DLH Holdings Corp
NASDAQ:DLHC
Earnings Call Analysis
Summary
Q1-2024
DLH Holdings reported a promising start to fiscal 2024, with first quarter revenue of $97.9 million, EBITDA of $11.1 million, and a strategic deleveraging effort through the repayment of $5 million in high-interest debt, bringing total debt down to $174.4 million. The company faced some delays in business development due to federal budget continuing resolutions but remains confident in its growth channels and ability to secure new contracts. DLH is focused on high-value opportunities through diversified federal agency customers and aims to expand its footprint within the Department of Health and Human Services, the Veterans Administration, and defense agencies, which altogether form a substantial portion of its revenue base. The company's target is to reduce its debt to $153-$157 million by the end of the fiscal year, with an expected debt leverage ratio under 3.5x EBITDA.
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Good day, and welcome to the DLH Holdings Fiscal 2024 First Quarter Earnings Conference Call. [Operator Instructions] Please note today's event is being recorded. I would now like to turn the conference over to Chris Witty, Investor Relations Adviser. Please go ahead.
Thank you, and good morning, everyone. On the call with me today is Zach Parker, President and Chief Executive Officer; and Kathryn 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 3 of the presentation. This call may include forward-looking statements that relate to the company's outlook for fiscal 2024 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 will be referencing both GAAP and non-GAAP financial measures. 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, Kathryn 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 2024 first quarter conference call. Once again, thanks to the dedication, collaboration and innovation of our talented DLH workforce, we're on track for another year of solid performance here at DLH. Their dedication to our customers' vital missions, combined with the organization's overriding commitment to performance excellence and improved results continues to drive value for our DLH shareholders.
We rely on our people to set very high standards of excellence each year as we continue to build a world-class provider of emerging technology-enabled solutions and services. They continue to rise to the challenge, and we are very proud of their accomplishments.
Now turning to Slide 4. I'll provide an overview of the quarter's financial results. We reported first quarter revenue of $97.9 million and EBITDA of $11.1 million, while generating operating cash of $5.1 million during the period. We also continue to delever the company as Kathryn will review momentarily by paying off another $5 million of debt, ending the quarter with only $174.4 million of total debt outstanding.
With our organic growth, which has endured federal budget CR headwinds due to the timing of new budget decisions, we continue to see some delays in business development opportunities. However, we remain confident in our ability to generate new business through our robust growth channels, both existing and new award contracts.
Turning to Slide 5. Let me summarize a few key industry and environmental factors currently influencing our position in the market. First, as I just noted, the federal government is still operating under a continuing resolution, which typically slows down decision-making both on current IDIQ contracts and potential new business opportunities. The most recent resolutions keep the government running through March 1, with some departments funded through March 8. As a reminder, this is the third set of stop-gap measures that Congress has passed since September. And as a result, our clients have limited budget certainty which is restricting their ability to make new awards. That said, remaining cautiously optimistic that both the recent and near-term progress could result in funding flow for our major agencies through the remainder of fiscal '24, paves in a way for efficient contract implementation and awards.
We continue to build upon a strong pipeline of high-value opportunities across our broad customer base as well as key large multi-award IDIQ platforms, opening additional channels for the company. Our enhanced technical capabilities, highly credential workforce and science and technology platforms are ready to meet the evolving demands of our customers and to provide innovative value propositions.
Our ability to attract and retain industry-leading talent is critical to providing uninterrupted support for our clients' missions. DLH employees saw challenging complex problems and their program execution results are unmatched in delivering customer satisfaction. So it's truly an honor to receive a Great Place to Work certification, an award entirely based on what current employees say about their workforce. This achievement is assigned to customers, partners and prospective new hires alike that DLH creates an outstanding employee environment.
Now turning to Slide 6. We have provided an overview of our business base to illustrate the diverse set of customers we support. This broad customer base, which spans agencies within the federal military and civilian markets, offers many opportunities to deliver our differentiated services to an array of new and existing customers. Building a portfolio of work that supports mission-critical programs that have traditionally received broad bipartisan support is a long-standing strategic goal of our corporate and business development organization. 45% of our current business portfolio lies within the Department of Health and Human Services. Key clients under this umbrella include the Agency for Children and Families, Center for Disease Control and Prevention, and of course, the National Institute for Health.
Our capabilities in research and development, systems integration and big data analytics have allowed DLH to provide unmatched value to our HHS clients and penetrate new programs across the board. The VA comprises approximately 35% of our new -- of our revenue via the Veterans Health Agents -- Administration. This includes our long-standing CMOP operations. And we have a long history of supporting the VA, and we currently are looking forward to expanding our services inside the agency to deliver for those who so deserve our nation's excellence.
And thirdly, today, defense agencies comprise roughly 17% of DLH revenue, including the work across a broad array of programs in the Defense Health Agency and the military services. This book of business is poised to see substantial growth over the coming years as DoD looks to invest in health IT, digital transformation, data analytics, cybersecurity, AI-enabled research and numerous health-related platforms. Given that our client relationships spend decades, we can leverage this intimacy to shape customized solutions and expand our contract portfolio to new business development opportunities as well as growth on existing programs.
As government agencies continue to expand their commitment to cybersecurity, data analytics, IT modernization, artificial intelligence and the like, all directly aligned with our strengths, our company's addressable markets continue to grow. Our innovative offerings remain in the sweet spot of agency technology upgrade initiatives, as evidenced by the White House and Federal Agency strategic plans. By integrating our highly differentiated digital transformation capabilities with research domain expertise, this serves as a relatively unique platform to address broader range of solutions than ever before, helping our clients reach higher and perform even better every day. These will include exacting objectives of precision medicine, all of us studies the evaluations, strides initiatives for cloud security and many more.
With that, I'd now like to turn the call over to our Chief Financial Officer, Kathryn JohnBull. Kathryn?
Thank you, Zach, and good morning, everyone. We're pleased to report our first quarter results for fiscal 2024. Turning to Slide 8. I'd like to provide a high-level overview of some key financial metrics for the 3 months ended December 31, 2023, compared to the prior year period. We reported revenue of $97.9 million in the first quarter versus $72.7 million in the prior year period, reflecting the addition of our strategic acquisition in December 2022. We reported EBITDA of $11.1 million for the first quarter versus $8.1 million last year as adjusted for corporate development costs supporting that acquisition, and generated cash from operations of $5.1 million compared to $8 million in fiscal 2023, with the variance primarily related to vendor payment timing. This does not negatively impact our expectations for cash flow generation this year nor a planned debt reduction.
Speaking of which, if you'll turn to Slide 9, I'll provide an update regarding our deployment of the company's cash to reduce debt, strengthen the balance sheet and lower interest expense. We paid off approximately $5 million of our higher interest rate floating rate debt in the first quarter, ending the period with $174.4 million of total debt outstanding. As a reminder, approximately $6 million of quarterly interest expense is noncash amortization of finance and arrangement fees. Our cash generation ability reflects our focus on efficient and timely cash collections, resulting in days sales outstanding of 51 days for the period versus the industry peer group average of 61 days. We remain on track to reduce debt to between $153 million and $157 million at the end of the fiscal year, resulting in a debt leverage ratio of below 3.5x EBITDA by the end of the fiscal year. We will continue utilizing the favorable tax attributes of our acquisitions, along with stock compensation deductions to minimize cash and income tax payments going forward.
This concludes my discussion of the financial statements. And with that, I would like to turn the call over to our operator to open for questions.
[Operator Instructions] And today's first question comes from Joe Gomes with NOBLE Capital.
I wanted to start off with the revenue line and kind of get a feel for what you guys were expecting going into the quarter. It's a little lighter than what we had expected. I understand that the continuing resolution can represents a headwind for you guys. But I just kind of wanted to get a little better feel for what you were expecting going into the quarter? And what you think this means for the rest of the year?
Yes. That's a great question, Joe. I would say it did turn out a little softer than what we had expected, largely due to certain customers -- certain of our customer sets that are really being [indiscernible] by the budget uncertainty. As you well know, we have a few very large $100 million contracts that involve intramural and extramural scientific research around health challenges. And we've just seen that for consecutive quarters, several quarters now, that without budget certainty, there's been some reluctance to do some of the funding. So it's trailed what we were really expecting for this year. And then a couple of anomalies, they just have a some seasonality impacts.
Right, right. That's it. As Zach said, there has been some slowness in turning new orders as he indicated, although, as you might expect, Q1 is historically a softer, lighter quarter just the way -- just based on where it falls in the calendar and the impact of lead time around the holidays. So from that perspective, from our planning perspective, it's pretty in line, though we are -- we do see some slowness in the orders that we expected to give us some lift exiting the quarter and coming into Q2.
If we take a look at the VA contracts, they now have been extended into February, all this kind of looks like a little bit shorter of an extension than you normally see. I think they're normally a little bit longer than the 2 months. And just -- does that give us any -- or give you guys any insight as to what the VA might be planning here in the near term? Or do you think these contracts just -- as we thought in the past, continue just be extended out?
Yes. We -- as you well know, we -- when we start out -- started out on what we referred to as bridge contracts, we're usually going at what we would call 6 months that were really kind of pairing of 2, 3 months bundled together, et cetera. And it is customary for the acquisition community and the federal government to, as you get further along in these kind of extensions and you have procurements on the table right now to shorten the cycles in the event that they are able to make some progress on the awards. Having said that, though, we think there's nothing to really read into that. We still are really strongly believing that we see no material impact to FY '24's plan and results just based upon the timing and the potential evolution of the acquisition chain.
Okay. Great. And then on HHS. This quarter evidently were not -- didn't need to break that out in the Q. So just wondering how that big contract performed in the first quarter compared to last year?
Yes, very consistently because we've returned to a normal operating cadence as opposed to the variation that happened during the COVID challenges. We do have comparable results year-to-year from that program.
Okay. Great. And then one last one for me and I'll drop back in queue. There was a nice drop in SG&A as a percent of revenues cap, and I was just wondering, is that sustainable? Is that a good number to use going forward? Or do you think that cost will begin to edge back up over the rest of the year?
I do think that it's going to be a function of the timing of BD costs. And so given the congestion around RFPs getting issued, our G&A costs incurred in the quarter were a little lighter than we expected. So that -- we get both good and the bad side of that coin, I guess, if you want to think about it that way. But we'd be happy to spend that money for the long-term value that it delivers in the company and our growth strategy. But I think I don't see that as our delivering a permanent reduction in SG&A costs to scale yet until we get on that track of that for an investment in business development and the yield on the back end in the form of awards. That helps for modeling your outlook.
[Operator Instructions] Our next question comes from Brian Kinstlinger with Alliance Global Partners.
Can you talk about the bookings and proposal submission trends, I joined the call late, if not from a quantitative perspective, then at least at a high level, have they -- each of them have they been strengthening? Have they been weakening? Are they stable? Just high-level discussions so we can understand the market conditions.
Yes. I missed the first part. You said that bookings and what was the other...
Proposal submissions?
Yes. Yes. I think like Kathryn said, the data that contributed to the softer SG&A is an indication of the little lighter than anticipated proposal development period. We -- there are a number of programs that the government has issued that are continuing to extend to the right. Probably the most notable one that we've given color to is one of our large multiple award IDIQ contracts, which will open up channels for us to bid a number of contracts, and we refer to that one as the CIO-SP4.
We believe that the evidence indicates that the government is getting very, very close to resolving all of the protests that they've encountered over the last year now, and that we should see an award in [ online ] potentially by the end of Q2, which will create those bidding opportunities for us in Q3 and 4. Some of those are going to be long-term opportunities. Some of those will be quick turnarounds. And so we've positioned ourselves to be able to do both as they come forward. But again, a little disappointed that we haven't had the opportunity to bid on those as yet as the booking continues to slip to the right. But having said that, we're still continuing to develop value propositions. We believe we're going to be winning value propositions on some of our existing IDIQ contracts provided that the funding comes as well.
So I'm curious, in past coverage where I've covered some of the more defense-related IT guys, the win rates were around 25% to 30%, 30% would be excellent. I'm not sure it is similar for DLHC or not. But if it is, I'm wondering, are you casting a wide enough web outside of your existing book of business to drive growth? And if not, what can you do to increase that web to drive stronger growth?
You are actually a great straight man for us. Yes, so we have, as a result of some of the capabilities that came in at the end of last calendar year, in part with our acquisition and also with some key investments and hires that we have made. We have been very active over the last quarter to accelerate diversification of our addressable market. So there are some agencies that we felt were a little far for us before that are now within our swim lanes. We've expanded our pipeline development in areas that are leveraging stronger cybersecurity -- or enhanced cybersecurity calls or stronger health IT qualifications, and our pipeline, new business pipeline is beginning to really reflect that. Those opportunities, of course, are things that we hope to see in this fiscal year [ today ]. And then, of course, we expect to exit very, very strong with the ability to get some of those awards in place. We're also very accurate with regard to our industry. We generally look at 30% win rate. Our new business has been very, very good. We expect a lot higher than that, as in close to 100 on our recompetes that we choose to stay in that business. But 30% would be an industry standard top-of-the-line win rate. And we've -- and 20% is still good. We've had -- we also kind of bucket those into 3 areas. One is the multiple award IDIQs, [ GYX ] as they call them, which generally have a 0 booking the way in which we treat them, but open up huge opportunity for organic growth. And then we have small to medium-sized bids which had been our sweet spots in the prior stages before our last phase of the acquisitions. Those are, again, things ranging anywhere from $10 million to $50 million. And then medium size to larger being north of $50 million and much like probably our last $600 million or $700 million win. So we're -- we kind of look at each of those as now we feel that we can swing the bat on some of those larger opportunities that before we had to partner with, and we're now establishing those opportunities into our pipeline.
And that's really the opportunity for productive use of that delay time. No one desires the delays that the industry is experiencing, but for us, particularly probably more so than most, it's an opportunity to really have the client call plans working and really raise awareness and really, to your point, open the aperture, not even that far adjacent from where we've been, but more so really for people who don't necessarily think of DLH and certain capability sets because they haven't seen us there yet, but really having them understand how we have resident in the company that the breadth of capabilities that can really respond to new things and really giving those proof points and building awareness before the bid opportunities come out. So you never run out of ideas of how to raise profile and build awareness. So in some respects, we're I think making the best use of that delay time to really continue to improve our position for when the opportunity to bid comes in.
And that pipeline shaping activity will be in part reflecting the answer that Kathryn gave to Joe earlier, right? So we're doubling it down on the positioning opportunities, whether the RFPs come out or not from the customer, from -- which would lead to [ B&P ] investment on the SG&A side. So you'll see we would expect that the next quarter's results will be more reflective of that portfolio expansion.
Great. My last question revolves around the GRSi transaction. I'm curious, I don't know if you provide numbers or high level again, whichever. If you look at their 2023 revenue, is it growing over -- did it grow over 2022? Did it shrink? Is it the same? And then I'm curious if you evaluated where you hope to be at this point in terms of its revenue contribution again, from the IT side. Are you where you would hope to be? Or was it more impacted as well by what's going on in the broader market? And so maybe you're a little bit behind plan.
Sure. So we're tackling that one. Great question. Yes, regarding '22 to '23 and beyond. As you may recall, the -- first of all, they've -- that acquisition has delivered all that we have expected in terms of enhancing our competencies, our capabilities and channels for growth in expanding markets. So it's been a very, very, very strong in that regard. You may also recall that in the existing book of business that existed when we closed the acquisition in December 8, there was still a fair amount of contracts that we considered that were -- had been small business set aside, and that was worked at -- there's a degree of uncertainty as to whether or not we would be able to retain that work within the GRSi.
And in most cases, that remain as a minimum, we would likely get 50% of any arrangements or 49% of any arrangements that we have with a small business partner. So those are starting to -- those -- the schedule and the timing of those have been a little bit different from what we had expected going forward. But they're obviously -- they're having with Kathryn and I fully anticipated the type of erosion in that market area, while the company is doing very good in positioning that we've won a couple of those that were -- we're not terribly optimistic on. But again, it would net terms in terms of have a net negative effect on the revenue. But that was all anticipated because it's those capabilities that allow us to win in the unrestricted market that we saw the value and we're comfortable seeing some of that erosion for the small business set aside work. So Kathryn, do you want to add to that?
Yes, absolutely right. So the strong EBITDA contributors were locked in, really protected and have continued to deliver. There's been some erosion of the lower-end work, as Zach described, a lower end from -- just from a numbers perspective, no disrespect to the work being performed and the customers being served or obviously. But from a growth perspective, to your second point, naturally, GRSi has been equally, if not more so affected by the delays in decisions around particularly that large IDIQ that Zack mentioned, CIO-SP4. They were, as many of you remember, we talked about on former -- prior calls.
They are a schedule holder on CIO-SP3. So unlike DLH, the heritage DLH, which really did not have the resident technical capabilities to bid on CIO-SP3, but was preparing itself through its acquisition program to be credible in CIO-SP4. In contrast, GRSi was on CIO-SP3, but that's a small business, and they've obviously grown out of that. So they've kept the work they had but the opportunity to really bring their expanded talent that they've built over time into the large-scale operations that we expect as part of their forward opportunities, that's been delayed. So the growth strategy for GRSi has that bit of an overhang that the whole business in the industry is experiencing. But in terms of relevance to our journey ahead and really ability to contribute to our talents in addressing the market, they are everything we expected them to be.
Yes. Let me add a piece to that, though, we -- our strategy was built -- was not just to come on those qualifications, we have been very, very active in driving collaboration across the business. We really are looking at 1 plus 1 equaling 3. So we were not looking at their existing business based on capabilities alone. What we have seen and what excites us most is the synergy of pursuit of these opportunities based upon our heritage NIH work as well, which is heavily based in the science and security side of the business, with the IT aspects that came with the acquisition. When you put those together, you have some of the world-renowned epidemiologists and research scientists together with the technology capabilities that came along with the acquisition. We are seeing some innovations and opportunities to provide past performance references that the customer is not seeing very much on the competitive landscape. So we're excited about the synergy and what that has opened up in terms of not only the value propositions, but cross-agency selling.
And as we have no further questions in the queue, I'd like to turn the conference back over to Zach Parker for any closing remarks.
Well, thank you all. We really appreciate your continued support and interest in DLH. We ask you to look forward to a couple of dates in the future. And we'll meet you again in the not-too-distant future. First of all, will be March 14, where we will have our Annual Shareholders Meeting. We would actually physically be in New York. So come on by. Kathryn and I and our Board of Directors would love to see you there. And also stay tuned. We will be participating in an Emerging Technology Investor conference, large and small caps at the Alliance Global Partners events on February 7. You can read the details on our website. And where will be disclosing a little bit more color around some of the technology evolution that the company is going through and how we see that being a key part of driving value. . So thank you very much, and we look forward to hearing and seeing you soon. With that, have a blessed day. Bye for now.
Take care.
Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.