DLH (NASDAQ:DLHC) executives said fiscal 2026 first-quarter results were shaped by federal funding disruption early in the period, but emphasized that a recently enacted budget has improved visibility for government clients and could support organic growth initiatives as the year progresses.
Management cites improved budget clarity and modernization demand
President and CEO Zach Parker said the quarter followed “the longest government shutdown in our nation’s history,” as well as a short-term funding gap at the end of January. He said the enacted budget provides “increased funding capacity and improved visibility” for clients for the remainder of the fiscal year, adding that several key federal health agencies received funding increases versus fiscal 2025 levels, partially reversing prior reductions that had affected DLH’s current and addressable markets.
While revenue declined year-over-year, Parker attributed much of the decrease to previously discussed program transitions to small-business set-aside contracts, including VA CMOP and Head Start. He also noted sequential improvement in adjusted EBITDA margins from the fourth quarter and reiterated a focus on indirect cost reductions, capital discipline, and deleveraging.
Revenue declines year-over-year; adjusted EBITDA margin improves sequentially
Chief Financial Officer Kathryn JohnBull reported revenue of $68.9 million for the three months ended Dec. 31, 2025, down from $90.8 million in the prior-year period. She said the contraction reflected contributions from expansion on existing contracts that were more than offset by conversions of certain programs to small business set-aside contracts and “certain government efficiency initiatives.”
JohnBull said the revenue decline was “mostly due to small business set-aside conversions,” primarily CMOP and Head Start, which accounted for an approximate $18 million decrease versus fiscal 2025. In response to a question on the remaining year-over-year decline beyond that $18 million, management cited “nicks and nibbles” from government efficiency initiatives, unbundling activity that moved work to other vehicles, and the completion of a small international USAID project in January 2025.
Adjusted EBITDA was $6.5 million, compared with $9.9 million in the prior-year period, driven primarily by lower revenue levels and partially offset by indirect cost management. JohnBull said adjusted EBITDA margin improved sequentially to 9.5% and that cost-scaling initiatives would continue into the second quarter, including additional reductions in indirect spending in anticipation of further CMOP site transitions.
Cash flow and debt: seasonal use of cash; deleveraging remains a priority
DLH used approximately $4.8 million of free cash flow during the quarter, which JohnBull said is typical for the first quarter due to seasonal working capital needs. She said the cash usage was an improvement from last year’s $12.1 million use of free cash flow, which had been affected by delayed collection of an unusually high level of receivables. Management said the primary driver of first-quarter cash usage was timing of labor and payroll tax payments around year-end public holidays.
Debt increased to $136.6 million during the quarter, which management attributed to first-quarter working capital requirements and the impact of the government shutdown. JohnBull said the company remains ahead of its mandatory term repayment schedule and in compliance with all financial covenants. Looking ahead, she said DLH expects to convert approximately 50% to 55% of EBITDA generated during fiscal 2026 into debt reduction by year-end.
CMOP outlook: wind-down expected by Q3
On the VA CMOP program, management said it is in a “wind down phase across the board.” JohnBull said the company expects a “complete wrap-up of CMOP in Q3 of this current fiscal year,” noting that DLH had anticipated CMOP’s completion as near-term as early as the first quarter of fiscal 2025.
Management also discussed actions to align costs with volume changes. Parker described a phased plan for indirect cost reductions and said the company is applying tools such as AI and machine learning to drive efficiencies in enterprise operations as well as customer delivery. JohnBull said both the cost savings and the costs to achieve the reductions were reflected in first-quarter results and included in the bridge between standard EBITDA and adjusted EBITDA; she added that timing within the quarter affected how quickly the reductions were realized.
Pipeline factors: CIO-SP4 cancellation, fewer bid opportunities, and shift toward faster procurement
During the question-and-answer session, management discussed the contracting environment and pipeline dynamics. Parker said the company had experienced a “little bit of each” in terms of impacts, including limited bid opportunities and some opportunities shifting to contract vehicles where DLH could not compete as a prime. He also said customers, facing budget uncertainty, had often relied on bridge work or extensions for incumbents instead of running competitions.
Management specifically addressed the cancellation of CIO-SP4, which Parker said had been viewed as a viable vehicle for DLH with anticipated opportunities. JohnBull said the cancellation provided clarity after a prolonged process, even as some opportunities moved to vehicles where the company was not positioned to prime. She added that management believes the “overwhelming majority” of the relevant opportunities appear to be headed to vehicles where DLH can compete as a prime, including GSA Schedules and OASIS, which management referenced as potential alternatives.
Parker also said DLH is seeing increased use of “commercial best practice” approaches, including other transaction authorities (OTAs), which can begin with smaller pilot awards and then scale into larger execution phases. He said this shift could change the revenue profile and pipeline appearance—potentially featuring more rapid, smaller initial programs rather than traditional five-year contract structures—while still supporting organic growth trajectories.
Commercial work remains limited, with targeted opportunities in biotech/biopharma
In response to a question about civilian clients, Parker clarified that DLH’s references to “civilian agencies” primarily mean federal civilian agencies such as NIH, CDC, ASPR, DHS, and others, as distinct from defense-aligned customers. He said DLH has a small amount of commercial work, including through partnerships with universities and grant-funded opportunities, largely within its public health and scientific research organization.
Parker and JohnBull said commercial expansion is not expected to become a major portion of the business, and that a meaningful move into commercial markets would likely be led by an acquisition. However, Parker said DLH is evaluating whether it can “pull a little more of that business in-house,” including targeted opportunities in biotech and biopharma, and noted the addition of a new resource with experience with the FDA and the biotech community.
Management also said there are no government-contract restrictions that prohibit DLH from pursuing commercial work, though JohnBull noted it requires a different sales model and investment trade-offs compared with federal contracting.
About DLH (NASDAQ:DLHC)
DLH Holdings Corp. (NASDAQ: DLHC) is a provider of mission-driven professional services primarily to federal government agencies and select commercial clients. The company designs and delivers tailored solutions across a range of critical mission areas, including program and project management, consulting, technical assistance, and administrative support. Through its Healthcare Solutions offerings, DLH also specializes in supporting clinical and allied health staffing needs for federal health agencies and health systems.
Operating under its Federal Solutions segment, DLH partners with agencies such as the Department of Veterans Affairs, Department of Defense, Department of Homeland Security, and the Department of Health and Human Services.
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