DLHC - NASDAQ

Hello, and welcome to the DLH Holdings Corp. Fiscal 2024 Second Quarter Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to hand the call over to Chris Witty, Investor Relations Adviser. Please go ahead.

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

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 4. 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 Kathryn will review in a moment. We also continue to delever the company, paying down $3.6 million of debt, 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 5. 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 2 key recompetes 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 expansion. 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 won 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 5.5 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 in 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 8 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 VA had made an initial award decision for one of the 8 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 8 separate procurements, we have been awarded a sole-source ID/IQ 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 31 of this year with the potential for additional orders beyond the initial tasking. Overall, we see a wide array of opportunities across our core targeted markets in the coming quarters, including through the multiyear large ID/IQ 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 high bid activity across the agencies that we serve. Our wide array of applications, research and development and 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 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, Kathryn JohnBull. Kathryn?

Thank you,

[Operator Instructions] And our first question will come from Joe Gomes of NOBLE Capital.

So on the national security contracts that were awarded a small business, any way to size that? And then how much more of that, if any, is at risk?

Yes, Joe, great question. As you may recall, during the end of 2022, early part of 2023, we did discuss it, 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 of those when they came around for recompetition. And that accounts for largely what you have seen thus far in that, which Kathryn 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 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.

Okay. And on the G&A, you mentioned some of the legal costs increase were driving some of the increase in G&A. Do you see that continuing going forward? Or should G&A drop back down to the more historical type of run rate?

Well, we do see it continuing, albeit likely at a lower level of consumption. However, 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 the percent of G&A cost 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

Okay. And on the VA contract, I mean, congrats on getting extended once again. But I don't know,

Sure. Thank you for the question, Joe. And again, yes, you're correct. As you may recall, this procurement cycle with recompetes 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 we're currently in this phase where it yet again is another approach where it's by location, and it is combined both the medical logistics and pharmacies. 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 will first evaluate the small business opportunities, take a look at what risk are associated with that. If that is suitable, then continue with the awards. And if not, then reopen it to an unrestricted environment. So this is their first attempt at this new model of bundling, and we'll see how it yields in the future.

And if you were to lose one or more of the 8 contracts, how quickly can you get rid of the cost that are associated with serving those contracts?

Yes. Great question. We have, as you might imagine, over the years, continued to model various scenarios that align with the new acquisition strategies, right? And of course, this strategy which came out 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 7 or 8 concurrently, so that they can manage the phase-in process, which is 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 will have a scale-down associated with the range of contracts. But we feel very comfortable that we, within a full operating quarter, will be able to hit a pretty quick reduction and to be able to operate efficiently with regard to our EBITDA margin basis.

Yes. I mean as a services business, of course, components of our cost are the direct cost of performing the contracts. And that is, by far and away, the majority of the cost. And naturally, that scales. If the contract moves, the cost move with it. There's also, of course, cost to running any particular part of our operation that is distinct to that operation. And CMOP, as we've described before, is very large scale, deceptively complex. I mean we think of it as it's a 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 volume of business scales. And then there are, of course, the corporate costs of running the overall business. So

Okay. One more for me,

Joe, I appreciate that. Our federal government is really stepping up its activity with regard to security and cybersecurity across all agencies. Recently, in the last year, the White House 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 Infinibyte 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 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 in 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 Infinibyte both complements and gives us a breadth and a capability that's somewhat unique. And we're just looking to include that in our value propositions for these new bid backlogs that are finally starting to uncork a little bit with some budget certainty with some of these customers.

But that would be a great example, Joe, of what we talked about earlier in this call about the cross-selling opportunities.

Yes.

Okay. Great. A nice strong quarter. Look forward to seeing how the second half of the year unfolds.

We do, too.

[Operator Instructions] This concludes our question-and-answer session. I'd like to turn the call back over to

Thank you, Andrea, and thank you all for your attention today. Please stay tuned over the coming quarter. Kathryn and I will be providing some additional color around our pipelines and new business as well as updates on our current and organic contract growth opportunities at some upcoming investor conferences. Thank you all for your support, and have a blessed day. Bye for now.