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DLH Holdings Corp. (DLHC)

Q4 2024 Earnings Call· Thu, Dec 5, 2024

$5.98

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Transcript

Operator

Operator

Good day and welcome to the DLH Holdings Fiscal 2024 Fourth Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Chris Witty, Investor Relations Advisor. Please go ahead.

Chris Witty

Analyst

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. 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 the 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.

Zachary Parker

Analyst · NOBLE Capital. Please go ahead

Thank you very much, Chris, and welcome to everyone here for joining us on the fourth quarter communication. I'd like to take a moment to once again express our appreciation to the tremendous commitment that our workforce has given during this quarter to be able to deliver great results. It happens to be a very, very strong end of the year. And we really are truly blessed to have a well -- a strongly committed team of scientists, technologists and subject matter experts delivering every day for our customers and we really, really appreciate that. In addition, we're going to cover a number of things on today's call as we want to really give some highlights around our differentiating capabilities. But our troops have really done a tremendous job and I know we'll continue to do so in the quarters to come. Now turning to Slide 4, I'll provide an overview of our financial results. We reported fourth quarter revenue of $96.4 million, and for the full year revenue increased to nearly $396 million, surpassing our previous record results. Our EBITDA for the fourth quarter was $10.7 million and $42 million for the fiscal year. We generated operating cash of $12.5 million during the period, equating to $27.4 million of operating cash flow for the fiscal year. This cash generating ability allowed us to pay down debt by $11.9 million in the fourth quarter, ending the fiscal year with $154.6 million in total debt outstanding. Kathryn will review our results further in a moment. If you would turn to Slide 5, I'd like to give you an update on our near-term outlook as we move into a new year and soon a new administration. We are very pleased announce a new $76 million contract award with the United States Navy…

Kathryn JohnBull

Analyst · NOBLE Capital. Please go ahead

Thank you, Zach, and good morning, everyone. Excuse me. We're pleased to report our fourth 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 September 30, 2024. We reported revenue of $96.4 million in the fourth quarter versus [technical difficulty] in the prior year period, reflecting the conversion of contracts to small business set-aside programs, including the first CMOP site, as we discussed last quarter. While we continue to see expansion and wins across our health IT and readiness customers, as Zach discussed, we believe that future periods will be impacted by additional small business transitions. We reported adjusted EBITDA of $10.7 million for the fourth quarter versus $12.1 million last year. Adjusted EBITDA was down due to the overall sales level in the mix of the business, including a higher proportion of revenue derived from non-labor cost, which inherently produce a lower margin. Now if you'll turn to Slide 9, I'll review some key financial metrics for the first fiscal year -- for the full fiscal year, pardon me. Revenue rose 5.3 million to just under -- 5.3% to just under $396 million, primarily reflecting the impact from our acquisition in December of 2022, along with growth in our HHS portfolio, partially offset by the small business conversions we've discussed. Adjusted EBITDA is roughly flat year-over-year at $42 million and the company generated operating cash of $27.4 million for the full fiscal year, down from $31 million in 2023. The decrease year-over-year was primarily due to the payment of lease liabilities established as part of the December 2022 acquisition, partially offset by a decrease in day sales outstanding to 45 days. Slide 10 provides an update on our deployment of the company's…

Operator

Operator

[Operator Instructions] The first question comes from Joe Gomes with NOBLE Capital. Please go ahead.

Joe Gomes

Analyst · NOBLE Capital. Please go ahead

Thank you. Good morning, Zach and Catherine.

Zachary Parker

Analyst · NOBLE Capital. Please go ahead

Good morning, Joe.

Kathryn JohnBull

Analyst · NOBLE Capital. Please go ahead

Hey, Joe.

Joe Gomes

Analyst · NOBLE Capital. Please go ahead

Just want to -- I know this is a little bit backwards looking, but I just kind of wanted to go a little bit over the CMOP. So it sounds like for fiscal 25', Q1 and Q2 were should be somewhat as the same Q4 run rate. But then going forward after Q2 when the extended contract -- the contract extension is over that that should drop off somewhat dramatically. And so I was wondering what percent of that $140 million of CMOP that you did this past fiscal year are you bidding on as a subcontractor?

Zachary Parker

Analyst · NOBLE Capital. Please go ahead

Yes. Thanks. Great first question there, Joe. Yes, I think you're not far off. Our best estimate is as you -- as indicated that Q1 and Q2 will be relatively similar to Q4. Obviously, there will be some variances there. And then it is our current expectation that and communications with the VA that they are anticipating executing on some of the other awards downstream. So we're looking at the material aspects to be reflected in the second half of the year for FY '25, which coincides of course with the time period with -- provided there's not too much delay or paralysis associated with the continuing resolution and the award of new contracts with the ramp up hopefully of some decisions to be made on the bids and proposals that we have in place now. With regard to the -- our commitments on the bids, it's still very procurement sensitive environment. So we're really not giving very much color there. I can tell you that we are not bidding on all of them. There are several of them which we are not bid. We have elected to participate with small business partner on a few and we'll leave it at that.

Joe Gomes

Analyst · NOBLE Capital. Please go ahead

Okay. Thank you for that. And obviously, in the quarter, you continue to do a great job of on the SG&A side, down that I think it was about $8.5 million. Is that a good run rate or going forward do you think there's more that can be taken out on the SG&A, obviously putting aside the whole CMOP part of it right this second?

Kathryn JohnBull

Analyst · NOBLE Capital. Please go ahead

I think our SG&A rate will run around -- it will probably as we indicated in our discussion on Slide 11 in the deck, we will feel some growth as a percent of top line as that top line as CMOP exits the top line. But we do expect to scale the business appropriately. So if you think about gross margin running at the 20% to 21% rate and EBITDA of 9% that implies SG&A of somewhere between 11% and 12%. As a function of really needing scaling the business where appropriate, but protecting our ability to execute and to really pursue and develop organic growth. So we are not anticipating scaling that level of effort. To the contrary, we think the size of the pipeline we've identified and worked focused on building means that we should continue to pursue that investment and deliver the top line growth. So there'll be -- for a period of time, there'll be probably some bubbling up of the percent of SG&A costs, the dollar value will vary depending on where the top line is. But I hope that helps you from a modeling perspective. But clearly, we understand the importance of scaling SG&A costs where we reasonably can, but we need to make sure we balance that in the context of protecting our ability to execute and deliver on our organic growth strategy.

Joe Gomes

Analyst · NOBLE Capital. Please go ahead

Okay. And then on the defense presence that you guys have, obviously, we are having a new administration come in here in another month or so. And then same thing on the DOGE. Maybe you can just give us a little more color detail on the opportunities that this opens up for you guys and how that fits into some of your core strengths and especially on the DOGE going forward?

Zachary Parker

Analyst · NOBLE Capital. Please go ahead

Yes, great question. Yes and again I've had the pleasure sitting down multiple times with folks on the transition team working a variety of the agencies and as well as the DOGE Commission as I kind of refer to them. What we like about it in terms of our heritage and DNA is we have been a company. If you look to use the example of the CMOP over the course of when we took it over, the number one driving aspect for growth for us was that we were driving efficiencies into the business that they had not accomplished before, right? And as those efficiencies that led to the VA achieving record level per capita costs for delivering their services prescription pharmaceutical service record level, right. Along with that achieving the highest exacting standards of customer service and satisfaction to our veterans, right. Evidenced by nearly two decades consistently of winning the JD Power Award for mail order pharmacies against all of the commercial and other countries. And so we have -- our culture has been that way all along. Every time we brought in new family members through acquisitions and organic growth, that's also been a cultural imperative to make sure that we are in alignment. And I can tell you that our leadership teams and on all the contracts that we execute, we are looking to drive best practices in a way that delivers efficiencies and cost savings. And even at the expense of revenue, top line revenue for us, we believe that doing those right things will usually yield positivity and it has for us. So we are looking forward to being able to have a dialogue with and look for those opportunities where this new administration is looking to accelerate efficiencies. And that's just a strong part of our DNA that we think positions us well with a lot of the headlines coming out of there from the DOGE and other perspectives. Beyond that also is your question with regard to defense and as you well know, we are bolstering our commitments to defense as evidenced by our win with the Navy, most recent win with the command control and the intelligence, surveillance and reconnaissance community. We have seen for quite a while a convergence between the health care community and the cybersecurity and data surveillance arena. And that intersection over the last several years has made its way into strategic plans of organizations such as HHS, various divisions there and hugely across the defense and military health services community. And so we are looking to leverage that where we will have expansion with Navy, Marine Corps and others, much like you saw in our recent TACNET [ph] win against a large long time incumbent. But our pipeline is also healthy there too. I would say today Joe, approximately 50% of our new business pipeline over the next couple of years is reflective of defense health and defense intelligence community as well.

Joe Gomes

Analyst · NOBLE Capital. Please go ahead

Great. And then one more if I may and I'll turn it over. So Kathryn, I know it's a very fluid situation here, but do you have any goal for debt reduction for fiscal '25 that you care to share with us?

Kathryn JohnBull

Analyst · NOBLE Capital. Please go ahead

Well, I do expect to continue at a very healthy EBITDA conversion rate. My internal target is 55% of that. So, it's going to be a function of the timing of when CMOP exits a portfolio. But whatever EBITDA we deliver, I do expect us to convert that smartly to ability to pay down debt.

Joe Gomes

Analyst · NOBLE Capital. Please go ahead

Great. Thanks again for the time and I'll turn it over.

Zachary Parker

Analyst · NOBLE Capital. Please go ahead

Thank you.

Kathryn JohnBull

Analyst · NOBLE Capital. Please go ahead

Thank you, Joe.

Operator

Operator

The next question comes from Burt Osterweis with Osterweis Business Consulting. Please go ahead.

Burton Osterweis

Analyst · Osterweis Business Consulting. Please go ahead

Good morning, Zach and Kath.

Kathryn JohnBull

Analyst · Osterweis Business Consulting. Please go ahead

Good morning, Burt.

Burton Osterweis

Analyst · Osterweis Business Consulting. Please go ahead

Good morning, Zach, Kathryn. Congratulations on a solid quarter and year end. I had a question on the intangible assets number on the balance sheet. And I noticed it went down a bit this quarter from last quarter. But am I correct in assuming that that contains a component that represents a discounted future cash flow pipeline contracts that we've won but haven't yet executed on? And if so, what percentage -- how much did that New Navy contract pump that number up? And if not, then where does that appear on the balance sheet?

Kathryn JohnBull

Analyst · Osterweis Business Consulting. Please go ahead

Yes. What's in the balance sheet is really a function of what exists at time of the acquisition. So purchase accounting requires you to value the business you acquired. So and it really only allows you, requires you, but more so allows you in terms of establishing an asset, really only allows you to establish that for awarded contracts. It doesn't allow you to value your pipeline of potential other future opportunities. That's kind of inherent in goodwill, if you will. So the intangible related to the backlog of all the various acquired companies, that's all footnoted out for us in the 10-K. I apologize if I don't remember the footnote. No, but if you want to reach out to me later, I can tell you. But those amortize over average useful lives of the contracts at the time you do the acquisition typically somewhere between 7 and 10 years.

Burton Osterweis

Analyst · Osterweis Business Consulting. Please go ahead

So that Navy contract would appear that some component of it would have bumped the intangible assets?

Zachary Parker

Analyst · Osterweis Business Consulting. Please go ahead

No.

Kathryn JohnBull

Analyst · Osterweis Business Consulting. Please go ahead

No. Since that was not a contract that the acquired company had at the time we bought them, it's not a part of that valuation.

Burton Osterweis

Analyst · Osterweis Business Consulting. Please go ahead

Okay. I got you. All right. Thanks so much. Have a happy holiday if I don't see you before.

Zachary Parker

Analyst · Osterweis Business Consulting. Please go ahead

Yes, thank you.

Kathryn JohnBull

Analyst · Osterweis Business Consulting. Please go ahead

Thank you, Burt.

Zachary Parker

Analyst · Osterweis Business Consulting. Please go ahead

Same to you Burt, you and yours. And as you know, maybe we'll see you March 13 when we have our annual shareholder …

Burton Osterweis

Analyst · Osterweis Business Consulting. Please go ahead

I hope so. Thanks.

Kathryn JohnBull

Analyst · Osterweis Business Consulting. Please go ahead

Absolutely. Thanks for joining us.

Operator

Operator

[Operator Instructions] The next question comes from Ross Davisson with Banneton Capital. Please go ahead.

Kathryn JohnBull

Analyst · Banneton Capital. Please go ahead

Good morning, Ross.

Ross Davisson

Analyst · Banneton Capital. Please go ahead

Hi, Zach. Hi, Kathryn. Good morning.

Zachary Parker

Analyst · Banneton Capital. Please go ahead

Hey, Ross.

Ross Davisson

Analyst · Banneton Capital. Please go ahead

Thanks for taking the question.

Zachary Parker

Analyst · Banneton Capital. Please go ahead

Yes.

Ross Davisson

Analyst · Banneton Capital. Please go ahead

The -- I think the only question I had was around just setting aside CMOP, my understanding is that you faced a headwind of small business set asides just in the other parts of the business as well. And if I have that right, is there kind of a known amount or a horizon of that transition or is it an ongoing process and you're just -- it depends a lot on procurement processes and you're just not sure when it might end?

Zachary Parker

Analyst · Banneton Capital. Please go ahead

Yes, great question, Ross. Yes, indeed, there was a component that was inherent and we disclosed to some extent, but as you know, just about every one of our acquisitions had a portion of their business that we described that was contributed to the pro forma that was subject to small it was already small business set aside and there was zero likelihood that we would it would change as they came full term. Some of those had a year of life, some of them 2 years of life in the small business ring before they came around. So those were clearly known. And then as we indicated earlier in this year, in January of calendar '24, the President issued an executive order, executive memo that translated into a number of agencies where they put added pressure on agencies to identify more work as recurring work to have it set aside. And so we've been modeling those and we've had our industry has had some pretty material impacts from that over the course of the last year, some very large contracts and we've had we've seen where a $1 billion contract that was held by a very large company went to small business set aside and we were not immune to that as well. So we've had two to three of ours that we've had long-term contracts. What we're finding the government doing is trying to unbundle or break apart some of those and say, hey, here's maybe a $20 million annual contract that maybe $10 million of that can be set aside for small businesses, so let's take an approach. And so as this approach of breaking those up. And so for us on our recurring work, obviously, there's risk that we build into our waterfall in our pipeline.…

Kathryn JohnBull

Analyst · Banneton Capital. Please go ahead

And Ross, I would just add to that to say, of course, what we are describing to you is what we are experiencing, that's the philosophy and the direction provided by the outgoing administration. And if you've been in this business for more than a handful of years, you know that the pendulum swings and each administration wants to provide their own imprint and their own philosophy and all that. So whatever we're describing to you is really what we've seen and heard the current administration articulate. Of course, we are watching carefully what the new administration will set forward as their goals. And the key for us, as Zach said, it's always a lot more fun when a new award is icing on the cake and completely incremental. It's less fun when you're filling the hole. But our job is to really define a set of capabilities and a set of markets that provides a robust enough pipeline that you provide insulation and offset the ability to absorb some just some of the ebbs and flows of parts of your business based on changes in philosophy and strategy for your customers. So, we really -- we are happy with our progress so far about providing enough diversity of our contract base and opportunities to get multiple at bats [ph] to offset some of these impacts. But clearly, we are looking we view the better part of that opportunity as in front of us. And so we are excited about our ability to execute against that $4 billion pipeline and deliver a reasonable part of that for DL8.

Ross Davisson

Analyst · Banneton Capital. Please go ahead

That's very helpful. A really good color. And yes, great point, Kathryn. Of course, everything could change come January, February and thereafter.

Kathryn JohnBull

Analyst · Banneton Capital. Please go ahead

That's interesting, I guess.

Ross Davisson

Analyst · Banneton Capital. Please go ahead

Just kidding. And just quick follow-up on that. So I mean, is it fair to think about and this is just kind of more like kind of a story to fiscal 2024, is it fair to think about you had this headwind that you just described and it's helpful to understand like some of it was clearly identified when you acquired GRSi, and then some of it was more driven by the executive order. Is it fair to think of F24 as facing that headwind and then the what because of the continuing resolutions and just some of the slowness there that you didn't see as much ramp as you might have otherwise. And so you've got this declining anticipated, but slightly declining piece and you didn't have as much growth as you might have had because of a slow kind of process. Because I totally hear you that there's a large amount and a very -- it sounds a very exciting amount of sort of business to come and I'm excited to see that. I'm just curious as you think back on the year, was there a bit less of a pickup in new business than you might have otherwise hoped?

Zachary Parker

Analyst · Banneton Capital. Please go ahead

Yes, that's a great question. Yes, I think the right way to look at it, Ross, is that we -- our new business pipeline is at a record for a couple of reasons. A, as we've gotten really good at identifying and positioning for some really good quality opportunities that now reflect the totality of our capabilities in DTC, SEI and SRC, right. These are the capabilities that each of our decision makers and our targeted agencies need desperately. And those awards -- those type of awards will have high value, will have best value awards and we think will add great value in terms of our financial profile. At the same time, there's been a buildup, right? We don't count the recompetes in those numbers like CMOP and so forth and of course, you know our status there. But we would love to see more decisions, right. So that there are things that we have been anticipating, we would have submitted proposals by now that still continue to slip to the right. That's often a function of budget instability, right, which comes with CRs where customers just really can't make decisions in Q1, Q2 not knowing again what they will have at their disposals for three and four. And so it's really a two-pronged thing. There weren't anything as we were missing. It's really largely the fact that acquisitions, while they're not as bad as what we've seen from the VA on CEMA, there are a number of other programs that we are chasing where the incumbent is getting extensions like we are, but we are really hopeful and starting to see signs that RFPs will be coming out.

Ross Davisson

Analyst · Banneton Capital. Please go ahead

Okay. Yes, that’s really helpful. Thank you both. I appreciate it.

Kathryn JohnBull

Analyst · Banneton Capital. Please go ahead

Thanks for joining us, Ross.

Operator

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Zack Parker, President and CEO for any closing remarks.

Zachary Parker

Analyst · NOBLE Capital. Please go ahead

Thank you. Once again, I want to thank you all for participating today and for your continued support and interest in DLH. We are really excited about what the future holds. We really appreciate your continued interest and we will certainly keep you posted with regard to the evolution of not only the impact of the administration changes, but the continued evolution of DLH. A major part of that of course will be our descriptions of the business as we approach our annual meeting for the shareholders, which is scheduled for March 13. And once again, we'll be based in New York. So we look forward to engaging you as we continue to keep you abreast on both Q1 and the implementation of the strategy. Thank you again, you all and have a blessed day. Bye for now.

Operator

Operator

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