DLH (NASDAQ:DLHC) reported fiscal 2026 third-quarter revenue of $44.2 million as the company completed the transition of its Veterans Affairs Consolidated Mail Outpatient Pharmacy, or CMOP, program to small-business set-aside contractors and shifted toward a business base centered exclusively on technology-powered solutions.
Technology-powered solutions generated $38 million in revenue during the quarter ended June 30, Chief Financial Officer Steve Oroho said. The company expects fourth-quarter revenue at a similar level.
Cost Scaling and Profitability Targets
DLH completed cost-scaling initiatives during the third quarter to align its operating structure with expected revenue levels following the CMOP transition. The actions resulted in approximately $3.3 million of eliminated and one-time costs during the quarter, according to Oroho.
While the company expects a small remaining tail of actions in the fourth quarter, JohnBull said the cost reductions are “materially complete.” She said DLH has reestablished a cost structure that is competitive at its current business scale.
Adjusted EBITDA was $3.4 million, or 7.7% of revenue, after adjusting for the timing and incremental costs tied to the scaling initiatives. The company generated $4.2 million in free cash flow during the quarter, with most of that cash used for debt reduction.
In response to an analyst question, Oroho said DLH expects gross margin to return to historical levels of about 20%. He also said general and administrative expense should return to roughly $4.5 million to $5 million, or approximately 11% to 12% of revenue.
Management reiterated its longer-term goal of reaching adjusted EBITDA margins of 9% to 10%. Oroho said the company believes it could achieve that profitability level with a modest amount of growth over coming quarters, aided by operating leverage and expansion opportunities within its existing contracts.
Debt Reduction Continues
DLH ended the quarter with $128.7 million of debt, down from $132.7 million at the end of the previous quarter. Oroho said the company remains ahead of its mandatory term-loan repayment schedule and is in compliance with all financial covenants.
Debt is expected to remain relatively stable through the end of fiscal 2026 because of the timing and nature of the cost-scaling actions. Beginning in fiscal 2027, however, the company expects to realize more of the benefits from those actions and continue reducing debt.
JohnBull said mandatory debt payments are nearly nine months ahead of schedule. She identified balance-sheet deleveraging and stronger operating performance as foundations for the company’s growth strategy.
Procurement Activity and Contract Pipeline
Management said the government procurement environment has become clearer and more stable in recent months after a period marked by government shutdown concerns, budget uncertainty and reductions in federal contracting departments. Those conditions had slowed procurement activity through fiscal 2025 and into the current year.
“Numerous key deals and large procurements” tracked by DLH for fiscal 2025 are now coming up for bid, JohnBull said. The company is seeing increased bidding activity heading into the end of its fiscal year and expects certain award decisions in coming quarters, subject to agency timelines and procurement processes.
DLH received a multiple-award indefinite-delivery, indefinite-quantity contract in June to provide logistics information technology services to the U.S. Navy. Through task orders under the vehicle, DLH can compete to support systems modernization, integration, sustainment and migration for Naval Air Systems Command, or NAVAIR, which JohnBull described as a new customer for the company.
JohnBull said maintaining a robust collection of IDIQ contract vehicles is important as government procurement strategies evolve. She noted that the government canceled the CIO-SP4 vehicle, which DLH had pursued in the civilian market, but she said agencies are increasingly distinguishing between broad procurement opportunities that may move through the General Services Administration schedule and more specialized requirements directed to narrower IDIQ vehicles.
- DLH holds a GSA schedule vehicle for broader services opportunities.
- Management said one IDIQ won in early 2023, which had been relatively quiet, is now showing close to a dozen potential opportunities.
- JohnBull said that vehicle has only eight holders, creating a more controlled competitive environment for specialized work.
Agency Outlook and Growth Priorities
JohnBull said stability appears stronger at the National Institutes of Health and the Department of Health and Human Services than at the Centers for Disease Control and Prevention. She said DLH remains more cautious about the pace at which CDC-related opportunities may translate into revenue because of political and leadership uncertainty, although recent activity through the OASIS contract vehicle has shown strength.
The company’s near-term growth focus is on contract expansions and smaller “singles and doubles” opportunities, according to JohnBull. Management intends to pursue new work while maintaining a disciplined business-development pipeline and relying on DLH’s workforce of technologists and researchers across its capability areas.
JohnBull said the company’s strategic direction will be defined by “clarity and sharp focus” rather than an overhaul, with disciplined execution for customers, organic growth and employee development serving as its priorities.
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.
