DLH Holdings Corp (DLHC) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the DLH Holdings Corp. earnings conference call. My name is Esteban, and I will be our operator for today. (Operator Instructions)

I would now like to turn the conference over to your host for today, Michael Goldstein, Counsel to DLH Holdings Corp.

Thank you, Esteban. Good morning, everyone, and thank you for joining us for today's conference call. I am Michael Goldstein, partner with Becker & Poliakoff, LLP, Counsel to DLH Holdings Corp. On the call with me today is Mr. Zachary Parker, the President and Chief Executive Officer of DLH; and Mrs. Kathryn JohnBull, the Chief Financial Officer of DLH.

Before we begin the substance of our call, I'd like to make a few brief introductory comments. Earlier today, the Company posted its earnings release, which outlines the topics that management intends to discuss today. Should you have missed that release, it can also be found on DLH's corporate website at www.dlhcorp.com.

Additionally, as part of today's call we have created a slideshow presentation, which can also be accessed on the DLH website. Go to the investor relations tab towards the right side of the page and click on presentations under the drop-down menu. We are also providing a simultaneous webcast of today's call, and a replay of this conference call will be available later today.

Please note that this conference call may contain forward-looking statements as defined by the federal securities laws. Statements in this conference call regarding DLH Holdings Corp.'s business which are not historical facts are forward-looking statements that involve risks and uncertainties. These statements reflect DLH's current views and are subject to important factors that can cause its actual results to differ materially from anticipated results as a result of various risk factors and uncertainties.

Factors that could cause DLH's actual results to differ materially from those it anticipates are summarized in our earnings release filed earlier this morning and are described in the Company's Securities and Exchange Commission filings. The Company's Safe Harbor statement is also included in this presentation and should be incorporated as part of any transcripts to this call.

DLH expressly disclaims any current intention to update any forecasts, estimates, or other forward-looking statements contained in this call. In addition, the Company's presentation today will include a discussion of non-GAAP financial measures, and these non-GAAP measures should not be considered in isolation or as a substitute for performance measures prepared in accordance with GAAP.

With all that said, it's my pleasure to turn the call over to Mr. Parker, President and Chief Executive Officer of DLH Holdings Corp. Zach?

Thank you, Michael, and good morning and welcome to our shareholders and other interested parties. We appreciate your participation in this conference call and webcast.

I will begin by reminding everyone of the strategy that we have been executing as a company. I think it is important to have that context as we review our results and look to where we are taking the Company in the future.

We are focused first on performance. That applies to both our customers and our shareholders. Secondly, portfolio shaping, as we continue to position and bid work in key mission-critical government market areas that we believe will deliver enhanced value to our customers and our stakeholders.

And third, our organic growth strategy remains highly aligned with our current customers' priorities and challenges. The Department of Veteran Affairs is our largest customer. Of note: during the quarter the President released his proposed FY fiscal 2015 budget for the Department of Veteran Affairs, including a projected 6.5% increase in the budget, including expanded access to healthcare and other benefits. We believe that our expertise in leveraging unique processes, tools, and technology to increase their productivity, quality, and reduce their per-capita costs positions us well to expand our long-term support to the veterans as well as further penetration into adjacent Department of Defense markets.

As Michael indicated, earlier today we posted our second-quarter fiscal 2014 results. We are pleased with our second-quarter results, in which we continued our recent trend of delivering increased revenue, gross profit, and earnings.

Revenue grew 13.4% over prior-year second quarter, delivering our sixth consecutive quarter of revenue growth. Gross profit dollars grew 24.2%, and adjusted EBITDA grew fourfold over the prior-year second quarter. We believe that our results validate our strategy for navigating through a very challenging budgetary environment. We are committed to continuing our efforts to enhance shareholder value through measured growth and quality financial results.

In addition to our substantial improvement in operating results over the past six quarters, we also significantly improved the Company's future business base. The Company closed second quarter fiscal 2014 with a strong backlog of firm orders extending for three to five years, as well as a robust, quality, qualified pipeline of opportunities for potential revenue growth in the future. We believe that the markets we have targeted will enhance our abilities to expand our business base, applying our operational expertise to secure contracts in adjacent markets. As always, we remain focused on long-term growth and improving shareholder value.

With regard to market expansion, we believe that our new business pipeline remains very healthy. Though the continuing federal budget delays and sequestration have slowed the pace of sizable new contract awards, we believe that our capture activity, market differentiation, and positioning of DLH for strategic new business has placed us in an enhanced position to achieve our goals. We believe that these will provide critical new capabilities to our Company's portfolio, consistent with our long-range strategic plan.

In summary, DLH continues to successfully execute its strategy while facing the demanding headwinds and challenges imposed by the budget uncertainties. We continue to maintain a laser focus on providing top-quality services and best practices as we support our nation's high-priority health and logistics services to our veterans and uniformed service members. All of these factors combine to increase our confidence in the long-term prospects of the Company.

And finally, slide number 8 in our posted earnings presentation provides a snapshot of our current state. Having grown to over 1,200 employees distributed across the country, many of which hold specialized credentials, provides us with excellent bandwidth to take on additional work, particularly in the healthcare arena. More importantly, we are extremely proud of the hard work and dedication that we receive from our leadership team and the workforce out in the field. I will discuss this a bit further before we close this morning.

Kathryn will now provide a more detailed discussion of our financial results. Kathryn?

Thank you, Zach, and good morning, everyone. Revenues for the three months ended March 31, 2014 and 2013, were $14.7 million and $13 million, respectively, which represents an increase of $1.7 million or 13.4%.

Revenues for the six months ended March 31, 2014 and 2013, were $29.2 million and $26 million respectively, an increase of $3.2 million or 12.4%. The increase in revenue for the three- and six-month periods is due primarily to new business awarded during 2013 and expansion on current programs.

Gross profit for the three months ended March 31, 2014 and 2013, was $2.2 million and $1.8 million, respectively, which represents an increase of $0.4 million or 24.2%. As a percentage of revenue, gross profit was 14.9% and 13.6% for the three months ended March 31, 2014 and 2013, respectively.

Gross profit for the six months ended March 31, 2014 and 2013, was $4.3 million and $3.6 million, respectively, which represents an increase of $0.7 million or 21.1%. As a percentage of revenue, gross profit was 14.8% and 13.7% for the six months ended March 31, 2014 and 2013, respectively. The gross profit improvement for the three and six month periods, both in dollars and as a percent of revenue, benefited from new business awarded in 2013 and improved contract performance and cost management.

General and administrative expenses, or G&A, primarily relate to functions such as operations overhead, corporate management, legal, finance, accounting, contract administration, human resources, management information systems, and business development. G&A expenses for the three months ended March 31, 2014 and 2013, were $1.9 million and $1.7 million, respectively, an increase of $0.2 million or 12.6%.

The increase was due principally to expenses related to growing our contract base and non-cash stock option expense. As a percent of revenue, G&A expenses were favorable over prior year at 13.2% for the three months ended March 31, 2014, compared to 13.3% for the three months ended in 2013.

G&A expenses for the six months ended March 31, 2014 and 2013, were $4 million and $3.6 million, respectively, an increase of $0.4 million or 10.9%. Non-cash stock options expense was a significant contributor to the increase in G&A expenses, as those costs were $0.3 million and $0.1 million for the six months ended March 31, 2014 and 2013, respectively. As a percent of revenue, G&A expenses were 13.6% and 13.8% for the six months ended March 31, 2014 and 2013, respectively, an improvement of 0.2% over the prior year.

Income from operations for the three months ended March 31, 2014, was approximately $225,000 as compared to income from operations for the three months ended March 31, 2013, of approximately $9,000. Income from operations for the six months ended March 31, 2014, was approximately $291,000 as compared to a loss from operations for the six months ended March 31, 2013, of approximately $84,000. The improvement in income from operations for the three- and six-month period results from improved gross profit, described above.

Other expense in the net was $28,000 for the three months ended March 31, 2014, as compared to other expense of $118,000 for the three months ended March 31, 2013. The reduction in other expenses is due principally to settlement of our convertible debentures and warrants during the first quarter of fiscal 2014, which eliminated the related interest expense and amortization of those equity instruments.

Other income in the net was $39,000 for the six months ended March 31, 2014, as compared to other expense of $153,000 for the six months ended March 31, 2013. The improvement is due principally, again, to a gain recognized on the maturity of the derivative financial instruments associated with our convertible debentures.

Net income for the three months ended March 31, 2014, was $197,000 or $0.02 per basic and diluted share as compared to a net loss of $109,000 or $0.01 per basic and diluted shares for the three months ended March 31, 2013. Net income for the six months ended March 31, 2014, was $330,000 or $0.03 per basic and diluted share as compared to a net loss of $237,000 or $0.03 per basic and diluted share for the six months ended March 31, 2013. This improvement to net income for the three- and six-month periods is, again, due to principally the increased gross profit described earlier.

Adjusted EBITDA for the three months ended March 31, 2014, was $330,000 as compared to $80,000 for the three months ended March 31, 2013. Adjusted EBITDA for the six months ended March 31, 2014, was $638,000 as compared to $109,000 for the six months ended March 31, 2013. The improvement to adjusted EBITDA in the three- and six-month periods is due principally to increased gross profit, as described earlier.

Moving on to our capital structure, year-to-date cash flow from operations increased $258,000 due principally to profitable operations. Ending cash position of $3.1 million at March 31, 2014, was within our plan. Our loan balance at March 31, 2014, was $0.6 million. Our available loan reserves at March 31, 2014, were $1.5 million, comprise of unused loan capacity of $0.5 million and a letter of credit reserve of $1 million.

Our financing options were enhanced during the second quarter. As previously disclosed, in March 2014, the Company entered into a new amendment to our loan agreement in which our lender agreed to reduce the interest rate and certain of their service fees. We believe this amendment reflects the progress we've made to date in establishing a sound business model and delivering profitable returns.

The current term of the loan agreement was extended to July 29, 2015, with automatic renewal on each anniversary date or subsequent 12 month terms, unless terminated by either party. We believe that we have adequate liquidity resources to fund operations and support growth over the next 12 months in view of our existing cash position, our additional funding available, and reduced interest and fees committed by the Company's lender and the forecasted cash flow from operations.

We are pleased to have exceeded our second-quarter profitability objectives. We believe we've implemented an operational model that can sustain this progress and that can scale as the Company grows.

That concludes my discussion of the financial statements. I will now turn it back over to Zach.

Thank you, Kathryn. For those of you looking at the posted earnings presentation, slides 17 through 23 provide some of the highlights of the Company's transformation and the positioning to become a market leader in the highly valued government health and health IT services arena.

Having created a solid infrastructure and credentials including a government-approved accounting system, facility security clearance, and the like, puts the Company in a position to assume a prime position on several bids for which we might otherwise have been relegated to only a small subcontractor position. The evolution of our Board of Directors composition, the executive leadership team, and the addition of our Advisory Board over recent years have paid big dividends in preparing us for the future and shaping our strategy.

I truly believe that ultimate performance is a function of strategy and execution as modified by a team chemistry. And with the final addition of Kathryn JohnBull to my leadership team, our team chemistry quotient has certainly elevated.

Slide number 20 identifies a few key components of our strategy, which includes a laser focus on performance and customer satisfaction, generally measured by the customer indices and independent assessments such as the J.D. Power awards Association. Our continued refinement and investment in market differentiators such as our SPOT-m and e-PRAT tools remain core to our strategy to move up the margin scale in service delivery and in the new markets.

Our current and growing competencies in health and wellness, medical logistics, public health, and pharmaceutical services will continue to serve us well in this journey. I invite all of you to participate on our calls and upcoming investor meetings, as listed in our presentation, as we seek to provide additional color to our strategy and the game plan for achieving greater success and value in the future.

Let me summarize by saying that we remain keenly focused not only on service delivery but delivering value as we navigate through these government waves, both on the top line as well as the margin pressures. While there are many risk factors that we continue to manage, we believe that we have refined our business model to consistently deliver positive adjusted EBITDA and shareholder value.

Our current and adjacent markets remain quite viable and offer substantial profitable growth opportunities and a healthy pipeline for DLH and our partners. Our key strategic initiatives for FY 2014 and beyond remain aligned with delivering the resulting shareholder value.

With that, I would like to turn the call over to our operator, Esteban, to open the call for questions.

(Operator Instructions) Benj Gallander, Contra.

First, I want to congratulate you guys. Zach and Kathryn, you've been doing a wonderful, wonderful job.

Thank you.

Thank you, Benj.

My question is, though -- I mean, it's hard for a company of your size in this industry to really gain traction and have a black bottom line, you know, millions of dollars. And I'm just wondering if it might not be the time, now that you are profitable and the balance sheet is good, to look at strategic alternatives and put the Company up for sale?

Yes. So that is a question, Ben?

Yes, that's a question -- if it's not time to do that.

Well, it certainly is a good question. And we have no immediate designs on putting the Company up for sale. Our commitment is to drive greater value in the current state.

I will tell you that we have quarterly Board of Directors meetings. We address major strategic potential evolutions. Those include adding an acquisitive piece to our long-term growth strategy. We are always entertaining opportunities with our Board of Directors and our executive leadership team for the potential of restructuring. But we have no immediate plans, again, just to restate, for the sale of the Company, nor is it in either of our existing near-term strategies.

Okay. Well, you've done -- I mean, the restructuring seems largely complete, and I guess the key is getting more orders in. But yes, I'd suggest to you and the Board that it might be time, and that might be the best way to achieve shareholder value.

And I do thank you very much for your work. It's been wonderful to watch the progress.

Appreciate your comments there, Ben. And certainly astute observation and recommendations. You bet you.

We have no further questions at this time. I apologize; it looks like we did have a couple queue up just now. Richard Greulich, REG Capital Advisors.

Zach, I wanted to -- let's say, late last year -- I think at that time, you were thinking that the Company might be getting a couple of larger orders sometime in the first half of this year. They never really came -- transpired. Any sense that you're getting closer to that?

Well, you know, we always like to think we are getting closer to it. And then, of course, in the government space where we are, a number of these bids do tend to age. And of course we wish we had greater control over that, but we do still have a fair number of opportunities which we have positioned, that we have submitted bids, and we are awaiting decisions. And we like to think that as the fiscal year nears, as we now -- as you well know -- are in the early stages of Q3 for the government's fiscal, that things will start to move down the pipe.

But yes, we are still in the running and are still very optimistic that we have a solution offering that will yield success. But again, we really wish -- you know, some of these things are now -- some of these programs age 18 months, and it's not uncommon anymore now. So it's a logjam that we are really hoping the federal government can break.

Okay. Well, thanks for your work. Thank you.

Howard Brous, Wunderlich Securities.

First of all, congratulations on your work and the movement towards profitability.

Thank you, Howard.

Thank you. Backlog -- you mentioned the word backlog, but what is the backlog? I didn't see any numbers released.

So we do publish our quantified backlog. We quantify it as part of our annual filings, and we did disclose at the end of September that our backlog was $240 million.

We don't formally update it on the interim quarters, but the point we made at the end of the year is -- it's still applicable now in that the major components of our work have all gone through renewals within the last two years. And we were successful in all of those renewals and increased our market share from somewhere around a 65% of the business process where we were managing for VA and the mail-order pharmacies, and all that work has been recompeted. We were successful.

We are now the sole national provider for that work. And having that under contract with terms remaining of 3 to 5 years, depending on whether they were awarded in 2011 or at the end of 2013, means that we have substantial runway and assurance of our current base of business, so that, to Rich's question earlier, naturally, if you're working, part of your energy is going to protecting your current base. That takes time away from time spent on developing new offerings.

And so having the assurance of that runway for 3 to 5 years provides great ability to reorient our energies even more so. You don't stop doing business development while you recompeting your current base, but obviously it takes cycles, and everybody has 24 hours in one day.

So we are happy to have that work under contract cover for the remaining balance of the original five-year award terms. And those terms are still relatively longish, certainly outside of our annual cycle and the next upcoming annual cycle, so that we can focus on our -- more robustly on our new offerings. Does that help clarify?

Yes. I'll go back to that number -- which leads me to gross margins. I know what they are this quarter. For modeling purposes, what can I look for for the rest of this fiscal year and for the following year?

Well, I'll start. As you probably know, Howard, we do not give guidance, and -- but --.

I know that, but -- but gross margins --?

Yes. We do believe that the trajectories that we are on right now that you've kind of realized in our current book of business has had some modest growth there. And as you kind of hear the undertones of part of what we were talking about the new business that we have in the pipeline, new business potential -- that we've been really leveraging our tools and technologies to move up that margin scale.

And, of course, how much of that we will be able to deliver would be a function of the awards and the ultimate negotiated rate. So those are still to be determined. It would be probably inappropriate for us to try to estimate those. But suffice it to say that we are really pursuing work that generally has the potential for higher margins than our current book.

Well, so can I assume that for the next fiscal year that the total gross margins would probably be greater than this year? Is that a fair assumption?

That is our expectation. So, the -- if you look at the trends of -- yes?

Okay. Okay, I appreciate it. That's all I have.

All right. No other questions queued up at this time.

Well, again, thank you all for participating in today's conference call. Should you have any questions, feel free to contact Kathryn or myself.

We thank you for your interest and your support and look forward to speaking with you again in the coming months as we report our fiscal 2014 third-quarter results. Thank you and good afternoon.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.