WidePoint Corp (WYY) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the WidePoint Corporation 2007 earnings conference call. During today's presentation all parties will be in a listen only mode. Following the presentation the conference will be open for questions. (OPERATOR INSTRUCTIONS) If you are using speaker equipment, please lift the handset before making your selection. I'd now like to turn the conference over to Cale Smith from Hawk Associates. Please go ahead, sir.

Thank you. Good afternoon, this is Cale Smith from Hawk Associates. Welcome to the WidePoint year-end 2007 conference call. On the phone today are Steve Komar, CEO of WidePoint; Jim McCubbin, the Company's Chief Financial Officer; Dan Turissini, WidePoint's Chief Technology Officer and CEO of subsidiary ORC; and Jim Kang, CEO and President of iSYS. I'd like to begin by reading the Company's Safe Harbor statement and then we will hear from Steve and Jim 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 provided by these forward-looking statements. These factors include but are not limited those detailed in the Company's periodic filings with the Securities and Exchange Commission. Now here is Steve with his opening remarks.

Hi, thank you, Cale. Good afternoon to everyone and on behalf of the WidePoint management team I'd like to welcome you all to the Company's 2007 year-end earnings and investor call. And as always to thank you for your time and interest in the Company.

During our last investor call, which was several months ago, I made a reference to the fact that we were working with two companies very closely and had forged a strategic alliance with each of those and a little bit of a teaser associated with the fact that we felt there would be more information soon to come. As many of you are aware, at least one of those companies has transformed itself into an acquisition for WidePoint Corporation and today, I'm basically pleased to formally welcome Jim Kang, CEO of iSYS LLC to WidePoint, to this conference call and to our management team. The iSYS acquisition which was completed in early January essentially doubles WidePoints size, provides synergies in two of our core business segments, and also opens an exciting new market opportunity for us in the Mobile Telecom managed services field. Both Jim and Dan Turissini of ORC will be available for discussion and to answer your questions later in this call. Now, back to 2007 results.

Our PKI related businesses performed strongly with revenues more than doubling versus the prior year. 2000 revenues came in at $3.6 million in the PKI sector. Unfortunately this growth was not sufficient to offset a year to year revenue shortfall in the engineering and consulting segment due primarily to a number of large one-time software sales that occurred during the prior year period and in addition to that some drop off in billable consultants hours during 2007. As a result, revenues totaled $14.1 million in 2007, which was $3.9 million less than that achieved in 2006. On the other hand, gross profit totaled $3.6 million in 2007 with gross margins improving from 21% in the prior year to 25% in the 2007 year, a lot of that due to a shift to higher margin revenues and revenue mix. And both the engineering consulting and PKI segments were profitable at the operating income line. Jim McCubbin will expand upon and analyze some of these figures during his comments to follow.

Well, it's already April, of 2008, so a look to 2008 and the future would seem appropriate. We are experiencing positive trends in our business segments, ranging from the Transportation Workers contract and alliance with Lockheed Martin Corporation across to our alliance with the FiXs smart card alliance and the PKI segment and across to the recently awarded by the general services administration, FSSI contract to iSYS and our newly acquired Mobile Telecom services segment. We also see activity levels accelerating throughout the federal contracting process as the year progresses.

In summary, we remain quite optimistic about our growth trajectory for 2008 and beyond. We see aggressive growth rates for both our PKI and Mobile Telecom segments and a more stable and measured growth in our engineering, consulting offerings.

Our current multi-year contract revenue backlog is approaching $100 million, sizeable additional awards already in the pipeline. We believe the outlook is very promising for both the Company and its investors, and want to assure you that management is committed to maximizing this opportunity for success.

I'd like to thank you and thank you for your attention, now I'd like to turn the meeting over to Jim McCubbin to take you through a more detailed financial and operational review. After which we will open the meeting to your questions and any other discussions. Jim?

Hello, everyone. Steve has pointed out 2007 was again a very productive year for us at WidePoint. Revenues for the year-ended December 31, 2007, were approximately $14.1 million, a decrease as Steve said of approximately $3.9 million as compared to revenues of approximately $18 million for the year-ended December 31, 2006. This decrease was materially attributable to a spike of software resales, which occurred in 2006, the government agencies for prep work for the launch of related HSPD 12 work that we commenced in 2007. In 2006 software resales were not recurring events and in 2007 therefore does provide a bit of a skewed result, offset for otherwise a very positive revenue performance as we've been shifting more of that performance towards the PKI segment.

The positive trend that we are pleased with is that our continued year in and year out growth as I said in PKI credentialing managed service has grown this segment, continuing its strong upward growth of revenues approximately up 103%, increasing from $1.8 million to approximately $3.6 million in 2007. Given the budget difficulties that we experienced in 2007 that all but stalled HSPD 12 efforts we're very please that we found ways to continue this strong growth and look forward to positioning us for that continued strong growth in 2008 and beyond. Another positive event as Steve mentioned was improvements in our gross margins in 2007. For the year we witnessed these improvements moving from 21% to 25% in the year ago period. We do anticipate that our gross margins in our consulting segment and our PKI segment should continue to expand as our PKI segment grows in relationship to the combined mix. As our PKI segment further expands we also believe that those margins will reach critical mass, as the financial model then exceeds carrying costs and then more of those revenues on a recurring basis and gross margin line will find its way to the bottom line.

In looking at our other cost such as SG&A, depreciation, amortization and interest income, those components leveled off in 2006 from 2000 -- in 2007 as compared to 2006 in absolute terms with about $4.2 million being incurred in both years. In 2007, in fact, backing out the approximately $580,000 related to depreciation expense, amortization expense, and stock compensation expense, we actually had net -- the equivalent of net income of approximately $62,000, all positive signs again on how we have been managing our balance sheet in what was a difficult environment in 2007 which is now just starting to change for the positive in 2008. So, as a result of this, our net loss for the year-ended December 31, 2007, was approximately $500,000 or $0.01 per basic and diluted common share, a slight increase over the $400,000 net loss or $0.01 per basic and diluted share we recognized in 2006 but again given the 2007 budget set backs we realized we're very pleased with this result as we grew our PKI segment and made all of our internal investments from internal sources. In fact we ended the year with net working capital of approximately $3.3 million with $1.8 million in cash and cash equivalents and $4.8 million in accounts receivable only offset by $3.4 million in accounts payable and accrued expenses.

That brings us to the end of 2007 but many things happened in the end of 2007 and the beginning of 2008. This all started with several exciting developments. We entered 2008 with expanding our commercial loan agreement with Cardinal Bank. This opportunity in working with the bank in again a very difficult marketplace led us to the acquisition of iSYS in January of 2008.

Looking at iSYS, iSYS had revenues of approximately $20 million last year, and net income of approximately 1.4 million to $1.5 million on a standalone basis as a privately held Company. With a backlog of $75 million that they brought to the table with us entering 2008, we're looking for very strong continuing growth, from iSYS being part of WidePoint going forward. We can't say enough about the synergistic benefits of of this acquisition, as it brings forward information assurance strengths from our ORC operations and iSYS operations and brings them together, adds forensic informatics which is very important to us because of what our belief of the securitization necessities of those very important lines of information and communications between the different labs around the state and the FBI. With that we have also found ourselves now being one of the largest Federal Government providers of Mobile Telecom managed services in the wireless environment. We believe that's very synergistic to our security business as the securitization of PDAs and other devices adds strength and benefits to our PKI model in which case at this time we're performing it on laptop, desktops and with special devices and smart cards, again expanding our reach. Major benefits for what we're capturing on a competitive basis. But that wasn't alone with what's happened in the transition period from 2007 to 2008.

Other positive events that we've witnessed in the first quarter of 2008 have included several contract wins, the addition of a new major contract vehicle, several partnerships and teaming relations, and several contract extensions. During the first quarter we have had wins with the FSSI which is Federal Strategic Sourcing Initiative for approximately $93 million, which we believe will be implemented over starting in the second quarter of this year. We've also had extensions and growth within the Department of Homeland Security, with the DLA, WHS, CDC, TSA, and the DoD, major acronyms that seem to be prevalent within the Federal Government, but again, across all boards, we've seen some major movement in the end of the first quarter with these extensions and contract awards that we're very pleased with.

We also during the first quarter became FiXs certified. We have signed up a major association to provide FiXs credentials with that will add another 40,000 members as an opportunity for us this year. We've added another agency under HSPD12, and we started what we believe will be a major DoD initiative, that all is going to be starting in the end of the first quarter and moving forward in the second quarter. Most of these items, more for competitive reasons than nothing we will probably be putting out some press releases to finding them with over the next 60 days. We do want to make sure that we have things well under way and that we have them wrapped up where there can be no competitive threats for us.

So so looking at the beginning of the first quarter of 2008 which is seasonally weak as the Federal Government competes its budget process. We're anticipating revenues of more than $7 million in this quarter and we're expecting, based on backlog contract wins to see this revenue base grow sequentially in each quarter outward. So with that, we're pleased with how we came through 2007 given the environment. We're pleased at how we found ourselves expanding the business base materially with the acquisition of iSYS. We're very pleased with the contract wins and the forward movement we're finally starting to realize in the first quarter of this year, and we're expecting as Steve said earlier, many positive events for both the shareholders and the Company looking forward as we move beyond 2008 into 2009 and 2010. So with that, Steve, thank you very much.

Thank you, Jim. I appreciate the expanded information. Very well done. I would now like to turn the call back over to Nicole, and hopefully she can help us move on and open the call and take your questions.

Thank you, sir. (OPERATOR INSTRUCTIONS) Our first question comes from the line of [Jeff Miller] with JMG Capital. Please go ahead.

Hi, guys. Just had a quick question, if you had combined I guess pro forma revenues of $34 million from last year combining iSYS and you, shouldn't revenue be a little greater than $7 million for the first quarter '08 going forward?

Well, right now we're projecting seasonally, no, first quarter has always been light with us. We're looking forward to quarter to quarter growth based on backlog, but the first quarter in what we're estimating right now, that's just where we are, Jeff.

Okay. So--?

We do see a major growth level of growth quarter in quarter out.

Okay.

Sequentially.

Understood, okay. So we can expect then a ramp up as you go through the year?

That's correct. And last year in '07 if you would have seen it on a pro forma basis you would have seen the ramp as well.

Okay.

If you look at the 8-K, 8-Ka, number 1 filed earlier in March on iSYS, you will see their nine month numbers and then take a look at their nine month and their 12 month number I just projected and you'll see how that ramp occurred there as well. Third quarter, fourth quarter you do most of your business.

Perfect. Thank you very much.

Okay, thank you.

Thank you. Our next question comes from the line of Jeremy Grant with Stanford Group. Please go ahead.

Hi, good afternoon, guys, how are you doing?

Hi, Jeremy, good, thank you.

I wanted to ask you a bit about backlog. You were talking, it's up to around $100 million now over multiple years and a lot of it comes from the new Mobile Telecom Management IDIQ?

Yes, that's -- well, no. Not in the base -- in the base $100 million we referred to does not include$ 93 million FSSI contract.

Okay. Can you break down a little bit of what the 100 does include, or I guess that's sort of part A of the question and part B is how much do you look at it as funded backlog heading into 2008?

Jeremy, it's Jim. Right now, the $93 million on the IDIQ contract for the FSSI program is not included in that number.

Okay.

Two, you're looking at about $50 million funded, okay? You're looking at that spread over the next two years at the minimum.

Okay.

On top of that, they're coming from several programs with DHS, TSA, and clients that we presently have.

Okay.

Does that help?

Yes, so the 50 I was just trying to get an idea of what's near term versus sort of I guess a little bit further out in the ether.

Right, but we also believe by the end of the second quarter we'll be able to expand that number and give you a little bit greater detail.

Okay, I know you're just closing the acquisition and everything too, so that creates some issues. Wonder if you could talk just a bit about some of the opportunities on cyber security? I know you mentioned both with WidePoint score as well as with iSYS, and obviously here in Washington there's a tremendous effort going on with this whole new cyber security initiative. Where do you see yourself particularly strong within that universe?

Good question. Fairly general. Dan, do you want to take a shot at that some

Well, hi, this is Dan. Hi, Jeremy.

Hi, Dan.

As you know, what we are offering out of ORC is constantly increasing across the Identity Management environment, including the hosting of identity protected or certificate protected assets and data, so we're going with a lot of our large partners who we're starting to deploy the various types of cards, a lot of them all focused around the FIPS 201 and we are offering other transactional data environments that provide, I don't want to say the specifics because of the folks competition, but data that is going to be supported and provided to card holders and more often relying parties who are authenticating folks with the cards but also need specific information as to determine their privileges and access requirements.

Okay. And is there anything coming from the iSYS side that also plays in that?

Well, for the stuff that we're doing is that we're providing professional services and as you said cyber security is a primary objective for the Federal Government, and so we're working closely with the Department of Defense and other federal agencies to help them secure their system and so we're providing professional services and engineering services so we feel that that particular area will continue to experience substantial growth.

Okay, great. And then the last question I have was the doubling of PKI revenue, is TWIX the largest driver there or were there some other things as well to be looking at?

Other things as well, Jeremy.

Yes, I think the answer is both, right?

Both.

Yes.

Okay. All right, that's all I had, thanks.

Thank you, Jeremy.

Thank you. Our next question comes from the line of [Sam Donaldson], Private Investor. Please go ahead.

Gentlemen, given all the positive development that you've outlined here, and I take it there's not going to be these one-time spikes that occurred in '06 in '07, is it reasonable to anticipate a net operating profit this year? And perhaps even a healthy one and if not, what would be the factors inhibiting that?

Well, Sam, hi, by the way, this is Steve.

Hi, Steve.

I'm going to answer your question to the limits of my ability to do so without undue disclosure, but I think it's fair to say and I'm sure I speak for everybody on this end of this phone call that we expect to have robust operating earnings in 2008.

Well, I know you can't pin down to a figure, but I guess the last part of my question really was the important part. Do you see any factors that might inhibit it? For instance, we do business with the Federal Government to a large extent and I take it the recession that we are either in or may go into is not going to materially affect that, but tell me if you see anything else in the horizon we might watch for?

Well, Sam, I guess to some extent we all live with this every day. That flank risk is clearly there. We don't consider it a high risk at this point, and we feel pretty positive about the directions but if you talk about the structural risks, well, the political process number one, the continuation of military efforts, and the impact that they might have in terms of draining available funding, those are all real life risks that we live with, but we have not seen deterioration as a result of that and recently we did and we mentioned earlier 2007 was a difficult year. Part of that was associated with diverting funding to the war effort, but we do not see that at this point in time as a major risk.

Surely, Congress this year after two years of not funding the Federal Government other than continuing resolutions and that type of money is going to do something in addition to that. That's all I have but again I want to thank you and congratulate you on your efforts.

Hey, Sam, it's Jim.

Hey, Jim.

How are you, bud?

Good.

The IT budget and everything has passed. It has been expanded. They are putting more money into IT security on Dan's side. On Jim's side which we haven't really got into a whole lot and we'll get more into in the first quarter he's actually part of the initiative. He saves money for most of the agencies in what he does and there's a big flight to what he's doing this year. Purposely so it would loosen up some other budget money within those agencies to do other endeavors and that's why the large contract award for the federal, sourcing strategic sourcing initiative was really all about how the agencies can save money and that's why we believe that will give us a little bit of an added punch in almost any recessionary environment, but of course, Steve told you the hindrances, but I just wanted to point out some of those factors and why we did the iSYS acquisition and positioning us, going forward.

Well, look if we can save the government money at the same time, make money for WidePoint that's a twofer. Thanks again.

Thank you, Sam.

Thank you. Our next question comes from the line of [Barry Zealin] with Axiom Capital Management. Please go ahead.

Yes, hi, this is David Jordan, I'm sitting with Barry Zealin, good morning -- or good afternoon, I should say. I just have a couple questions I'll rattle them off so you can respond to them when you want. Number one, what did you pay for iSYS? Number two, you mentioned, I think Steve mentioned a second Company. Could you tell us a status about that? And I think you mentioned that you have a $95 million backlog and I think a briefly heard you do, you expect that to be done in two years so that would imply $50 million a year. So would it be fair to assume that even if it's back ended a little bit, you are going to do at least $40 million out of that almost $100 million? And was there some number in that you said aside from the $95 million in the backlog, there was another $50 million contract or did I get that wrong? I'm sorry it's a lot of questions but I appreciate being a shareholder.

If you don't mind us sort of shotgunning back at you we'll answer as many of those as we can.

I appreciate that.

Hi, David, hi Barry, it's Jim.

Hi.

One, your first question on purchase price?

Yes.

The purchase price, we have specked out in an 8-K, and that's out, that was put out approximately January 8, was spelled out the terms, in general, high level terms. The principal was paid $5 million in cash, which is [JEN], JEN also was paid 1.5 million in shares, and then there was placed into escrow 3 million shares of stock. Also, on mid March, there was an 8-Ka which has the pro forma impact describing and showing both his audited financials in 2005 and 2006, the nine month period 2007, there's also pro formas of what the companies look like together. I think that will help you understand not just the transaction value but also the accretiveness of the transaction that we entered it.

Right, appreciate that.

Okay?

The second Company that you mentioned?

There's also a $2 million note, David.

Okay.

If you think of it in terms of $5 million in cash, $2 million in a note, 1.5 million shares, that's the transaction. Everything else is associated with performance incentives going forward.

It was a great acquisition. And what happened with the second company, Steve?

The second company remains a strong strategic alliance partner today. We are working with them very closely in terms of synergizing some of our product opportunities but that's as far as I can go today.

Might they be acquired?

It's always a possibility.

Okay, that's fine. I've got two more, I think.

David? In no event would we ever acquire somebody unless it was a very accretive for us. In the K, you will see that we will have, finance them to a small extent and we will have collateralized all their assets with that financing but again we try to do things where there's proof and performance and that there's only a benefit to us and that's what we're looking for so therefore, there's a win-win for both parties and again it has to be a win-win for both parties and very accretive for our shareholder base.

Great. Could you comment on my confusion about the $95 million backlog and maybe another 50 million contract and I think Jim, you were the one that said you expect to recognize the contract value in two years? Was I mistaken with that?

We through out a whole lot of numbers there.

Right.

May have confused you. To keep it a little simpler, we came into the year, okay, and we're positioned right now with about $100 million in backlog opportunity. Of that, okay, there's, as Jeremy asked earlier, there's about $50 million of it funded that we think we'll recognize over the next two years at the minimum.

Okay.

That does not include though, any of the contract wins such as FSSI and the others that I discussed with the FSSI contract alone, being an IDIQ contract worth $93 million over a five year horizon.

Okay. So if you take the, if you take that contract and if it's equally distributed over the five years that's $20 million and the other is $50 million in two years, that's $45 million, so I would think that a 35 million, $45 million revenue number is not unobtainable, or is attainable?

David, we're not commenting on this right now. What we did comment on is we're looking for greater than $7 million in the first quarter and we're looking for sequential revenue growth quarter in quarter out for the rest of of '08. That's what we've said.

With rising margins I believe you said also?

Along with rising margins. We're pleased with our backlog opportunity. We're pleased with the contract wins that we're just starting to get. A lot of the work in wins were, occurred in March. We want to get a lot of that work going before we really discuss it in any details for competitive reasons.

And the last question I promise. In the space that you're in, is anybody recognizing a greater level of revenues or the visibility of a greater level of revenues than you?

We believe we're market leaders in the two segments that we have niches in.

Sounds great.

Which are PKI and--.

Thorough Mobile Temps.

Great. You're doing a great job and I appreciate your time. Thank you very much, gentlemen.

Thank you.

Thanks, Barry.

Thank you. Our next question comes from the line of [Victor Sedako] with Gunn Allen Financial.

Hi, gentlemen, how are you?

Hi, Victor.

Congratulations on your efforts as well. Any idea when you see any visibility, where you can give guidance for the rest of the year?

Victor, with us just finishing the acquisition, pulling together everything with our filings, getting everything started in the first quarter, we're not in a position to even remark on that yet. We're still pushing everything to complete so we have a good 2008, at such time that we really have our hands wrapped around that we'll try to give it to you. We're just not there right at this second.

Would you say maybe two quarters out? Another quarter out?

Again, Victor, we're just not ready to comment on that yet.

Okay. All right, all else looks well. Very good. Thanks, guys.

Thank you.

Thank you. (OPERATOR INSTRUCTIONS) Our next question comes from the line of [Jerry Farber], with Jerry Farber LLC. Please go ahead.

Hi, good afternoon. I was wondering if you could just help out going through the sources and uses of cash in '07, what was operating cash flow and other sources of cash? What was the uses of cash which brought us to the year-end cash balances and any commentary about '08 cash flow and any other financing needs, perhaps?

Hello, Jerry, but we're definitely turning this one to Jim.

Hey, Jerry, I haven't filed the 10-K yet with a statement of cash flows on it so I can't really go into great detail with it. We'll be filing the 10-K in a couple days and I can walk you through it at that time if you don't mind.

Right, but as sort of a follow-up, I assume the year-end cash balance reflected, did the events of your cash acquisition, those took place subsequent to year-end?

Yes, the acquisition and the debt all happened in early January of 2008.

Okay, right. So the year-end cash we saw was basically a result of operating cash flow and uses?

That's correct. And with that, if you back out the net loss, you back out the depreciation, amortization, stock compensation expense, those items alone bring you positive and then what you're going to have is some major pay down in payables, which gets you to about the $3.3 million in working capital that I discussed. We managed cash very effectively last year while also making some investments within our infrastructure at ORC for the FiXs credentialing and other credentialing programs, so we're very pleased with how that turned out, because how well it turned out--.

Okay. Thank you.

--it allowed it. Other things. Thanks, Jerry.

Thank you. We have no further questions in the queue. I'd like to turn it back over to management for closing remarks.

Thank you. I would just say in closing that we appreciate everyone's continued attention and interest. We really believe as a team that we are on the threshold of some very exciting things in 2008 and beyond and we look forward to the opportunity to be able to talk with you again soon and to share some of those upsides. Thank you again.

Thank you, ladies and gentlemen. That does conclude our conference for today. Thank you for your participation. You may now disconnect.