WidePoint Corp (WYY) 2010 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for you standing by. Welcome to the WidePoint Corporation third-quarter 2010 earnings conference call.

During today's presentation, all participants will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions). This conference is being recorded today, Wednesday, November 10, 2010.

At this time, I'd like to turn the conference over to David Fore with Hayden IR.

Thank you operator. Good afternoon to all participants (inaudible) WidePoint's third-quarter financial results conference call. with me today are WidePoint's Chairman and CEO, Steve Komar, and Chief Financial Officer Jim McCubbin. Steve will provide an overview for the quarter and year-to-date results, and Jim will provide additional financial details. Then we will open the call to questions from participants.

I'll begin by reminding you that this conference call contains forward-looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks, uncertainties and assumptions as described from time to time in registration statements and reports, and other periodic reports filed with the Securities and Exchange Commission. All statements other than statements of historical facts which address the Company's expectations its future [or suspected] financial performance, or operating strategy can be identified as forward-looking statements. These statements are based on the current beliefs and expectations of the Company's management and are subject to significant risks and uncertainties. Actual results may differ from those described in the forward-looking statements. Those forward-looking statements involve certain risks and uncertainties that are subject to change based upon various factors, many of which are beyond the Company's control. We caution investors that these forward-looking statements speak only as to the current [story] the date hereof. The Company hereby expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any such statements, to reflect any change in the Company's expectations or changes of events, conditions or circumstances on which these statements are based.

I'd now like to turn the call over to WidePoint's Chairman and Chief Executive Officer, Steve Komar, for opening remarks.

Thank you David. Good afternoon to everyone who has joined us today. As always, we appreciate your time and attention and your continued interest in WidePoint. Our third quarter proved to be another very successful operating period for the Company as we have continued to benefit from our diversified services platform which produced meaningful year-over-year and year-to-date growth and performance.

While I'll leave the financial detail to Jim, I did want to highlight a couple of key metrics. WidePoint grew its revenues in the three months ended September 30, 2010 to $13.8 million, or 21% better than the $11.4 million realized in the year-ago period. This also represents a quarter-to-quarter increase of 10.5% to the $12.5 million of revenue achieved in the immediately preceding June quarter of this year.

On a nine-month year-to-date basis, we grew revenues by 17% to $37.4 million from $31.9 million in the prior year. Each of our three business segments contributed to our third-quarter performance, but our CyberSecurity Solutions segment led the way by delivering revenue growth of 158% as we begin to see the effects of our expansion into state and local markets and the continued acceleration of federal agencies, adoption and implementation of our digital credential-based CyberSecurity Solutions.

Significant contributors during the quarter were a purchase by the Department of the Navy for services related to digital credentials, and the continued rollout of a Department of Justice funded award to Delaware State University issued during the second quarter for the delivery of a securitized crisis management capability from our Advanced Response Concepts subsidiary.

Gross profit for the three-month period ended September 30 grew 47% from the year-ago period. Gross margin of 29% was 500 basis points higher than in the third quarter of 2010 and the same period last year, this being directly attributable to the combination of increased revenues and incrementally higher margins resulting from improved economies of scale in the CyberSecurity Solutions segment.

Operating income increased 102% and 75% respectively in the three and nine-month periods of 2010 versus the same periods in 2009. Net income increased 116% in the quarter and 97% for the nine months compared to the prior-year periods.

While we are quite pleased with this solid performance, perhaps of more significance is the fact that we have every reason to believe that the trajectories we have established over the past several quarters will continue into foreseeable future quarters as we continue to focus on leveraging existing relationships and penetrating available market opportunities that require both our services and product capabilities.

With that as a preamble, I'd like to turn the call over to Jim McCubbin, WidePoint's CFO, for a more in-depth discussion of our financial results. Jim, the floor is yours.

Hello everyone. During the third quarter, we are happy to report that we continued to generate solid financial metrics, which demonstrates the continued success of our growth and profitability strategy and the leverage that our business model has been providing for our financial results. These positive results are allowing us to hit the targets that we established at the beginning of this year. With the remaining quarter in our fiscal year 2010 moving along, this is clearly providing us with the confidence that we will be wrapping up a successful year solid growth in the topline revenue, margin improvement, and bottom-line results.

In reviewing the quarter, we saw net revenue for the three months ended September 30, 2010 increase $2.4 million, or 21%, to $13.8 million from $11.4 million in last year's comparable period. This was primarily due to growth in our CyberSecurity Solutions segment.

Looking at our segments, Wireless Management increased nominally to $6.9 million from $6.8 million a year ago. The increase in revenue was primarily the result of growth in new customer expansions as a result of recent awards, which were partially offset by a reduction in services for billable calling minutes we provide to one of our large customers which we have been attempting to move away from, as it is a very low-margin service offering. Short-term, given this, we may witness a reduction of variability in revenue growth as the revenue mix in this segment experiences a reduction of billable calling minutes as compared to managed fees. As we shift our attention to expanding the fee portion of our sales mix, this change in mix should lift margins and have little to no impact negatively on the bottom line -- all a good thing.

Our CyberSecurity Solutions segment recorded revenue of approximately $4 million in the third quarter versus just $1.6 million last year. This 158% growth is primarily a result of a purchase by the Department of the Navy for services related to our credential services, the continued rollout of the state of Delaware under an award issued to us during the second quarter of 2010 by Delaware State University, and continued increases in the volume and high levels of repeat customers for our credential sales associated with several initiatives requiring the use of those credentials by government agencies that we are witnessing, especially as they gain greater traction and exposure this year and, what we look forward to, even greater exposure and traction next year.

Meanwhile, our IT Consulting Services and Products segment reported revenue of approximately $2.9 million for the three-month period ending September 30, 2010 compared to $3.1 million for the three-month period ending September 30, 2009. This 6% decrease was due primarily to weakness in our commercial marketplace as a result of negative economic conditions and some outsourcing by a customer to four location, which we do not see continuing to have a negative impact in the future. We anticipate that this segment should continue to grow at a moderate rate long-term, but given the nature and variability of the products and services we offer within this segment, this growth may be erratic quarter to quarter. We've seen for the nine months the segment improve overall, but we have seen quarter-to-quarter variation, with an expectation by us we will see an actual uptick in this segment in the fourth quarter.

Gross profit for the three months increased 47% to $3.9 million, or a 29% gross margin, compared to $2.7 million, or a 24% gross margin. Gross margin was substantially higher in the third quarter of 2010 as compared to the third quarter of 2009 as a result of greater revenues and higher margins associated with improved economies of scale in our CyberSecurity Solutions segment.

Because of the increasing volume of new users and high rates that we are experiencing from returning users of our credentials, we have been able to realize greater efficiencies in our operations. This has allowed us to provide a more competitive customer unit price, which continues to support greater levels of gross profitability. We anticipate our gross profit as a percentage of revenue should increase as we continue to witness growth in this area.

Total operating expenses increased 32% to $2.8 million for the quarter ending September 30, 2010, compared to $2.1 million for the year-ago period. Operating expenses as a percentage of sales increased slightly from the year-ago period due to increases in both sales and marketing and in general and administrative expenses, including a couple of one-time events associated with an allowance attributable to an Accounts Receivable matter and some additional audit and review costs associated with wrapping up a review by the IRS positively. Burying these events, we should see stability within this area looking forward.

WidePoint reported operating income of approximately $1.1 million in the third quarter, up approximately 102%, compared to operating income of approximately $583,000 in the third quarter last year. Net income was approximately $1.1 million, or $0.02 per basic and diluted share, compared to net income of approximately $515,000 or $0.01 per basic and diluted share in the year-ago period. But I would like to address the leverage in the model has been shown here with 21% revenue growth attributing to over 100% bottom line growth, factors that we are pleased with as it proves that our financial model is working for our plan.

On a year-to-date basis, net revenue for the nine months ended September 30, 2010 increased $5.5 million, or 17%, to $37.4 million, compared to $31.9 million for last year's comparable period. Our Wireless Mobility Management segment increased to $20.7 million from $20.2 million for the nine months ended September 30, 2009. Our CyberSecurity Solutions segment revenue increased 84% to $7.9 million from $4.3 million a year ago, and our consulting revenue increased to $8.8 million from $7.4 million -- all positive trends we expect to see played out for our fiscal period ending 2010.

Year-to-date, gross profit increased 75% to $9.4 million, representing 25% gross margin, compared to gross profit of $6.9 million or 22% gross margin in last year's same period. The percentage of gross profit was higher in the first nine months of 2010 as compared to the first nine months of 2009 as a result of higher margins associated with improved economies of scale in our Wireless Mobility Management and CyberSecurity Solutions segments, and a greater mix of higher margin direct consulting services as compared to lower margin software reselling in our IT Consulting Services and Products segment, evidence that the leverage in our business model again has been successful.

Total operating expenses increased 28% to $7.4 million for the nine months ended September 30, 2010, compared to $5.8 million for the year-ago period. Operating expenses as a percentage of sales increased slightly to 20% from 18% the year-ago period due to increases in both sales and marketing and general and administrative expenses, along with those one-time events we had mentioned above in the third-quarter period of performance. We do expect in the future that G&A and SG&A will nominalize to the overall long-term rates, excluding a couple of those one-time events we took in the third quarter.

For the nine months ended September 30, 2010, WidePoint reported operating income of approximately $2 million, up approximately 75% from approximately $1.1 million in the same period last year. Net income was up approximately 97% to approximately $1.8 million, or $0.03 per basic and diluted weighted average share outstanding, compared to net income of approximately $895,000, or $0.02 per basic and $0.01 per diluted weighted average share ending the year-ago period, all trending positively and in line with the guidance we established at the beginning of this year.

Looking at our balance sheet, we continue to witness positive metrics with $5.5 million of working capital year-to-date, which increased 37% from $4 million as of December 31, 2009. Shareholders equity was up 12.6%, or approximately $1.9 million, to $16.7 million from $14.8 million as of year-end 2009, all evidence that the profitability we are generating is being realized and building greater values in working capital, the reduction of debt, and equity growth for all of our shareholders.

Looking at the remainder of 2010, we are also predominantly reiterating our 2000 full-year outlook. We expect increased consolidated revenues by approximately 20%, expanded gross margins to operating margins with gross margins in the 22% to 26% range, and operating margins in the 6% to 8% range, along with the maintenance of or decreasing of selling, general, and administrative costs as a percentage of total revenue, of course excluding any one-time events, and the acceleration of the growth rate of our net income.

With that review completed, I'd like to turn it back to Steve for final comments before we open up the call for questions.

Before we open the call to questions, I'd like to take a moment or two just to highlight a couple -- a number of initiatives and successes we experienced during the third calendar quarter of this year. We've already touched on the CyberSecurity credentialing solution for the Department of the Navy's mobile communication requirement, which we mentioned is one of the revenue growth drivers this quarter. These solutions, though, are widely used in situations where they provide secure, remote access to critical system applications for mobile workforces. ORC SmartCard or CAC, common access card equivalent management console fully met the rigorous Navy operational testing and configuration control requirements. Being chosen for this initial $3 million reward demonstrates that our value-added security solution is highly cost-effective and that it leverages and complements existing defense network security solutions.

Our identity assurance services were also chosen by MERSCORP which is the electronic loan registry for the mortgage finance industry in order to provide digital certificates for identification and digital signature to its registry members. WidePoint will provide MERSCORP members like mortgage originators, lenders, document custodians, settlement agents, title companies, insurers, investors and county recorders with the ability to digitally sign and encrypt information so users can be certain as to the identity and the credentials of the organizations with which they are transacting business, and can be confident in the integrity of the data they have transmitted.

Our government proven federally compliant digital credentials were the ideal answer for key members of the mortgage banking and financial services industries looking to streamline the mortgage process and add state-of-the-art security features to the electronic transmission of records, contracts and documents. This agreement further demonstrates WidePoint's ability to extend its proprietary solutions through emerging market requirements outside the government sector.

Last but certainly not least, our iSYS subsidiary was awarded a five-year contract which includes a base year and four option years to provide wireless management services to the Transportation Security Administration. This contract award is valued at approximately $84 million over its five-year life. As the leading provider of mobile management services to the US federal government, iSYS manages more wireless devices for more agencies than any other provider. This award marks a substantial expansion of the TEM services that we presently provide to the TSA. It also demonstrates that the federal government recognizes that using our TEM services allow them to improve efficiency, streamline services, and manage their expenses more cost effectively.

As you can see from the above, we are carrying a significant amount of momentum into our fourth quarter. This momentum, coupled with our positive financial metrics, position us well for the current quarter and moving forward into 2011.

Of course, there will be challenges and the management team will be focused on anticipating and responding to those. More importantly, we believe the performance guidance Jim has earlier presented and updated today speaks well to the positive outlook for WidePoint Corporation.

With that, I'd like to open it up for questions. If I can lean on the operator to help us out and if you can assist us with opening the lines.

(Operator Instructions). Mike Malouf, Craig-Hallum.

Thanks guys. Good quarter. It's sure nice to see the leverage, especially on the gross margins. Great job.

Well, I did have a question with regards to the general G&A line. You obviously had some one-time expenses that you alluded to. Can you give us a sense of how much that was in the quarter? You said you might go back down to a more sustainable level. I just want to try to get a sense of how much that was.

As you know, we have been trying to keep SG&A around that 18% or less number. We had a couple hundred thousand dollars and a couple of one-time events that we chose to take in the third quarter, as it was prudent for us to do so. If you kind of exclude that, it puts us right back down at that 18% level. So with that, they were one-time events. So we should really be right back there. As our revenues scale, we really shouldn't be seeing a whole lot more spikiness in SG&A. In fact, if anything, on a percentage basis, we probably will see it fall.

By the way, I just want to let you know that it's a fairly high-priority item with us in the sense that we have advertised widely that we believe that we can leverage that SG&A base and do it intelligently and help build profitably. So, you can be assured our focus will be on that in coming quarters.

We also did do a lot of sales and marketing in the quarter for next year, so there's a lot of shows, so FYI.

Great. Thanks. Just a question about the Navy $3 million contract. Was that all recognized in this quarter, or is there some in the fourth quarter as well? Can you remind us how much going forward we have as far as maintenance revenue surrounding that contract? Thanks.

One, a good bit of it was recognized in the third quarter. Some of it will be recognized in the fourth quarter. That's number one.

Number two, renewals -- we are working out what the renewals will be. It's not maintenance per se like software, but it will be a renewal in the third quarter with a very sizable renewal number. We just don't have that number to give you exactly right now. We'd also like to point out to you the fact that this was an initial order to get us in place with the Navy, and we believe there's utilization for these consoles, and what they do with cyber defense and cyber security initiatives throughout the Navy, as well as the DOD and other applications. We are marketing it and are in discussions with greater utilization of what that initial work was for.

Just a last question -- I know that you said that you did ramp up SG&A a bit in the third quarter to go after some particular opportunities that might be successful in 2011. I am wondering if you could elaborate a little bit on what kind of opportunities that could -- that we could sort of see going into next year. Thanks.

We are doing a few things. One, we've been out marketing the Delaware State University project that is with our Advanced Response Concept, so we've had some of that marketing expense, where we would like to see that rolled out across the country to all the chiefs of police and all the different police forces. We've also been working on a number of alliances, strategic partnerships, in taking our CyberSecurity offerings to the next level, as well as we have been marketing our mobile telcoms, [stuff] a little but more broadly to the states' municipalities as well as other agencies. So with all that, we made a really solid push, because the turns in our businesses, as you know, can be 1, 1.5 years. So we're laying the groundwork for next year, and we're trying to lay the groundwork for some exceptional growth. That's how it starts, planting these seeds today.

Thanks a lot guys.

Fred Milligan, Sanders Morris Harris.

Good afternoon guys. You knocked the ball out of the park. That's pretty good. Hey, the quarter is strong in regards to the dynamics of CyberSecurity, Wireless much less so. Is that going to be the pattern going forward?

No. You're going to see -- it's Jim. You're going to see some behavior where, in the fourth quarter, you may see more out of Wireless and Consulting Services, that is fourth quarter tends to be a little bit traditionally stronger in those areas. Wireless this year has lagged where last year it was extremely strong. We're seeing a lot of strong interest now come back; in the second and third quarter, it reappeared while it seemed like everybody was on hiatus with the federal agencies. So we do not expect that to be the case.

If we play everything appropriately, we could find all three segments doing very well next year. But again, any one of the three -- it's nice to have a diversification because it appears something is always working for us, and we finally have got some of the size and leverage where that's working at our benefit. When they all one day work together very well, that will be hitting the ball out of the park.

I think we've said in the past that there's always going to be a little volatility between our segments. I think that statement still applies. I know we can't use the -- characterize ourselves in a different way than we are within this segment, but we do believe that each of our segments is going to continue to grow and that there just may be, on the quarter-to-quarter basis, a little bit of volatility between them. But the outlook for each of the segments is for strong continued revenue growth.

Now, the Wireless, will that be marketed to the states and local governments as well?

We are actively quite -- we are quite active today in doing exactly that. We have a couple of charter clients. We have a lot of activity going on, and a lot of interest from other state and local agencies. We think we're going to have some really good news on that in the not-too-distant future.

Thank you.

[Voltan Burnette], Deka Investments.

Gentlemen, first of all, congratulations on the quarter. Well done.

I had a question as it pertains to margins. If this was addressed -- I hopped on a little bit late, so please forgive me. But I see that you guys are increasing your margins here. Can you speak to what it looks like moving forward?

Do you mean the continued margin proven?

Right (multiple speakers)

We didn't hear you; you broke up.

I apologize.

Can you state the question again?

Certainly. Can you speak to the margins and their improvement moving forward, or what are they going to look like in the subsequent quarters?

That really gets -- that's a little bit difficult for us to gauge right now. It depends on which of the three segments move at what times. We tend to look over the year. We believe, at maturity, assuming percentages, relative percentages and a mix of Wireless mobility and Cyber being somewhat equal, you're going to find yourself with margins in the higher 30% range. If you have Cyber being greater than that in the overall mix, you'll see that getting up into the 40s% and 50s%. So it really depends on the mix as it evolves. Our three segments have different margins. Given the big change in the third quarter, you can see how a small change in revenue greatly impacts the overall margins for the business. So that's why it's exciting to see Cyber really taking hold and having the growth prospects it has because of just that, the margin improvements.

[John Henderson], JDH Capital.

Congratulations. It's very nice to see operating leverage come through this quarter and see those margins expand, so way to go.

Just a couple of quick questions -- I missed a part of the call earlier, and I'm not sure if you guys touched upon this. Regarding the overall opportunity looking out into next year for the Navy and other areas, in particular the Navy, how quickly does this initial stage, which I think is like 20%, 25% potential of the overall contract, when does that get completed? Thereafter, when do you think you would have a feel for if you're going to get add-on revenues from that contract?

We can't address the Navy in any kind of detail. We can address CyberSecurity in general, but some of the defense and cyber security issues are matters that we work on. We are not at liberty to go into great detail with. I hope you can understand that.

Okay, that's great. Everything else has been answered, so keep up the good work.

(Operator Instructions). [Sam Donaldson], private investor.

Gentlemen, these results are just terrific. when I think how far you've brought this company in the last three years, it's really extraordinary. As a stockholder, you certainly have my thanks, at least compared to everybody else, [Ron] and Jim, and all the people who've made this possible.

Sam, forgive us. We're having an awful lot of trouble hearing you.

Should I speak up? Can you hear me now? Am I Verizon?!? (multiple speakers) These are terrific results. You have my thanks. It's extraordinary what you've done in making the progress for this company. When you say, Steve, that you anticipate the same level of progress for the foreseeable future, it makes me almost giddy.

Thank you, Sam.

I have a question, and I think Jim knows what it is. The Republicans say they're going to cut the budget. They're going to cut it everywhere. Now, whether they can do it or not, we'll see. But the point is, in the areas where we are making our sales, and that includes state governments as well as the federal government, would you anticipate that the kind of cuts you hear floating around would affect our ability for new contracts?

This is Jim. Yes, I think I was aware of a question, this question you may ask. It's our belief that the defensive and cyber security areas in which DHS, the DOD and various other three letter agencies are working, they will not be curtailed in any of the budget, in any of the policy briefings and briefings that we've been part of. That is actually where they are going to be increasing their spending and most of the buys are going. A lot of the decrease in budgets are going to be addressed via personnel, some of the streamlining that Gates is doing -- Secretary Gates with the DOD. They are predominantly in areas that would be more associated with our consulting group. But again, our consulting group is a little bit pulled away from that because it's more aligned to cyber security.

Our Wireless space actually provides a cost savings, so we are actually hopeful and pleased that they are doing some of this because they are going to be looking for more money to save, and we have proven white papers and proven client histories for which case we've saved anywhere from 30% to 60% on the average spend by a number of large agencies within the DOD. So that should be a positive impact for us as well.

So overall, we don't see a lot affecting our Wireless and/or CyberSecurity segments. We could have a slight -- or a little bit of exposure in consulting, but I think the other two segments will more than offset that and still allow us to grow.

It doesn't get any better than that. Thanks to you again. Bye-bye.

Gentlemen, I'm showing no further questions at this time. Please continue with any closing remarks.

Thank you. I would just say I offer a final thank you for your continued interest and support in WidePoint. We appreciate your questions and ongoing commitment to the future of the Company, and we look forward to updating everyone after our fourth-quarter and full-year 2010 results are released. Until then, I wish you and please have a pleasant evening at a respectful Veterans Day. Thank you.

Thank you sir. Ladies and gentlemen, this does conclude the WidePoint Corporation third-quarter 2010 earnings conference call. Thank you for your participation. You may now disconnect.