DLH Holdings Corp (DLHC) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2015 DLH Holdings Corp. earnings conference call. My name is Mark and I will be your operator today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to Casey Stegman of Stonegate Capital Partners. Please proceed, Sir.

Thank you, Mark. And good morning, everyone, and thank you for joining us for today's conference call. My name is 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 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 be found on the Investor page of DLH's corporate website, at www.DLHCorp.com.

As a part of today's call, we have provided a slide show presentation that can be accessed on DLH -- 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 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 Corp.'s business, 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 is 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's 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 other interested parties. We appreciate your participation in this conference call and the webcast. I will provide a few brief comments regarding our Q3 performance, and then turn the call over to our CFO, Kathryn JohnBull, and we will then return with some questions and answers.

Earlier today, we posted our third-quarter fiscal year 2015 financial results. We are very pleased with our third-quarter operating performance, as we achieved record levels in our key operating metrics. Third-quarter revenue of $16.8 million was a record high since we began our corporate transformation in 2010, and grew nearly 7% over the prior-year third-quarter. Gross margin of $3 million was also a record high, and improved nearly 32% over the prior year.

Our mix of new business awards and contract -- improved contract performance had generated a gross margin rate of return of 18.1% for the quarter, an improvement of 3.4% over the prior-year third-quarter, and the highest rate of return since our business transformation as well. DLH's income from operations and adjusted EBITDA more than doubled over the prior-year third-quarter, showing sustained growth in profitable operations.

Our strong cash position of nearly $5 million, working capital surplus of $1.6 million, no debt, an asset-backed credit limit of $6 million, and early interest from potential financing partners has positioned us to set our sights on acquiring a strategic business to expand our service offerings, and increase our revenue end market share. That continues to be a part of our long-range strategy.

Our operating results reflect our strategy to expand our business within our key customer base and into adjacent federal markets. Our business capture initiatives include military and veteran requirements for telehealth services, behavioral health services, medication therapy management, health IT solutions, process management, clinical systems support, and healthcare delivery.

A note about our largest customer. DLH continues to see a critical need for expanded care within our sector of the federal government market, and particularly the Department of Veteran Affairs, which recently announced that a number of veterans continue to be on a wait list, and is treated -- and the treatment of 50% higher than at this same time last year. This attributed to a soaring demand from veterans for medical services, brought on by the opening of new centers, and accommodation of aging veteran population seeking care, and the return of younger veterans from Iraq and Afghanistan.

As a result of this rapidly expanding business market, the VA and Congress took measures in late July to redistribute budget allocations to ensure that adequate funding remains to deliver these key services to veterans. While these actions are outside of the programs in which the Company is currently active, they indicate a strong ongoing bipartisan support for the VA health operations. This is an area we see as great -- creates great opportunities for expansion for the Company.

We are also very excited about recent additions to our business development team. We continue to invest in the growth of the business, and that is the key strategic objective of this phase of the Company's transformation. We are expanding upon a network of strong relationships with industry partners, and have added near-term bidding opportunities to our pipeline, and have a very strong qualified pipeline for new business opportunities and signature wins.

We continue to have a strong backlog and a robust pipeline of new business opportunities that we will pursue over the next 18 to 24 months in the selected competencies which include health and wellness, medical logistics, public health, and pharmaceutical services, that will enable us to serve our current and future customers. As I have stated below, these new market opportunities within our pipeline will generally have a different character that will allow us to have greater complexity worth driving higher gross margins.

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 question-and-answer session. Kathryn?

Thank you, Zach, and good morning, everyone. We appreciate your joining us today. Our third-quarter and year-to-date results continued our trend of improving our key metrics, as we delivered growth in revenue, gross margin, income from operations, and adjusted EBITDA compared to the prior-year period.

Detailed financial results for the third quarter ended June 30, 2015 versus the prior-year third-quarter are as follows. Revenue of $16.8 million increased $1.1 million or 6.9% over the prior-year third-quarter, with the increase due principally to new business awarded late in 2014 and expansion on current programs. Gross margin of $3 million increased by $0.7 million or 31.6% over the prior-year third-quarter. As a percentage of revenue, our gross margin rate of 18.1% improved by 3.4% over the prior-year third-quarter.

[Detailed financial] margin results are attributable to improved contract performance and higher margins on new business. G&A expenses, which include general, administrative, operating and business development activities, were $2.3 million, an increase of $0.3 million over the prior-year third-quarter, due principally to planned expenses related to managing and growing our contract base.

As a percent of revenue, G&A expenses were 13.5% of revenue and were within anticipated levels required to manage and grow our contract base. Income from operations was approximately $0.8 million, an increase of $0.5 million or 185% over the prior-year third-quarter, due to improved gross margins, partially offset by increased G&A expenses as described above.

Net income was approximately $0.4 million or $0.05 per basic and $0.04 per diluted share compared to net income of $0.3 million or $0.03 per basic and diluted share in the prior-year period. Improved profit is due principally to higher gross margins, partially offset by additional expenses allocated to grow and manage our business.

Adjusted EBITDA is a non-GAAP measure that represents earnings from operations with noncash items such as tax, stock expense and depreciation added back in. This is a key measurement that our management team and directors use to evaluate the cash contribution attributable to our business operations. Adjusted EBITDA for the third quarter ended June 30 was approximately $0.8 million, an increase of $5.5 million or 125% over the prior-year third-quarter. This increase is due principally to increased revenue and gross margins.

Detailed financial results for the nine months ended June 30 versus the prior-year nine months are as follows. Revenue for the nine months ended June 30 was $48.4 million, an increase of $3.4 million or 7.7% over the prior-year period. This increase is due primarily to small contracts awarded over the past year and expansion on existing contracts.

Gross margin for the nine months ended June 30 was approximately $8.3 million, an increase of $1.7 million or 25.4% over the prior year. As a percentage of revenue, our gross margin rate of 17.2% for the nine months ended June 30 improved by 2.5% over the prior-year period. Favorable margin results are due principally to improved contract performance and higher margins on new business.

G&A expenses for the nine months ended June 30 were approximately $6.7 million, an increase of $0.7 million over the prior-year period, due principally to planned expenses related to managing and growing our contract base. As a percent of revenue, G&A expenses were 13.9% of revenue, an increase of 0.6% over the prior-year period, and were in line with anticipated levels required to manage and grow our contract base.

Income from operations for the nine months ended June 30 was approximately $1.5 million, an increase of $1 million over the prior-year period, was due to improved gross margin and management of discretionary spending. Other expenses of approximately $0.7 million was principally due to the previously disclosed settlement of the retroactive payment plan in March of this year.

Net income for the nine months ended June 30, 2015 was approximately $0.5 million or $0.05 per basic and diluted share, compared to $0.6 million or $0.06 per basic and diluted share in the prior-year period. The reduction in net income and earnings per share was principally due to the settlement of that retroactive payment plan in March 2015. And excluding this noncash nonoperating charge of $0.6 million or $0.4 million after-tax, the nine months ended June 30 generated net income of $0.9 million or $0.09 per basic and diluted share, compared to net income of $0.6 million or $0.06 per basic and diluted share in the prior-year period.

Our improved pro forma net income result is the result of increased revenue, higher gross margins and controls on discretionary spending. Adjusted EBITDA for the nine months ended June 30 was approximately $2 million, an increase of $1 million over the prior-year nine-month period. This increase, again, is due to growth in revenue, higher gross margins and controlled and discretionary spending.

Moving on to the balance sheet. Our working capital surplus of $1.6 million has increased by $0.9 million over the past nine months, and our third-quarter results reflect our trend of improving liquidity. We closed the quarter with $4.7 million in cash and no debt. We expect that this cash in addition to ongoing operating cash flow in our borrowing capacity will provide adequate resources to fund operations and support growth over the next 12 months.

We are pleased with our third-quarter operating results, and we believe that we have implemented an operational model that can sustain this progress and that can scale as the Company grows.

That concludes my discussion of the financials. And with that, I would like to turn the call over to our operator to open the call for questions.

(Operator Instructions). Dan Trang, Stonegate Capital Partners.

Thanks for taking my call. Just wondering about the improvement in the gross margin -- now at 18.1%, if I'm correct? Right?

Right.

That's correct.

Are you going to be able to sustain that gross margin going forward?

Good question. Good morning, Dan. Appreciate your call. And yes, we do have a high degree of confidence that we'll be able to sustain that. As you look at certainly our trend and the trajectory of our gross margins in our earnings presentation online, you'll see that we've had a pretty steady trend to get here.

And those are largely a function of what we consider fundamentals and some impacts -- some substantial impacts of initiatives that we've put into place, most to drive higher margin business and, just as importantly, to manage elements of cost, which, quite frankly, years ago, we just didn't have the tools and the resources to be able to do that. So we feel very confident that this will at least be sustainable.

And that's important. Because, as you well know, we talk a lot about our new business being -- that we are focusing on being a higher complexity of work, which will drive greater margins, gross margins, as well. And that's going to be important for us to deliver the type of value to the shareholders that we have in our pockets.

Kathryn, do you want to add anything to that?

Reinforcing that comment, I do expect that this is a sustainable trend, and it does represent the fruits of the efforts we've put into improving contract performance for our current organic business base, as well as pursuing higher return new work.

Okay. And currently, you guys have no debt on the books. I'm wondering if there is a situation where you may have to add debt? Or is that not in the foreseeable future?

Well, a function -- growth -- with growth sometimes comes some upfront investment costs that we will weigh the nature of that -- of each of those individual opportunities. And then, of course, the acquisitive component of our long-term strategy also has the potential for us. And we will review those on a case-by-case basis.

Kathryn?

Exactly right. Yes. So we do expect that -- the services business in the government space, of course, is extremely cash flow positive, and has very, very favorable payment terms. So generally the outstanding from that are 45 days.

So, in the front end of a contract, it's not so unusual to have a little bit of consumption of cash, but that's a fairly short-term phenomena. And then once you get cash flow going on that, you shouldn't need debt to fund that. But -- and then further, as Zach said, we do have, as part of our long-term strategy, potential acquisitions, strategic acquisitions that would tuck in. And we may require borrowing to finance that.

Okay. Thank you.

You bet. Thank you.

Richard Greulich, REG Capital Advisors.

I wanted to focus -- I mean, I'm always -- I continue to be not amazed, but very pleasantly surprised how you keep improving the profitability of the business without any major increments. You know, just that these are kind of -- you're bumping along, adding $0.5 million here, $0.5 million there. Well, I was surprised at the revenues actually were as strong as they were, because there were no major contract announcements or new ads in that regard.

Yes. No, good question. I'll do it in reverse order. Let me talk on the revenue side. Yes, that topline is a function of -- as we've talked a lot this year, and as you've probably seen from our peer and benchmark companies, the government has still been really quite slow with a lot of awards for new contracts. And I am going to talk a little bit about new contract shortly.

And so we have had an increased focus for this year in order to continue to drive some positive performance and create new opportunities for growth, to really look at expanding on some of our existing contracts. We refer to this frequently as on-contract growth. And we've had some good growth there as well.

A good part of those we're really focusing on some of our newer business that we'd won and reported over the course of the last year, year and a half, and helping customers to find added solutions that would net out as growth for us, both on the top line and a bit on the bottom line. So we are going to continue to do that without taking our eye off of really the major contract awards. We just really felt that we're going to need to continue to have positive growth despite some of the delays in the new contract awards.

With regard to the overall profitability, you want to talk about that, Kathryn?

Right. So that is, as we've talked on, on a few occasions and a few calls before, I mean, we do have a organic book of business that we are very -- of course, very long tenure with. But -- yes, and we have them operating smoothly, and they do deliver a certain level of returns. But there are always opportunities to both continue to improve your performance of costs there. There are a number of our costs, as we've talked about before, are fairly fixed, because some of these positions are subject to service contract acting if labor costs are prescribed.

But there are still some degree of variable costs. If you are actively managing, you can continue to deliver improvements in, if you're seeing some of that show up, as well as the expansion, as Zach mentioned earlier, some of the opportunities for expansion are more value-added services.

And so we've talked about how, from our perspective, we do, of course, endeavor to show our customer the value proposition and what we contribute, and how we improve their operations, and how we develop productivity gains for them. And then what we might be able to do in terms of expanding our reach for them. And naturally, the way we attempted to expand our reach is in the higher return areas of the programs, where we think we have better ability to differentiate ourselves and more opportunities to deliver value to the customer. So that's showing up in the numbers.

Thank you for your comments, and thank you for your good work.

Thank you, Richard.

Thank you.

Howard Brous, Wunderlich Securities.

Zach, Kathryn, congratulations on another good quarter. I keep sitting here and keep being amazed at the continuation. I have basically two questions. One, you started out in the -- with the question of delays and new contract awards. And I must apologize -- I wasn't on the whole call, so I don't know what was said earlier. Can you talk about that -- delays in new contract awards?

Sure. And I'll use the opportunity to add another bit of information as well. So, we didn't elaborate on the delays in the government new contract awards. But this year has been another year where -- and particularly in the Department of Defense and the Department of Veteran Affairs, there has continued to be a lag of a lot of contracts being awarded.

A number of these contracts amongst our peer companies and several that we had bid in the course of the last year, year and a half, just have not -- the government has not made a decision on the awards, which means they've also not obligated the funding for these. Some of these contracts are new work, and others are recurring work with existing incumbents.

And so what we have seen is a pattern of extending the incumbent contracts until the contracts and acquisition community can make the decisions on awards of contracts. So we've seen a fair amount of that, that we've talked in some prior quarters about a few of the bids that we've had in place that have aged now in excess of 15 months. And that kind of continues from those key awards would have -- we are still hoping will drive some of the relatively near-term growth.

The -- but the other news I'd like to share is relatively hot off the press. And subsequent to the quarter and in just the recent week, we have just been notified of a new contract award that we are part of that was recently notified as a -- announced as a multiple award contract that will be Indefinite Delivery, Indefinite Quantity -- the term we use, IDIQ -- for the United States Army's Medical Material Development Activity. We refer to them as USAMMDA.

It's a very large ceiling contract over 10 years. It's what many of us refer to as kind of a hunting license. There's no direct funded programs for us as -- upon award, but it will create an opportunity for four companies, four teams to compete for task orders in the near future. We will be providing more color on that. It's relatively hot off the press. We are still in discussion with our teaming partners to solidify our approach to pursuing these task orders. So there will be more there.

But we are very, very pleased and excited about this. As you may recall, a little -- about two years ago, we won a contract with USAMMA, where we were doing the research and development, and some test and evaluation of joint medical devices to be used in theater. It is some of the higher margin work that we've added in-house today. And so we think this will complement -- we are hoping that this will complement that same composition type of work. And we expect that to help on both the top and the bottom line in the future.

But we'll have more on that. And we are hoping that that, of course, Howard, will be a trend that the government frequently will try to make awards in the end of the fiscal year, so that they can have the ability to obligate funds. If not this fiscal year, they will be well--prepared to start next fiscal year with some contract vehicles to make task order awards.

So, congratulations. Things certainly are in order. You talked earlier about business opportunities in the next 18 to 24 months. Can I assume that those business opportunities would contain similar gross margins as exists in the base business or greater, should they happen?

Good question. As we grow that pipeline -- and we will be giving, at the end of the year, our usual quantitative description of our pipeline. But our objective, as Kathryn mentioned a little bit earlier, is to ensure that the majority of our new business pipeline is a character of work that is higher-margin gross margin than our current book of business. So we expect that to move north of where we are delivering today.

The nature of that work, much like the work that we just described with this new contract, will be back into the higher professional level and more complex type work that generally, when you add value in the best value environment with clients like this, as opposed to the lowest bidder, we are generally able to see better margins come out of that. So we expect it to be higher rather than straight-lined.

Last question which I want to pose. As a shareholder, what can I wish for, say, in two years from now, three years from now, that the Company will achieve certain goals?

Very good question. I'm going to give you a very high level one, but let me introduce that with also some additional news that we are posting on our website. Next month, Kathryn and I will be participating in the Ideas Investor Conference in Chicago. It's one that generally is targeted for small caps.

And at that meeting, one of the things we're going to disclose is a little greater -- quite a bit more color around our growth plan. And that growth game plan in and of itself will address, certainly organically, where we see ourselves differentiating, what types of expectations we can see in the 18 to 36-month window.

I can tell you that we have recently completed some long-range forecasts as to what we think the art of the possible will look like, and with the combination of sustainable organic growth around our pipeline, with the type of tuck-in acquisitions that have various characteristics over the course of the next 36 to 48 months. And that will probably be a good opportunity for us to get into greater disclosure while we are still in this phase of, of course, of not providing guidance.

Kathryn, do you want add anything to that?

Well, I think that's entirely consistent with where we are headed. And we are working with -- but Stonegate is assisting us in that, that development of greater granularity and greater vision on where we are headed, and more specificity there. And the Ideas Conference is -- just in case you're interested in checking it out -- is the last week of August. So August has snuck up on us already. It's August 25th through 27th. We are presenting on the 26th.

I'll keep that in mind. And you know we have a client up there.

Yes, indeed.

Oh, yes. We will be posting -- you know, Becker & Poliakoff generally runs a quick review of our public disclosures. It is our intent to make everything public, coincident with the conference --

Right.

-- so that you will have the same information that we will furnish with those folks as well.

Zach, Kathryn, again, congratulations. Great job, really.

Good to hear from you, Howard.

My pleasure. Thank you.

(Operator Instructions). I would now like to hand the call back over to Zach for closing remarks.

Well, thank you, Mark. And thank you all again for participating in today's conference call. Should you have any additional questions, please feel free to contact myself or Kathryn. We thank you for your interest and support, and look forward to talking with you again in December as we report the fourth-quarter and our fiscal year 2015 results.

Thank you, and have a blessed day.

Thank you very much. This concludes today's conference call. Thank you for your participation. You may now disconnect. Have a great day.