WidePoint Corp (WYY) 2007 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the WidePoint Corporation second quarter conference call. At this time all participants are in a listen only mode. Following today's presentation instructions will be given for the question-and-answer session. (OPERATOR INSTRUCTIONS). I would now like to turn the conference to our host, Mr. Cale Smith from Hawk Associates. Please go ahead, sir.

Good afternoon. This is Cale Smith. Welcome to the WidePoint second quarter 2007 conference call. On the phone today are Steve Komar, CEO of WidePoint; Jim McCubbin, the company's Chief Financial Officer and Dan Turissini, WidePoint's chief technology officer and CEO of subsidiary, ORC. I would like to begin by reading the company's Safe Harbor statement, and then we will hear from Steve, Jim and Dan before they take your questions.

This afternoon's discussion contains forward-looking statements that involve known and unknown risks, uncertainties or other factors not under the company's control. Those risks may cause actual results, performance or achievements of the company to be materially different from the results, performance or other expectations implied by these forward-looking statements. These factors include but are not limited to those detailed in the company's periodic filings with the Securities and Exchange Commission. Now here is Steve with his opening remarks.

Thank you, Cale. Appreciate it, and the introduction. Good afternoon everyone on the call. I am Steve Komar, and as Chairman and CEO of WidePoint I would like to welcome you all to the company's second quarter 2007 investor call, and to thank you, as always, for your proactive and continuing interest in WidePoint. I'd like to begin with a few overview comments which would be consistent with our recent SEC regulatory filings and a press release, both of which were issued earlier today. And I would like to just mention a few of the highlights that we feel that we've experienced in this second quarter.

First by far is our PKI and PKI managed service revenue growth. For the three months ended June 30, 2007 we experienced $1.2 million worth of revenues from that particular product and services sector compared to the year ago period, of $0.2 million or in essence something in excess of a 475% percentage growth on a year-to-year basis.

Secondly, we've experienced greatly improved gross profit margins during the second quarter of 2007 versus the prior year, and this pretty obviously is associated with both the PKI managed services growth and the dropping off of some of the lesser or lower margin businesses in the 2006 reference period. In essence, our gross profit margins doubled from 17% last year to 33% in the second quarter of '07.

On the other hand our consulting services sector were not able to keep up the revenue pace and in fact had lower revenues in the second quarter than the prior years period. This was due primarily to a $1.5 million non-recurring software sale that we recorded in the second quarter of '06. The absence of that revenue stream in 2007 plus some challenges that we are having in terms of recruiting staff for some new contract opportunities we have, have resulted in fact lower second quarter '07 revenues for that sector.

Again, to highlight we achieved a net income breakeven in the second quarter of 2007 versus a $375,000 loss in the prior 90 days in the first quarter of 2007. We've experienced improved cash flows, our networking capital is now in excess of $3.5 million, and the great majority of that is in cash and cash equivalents.

Moving right along, I think in addition to the second quarter's results which is of course the purpose of this call and this meeting, I think there are some fairly or equally important matters to consider. As we exit the second quarter of 2007 we clearly see the trend that we see at the end of the second quarter continuing through the second half of 2007 and beyond. We are observing increased activity levels in both the commercial and security markets, and we do expect our PKI and managed services revenue growth trends to continue. We expect to see growth but more modest growth from our consulting services for the next six months.

Some of you may recall that at the beginning of the year at an investor call we advised of some expected weakness during the first half of 2007. In effect, we experienced that in the first quarter and have begun to see a recovery from that in the second quarter of 2007. We are now fairly heartened by what we see going forward. What this means to us summarizing, is that we envision meaningful improvements in revenue and earnings performance during the second half of 2007 and in 2008.

We expect to achieve this through a combination of focused organic growth on our existing base businesses and second, by further strengthening our business development activities and organization. And as always, we will continue our exploration of strategic fit acquisition opportunities to accelerate both our position in the marketplace and our growth as an enterprise.

In addition, there were a number of other highlights during the second quarter but I'm going to let Dan and Jim discuss these in their respective comments. With that, I will say thank you, and I will pass the microphone to Dan.

Thank you, Steve. From the ORC point of view we had a strong second quarter; it was marked with increased strategic agreements, increased revenue in our managed PKI related service, and an increased activity in federal and commercial request for proposals. We have specifically strengthened our relationships with Northup Grumman, Lockheed Martin and the Federation for Identity and Cross Credentialing Systems which is open to large opportunities in both commercial and first responder market. Representing two large pools of people to be credentialed with both ECA and AC certificates.

Specifically our introduction of combining the FiXs physical credential with the ECA certificate at the recent FiXs West Coast conference, which will provide cross credentialing and combined physical and logical access to DOD's resources, was very well received.

We have also seen an increased vigilance toward the enforcement of identity assurant mandates within the DOD. This has included the establishment of a new identity assurance directory at the OSD level, as well as a broadening of the requirements for contractors to use these credentials to get into things such as the requirements for contractor performance requirements.

We have seen an uptick in our credential orders and much to do with these performance assessment reporting requirements, as well as our increase in now providing certificates to non US citizens abroad who work for these various DOD contractors.

We are also preparing our GSA eAuthentication managed validation and translation service to support the broad PIV deployment and become a government enterprise validation service that will enable cross credentialing in government to government and business to government transactions across PIV, ECA and AC's community. We are seeing a lot of activity on the application side to prepare for this PIV deployment within the federal government.

Specifically within the shared service provider PIV managed service environment, we are very encouraged with the recent resurgence of RSP activity and are currently pursuing approximately six opportunities, both as a prime and in a sub role. Finally, as announced in our recent press release, we are extremely confident that the deployment of our United Space Alliance PIVotal ID, Smart ID Badge solution will be a replicable model, one that will enable industry to leverage these specs, such as FIPS 201 to comply with federal acquisition requirements, HIPAA, Sarbanes-Oxley and establish strong identity assurance systems that are necessary to meet both these external requirements and their internal information assurance needs.

We believe these accomplishments over the last quarter have confirmed our expectations of a strong second half of '07 and going forward into '08. That's all I got, Steve. Thank you.

Thank you, Dan. I will pass it across to Jim for your comments.

Hello, everyone. Jim McCubbin here, Chief Financial Officer of WidePoint Corporation. The second quarter of 2007 was again a very productive quarter for us at WidePoint as both Steve and Dan have just pointed out. We were awarded several contracts and renewals, continued in our joint efforts in expanding into new service areas associated with several additional pools of people that continue to need to be credentialed in the future, that continue to expand our internal infrastructure, which right now we are working on an ATO for our ACES certificates. So we will be allowed to issue them under the federal mandates and be approved to for the next three years.

That is a very important for us as well as we differentiate ourselves from our competitors and stay in front of the pack, as we've always said that we would attempt to do and we have continued to do. We believe all these positive events continue to prime the pump for what we believe will be our future financial success for the company as we look towards the second half of 2007 and 2008.

On the financial front we experienced continued sporadic growth within our PKI segment along with some contractions within the consulting segment as we witnessed a bump this time last year associated with the material software resale along with some contractions as a result of some hiring issues we faced in filling a number of open positions that we have. These are just choppy events that on a quarter to quarter basis tend to smooth out but we did experience the contraction on the consulting side that was more than offset, if you factor in the PKI growth. And especially given the fact if you back out that onetime software resale, which is approximately $1.5 million.

So given the marketplace that we've been working in, you will see choppiness given both seasonality and contract delays and [awards] that at times are beyond our control as we work within a team environment. Moving on and given these events, what I would like to do is say our total revenues decreased by approximately $1.4 million from $7.5 million for the six months ended June 30, 2006 to $6.1 million for the six months ended June 30, 2007, again predominantly due to that $1.5 million software resale that happened last year, as well as some continued softness in the segment of consulting that we are focused on, more than offset by the growth in our PKI business where we have continued to focus on.

So WidePoint's total revenue as a result of this decreased by approximately $1.5 million from $4.8 million for the three months ended June 30, 2006 to $3.3 million for the three months ended June 30, 2007. Again, the material cause in this reduction of revenue during the three and six-month periods were the nonrecurrence of the onetime software resale and some softness within filling some positions more than offset by the growth in our PKI managed service segment.

In expanding on PKI, our PKI credentialing and managed services segment experienced revenue growth of approximately 252% with revenues increasing approximately $1.1 million from approximately $424,000 for the six months ended June 30, 2006 to approximately $1.5 million for the six months ended June 30, 2007, all as a result of the continuing adoption of the federal government's various mandates to rollout our future credential programs to various agencies and contractors.

For the three months ended June 30, 2007 our PKI credentialing and managed services segment experienced revenue growth of approximately 488% with revenues increasing approximately $1 million from approximately $200,000 for the quarter ended June 30, 2006 last year. So with that, we are very pleased to see that growth to $1.186 million for the quarter ended June 30, 2007. We do anticipate the credential sales and managed services sales should continue to increase in the medium to long-term horizon as we continue to fulfill contract wins. We witnessed the further adoption of the ECA program by the DOD, the HSPD-12 program finally starts to rollout as well as various other groups and pilot programs come online associated with the various other federal government mandates.

Looking at this and moving into cost of sales, we witnessed a decrease in our costs primarily attributable to strengthen our PKI segment driven by new client award and expansion of past client requirements. We were very pleased to see this growth segment as the revenue starts coming online how strongly the margins improved and grow; in which case going from approximately $100,000 loss on $200,000 revenue in the prior period quarter, to a jump of over $300,000 in profitability as it grew to over $1 million.

As those numbers increased within that segment, we liked the business model, the managed service model and how it drives free cash flows ultimately to this business model. So with that, I would like to move onto SG&A and do a quick review of SG&A. We also witnessed a slight increase primarily attributable to higher bid and proposal costs and some recurring nonrecurring legal expenses associated with some contract document review costs. We believe that the increase in investment in the bid and proposal cost represents money well spent given the potential opportunity that we are starting to see bear fruit.

We've had a very stagnant period when things stalled in the first quarter of '07, and as we took the time in hand to start looking at other pools of people and expanding into it in the first quarter, we realized some benefit from that change. In fact in the second quarter and with this investment that we've made just in SG&A we are seeing it bear fruit. And in this case in the second quarter in June and hopefully moving forward into the third and fourth quarters into '08. The remaining other costs within depreciation, interest expense that really didn't change that much. And as a result of all these things we only realized a loss of a little less than $1,000 for the period ended in June 30, 2007 compared to approximately $230,000 in loss in the prior quarter, which again we are very pleased with. And which we also believe represented how our business model can work in scale not just on the top line but throughout the entire business model.

Well, addressing cash, the second quarter was also very interesting given the fact the event that yes, revenues did fall slightly, with various topics I have already addressed, but we also managed to shift to a bit different business model, and cash flows from operating activities actually grew $730,000. With this, we also invested $170,000 in investing activities along with $106,000 in capital expenditures. So ladies and gentlemen, for the quarter we financially grew our revenues within our key PKI segment; we won additional contracts, we positioned the company with additional partners and opportunities, improved cash and cash equivalents over just the past quarter alone, maintained working capital approximately $3.5 million, incurred no debt and continued to invest in the company.

As we look forward and the marketplace starts picking up, we truly believe that we have built the basic financial infrastructure to take advantage of the market opportunity that we are witnessing. And that Dan has described in his prior conversations, as well as Steve. So thank you, gentlemen, ladies. Back to you, Steve.

Thank you Jim and Dan. Hopefully that was a well-received summary of our activities over the past 90 days. At this time I think I would like to pass this back to our moderator, Chad, who hopefully can help us out and open the lines for a question-and-answer period.

(OPERATOR INSTRUCTIONS) Jeff Miller, JMG Capital.

Nice quarter. I know this is kind of the Gobi Desert period for you or was in Q1, but can you go into a little more depth about how many credentials you credentialed this quarter and what are the sizes of the contracts you won? And can you anticipate Q3 getting some meaningful jump in the credential contracts in the 10,000, 20,000 and 30,000 range like you had I think in Q4 '06?

I think Dan and I can probably address that because it really is two questions, or a couple questions in various different areas. One, we actually didn't list credential sales because the business segment and what we have been doing product wise hasn't been credential specific. We've been standing up services, servers and boxes and various other tools within our managed services that is focused on providing more of a solution. So with that, we did see a jump, a meaningful jump in credentials that will be issued over a period of time as well as of the quarter. So they are starting to become segmentation within our segmentation, if you can follow that.

We do see meaningful growth coming within the segment over the next two quarters and in '08. And our partnerships that we are working on right now we believe may bear fruit in us capturing some of those pools of people that I think you may witness or see firsthand near-term, but we can't really disclose that yet. I am also kind of covering us a little bit on the next two quarters because also from a revenue recognition perspective some of those partnerships that we have, they drive when we issue or when we stand up the services, and it is not us working alone.

But we are witnessing us coming out of a thaw, like you said us in the Gobi Desert. We are very pleased also that we turned around and started focusing on other pools of people, not just HSPD-12 because half of our growth came from what we did in the first quarter. Which was a very -- it was nice for a small company because strategically we could expand and change roles and you can see alone what that did in the second quarter from the segment. With that I think I can let Dan try to address any other questions you have within the thaw and where we are opportunity wise.

I think Ken can talk a little bit to USA to give an indication of why the serve count has not been immediately relevant as it has been.

So a large portion of the revenue for second quarter and this is where some of this model is changing, two of our new customers -- specifically United Space Alliance and our follow-on effort with XTec and the Department of Labor, both of those were sold as provisioning. So in the issuance where there are two ways to issue these credentials where we are actually doing the manual issuance piece, those two organizations are doing it themselves. So we sold those credentials as a provisioned credential, so the credentials are sold. Many of them have been issued, but they also have some time to self issue the balance. From our point of view the machines were provisioned, their licenses were provisioned, and that became a sale.

So then going forward how do you get your revenue then from these two new customers if they are going to be self credentialing? Is it just because they're utilizing your services and you have (multiple speakers)

They're utilizing our [backend] and they have a licensed managed service agreement. We are keeping the lights running, and we have an annual maintenance cost that is collected each year to keep that system running. And in addition, on the USA side there was also a big piece of systems engineering work to put their system, their issuance system, their local work stations together that will allow them to do this on an as required basis. But they procured the credentials, if you will, upfront and procured them as an initial license with an annual maintenance agreement.

Jeff, that is kind of like the renewal.

Yes, that's great.

So that way we could also reduce costs dramatically and increase productivity and profitability within the managed service.

Perfect.

It scales nice, too.

Exactly. I think I recall -- I don't have my notes in front of me but it ramps up as the size of the pool of credential people increases, correct?

Yes.

Good. Thank you.

[Ted Karcus], [Forester Financial]

Greetings gentlemen. Nice quarter. I think Dan mentioned that there are six opportunities that you're going after right now where there are fees out there, where you are looking at both prime and sub roles. Can you give us a little more detail on that in terms of how many of them are as prime and how many are sub? And the ones where you're going as prime if you lose it, would you also end up with sub roles in the ones where you're going after as prime? And secondly could you break it down between what is HSPD-12 and what is not HSPD-12?

We are in a sub role in all of them. We are in a prime role right now probably we're considering four of them, working on four of them at the prime role. The four of them are specific to HSPD-12, including another GSA, OCI, office of CIO environment, DHS has come out with an RFP -- I forget the other two -- and we have two commercial that are commercial/government, if you will. They are one is FiXs related, that is to provide cards and credentials to access government resources. And the other one is a outshoot of our health information services pilot that we did last year.

And there are various levels of credential sizes ranging from the 30,000 to 50,000 all the way up to one million, over a five-year period. And there are also various models including soup-to-nuts issuance where we do the whole nut and that is where we are mostly in the sub role. And then there is some that are the model that we just spoke of, where we do the provisioning and the training for the entity to do it its own local issuance.

Okay, it sounds like -- I have been following the company for a while now. Obviously we are moving away from just talking about credentials now, and we are talking about where the revenue streams are going to come from, and the cash flow is going to come from, the earnings are going to come from in the future. Can you give us an idea -- you said 30,000 to 50,000, some of the smaller ones up to one million, over five years. That is the credentials you are talking about up to one million credentials?

One million users.

User, end-users, okay. Do you have any idea what kind of revenues we are talking about with these? And actually my real question was, do you have an idea, has your model changed in terms of what you think the credentials are going to sell for?

No, as I said in the past, the finite cost of the credential is going to be level loaded. There is going to be -- the cost of the credential to the end-user or to the person that is buying, if you will, is going to be between 50 and $100. There is a big portion of that front end issuance piece which is very labor-intensive that when pulled out of that cost may lower the cost or the price, if you will, to us but will not move very much to grade the profitability of the credential.

In other words, it might go down a 40, $30 a person say, but we are still going to see the 20 to $30 profitability in there. And that is in general terms. In the larger environments we are seeing that there is going to be a bigger desire to have the back end provisioned and to let the people they already have doing similar things like an HR and security do the vetting and the credentialing. So that is manpower we don't have to put out there, but that has and it has been evidenced both in US and a couple of other projects where it has come back, if you will in the training and the engineering piece. Because you can't just say here's a box, go forth and do. So we are getting, if you will, additional requests or follow on work for training and systems engineering and putting their internal processes together.

I will let you know we are planning -- I won't tell you the specifics, but we are planning a release on a project, and we are seeing opportunities in this one case up to $25 million over the next five years. So there is a substantial opportunity. This opportunity that we're going to announce in a week or so will provide not only a short-term increase in revenue, but as the outgoing people are increasing the issuance and increase over the years in the annuity.

Just so I understand this, it sounds like --.

Just say anything, Ted.

I'm sorry?

He just was speaking in general terms.

I don't care about that, that's not what I'm getting at. It sounds like -- I don't want to use the word seachange, but it almost sounds like there's a seachange going on in the business model between issuing credentials and now doing some of the training and engineering, and then where does the annuity come from? Does it come from managing the credentials after they are issued or could you explain that to me?

The big piece of this has always been the back end life cycle management of the credential and that trusted server in the back. The additional stuff, if you will like actually handing the card to a person or handing the credential to a person, although it may provide additional revenue, was not the place where we were making money.

I think, Ted, the only comment I would add to that is I think number one, it is perceptive that you picked that up just from this quick conversation, but the reality is there is some change in the revenue dynamic going on. But we don't think it is a seachange, per se. It is a change of mix, but we do not see that as detrimental to our original set of projections.

Okay, and I don't know if I could ask one or two more quick questions. Just in terms of the size of this FiIx opportunity, could you put that in perspective in terms of total numbers that you're going after or how big the numbers could be?

Like I said, of the six there is two or three that are in the 30, 50 to $100,000 range.

The credentials.

Then there are two or three that over a five-year period we are looking at a minimum one million, and up to 7 million credentials.

And these FiXs opportunities will be awarded over the next six months?

That's our hope.

And then into next year in terms of HSPD-12, actually rolling out the way we thought it was going to. Do you have a better idea of when the floodgate starts?

HSPD-12 is going to be an insignificant piece of this going forward model. We are seeing a lot more interest from the first responders, from the medical community, HSPD-12 is happening, and it is moving along. But I think it is going to move along at a much slower pace than the rest of this environment and is going to end up being not as significant.

Okay.

That was one of the reasons in the first quarter when we were looking at everything stalling where we looked at where people were kind of getting ahead. And when we started firsthand realizing that these other pools of people were not going to be lagging but actually leading, that is when we jumped and changed our strategy slightly and our mix to go after these pools before other people could even realize it.

Right. Thank you very much.

(OPERATOR INSTRUCTIONS) Frank Bianco, Argent.

I got three actually. The first is you mentioned that you are seeing activity pick up. Could you just give us more color as to what might be triggering that? Do you want the other questions as well?

I will start with that. We are seeing a lot more activity on the DOD side because recently they have set up a couple or locked down a couple of broad area databases which are focused on contractor performance reporting. And it is basically some of the things you need to report on your government contracts prior to getting paid. So it is a big incentive to do this. They've shut down user name and password access recently and only accepting ECA. And for DOD folks, of course, DOD certificates to access these websites.

So the interest is coming from the contractors from here?

Yes, it is coming from the contractors and being promulgated by the Department of Defense.

And then can you just touch on the funding outlook or is that not a material issue now that you sort of just changed the way you're going about your business?

Funding for the government --

Yes, government-wide, yes please.

We are in the same boat from the government piece as we were a couple months ago. They are still scrambling right now with war initiatives. If you walk around town and you ask the question the end of the year money is not showing up yet. So government spending itself is not flowing like we would have hoped it would, and that is what is basically slowed down the HSPD-12.

On the other front, though, commercially there are a lot of grants out there in local and state governments. And a lot of money is moving in that direction which is really bringing up that first responder and this commercial activity.

And then you also mentioned acquisitions in your opening remarks. Can you just talk a little bit about what kind of size you might be looking at and potentially how you might fund these? Are you guys going to come back to the market anytime soon?

Frank, I am going to be the bad guy on this. I hope you don't mind, but I do not think we really can give you any guidance. The one thing I can say is that we are active in that market. We are looking at opportunities and I really do not think we are in a position to share any more than that right now, and you have my apologies.

I understand. Let me ask you this, then. With the stock where it is, would you be comfortable issuing stock down here?

Really can't say, Frank.

Okay. Thanks.

As we've always said in looking at acquisitions we would only do something strategic in nature and also accretive. We would never put anybody -- since we are all here large shareholders just at this table on this side of events, we're not going to dilute ourselves. And I think that is where you're going with that. And we are in no panic or rush to go out and acquire anything. So we've been saying that we'd look at things all along; we always will look at things all along. But it is going to have to be strategic in nature and it's going to have to offer the growth opportunities that we offer internally. Okay?

Okay. Thank you.

(OPERATOR INSTRUCTIONS) We have no further questions at this time. I will turn back over to management for any closing remarks.

Thanks, Chad. Appreciate it. And again, my thanks and Jim and Dan's thanks, as well to the participants for your continued attention and interest in WidePoint. And we look forward to being with you 90 days from now and talking to you about the fulfillment of several of the things that we've indicated are our current trends today. We look forward to that, and we thank you again for your time and attention.

Ladies and gentlemen, this concludes the WidePoint Corporation second quarter conference call. You may now disconnect. Thank you for using AT&T.