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DLH(DLHC) - 2026 Q1 - Earnings Call Transcript

2026-02-10 16:02

Financial Data and Key Metrics Changes - Revenue for the first quarter was reported at $68.9 million, down from $90.8 million in the prior year, primarily due to the conversion of certain programs to small business set-aside contracts, resulting in an approximate $18 million decrease [11][12] - Adjusted EBITDA for the quarter was $6.5 million, compared to $9.9 million in the prior year, with an adjusted EBITDA margin improving sequentially to 9.5% [12][14] - Free cash flow usage was approximately $4.8 million during the quarter, a significant improvement from $12.1 million in the previous year [13] Business Line Data and Key Metrics Changes - The revenue contraction was largely attributed to small business set-aside conversions, particularly from the CMOP and Head Start programs [11] - The company is focused on expanding efficiencies and margins while managing indirect costs, which are expected to improve in the second quarter [12][30] Market Data and Key Metrics Changes - The company noted improved demand across core markets, particularly in defense and intelligence, with a focus on rapid delivery, cost efficiency, and digital modernization [5][8] - Federal health agencies received funding increases compared to fiscal 2025 levels, which is expected to positively impact the company's addressable markets [4][8] Company Strategy and Development Direction - The company is committed to three strategic pillars: digital transformation and cybersecurity, science, research and development, and systems engineering and integration [8] - There is a focus on leveraging technology and innovative tools to enhance productivity and competitive positioning [6][9] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in exiting fiscal 2026 in a stronger position, supported by improved budget clarity and a healthy addressable market [10][15] - The management team emphasized the importance of agility and responsiveness to compete effectively in the evolving market landscape [58][60] Other Important Information - The company is actively working on deleveraging its balance sheet, with debt increasing to $136.6 million during the quarter, but remains compliant with financial covenants [14][15] - The management highlighted the importance of maintaining a competitive indirect cost profile to support organic growth [28] Q&A Session Summary Question: What accounted for the remaining $4 million in revenue decline? - The decline was attributed to smaller impacts from DOGE initiatives and the completion of a USAID project [19][21] Question: Update on CMOP contracts and transition timing? - The company expects a complete wrap-up of CMOP work by Q3 of the current fiscal year, with improved transition processes in place [25] Question: Insights on cost reductions and their impact? - Cost reductions are reflected in Q1 results, and the company is scaling costs in line with the volume changes from CMOP [30][31] Question: Market opportunities and bidding activity? - The company has seen limited bid opportunities due to budget uncertainty but anticipates more stability moving forward [36][40] Question: Focus on civilian clients and commercial opportunities? - The company works with federal civilian agencies and is exploring more commercial opportunities, particularly in biotech [50][51]