WidePoint Corp (WYY) 2008 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to WidePoint Corporation third quarter 2008 earnings conference call. During today's presentation, all participants are in a listen-only mode. Following the presentation, the conference will be open for questions. (OPERATOR INSTRUCTIONS) I would now like to turn the conference over to Frank Hawkins of Hawk Associates. Please go ahead, sir.

Thank you, Mary. Good afternoon. This is Frank Hawkins, CEO of Hawk Associates, WidePoint's IR firm. Welcome to the WidePoint third quarter 2008 conference call. On the phone today are Steve Komar, CEO of WidePoint, 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 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 And now here's Steve with his opening remarks.

Thanks, Frank, and good afternoon to everyone. On behalf of myself and the WidePoint management team I'd like to welcome you all to the third quarter 2008 investor conference call. I have to start by saying that we join you today in the midst of some difficult economic and financial times, times that have impacted just about every one of us in one form or another. Although these same conditions have had some limited impact on the Company's markets I'm pleased to report that WidePoint is in solid financial condition and very well positioned to exploit its high-growth, niche target market opportunities for the foreseeable future.

Focusing first on operating results, our total Company revenues for the third quarter of 2008 were $8.9 million, more than double the 2007 comparable period performance. And nine months year-to-date 2008 revenues of $25.3 million are approximately 150% greater than the prior-year period. The bulk of this growth is attributable to our Mobile Telecom Managed Services business with revenues of $5.3 million in the third quarter of 2008 versus, well, zero, in 2007. However, even with a pro forma comparison to preacquisition results revenue from this segment increased about 50% versus the prior-year period. Our Consulting Services segment revenues for the nine months ended 2008 were $7.8 million, up 6% from the prior-year period, but at $2.4 million for the third quarter of 2008 are marginally down from the second quarter or the previous quarter of 2008. This segment continues at a steady pace but did it not experience the usual seasonal sales uptick that accompanies the government sectors fiscal year ending as of September 30.

In our PKI Credentialing segment we experienced a similarly soft quarter, although its revenues on a year-to-date basis remain ahead of '07 -- 2007 performance levels. Clearly the roll out of the this market opportunity has been slower than projected. However, we are confident of its realization in coming quarters and fiscal years. To that end we have invested in the necessary capabilities, relationships and resources to ensure our competitive advantage and full market reach as this market matures.

On the earnings front, we realized positive EBITDA -- earnings before interest, taxes, depreciation and amortization -- positive EBITDA, for the quarter and year to date, although we did record a net loss for the quarter of $335,000, the difference between these two numbers primarily being non-cash items such as depreciation, amortization of acquisition intangibles, plus the cost of accounting for stock-compensation expense. From a stability standpoint our balance sheet and liquidity are very solid. We generated over $2.5 million in net cash from operations in the third quarter and $5 million on a year-to-date basis. Combining this with $4 million that we received in proceeds from stock issuances earlier in the year has allowed to us fund $5.4 million in acquisition costs and investments in necessary resources while increasing available cash from $2 million to $7 million during 2008.

As a Company and management we believe we have made the right decisions and necessary investments to ensure that we remain focused on specific market opportunities where we are, number one, competitively advantaged and, secondly, whose size and revenue potential will generate significant earnings and return on investment for our shareholders. We expect growing success in the coming quarters and calendar year. In the interim we appreciate your support and commitment in helping to us realize these goals and results for the corporation. Thank you.

And I'd like to turn it over to Jim McCubbin for his comments on finance, operations and key initiatives. Jim, it's all yours.

Thank you, Steve. Ladies and gentlemen, again, welcome to our 2008 third quarter investor call. The third quarter continued to build upon the financial foundation we established in the first and second quarter's of this year. We believe the financial ground work we laid is still on track and should help us demonstrate a financial model that will yield continuing top-line and bottom-line improvement in the fourth quarter of 2008 and for the full-year 2009. The capital we raised in the second quarter of 2008 has allowed us to make prudent investments during the third quarter in our bid and proposal efforts, as well as allowing us to further enhance our sales and marketing infrastructure with both tools and talent. These investments already have yielded several new contract awards and partnerships that should allow to us realize a strong position in two of our managed service segments, as they grow from early adoption to the beginning stages of full adoption by the federal infrastructure.

In profiling these two segments I would like to first address our Mobile Telecom Managed Services segment that experienced revenue growth of approximately 51% from $3.5 million for the three months ended September 30, 2007 -- this being prior to the acquisition by WidePoint -- to approximately $5.3 million for the three months ended September 30, 2008. This segment witnessed sequential revenue growth in each of the past three quarters and we anticipate with a high level of assurance that this revenue growth should continue into the fourth quarter of 2008 and into 2009. Underlying the support for this growth is our GSA FSSI contract vehicle in which we have been awarded competitively the first two contracts, contracts that will start to recognize revenues in the first quarter of 2008. Further bolstering the outlook for this segment is increased level of interest and discussions we have been having with many of the initial 14 agencies that provided the basis for the FSSI contract vehicle. Many of these agencies, or departments are presently in many different levels of discussions with us and we feel that we have again a high level of assurance in continuing to realize additional contract awards in the future.

Next in profiling our second segment I would like to address our PKI Managed Services segment. Our PKI Credentialing and Managed Services segment experienced a decrease in comparative quarter-to-quarter revenues, with revenues decreasing approximately 12%, or $154,000, from approximately $1.3 million for the quarter ended September 30, 2007, as compared to approximately $1.16 million for the quarter ended September 30, 2008. Countering this quarter-to-quarter trend is the recent trend that we have witnessed that has seen quarter-to-quarter sequential growth since our fourth quarter 2007. While not expanding as rapidly as we had anticipated we have seen steady growth over the past three quarters. We do expect to see this segment experience continued growth and ultimately break out, as we witness the move to more fully-adopted PKI programs throughout the federal infrastructure.

The adoption of PKI by the federal infrastructure we believe is a foregone conclusion. Implementation and timing are the challenges that we presently face. Our investments in this segment in the third quarter has yielded several strategic relationships that should allow us an able to implement our service widely. While not yielding dramatic financial results yet, these newly-achieved relationships should provide us with the ability to execute in a broadly-based federal infrastructure, which is so important to us in yielding the business model in we want to see in the future.

As an aside to our two strategic segments that we have profiled we have also have a third segment. This segment is our Consulting Services segment, which experienced a decrease in comparative quarter-to-quarter revenues, with revenues decreasing approximately 10%, or $258,000, from $2.7 million for the quarter ended September 30, 2007, to $2.4 million for the quarter ended September 30, 2008. This segment has been extremely variable over the past year, as we have seen revenues increase and decrease as a result of budget delays or cancellations that have increased revenues from one quarter to the next. However, smoothing this timeliness we can see that for the nine months ended September 30, 2008, we did witness revenue growth over the comparative nine-month period in 2007. Looking forward for this segment we anticipate that our Consulting Services, while continuing to be variable, will flatten and rebound as we witness increases in federal government consulting services and we expand our reach into new agencies and departments and as the economic environment ultimately does improve.

Taken together these three segments have caused our revenues to increase from approximately $4 million for the quarter ended September 30, 2007, to approximately $8.9 million for the quarter ended September 30, 2008. But looking beyond revenues and looking at our income statement we also experienced an increase in gross profit of approximately $300,000, with gross profit rising from approximately $1.2 million to $1.5 million. All of these revenue incre -- all of these gross profit increases were, of course, related predominantly to our rising revenues. We do anticipate that gross margins should rise in the future though as we realize a greater revenue mix from increased PKI sales, which we believe will have higher relative gross margins.

Looking at sales, general and administrative expenses for the third quarter we also witnessed approximately $1.75 million, or 20% of revenues, compared to approximately $1 million, or 25% of revenues in the third quarter. We also anticipate that our SG&A should level off at these levels and provide a relative percentage improvement as we witness increasing revenues in the future. Factoring in depreciation, interest expense and interest income for the third quarter of 2008 of approximately $83,000, as compared to approximately $4,000 in the third quarter of 2007, does yield a net loss for the third quarter of 2008 of approximately $335,000 as compared to a net income of approximately $178,000 for the third quarter of 2007.

Given that -- this net loss we would like to make everyone aware of the fact that after excluding amortization, depreciation and 123(R) stock-compensation expense for the third quarter 2008 we did for the second quarter in a row realize positive income in factoring in our interest carrying charges. This has led to the management of positive cash flows on our balance sheet and continues to provide the Company with the liquidity to finance the investment in the two key managed service segments that we have focused so much time, effort and money on, allowing us the opportunity to build WidePoint's financial model into one that will allow us to have a leading position within the two focus segments that we have. This we believe will ultimately generate a financial model that provides strong future cash flows and profits and supports the investments we have made in 2008.

Thank you. Steve?

Thank you, Jim, appreciate that. You covered a lot of ground. I think if I can ask our facilitator to rejoin us, we can then move to opening the lines for your questions and comments and we look forward to that.

Thank you, sir. (OPERATOR INSTRUCTIONS) Our first question comes from the line of [Mark Jellarine] with First Allied. Please go ahead.

Hi, how you doing?

Hi, good afternoon.

Good. I had a quick question regarding consistency of corporate communication strategy. A quarter ago stock fell off to $0.60 and the Company deemed it necessary to release a statement reiterating previous guidance on top-line revenue and this quarter stock fell off to $0.10 and there was silence, no public comment by the Company. As investors we're just looking for consistent strategies one way or the other, so I just want to do comment on that.

Okay, fair point.

Mark, I think when we commented on that we were commenting it on -- in conjunction with some other news that we were putting out at the time. We don't make a habit or we have not to date had a policy on commenting on stock fluctuations since it's a bit out of our control. We will discuss it, though, with our legal counsel and our investor relations people to see if there is a precedent for it and we're allowed to do that. We do have to be careful that we don't start making comments on things that we really can't influence.

Sure, sure. And then last point, just wondering if you could talk to your PR firm and maybe give them a little -- we have schedules on our end so if you can give more than, say, 48, 72 hours notice on the quarterly calls that'd be appreciated.

Hey, Mark, we absolutely agree with you there, as well, and in the past we've been trying to give a weeks notice. There was some difficulties that we were having in the preparation of finalizing the Q and a proxy and annual report that made it difficult for us to do it any earlier than we did, but we will attempt to make sure that we take that into consideration in future quarters.

Very good. Thank you very much.

And to be fair, Mark, we have heard that comment from a few others so we -- consider us sufficiently sensitized to it.

Very good. Thank you very much.

Thank you. (OPERATOR INSTRUCTIONS) Our next question comes from the line of [Ted Carkins], private investor. Please go ahead.

Greetings, gentlemen, congratulations on what I think is an excellent quarter and also congratulations on making a transition from a revenue company to hopefully what we're seeing as being a positive cash flow positive and earnings positive company. A couple of quick questions. First of all, shares outstanding increased, off the top of my head, I think about 5.5 million shares. Do you expect the shares outstanding to go level off? Was most of that due to the acquisition and would you expect shares outstanding to level off from this point going forward?

Hey, Ted, that was all related to the capital raised from back in May, as well as probably just some smoothing when basic and diluted was calculated because you look at the calendarization of it. But we have not issued and presently are not planning on doing any equity raises or material stock issuances.

Okay.

Does that pretty much answer your question?

Yes. And second question, from -- cash flow from operations looks like for the year is that about break even based on the fact that you reported a net loss which equaled the depreciation and amortization. Is that about accurate?

That's about accurate. We've been managing our balance sheet this year while we've been making the investments. When we raised the initial capital back in May it was purposely so we could build out some sales and marketing infrastructure. The business model in the two business segments that we're chasing are extremely large segments and we are really being pushed and making sure that we're prepared for a ramp up and so that's how we've been managing both the balance sheet and the income statement.

All right. Do you have an idea of when you could actually be reporting bottom-line earnings and when cash flow will actually turn positive? Or in the fourth quarter right now do you expect cash flow to be positive? Have we turned the corner on that?

With qualifiers in many places. As we've already said in our filings we anticipate revenues going up, we expect to see margins improving and we're flat tends out our SG&A. So from that conclusion, depending on what revenue really goes up by you'll see continued improvement to both cash flows and at some point we're going to get an inflection, hopefully sooner than later, into that positive income. We all want that as much as the next person.

Right. So I'm just looking right now at -- let's say $0.28 a share, I'm looking at $16 million Market cap. You have about $7 million cash and you're doing, it looks like this year, about $35 million -- just going from $25 million through the nine months, I guessing $35 million plus. So you are trading at less than one half of one times revenues, cash flow positive, earnings positive, hopefully soon, if the stock stays down here do you have any use for that $7 million? Could you see buying back stock, doing something? It seems like the stock is incredibly cheap. I know the Market's doing what it's doing still, but at some point fundamentally from a business point of view do you have a plan or what your thoughts are with the Market cap so cheap?

Well, Ted, right now I can tell you as soon as we have a high enough level of confidence in that forward continued income stream then I'm sure we would address it if we were staying at valuation that we couldn't use the capital for that would yields a better result. So it really depends over this next quarter or two, so it really does. But the Market dynamics, as you're aware, have just been almost silly. There's a lot of companies out there that are multiples that nobody's ever seen before.

Right. Well, congratulations on the quarter and good luck in the future. Thank you.

Thank you, Ted.

Thank you. Our next question comes from the line of David Jordan with Axiom Capital Management. Please go ahead.

Hi, gentlemen. You announced on your -- I think when you announced your numbers that you said that because the awards associated with iSYS that each quarter would be up $1 million or least said you'd have incremental revenue of $1 million a quarter for the next several quarters. Would that imply, number one, that you would do at least $9.9 million for the next quarter and progressively more as the other businesses chip in? And could you share with us what the gross margins -- just absolutely the gross margins are in each business segment, please?

Well, Ted -- I mean David, we can say this. We do expect the second half to be greater than the first half. We believe that we're running at that pace presently. I don't think I can really contradict your fourth quarter estimate but --

Having said that that implies that the second half is equal -- that implies a $7.5 million fourth quarter, so that -- I mean it's illogical to think that your business is going to be down for the fourth quarter, so if it's nothing more than stable plus the million dollars -- continue.

David, David, while we believe that we're going to do much better than that $7.2 million in the fourth quarter, we do need to qualify it. The quarter still has to happen. We're feeling fairly positive as we've making our halfway point through the quarter and in our visibility it looks very good. So, given that we're seeing some growth in the fourth quarter over the third quarter. But, as a qualifier Consulting Services always has great variability in the last month of the quarter. We could see a range of revenues moving all over from that $9 million to $12 million range because of some of that variability and that end of quarter spending in that segment.

Well, the $9 million to $12 million is certainly different than saying that you expect your second half to be better than the first half where it's implied that the fourth quarter would be as low as $7.2?

Right. But, David, again all we were doing was restating a statement we had made on the last call and the call prior to that that we were expecting our second half to be greater than the first half. In no way did we mean to imply that we were going to not have incremental improvements between Q3 and Q4. That was not our intent and I'd like to clarify that now. What we were doing is just resupporting some guidance that we had given in the past.

What kind of gross margins do you have associated specifically with the iSYS business?

I think you may be addressing the Mobile TMS business?

Mobile TMS business, right.

We really don't identify it by company names. We see a range of gross margins, depending on what we're offering within that Mobile TMS sector. We haven't reported it, but it is presently in that 16% to 22% range and that's also allowing for certain purchase accounting that is placed in amortization and placed against cost of goods sold. We do see that number improving because it is a Managed Services, as we grow the base of users, but that's where it is approximately now.

Okay. Thank you.

Thanks, David.

Thank you. Your next question comes from the line of [Paul Cumina], private investor. Please go ahead.

Yes, quick question for you. How has the acquisition of the Protexx CIO played out in your acquisition strategy?

Well, we can take a shot at that. Maybe we'll both answer that one jointly, but I would say first that Protexx was acquired mid third quarter. It was not a material contributor or detractor to our results for that quarter. In terms of strategy, we view that business going forward as an expansion of our capabilities to serve some new markets in the PKI and PKI-related sectors. We still feel very confident that they will, in fact, be a material contributor as we move into 2009. I would not expect to see a material plus or minus from them in the fourth quarter -- and I'm sure I just violated some kind of a rule about projections. But basically that company is fitting in very nicely into our strategies and we think that when they get off the blocks, which we think will be as we approach year end that we will see some pretty significant performance out of them in 2009.

Hey, Paul, that's a very good question, by the way. How it fits into our strategy, we have the capability -- or the ability to acquire some software that we could pretty much broaden the PKI offerings down to a commercial base. We also had the capability to bring on some data and motion packet level security, which kind of fits into the mobile environment, which helps us blends the securitization of mobile devices. We've never really addressed the overall strategy of the Company, but going into the mobile space by itself wasn't just a decision we wanted to make because we wanted to be in the mobile space. We wanted to be in the mobile space where we could take some of our capabilities within the public infrastructure and security and make sure that we levered a base where we could not just provide it for SmartCards or laptops or desktops but also mobile devices. Controlling and managing a large base of mobile devices just clearly fits into that strategy of cross marketing and we have high hopes for it in the future. Does that help clarify the strategy?

Yes, it does. Yes it does and thank you for your time for clarifying that for me.

Thanks, Paul.

Thanks, Paul.

No problem.

Thank you. (OPERATOR INSTRUCTIONS) Management, it looks like there are no further questions. I'll turn it back over to you for closing comments.

Well, thank you very much and again, in closing thanks to our investors for taking the time and the support and the commitment for us as we focus very strongly on delivering improved performance and building a quality enterprise as we go into 2009. We thank you again for your support and have a great evening.

Thank you. Ladies and gentlemen, that will conclude today's teleconference. We do thank you again for your participation and at this time, you may disconnect