DLH Holdings' Q4 2025 Earnings Call: Contradictions on Head Start Protests, Pipeline Delays, CMOP Strategy, and Unbundling Impacts

Date of Call: None provided

Financials Results

• Revenue: $81.2M in Q4, down from $96.4M year-ago (Q4 decline driven by ~ $11M of small-business set-aside conversions, including ~$7.5M from CMOP); FY2025 revenue $344.5M

Guidance:

• Expect to return to historical gross and EBITDA margins through scaling actions implemented in late Q4 and current Q1.
• Anticipate FY2026 debt reduction to convert ~50%–55% of EBITDA to debt paydown; all mandatory term debt paid through Sept 30, 2026.
• Management expects new, mostly margin-accretive awards to begin surfacing in calendar Q1 as proposal activity converts to wins.
• Continuing VA IDIQ pharmacy/logistics work (ordering period through Nov 2026) with task orders already awarded.

Business Commentary:

* Revenue Decline and Small Business Set-Aside Impact: - DLH Holdings Corp. reported revenue of $81.2 million in Q4, a $15.2 million decrease from the prior year period. - The decline was primarily due to the impact of program timing, contract unbundling, government efficiency initiatives, and the conversion of certain programs to small business set-aside contracts, with approximately $11 million attributed to small business set-aside conversions, including CMOP.

• Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) Decrease:
• DLH reported EBITDA of $6.6 million for Q4, down from $10.7 million in the previous year.

• The decrease was primarily due to a lower revenue level and pressure on gross margins, as the company retained investments in key innovation resources to address its growth pipeline.

• Debt Reduction and Strong Cash Flow:

• DLH reduced its debt by $10.7 million in Q4 and ended the fiscal year with $131.6 million of debt outstanding.

• The debt reduction was achieved through strong cash flow generation, which also enabled all mandatory term debt payments to be made through September 30th, 2026, a year ahead of schedule.

• Pipeline and Future Growth Opportunities:

• As of the end of the fiscal year, DLH's pipeline was north of $3 billion, representing qualified opportunities over a 24-plus month period.
• The company is optimistic about growth opportunities in its addressable market, driven by new contract awards and its focus on digital transformation, cybersecurity, and technology-powered applications.
  

  Sentiment Analysis:

  Overall Tone: Neutral

  • Management balanced acknowledgement of Q4 revenue decline ($81.2M vs $96.4M) driven by small-business set-asides with optimistic statements on transformation and growth ('optimistic about the growth opportunities'), highlighted strong cash generation and debt reduction ($10.7M in quarter; year-end debt $131.6M) and a pipeline 'north of $3 billion.'

Q&A:

• Question from Joe Holmes (Noble Capital): Have you protested the Head Start transfer to small business, or is that now just lost?
  Response: DLH did not participate in any protest and is not contesting the Head Start small-business set-aside outcome.

• Question from Joe Holmes (Noble Capital): On CMOP—one location transitioned; when do you expect awards for the remaining locations and is there a possibility DLH would win any remaining solicitations (including as a subcontractor)?
  Response: DLH has removed JV bids and is not bidding as a JV; it has supported small-business partners on some solicitations; remaining decisions are expected over the next quarter or two and DLH has not secured those awards directly.

• Question from Joe Holmes (Noble Capital): When do you think we would see a return to historical growth and EBITDA margins given where we stand today?
  Response: Management expects margins to normalize as scaling measures from late Q4/current Q1 take effect and margin-accretive awards are realized, potentially beginning in calendar Q1, though timing depends on contract types.

• Question from Joe Holmes (Noble Capital): What’s the size of the pipeline today?
  Response: The company reports a pipeline north of $3 billion of qualified opportunities over a 24+ month period.

Contradiction Point 1

Protest of Head Start Program Transfer

It involves the company's stance on protesting the transfer of the Head Start program, which could impact its strategic positioning and revenue expectations.

Did you protest the transfer of the Head Start program to a small business disclosed in the 8-K? If so, what is the current status, and is it still ongoing or considered lost? - Joe Holmes(Noble Capital)

2025Q4: We were not a participant in the protest effort. The Biden administration issued an executive order in 2024 to pursue more small business set-asides, including unbundling contracts such as that one. We hoped the government would change that strategy but it became clear last year that it was their commitment, so we are not participating in protests. - Zach Parker(CEO)

Could you clarify the question that was cut off during the call? - Joe Gomes(NOBLE Capital)

2025Q3: Our anticipated erosion from our previously discussed unbundling and small business set asides from the prior administration is continuing on plan. - Zachary C. Parker(CEO)

Contradiction Point 2

Pipeline Conversion and RFP Flow

It involves the company's expectations regarding the conversion of its pipeline and the flow of Request for Proposals (RFPs), which are critical for revenue forecasting and strategic planning.

What is the current pipeline size? - Joe Holmes(Noble Capital)

2025Q4: We ended the fiscal year with a very strong pipeline of over $3 billion in qualified opportunities over a 24-plus month period. - Zach Parker(CEO)

[Question content was not clearly stated due to a disconnection] - Joe Gomes(NOBLE Capital)

2025Q3: Our pipeline conversion has been slowed, RFP flow over the recent quarter too has been slowed. - Zachary C. Parker(CEO)

Contradiction Point 3

CMOP Contracts and Strategy

It involves the company's strategy and expectations regarding the CMOP contracts, which are significant for revenue and operational planning.

Regarding CMOP, you originally had four contracts. One was completed by the end of November, and two more solicitations are pending. When do you expect the remaining two awards to be made? - Joe Holmes (Noble Capital)

2025Q4: There are three locations remaining, which we will continue to operate as the VA executes their strategy to transition to temporary staffing firms. - Zachary C. Parker(CEO)

What is the revenue run rate for remaining CMOP contracts? - Joseph Gomes (NOBLE Capital)

2025Q2: We're expecting the quarterly run rate to be around $23 million to $25 million for the remaining locations that we expect to extend. - Kathryn M. Johnbull(CFO)

Contradiction Point 4

Small Business Set-Asides and NIH Impact

It pertains to the company's strategic approach and potential impacts of government actions, which can influence revenue and business operations.

Have you filed a protest regarding the Head Start program transfer to small businesses mentioned in the 8-K filing, and if so, what is the current status of that protest? - Joe Holmes (Noble Capital)

2025Q4: We were not a participant in the protest effort. The Biden administration issued an executive order in 2024 to pursue more small business set-asides, including unbundling contracts such as that one. - Zachary C. Parker(CEO)

How far along are we with small business set-asides and the loss of existing acquired small businesses? - Joseph Gomes (NOBLE Capital)

2025Q2: We see the impact of small business set-asides largely running out by early Q4. - Zachary C. Parker(CEO)

Contradiction Point 5

Impact of Unbundling on Revenue

It highlights different explanations for the impact of unbundling on the company's revenue, which is crucial for understanding the company's financial performance.

Have you protested the transfer of the Head Start program to small businesses mentioned in the 8-K filing, and if so, what is the current status of that protest or has it been abandoned? - Joe Holmes (Noble Capital)

2025Q4: We were not a participant in the protest effort. The Biden administration issued an executive order in 2024 to pursue more small business set-asides, including unbundling contracts such as that one. - Zachary C. Parker(CEO)

Can you rank this quarter's revenue drivers by percentage contribution? - Joe Gomes (NOBLE Capital)

2025Q1: The key impact was from the unbundling of a DoD program, affecting low-margin revenue. - Kathryn JohnBull(CFO)