DLHC - NASDAQ

Good day, and welcome to the DLH Holdings Fiscal 2025 Third Quarter Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Chris Witty, Investor Relations Advisory. Please go ahead, sir.

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

Thank you, Chris, and welcome, everyone. Welcome to our third quarter conference call, and I'm pleased to have the opportunity to report on our financial results and provide an update about the current environment and an outlook. First and foremost, I'd like to begin by thanking our stellar employees for their steadfast dedication to our customers' missions. It has been a tumultuous period as we entered fiscal '26 for technical companies, solution companies like us. Yet our employees continue to rise to the occasion, leading with innovative and productive projects and solutions supporting our customers with excellent results. Their performance is why I'm so confident about the future of DLH. Now if you'll turn to Slide 4, I'll provide an overview of our Q3 results. Starting with revenue. Our anticipated erosion from our previously discussed unbundling and small business set asides from the prior administration is continuing on plan. I'm also pleased with how effectively our team has managed through this period, and Kathryn will give some added color to that a little bit later. The new administration has added layers of funding review and approval cycles that have slowed our revenue stream, and this is from work from our existing contracts. That being compounded by the effect of both of those 2 features has tremendously stalled the flow of new business growth for DLH. This, of course, will be as reflective relative to prior quarters. Our pipeline conversion has been slowly -- had been impacted and slowed. RFP flow over the recent quarter too has been slowed. Our delivery of proposals and material proposals that's things like over $25 million and over $100 million, much lower than anticipated and the same for contract awards. However, having said that, I've had an opportunity along with some of my industry colleagues to have met with appropriate influencers on the hill. And I really feel optimistic that anticipated changes will be productive and on their way soon. And I'll discuss this a little greater -- a little bit later. With respect to margin delivery, cash flow generation and debt paydown, we've made significant progress again this period. Our operating expenses continue to decrease as we scaled operations to meet the changing revenue volume and protect margin delivery while we prioritize our investments, continue to prioritize our investment in growth initiatives. We reduced debt by $9.4 million compared with Q2. Our debt to close the quarter was $142.3 million, and we are a year ahead of our mandatory debt payments. We expect to continue to aggressively deploy capital to pay down debt, manage our leverage and strengthen our balance sheet. The reconciliation bill, the fiscal 2025 budget bill and fiscal 2026 White House budget request combined to give greater clarity about the administration's spending priorities in the years ahead. This will help our customers. We are pleased that DLH's capabilities continue to align with the federal government's demand and believe that funding increases for our services in core areas of focus, which include technology integration, cybersecurity, artificial intelligence and machine learning and the like, will continue to provide opportunities for the company's growth organically. I will speak to this in further depth on the following slide. The fusion of DLAs technology and research expertise is continuing to make mission-critical impact for our customers, and we see more opportunities in the near term. Solutions that we have developed and deployed through our internal R&D program, along with collaboration with military health agencies gives us reason to believe that our top technology programs seen by our government peers or well received. Such applications leveraging technology spend in AI, robotics, engineering, unmanned aircraft-s and automation demonstrates a crucial life-saving impact of the work carried out by our staff of data scientists, engineers, technologists, et cetera, to have such positive impact upon our citizens, our service members and our veterans. Our unique combination of advanced technology of world-class scientific expertise provides -- continues to provide tremendous value for our customers and targeted growth, and we firmly believe that our company's experience and expertise will continue to open new doors, expand our book of business as we go forward. Now let's turn to Slide 5 for a further review of the current federal spending outlook. As you can see, we continue to believe that our core competencies and capabilities align very well with the federal technology initiatives, and we expect that the current administration's priorities will lead to new business opportunities and contract wins for us in the medium and long term. The marketplace remains dynamic as the federal workforce is being reshaped. Procurements are being reshuffled based on the administration's priorities and certain departments and programs have undergone significant changes. Our strategic actions this year, focusing on operational agility, financial flexibility and technology differentiation have proven effective in these market conditions. This approach has allowed us to navigate industry challenges and strengthening our long-term position. We remain tremendously committed to our organic growth initiatives, and we are confident in our strategy to increase this revenue and margin delivery in the quarters to come given some of the anticipated changes by this administration. As mentioned before, recent weeks have brought increased clarity to the programs and initiatives that have been prioritized by the administration. Modernizing federal technology, maximizing efficiencies, integrating artificial intelligence and machine language and bolstering cybersecurity while keeping America leading edge are consistent thought lines. The enacted budget for the remainder of fiscal '25 and the administration's fiscal 2026 budget and the One Big Beautiful Bill Act provided increased funding for each of these initiatives. I mentioned earlier that anticipated changes seem to support a positive outlook for DLH. This is largely attributed to some of the acquisition reforms that are in motion that will drive priority shifts in the way in which the client buys. And this administration is really committed to accelerating the speed of delivery on these type of new opportunities and contracts. We believe this provides significant opportunity for DLH. Our company has a strong legacy of making programs more efficient for customers through the integration of cutting-edge technologies, producing millions of dollars in cost savings to the government. Federal investment in AI and ML, systems integration, cloud computing, software development, research and development, data analytics and other advances have aligned with what we have been building over the last 2 and 3 years and continuing to invest in for near-term opportunities. While we believe the upcoming quarters will have steady procurement activity, the realignment of the customers' contracting resources may cause again contract awards to slip to future periods. To navigate the market dynamics, our goals are simple and threefold. First, we'll continue to delever the company. Second, we're going to do everything we can to protect our revenue base and focus on new business and organic growth with key opportunities that drive and deliver value for our business line. And finally, we're going to continue to preserve our margin delivery through proactive scaling initiatives. And as we move past these challenges created by short-term market dynamics, we believe the company is very, very well poised to once again become that growth enterprise that leverages its unique capabilities through differentiation and improve the governance mission and the lives of those that it touches. With that, I'd now like to turn the call over to our Chief Financial Officer, Kathryn John. Kathryn?

Thanks,

[Operator Instructions] And the first question will come from Joe Gomes with NOBLE Capital.

Joe, I think you're breaking up.

Yes, you may have cut off just a bit.

It seems Mr. Gomes his line has disconnected. [Operator Instructions] Mr. Gomes, if you are listening, you can press it as well to rejoin. [Operator Instructions]

Operator, you indicated that he disconnected.

Yes.

Let's give him a moment.

All right. Let's proceed and perhaps he'll join us.

Yes, Ma'am. [Operator Instructions]

While we're waiting for Joe, let me add a little color to a couple of comments that we had in the opening presentation. One in particular is, of course, the continued evolution of our small set-aside business that was largely initiated during the previous -- during the Biden administration, most notably for us, of course, has been our VA support for the mail order pharmacy programs. That, as Kathryn indicated, continues to move down the small business set aside path. We've been working very closely with the customer to affect smooth transitions. It has been a little bit slower than we had anticipated last year for that erosion. But by and large, we do see pretty heavy activity on that throughout the remainder of this quarter and we'll certainly keep you posted on that. At the same time, some of the other contracts that were unbundled, those two, those that we anticipated as we entered fiscal year '25 have continued pretty much on track. As I indicated earlier, we did -- we were expecting to have some of that offset by our new business pipeline with the anticipated RFPs flows from what the government was indicating and our customers were indicating before. And I did just want to mention that, that has slowed materially this last quarter. And again, many of those are attributed to administration factors. One factor that I did not specifically indicated is that there were a large number of cuts in the government, as Kathryn indicated, but it was largely due to contract acquisition people. So it's those folks that put together the RFPs, those folks that evaluate the contractors' proposals and then those that award those contracts with a number of that -- those workforce participants cut through administration activities. There's just been gaps in resources to be able to move that along. I will say that both through court action and some initiatives from our agencies, some of those are being recalled. We've seen some of that in some of our agencies over the last month. And so we're hoping to see that the stability start to measurably come back with regard to the resources that the government needs to move these solicitations and contracts forward. So we're optimistic that some of that return will have some positive impact to our industry's pipeline, but particularly for those areas that we are focused. Any luck with Joe return?

No sir, not at all.

Yes, he has tried a couple of times to get back in.

Well, operator, if there are no further questions, I think we want to take this time to certainly thank those that have participated in our session today. We continue to feel really, really strong about the outlook of DLH. We think that we have a good grasp on the areas that are transitioning from the government. We've got good level of engagement with the decision makers and influencers and I feel very, very optimistic that as we exit '25, we'll have some good news in Q4 with regard to the positioning for a very, very strong recovery in '26. With that, I'll turn it back over to the operator, and we look forward to seeing everyone again soon. Have a blessed day.