DLHC - NASDAQ

Good morning and welcome to the DLH Holdings Fiscal 2023 Third Quarter Earnings Conference Call. [Operator Instructions] Please also note that this event is being recorded today. I would now like to turn the conference over to Chris Witty, the Investor Relations Advisor. Please go ahead, sir.

Thank you and good morning, everyone. On the call with me today is

Thank you, Chris and good morning everyone. Welcome to our 2023 third quarter conference call. We continue to make good progress and remain on track for a strong end to fiscal 2023. These accomplishments are attributed to the great commitment and talent of our accomplished and distinguished employee base. They have weathered the pandemic storm and continue to deliver high-caliber solutions and services to our clients. Let’s dive into the financial highlights on Slide 4. I’ll first provide a high-level overview of the quarter’s financial highlights. I am pleased to announce that the third quarter revenue surpassed the $100 million mark setting a new milestone for our ongoing operations that reflects our success, acquiring and integrating, growing organizations as well as importance of key programs and agencies that we serve. We anticipate being at or better than this run rate going forward, testimony of our new phase of growth – of our next phase of growth, which is built upon organic strength, a broader array of technology-enabled solutions and reflects strong demand for the company’s extensive capabilities by the federal government. During this quarter, our reported operating income was $7.1 million and EBITDA rose to $11.4 million. We also managed to reduce our debt by over $8 million since the end of quarter 2, utilizing our strong cash flow to delever the balance sheet efficiently. Our reported EPS was $0.12 per diluted share and our backlog at quarter end was approximately $817.8 million. We are operating in a very active and attractive bid environment and anticipate winning our fair share of our new contracts in the coming quarters, supporting the accelerated growth going forward. Turning to Slide 5. I want to give an update on some key developments for the company and its outlook. We recently announced that DLH had been awarded a contract to compete for Expanded Digital Transformation, Systems Engineering and Cybersecurity Services for the National Heart, Lung and Blood Institute, NHLBI. As part of this program, we will continue to provide advanced solutions and technology services to support this customer as a global leader in heart, lung and blood research and training and education as well. This multiple-award contract, indefinite delivery and definite quantity contract has an award ceiling of $85 million in a 5-year contract term. Our integration of GRSi is also on track, and we are continuing to achieve, anticipate the anticipated enterprise results since the deal’s announcement. The transition of GRSi to key DLH business systems, such as our Enterprise Resource Planning, ERP and our Human Resource Information Systems – Human Resource Information Systems is complete leading to greater operational efficiencies across the board. Our expanded go-to-market strategy is evolving as the teams pull together and demonstrate the full range of the DLH enterprise capabilities to our customers. And lastly, as you may recall, the Fiscal Responsibility Act of 2023 was enacted early in 2023. This increased the debt ceiling and allowed budget negotiations to begin for the next fiscal year. This includes providing initial funding targets for defense and non-defense agencies alike. Of course, there’s always a possibility that we’ll face another year that begin with a continuing resolution. But in any case, our programs and capabilities remain in high demand with strong bipartisan support. We believe the outlook is positive for fiscal 2024 and numerous opportunities to grow our top line and continue to improve the company’s underlying results. As a reminder, DLH has access to many billion-dollar plus IDIQ contract vehicles that allow us to compete on more value-added agency work than ever before. Also, the White House fiscal 2024 preliminary budget called for historic investments in research, artificial intelligence and machine learning and digital transformation areas which would also boost our growth trajectory and bottom line performance. Our highly differentiated capabilities, broad area – a broad array of contracts and diversified suite of technology solutions make us a one-stop shop for advancing the government’s goals of tomorrow, and we look forward to what fiscal 2024 will bring. With that, I’d like to turn the call over to our Chief Financial Officer, Kathryn JohnBull. Kathryn?

Thank you,

Thank you. [Operator Instructions] At this time, we will take our first question, which will come from Joe Gomes with NOBLE Capital. Please go ahead.

Good morning. Congrats on the earnings.

Good morning, Joe.

Thank you. Good morning, Joe.

So I wanted to just start off,

Great question, Joe. Those are always very material to our ability to drive that organic growth, as you will know. I’m actually pretty encouraged by the most – in particular, our most recent lines, the NHLBI contractors, one in which – it’s bringing new opportunities for new workforce, but we’re in a position of really leveraging a real strong track record that we’ve had with that particular customer, particularly within the competitive environment. While it is a multiple award contract, we have over the last 4, 5 years, exhibited a real, real strong ability to have a higher win rate in this community. So we’re hoping that with our valued enterprise capabilities that, that will continue. We have been disappointed as you all know, with the government’s slowdown up until relatively recently as it relates to issuing new work on our previous IDIQs. I think I mentioned to you before, last time that our Defense Health Agency, Omnibus 4 IDIQ still has yet to issue the first request for a proposal. And we have been on standby with a real strong team for quite some time. That still continues to be the case, but we are starting to hear some – we’ve been very proactive on that, and we’re starting to hear that they are prepared, they’re getting closer and closer to prepared to issue a few of those. Similarly, we’ve had just slower than anticipated than government announced work on our – some of our other ones within NIH. And then lastly, as you know, many of us across the industry, we’re anxiously looking for the government to resolve their process on the largest would be IDIQs, the CIO-SP4, it is where the biomedical research technology work is for largely health and human services agency is to be conducted, one that has been very strategic for DLH. We’re fortunate that in the heritage contract, the – our GRSi has some presence and some opportunities to pursue, but those will expand once CIO-SP4 before gets resolved. It has been delayed by I think, over 100 protests, largely by some of the small business partners. And that has slipped any opportunities for us to prime any of the unrestricted work that we’ve had our eyes on for a better part of the year. But the upside of that is we do think that, like I said, with the approval, getting beyond the Budget Control Act that should give some of our agency’s greater clarity and budget and the ability to issue some of the recurring work.

Okay. Great. Thanks for that update. And then on the VA, obviously, we’ve talked about this in the past. You’re on continuing work there, I think, through October on one of the contracts, in November on the other on the bridge contracts. Just wondering kind of an update, if any, on the VA process there?

Yes. Still no definitive actions as you know, and for the benefit of the audience, we have been on – will effectively bridge contracts since November of 2016 for the – they have applied two strategies relative to the acquisition approach to date since 2016. And they have – based upon market conditions and other factors, they have continued to reevaluate that acquisition strategy. Proposals have been in since the beginning of the year, largely through services able, veteran and small businesses. We are continuing to participate there in a very meaningful way as well as we’re on standby should they elect to once again revisit that acquisition strategy and to reissue those in a unrestricted environment. So we are very committed to continuing to support our veterans in a distinguished way, delivering a high degree of customer satisfaction as we have for over a decade now represented by, of course, the J.D. Power Awards and other indicators of a high degree of customer satisfaction. So no new news there yet, Joe, and – but we were being optimistic that we’re going to have an opportunity to continue to impress the agency as we go forward.

Great. Thanks for that. I will back in queue.

You bet. Thank you, Joe.

[Operator Instructions] Our next question will come from Brian Kinstlinger with Alliance Global Partners. Please go ahead.

Great. Thanks. Only one question. With the challenges, at least in the short-term, you talked about in the government with awards and I don’t know if you call them delays. Can you talk on the other side of the bid-and-proposal equation, are big commissions as many as last year? Are you bidding on a lot more work? Just maybe talk about the proposal activity and from a quantitative perspective or qualitative perspective? Thanks.

Yes. Great question, Brian. Yes, outside of the IDIQs, we have really targeted, as we’ve described before, a pretty healthy bid-and-proposal backlog. A number of those have started to come forward. Of course, earlier in the year, as you heard us describe the end of December time frame and January, quite a bit on the re-compete activity associated with the VA work. But subsequent to that, we’ve seen in the last several months really pick up with regard to some – a couple of our major bids. So we will be finding – you will be seeing that our BMP activity, which really will start G&A we’ll be pretty heavy during Q3 and certainly, as we move into the final stages of the fiscal year. So yes, we’re starting to see some of that pickup in the non-IDIQ arena which we’re hopeful is going to be more of a trend over the course of the rest of this fiscal year. It would not be uncommon for a number of these agencies to feel the pressure at the end of this fiscal year. They have been very restrained and particularly in our areas within health and human services. Very restrained in many cases, issuing contracts where they do have funding, right? A lot of that again was due to the uncertainty prior to the Fiscal Act being deployed. Kathryn, anything to add there?

No, I think that’s right. Yes, slow start to the fiscal year, but encouraging recent trends.

Great. Thanks so much.

And our next question will be a follow-up from Joe Gomes of NOBLE Capital. Please go ahead.

Thanks. Just on the HSS or HHS Head Start program. You had a great start to the year when you look year-over-year. And it looks – if I’m running the numbers correctly in the last couple of quarters, you’ve been below what you did the prior year. Is there anything specific going on with that program or is it just normal ebb and flow?

I would think of this year as the more indicative. If the program from a good news perspective has returned to its normal cadence of being pretty front-loaded in our fiscal year Q1 and Q2 because that aligns to many of the grantees who are, if not sponsored by us inside of school are certainly affiliated and trying to align around the school system cycle. So ‘22 definitely was extremely backloaded because remember, we were all still working our way through Omicron in Q1 and Q2 of our fiscal ‘22. And so things got pretty backloaded. That’s what makes the comparison of organic revenue year-on-year for Q3 this year look a little lumpy because of some of the back end lift we got from head start this year as opposed to this year – last year, pardon me, as opposed to this year returning to the normal layout of the contract performance.

Okay, thanks, Kathryn. Appreciate it.

You are welcome.

At this time, there are no further questions in the queue. So I’ll hand it back over to Mr.

Well, thank you all for your continued interest and support in DLH. As you probably have heard, we’re really pretty excited about the company that we have become. As we – I can assure you that so have our human capital assets and we really, really are looking forward to closing strong and really entering FY ‘24 with the type of trends and expectations that we shared before. I might add that we are also going to be attending, if you look at our investor website attending a couple of investor conferences and I can provide some additional color around the business over the coming months. We look forward to engaging with you more in the near-term and certainly look forward to closing out Q4 with you as we enter in the latter part of the year. Thank you all for your time. Have a blessed and productive day. Bye for now.

Thank you.