WidePoint Corp (WYY) 2008 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the WidePoint Corporation second quarter 2008 earnings conference call. At this time, all participants are in a listen-only mode. (OPERATOR INSTRUCTIONS). As a reminder, this call is being recorded today, Thursday, August 14, 2008. I would now like to turn the conference over to Mr. Frank Hawkins from Hawk Associates, the company's investor relations firm. Please go ahead.

Good afternoon. Now, this is Frank Hawkins of Hawk Associates, and welcome to the WidePoint second quarter conference call. On the phone today are Steve Komar, the CEO of WidPoint, and Jim McCubbin the company's Chief Financial Officer. I would 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, and 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, and 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 the opening remarks.

Thank you, Frank. Good afternoon to all. On behalf of the WidePoint management team, I would like to welcome you all to the company's second quarter 2008 investor call. And as always, to thank you for your time and continued interest in our company. Today we're pleased to report continued progress in our efforts to meet our strategic goals, on several fronts in building a sound, dynamic, and growing business enterprise.

During the day today, via press releases, and an SEC 10-Q filing, we are reporting impressive revenue growth results for our second quarter, and six months year to date 2008, versus comparable year ago periods. Percentage increases are 182% better for the second quarter, and 167% better for the six months year to date. We are, of course, quite pleased, with this. But recognize that much of this performance results from our acquisition of iSYS LLC, and the rapid growth of our mobile telecom managed services business. As a result, it may be more analytical and instructive for us to compare our results to the prior calendar quarter, that is the first quarter of 2008. With $9.3 million of second quarter revenues versus a $7.2 million first quarter of 2008 revenue performance, we see a strong, roughly 30% quarter to quarter revenue growth. Importantly, each of our business segments contributed positively to this revenue growth, and we expect to see a recurrence of this period-to-period growth during the second half of 2008.

WidePoint also experienced gross profits of $1.6 million in the second quarter of 2008, versus $1.1 million in the first calendar quarter of 2008. This is roughly a 45% quarter-to-quarter increase. And, again, each of our business segments contributed positive operating income to this result. For the consolidated company, we are reporting a small loss from operations, and a net loss for the quarter. Both numbers represent improvements from prior quarter and prior period. Even as we consciously invested and reinvested in sales, marketing, and business development resources, that are necessary for us to have the ability to meet the revenue growth goals of the company. We expect this positive bottom line profitability trend to continue. WidePoint also strengthened its balance sheet and operational liquidity during the quarter, through a private placement investment, and other cash conservation efforts.

Turning to the individual business segments, a number of positive events were realized during the period. At the mobile telecom business, iSYS was awarded contracts with five federal agencies, that should provide incremental revenues of $10 million over the coming year. And we continue to aggressively engage the 14 sponsoring federal agencies, under the GSAs Federal Strategic Sourcing Initiative contract, known as FSSI, for which iSYS was a successful bidder.

In the consulting services arena, we realized second quarter 2008 revenues of $3.4 million, and are pleased to see the resumption of revenue growth in an area that had lagged in past quarters. The primary drivers here were contracts for wraparound consulting services, tied to our PKI crendtialing activities, as well as more modest improvements with our identity assurance, and forensic informatics contracts. Our PKI credentialing and management services segment realized $1 million in second quarter revenues, over 30% better than the first quarter calendar year 2008 result. More importantly, we are now well positioned for more aggressive penetration and growth, focused on leveraging our strategic alliances with Lockheed Martin on a rapidly deploying transportation workers (inaudible) contract and our unique partnership with the [Fixis] Federation for CAC and ECA equivalent access IDs. As well as with the US Army base access, or spot program, at Fort Belvoir, Maryland, which is now concluding a successful pilot rollout that should generate substantial additional DOD Department of Defense identity assurance opportunities for WidePoint.

Also a note in the PKI segment, during the month of July, we completed the acquisition of Protexx Inc., which is a provider of software based 2048 bit tunnel architecture, with authentication and encryption solutions to both the state and local first responded market, and to the commercial sector business enterprises. This acquisition rounds out the menu of PKI solutions that ORC offers to the marketplace, and will accelerate our entry into commercial sector markets.

As we look ahead, I would like to take a minute and reiterate some of my comments from our last investor call, which identified mobile telecommunications, and PKI credentialing services as priority growth initiatives for WidePoint. Each of these offerings addressed emerging niche markets, with near term rapid growth potential, with greater than $1 billion in identified market size for each. They are managed service models, with attractive margins, and annuity revenue streams. And WidePoint business segments are well-positioned as proven service providers to each. Our maximization of these initiatives, is a very important component of our outlook and value potential over the next few years, and the bulk of our attentions, efforts, and resources, are focused on their success.

Summarizing, as we move forward, we'll be working to solidify and accelerate many of the favorable trends emerging from our most recent results, and are quite excited about our outlook for the remainder of 2008, and beyond. But enough from me. I would like to turn the meeting over to Jim McCubbin for a more detailed financial and operational review, after which we'll open the lines for your questions and comments. Jim, the stage is yours.

Thank you, Steve, for the thorough review, taking a lot of the financial analysis, and portraying it already for me. Ladies and gentlemen, welcome to our second quarter call. As Steve has already said, the second quarter continued to build upon the foundation we established in the first quarter of this year. And our success to date is leading us to a promising prognosis for continued revenue growth, and improving financial performance in the second half of this year, and into 2009. The capital we raised in the second quarter of approximately $4.1 million has allowed us to improve our financial capabilities, and make prudent investments within live point, the primary investment being the improvements we are presently making in sales and marketing. These financial investments, we believe will allow us to increase our bid and proposal efforts in our two strategic niche segments, which Steve has talked about. They're just now moving from early stage adoption, into the next stage of wider adoption and expanded growth. We're very excited about where we are positioned at this time with these segments, and the improvement in sales and marketing will allow us, we believe, to capture even more revenues as we continue along this path.

I'll expand upon this in a moment, but I would first like to address our financial performance in the second quarter of 2008. WidePoint's total revenues increased by approximately $5.9 million from $3.3 million for the second quarter of 2007, to $9.3 million for the second quarter of 2008. For the six-month period ending June 30, 2008 we also witnessed revenue growth with revenues growing from approximately $6.1 million to $16.4 million. This growth was attributable to strong performance in our mobile telecom managed services segment, and our consulting services segment, which benefited from growth related to the preparation of our PKI segment transition, from various pilots to larger projects.

Further looking at the first quarter to second quarter relative performance in 2008, all three of our segments exhibited growth with revenues growing from approximately $7.2 million to $9.3 million. Given the current bid and proposal activity we're experiencing, and our recent wins, the second half continues to look promising. And we believe we'll continue to support a revenue growth goals and objectives into the second half.

Looking at our gross margin, we also witnessed growth of 40% and 45% in a quarter to quarter comparison, and six months comparisons, respectively. We continue to expect this growth will continue to grow in both an absolute basis, and on a percentage basis, as we realize economy to scale. On a quarter to quarter, and the first quarter to second quarter of 2008, we also realized that this trend should continue into the second half.

Looking at SG&A, we also witnessed an increase in absolute dollars, as a result of the iSYS acquisition, and a decrease on a percentage basis due to the larger revenue streams attributable to the iSYS acquisition. SG&A costs for the second quarter rose to approximately $1.8 million from $1.2 million on an absolute basis, but on a percentage basis fell from 36% in the second quarter of 2007, to 19% in the second quarter of 2008. As we continue to grow our revenue streams and make investments in our SG&A, we do anticipate on a percentage basis, that our SG&A cost will continue to fall, improving our financial performance and business model in the future, while still supporting our bid and proposal efforts near term.

Moving on from there, and adjusting out non-cash expenses from the above, that I've just discussed, the positive news really does appear. Our adjusted EBITDA, which is earnings before interest, taxes, depreciation, amortization and stock compensation expense, under 123 R, actually improved dramatically. The second quarter we saw a positive $224,000 in adjusted EBITDA, growing from a negative approximately $160,000 in the first quarter of 2008, or a representative improvement of close to $400,000 or $385,000 to be a little bit more specific, that occurred in that swing, on a little over $2 million in revenue growth. We're very pleased with being able to provide the positive EBITDA growth, while at the same time making the investment into the bid and proposal activities, making the investments into our SG&A infrastructure, and still maintaining the improvements on our revenue models that are important to us, as a management team, and as investors.

Moving on from adjusted EBITDA, and factoring in the small amount of depreciation and interest expense, we did see our loss of operations increase from approximately $146,000 to $178,000 for the quarter, or approximately $0.01 per share. So with that we've come out with a very good foundation quarter in the second quarter. Growing from our first quarter. And we believe we're positioned, with our current working capital of $3.3 million, our cash of $4.8 million, accounts receivable of $6.9 million, to really move into the second half, secure and really tie down the market opportunities that we're chasing. So we can have a very, very strong financial performance in 2009, which we believe will make everybody happy, as we've grown tremendously from 2007 into 2008. With that, back to you, Steve. Thank you.

Thank you, Jim. Lots of good information. Well presented. I think at this point in time, if we can ask our facilitator, Pam, to come on line, and we can proceed to open the lines for questions and comments, from the attendees.

Thank you, sir. (OPERATOR INSTRUCTIONS). The first question comes from the line of Brendan McMillan from Capital International, please go ahead.

Yes, thank you. Could you all talk about the mobile security-- the mobile management offering that iSYS has? And just sort of walk through, how it compares to the competitor's offerings, and how you think you'll do based on that, on a comparative basis, when it comes down to bake-offs among the federal agencies?

That's a very, very good question. Let me give the best shot at kind of walking you through our solution set. The iSYS solution set for mobile [Tems] offering is a very strong solution. It's been really built out to support several federal agencies. It is a software solution that is proprietary to us. We do own it. We have developed it, and built it.

What it does, is it allows us to go in to the client, and provide savings through optimizing their billing, managing all of their phones, so they have a thorough inventory, backing up providing some storage capability, and ability to transfer from older phones to newer phones. And the full life cycle of management, including deployment for us to get rid of the phones in an environmentally sound way. The key to all of this, is really our ability to optimize the bills, which the agencies that we're at, have realized savings of anywhere from 35% to 60%. These savings literally provide them extra income, and what we've witnessed is they've increased usage of higher level phones, data systems with these budgets, which also then increases the revenue streams to us.

So there is-- it's a cradle to grave service. As it compares to the two competitors that are trying to look at the space, they do not have a baked off solution that has a strong optimization solution. They also do not have strong past performance within the Federal Government base.

I would just add that I think past performance is also a substantial criteria here. Until the arrival of the FSSI contract, much of the success has been by word of mouth, and by customer referral from agency to agency. And there is no competitor out there that can do anything like that today. And what we're dealing with, as a customer base that is essentially 100% supportive, and very proactive in terms of mouthing the benefits of a relationship with that product to the other agencies.

Okay. Could you address then how you charge for that solution, and if those charges are already set, or calculated into what you are estimating to be the savings on the customer payment basis?

Yes. Actually we charge on a monthly annuity basis, per device. Along with that, the savings are that the customer is recognizing, includes the cost they're paying for us. So literally, they're finding themselves with up to 60% savings, after paying for our monthly service. We also have a very strong solution that allows us to optimize, and provide the best coverages for the agencies, no matter where they may be in the country or even abroad.

So we can optimize performance for them as well, which again, is an additional benefit that we offer, that our competitors do not offer. We have built this specifically for the agencies and the mobile marketplace. This was not a product set that was built to migrate from a land line solution, or from some other software package. This was something built specifically to address the present marketplace that we're dealing with. And I believe it's one of the reasons our past performance has been so strong to date, and our acceptance has been so strong to date.

So would it be accurate to say-- would it be accurate to say that basically because of the billing practices, and the number of billing plans, and the overages, they're so much different in the mobile marketplace. That the software, and its customization to that market is what is helping you sort of bring about the savings, on the customer level?

Actually that is correct. A lot of the complexity in the mobile marketplace, especially on the billing side, as software makes visibility and the optimization easy to recognize where there is issues or problems, and where efficiencies can be gained.

Okay. And then I guess, finally, can you talk about market size? I mean, in terms of agencies, mobile users within the Federal Government space, and maybe other customer bases that you think are-- where the solution would work. I mean, I would assume that from what I've seen in the corporate sector, some corporations do this internally, and try to buy in bulk, and manage across a couple of carriers, to try to optimize plans, et cetera. But within the Federal Government's base, I'm not aware that those practices have really gone on, and maybe you could just address what portion of the government's space, and maybe the corporate marketplace would be addressable?

Well, right now we're at five agencies that have deployed this so far. We believe there is a marketplace for 40-- greater than 40 large agencies, and 14 agencies right now that are in serious discussions with the FSSI program, a program office with the GSA. We're looking at a minimum of 220,000 units that are being estimated under just the FSSI program office, for those 14 agencies, and we believe through past experience that number is small, compared to what we believe it will be.

So we believe the marketplace for just federal agencies is in the 500,000 to greater than million user base, factored out. We're also experiencing some early stage success with some local municipalities and cities, including the city of San Diego, several cities in Ohio, that this has worked very well for as well, and we also have done it for Ohio State, a university. To your comment on large customer or corporate clients, some corporate clients do this effectively well. But most we found to date, aren't.

Our big focus, though, hasn't been so much on the corporate environment, even though we are starting to play there, it's really more on the state, local municipalities, and the federal. We think our competitive position is the strongest, because of how the tool has been built for those marketplaces, and the inefficiencies in those marketplaces.

If I'm just looking for your revenues for this reported quarter, approximately how many devices are represented there? And then, so what is your sort of base of devices relative to this opportunity set in the FSSI contract you're talking about, of 220,000 or so?

Well, right now we're looking at maybe 35,000 units, as an absolute blended count. So as you can see, we're just started to scratch the surface presently. We have a long way still to go, and a lot of bid and proposal activity. That's one of the reasons we're pushing so hard at making sure that we can address our client base, and the client opportunities that we see.

Okay. Thank you.

Thank you.

Thank you. And our next question comes from the line of [Alex Zinder], from Deutsche Bank. Please go ahead.

Hello, guys. Congratulations. It looks like you're going in the right direction. The one thing I was going to ask is, can you give me a sense of how your pilots are doing? I know you have a lot of pilots out there. And I want to try to understand, when you go from a pilot to a little bit wider audience, to the full department, and how long that takes? So I'm trying to get a sense of the magnitude of increased, you have a pilot do you go from one to ten, or that type of thing?

Hi, Alex. This is Steve. Is your question directed at mobile telecom, or at PKI, or something else?

First at PKI. But also I would like to understand the mobile telecom. I guess it's a little different. First PKI, and then we'll get into the mobile telecom.

Fair enough. One good example, might be the Army spot program that I referred to at Fort Belvoir, which is in pilot, or near the end of pilot stage right now, and that involves 3 ,000 users per se. The total population that we feel will be addressed solely at Fort Belvoir will be 30,000 users. And in terms of timing, we're looking at two to three months for the conduct of a pilot program. The reality of life is that sometimes it takes awhile before those pilot programs start, and candidly the Fort Belvoir one started three to four months later than we thought it would.

The payback however, is that it's going very well, it's being well received. And we expect to move on soon after the culmination of that, into a much broader expansion, if you will, within Fort Belvoir. And also replicating that time line with some acceleration, we see the opportunity to move out into several additional bases in the Washington DC area, expanding that pilot, and then going to full distribution, if you will, or utilization over time lines that can range from three months to a year, candidly, if not more. Depending on the size of the base, and the complexity of installation.

Got it. And how many of these pilots do you have running now? .

In the military segment, the spot DOD program, is the program right now.

Okay.

Alex, that pilot leads to the full DOD rollout, which will start with the Army, and then go to the other facilities, services. There are some other small programs that we're working on with other agencies. Okay. As well as first responders, as well as certain states, related to either first responders and/or their compliance with HSPD 12 with the Federal Government.

In regards to mobile [Tems], it's a little bit different. That's actually starting as contract awards, where they may be a department within an agency, and then growth beyond that. And that has worked for the following five agencies that we've had with-- and iSYS has deployed very effectively. The press releases that you've witnessed over the last six months, has demonstrated how it seems these agencies, once they get it embedded and start getting their hands wrapped around it, it just kind of takes on an expansion life of its own. So we're actually very pleased with that growth mechanism, because it kind of just-- it's like rising water, it just lifts.

Right.

I would just add that if you're comparing the PKI to the mobile telecom, that both pilot, if you will, or departmental rollout stages, as well as partial to full adoption, are on a much faster timeline than they are on PKI. That's just the reality of that marketplace, and to the credit of the iSYS organization, they've been able to respond to that quick installation challenge.

Right.

The management team at iSYS has done a tremendous job.

It sounds like we're going to see a lot of the benefits of iSYS starting in the second half, and obviously rolling into next year, and it sounds like the lot of the PKI, the same ramp up, we should see next year, am I correct?

Most likely. The iSYS side, remember, is just-- is in kind of a faster ramp-up stage right now. Quarter and six months averages, you're looking at 300% to 500% growth from last year to this year, prior to our owning them. I mean, they're just really in a very nice place at this time. And especially, given the fact that the representative savings can be demonstrated in white papers, with the current client base.

Perfect.

I do think, Alex, I do think that your time line projections are pretty reasonable and rational.

Great. Thank you very much. That's all I have.

Thank you, Alex.

Thank you. (OPERATOR INSTRUCTIONS). Our next question comes from the line of Mark [Gillries], from First Allied. Please go ahead.

Hello. How are you? I would like to know management's latest thought process, as it pertains to a-- potentially affecting a Nasdaq listing?

Mark, when we can go on to Nasdaq, we would love to entertain that. Presently, we don't meet the standards. I'm always talking to both Amex and Nasdaq to see how we can improve that. Right now, the best I can say, is it's a discovery stage.

Okay. Thank you very much.

Thank you.

Thank you. (OPERATOR INSTRUCTIONS). And we do have a follow-up question from the line of Brendan McMillan, from Capital International. Please go ahead. And your line is open. Please make sure that your mute button isn't pressed.

Great. I had mute pressed. Two questions, if I could. One is just on the previous caller's questions. What are the minimum standards on the Nasdaq? Is it basically there's a bid price minimum and then a net asset value minimum? Could you just refresh us-- our memories on what those are?

Well, what I looked at recently is you have a $5 stock price. I've been told, that there's been some changes on the Nasdaq-- the equivalent of the Nasdaq small cap that I'm exploring right now, to see if we could effectuate a potential change from Amex to Nasdaq. We may be better suited for that marketplace. But I just don't have the final answers yet.

Okay. And I guess the second question is just with regard to waiting for next year for the PKI ramp-up, are you expecting that the earlier part of next year, the back half, and maybe could you just explain why.

Well, I'll take that one, Brendan, and then let Jim supplement me as necessary. But I think as we referred to, some of these pilot programs, and the reality of the government contracting process, we do feel-- and there are some logistical issues associated, frankly, with basically what they call vetting and then certifying and card issuance associated with some of these populations. I just think that practicality requires us to project that during the course of 2009 we expect to see substantial growth, and implementation in the PKI market segment. That does not mean that we do not expect to start seeing some growth in the latter half of 2008. I think what it does mean is, if you're thinking about full-blown success, and aggressive revenue growth, we need to be looking probably six to nine months out, on the time line. I don't know if Jim would agree with that. We have a lot of spirited conversations about this.

And sure, the bottom line impact here is, now we have customers and people wanting to deploy, and we have provability proven. And all of the hard work has been done, on the up front work. Now, going into deploying it means putting out enrollment stations with our partners, making sure that people get ramped up, and moving from that pilot stage, up to full deployment. That's just logistically, it takes a little bit of time to get that deployed. Once that is deployed, then you can readily bring on a lot of credential users. But making sure that we spend a little time doing it right up front, is very important in scaling any operation. So you don't want to make a mistake, because then you could jeopardize the full deployment of everything that you're doing.

Probably-- on redirect, the only thing that I would add to that Brendan, is that I think that perhaps the most significant change in environment is we are seeing all of the signs of serious deployment. And candidly, we've been around here waiting for just a little bit of time to see those signs. And we are beginning to see them out there. We are past, we believe, this hesitation and avoidance, and what we're seeing is a lot of contracting activities, and what we believe is the beginning of this hopeful waterfall of good news.

Great. Thanks.

Thank you Brendan.

Thank you. And I'm showing that we have no further questions at this time. I'll hand it back to management for any closing remarks.

Well, thank you. Thank you, Pam. Again, thank you to everyone for your time, attendance, and good questions. And we're also happy to have some opportunity to bring some good news to the assemble group today, and to assure you that we will be continuing to work to meet our success goals, and to improve the valuation of the company, your investment in the quarters ahead. Thank you again very much.

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