DLHC

Good day, and welcome to the DLH Holdings Fiscal 2026 second quarter earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Chris Witty, investor relations advisor. Please go ahead, Chris.

Thank you. Good morning, everyone. On the call with me today is Zach Parker, President and Chief Executive Officer, and Kathryn JohnBull, Chief Financial Officer. The company's earnings release and PowerPoint presentation are available on our website under the investor page. I would now like to provide a brief safe harbor statement, which is also shown on slide three of the presentation. This call may include forward-looking statements that relate to the company's outlook for fiscal 2026 and beyond. These statements are subject to various risks and uncertainties, which could cause actual results and events to differ materially from such statements. Please refer to the risk factors contained in the company's annual report on Form 10-K and in our other filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statements.

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. President and CEO Zach Parker will speak next, followed by CFO Kathryn JohnBull, after which we'll open it up for questions. With that, I'd now like to turn the call over to Zach. Please go ahead, Zach.

Thank you, Chris, and good morning, everyone. Welcome to our second quarter conference call. I am pleased for the opportunity to report our financial results and provide color regarding the current environment and our outlook. As I begin, I would like to recognize the performance of our highly skilled workforce. Our people are our number one asset as a company, and we lean on the passion, creativity, and expertise of our staff in order to succeed. This past quarter, you once again demonstrated the innovative thinking required to support our customers' critical missions and delivered excellence across the way. We continue to thank everyone at DLH for this execution. Now, turning to slide four, I'll provide an overview of the federal marketplace achievements and financial performance. The fiscal 2026 budget cycle is now complete, and the 2027 outlook is coming into focus.

We believe that the current federal funding environment is favorable to DLH. Clients across our markets have increased funding capacity and improved budget visibility, allowing for a steadily improving procurement environment. Key federal health agencies received FY 2026 funding increases compared to the FY 2025 levels, reversing in part the previously proposed funding reductions outlined by the president's request for fiscal 2026. Agencies in the defense and intelligence market have received significant budget increases that align particularly well with our capabilities. These are supported on both sides of the aisle, and we expect to be a healthy profile for us in the years to come. We believe that the improved clarity and stability, which has emerged in the recent months, meaningfully expands the company's addressable market and supports the company's strategic organic growth initiatives.

Last year, and throughout the shutdown in our FY fiscal year Q1, budget uncertainty and large reductions to the federal agency contracting departments significantly slowed procurement activity across the government. Such, numerous key deals and strategic large procurements that we were expecting in FY 2025 are just now coming up for bid. We are encouraged by the increase in bidding activities and are experiencing a busy second half of the fiscal year responding to procurement requests. We expect certain award decisions over the coming months, subject to customer timelines and the procurement processes. DLH continues to maintain a healthy pipeline of opportunities which will leverage our world-class workforce, our advanced capabilities, and our recently developed commercial technology differentiators to elevate our win probabilities in this pipeline.

Notably, the President's recently released fiscal 2027 budget request calls for historic spending increases in the defense and intelligence sector. The administration proposes that this investment be partially offset by unspecified reductions in federal health spending. As always, the President's budget request is an initial step in the multi-phase federal budget cycle. We will remain engaged with the Hill, our customers, and influential industry groups as this process advances. Additionally, the current administration has taken several actions intended to simplify contracting and to accelerate the time required to complete transactions. We find this is very healthy for our industry.

In addition to non-traditional contract arrangements that we discussed at our recent shareholder meeting. There have been executive orders to streamline the regulatory environment in contracting and to rebalance the risk-reward trade-off, moving away from some of their cost reimbursement contracts to fixed price arrangements with performance metrics. The changes align very well with DLH's strategy and our heritage. We welcome this needed shift by our government. Our defense and intelligence customers continue to prioritize prototyping, rapid delivery, cost efficiency, digital modernization, and the integration of advanced technologies, particularly as they relate to health and C4ISR systems. These align very well with our DLH Cyclone and DLH Nexus Labs, digital sandbox investments that are cloud secure. In parallel, federal health agencies remain focused on interoperability, cybersecurity, including zero trust architectures, cloud migration, and AI adoption.

Collectively, these priorities position DLH very strong to grow organically from these initiatives. It is always gratifying when DLH innovation and performance excellence is acknowledged by our industry. In recent months, DLH supported projects in automation, artificial intelligence, scientific research, data science, and information technology were recognized by customer and industry organizations for outstanding program performance and significant technology achievements. We are proud of these accomplishments as they illustrate the thought leadership, ingenuity, and passion of our employees in advancing the missions of our customers. While revenue was down year-over-year, largely due to the previously discussed program transitions to small business set-aside contracts, these include the VA CMOP and Head Start, we remain committed to maximizing shareholder value. Through strong project management delivered margins and implemented cost-scaling initiatives, we delivered an adjusted EBITDA margin of 9.0%.

As Kathryn will discuss in more detail shortly, we continue to de-lever our commitment to the balance sheet. Total debt was reduced to $132.7 million, aligned with our debt reduction plans for FY 2026. In late-breaking news, we were awarded a two-year sole source extension of one of our contracts to provide world-class clinical research support services to the National Institutes of Health. We truly appreciate the opportunity to continue this tremendous support in this critical public health mission that has been a primary focus area for DLH for decades. Overall, we remain well-positioned to succeed over the coming years and are excited to vie for the high-value organic growth opportunities that our company was assembled to compete for.

Our differentiated suite of data science and AI/ML technology applications, our outstanding capabilities, and workforce aligns exceptionally well to position us for work within our three strategic pillars: science, research, and development, digital transformation and cybersecurity, and systems engineering and integration. As government acquisition strategies evolve, we remain prepared and proactive, leveraging speed, innovation, and agility to compete on multiple fronts in an accelerated acquisition landscape. With that, I'd now like to turn the call over to our Chief Financial Officer, Kathryn JohnBull. Kathryn?

Thank you, Zach, and good morning, everyone. Thanks for joining our reporting on our second quarter results for fiscal 2026. Turning to slide six, I'd like to first provide a high-level overview of some key financial metrics for the three months ended March 31, 2026. We reported revenue of $59.3 million in the second quarter versus $89.2 million in the prior year period, reflecting contributions from expansion on existing contracts offset by the impact of conversion of certain programs to small business set-aside contracts, as discussed in the past, and certain government efficiency initiatives. In total, the revenue contraction was mostly due to small business set-aside initiatives, primarily from CMOP and Head Start, with approximately a $24 million increase in the quarter-over-quarter results. The remaining change was due to year-over-year contract completions and government efficiency initiatives.

We reported adjusted EBITDA of $5.3 million for the quarter, compared to $9.4 million in the prior year period, with the decrease primarily driven by the change in revenue volumes. Adjusted EBITDA margin was 9% for the quarter, adjusting for the timing and incremental cost impact of our cost-scaling initiatives implemented in the second quarter. From a free cash flow standpoint, we generated approximately $3.8 million during the quarter. In comparison to the prior year period, the prior year reflects the results of significant working capital build stemming from the transition of a CMOP location that restricted cash collections early in fiscal 2025. Now turning to slide seven. I'll wrap up with a summary of our debt reduction efforts, which remain a key focus area for DLH.

Debt reduced during the quarter to $132.7 million, a reduction from $136.6 million at the end of the previous quarter. This marks the resumption of our deleveraging trend after the typical seasonal uptick we experienced in the first quarter. We expect to convert approximately 50%-55% of EBITDA generated during FY 2026 to reduce debt by year-end. We remain well ahead of our mandatory repayment schedule and in full compliance with all financial covenants. With that, I would now like to turn the call over to our operator to open up for questions.

We will now begin the question-and-answer session. To ask a question you may press star then one on your telephone keypad. If you're using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question please press star then two. At this time, we will pause momentarily to assemble our roster Our first question comes from Joe Gomes with Noble Capital.

Good morning.

Good morning, Joe.

Hey, good morning, Joe.

I just want to start out on the VA CMOP. You know, do we have anything left there? You know, how much longer do you think that's gonna run through? I know we were hoping it would end, I think, in this, the fiscal third quarter of this year, but maybe a little just update on where we stand on that.

Yeah, I think we're still on plan, with regard to that reduction. You know, the VA and our team have been working collaboratively towards standing down the final couple operations. Kathryn, do you have any greater specificity for that?

Sure, yes. Our expectation is that we will wrap up the transition of those contracts just before Memorial Day.

Okay. Get that behind us.

Yes, sir.

Yeah. It's obviously it served us well. You know, we remain committed, Joe, to supporting our nation's veterans. We've got, we've still got irons in the fire for transitioning to different types of work for the VA. Once again, once the VA changed that acquisition process, not only to small business set-aside, but changed it from, you know, from being a solutions and tech-derived execution to just butts in seats. We withdrew all of our joint venture bids and, you know, approached it accordingly. It's bittersweet. As you know, we had a couple of decades of support in that arena, but we wish the small business community well.

Right. Exactly. Agreed. You know, Zach, you talked about, you know, how, you know, there's been multiple delayed procurements. You know, there's some going through the pipeline now, coming up for bids. You're hoping, you know, hear something here, and you know, in the next couple of months. I guess the kind of the concern here is, you know, obviously every September 30th, we go into, you know, a threatened government shutdown, a contingency budget, all that, which then seems to always delay contracts. You know, what's your comfort level of actually seeing some of these contracts be awarded, you know, in a timely manner versus, you know, getting caught back up in the whole contingency budget issue?

If you might be able to provide us a little more color on that, the nice late-breaking news of the new award that you re-received.

You bet, Joe. First of all, on the, I'll cover the market, what we see in the market, and I'll ask Kathryn to address the extensions. Yeah, we, you know, we're always very mindful of what the headwinds could be as we have, you know, we've come to know continuing resolutions and shutdown risk quite well over the years, recent years and certainly with this administration. We're also encouraged by some multi-year funding initiatives that have gone forward that have already been approved that we anticipate continuing to move forward in selected agencies.

Particularly, we still find good strength and support on both sides for defense and intelligence budgets as well as critical healthcare programs. We're really pretty comfortable in that arena. More importantly, Joe, in the last quarter, we have seen actually multiple RFPs that we have been signaling were coming. Fortunately, these have gotten under the wire before the September crisis, the usual September crisis. I think that was also attributed to some of the budget visibility. Once they got the budget passed, customers have had some pent-up demands for moving along on some of these procurements.

We think that the fact that we've had three or four of the more material ones come through already. We have submitted bids. We're hopeful that the decision process will also move forward in the coming quarter. Often for very material bids, it's often they see a protest or something of that nature that might delay the actual award and start of work. We believe that we've got, you know, some that we're very well positioned, that, you know, we should have decisions by this fiscal year. With regard to the contract extensions, Kathryn, over to you.

Sure, yeah. It is as we mentioned, it's the continuation of a key contract we've been working in support of the NIH for a number of decades. It would have gone through a normal recompete cycle at the completion of its 10-year period of performance here shortly. The NIH has decided to or made the case to extend it for under a sole source bridge for two years. Anytime, of course, an important part of your portfolio gets an extension and gives you additional revenue visibility, that's always very welcomed.

That's work that's really reflects, as Zach mentioned earlier, just as we value a strong presence and continue to have interest in veterans health, of course, public health is a key dimension of our portfolio and market-facing strategy for addressing every aspect of federal healthcare delivery. This part of our portfolio of contracts in that public health sector is very critical to us. We're pleased and honored to be able to continue to provide that support and to get the revenue, the additional revenue visibility in the short run.

Okay. Thank you for that color. On the, you know, the cost scaling or the right sizing, are we where we need to be, you know, for the current or the expected near-term revenue production? Do you think there might even be more cost scaling that needs to occur here?

I think we've done the significant actions. We always have some strategies we're working through, and those would continue to be as leases come due, for example, continuing to evaluate our footprint in our real estate, those kind of activities. We continue to evaluate and assure that our cost structure remains competitive and allows our rates to stay competitive for bidding on new work. We think that we've accomplished the material reductions that are necessary to right-size the business.

Okay, great. Thanks. I'll get back in queue.

You bet. Thank you, Joe.

Thanks, Joe.

If you have a question, please press star then one.

Hearing none, do we wanna reopen it for Joe? Operator?

He is not back in the queue. Joe, if you need to re-queue.

Okay. Just give Joe just a second as he did put himself back in the queue, and if not, we'll move forward. All righty. Well, with that, I'd like to thank everyone for your participation throughout this call today.

Joe Gomes is on the call.

Okay. Joe, anything else?

Yeah, maybe a little more. You know, Zach, as you talked about, you know, some of the potential of when we're reprioritizing federal health spending, you know.

Yes.

what we've seen here in the past couple of years, you know, it's been a challenging time for DLH in losing, you know, obviously the.

Yeah.

CMOP business and the Head Start and, you know, to potentially see prioritizing federal health spending, you know, it just throws up, you know, additional challenges for the company.

Yeah.

Maybe you can give us a little more your thoughts and color and how you're gonna go about this, you know, addressing this.

You bet. You bet. No, great question again, Joe. Yeah, I think, you know, the best way we characterize it is, as you well know, we advertise, communicate it, try to be very transparent with regard to what, you know, largely was fueled by the Biden administration's commitment to move not only the VA, but a number of other agencies' contracts to small business. We anticipated that erosion. It started in 2024 and certainly matured in 2025. As you indicated earlier, we expect to have the final pieces of the headline set aside for us, which was VA CMOP, finally running out this year.

But having said that, we're also well-positioned, and we're very optimistic that the RFPs and solicitations that had been earmarked for FY 2024 align with our, you know, establishment of our differentiators in data science and data analytics. We're gonna be fueled by RFPs in FY 2025. Unfortunately, as we indicated earlier, it was all of those basically stalled. Not all of them, but the overwhelming majority of those are basically stalled. So we had a relatively flat bid cycles for the major new business deals that are just now coming around. A few of those have evolved from the government deciding to move towards some grants.

The DOGE effect, certainly impacted a lot of our clients where they did not have the acquisition officials to issue those RFPs. They've begun to stabilize that over the course of the last six months. And again, we're starting to see both in the defense and intel side and in the public health arena, those solicitations come back. We've got a few we're anticipating in the next few months. We've got a pretty healthy revenue potential for some that have recently submitted. So we're just optimistic that that trend will continue. We're not expecting to have a series of the major DOGE government cuts, major DOGE program cuts, budget cuts, followed by, you know, historical shutdowns in the coming months.

The global challenges, both including the war in the Gulf, are going to certainly keep a strong commitment of funding and rapid development initiatives for the defense and defense health arena as well. We right now do see good optimism, you know, that the flatness in terms of opportunities for us to compete in 2025 is starting to break, and that's good for us. What we thought was going to be a pretty quick V curve turned out to become a little more bathtub. We are starting to see the opportunities hit now and certainly feel that we'll be able to compete favorably for our share.

Thanks for that color, Zach. Much appreciated, and I'm looking forward to starting to see some wins be put up on the board here after a as you said, a challenging period here. Nothing really to do with you guys, it's the government itself. But it'd be nice to start to see your the engine start back up again and be moving strongly going forward.

We can't wait. Yeah.

100%.

Yes.

This concludes our question-and-answer session. I would like to turn the conference back over to Zach Parker for any closing remarks.

Well, again, I want to thank you all for, again, your participation, your interest in DLH. We remain committed to driving that shareholder value. We are looking forward to chatting with you with in the coming quarters. We ask everyone have a blessed day, and we'll talk again soon. Bye for now.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Good day, and welcome to the DLH Holdings Fiscal 2026 First Quarter Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Chris Witty, Investor Relations Adviser. Please go ahead.

Thank you, and good morning, everyone. On the call with me today is Zach Parker, President and Chief Executive Officer; and Kathryn JohnBull, Chief Financial Officer. The company's earnings release and PowerPoint presentation are available on our website under the Investor page. I would now like to provide a brief safe harbor statement, which is also shown on Slide 3 of the presentation. This call may include forward-looking statements that relate to the company's outlook for fiscal 2026 and beyond. These statements are subject to various risks and uncertainties, which could cause actual results and events to differ materially from such statements. Please refer to the risk factors contained in the company's annual report on Form 10-K and in our other filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statements. 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. President and CEO, Zach Parker, will speak next; followed by CFO, Kathryn JohnBull after which, we'll open it up for questions. With that, I'd now like to turn the call over to Zach. Please go ahead, Zach.

Thank you, Chris, and good morning, everyone. Welcome to our first quarter conference call. I am pleased for the opportunity to report our financial results and provide color regarding the current environment and outlook. Now turning to Slide 4, I'll provide an overview of our achievements and outlook. The first quarter was marked by the longest government shutdown in our nation's history, followed by a short-term funding gap at the end of January. However, the recently enacted budget provides increased funding capacity and improved visibility for our clients for the remainder of the fiscal year across our markets. we expect that to be a positive impact. Notably, key federal health agencies received funding increases compared to the fiscal 2025 levels, reversing in part previously disclosed funding reductions to our current and addressable markets. We believe this improved clarity and stability meaningfully support the company's organic growth initiatives. This budget stability comes at an opportune time for DLH as we continue to see improving demand across our core markets. Defense and Intelligence customers are emphasizing rapid delivery, cost efficiency digital modernization and advanced technology integration through the application of command, control, communications, computers, cyber defense and combat systems with intelligence, surveillance and recognizant known as C6ISR expertise. At the same time, federal health agencies continue to prioritize system interoperability, cybersecurity, including 0 trust applications, cloud migration and AI adoption, which positions DLH competitively well for modernization-driven awards. These are areas that leverage our strengths, our capabilities and our innovative proprietary tools as discussed previously to enhance productivity on current work while elevating our competitive position on organic growth opportunities. While revenue was down year-over-year, largely due to our previously discussed program transitions to small business set-aside contracts, such as the [indiscernible] and head start. We are seeing improved visibility and are encouraged by the midterm outlook. More importantly, we delivered sequential improvement in adjusted EBITDA margin from the fourth quarter, as Kathryn will discuss in more detail shortly. We remain firmly focused on expanding efficiencies and margins and improving overall returns as the year progresses and award decisions are made. We also continue to execute on our commitment to deleveraging the balance sheet. As is typical in the first quarter, Debt increased modestly, driven primarily by the timing of labor and payroll tax repayments around holidays. That said, we remain on track with our debt reduction plans for fiscal 2026. We Overall, we remain well positioned to succeed over the coming years, including competing effectively for high organic value opportunities within a healthy and expensive addressable market. Our differentiated technology application capabilities, tools and workforce alignment exceptionally well position us for 3 strategic within our 3 strategic pillars that those are digital transformation and cybersecurity, science, research and development and systems engineering and integration. Importantly, the improved clarity around the fiscal '26 budget, combined with our broad portfolio of contract vehicles, bodes well for DLH's long-term growth outlook. We remain committed to continued investment in the talent, tools and technologies required to meet the evolving complex needs of our customers across each of our core markets. our customers leverage our capabilities to access leading edge processing speeds digital sandbox environments, tailored integrations with cot products and technologies, advanced data science and actionable visualizations and dashboards that support mission-critical decision making. While the government services market has experienced meaningful disruption this year, driven by delays in contract solicitations and awards and previously uncertain budget visibility. We have continued to use this period to transform DLH in a positive way. Today, we are technology, engineering and scientific solutions provider that is extremely well positioned to compete for the opportunities of the future. As we work to enhance our organic profile, we will remain disciplined in reducing our indirect costs and managing our capital deployment. The management team and I are confident that DLH is on track to exit fiscal 2026 in a much stronger position than we began, and we are encouraged by what lies ahead. Before I close, I would like to recognize the performance of our deep and highly credentialed workforce. In a challenging environment, we lean on the passion, ingenuity and expertise of our staff to succeed. This past quarter, you once again surmounted extraordinary challenges in support of our customers. As always, thank you to everyone at DLH for your commitment to excellence demonstrated each day. With that, I'd now like to turn the call over to our Chief Financial Officer, Kathryn JohnBull. Kathryn?

Thank you, Zach, and good morning, everyone. We're pleased to report our first quarter results for fiscal 2026. Turning to Slide 6. I'd first like to provide a high-level overview of some key financial metrics for the 3 months ended December 31, 2025. We reported revenue of $68.9 million in the first quarter versus $90.8 million in the prior year period, reflecting contributions from expansion on existing contracts, offset by the impact of conversion of certain programs to small business set aside contracts as discussed in the past and certain government efficiency initiatives. In total, the revenue contraction was mostly due to small business set aside conversions, primarily from CMOP and Head Start with an approximate $18 million decrease in the quarter versus fiscal 2025. We reported adjusted EBITDA of $6.5 million for the quarter compared to $9.9 million in the prior year period, with the decrease primarily driven by lower revenue levels. partially offset by effective management of indirect costs as we aligned our cost structure with reduced volume. Importantly, adjusted EBITDA margin improved sequentially to 9.5% for the quarter. Our cost scaling initiatives continue into the second quarter, including further reductions in indirect spend in anticipation of future CMOP site transitions and we expect the impact of these actions to become more evident in our second quarter results. From a free cash flow standpoint, we used approximately $4.8 million during the quarter which is typical for the first quarter, given seasonal increases in working capital requirements. Importantly, this represents a significant improvement compared to last year's use of $12.1 million of free cash flow which reflects delays which reflected delays in the collection of an unusually high level of receivables. As Zach mentioned earlier, the primary driver of cash usage this quarter was the timing of labor and payroll taxes around the public holidays at the end of the year. Now turning to Slide 7. I'll wrap up with a summary of our debt reduction efforts which remain a key area of focus for DLH. As a result of the first quarter working capital requirements I mentioned earlier, including the impact of the government shutdown, debt increased during the quarter to $136.6 million. We remain well ahead of our mandatory term repayment schedule and in full compliance with all financial covenants. Looking ahead, we expect to convert approximately 50% to 55% of EBITDA generated during fiscal 2026 to reduce debt by year-end. As our investors know, we take deleveraging very seriously and have a strong track record of execution, even though the uncertainty of the past few years related to the runoff of small business set-aside programs. We remain more than adequately capitalized to support our growth strategy and now have greater visibility into the year ahead than in prior quarters. As the year progresses, we look forward to improvement in our operating fundamentals and organic growth initiatives. With that, I would now like to turn the call over to our operator to open it for questions.

[Operator Instructions] The first question today comes from Joe Gomes with Noble Capital.

So Kathryn, just you said about $18 million of the delta in the revenue decline was from CMOP and head start, and that would leave about $4 million still unaccounted for what was the other $4 million? Where did that get lost?

Yes. It's what we have referred to as the Knicks and the nibbles of the [indiscernible] initiatives that happened in the early part of fiscal '25 somewhat after December, but in Q2 of fiscal '25. Also, the wrap-up of that little that single international project that we had that completed in January of '25 yes, USAID project. So it is a sundry of smaller impacts that were not strategic and not related to the small business set aside.

And Joe, those as Kathryn indicated, they're a little bit smaller because those were the effect of unbundling contracts, right, so that they were able to make more work available also to small businesses or other contract vehicles that have been in existence.

Okay. And on the spot, I know we, we had 4 contracts in the end of last year and 1 they had recently awarded somebody else. I think 2 more were out for bid. Any update on the 2 that were out, have they been awarded any timing as to when they might transition and anything new on the last remaining location.

Well, we're looking at we believe we'll be, we're really in the wind-down phase across the board for the CMOP work. The VA has gotten more a little battle rhythm set for being able to do some of the transitions, complete their evaluations a little more timely fashion and to move into a transition phase we have been leading very aggressively and supportive of making those transitions, the specifics on the contract coverage. I'll turn it over to Kathryn.

Yes. No, I think that's the right way to think about it. As we indicated as early as the first quarter of we certainly expected the completion of the CMOP work to be near term. And as Zach said, the cadence now that there seems to be a pretty manageable process for making those transitions, we are looking at probably a complete ramp-up of CMOP in Q3 of this current fiscal year.

Okay. And when you talk about the cost reductions that you've taken so far. One, was there any cost to those? And where would that show up on the income statement? And two, is that inclusive of the expected losses? Or you need to do additional cost out once all 3 of those contracts transition?

Let me kick it off and I'll let Kathryn hand on the specifics. So when we exited '24, we kind of laid out, at least internally and with our Board a game plan around this reset, right? The reset of the decline in business that we have been communicating that would result from CMOP and some of the unbundling and bundling of other contracts and small business set asides, while at the same time, we're anticipating more bid opportunities and wins throughout '25. So we had looked at what we kind of call them V curve and managing that for exiting '24 and throughout '25. The delays, obviously, as Kathryn indicated, in the opportunity bid opportunities during '25 due to all the challenges we've discussed had really necessitated that we made sure we had a plan that was flexible and would be phased for indirect reduction. We have implemented 2 major components of that indirect reduction. It's very important for us to maintain a competitive indirect cost profile to be able to compete organically, and that's been a key driver for us. While we've been managing the phaseout of these contracts, including those that still continue for CMOP. So we've had a management plan to make sure we can do those indirect reductions. At the same time, I would tell you, we've been implementing new measures to drive efficiencies of playing some of the tools we do for our customers, AI, ML and things of that nature to drive efficiencies in executing not only for our customers but also for our enterprise. And we're going to continue to look at deploying that. We've got a project or 2 that has some of that running out through this the remainder of this fiscal year where we can enhance and augment the caliber of services by our folks using some of these tools. We think those efficiencies will also help us in the long run. Kathryn, do you want to answer a couple of the specifics on the timing and G&A impact.

Yes. To your question, Joe, about whether the cost of those reductions is factored in and where does it show up? That is reflected in our Q1 results, both the impact of the reduction in cost as well as the cost of achieving those reductions is all reflected in the Q1 financials. And also then considered as part of the crosswalk from standard EBITDA to adjusted EBITDA. In other words, that adjustment reflects as if those reductions had taken place at the beginning of the quarter. I'm sure you can appreciate that those have to be thought through and take some implementation time and so, therefore, happened midway in the quarter. In terms of addressing the change in volume of CMOP specifically, that's part of the overall program, and we have scaled costs related to supporting CMOP as CMOP has made its journey downward. But we do, of course, still carry some costs for running the remaining locations, but we will scale it in the appropriate time frame, along with the changes in revenue volume, just as we do the volume of business for the entire enterprise.

Okay. And 1 more for me. I mean it sounds we might be starting to see some positivity here on the pipeline and bidding activity just wondering, Zach, we got named to a number of IDIQ contracts. Have they just not been putting anything out for bid or not stuff that DLH is bidding on or have there have been some projects out there that you've been on just have not won. I mean, is the I guess, kind of the hit rate of award for you guys, is that staying steady? Or is that decline? I mean maybe a little more insight into the market opportunity out there and how DLH is faring in that?

You bet, Joe. And we are planning on giving a deep color as we have historically from time to time on that pipeline during our upcoming annual meeting with the shareholders. But to your point, yes, we've a little bit of each, right? So we've had in terms of the major IDIQs and the MAC IDIQs, the most recent news, of course, is [indiscernible] has been canceled. And as we have stated before, we saw that as a very attractive and viable vehicle for us with a number of opportunities that we had anticipated being able to bid in '25 that would allow us to start to generate some revenue around this time period. A number of those some of those jobs some of our customers have moved to other vehicles already anticipating that CIOS [indiscernible] was not going to be viable. And so we've had a couple of erosions to our pipeline attributed to work moving to a vehicle, which we could not prime. That's had some impact. And while at the same time, I'd have to say the biggest key has been customers given the budget uncertainty, et cetera, have continued to do kind of like some of our customers, bridge work instead of extending the existing incumbents instead of having a competition. And that's where we're thinking that now that they have stability, some visibility in their budget for some time. That they'll be able to move on with it and get some of those procurements. So we still just have not had a large volume of bid opportunities. We had 1 bid opportunity for the entire month of January. And that's just really, really trickling. And that one is a small one. So we have our needle-mover deals, which we invest a lot in, and we really push to drive a high wind profitability. And we have some of those that come from some of these MAC IDIQs. Some many of those are much smaller. But we're really feeling pretty encouraged that a number of the major needle movers for us. now we'll start to get some stability. We're still actively working to make sure that some of those that were earmarked for CIOS before and success predecessor [indiscernible], that we're well positioned on the GSA schedules and Oasis of which we think will be 2 of those where it would allow us to prime. But when they've moved a couple have moved to some vehicles where we were not prime is very disappointing. Some of the customers just had not had the influence as they thought they would have with the acquisition shop, but we're continuing to monitor that very closely.

But getting that certainty, the key takeaway, as you set it up, Joe, is we view that as positive that to get certainty even if the even if it isn't the way we would have done it, it's really distracting from a resource perspective and not cost effective to be trying to support and straddle all possible pads. So for us, just give us an answer, give us clarity, we can pivot and get ourselves organized to address that way. And so as Zach mentioned, while we're certainly majorly disappointed that CIOSP4 has gone away as a vehicle it's good to just have the clarity. It's been dangling for 3 years now, so at least 3, probably longer than that. So it's good to have the clarity. And while some things did drain off and go to vehicles, we're not prime or position to prime on the overwhelming majority of those opportunities appear headed places that we can and will compete as a prime. So it's good to have resolution of that strategy and to be able to move out on responding to it and pivoting our strategy to address the path that's going to come out on so that we can get on with it already.

Yes. And I want to add, John, to that, Joe, is that we're seeing a major movement by a number of our customers, including Department of War to leverage more commercial best practice vehicles and approaches. We've referred to OTAs, other transaction authorities as something that has been viable and certainly, we demonstrated during COVID to be a viable means to get some of these bids out faster. What you're going to see is what we are seeing is a number of these vehicles start with a pilot that is a much smaller dollar value for the award and then you move from pilot to true execution. And so the revenue profile and the value of the awarded contract will shift a little bit but we're preparing for that. We've been well prepared for that. We've made some down select on a couple of those already. But we're going to see in the industry, a pretty heavy move towards not using our traditional RFP contracting model that just takes so long for the government to get this in place. And this administration is really, really keen to cut through those delays and to use more commercial best practices. So stay tuned on that. We'll talk a little bit around that as well during our upcoming annual meeting on the acquisition environment and our pipeline.

[Operator Instructions] The next question comes from Bert Osterweis with Osterweis business consultation.

Good morning, Zach and Kathryn. I hope you're doing well. A little cold up here in Massachusetts. But all right. I was reading the annual report. And in a number of places, it states that we solve complex problems for civilian and government clients alike. But I only ever hear about the government clients. I was wondering more who those civilian clients are. And Zach, you mentioned in your what you just said, the last answer, was about a focus of more commercial type of jobs or commercial type of going after the jobs and I know Kathryn, you said it's not possible to pursue all possible paths. It's not financially viable, but it almost seems like the civilian customers are easier to go after. And so I was wondering, first, who they are? And second, is that something we can focus on more?

Sure. No, great question. First of all, we probably should have a clarification of that because while we do work with the Defense Health Agency, the Department of War, in particularly in the C5 ISR arena, C6ISR arena, we are in the federal government space, we really referred to the civilian agencies that are still federal government, right? And those include customers like the National Institute of Health, the Center for Disease Control, ASPR would include DHS and other agencies, they're still federal clients. Now and so that's really what we're referring to on the macro for us that we have civilian agencies and then those that are aligned with defense. The other point, though, that raise is commercial work. And we do have a small book of business, a small bit of business with commercial. We're doing some of that work through partnerships with universities. And we do believe that there's an incubator area that lends itself for us to be able to work with more commercial companies. It's not going to be a major portion of our business. Kathryn and I have long stood and held the position that if we're going to try to move into that market in a meaningful way, it would be led probably with an acquisition. But we do have some adjacencies where we've been doing work, leveraging relationships with the federal government that have led us to doing some work usually grant funded with the commercial community. And within our public health and scientific research organization, we are looking to perhaps try to pull a little more of that business in-house.

I was thinking biotech firms and things like that.

It is biotech. You're actually you're right spot on. It is in that arena that we have been doing some of that work. We've had some talent on our staff on [indiscernible] and Christian staff that have worked with the biotech and biopharma community. And we're looking to see if we can parlay that as well. We've just brought on a new resource that has tremendous reputation and experiences with FDA and as such, it also worked closely with the biotech community. So we're taking a fresh look at that as a potential account for us right now, it's just targeted opportunities, specific opportunities, but it could develop into an account by year's end.

Those commercial enterprises need to access that government approval queue and it's often an inscrutable protracted process for them, and so they're happy to opportunistically leverage our capability to help steer them through that. But as I said, that would be in the course of relationship building and opportunistic avenues, but not really something that we're going to we're prepared to invest a lot of money in pursuing commercial opportunities.

The other part of that, to your point, Burt, is we need to make sure that even though the 99% of our book of business is with the federal government, we need to be able to operate at speed like commercial companies or truly commercial companies. We have and we believe that the administration is removing some of those barriers on allowing companies and customers that have interest and capabilities to be able to move at speed consistent with commercial companies. And so again, we're taking a look at leveraging some of these OTA type vehicles and our ability to leverage what has been our heritage, and that's to be able to be far more agile than a lot of our large tier companies to be able to be tremendously responsive and operate more like a commercially aligned company. . So please look for more of that. That often will mean our pipeline will look a little bit different with speed and smaller start-up sort of programs a little bit less 5-year booked values, but they offer the same organic growth profiles and trajectories that we have had otherwise, just a more rapid deployment and we've developed some of our tools so we can do rapid prototyping and that's going to help us in a number of areas where clients want to build a little test a little and then make a longer commitment. And we think we're well positioned with some of our digital sandbox opportunities and our cyclone platforms to demonstrate and move quickly from prototype to development and deployment.

One last question. Is there anything in our government contract, which prohibits us from going after civilian contracts?

No, nothing that precludes it at all. It is a very different regulated environment. From time to time, you'll see things like you hear this administration talk about most favored nation kind of rates, in some cases, in our world, we have to look at where the best, best what I'm going to look for, Kathryn the rate schedules that we offered a couple but no regulatory formalized regulatory constraints.

It's really just a function more so of it. It's a distinctly different kind of sales model. And so you have to kind of weigh out your options for investing in that kind of a sales force, if you will, commercial sales force versus the model that makes sense in the government context. But there are some specific boutique opportunities that we're aware of and that we're leveraging. .

At this point, there are no further questions in queue. I would like to turn the conference back to Mr. Parker for any closing remarks.

Once again, I want to thank everyone for participating in our call today and for being good stewards of the DLH equity stakes. We are really, really committed, remain committed to giving you good visibility into the future and look forward to seeing and chatting with you all at the upcoming annual meeting. With that, everyone, have a blessed day, and we'll connect again soon. Bye for now. .

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.