Q1 2024 DLH Holdings Corp Earnings Call
Participants
Chris Witty; IR; Darrow Associates, Inc.
Zachary Parker; President, Chief Executive Officer, Director; DLH Holdings Corp
Kathryn JohnBull; CFO; DLH Holdings Corp
Joe Gomes; Analyst; Noble Financial Capital Markets
Brian Kinstlinger; Analyst; Alliance Global Partners
Presentation
Operator
Good day and welcome to the DLH Holdings Fiscal 2024 first quarter earnings conference. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask to ask a question. You may press star and one on your telephone to withdraw your question, please press star. Then please note today's event is being recorded. I would now like to turn the conference over to Chris Witty, Investor Relations Advisor. 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 2024 and beyond. These statements are various 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 safe on today's call, we will be referencing both GAAP and non-GAAP financial measures and reconciliation A reconciliation of our non-GAAP results to our reported GAAP results is included in our earnings release and an 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 Sam. Please go ahead, sir.
Zachary Parker
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 are 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 continued to delever the Company, as Kathryn will review momentarily by paying off another $5 million of debt in an ending the quarter with only $174.4 million in 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 and business development opportunities. However, we remain confident in our ability to generate new business through our robust or 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 our current IDIQ contracts and potential new business opportunities. The most recent resolutions keep the government running through March first with some departments funded through March eighth. As a reminder, this is the third set of stopgap 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 the both the recent and near-term progress could result in funding flow for our major agencies through the remainder of fiscal 20 for paving the 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 credentialed 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 Unoura in an uninterrupted support for our clients' mission. The Allegion employees solve challenging complex problems, and their program execution results are unmatched in delivering customer satisfaction. So it was truly an honor to receive a Great Place to Work certification and award entirely based on what current employees say about their workforce. The 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. Va comprises approximately 35% of our new rebate of our revenue via the Veterans Health agents administration. This includes our long-standing Seamap 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 still deserve our nation's excellence.
And thirdly, today, defense agencies comprise roughly 17% of DLH revenue including 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, ANIAI. enabled research and numerous health-related platform. Given that our client relationships span decades, we can leverage this intimacy to shape customized solution and expand our contract portfolio through 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 will remain in the sweet spot of of agency technology upgrade initiatives as evidenced by a White House and Federal agency strategic plan by integrating our highly differentiated digital transformation capabilities with research domain expertise that serves as a relatively unique platform to address a broader range of solutions than ever before, helping our clients reach, hire 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. Catherine?
Kathryn JohnBull
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 three months ended December 31, 2023 compared to the prior year period. We reported revenue at $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 customer or to vendor payment time. This does not negatively impact our expectations for cash flow generation this year or 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 non-cash amortization of financing 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 below three points, but 3.5 times 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 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.
Question and Answer Session
Operator
If you would like to ask a question, please press star then one on your telephone keypad. If you're using a speakerphone, we ask that you please pick up your handset before if at any time your question has been addressed and you would like to withdraw your question, please press star then two. Once again, ladies and gentlemen, that's star one if you have a question.
And today's first question comes from Joe Gomes with NOBLE Capital. Please go ahead.
Joe Gomes
Good morning and thanks for taking my questions, Ken Morning, Joe.
Morning, gentlemen. I wanted to start off with the revenue line and kind of get a feel for what you guys were. I'm expecting going into the quarter, while it's a little lighter than what we had expected. I understand that the continuing resolution, can it represents headwind for you guys, but I just kind of wanted to get a little better feel for what you are expecting going into the quarter, what do you think you are there means for the rest of the year?
Zachary Parker
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 segments that are really being thrown by the by the budget uncertainty whereas you well know, we have we have a few very large hundred million contracts, and that involves InterMune extra new scientific research around health challenges. And we're just seeing that four consecutive quarters some quarters now that without budget certainty, there's some been some reluctance to do. Some of the funding source is trailed what we've explained, what we were really expecting for this year and then a couple of anomalies that we just have some seasonality impacts.
Kathryn JohnBull
Right, right. That said, as I've said, there has been some slowness in turning new orders since he's indicated, although as you might expect, Q1 is historically a softer lighter quarter just from the way, just based on where it falls in the calendar and the impact of lease term for the around the holidays. So from that perspective, from our planning perspective, it's pretty in line, though, 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.
Joe Gomes
Okay. Thank you for that. I presume if we take a look at the VA, our contracts there now have been extended into February of 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 two 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 this contact is just as we thought in the past, continue to be send it out?
Zachary Parker
Yes, we are, as you know, that we when we started out started out on what we refer to as bridge contractually, we're usually going at it what we would call six months. And we're really kind of a period of two, three months bundled together, et cetera, as it is, 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 the they are able to make some progress on new awards.
Having said that, we think there's nothing to really read into that, we still are really strongly believing that we see no material impact to FY2024's plan and results. And then just based upon the timing and the potential evolution of the acquisition chain.
Joe Gomes
Okay, great. And then on HHS. Q3 M&A, we're not didn't need to break that out in the Q, so I was just wondering, you know how that big contract perform in the first quarter compared to the last?
Kathryn JohnBull
Yes, yes, very consistently out and because of because we've returned to a normal operating cadence as opposed to the variation that happened during the COVID, the COVID challenges, we do have comparable results year to year from that program.
Joe Gomes
Okay, great. And then one last one for me. And I'll drop back in queue and there was a nice drop in SG&A as a percentage of revenues cap. And I'm just wondering, is that sustainable? Is that a good number to use going forward? Or do you think that cost will we'll begin to edge back up and over the rest of the year?
Kathryn JohnBull
I do think that it's going to be a function of the timing of media cost. And so given the congestion around RFPs getting issued it where our G&A costs incurred in the quarter were a little lighter than we expected. And so that that cannot get they get the look 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 levers in the Company and our growth, our growth strategy. But I think bit, I don't see that as are delivering a permanent reduction in SG&A costs to scale yet, you know, until we get on that track of that front end investment and business development and the yield on the back end in the form of awards. That helps, firstly for modeling your outlook.
Joe Gomes
Okay, great. Thanks for taking the questions. I'll get back in queue and maybe for Jason.
Operator
And then as a reminder, ladies and gentlemen, if you'd like to ask a question, please press star then one.
Our next question comes from Brian Kinstlinger with Alliance Global Partners.
Brian Kinstlinger
Please go ahead and good morning, guys. Thanks for taking my questions. And can you talk about maybe I missed that and Hi, Catherine, can you talk about the bookings and in proposal submission trends?
I joined the call late, if not, from a quantitative perspective, at least at a high level, have they you then have they been strengthening? They've been weakening? Are they stable? Just high high-level discussions so we can understand the market conditions.
Zachary Parker
Yes, I missed the first part, you said that bookings are mostly other proposal submissions?
Joe Gomes
Yes.
Zachary Parker
Yes, I think my Catherine said the data that contributed to the softer SG&A is an indication of a 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 as well. We'll open up channels for us to be a number of contracts and we refer to them as the CIRS. before. We believe that 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 our minds potentially by the end of Q2 and which would create those bidding opportunities for us in Q3 and for some of those are going to be large term long long-term opportunities, and those will be quick turnarounds. And so we've positioned ourselves to be able to do both and you know, as they come forward. But again, low low disappointed that we haven't had the opportunity to bid on those as yet whereas the via the booking continues to slip to the right. But having said that, we are still continuing to develop value propositions, we believe are going to be winning value propositions on some of our existing IDIQ contracts provided that the funding comes as well.
Brian Kinstlinger
So I'm curious, coverage where have covered some of the more defense related IT guys, the win rates were around 25% to 30%, 30% would be excellent model. I'm not sure how similar to our DLHC. or not, but if it is, I'm wondering are you casting a wide enough web outside of your existing book of business has been drive growth? And if not, what can you do to increase that, that web to drive stronger growth on your you are actually a great straight man for us.
Zachary Parker
Yes. So we have with whom we have that as a result of some of the capabilities that came in at the end of last calendar year. And then 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 after quarter to accelerate and 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 that are leveraging stronger cybersecurity for our enhanced cyber security quals or stronger health IT qualifications and our pipeline new business pipeline is beginning to really reflect that if those opportunities, of course, are things that we hope to see in the this fiscal year to bid and then, of course, we expect to exit to exit very, very strong with the with the ability to get some of those awards in place.
You're also very accurate with regard to our industry. We generally look at 30% win rate on new business has been very, very good. We are we expect a lot higher than average and close to 100 on our recompetes that we choose to stay in that in that business. But the 30% would be an industry standard top aligned win rate. And we've and 20% is still good.
We've had we also kind of bucket those into three areas. One is the multiple award ID IQs GX as a cone, which generally have a zero booking the way in which we treat them. But if you open up a huge opportunity for organic growth, and then we have a small to medium-size business, which had been our sweet spots in the prior and prior stages them before and last phase of the acquisitions. Those are, again, things ranging anywhere from $10 million to $50 million. And then that medium size to larger being north of north of $50 million. And much like probably our last $600 million or $700 million. So we're we kind of look at each of those is now we feel that we can swing back 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.
Kathryn JohnBull
I think I know and desires the delays that the industry is experiencing, but for us, particularly probably more so than most. It's an opportunity to really have that client call plans working and really raise awareness and really, to your point, open the aperture and not even that far adjacent for where we've been, but more so really for people who don't necessarily think of DLH and certain capability sets because and they haven't seen us there yet, but really having them understand how we have resident in the company that the breadth of capabilities 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 around a 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 done a time to really continue to improve our position for when the opportunity to bid comes in.
Brian Kinstlinger
Great. Yes. And then Q3 is shaping activity that's there that pipeline shaping activity will be in part reflecting the actually the Katherine gave to Joe earlier, right?
Zachary Parker
So we're doubling down on the positioning opportunities, whether the RFPs come out or not from the customer from us, which would lead to a B and P investment on the SG&A side. So you'll see we would expect it to the next quarter's results will be more reflective of that, that portfolio expansion.
Brian Kinstlinger
Great. My last question revolves around the GRSI. transaction. I'm curious if you provide numbers or high level again, whichever and if you look at their 2023 revenue. Is it growing over 20 to grow over 2022? Did it shrink? Is it the same? And then I'm curious and 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 is it more impacted as well by what's going on in the broader market. And so maybe you are a little bit behind plan.
Zachary Parker
Sure. I would add to that when Great question. Yes, regarding '22 to '23 and beyond. As you may recall, the first of all day, if that acquisition has delivered all that we would have expected in terms of enhancing our competencies our capabilities and channels with 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 of the existing when we closed the acquisition December raise, there was still a fair amount of contracts that we consider that we're had been small business set-aside, and it was work that we do. So there's a degree of uncertainty as to whether or not we would be able to retain that work within the GRSI. and most 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 at the schedule. And the timing of those have been a little bit different from what we had expected going forward. But they obviously -- they're having what Kathryn, and I fully anticipated the type of erosion in that market area, while the company is doing very good in positions that we've won, a couple of those that were that we were not terribly optimistic on. But again, I would net net terms in terms of building that 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 Anchorage unrestricted market that we saw the value. And we're comfortable seeing some of that erosion for the small business set aside where actually, Katherine, you want to add to that?
Kathryn JohnBull
Yes, absolutely, right. So the strong EBITDA contributors were locked in really protected and have continued to deliver has been some erosion on the lower end work, as Zach described a lot lower. And from a just from a numbers perspective, not no disrespect to the work being performed and the customers being served, or they spike up. But from a growth perspective to your second point, naturally on GRSI. has been equally, if not more so affected by the delays in decisions around particularly that large ID IQs, as Zach mentioned, CRS. before that they were as many of you remember, we talked about on former prior calls, they are scheduled order, Ontario SP. three. So unlike DLH, the Heritage deal age, which which really did not have the resident the technical capabilities to bid on CRSP. three, but was preparing itself through its acquisition program to be credible in CIOSP. before In contrast, Joe GGRISI. was Ontario SP. three. But as a small business, and they've obviously grown out of that. So they've kept the work. They had their opportunity to get 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 and so the growth strategy for DRSI. has that bit of an overhang that the whole business and the industry is experiencing flat in terms of relevance to our journey ahead and really ability to contribute to our growth talents and addressing the market they are everything we expected them to be.
Zachary Parker
Yes. And 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 one plus one equaling three. So we were not looking at the existing business base and capabilities alone, kind of what we are seeing and what excites us most is the synergy of pursuit of these opportunities based upon our heritage in H. work as well and which is heavily based in the into the science and security side of the business with the IT aspects that came with the acquisition. When you put when you put those together and some of the some of the world-renowned epidemiologists and research scientists. And together with the technology capabilities that came in that were 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 value propositions but across agency selling.
Brian Kinstlinger
Okay, thanks so much for your time.
Kathryn JohnBull
Very clear brine.
Operator
Thank you. And as we have no further questions in the queue. I'd like to turn the conference back over to Zach Carter for any closing.
Zachary Parker
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.
I will meet you again at two in the not-too-distant future that first of all, it will be March 14th where we will have our annual shareholders meeting will actually physically be in New York. So come on by Katherine, 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 logic to small caps at the Alliance Global Partners events on February seventh.
We can read the details on our website. And there will be disclosing a little bit more color around some of the technology evolution that the Company has gone through. And now we see that being a key part of driving value.
So thank you very much, and we'll look forward to hearing and seeing you soon. With that, have a blessed day five announced Take care.
Operator
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.
