DLH Holdings Corp.

Good day and welcome to the DLH Holdings Fiscal 2026 First 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 that 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 Johnable, 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 column 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. 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 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 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 calls. I am pleased for the opportunity to report our financial results and provide color regarding the current environment and outlook. Now turning to slide four, I'll provide an overview of our achievements and outlook. The first quarter was marked by the longest government shutdown in our nation's history, followed by a short-term funding gap at the end of January. However, the recently enacted budget provides increased funding capacity and improved visibility for our clients for the remainder of the fiscal year across our markets. We expect that to be a positive impact. Notably, key federal health agencies received funding increases compared to the fiscal 2025 levels, reversing in part previously disclosed funding reductions to our current and addressable markets. We believe This improved clarity and stability meaningfully support the company's organic growth initiatives. This budget stability comes at an opportune time for DLH as we continue to see improving demand across our core markets. Defense and intelligence customers are emphasizing rapid delivery, cost efficiency, digital modernization, and advanced technology integration through the application of command control, communications, computers, cyber defense, and combat systems with intelligence, surveillance, and recognizance, known as C6ISR expertise. At the same time, federal health agencies continue to prioritize system interoperability, cybersecurity, including zero trust applications, cloud migration, and AI adoption. which positions DLH competitively well for modernization-driven awards. These are areas that leverage our strengths, our capabilities, and our innovative proprietary tools, as discussed previously, to enhance productivity on current work while elevating our competitive position on organic growth opportunities. While revenue was down year over year, largely due to our previously discussed program transitions to small business set-aside contracts, such as the VAC MOP and Head Start, we are seeing improved visibility and are encouraged by the midterm outlook. More importantly, we delivered sequential improvement in adjusted EBITDA margins from the fourth quarter, as Catherine will discuss in more detail shortly. We remain firmly focused on expanding efficiencies and margins and improving overall returns as the year progresses and award decisions are made. We also continue to execute on our commitment to deleveraging the balance sheet. As is typical in the first quarter, debt increased modestly. driven primarily by the timing of labor and payroll tax repayments around public holidays. That said, we remain on track with our debt reduction plans for fiscal 2026. Overall, we remain well positioned to succeed over the coming years, including competing effectively for high organic value opportunities within a healthy and expansive addressable market. Our differentiated technology application capabilities, tools, and workforce alignment exceptionally well position us within our three strategic pillars. Those are digital transformation and cybersecurity, science research and development, and systems engineering and integration. Importantly, the improved clarity around the fiscal 26 budget, combined with our broad portfolio of contract vehicles, bodes well for DLH's long-term growth outlook. We remain committed to continued investment in the talent, tools, and technologies required to meet the evolving, complex needs of our customers across each of our core markets. Our customers leverage our capabilities to access leading-edge processing speeds, digital sandbox environments, tailored integrations with COTS products and technologies, advanced data science, and actionable visualizations and dashboards that support mission-critical decision making. While the government services market has experienced meaningful disruption this year, driven by delays in contract solicitations and awards, and previously uncertain budget visibility, we have continued to use this period to transform DLH in a positive way. Today, we are a technology, engineering, and scientific solutions provider that is extremely well positioned to compete for the opportunities of the future. As we work to enhance our organic profile, we will remain disciplined in reducing our indirect costs and managing our capital deployment. The management team and I are confident that DLH is on track to exit fiscal 2026 in a much stronger position than we began, and we are encouraged by what lies ahead. Before I close, I would like to recognize the performance of our deep and highly credentialed workforce in a challenging environment We lean on the passion, ingenuity, and expertise of our staff to succeed. This past quarter, you once again surmounted extraordinary challenges in support of our customers. As always, thank you to everyone at DLH for your commitment to excellence that you demonstrated each day. With that, I'd now like to turn the call over to our Chief Financial Officer, Catherine Johnville. Catherine.

Thank you, Zach, and good morning, everyone. We're pleased to report our first quarter results for fiscal 2026. Turning to slide six, I'd first like to provide a high-level overview of some key financial metrics for the three months ended December 31st, 2025. We reported revenue of $68.9 million in the first quarter versus $90.8 million in the prior year period. reflecting contributions from expansion on existing contracts offset by the impact of conversion of certain programs to small business set-aside contracts, as discussed in the past, and certain government efficiency initiatives. In total, the revenue contraction was mostly due to small business set-aside conversions, primarily from CMOP and Head Start, with an approximate $18 million decrease in the quarter versus fiscal 2025. We reported adjusted EBITDA of 6.5 million for the quarter compared to 9.9 million in the prior year period, with the decrease primarily driven by lower revenue levels, partially offset by effective management of indirect cost as we aligned our cost structure with reduced volume. Importantly, adjusted EBITDA margin improved sequentially to 9.5 for the quarter. Our cost scaling initiatives continue into the second quarter. including further reductions in indirect spend in anticipation of future CMOP site transitions. And we expect the impact of these actions to become more evident in our second quarter results. From a free cash flow standpoint, we used approximately $4.8 million during the quarter, which is typical for the first quarter given seasonal increases in working capital requirements. Importantly, this represents a significant improvement compared to last year's use of $12.1 million of free cash flow, which reflected delays in the collection of an unusually high level of receivables. As Zach mentioned earlier, the primary driver of cash usage this quarter was the timing of labor and payroll taxes around the public holidays at the end of the year. Now turning to slide seven, I'll wrap up with a summary of our debt reduction efforts, which remain a key area of focus for DLH. As a result of the first quarter working capital requirements I mentioned earlier, including the impact of the government shutdown, debt increased during the quarter to $136.6 million. We remain well ahead of our mandatory term repayment schedule and in full compliance with all financial covenants. Looking ahead, we expect to convert approximately 50% to 55% of EBITDA generated during fiscal 2026 to reduce debt by year end. As our investors know, we take deleveraging very seriously and have a strong track record of execution, even though the uncertainty of the past few years related to the runoff of small business set-aside programs. We remain more than adequately capitalized to support our growth strategy and now have greater visibility into the year ahead than in prior quarters. As the year progresses, we look forward to improvement in our operating fundamentals and organic growth initiatives. With that, I would now like to turn the call over to our operator to open it 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 touch tone phone. If you're using a speaker phone, 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 today comes from Joe Gomes with Noble Capital. Please go ahead.

Good morning. Good morning, Joe. Good morning, Joe. Catherine, you said about $18 million of the delta in the revenue decline was from CMOP and Head Start, and that would leave about $4 million still unaccounted for? What was the other $4 million? Where did that get lost?

Yeah, it's what we have referred to as the nicks and the nibbles of the DOGE initiatives that happened in the early part of fiscal 25, somewhat after December, but in Q2 of fiscal 25. Also the wrap up of that little, that single international project that we had that completed in January of 25. Yeah, USAID project. So it is a sundry of smaller impacts that were not strategic and not related to the small business set aside.

And Joe, those were, as Catherine indicated, those were smaller because those were the effect of unbundling contracts, right, so that they were able to make more work available also to small businesses or other contract vehicles that had been in existence.

Okay, thank you for that. And on the CMOP, I know we had four contracts at the end of last year and one they had recently awarded somebody else. I think two more were out for bid. Any update on the two that were out? Have they been awarded any timing as to when they might transition and anything new on the last remaining location?

Well, we're looking at, we believe we'll be, we're really in the wind down phase across the board for the CMOP boards. The VA has gotten a little battle rhythm set for being able to do some of the transitions, complete their evaluations in a little more timely fashion, and to move into transition phase. We have been leaning very aggressively and supportive of making those transitions. The specifics on the contract coverage, I'll turn it over to Catherine.

Yeah, no, I think that's the right way to think about it. As we indicated as early as the first quarter of 25, we certainly expected the completion of the CMOP work to be near term. And as Zach said, the cadence, now that there seems to be a pretty manageable process for making those transitions, we are looking at probably a complete wrap-up of CMOP in Q3 of this current fiscal year.

Okay. Thank you for that. And when you talk about the cost reductions that you've taken so far, one, was there any cost to those and where would that show up on the income statement? And two, is that inclusive of the expected CMOT losses or will you need to Do additional costs out once all three of those contracts transition?

Yeah, let me kick it off. And I'll let Catherine hand down the specifics. So when we exited 24, we kind of laid out, at least internally and with our board, a game plan around this reset, right? The reset of the decline in business that we had been communicating that would result from CMOP and some of the unbundling and bundling of other contracts and small business set-asides. While at the same time, we're anticipating, you know, more bid opportunities and wins throughout 25. So we had looked at what we kind of call a V curve and managing that for exiting 24 and throughout 25. The delays, obviously, as Catherine indicated, and the bid opportunities during 25 due to all the challenges we've discussed. had really necessitated that we made sure we had a plan that was flexible and would be phased for indirect reduction. We have implemented two major components of that indirect reduction. It's very important for us to maintain a competitive indirect cost profile to be able to compete organically, and that's been a key driver for us while we've been managing the phase-out of these contracts, including those that still continue for CMOP. We've had a management plan to make sure we can do those indirect reductions. At the same time, I would tell you we've been implementing new measures to drive efficiencies, applying some of the tools we do for our customers, AI, ML, and things of that nature. to drive efficiencies in executing not only for our customers but also for our enterprise. And we're going to continue to look at deploying that. We've got a project or two that has some of that running out through the remainder of this fiscal year where we can enhance and augment the caliber of services by our folks using some of these tools. We think those efficiencies will also help us in the long run. Catherine, you want to answer a couple of the specifics on the timing and G&A impact?

Yes, to your question, Joe, about whether the cost of those reductions is factored in and where does it show up, that is reflected in our Q1 results. Both the impact of the reduction in cost as well as the cost of achieving those reductions is all reflected in the Q1 financials and is also then considered as part of the crosswalk from a standard EBITDA to adjusted EBITDA. In other words, that adjustment reflects as if those reductions had taken place at the beginning of the quarter. I'm sure you can appreciate that those have to be thought through and take some implementation time and so therefore happened midway in the quarter. In terms of addressing the change in volume of CMOP specifically, that's part of the overall program. And we have scaled costs related to supporting CMOP as CMOP has made its journey downward. But we do, of course, still carry some costs for running the remaining locations, but we will scale it in the appropriate timeframe along with the changes in revenue volume just as we do the volume of business for the entire enterprise.

Okay, thanks. And one more for me. We might be starting to see some positivity here on the pipeline and bidding activity. Just wondering, Zach, we got named to a number of IDIQ contracts. Have they just not been putting anything out for bid or not stuff that DLH is bidding on? Or have there have been some projects out there that you've been on just have not, you know, won. I mean, I guess kind of the hit rate, you know, of award for you guys, is that, you know, staying steady or is that declined? I mean, maybe a little more insight into the market opportunity out there and how DLH is faring in that.

You bet, Joe. And we are planning on giving a deep color as we have historically from time to time on that pipeline during our upcoming annual meeting with the shareholders. But to your point, yes, we've had a little bit of each, right? So we've had, in terms of the major IDIQs and the MAC IDIQs, the most recent news, of course, is CIO SP4 has been canceled. And as we had stated before, we saw that as a very attractive and viable vehicle for us with a number of opportunities that we had anticipated being able to bid in 25 that would allow us to start to generate some revenue around this time period. A number of those, some of those jobs, some of our customers had moved to other vehicles already anticipating that CIOS B4 was not going to be viable. And so we've had a couple of erosions to our pipeline attributed to work moving to a vehicle which we could not prime. That's had some impact. And while at the same time, I'd have to say the biggest key has been customers, given the budget uncertainty, et cetera, have continued to do kind of like some of our customers, bridge work instead of extending existing incumbents instead of having a competition. And that's where we're thinking that now that they have stability, some visibility in their budget for some time, that they'll be able to move on with it and get some of those procurements. So we still just have not had a large volume of bid opportunities. You know, we had one bid opportunity for the entire month of January. And, you know, that's just really, really trickling. And that one's a small one. So, you know, we have our needle mover deals, which we invest a lot in. And we really push to drive a high win probability. And we have some of those that come from some of these MACID IQs. Many of those are much smaller deals. But we're really feeling pretty encouraged that a number of the major needle movers for us now will start to get some stability. We're still actively working to make sure that some of those that were earmarked for CIOSP4 and predecessor, CIOSP3, that we're well positioned on the GSA schedules and OASIS schedules. of which we think will be two of those where it would allow us to prime. But when they've moved, a couple have moved to some vehicles where we were not primed. It's very disappointing. Some of the customers just had not had the influence as they thought they would have with the acquisition shop. But we're continuing to monitor that very closely. Okay.

But getting that certainty, the key takeaway as you set it up, Joe, is we view that as positive, that to get certainty, even if it isn't the way we would have done it, it's really distracting from a resource perspective and not cost effective to be trying to support and straddle all possible paths. So for us, just give us an answer, give us clarity, we can pivot. and get ourselves organized to address that way. And so as Zach mentioned, while we're certainly majorly disappointed that CIO SP4 has gone away as a vehicle, it's good to just have the clarity. It's been dangling for three years now, so at least three, probably longer than that. So it's good to have the clarity, and while some things did drain off and go to vehicles we're not positioned to prime on, the overwhelming majority of those opportunities appear headed places that we can and will compete as a prime. So it's good to have resolution of that strategy and to be able to move out on responding to it, you know, and pivoting our strategy to address the path that's going to come out on so that we can get on with it already.

Yeah. And one adjunct to that, Joe, is that we're seeing a major movement by a number of our customers, including Department of War, to leverage more commercial best practice vehicles and approaches. We've referred to OTAs, other transaction authorities, as something that has been viable and certainly demonstrated during COVID to be a viable means to get some of these bids out faster. What you're going to see is what we are seeing is a number of these vehicles start with a pilot that is a much smaller dollar value for the awardee. And then you move from pilot to true execution. And so the revenue profile and the value of the awarded contract will shift a little bit, but we're preparing for that. We've been well prepared for that. We've made some down selects on a couple of those already, but we're gonna see in the industry a pretty heavy move towards not using our traditional RFP contracting model that just takes so long for the government to get this in place. And this administration is really, really keen to cut through those delays and to use more commercial best practices. So stay tuned on that. We'll talk a little bit around that as well during our upcoming annual meeting on the acquisition environment and our pipeline.

Okay, great. Thanks for taking my questions. I'll get back in queue when someone else asks a few.

Appreciate it, Joe. Again, if you have a question, please press star, then 1. The next question comes from Bert Osterweiss with Osterweiss Business Consultation. Please go ahead.

Good morning, Barry. Good morning. Good morning, Zach and Catherine. Hope you're doing well.

How about yourself?

A little cold up here in Massachusetts, but all right. I was reading the annual report, and in a number of places, it states that we solve complex problems for civilian and government clients alike. But I only ever hear about the government clients. Wondering more who those civilian clients are. And Zach, you mentioned in what you just said, the last answer was about a focus of more commercial type of jobs or commercial type of going after the jobs. And I know, Catherine, you said it's not possible to pursue all possible paths. It's not financially viable. But it almost seems like these civilian customers are easier to go after. And so I was wondering, first, who they are, and second, is that something we can focus on more?

Sure. No, great question. First of all, we probably should have a clarification of that because while we do work with the Defense Health Agency, the Department of War, in particular in the C5ISR arena, C6ISR arena, we in the federal government space, we really refer to the civilian agencies that are still federal government, right? And those include customers like the National Institute of Health, the Center for Disease Control, ASPR, would include DHS and other agencies. They're still federal clients. Now, and so that's really what we're referring to on the macro for us that we have civilian agencies and then those that are aligned with defense. The other point, though, that you raised is commercial work. And we do have a small book of business, small bit of business with commercial. We're doing some of that work through partnerships with universities. And we do believe that there's an incubator area that lends itself for us to be able to work with more commercial companies. It's not going to be a major portion of our business. Catherine and I have long stood and held the position that if we're going to try to move into that market in a meaningful way, it would be led probably with an acquisition. But we do have some adjacencies where we've been doing work leveraging relationships with the federal government that have led us to doing some work, usually grant-funded, with the commercial community and within our public health and scientific research organizations. We are looking to perhaps try to pull a little more of that business in-house.

Thanks, Zach. I was thinking biotech firms and things like that.

It is biotech area. You're actually, you're right spot on. It is in that arena that we have been doing some of that work. We've had some talent on our staff, on Janine Christian's staff that have worked with the biotech and biopharma community. And we're looking to see if we can parlay that as well. We've just brought on a new resource that has tremendous reputation and experiences with FDA. And as such, it also worked closely with the biotech community. So we're taking a fresh look at that as a potential account for us right now. It's just targeted opportunities, specific opportunities. But it could develop into an account by a year's end.

Yeah, those commercial enterprises need to access that government approval queue, and it's often an inscrutable, protracted process for them, and so they're happy to opportunistically leverage our capability to help steer them through that. But as Zach said, that would be in the course of relationship building and opportunistic avenues, but not really something that we're prepared to invest a lot of money in pursuing commercial opportunities.

The other part of that, though, to your point, Bert, is we need to make sure that even though 99% of our book of business is with the federal government, we need to be able to operate at speed like commercial companies, truly commercial companies. And we believe that the administration is removing some of those barriers and allowing companies and customers that have interest and capabilities to be able to move at speed consistent with commercial companies. And so, again, we're taking a look at leveraging some of these OTA-type vehicles and our ability to leverage what has been our heritage, and that's to be able to be far more agile than a lot of our large tier companies, to be able to be tremendously responsive and operate more like a commercially aligned company. So please look for more of that. That often will mean our pipeline will look a little bit different with speed and smaller startup sort of programs, a little bit less of five-year booked values, but they offer the same organic growth profiles and trajectories that we've had otherwise, just a more rapid deployment. And we've developed some of our tools so we can do rapid prototyping, and that's going to help us in a number of areas where clients want to build a little, test a little, and then make a longer commitment. And we think we're well positioned with some of our digital sandbox opportunities and our cyclone platforms to demonstrate and move quickly from prototype to development and deployment.

Thanks. One last question. Is there anything in our government contract which prohibits us from going after civilian contracts?

No, nothing that precludes it at all. It is a very different regulated environment. From time to time, you'll see things like you hear this administration talk about most favored nation kind of rates. In some cases in our world, we have to look at where the best, what am I looking for, Catherine, the rate schedules that we offer the company. But No regulatory, formalized regulatory constraints.

Anything to add?

Okay.

Right. It's really just a function more so of it's a distinctly different kind of sales model, and so you have to kind of weigh out your options for investing in that kind of a sales force, if you will, commercial sales force versus the model that makes sense in the government context. But there are some... specific boutique opportunities that we're aware of and that we're leveraging.

Thanks for that. Have a great day.

Look forward to seeing you. At this point, there are no further questions in queue. I would like to turn the conference back to Mr. Parker for any closing remarks.

Once again, I want to thank everyone for participating in our call today. and for being good stewards of the DLH equity stakes. We are really, really committed, remain committed to giving you good visibility into the future and look forward to seeing and chatting with you all at the upcoming annual meeting. With that, everyone have a blessed day and we'll connect again soon. Bye for now.

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