DLH Holdings Corp. Q1 FY2026 earnings call

• The first quarter was affected by government shutdowns and funding gaps, but the recently enacted budget provides increased funding and visibility. Defense and health agencies have specific priorities like rapid delivery, cost efficiency, digital modernization, and cybersecurity. - Revenue was down due to program transitions, but adjusted EBITDA margin improved sequentially. The company is focused on deleveraging the balance sheet, with debt increasing modestly in Q1 due to working capital requirements. - The company has a broad portfolio of contract vehicles and is well-positioned for long-term growth with improved budget clarity. Cost scaling initiatives continue, with further indirect spend reductions anticipated.

In the first quarter of Fiscal 2026, DLH Holdings reported revenue of $68.9 million, down from $90.8 million in the prior year period. The decline was mostly due to small business set aside conversions, primarily from CMOP and Head Start, with an approximate $18 million decrease. Adjusted EBITDA was $6.5 million for the quarter, down from $9.9 million in the prior year, but adjusted EBITDA margin improved sequentially to 9.5%. Revenue contraction also included other smaller impacts like unbundling contracts and the wrap-up of a small international project. Free cash flow used was approximately $4.8 million in the quarter, an improvement from the prior year's $12.1 million use.

• Expect to convert approximately 50% to 55% of EBITDA generated during fiscal 2026 to reduce debt by year-end. - Look forward to improvement in operating fundamentals and organic growth initiatives as the year progresses.

• Risks related to government shutdowns and budget uncertainties affecting contract awards. - Delays in contract solicitations and awards impacting revenue. - Competition for contracts, including some work moving to vehicles where DLH was not prime.

Q: Joseph Gomes asked about the $4 million unaccounted for in revenue decline, with Kathryn M. Johnbull responding it was from sundry smaller impacts like unbundling contracts and a completed USAID project. Zachary C. Parker added it was due to unbundling to make work available to small businesses.

A: Kathryn M. Johnbull explained the $4 million was from sundry smaller impacts not related to small business set aside. Zachary C. Parker noted it was from unbundling contracts.

Q: Joseph Gomes asked about bid activity and pipeline, with Zachary C. Parker discussing delays in bid opportunities, impact of canceled CIOS, and focus on MAC IDIQs and GSA schedules. Kathryn M. Johnbull emphasized the importance of budget certainty for pivoting strategies.

A: Zachary C. Parker talked about limited bid opportunities, impact of canceled CIOS, and focus on MAC IDIQs. Kathryn M. Johnbull highlighted budget certainty allowing pivoting.

Q: Burton Osterweis asked about civilian clients and focus on commercial jobs, with Zachary C. Parker discussing federal civilian agencies like NIH and CDC, and potential for commercial work in biotech with partnerships and new resources. Kathryn M. Johnbull noted commercial work is opportunistic.

A: Zachary C. Parker discussed federal civilian agencies and biotech opportunities. Kathryn M. Johnbull said commercial work is opportunistic.

Q: Burton Osterweis asked if government contracts prohibit pursuing civilian contracts, with Zachary C. Parker responding no, but it's a different regulated environment. Kathryn M. Johnbull added it's a different sales model.

A: Zachary C. Parker said no regulatory constraints. Kathryn M. Johnbull noted it's a different sales model.