second half of the fiscal year. The debt reduction is expected to result in a leverage ratio below 3.5 times, providing further cash savings and earnings expansion through reduced interest expense. This concludes my discussion of financial statements. With that, I would now like to turn the call over to our operator to open for questions.
Operator
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 are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble the roster. And our first question will come from Joe Gomes of Noble Capital. Please go ahead.
Joe Gomes
Good morning, and thanks for taking the questions.
Zach Parker
Hey, Joe. Good morning, Joe.
Joe Gomes
So on the national security contracts that were awarded to small businesses, any way to size that, and then how much more of that, if any, is at risk?
Zach Parker
Yeah, Joe, great question. As you may recall, during the end of 2022, early part of 2023, we did discuss that with the acquisition that we completed with GRSI, that there were some opportunities, some of the programs had previously been awarded in a small business environment. And so we did expect to have some runoff. when they came around for re-competition. And that accounts for largely what you have seen thus far in that which Catherine has referred to. We still have a couple or a few of those that are still pending. We expect most of those decisions this fiscal year. And we'll have some degree of certainty as to what that conversion rate will look like. As you know, some of these contracts, we would generally, if we were to recompete those, we will recompete them generally as a subcontractor position, which potentially affords us 49% of retention of those contract values. And so we'll keep you all informed as to how those progress downstream.
Joe Gomes
Okay, thanks for that, Zach. And on the G&A, you mentioned some of the legal costs. increased, driving some of the increase in GNA. Do you see that continuing going forward, or should GNA drop back down to the more historical type of a run rate?
Catherine Johnville
Well, we do see it continuing, albeit likely at a lower level of consumption. However, I think even notwithstanding that, our G&A rate for the quarter was not particularly out of line. I think our Q1 was perhaps a little bit of an outlier to the favorable. If you look at that, if you look at the percent of G&A costs in Q1, it was really a function of our getting the operating leverage we expected to get post the integration of activities from the GRSI acquisition, and not yet having fully as is always our model, redirected those costs to really position the company for growth. Really the emphasis now, and Zach will go into this more as he talks about growth in the rest of this call and upcoming quarters, but really as we've talked about before, our strategy for growth, it's working well to have each of the parties pursuing their own portfolios and really continuing to support their current customers and continuing to grow their independent lines business where we're positioning and really investing is really the cross-selling opportunities and really integrating the company and really making sure that we're pulling the capabilities up to pursue opportunities that would not have been viable for any of the independent parts of the company. And so we do expect to continue that. in the out-quarters, and that is a bit of a backfill to some of the operating leverage savings we've achieved.
Joe Gomes
Okay. And on the VA contract, congrats on that getting extended once again. But I don't know, Zach, if you can provide any more color as to what the VA's thinking is. They just seem to change gears at the drop of a moment's notice and just trying to see if we can get a little better understanding of their whole thinking and process here. Like you said, the funded now is through the end of this fiscal year and then potentially through October of 25. which seems to be a long time for them to have to make a decision on these contracts. But we know this has happened in the past. So just any other insight you can give would be greatly appreciated.
Zach Parker
Sure. Thank you for the question, Joe. And again, yes, you're correct. As you may recall, this procurement cycle with Recompete for Us started back in November of 2016. And in fairness to the VA acquisition community, there was really heightened degree of commitment and new approaches associated with the kingdomware decisions that forced the VA and various acquisition shops to take a look at the appropriate acquisition strategies. And over the years, the VA has had two versions, if you will, of this acquisition. And, of course, each was set back in large part due to a protest. And so this is really, we're currently in this phase where it again, yet again, is another approach where we've had, where it's by location and it is combined both the medical logistics and pharmacy. So it is kind of a first time for them in this arena with it being exclusively set aside. And the way in which the process works is that first the VA is required to do a thorough evaluation of the set aside environment and then make a determination around market best value interest to the government. And should they determine that awarding in a small business environment, set-aside environment, is not in their best interest, then they must restart a new acquisition. So it's in large part driven by the formalized acquisition regulations that evolved from that law, and they're doing their best to try to get an acquisition strategy that We'll first evaluate the small business opportunities, take a look at what risks associated with that. If that is suitable, then continue with the awards, and if not, then reopen it to an unrestricted environment. This is their first attempt at this new model of bundling, and we'll see how it yields in the future.
Joe Gomes
Thanks for that insight, Zach. if you were to lose one or more of the eight contracts, how quickly can you get rid of the costs that are associated with serving those contracts?
Zach Parker
Yeah, great question. We have, as you might imagine, over the years, continued to model various scenarios that align with the new acquisition strategies. And, of course, this strategy, which came out recently, in the procurement phase last year, we have taken a look at that. So we do have some step-down approaches and plans to execute them. It's going to be a function, Joe, of how many of them are awarded in a given time period, right? Every indication is they would not award all seven or eight concurrently so that they can manage the phase-in process, ranging from 60 to 90 days in those solicitations. So if they were to do that, if you think about it, we have various models that would have a scale down associated with the range of contracts. But we feel very comfortable that we will, within a full operating quarter, be able to hit a pretty quick reduction and to be able to operate efficiently with regard to our EBITDA margin basis.
Catherine Johnville
Yeah, I mean, as a services business, of course, our components of our costs are the direct cost of performing the contract. So those are, and that is by far and away the majority of the cost. And naturally, that scales if the contract moves, the costs move with it. There's also, of course, costs of running any particular part of our operation that is distinct to that operation. And CMOP, as we've described before, is a very large scale, deceptively complex. I mean, we think of it as it's fulfillment of prescriptions, and of course it is. But it's complex in terms of the deployment of the workforce in response to variable demand. And so there is an infrastructure supporting that particular operation in a unique way, and that is, of course, scalable as the effort, the volume of business scales. And then there are, of course, the corporate costs of running the overall business. So as Zach suggests, the scaling will be, I expect to be very well aligned with the timing of the revenue volume changes. And then we have to address the impact to the corporate infrastructure costs. But we're, as Zach said, we model this regularly and we are prepared for This is an outcome, even as we continue to support VA as a key customer and something that we've invested in helping their outcomes be strong and the operation continue to improve.
Joe Gomes
Okay, one more for me and I'll get back in queue. Zach, you guys haven't talked about the InfiniBytes. I just wanted you to give us kind of an update and how that is going out and being accepted.
Zach Parker
Great straight man, Joe. I appreciate that. Our federal government is really stepping up its activity with regard to security and cybersecurity across all agencies. Recently, within the last year, the White House has issued cybersecurity guidelines. There's implementing regulations being formed. There's a strong, strong commitment to execution of sound cybersecurity principles, as well as major commitment to cloud modernization for programs. We're starting to see those, and we're hearing more from those agencies, met with some of the highest levels in the leadership on the federal government just earlier this week in that regard. So we believe that our InfiniBite solution still offers a very, very highly secure differentiating capability since we are one of the certified, FedRAMP certified companies. So it still remains, we think, a strong, strong differentiator as we start to see those cybersecurity and information assurance opportunities coming down the pipeline. It is an area, Joe, where we have a strong campaign. It obviously was bolstered with the capabilities that we have brought in, both with the work that we're doing, the cybersecurity mission engineering work that we're doing for the Navy and complemented by some exacting high security up to and including zero trust architecture that we're doing within NIH in driving some of their transitions for the biomedical research community. So we're really excited about how we think InfiniBiTE both complements and gives us a breadth and a capability that's somewhat unique, and we're looking to include that in our value propositions for this these new bid backlogs that are finally starting to uncork a little bit with some budget certainty with some of these customers.
Catherine Johnville
But that would be a great example, Joe, of what we talked about earlier in this call about the cross-selling opportunities.
Zach Parker
Yep.
Joe Gomes
Okay. Great. Thanks for taking the questions. I appreciate it. And a nice, strong quarter. Look forward to seeing how the second half of the year unfolds.
Catherine Johnville
We do, too.
Operator
Once again, if you would like to ask a question, please press star then one. This concludes our question and answer session. I'd like to turn the call back over to Zach Parker for any closing remarks.
Zach Parker
Thank you, Andrea. And thank you all for your attention today. Please stay tuned over the coming quarter. Catherine and I will be providing some additional color around our pipelines and new business, as well as update on our current and organic on-contract growth opportunities at some upcoming investor conferences. Thank you all for your support, and have a blessed day. Bye for now.
Operator
The conference is now concluded. Thank you for attending today's presentation and you may now disconnect.
Disclaimer