DLH Holdings Corp.

Good day and welcome to the DLH Holdings Corp. Fiscal 2025 First Quarter Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal conference specialists 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 touchtone phone. To withdraw your question, please press star then two. Please also note this event is being recorded. I would now like to turn the conference over to Chris Witte, investor relations advisor. Please go ahead.

Thank you and good morning everyone. On the call with me today is Zach Parker, President and Chief Executive Officer and Katherine Johnbull, 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 2025 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 10K 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 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 Katherine Johnbull 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.

Thank you, Chris. And good morning everyone. Welcome to our first quarter conference call. As we begin fiscal 2025, I'd like to take a moment to thank our talented employees for being so dedicated to the future of DLH during this transformational time in our country's history. It is your thorough dedication and commitment to excellence that allows us to succeed. Even as industry conditions change, your steadfast passion for our customers' critical missions drives DLH toward a bright future. Now turning to slide four, I'll provide an overview of our financial results. Performance excellence and accelerating organic growth remain our highest priorities as a company. And recent developments illustrate the strength of our transformed new business pipeline. Our recent award to provide C6ISR and advanced IT services to the Navy expands our information warfare systems engineering portfolio covering from Norfolk, Virginia to San Diego, California. This recent award has been key to our organic growth campaign of opportunities, particularly those that leverage intelligence, surveillance expertise, and mission-critical readiness-related services to our clients. We remain confident about our long-term vision-bearing fruit in this and in near-term fiscal years as our bidding posture with our strategic clients has really been strong. A new administration brings both challenges and opportunities, but we have always based our portfolio of business around enduring programs which obtain broad bipartisan support in Congress. And I'm happy to say this continues to be the case. Our services and solutions are focused on improving technology utilization, enhancing productivity, and efficiency for our clients. That has been at the core of all that we do. These are values directly aligned with this administration's stated priorities. And overall, our initial assessment of this administration's impact on DLH's current book of business and future opportunities still remains at neutral to slightly positive. And we still have that belief as we look for the long view. Today, we have not had any material impact from the recent executive orders. We reported first quarter revenue of $90.8 million and EBITDA of $9.9 million, representing an EBITDA margin of 11% on revenue. While we used cash during the quarter due to short-term growth in receivables and increased debt accordingly, we expect strong cash flow in the fiscal second quarter and a continuation of our key leveraging strategy, as Catherine will review in a moment. Slide five provides a snapshot of our go-forward growth strategy as reviewed last quarter. While the company will likely continue to feel the effects of small business set aside unbundling of contracts in the coming quarters, our growth is squarely focused on the opportunities which leverage our digital transformation, cybersecurity, research and development, and systems engineering capabilities.

We have

a strong pipeline of qualified and well-positioned bidders. We anticipate half a dozen or so of those to be awarded this year. Our qualified pipeline has several opportunities with contract values in excess of $100 million and more that should substantially offset the eventual small business set aside erosion. As I mentioned, our focus on differentiating technology and innovation is yielding results by both expanding our footprint for the existing customers as well as opening new channels for growth such as through new contract vehicles, the multiple award IDIQs, our platform for generating new business has never been stronger. Slide six serves as an illustrative example, case study, of how we expect to leverage our existing work and broaden capabilities to win new business in the near term and long term. Each step in the process provides a new building block for which we can establish franchise programs across the health and readiness marketplace. This graphic illustrates a growth campaign of selected opportunities that pull together attributes from across our company's capability sets. The opportunities vary by total contract value and customer, but each requires the differentiated capabilities and solution that DLH can offer. We remain well positioned for organic growth going forward and believe the federal marketplace offers opportunities to expand our technology powered solutions. We remain focused on accelerating the company's top line, leveraging our credentials, personnel, highly enhanced capabilities and over time will more than make up for any of the, again, small business set aside erosions. We continue to believe the best is yet to come and are building a strong DLH to serve the needs and challenges of our clients. With that, I'd like to turn the call over to Katherine Johnbottle, our Chief Financial Officer. Katherine.

Thank you, Zach, and good morning, everyone. We're pleased to report our first quarter results for fiscal 2025. Turning to slide eight, I'd like to provide a high level overview of some key financial metrics for the three months ended December 31, 2024. We reported revenue of $90.8 million in the first quarter versus $97.9 million in the prior year period, reflecting contributions from recent contracts awards offset by the conversion of certain VA and DOD programs to small business set aside contracts, as well as service delivery timing on key HHS contracts. Revenue contraction due to small business set aside conversions within our DOD portfolio was approximately $5 million in the quarter. This amount is comprised of approximately $3.5 million of non-labor, lower margin, pass-through revenue from a contract that was unbundled in this past quarter, and approximately $1.5 million from the winding down of acquired small business contracts in the prior year period. While we remain focused on winning new programs that bode well for future growth, small business set aside conversion headwinds are likely to impact our results for the upcoming quarters. A second CMOP site has transitioned to a small business contractor as of January 31, 2025. This location averaged approximately $7 million in revenue per quarter over the last 12 months. We are under contract to perform services at the remaining locations through at least April, and we expect to provide services on these locations while the customer continues to execute its procurement strategy. We reported EBITDA of $9.9 million for the first quarter versus $11.1 million last year. EBITDA was down primarily due to the lower overall revenue level, offset in part by reductions in certain variable indirect cost as we scale the business. From a cash standpoint, we used approximately $11.5 million of operating cash during the quarter versus cash generation of $5.1 million last year first quarter. As a reminder, prior year period was positively impacted by delayed payments from the fourth quarter of fiscal 2023, making it an unusual comparison. In addition, our first quarter collections this year were impacted by collection delays on one significant account, which has already begun clearing in the second quarter. We anticipate Q2's cash generation to more than offset the first quarter shortfall and therefore lead to a reduction in debt. Turning to slide nine, we ended the quarter with total debt of $167 million versus $154.6 million at the start of the fiscal year, reflecting those short-term borrowings. As a current update, debt today is slightly under $161 million. As I mentioned a moment ago, we anticipate utilizing approximately 50 to 55 percent of EBITDA to pay down debt during the remainder of fiscal 2025. As always, using cash to delever the company is a top priority going forward. Our amended credit facility continues to provide excellent financial flexibility as we navigate through the changing business climate this year. It provides enhanced borrowing capacity to satisfy short-term working capital needs, as well as our strategic focus on new business initiatives. We will continue to invest in organic growth and believe our strong portfolio of technology-powered solutions puts us at the table for more programs than ever before. As Zach previously mentioned, our pipeline of qualified new business opportunities now stands at approximately $4 billion, representing a diverse mix of existing and new customers with budgets and priorities expected to be aligned with the new administration. This concludes my discussion of the financial statements. And with that, I would now like to turn the call back to our operator to open up for questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Our first question will be from Joe Gomes from Noble Capital.

Good morning, Zach and Catherine. Thank you for taking my questions.

Hey, Joe. Good morning, Joe. Thanks for joining us.

I wanted to start out. You mentioned in your remarks and in the press release, probably like four specific items for the revenue decline, what we compete that were lost for the small business set-asides, just the small business transitions, some non-strategic projects winding down. Catherine, you talked a little bit about some of the numbers. I just wonder if you could kind of give a percentage of those items that impacted the revenues, what was the greatest down to what was the least impactful.

Yeah, sure, Joe. Happy to do that. The key impact or the most significant impact of the quarter was derived from the unbundling of one of our recompete. As we shared in prior calls, the prior administration had a commitment to small business set-aside and really ran contrary to the couple decades long practice of consolidating contracts under a prime contractor that would really, number one, drive integration efficiencies from the program and secondarily really transfer from the government to that prime contractor, the performance risk of really trying to manage a series of contractors. But even though that was a couple decades trend, nonetheless, the prior administration really provided a mandate that certain things be unbundled. We experienced that in the quarter, that one of our DOD programs was unbundled and as we mentioned in the comments in the call, largely that was derived from subcontractors we had on our team where we were assuming that integration responsibility. So that's why it had less of an impact to our gross margin delivery because it's relatively low volume, low margin work. Secondarily, as we've talked about on a number of calls, there was a tail of small business revenue that we acquired. Sometimes those tails take a long time to run out. But throughout the quarters of 2024, we mentioned some of those small business acquired contracts that were wrapping up. But as a comparison point, year over year in the first quarter, that transition hadn't really started much until later quarters of 2024. So that was about a million and a half that was present in Q1 of 2024, exiting throughout Qs 2 to 4 of 2024 and not present in Q1 of 2025. So the year over year comparison is impacted by about a million and a half dollars. Thirdly, there's about a million and a half related to winding down or having completed the exit from international work, which is of course getting a lot of attention these days in the headlines. Without commentary to the merits of that work, we made a business assessment a couple of years ago that that work, international work, was a distraction for us. You can't really do that work. You have to be either all in or all out. The work that we had there was a limited number of contracts that we viewed as really not our appropriate, not our focus, not strategic to us. And so we have made a decision to exit, and that exit has also been taking place throughout the quarters of 2024. So year over year in Q1, you see about a million and a half variation from that. There'll be a tail of it

this

quarter. That's right.

We'll

wrap up the exit on that probably in the May time frame. And then finally, there was about $2 million of just timing of services we would have expected to perform in Q1 that slipped into Q2, and we expect to pick it back up in Q2.

Okay, great. Thank you for that overview. It was very good. I know in the 23, 24, you guys did win some seats at the table, so to speak, on some large IDIQs. Are we starting to see a steady stream of task orders come out from those? Are we still waiting for those to kind of ramp up?

Yeah, great point, Joe. Yeah, it's interesting that you mentioned those because what we did find was one of those opportunities was large IDIQs, the way in which it was awarded by the government was replacing a previous contract, but they were gapped, right? And during that gap period, the government moved that work to different vehicle, and many of those contracts were three-year contracts, right? And many of those are now coming back around for competition, and some of that work that was moved while there was gap was moved to a vehicle called Oasis, and of course, we just recently won Oasis, so we are now finding some of those opportunities that we had anticipated bidding now on the other vehicle contract vehicle, DHA Omnibus to be specific, that we are now looking at and bidding on Oasis. It's fortunate timing-wise for us that Oasis just finally made that award decision, and we were successful, and so right out of the gate, we've got some of the bids we've been posturing for to bid over the course of the next few months. So, yeah, we're excited to now have that Oasis IDIQ for work that we're anticipating on the other vehicles, but the good news is now we can prime those opportunities rather than having to take a back seat to someone else on Oasis.

Great. And then one of the things that we talked about, you know, and previously, but we haven't really heard a whole lot about lately is, you know, your InfiniByte Cloud product. I was wondering if you could just kind of give us an update on that product.

Yeah, no, great question. Yeah, we are in the process of, first of all, InfiniByte Cloud happens to be our FedRAMP and FedRAMP marketplace opportunity, capability. That platform we have built and designed for large-scale data analytics services around, largely around health and healthcare solutions. With the advent of our expanded capabilities with cloud that came in with our acquisition, we completed integration in the end of 2023. We've now been taking a look at InfiniByte Cloud 2.0. And so we're in that process right now. We expect that we're doing some investment as we speak to expand the versatility of that platform. InfiniByte Cloud happens to be designed for the most secure type programs and projects in order to that are required by the federal government. It is not suited for, you know, lower level security items. And so we've got a team that is developing, again, a very broad cloud-based platform to expand our InfiniByte offerings. So we're pretty excited about that. We think it will continue to give us some great versatility. It needs to evolve because, as you probably know, the cybersecurity environment and public health security environment is evolving. And folks are leveraging a variety of tools that still must also be managed in a secure environment. The government is very concerned as industry around how do you leverage tools such as AI ML while also operating in a secure environment. And so we're leaning forward to evolve InfiniByte so that it can operate in tomorrow's environment.

And there's a heavy overlap between if you follow the issuing of the CMMC, the Cyber Maturity Model, regulations in late October, there's a pretty good overlap, not 100% but pretty darn close, between FedRAMP and CMMC. So we think that gives us a good head start on that credential that we expect to start making its way into contracts.

Okay. And then one more for me. Again, in the press release, you talk about the little about an $800,000 increase in SG&A, reflecting investments in organic growth. It sounds like some of that could have been right here for the InfiniByte we just talked about. Anything else that you could point out?

Well, not a lot that we can disclose very much. As we talk about our organic growth paths, differentiators are very important. InfiniByte Cloud and secure cloud capabilities is a very material one. We're also doing some development. We'll share some more at our upcoming annual meeting. But we're developing some additional cybersecurity capabilities, systems engineering, modeling simulation capabilities, and we're bringing on the appropriate type of talent across the business to help us deliver that. So we're going to continue to, as Catherine and I said over the recent quarters, to make sure that we're accelerating our organic growth profile, making sure we're investing to ensure that 25 and 26 can realize those in a differentiating way. So you elevate your win probability not by just building a larger qualified pipeline, but a better positioned qualified pipeline. So we continue to make those investments for organic differentiators.

Great. I'll get back in queue. Thank you for taking the question.

You betcha. Once again, if you would like to ask a question, please press star then one. All right. We'll move back to Mr. Gomes for his follow-up from Noble Capital. Please go ahead.

Thanks again. I'll ask a couple of more here. You bet. On CMOP, just one question. I'm not sure if you've heard of the CMOP, but I just want to make sure I'm understanding everything here. So there was seven that you had under your belt that you were still servicing, that you are still servicing. I think four of those had to have their bids last year, three of them haven't yet to, I guess, go out for bid or have their timetable set. I was wondering, of those, how many have you partnered with to bid on? What are you thinking in terms of the capability of your partner winning any of these awards?

Well, we remain in the very competition-sensitive environment there, Joe. I can tell you that we have not bid all of them. Our partner has been a small business, and we've worked collaboratively to make sure that the big backlog on CMOP is one that our small business partner feels very, very comfortable and competent that they have the bandwidth to execute with our support. And so I can tell you that we're not bidding all of those that are remaining, but we do believe it'll be a very material, if we're successful, if our partner is successful, it'll still be a material retention of business for us. But it'll be, again, as a subcontractor at best and one in which we'll evaluate the win probabilities once they start to issue some final RFPs. They're not, the VA, I say that because the VA is not done with that acquisition in any way, shape, or form. Any and all of those that are still remaining outside of exclusive, as Catherine indicated, Chicago that we call Hines, any of those are still subject to have RFP changes and amendments that could lead us to even changing our bid posture on those. So it remains fluid, Joe, until the government makes some of those decisions. The good news is the VA now is moving forward with their new leadership. The new administration and the DOJ community has recently met with the VA. We anticipate, as per usual, that we will have an opportunity to have an executive visit by the new secretary and probably within the next couple of weeks. And this new administration still could put their finger on the acquisition and the approach. So remain so fluid and so competition sensitive. And we've got to respect the non-disclosure agreement that we have with our prime partner.

Fair enough. And then one more. I think we're still operating under a continuing resolution. You guys see any impact from that on the business?

Well, we're fortunate right now, Catherine gave you some of the details as far as what we have in the way of contracts and mimes, et cetera. But we do anticipate that we'll be in a CR mode, Joe. I spent this past week with many of our peer companies as the professional services council leadership summit. We're anticipating that in the coming months there will be quite a bit of you know, we're still with not only we have the CR, we've got some caps that have to be resolved, some of the ratios of the caps from DOD to civilian. We've got a debt limit ceiling that was punted to the right coming up, which always holds an imminent potential for a shutdown for any duration. So we expect a lot of noise over the coming quarter or so at the executive level the good news is we try to make sure we manage that signal to noise ratio. And what we see in terms of stability of that signal is that fortunately, most if not all of our programs are appropriated already, which means there'll be continuity against some of the potentials of shutdown. We also are expecting that everything that we have in our pipeline remains pretty solid and supported by both sides of the aisle. As you see, we have a lot of defense, military health, health and health in areas that again also remain really quite strong on both sides of the aisle. So the veteran community as you well know, as long as this tail continues to run out, both of these administrations are very supportive of veteran health and the sort of DRs most of the business we have in our pipeline, new business pipeline are recurring work. So they're not subject to the restrictions of new business awards. So as long as we can have customers that are focused on the acquisitions and the commitment to their awards, we feel really pretty confident that we won't see any material erosion associated with budget constraints.

Great. Thanks for that, Zach. That's it for me. Thank you very much again.

You bet, Joe. Appreciate

it. Thank you. And ladies and gentlemen, this concludes today's question and answer session. I would like to return the conference back to Zach Parker for any concluding remarks.

Once again, I'd like to thank you for your support and interest in DLH. And I look forward to chatting with you next month as we have our annual shareholder meeting. And until then, be blessed and have a wonderful, productive day. Bye for now.

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