Release Date: August 01, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- DLH Holdings Corp (DLHC, Financial) reported third quarter revenue of $100.7 million and EBITDA of $10.0 million, demonstrating solid financial performance.
- The company generated operating cash flow of $4.6 million during the period, translating to $14.9 million year-to-date, showcasing strong cash generation capabilities.
- DLH Holdings Corp (DLHC) is optimistic about new business opportunities and expects several award decisions in the near-term, potentially boosting future growth.
- The company is actively deleveraging its balance sheet, having paid off $4.3 million of higher interest floating rate debt during the quarter.
- DLH Holdings Corp (DLHC) continues to expand its capabilities in public health and enterprise IT management, indicating growth in key markets.
Negative Points
- Third quarter revenue was negatively impacted by the transition of some small business set-aside work, affecting overall sales.
- EBITDA was lower than the previous year, largely due to a higher-than-normal contribution from non-labor pass-through revenue, which carries lower margins.
- The award timing for several contracts remains uncertain, potentially affecting future revenue streams.
- Gross margin decreased by 200 basis points year-over-year and 300 basis points sequentially, driven by lower margin pass-through costs.
- The company faces challenges with small business set-aside contracts, which could lead to further revenue erosion in the coming quarters.
Q & A Highlights
Q: Revenue came in lower than expected. Can you provide more color on the soft business award runoff and the recompete process as a subcontractor?
A: Zachary Parker, President and CEO, explained that the lower revenue was due to the transition of some contracts to small business set-asides. DLH has a strong win rate for existing business, but some contracts acquired through acquisitions are rolling off. The company is working to maintain contracts in an unrestricted environment and expects some contracts to run out between Q3 and Q4, with a possible trickle into Q1.
Q: Can you provide more details on the CMOP contracts and your confidence level in re-competing for them?
A: Zachary Parker noted that the VA has repeatedly revised its acquisition strategy for CMOP contracts, now focusing on staffing rather than performance. DLH's appetite for the current versions is not the same due to the shift towards a low-cost shootout environment. However, DLH remains engaged with small business partners for certain sites and locations.
Q: What is driving the decrease in gross margin?
A: Kathryn JohnBull, CFO, stated that the decrease in gross margin is due to a higher contribution of lower-margin pass-through costs in the quarter, which inherently generate tighter margins.
Q: How much of the $100 million in quarterly revenue is related to small business contracts?
A: Kathryn JohnBull indicated that the portion of revenue related to small business contracts is not material, likely less than 5%. Most of the anticipated conversions to small business contracts are largely behind the company, excluding CMOP.
Q: Can you quantify the total proposals outstanding that are pending adjudication?
A: Zachary Parker mentioned that DLH has over two dozen opportunities that could materially affect growth by mid-FY'25. The company is optimistic about its ability to win these contracts, which include higher-margin digital transformation and cybersecurity work.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
