DLH Holdings Corp (DLHC) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the DLH second-quarter earnings conference call. My name is Candace and I will be the operator for today. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today Mr. Casey Stegman with Investor Relations. Please proceed, sir.

Thank you, Candace, and good morning, everyone, thank you for joining us on today's conference call. I am Casey Stegman of Stonegate Capital Partners, Investor Relations Advisor to DLH Holdings Corp. On the call with me today is Zach Parker, President and Chief Executive Officer of DLH, and Kathryn JohnBull, Chief Financial Officer of DLH.

Earlier this week the Company posted its earnings release which outlines the topics that management intends to discuss today. Should you have missed that release it can be found on the Investors page of DLH's corporate website at www.dlhcorp.com.

As a part of today's call we have provided a slideshow presentation that can be accessed on the DLH website. Go to the Investor Relations tab toward the right side of the page and click the presentations under the drop-down menu. We are also providing a simultaneous webcast of today's call with a replay available later today on our website.

Please note that this conference call may contain forward-looking statements as defined by the federal securities laws. Statements in this call regarding DLH Holding Corp.'s business, which are not historical facts, are forward-looking statements that involve risks and uncertainties.

While these statements reflect DLH's current views and outlook, they are subject to factors that could cause its future results to differ materially. These risks and uncertainties are discussed in detail in our documents filed with the SEC, specifically the most recent reports on Form 10-Q and 10-K.

On today's call we will be referencing both GAAP and non-GAAP financial measures. A reconciliation of our non-GAAP results to our reported GAAP results included in our earnings release and in the investor presentation on DLH's website. All comparisons throughout this call will be on a year-over-year basis unless stated otherwise.

With that said, it is my pleasure to turn the call over to Zach Parker, President and Chief Executive Officer of DLH. Zach.

Thank you, Casey. Good morning and welcome to our shareholders and interested parties. We appreciate your participation in this conference call and webcast. As Casey indicated, earlier this week we posted our second-quarter fiscal year 2016 financial results.

As many of you may know, two weeks ago Kathryn and I reported on our acquisition of Danya International. Today's reported financials will only represent the results of our heritage Company.

We are pleased to report another quarter of continued growth in revenue and operating margins over the prior year's second quarter, as well as cash generations from profitable operations. We have improved our gross margins by 18.1% through a combination of effective management controls of our programs, technology enablers, process improvements and specified cost controls. Kathryn will expand upon our financial results later in the call.

While we continue to focus on executing our core business and growing the Company organically, we have moved forward with a strategic plan to accelerate growth through the acquisition of Danya International, which we completed earlier in May.

We are very excited about this transaction and believe that Danya represents the perfect complement to DLH's culture, services and solutions. We believe this combination significantly enhances our abilities, capabilities and enables us to achieve multiple objectives of our strategic growth plan which we have been describing over the recent years.

Moreover, we expect to leverage our combined experience in mission-critical federal programs to focus on expanding within the federal health IT market.

Danya's capabilities include managing, monitoring and supporting large-scale health, human services and technology programs across the continuum of care and case management. We are particularly pleased to have brought on board a strong federal IT system integration, migration and management capability.

Danya's monitoring and evaluation services to the Department of Health and Human Services are critical to ensuring that education, health, social standards and other key domains are achieved through school readiness for the underserved community, particularly children and families.

As you already know, DLH provides proven cost-effective, quality professional services and solutions within the growing federal healthcare and medical logistics market.

Our market focus is service members' and veterans' requirements for telehealth, pharmaceuticals, behavioral health, medication therapy management, process management and healthcare delivery. This has included the expansion of DOD's research development, test and evaluation of medical devices to be deployed in combat theaters in support of our service members in our support to USAMMA.

DLH's flagship contracts support all seven of the Department of Veteran Affairs consolidated mail, outpatient, fulfillment and distribution centers. This provides mission-critical services that ensure that our nation's veterans receive prescriptions in a timely and accurate manner.

During the second quarter, DLH Solutions was notified that its prime teaming partners were awarded seats on the Department of Veterans Affairs' technology next-generation multiple award IDIQ contracts.

We believe that Danya complements DLH services with significant operational synergies that we expect will serve the existing customer base as long as -- the expansion of the business base to additional government agencies.

This will include the [T4] next-generation customer, future task order pursuits in [that] domain and key strategic focus areas which will include: medication adherence and medication therapy management solutions; telehealth research and service offerings to the Department of Defense and federal civilian agencies; health IT and information system solutions and services; and case management system solutions and services as well.

Together we believe the two companies are better positioned to execute on their respective programs and missions going forward and are also able to leverage their combined capabilities to target larger opportunities that would not have previously been available to either company as a standalone entity.

DLH continues to see the critical need for expanded healthcare solutions within our sectors of the federal health market, with funding in both the Department of Veterans Affairs and Health and Human Services increasing significantly over the past few years, and planned increases for the years ahead.

Given our combined strong backlog of long-term federal contracts, the recurring and core nature of the work which we do, our history of successful re-competes coupled with some of our new technology enabled performance differentiators, leads us to believe that the foundation for our business is solid and well positioned for growth. And we are looking forward to 2016 being a transformational year for DLH Holdings.

I would now like to turn the call over to our Chief Financial Officer, Kathryn JohnBull, who will provide a more detailed discussion of our financial results, after which we will begin our Q&A session. Katherine.

Thank you, Zach, and good morning, everyone. Just a reminder that the results we are reporting today are pre-acquisition as the Danya transaction closed on May 3.

We are pleased with our earnings and financial position we are reporting to you today. Our second-quarter results continue our trend of improving our key metrics as we deliver growth in revenue, gross margin and adjusted EBITDA compared to the prior year quarter.

We believe that our business base is solid and performing well. Operating margins continued to improve over the prior year period with adjusted EBITDA increasing by 19.2% over the prior year's second quarter.

We continue to generate strong operating cash flow ending second quarter 2016 with a net cash position of approximately $6.9 million and working capital surplus of approximately $5.3 million.

Our strong cash position contributed approximately $5 million to finance our acquisition of Danya International earlier this month, allowing us to obtain financing at very competitive interest rates.

Turning to the results of operations for the three months ended March 31, revenues for the three months were $16.9 million, an increase of $1 million or 6.6% over the prior year quarter. The increase in revenue is due primarily to expansion on existing contract vehicles resulting from program management and customer satisfaction with our services.

Gross margin for the three months ended March 31 was approximately $3.2 million, an increase of $0.5 million or 18.1% over the prior year quarter on higher revenue and improved performance on contracts.

As a percentage of revenue first-quarter gross margin of 19% increased by 1.8% over the prior year quarter. Favorable gross margin results are due principally to increased contribution from more complex contracts and effective assignment of staff to deliver strong contract performance, with emphasis on improving productivity through application of our DLH differentiators. We continue to focus on internal measures to control costs and improve our gross margins.

G&A expenses primarily relate to function such as operations overhead, corporate management, legal, finance, accounting, contract administration, human resources and business development. For the three months ended March 31, G&A expenses were approximately $2.5 million, an increase of $0.3 million or 14.4% over the prior year quarter.

As a percentage of revenue G&A expenses were approximately 14.8%, an increase of approximately 1% over the prior year quarter. The increase in expenses was due principally to additional program and operational resources to manage and grow our business and increased business development to pursue and capture new business opportunities.

Income from operations for the three months ended March 31 was approximately $0.7 million, an increase of $0.2 million or 33.8% over the prior year quarter. The improvement is due to increased gross margin of $0.5 million partially offset by $0.3 million of additional G&A expenses.

Other expenses net for the current fiscal year includes non-operational expenses related to the acquisition of Danya that closed on May 3. Prior year other expenses net included interest expense and a one-time charge related to the settlement of the retroactive payment claim in March of 2015.

For the three months ended March 31, 2016, other expense was approximately $0.1 million, a reduction of $0.5 million over the prior year which included that retroactive payment claim settlement.

Income before taxes for the three months ended was approximately $0.6 million attributable to $0.7 million from operations partially offset by $0.1 million other expenses described earlier. This represents an improvement of approximately $0.7 million over the prior year quarter, which was impacted by that March 2015 settlement.

Net income for the three months ended March 31, 2016 was approximately $0.3 million or $0.04 per basic and $0.03 per diluted share compared to net loss of $0.1 million or $0.01 per basic and diluted share in the prior year quarter.

Net income improvement of $0.4 million or $0.05 per basic and $0.04 per diluted share was due principally to the increased results of operations and a reduction in the non-operational other expenses.

Results of operations for the six months ended March 31 follow. Revenue for the six months was $33.5 million, an increase of $1.9 million or 6.1% over the prior year, due principally to expansion on existing contracts resulting from program management and customer satisfaction with our current services.

Gross margin for the six months was approximately $6.1 million, an increase of $0.9 million or 16.7% over the prior year period. As a percent of revenue our gross margin rate of 18.3% increased by 1.6% over the prior year six-month period.

Favorable gross margin results are due to increased contribution for more complex contracts and an emphasis on improving productivity through the application of our differentiators.

G&A expenses primarily relate to the administrative functions of running the business and for the six months ended March 31, 2016 were approximately $5 million, an increase of $0.6 million over the prior year period.

As a percent of revenue G&A expenses were 15%, an increase of approximately $0.9 million over the prior year period due principally to additional program management resources to manage our business and increased business development resources.

Income from operations for the six months ended March 31 was approximately $1.1 million, an increase of $0.3 million over the prior year period due to improved gross margins partially offset by increased G&A expenses.

Other income net for the current six-month period includes the acquisition-related expenses for the Danya transaction -- and compared to prior year expenses which included the interest expense and that one-time charge related to the retroactive payment claim.

For the six months ended March 31 other expense net was approximately $0.7 million, essentially even with the prior year period, which included that settlement claim.

Income before taxes for the six months ended March 31, was approximately $0.4 million, an improvement of $0.3 million over the prior year period attributable to increased income from operations.

Net income for the six-month period ended March 31 was approximately $0.2 million, or $0.02 per basic and diluted share, compared to prior year net income of $0.1 million or $0.01 per basic and diluted share. The improvement was due principally to $0.3 million increased income from operations partially offset by an increased tax provision.

Turning to the non-GAAP financial measures, we use adjusted EBITDA as a supplemental non-GAAP measure of our performance and we define adjusted EBITDA as net income adjusted to exclude interest, taxes, depreciation and amortization. And further adjusted to exclude other expenses including acquisition expenses, which we exclude because they tend to vary significantly based on the timing of proposed transactions, and they do not relate to the ongoing operation of the business base.

We further exclude non-cash equity expense. We believe that these two adjustments allow for better comparability of results from period to period and a better understanding of the health of the underlying business operations.

So on a non-GAAP basis adjusted EBITDA for the three months ended March 31, 2016 was approximately $0.7 million, an improvement of $0.1 million or 19.2% over the prior year three-month period. Growth is attributable to increased revenue and gross margin as previously described.

Diluted earnings per share on adjusted EBITDA was $0.07 compared to $0.06 per share in the prior year three-month period. Adjusted EBITDA for the six months ended March 31 was approximately $1.5 million, an improvement of approximately $0.3 million or 25% over the prior year period. This increase is due principally to increased revenue and gross margin as previously described.

Diluted earnings per share on adjusted EBITDA was $0.14 per share for the six month period compared to $0.12 per share in the prior year six-month period. Overall we are pleased with our second-quarter operating results and we believe we have implemented an operational model that will sustain our progress and allow us to continue to scale as the Company grows.

That concludes my discussion of the financial statements. And with that I would now like to turn the call back over to our operator to open it for Q&A.

(Operator Instructions). Laura Engel, Stonegate Capital.

Great results. I had two questions related to Danya. Last call when you all were introducing the acquisition you mentioned some cost synergies and gave a number in your pro forma. I wondered if you could just review I guess the high level nature of those synergies and now a couple weeks later if that is still a good number and if you expect additional synergies once the combination is further along.

The majority of our synergies of course are a result of combined capabilities for growing the business, there is some new development resources we're repositioning to grow the business. There is always going to be some savings as a result of, as you well know, common -- dual infrastructures.

And we have become a team already that is being orchestrated largely by [Fred Vago] and Kevin Wilson to take a look today at our respective infrastructures. Through our earlier due diligence we did realize that there would be some synergies there. Some of those will be in -- largely in the financial systems side of the business where we do believe that we will be able to sunset some of our legacy systems.

There are probably three or four areas in the IT arena that we also expect some relatively early results as well. So, we have just begun that integration effort what, I guess, Kathryn, formally last week?

Right.

But we do remain pretty much on schedule with the plan.

We think that is a good number (multiple speakers).

Okay. And then having had a little bit more time to look into Danya and the background information available, it looks like they cover many sectors and even historically have had some commercial customers.

Do you see the focus of your business remaining strictly on government focused in this healthcare and human services? Or do you see this as an opportunity to maybe beyond -- expand beyond that customer base?

We see a huge addressable market for us staying within our lanes of the federal government space right now. We do believe the addressable side of several domains within the monitoring, evaluation capability arena, the IT and health IT information systems migration arena as something that is a very ripe targeted market for us where we can continue to grow and keep our resources, our business development resources aligned in that market space.

Now that does not preclude us from having occasional commercial opportunity that may be very synergistically linked to a federal space. But we still see a very, very strong addressable market for us within the federal domain.

Great. Well, I appreciate it. Again, great quarter and I will get back in the queue.

(Operator Instructions). [Howard Drose], Wunderlich.

It's [Howard Brouse], but that is okay. Again, Zach, Kathryn, congratulations on the acquisition. And a follow-up to the first question about synergies. SG&A as a percentage of sales on a going forward basis looking at 2017-2018, what number could one look at SG&A as a percentage of sales rather than going down specifically to what items?

Thanks for that question, Howard, it is great to hear from you again.

This is not a softy question.

(Laughter) I am going to live to regret that, right.

No you're not, no you're not.

So SG&A expenses from our perspective, both companies operate in a very lean fashion. And so, while we do expect to achieve scale from combining the two enterprises, from our perspective really the best opportunity for the enterprise is to reinvest that savings in growing the business.

Because I think both companies have tremendous opportunities to really expand their reach in the federal health IT market, but of course that takes some business development resources.

So I wouldn't be expecting as a percent of revenue that we are going to get much leaner than where we have traditionally been. We will get some benefits from scale. And then as the Company grows that will nudge down, similar to what you saw in some of our earlier presentations back in the [ideas] conference context.

But in the short run, we think that there needs to be some particular emphasis on growing the business and reinvesting any resources that we economize on by leveraging the Company in the realm of business development.

I was going to refer to August of last year, you knew that was coming.

Right. Right, right.

In your Q, unbilled receivables September over March, is up about $300,000. Anything to point out about that issue?

It is really just as quirky as it is a function of how the month end cuts and what that means in terms of where we are in our billing cycles. All of those turn very quickly and we don't, in the legacy business particularly, carry any kind of [retaineges] or amounts that are not -- are able to be converted to cash at any short timeframe.

Okay, that is what I had. Thank you very much.

You bet. Hey, Howard, this is Zach I wanted just to add one other thing. With regard to your very astute question and focus on the SG&A as a percentage of revenue, we do monitor that for a number of internal reasons as well.

To be cost competitive in the markets in which we are pursuing, we are very sensitive to that as a key metric which addresses our competitiveness. We look very closely at our peers and benchmark companies and the various markets in which they [perceive].

So, we will continue to place great focus on keeping ourselves competitive, leveraging as much as we can on our differentiators to increase our effectiveness and efficiencies so that we can very favorably compete on price and cost in that arena as well.

Absolutely.

Great, again congratulations and thanks. Great quarter.

Thank you. And I am showing no further questions at this time. I'd like to turn the conference back over to Mr. Parker for any further remarks.

Well, thank you and we again appreciate everyone's interest in our continuing performance as we conclude our second quarter and move into our third-quarter fiscal 2016. We look forward to welcoming everyone to our next call. And please, if you have any questions during this period feel free to contact either Kathryn or myself. With that we are adjourned.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Have a great day, everyone.