Chris Witty; Investor Relations; DLH Holdings Corp
Zachary Parker; President, Chief Executive Officer, Director; DLH Holdings Corp
Kathryn JohnBull; Chief Financial Officer; DLH Holdings Corp
Joe Gomes; Analyst; Noble Capital
Operator
Good day and welcome to the DLH Holdings Corp fiscal 2025 1st quarter earnings conference call.
(Operator Instruction)
I would now like to attend the conference over to Chris Witty Investor Relations adviser. Please go ahead.
Chris Witty
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 2025 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 nongaap 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 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 now like to turn the call over to Zach. Please go ahead, Zach.
Zachary Parker
Thank you, Chris and good morning, everyone. Welcome to our first quarter conference call.
As we begin fiscal 2025. I'd like to take a moment to thank our talented employees for being so dedicated to the future of DLH. During this transformational time in our country's history, it is your thorough dedication and commitment to excellence that allows us to succeed, even as industry conditions change. Your steadfast passion for our customers', critical missions drives DLH toward a bright future.
Now, turning to slide 4, I'll provide an overview of our financial results, performance excellence and accelerating organic growth remain our highest priorities as a company, and recent developments illustrate the strength of our transformed new business pipeline. Our recent award to provide C six ISR and advanced IT services to the Navy. Expands our information warfare systems engineering portfolio covering from Norfolk, Virginia to San Diego, California.
This recent award has been key to our organic growth campaign of opportunities, particularly those that leverage intelligence, surveillance expertise and mission critical readiness related services to our clients. We remain confident about our long term vision bearing fruit in this and in near term fiscal years as our bidding posture with our strategic clients has really been strong.
A new administration brings both challenges and opportunities, but we have always based our portfolio of business around enduring programs which obtain broad bipartisan support in Congress. And I'm happy to say this continues to be the case. Our services and solutions are focused on improving technology utilization, enhancing productivity and efficiency for our clients that has been at the core of all that we do.
These are values directly aligned with this administration's stated priorities. And overall, our initial assessment of this administration's impact on DLH's current Book of Business and future opportunities still remains at neutral to slightly positive and we still have that belief as we look for the long view. To date, we have not had any material impact from the recent executive orders.
We report first quarter reported first quarter revenue of $90.8 million in EBITDA of $9.9 million representing an EBITDA margin of 11% on revenue. While we use cash during the quarter due to short term growth in receivables and increase our debt accordingly.
We expect strong cash flow in the fiscal second quarter and a continuation of our key leveraging strategy as Captain will review in a moment. Slide 5 provides a snapshot of our go forward growth strategy as reviewed last quarter. While the company will likely continue to feel the effects of small business set aside unbundling of contracts in the coming quarters. Our growth is squarely focused on the opportunities which leverage our digital transformation, cyber security, research and development and systems engineering capabilities.
We have a strong pipeline of qualified and well positioned bids. We anticipate half a dozen or so of those to be awarded this year. Our qualified pipeline has several opportunities with contract values in excess of $100 million and more that should substantially offset the eventual small business set aside erosion.
As I mentioned, our focus on differentiating technology and innovation is yielding results by both expanding our footprint with existing customers as well as opening new channels for growth, such as through new contract vehicles, the multiple award ID IQs, our platform for generating new business has never been stronger.
Slide 6, serves as an illustrative example. A case study of how we expect to leverage our existing work and broaden capabilities to win new business in the near term and long term. Each step in the process provides a new building block for which we can establish franchise programs across the health and readiness marketplace.
This graphic illustrates a growth campaign of selected opportunities that pull together attributes from across our company's capability sets.
The opportunities vary by total contract, by total contract value and customer, but each requires the differentiated capabilities and solution that DLH can offer.
We remain well positioned for organic growth going forward and believe the federal marketplace offers opportunities to expand our technology powered solutions. We remain focused on accelerating the company's top line leveraging our credentials, personnel, highly enhanced capabilities and over time will more than make up for any of the again, the small business side versions. We continue to believe the best is yet to come and are building a stronger DLH to serve the needs and challenges of our clients.
With that. I'd like to turn the call over to Kathryn JohnBull, our Chief Financial Officer Katherine.
Kathryn JohnBull
Thank you Zach and good morning everyone. We're pleased to report our first quarter results for fiscal 2025. Turning to slide 8. I'd like to provide a high level overview of some key financial metrics for the three months ended December 31, 2024.
We reported revenue of $90.8 million in the first quarter versus $97.9 million in the prior year period.
Reflecting contributions from recent contracts awards offset by the conversion of certain VA and DOD programs to small business set aside contracts as well as service delivery timing on key HHS contracts. Revenue contraction due to small business set aside conversions within our DOD portfolio was approximately $5 million in the quarter.
This amount is comprised of approximately $3.5 million of non labor lower margin pass through revenue from a contract that was unbundled in this past quarter and approximately $1.5 million from the winding down of acquired small business contracts in the prior year period.
While we remain focused on winning new programs that bode well for future growth, small business set aside conversion, headwinds are likely to impact our results for the upcoming quarters. A second [CMO] site has transitioned to a small business contractor. As of January 31, 2025 this location averaged approximately $7 million in revenue per quarter over the last 12 months. We are under contract to perform services at the remaining locations through at least April and we expect to provide services on these locations while the customer continues to execute its procurement strategy.
We reported EBITA of $9.9 million for the first quarter versus $11.1 million last year. EBITDA was down primarily due to the lower overall revenue level offset in part by reductions in certain variable indirect cost. As we scale the business from a cash standpoint, we used approximately $11.5 million of operating cash during the quarter versus cash generation of $5.1 million last year first quarter as a reminder, the prior year period was positively impacted by delayed payments from the fourth quarter of fiscal 2023. Making it an unusual comparison.
In addition, our first quarter collections this year were impacted by collection delays on one significant account which has already begun clearing in the second quarter. We anticipate Q2's cash generation to more than offset the first quarter shortfall and therefore lead to a reduction in debt.
Turning to slide 9, we ended the quarter with a with total debt of $167 million versus $154.6 million at the start of the fiscal year, reflecting those short term borrowings. As a current update, debt today is slightly under $161 million. As I mentioned a moment ago, we anticipate utilizing approximately 50% to 55% of EBITA to pay down debt during the remainder of fiscal 2025. As always using cash to delever the company is a top priority going forward.
Our amended credit facility continues to provide excellent financial flexibility as we navigate through the changing business climate climate. This year, it provides enhanced borrowing capacity to satisfy short term working capital needs as well as our other, our strategic focus on new business initiatives.
We will continue to invest in organic growth and believe our strong portfolio of technology powered solutions puts us at the table for more programs than ever before. As Zach previously mentioned, our pipeline of qualified new business opportunities now stands at approximately $4 billion representing a diverse mix of existing and new customers with budgets and priorities expected to be aligned with the new administration.
This concludes my discussion of the financial statements. And with that, I would now like to turn the call back to our operator to open up for questions.
Operator
Thank you. We will now begin the question and answer session.
(Operator Instructions)
And our first question will be from Joe Gomes from noble capital. Please go ahead.
Joe Gomes
Good morning, Zach and Kathryn. Thank you for taking my questions.
Kathryn JohnBull
Hey, Jones, (multiple speakers)
Joe Gomes
So I wanted to start out you mentioned in your remarks and in the press release, probably like four, specific items for the revenue decline where we compete that were lost for the small business set asides.
You know, there's just a small business transitions. Some non strategic projects winding down. [K] you talked a little bit about some of the numbers. I just wonder if you could kind of rank or give a, percentage of those items that impacted the revenues. You know, what was the greatest down to, what was the least impactful.
Kathryn JohnBull
Yeah, sure, Joe. Happy to do that. So the key impact of the lead, the most significant impact to the quarter was derived from the unbundling of one of our [rec compete] as we've shared in prior calls. The prior administration had a commitment to small business set aside and, really ran contrary to the couple of decades long practice of consolidating contracts under a prime contractor that would really number one drive in integration efficiencies from the program and secondarily really transfer from the government to that prime contractor, the performance risk of really trying to manage a series of contractors.
But, even though that was a couple decades trend, nonetheless, the prior administration really provided a mandate that certain things be unbundled. And so we experienced that in the quarter, that one of our DOD programs was unbundled.
And as we mentioned in the comments in the call, largely that was derived from subcontractors we had on our team where we were a sort of, we were assuming that integration responsibility. So that's why it had less of an impact to our gross margin delivery because it's relatively low volume, low margin work.
Secondarily there, as we've talked about on a number of calls, there was a tail of small business revenue that we acquired. And sometimes those tails take a long time to roll it out. But throughout the quarters of 2024 we mentioned some of those small business acquired contracts that we're wrapping up. But as a comparison point quarter to quarter year, over year in the first quarter, that that transition hadn't really started much until later, later quarters of '24.
So that was about a million and a half that was present in Q1 of '24 exiting throughout [Q2 and 2 to 4] of 2024 and not present in Q1 of 2025. So that year over year comparison is impacted by about a million and a half dollars. Thirdly, there's about a million and a half related to winding down or having completed the exit from international work, which is, of course, getting a lot of attention these days in the headlines without commentary to the merits of that work, we made a business assessment and a couple of years ago that that work, international work was a distraction for us.
You can't really do that work, you have to be either all in or all out and, and the work that we had, there was a limited number of contracts that we viewed as really not our appropriate, not our focus, not strategic to us. And so we have made a decision to exit and that, that exit has also been taking place throughout the quarters of 2024. So year over year in Q1, you see about a million and a half variation from that and.
Zachary Parker
There'll be a tail of it this quarter.
Kathryn JohnBull
That's right. (multiple speakers)
We'll wrap up the exit from that probably in the May time frame. And then, finally, there was about $2 million of just timing of services we would have expected to perform in Q1 that slipped into Q2 and we expect to pick it back up in Q2.
Joe Gomes
Okay, great. Thank you for that overview was very good. It just I know, in the '23 '24 you know, you guys did win some our seats at the table, so to speak on some large ID IQ's. You know, are we starting to see a steady stream of task orders come out from those or are we still waiting for those to kind of ramp up?
Zachary Parker
Yeah. Great point, Joe. Yeah, it is interesting that you mentioned those because we, what we did find was one of those opportunity is large ID IQs the way in which it was awarded by the government was replacing a previous contract, but they were gapped, right? And during that GAAP period, the government moved that work to a different vehicle and many of those contracts were three year contracts, right? And many of those are now coming back around for competition.
And some of that work and is that was moved while there was, GAAP was moved to a vehicle called Oasis. And of course, we just recently won Oasis. So we are now finding some of those opportunities that we had anticipated bidding. Now on the other vehicle contract vehicle DHA omnibus to be specific that we are now looking at and bidding on Oasis is fortunate timing wise for us that we Oasis just finally made that award decision and we were successful.
And and so, you know, right out of the gate, we've got some of the bids we've been posturing for to bid over the course of the next few months. So yeah, we're excited to now have that Oasis ID IQ for work that we're anticipating on the other vehicles. But the good news is now we can prime those opportunities rather than having to take a backseat to someone else on Oasis.
Joe Gomes
Great. And then one of the things that we talked about, in previously, but we haven't really heard a whole lot about lately is, your incentive by cloud product.
I wonder if you could just kind of give us an update on that product.
Zachary Parker
Yeah. No, great question. Yeah, we are in the process. First of all, by cloud happens to be our fed ramp and fed ramp marketplace, opportunity capability that platform we have built and designed for large scale data analytics services around largely around health and health care solutions.
With the advent of our expanded capabilities with cloud that came in with our acquisition that we completed integration in '23. We've now been taking a look at in [FY] cloud 2.0 and so we're in that process right now. We expect that we're doing some investment as we speak to expand the versatility of that platform. And then by cloud happens to be designed for the most secure type programs and projects in order to do that are required by the federal government.
It is not suited for you know, lower level security items. And so we've got a team that is developing again a very broad cloud based platform to expand our infinite offering. So we're pretty excited about that. I think it will continue to give us some great versatility, it needs to evolve because as you probably know, the cyber security environment and public health security environment is evolving.
And folks are leveraging a variety of tools that still must also be managed in a secure environment. The government is very concerned as industry around how do you leverage tools such as AIML while also operating in a secure environment? And so we're leaning forward to evolve in finite so that it can operate in tomorrow's environment.
Kathryn JohnBull
And, and there's a heavy overlap between, if you follow the issuing of the CMMC, the cyber maturity model regulations in late October, there's a pretty good overlap, not entirely, not 100% but pretty darn close between fedramp and CMMC. So we think that gives us a good head start on that credential that we expect to start making its way into contracts.
Joe Gomes
Okay? And then one more for me, you know, again the press release, you talk about, the little about a $800,000 increase in SG&A you know, reflecting investments in organic growth, it sounds like some of that was could have been right here for the in FY, we just talked about anything else that you could point out?
Zachary Parker
Well, not a lot that we can disclose very much. You know, as we talk about our organic growth path, differentiators are very important and fed by cloud and secure cloud capabilities is a very material one, we're also doing some development. We'll share some more at our upcoming annual meeting, but we're doing we're developing some additional, cyber security capabilities, systems, engineering, modeling simulation capabilities.
And we're bringing on the appropriate type of talent, across the business to help us deliver that. So we're going to continue to, as Kathryn and I have said over the recent quarters to make sure that we're accelerating our organic growth profile, making sure we're investing to ensure that '25 and '26 can realize those in a differentiating way.
And so you elevate your wind probability, not by just building a larger qualified pipeline, but a better position, qualified pipeline. So we continue to make those investments for organic differentiators.
Joe Gomes
Great. I'll get back in [queue]. Thank you for taking the question.
Zachary Parker
You bet you.
Operator
(Operator Instructions)
All right, We'll move back to Mr Gome's for his follow up from Noble Capital. Please go ahead.
Joe Gomes
Thanks again. I'll ask a couple of more here on [cmap].
Just want to make sure I'm understanding everything here. So there, there was seven that you had under your belt that you're still servicing, that you are still servicing. I think four of those who had to have their bids last year, three of them haven't yet to, I guess, go out for bid or have their timetable set.
I was wondering of those, how many have you partnered with to bid on? You know, what, what are you thinking in terms of the capability of your partner winning any of these awards.
Zachary Parker
Well, we remain you know, in the very competition sensitive environment there, Joe, I can tell you that we have not bid all of them. You know, our partner has been a small business. And we've worked collaboratively to make sure that the big backlog on [cmap] is one that our small business partners feel very, very comfortable and competent that they have the bandwidth to execute with our support.
And you know, so I can tell you that you know, we have not, we're not bidding all of those that are remaining. And but we do believe it will be a very material, if we're successful, if our partner is successful, it will still be a material retention of business for us, but it will be again as a subcontractor at best.
And one in which you know, we'll evaluate the win probabilities once they start to issue and you have some final [rfps], they're not the VA I say that because the VA is not done with that acquisition in any way, shape or form any and all of those that are still remaining outside of exclusive of scattered indicated in Chicago that we call Heinz, any of those are still subject to have RFP changes. And amendments that could lead us to even changing our bid posture on those.
So it remains fluid, Joe until the, until the government, makes some of those decisions. The good news is, [the VA now] has is moving forward with their new leadership.
The new administration and the [dodge] community has recently met with the VA we anticipate as per usual that we will have an opportunity to have an executive visit by the new secretary and probably within the next couple of weeks and this new administration, still could put their finger on the acquisition and the approach. So it remains so still fluid and so competition sensitive and, we've got to respect the nondisclosure agreement that we have with our, with our prime partner.
Joe Gomes
Fair enough and then one more. And I think we're still operating under a continuing resolution. You guys seeing any impact from that on the business?
Zachary Parker
Well, we're fortunate right now, Kathryn, give you some of the details as far as what we have in the way of contracts and et cetera, but we do anticipate that we'll be in ACR mode, Joe. And that, it's you know, I spent last week this past week with many of our peer companies as a Professional Services Council Leadership Summit. We're anticipating that, the next coming months, there'll be quite a bit of of impact with regard to the longer term budget.
You know, we still would not only do we have the CCR, we've got some caps that have to be resolved. Some of those ratios of the caps from dod to civilian. We've got a debt limit ceiling that was punted to the right coming up, which always holds an imminent potential for a shutdown for any duration.
So we expect a lot of noise over the coming quarter or so. At the executive level, the good news is we try to make sure we manage that signal to noise ratio, right? And what we see in terms of the stability of that signal is that fortunately, most of if not all of our programs are appropriated already, which means there will be continuity against some of the some of the potentials of shutdown.
We also are expecting that everything that we have in our pipeline remains pretty solid and supported by both sides of the aisle. Right? As you see, we have a lot of defense, military health, health and health in areas that again are also remain really quite strong on both sides of the aisle. So the veteran community, as you well know, as long as this tail continues to run out, both of these administrations are very supportive of, of veteran health and the sort of work that we do.
So we feel pretty good about the impact of CRS most of the business we have in our pipeline, new business pipeline are recurring work. So they're not subject to the restrictions of new business Awards. So as long as we can have customers that are focused on the acquisitions and the commitment to their awards, we feel really pretty confident that we won't see any material erosion associated with budget constraints.
Joe Gomes
Great. Thanks for that, Zach. That's it for me. Thank you very much again.
Zachary Parker
You bet, Joe
Operator
And ladies and gentlemen, this concludes today's question and answer session. I would like to return the conference back to Zach Parker for any concluding remarks.
Zachary Parker
Once again, I'd like to thank you for your support and interest in DLH. And I look forward to chatting with you next month as we have our annual shareholder meeting and until then be blessed and have a wonderful productive day. Bye for now.
Operator
And thank you, sir. The conference has now concluded. Thank you for attending today's presentation.
(Operator Instructions)
