WidePoint Corp (WYY) 2011 Q1 法說會逐字稿

Good evening, ladies and gentlemen, thank you for standing by. Welcome to the WidePoint Corporation 2011 first-quarter 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)

I would now like to turn the conference over to Mr. David Fore with Hayden IR. Please go ahead, sir.

Thank you, Operator. Good afternoon to all participants in WidePoint's first-quarter 2011 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 of the first quarter results and Jim will provide additional financial details. Then we will open the call to questions from participants.

I'll then remind 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 the registration statements and reports, and other periodic reports, filed with the Securities and Exchange Commission.

All statements, apart from statements of historical facts, which address the Company's expectations for its future, with respect to financial performance or operating strategy, can be identified as a forward-looking statement. These statements are based upon 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 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 any change of events, conditions or circumstances in which our statements were based.

I would now like to turn the call over to WidePoint's Chairman and CEO, Steve Komar for opening remarks.

Thank you, Dave, and good day to everyone who's joined us this afternoon. As always, we appreciate your continuing interest in WidePoint. Let me start with the statement that this was a very frustrating quarter for WidePoint, mostly due to circumstances that were well beyond our control, but that doesn't make it any more palatable. As we've said in the past, given our current concentration in the government sector, the timing of product delivery and our product mix within our target market, can significantly impact our results from quarter to quarter. And during the first quarter both were impacted by the impasse related to federal budgeting activities.

This situation had a negative impact on revenues in our first quarter, which is already our slowest seasonal quarter, and a proportionately larger effect on our bottom line. We all witnessed the unusually protracted budget negotiations at the Capitol and throughout the Federal District, and in the end, following a number of limited continuing resolutions, a 2011 compromised budget was most recently adopted.

Unfortunately the prolonged negotiations, coupled with a great deal of long-term uncertainty about future spending levels, due to the contentious climate in Washington, D.C., has negatively impacted both the issuance of purchase orders, and the pace of new contract awards from federal agencies. As a direct result, WidePoint's overall sales were down 5.7% versus the prior year's quarter. Both wireless Mobility Management and Cyber Security solutions were down. But they were partially offset by a fortuitous 30.1% increase in IT consulting services and products.

However, while acknowledging the budget issue and its impact, within the areas that are our focus, many of these concerns have now been addressed. We either now expect on the release of short-term funding for these projects, or we have enough visibility to make us comfortable with what we're seeing in the pipeline. Demand in our marketplace is strong, and the ground work we laid in 2010 continues to provide us with a platform to leverage opportunities in all segments of our business.

We fully expect Cyber Security initiatives to generate revenue growth in the future, as various federal agencies seek greater levels of identity management and better protection of the federal information technology infrastructure. An example of this during the first quarter, was the continuing acceleration and the issuance of ECA and AC certificates, which almost doubled versus the fourth quarter 2010.

In addition, the multi-million dollar contract we were awarded late in the first quarter 2011 from the US Army Corps of Engineers demonstrates recognition of the value that our telecommunications management solution provide-- that it provides to budget strapped governmental agencies and the management and control of their wireless devices. Looking forward in the Wireless Mobility Management segment, we are presently pursuing several significant service contract award opportunities at a number of federal agencies.

We are also initiating a new strategy to expand into state and local municipalities and commercial enterprises by utilizing intermediary sales channels to expand our reach into those markets. For the first quarter of 2011, we had approximately 65,000 wireless units under management. We anticipate incremental unit growth in the second quarter of 2011 as we add the Army Corps of Engineers to our current roster of customers.

We believe we will add between 20,000 and 30,000 additional units under management during 2011 as a result of the addition of work we are performing for the Army Corps alone. As we continue to market our services in 2011 and 2012, we also anticipate we will continue to add units under management from new agency awards, along with the addition of the growing probability of awards from state, local municipalities and our commercial opportunities.

Our Cyber Security Solutions segment revenue declined by 11.8% for the quarter. However, as mentioned, we anticipate that this segment should continue to demonstrate revenue growth in the future, as various federal agency mandates, such as the recent OMB, Office of Management Budgeting, 11.1 governmental wide directive continue to be implemented. We'll touch on that a little later.

We have entered into a number of relationships with partners such as Wackenhut, SAIC, and Deon, amongst others, who directly support the end-user base, which we are confident will facilitate access to these various federal agencies and their related technology infrastructure. We believe these new partnerships should widen our sales reach and allow us to take additional advantage of the new identity management implementation mandates over the next 18 months.

Overall we're looking at an improved second quarter and the opportunity for a strong second half. But as we periodically caution investors during our conference calls and SEC filings, as we've seen, quarter-to-quarter revenues can be erratic. With that I'd like to turn the call over to Jim McCubbin, WidePoint's CFO, for a more in-depth discussion of our financial results. I will then follow up with a recap of our first quarter and year end activities, before opening up the call to your questions. Jim?

Hello, everyone, and thank you, Steve. Our first quarter was frustrating, as Steve mentioned. Several projects were either delayed, or commenced late in the quarter, all impacting our financials negatively, as we had cautioned during our last call. Unfortunately, these impacted revenue areas, with high margins, predominantly in our Cyber Security segments, causing not just revenue declines, but margin declines.

Fortunately they were all just delays and not cancellations that were not fully offset by other positive events that did occur during the quarter. These included an offsetting amount of growth in our IT Consulting Services and Product segment, and positive movement in policy issues related to OMB 11.11 and HSPD-12, along with the commercial adoption of our credential offerings, which are all positive indicators for overall growth within our Cyber Security segment looking into the second half of 2011 and full year of 2012.

Given this, we would like to reiterate to everyone that while we did have some bad luck and some timing issues impact us in this first quarter and half, as a result of some of the budget impasse that occurred, nothing that had occurred to cause these timing issues has changed any of the drivers that are pushing the adoption of new Cyber Security requirements, that are being rolled out into the multiple environments we are presently marketing to and working within.

Now given this, we did witness net revenue for the 3 months ended March 31, 2011, decrease approximately $634,000, or 5.7%, to $10.5 million from $11.2 million in last year's comparable period. But we believe looking out we should see improvements, with the only question being the amount of compression in revenues that will occur as we attempt to catch up the work, and how that will ultimately be recognized in our fiscal year 2011.

Looking a little deeper within our various businesses, Wireless Mobility Management decreased about 19% to $5.6 million, from $6.9 million a year ago. The decrease in revenue was primarily the result of a reduction in services for billable calling minutes we provide to one of our large customers that we have seen reduce revenues overall, but that have little impact on net margins. However, our new Army Corps of Engineers contract provides us confidence that this segment should expand, as we experienced further adoption by federal government agencies and departments, and as we reach out and continue to expand our marketing to state and local municipalities and large commercial enterprises.

While the budget impasse has impacted the pace, we believe this is more of a paperwork issue than anything associated with the demand for the cost savings services we can provide to these agencies that we are marketing to. Looking at our Cyber Security Solution segment, revenue decreased approximately $169,000 to $1.3 million in the first quarter, compared to $1.4 million last year. This decrease was primarily the result of a shift in the delivery of work from the first to second quarter of 2011, as well as delays from anticipated awards associated with finalizing US budget matters.

A bright point in this area was that we did witness strong growth within our ECA and iSYS credentialing, with growth quarter over quarter and sequentially, and that we believe we will see continued investment within the second half of 2011 and all of 2012, that will more than make up for the short-term timing issues we faced in the first half of 2011 and the first quarter. In fact, we witnessed growth of approximately 100% as our ECA credentials saw growth that was attributed to the expansion as a result in the adoption of a large shipyard group, adopting our credentials for both internal and external uses that should continue for the foreseeable future.

We will have more soon for everyone on that transaction, but are pleased to see a commercial enterprise understanding the benefits of using our credentials for solving not just a government mandated issue, but the cross benefits that are present in the use of our services internally as well. We would also like to remind everyone that great strides are being made within the segment and the potential it can yield for all of us. As Steve had mentioned, with the continued policy push by the OMB, and the White House, we believe that we could witness a watershed event over the next 18 months.

In positioning ourselves, we have focused on building our key relationships with leaders in several commercial verticals in first responders, healthcare, public safety and financial industries. So while we have witnessed some short-term delays, our belief in where we are positioning ourselves will ultimately lead us to deliver the results within the segment that we have invested so much time and effort within.

Looking at our IT Consulting Services and Product segment, revenue was up approximately $848,000 to $3.7 million for the 3-month period ended March 31, 2011, compared to $2.8 million for the 3-month period ended March 31, 2010. This 30% increase was due primarily to an increase in Consulting services in support of federal agencies, and an increase in our reselling activities, offset slightly by a reduction in Commercial Consulting services.

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, the growth may be choppy quarter to quarter. Gross profit for the 3 months decreased 27% to $1.8 million, or 17.5% gross margin, compared to $2.5 million, or 22% gross margin last year. Gross margin was substantially lower in the first quarter of 2011, as compared to the first quarter of 2010, as a result of higher revenues associated with our IT Consulting Services and Product segment; which has lower margins and lower revenues than the higher margin Cyber Security segment.

As our revenues grow within our Cyber segment, we believe this will reverse itself. Total operating expenses increased 5.4% to $2.3 million for the quarter ended March 31, 2011, compared to $2.2 million for the year-ago period. Operating expenses as a percentage of sales increased about 240 basis points, to 22.3% from 19.9% in the year-ago period, due to increases in sales and marketing through the addition of several new hires, tools and services infrastructure improvements.

While we believe these investments are niche capabilities are important, combining them with the unmet demand for our services will support our ability to continue to expand our revenues in the future. We do anticipate these investments will level off and these rates as a percentage will fall as our revenues increase. As a result of all of this, we reported an operating loss of approximately $500,000 in the first quarter, compared to operating income of approximately $300,000 in the first quarter last year.

Net loss was approximately $317,000, or $0.01 loss per basic and diluted share, which is included in income tax benefit of $203,000 compared to net income of approximately $239,000, or $0.00 per basic and diluted share in the year-ago period. We anticipate that as we witness growth in our revenues and margins over the fiscal period, we will see profitability rebound for our fiscal year 2011.

Our balance sheet remains strong, with $5.8 million in working capital as of March 31, 2010. Shareholders equity was $21.9 million as of March 31, 2010. The Company generated approximately $609,000 in cash for the quarter ended March 31, 2011, and had $6.2 million in cash and cash equivalents as of the end of the quarter, compared to $5.8 million as of December 31, 2010. We believe we do not have financial needs or requirements to support our operations for this year, our debt continues to be paid down, and we are positioned to financially support the growth of our operations in fiscal year 2011.

With that, I'd like to turn it back to you, Steve.

Thank you, Jim. Excellent. And I think I'd now like to take a minute or two and just highlight a number of initiatives that we think speak to the future; as well as, yes, some successes that we experienced during the first quarter of 2011. I've already mentioned the multi-year multi-million dollar Wireless Management contract awarded through the general -- the GSA, the General Service Administration's FSSI, or Federal Strategic Sourcing Initiative contract with the US Army Corps of Engineers.

We expected this contract to be signed earlier in the quarter and contribute to quarter 1 revenue and earnings, and this delay was part of the reason for the quarter's shortfall. However, we have already begun to generate revenue from this contract early in the second quarter. In addition, during the first quarter we received future revenue contracts tied to both new awards and contract modifications. We are also actively bidding on near term agency contracts that can substantially enhance our revenue in 2011, all of which speaks well to the outlook for our Wireless segment.

Our Advanced Response Concepts Corporation subsidiary, otherwise known as ARC, released an operational beta version of its crime scene management and evidence tracking system; which deploys Phase II of the US Department of Justice technology grant with our academic partner Delaware State University and with the state's department of public safety, and 6 Delaware law enforcement jurisdictions.

ARC's Condor system, which has also been deployed throughout a consortium of 9 municipal law enforcement agencies in Massachusetts, is a specialized solution that enables crime scene investigators to digitally document evidence found in the field and to identify, label and track evidence throughout the chain of custody. This tablet-based systems integrates embedded barcode or RFID tagged evidence markers, provides for biometric attendance and tracking records at the crime scene, and is interoperable with the US national information exchange compliance system.

We believe we have a substantial regional and national opportunity as our realtime operational assessments continue to provide positive results for this new market segment and offering. In addition we are focused on a variety of opportunities, including substantial additional defense work on the Cyber Security side later this year. As regards our work with Lockheed Martin for court worker's identification, we see it continuing to progress along to potentially higher levels of utilization, and to prospectively migrate into other areas of the transportation services sector.

Directionally within the Cyber Security segment, WidePoint has continued to invest in maintaining and enhancing its trusted authority certifications across federal, state and local governments, providing trusted E-government authentication capability, specifically to maintain our competitively differentiated technology advantage to these markets. On the federal side, while we were seeing better than moderate growth during the last 6 months of 2010, the OMB 11.11 directive came with both good news and some short-term delays.

OMB 11.11 has put a stake in the ground mandating that all new applications will be credential-enabled this year, and that all legacy systems will be upgraded to be credential-enabled by the end of their fiscal year 2012, which is of course September 30, 2012. However, OMB 11.11 also prescribed that a planning period be completed first, which has been the current short-term focus. Because many of these applications are outward facing, this mandate also provides states and local governments with a final specification to the interoperable with the Federal Government and to obtain available grants to do so.

Since the issuance of OMB 11.11, INPUT, the government market research firm, has identified and is tracking numerous inquiries and planned requests for quotes, proposals from both federal and state agencies, that appear to address short to medium-term market opportunity of over 20 times today's total number of certs issued and outstanding nationwide. As mentioned, the recent federal mandates extend the requirements for transactional security beyond internal government.

WidePoint has positioned itself with various partners to expand into these domains, as Jim mentioned earlier, including healthcare, financial, public safety, state ID and telecommunications, and we intend to do this while maintaining a strong presence in the federal market. Although the state of the economy has delayed progress somewhat, we are currently negotiating with organizations across all of these domains that today total more than 1.5 million credentials to be delivered within the next 12 to 18 months of final negotiations and agreements.

Our agreement with Wackenhut Services is an example of the kinds of relationships we are pursuing to expand our reach into identified markets. Wackenhut will utilize our products in conjunction with and supplementing their existing technology solutions to their existing client base. We continue to encounter opportunities to expand into the commercial sector for our Cyber Security solutions, well beyond the current initiatives with Wackenhut and the Residential Mortgage Registry, or MERS, which we've talked to you about in the past.

Overall we believe WidePoint's Cyber Security and Identity Managed service is well positioned to capture a fair share of this multi-billion dollar potential annual revenue opportunity. In regard to our Consulting business, we've had a very strong performance and demand for our RT Consulting services and products, particularly with respect to our unique expertise in Cyber Security and specialized Consulting solutions. However, we continue to view this segment as a volatile business, with medium to low growth potential.

We operate in a competitive marketplace that is very price sensitive, but we've had a fair amount of success with it. We want to continue that success and we intend to try and keep that growth, and the margins going as well. In aggregate, and in addition to our recovering revenue base of business, we believe our new business initiatives in aggregate will comprise an incremental $200 million plus in revenue opportunity for WidePoint over the next 5 years. A not insubstantial portion of which we expect to come to fruition within the next 18 months.

We continue to believe the expectations we set last year are achievable over the medium to long term, notwithstanding some of the short-term hurdles we have experienced tied, to government budgeting impasses and required workarounds. With that as a back drop, we'll now open the call to your individual questions, and I am sure you may have 1 or 2 to share with us.

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) Mike Malouf with Craig-Hallum. Please go ahead.

Hi. This is Ross Licero for Mike. Wanted to know about the mobile side of the business. Could you give us a little more color on how the pipeline is looking for new contracts?

Well, yes, actually, this is Jim. How are you doing, bud?

Doing well, Jim.

Yes, in the end of the first quarter we had gotten the Army Corps of Engineers award. We had anticipated getting that at the end of the fourth quarter so we'd have it for the first quarter, but it was delayed. We are going to be adding a number of devices in the second quarter and third quarter, with wrapping up hopefully in the fourth quarter. So that's going well, we're pleased with that. We also have a number of marketing proposals and workout with a number of other agencies that did get delayed on them taking any action because of the budget impasse, but now we're starting to see that work itself free. We believe that will have a continued benefit into the second half as we see that break free. Overall, we're pleased with where that's going.

We also have some -- and we're waiting back -- for some feedback from several states right now on proposals and some competitive bidding that we're doing and completing. Overall, last year we were kind of stalled. We're seeing it starting to pick back up, and I think we'll kind of pick back up in the second half and continue that. Well, actually it's going to pick up in the second quarter, and then pick up further in the second half, and really go into 2012, especially given the fact how it is a cost-saving measure and people are now starting to recognize that.

Okay. Great. And given that these contracts were just delayed and not canceled, are you guys reiterating your 2011 guidance?

Right now we're waiting to see how much is going to be compressed into it. We believe that it's attainable. It just really comes down to revenue recognition right now, and the wrap up on a couple of awards that we have. We have a good bit of it done. We just have to see if we can compress it all into the second half, and that's the real challenge, and to overcome the loss from the first quarter. So we're hoping we're in good shape. We'll have a whole lot more guidance for you as we get through the next month or 2.

That's kind of what we're thinking. We think we can provide you a much higher probability assessment if we watch the next couple of months play out, and I think, frankly, that's our game plan at this point in time. We're very hopeful that we'll be able to reiterate guidance, but I think given the first quarter we want to get a little bit more water under the bridge.

Okay. Thanks.

Thank you.

Jacob Strumwasser with AYM Capital. Please go ahead.

Hi, guys. Why aren't you able to reiterate the guidance for the year?

Well, right now we want to make sure that we can catch it all up because a lot of awards that are coming, or have come, have all occurred at the end of the first quarter and are coming into the second quarter. So it is a matter of revenue recognition, making sure that you can deliver everything, and overcoming the losses that occurred in the first quarter. So it's catch up more than anything, and your ability to catch it up. It is more of a GAAP issue with revenue recognition. We're not worried about winning it, getting it awarded, again, it's just catching it up.

Yes, I think that's fair. I think from a trend-line perspective, we're pretty comfortable with what we had indicated earlier. Nothing's changed in the models, but there is this issue of really working hard to catch up and recover the full year from whatever shortfalls we had in the first quarter. That would be the only thing that would be holding us back.

You see that, right?

I understand. Is it fair, then, to say if you went from today as Q1 toward the next 12 months, that that income would be earned over the coming 12 months, effectively?

Effectively.

Okay. And can you talk a little bit -- congratulations on the commercialization with the shipping business. Can you talk a little bit more about the earnings ability for the commercialized side of that business?

Well, what we're doing in positioning has been actually part of our long-term plans anyway. Margins will tend to be a little bit stronger in the commercial area, and growth prospects are strong, too. It's just a matter of migrating there with our services. With what we've seen with this first client, which we will have a press release out on, once we have approvals in place, will really demonstrate that they're adopting what they have to do for the federal compliance requirements within their own internal use as well, just because of the cost savings and the benefits they receive all over for that integrated solution set.

So with that as we start working with verticals, and sales and marketing partners, you have a lot more leverage ability because other people over a larger sales organization is selling the product set. And we're doing that into healthcare, into first responders, into financials, and into public safety, and these are the areas specifically where there's a high demand for Cyber Security matters and issues because of a lot of the problems that we've witnessed over this past year.

Is this a major inflection point for the Company, in terms of it's a new customer stream?

As part of our plan, we've been migrating here all along. The inflection point was always set for 2012, as a lot of these requirements came online, and a lot of this was forced upon these industries. We're just now seeing that the White House and OMB take a stronger and stronger approach to it because of issues with both public safety and cyber crime, as well as some of the Medicare issues, HIPAA issues, and all of those things just coming to light. So it's kind of a natural evolution as -- and it's a great way for us to transition to be able to keep and build our federal presence, as well as let that drive the commercial growth of the business. So an inflection point? Yes, to an extent, but not an unplanned inflection point.

Okay. And so it is an inflection point in a good way, that's what I was saying -- .

Absolutely.

And the last thing that I just want to hit on quickly is the declining margin. Is it a cannibalization of your guys' business, or is this the operating leverage associated with more sales, or in this case less sales?

It is actually neither, Jacob. We both want to answer this one. But I think the first statement that needs to be made is that there's been no change to the underlying business model or expectations. So as our revenues roll out and catch up, we're quite confident that the same levels of profitability and return are there. And that nothing has been compromised in this process, certainly not any cannibalization associated with competitive pricing. That's my two cents, but I'll let Jim enhance it.

Jacob, to keep it simple, when you have a bunch of margin push right that's in the 50%, 60%, 80% range, and you offset it slightly with lower-margin work, it impacts the margins at least for that period. So we just had a mix issue where there was just a higher mix of low-margin work, and it wasn't overcome. And our growth and our model overall is to build out the higher-margin services, which is driving the leverage ability in the business model and that profitability.

Good. Thank you, guys.

Thank you, Jacob.

Fred Milligan with Sanders Morris Harris. Please go ahead.

Hi, guys.

Hi, Fred.

The Consulting business is growing a little bit. So could you give us a breakdown in terms of revenues in the first quarter, in terms of percentages for the Consulting, the Wireless, and the Cyber Security?

Hang on for a second, would you, Fred?

Sure.

Should be able to get that for you in just a minute.

I just have to look it up, bud, I don't have it off the top of my head. And actually, Fred, I don't know if I have it in front of me either.

Is the Consulting like 3% or 5%?

Well, no, it's in our segmentation tables, and I really didn't address segmentation per se, so -- .

Let that go. You talked about, in the report, release rather, billable minutes in the Wireless area that were not fully offset. I thought the billable minutes were rather very low margin and sort of a pass-through. Is that correct?

They were, but what happened is while we get you the other side of your question, is -- .

I'll get it.

Literally, WHS back in December, we made a strong push to migrate away from some of the billable minutes, and this is kind of the follow through there, and that's all it is. So if we would back out the billable minutes first quarter over first quarter, the Wireless segment actually, for WHS on apples to apples, the Wireless segment actually grew.

Okay. Now, with the contraction, and the first quarter you would have to look at the government spending as being a contraction of the government market. Under those circumstances, has the competition increased, and pricing more of a factor?

Well, we haven't seen pricing issues, we've seen a lot of paperwork issues. Where, literally, when you get into a continuing resolution in that environment, nobody is issuing new task orders per se, new contracts per se, they're living off of last year budget issues. And so you're just waiting for that to be resolved so they can put out new RFPs. It doesn't have anything to really do with pricing issues, their desire to do it, it really just holds up paperwork everywhere.

But wouldn't it be logical that everybody who's competing for this business or after this business would be more aggressive if, in terms of the business isn't as high or as much as had been earlier?

Well, Fred, it's not impacting competitive nature. In Cyber Security, what we're doing is what we're doing. We have a subset of competitors, period. And everybody is kind of waiting on what they're waiting on. It's not an issue of everybody trying to steal from somebody else being greater or lesser than. It's just really, you can't get anything done because you're caught up in the bureaucracy.

Okay. All right, moving on, is what you're doing with Wackenhut and the others, is that making any contribution now or is it too early to look at that?

Well, as I talked with you before, Wackenhut we just started. We're in the training session where we're educating and training sales force, workforce, and we're working with them in letting them understand some of the integration of our product into it, so we can collectively go after the clients that are demanding it. There's about a 1-year sales cycle, Fred.

So the commercial -- .

And that is what it was.

So the commercial -- .

We really see that in our realistic expectation would be too aggressive, frankly, to say third quarter. I really do believe that we'll -- if we're successful, we'll see some meaningful revenue growth from them perhaps in the fourth quarter and certainly by year end. And many of these initiatives just have a long lead time for them to get established and set. On the other side of this, Wackenhut has an enormous end-user base, and could very, very quickly implement product once, in fact, they've received contractual commitments to do so.

Fred, now, back to an answer that you had for the first -- in the first quarter, about a little over half of the business went to Wireless, about 35% went to Consulting and IT, and then about 12% went to pure Cyber. Now, we anticipate the Cyber number to be much greater for the year as a percentage. And also recognize that in the Consulting area, that push was related to work we were doing in the Cyber area, okay? So they kind of feed on each other.

Okay. So you can't separate them in that sense.

So not ideally because they work together. I can tell you probably a good $1.5 million to $2 million of that $3.5 million really went into support of Cyber initiatives with the federal government.

Okay. Now, in the states, is that at the same level as the commercial in terms of development, or is it moved further ahead?

The states were a little bit ahead of, I would say by a good year or more within some of the initiatives we're working and the marketing we're doing on both the Cyber side as well as on the Wireless side.

Okay.

So we started working on that a year ahead of any commercial efforts within the Wireless. Now in the Cyber side, the commercial is pretty much right per plan, and we're just moving right along.

I don't know how you measure this, but is there a backlog, or is there a way of putting a number on a pipeline?

Well, a pipeline and a backlog are 2 different things.

I understand.

And we really -- we don't address that on these calls. We do have a strong backlog -- .

Okay.

-- of contractual work in the Wireless side because that's more contractually obligated. On the Cyber side, it is more task ordered and more driven by purchases, so it's not. As it goes to the pipeline, we are addressing pipeline to expand and diversify our pipeline, as we've already discussed.

Okay. All right.

But specifically, Fred, though, migrating more and more towards the commercial side.

Yes, okay. All right. That's all I have, so thanks an awful lot. Appreciate it.

Thank you, Jacob.

That was Fred.

Fred, sorry.

(Operator Instructions) Drew Justman with Madison Investor Advisors. Please go ahead.

Thanks for taking my questions. Maybe we can start with the outlook for the second quarter. It sounds like it's gotten considerably worse since the conference call at the end of the first quarter. Is that an accurate assessment, or it sounds like things are a little bit -- or quite a bit more murky?

Well, the continuing resolution in some of the matters didn't get really resolved until the end of April and beginning of May. We did not anticipate that, so it weakened some of our expectations and revenue recognition in the second quarter. So in the first -- or on our last call, we were extremely strong on our second quarter because of the compression or catch up occurring more then than we witnessed because of the delays. The delays did go on a little bit longer. We do anticipate the second quarter should be better than the first, and that the compression of these catch-up revenues, we're just going to witness more in September and really with the wrap-up money. As you know, the government's going to spend -- through all of this, fiscal 2011 is still going to spend 9% more than they spent last year. So it is just going to be pretty much a rush to what they call year-end sweep-up money, and that's where we really anticipate to see most of it. And we're also being a little bit more conservative right now because of all the delays that did happen, and we have to make sure we can get the work performed. Hopefully there is an upside surprise, but we'd rather not communicate that, and just surprise you.

Yes, I would agree. There are the comments made on the last call that you guys are a conservative management team, and then the results this quarter I think were a little bit of a surprise considering that the first quarter was (inaudible - multiple speakers) completed at the end of -- .

No, in the last call we did guide to a weak first quarter. We did guide to that.

Yes.

And because of that, we've seen what happened, too. But that is what it is. We will, if anything, and most people that do know us, know that we tend to over-provide information in the quarters and the quarter calls, and we're completely outright with answering questions in what we believe. And we are a bit conservative.

Well, I'd hope that you would understand why we feel that it's appropriate for us to be a little bit cautious and conservative at this point. When the trend line re-emerges, and we're feeling a lot better about some statements we've made in the course of this call amongst other things, we'll be the first ones to come back and tell you that things are looking better. But the reality is, we still can't control what's going on in that contracting process. We're seeing a definite pick up in activity and in awards, but candidly, if it all gets bunched into the last 2 or 3 weeks of June, there are issues associated with the fact that that's all well and good, but that's not going to help us a whole lot with second-quarter revenues. So we are being cautious, and we're very hopeful we'll be able to come back with you with some upside news.

You mentioned that the second quarter is going to be better than the first. Do you expect to show profit in the second quarter, or is it uncertain?

Well, we would like to. The model would suggest that, and we will see. Our goal is to hit our goals for 2011, but we are looking at revenue growth and at least bottom-line neutrality if not better performance. We do anticipate that. We are anticipating a lot of compression in third and fourth quarter, which will then be a lot of catch-up income and catch-up revenue. Our model, though, would suggest really upward surprises in bottom-line income in both the third and fourth quarter because of that compression, just because you have a lot more gross margin and you have the same amount of net income. Again, it's just you're compressing and catching things, so it'll look weak now, it could look extremely positive the other way. But when you look at it for the year, it kind of marginalizes and naturalizes out.

Okay. And then what is a worst-case outlook for the year, if you could try to estimate that?

We don't have it. We've built the model where we should always do better than the prior year, so that would be what we would probably guide to in a worst case.

Okay, so north of 4.5 -- .

Not counting 1-time tax events or things like that, of course.

Right. And then, Steve, you mentioned some long-term guidance that was made in 2010 at the end of your prepared remarks. Maybe you could just refresh me on what exactly that is.

2010?

No, he meant long-term guidance 2012 and on.

No, I thought at the end of Steve's remarks that he said guidance that was introduced in -- long-term guidance that was introduced in 2010 is still on plan. So I was just wondering what the long-term guidance is?

Well, that guidance related specifically to 2 -- I think the 2 factors that I was talking about. Number 1, what we perceive to be the emerging market potential for commercial applications for our Security solutions. That is, of course, 1 of those mega-numbers out there that we believe that we will significantly participate in.

I was just wondering if there was any numbers behind that?

He was originally -- globally-- you were globally in 2010 looking at achieving that $200 million to $300 million milestones over the next 2- to 3-year period.

We also talked about incremental revenue over a 4- to 5-year period.

Right.

And I believe the number was $200-plus million.

Right.

And that's what we see, and that's basically a doubling to tripling of our experience over the last couple of years, in terms of new revenues versus base revenues. And we think that that is a very achievable target given both our track record, as well as the opportunity that we see staring us in the face out there.

Yes, it's phenomenal. And then with the higher-margin businesses, what would be just a ballpark earnings range for that, if that comes through?

You'll have to compute that. But gross -- you should see our SG&A level off to flatten out as a percentage of the business or if not decline. And you would see margins move into -- well into the 30% margins and if not higher. The watershed event is with a lot of this mandated credentialing in 2012 really being extreme high margin, and that really driving a major inflection point to the upside. And what's funny is, it's not driven by federal funding, it's driven by the requirement of the commercial entities to pay and adopt these. So the feds have found a way to actually push this off, this burden onto others, yet still require them to meet it. So as they say, go where the cash is, and that's where our business model originally took us, and that's where we're following it to.

So if I add this all up, it seems like the long-term opportunity is still terrific, yet the stock has pulled back significantly. In the past, the management team has been fairly opportunistic in terms of insider buying. Is that something that could be on the horizon for you guys?

Well, I'm just finishing paying my taxes for exercising all the warrants and everything else. I have everything into this Company I can put into it. I'm not a wealthy man myself, and most of the management team has our lives into this, so we're not wealthy. If we could, we would, and we do the best that we can. We're just, unfortunately, not financially positioned there.

Well, I think if you're looking for management commitment, I would imagine that you'll find that the place you'll most likely see that will be incremental exercises of the existing stock options on a management team. I don't think there's any big plan out here or anything beyond that at this point, and as Jim mentioned, we're all pretty invested in this opportunity.

Terrific. Thanks a lot, gentlemen, for answering my questions. Appreciate it.

Thanks a lot. Appreciate it.

Jacob Strumwasser with AYM Capital. Please go ahead.

Hi, guys.

Hello, Jacob.

Hi. Do you guys have any ability to buy back stock?

Well, we don't know if that would be prudent. If you really think about it, you take a look at the working capital that we have, what we're generating, the revenue streams that we're projecting, it would be kind of not intuitive, but if we did, we could find ourselves in a situation then not having enough working capital to support any extreme burst of revenue growth.

Sure. I understand.

We're positioned well enough where we don't have to raise capital, and we're building enough to meet the revenue growth demands of our future expectations.

Understood. Great. I'm just trying to kind of look at -- it was $1.40, $1.45, and now it's $0.90, and trying to figure out how much of that is already baked into what's happened in the past versus going forward, and the ability for the Company to take advantage of that, but I understand what you guys are saying.

Yes, but Jacob, our problem is we have to really look at the business and funding the business and sticking to our model. As it goes to IR, that's awareness, and there was a lot of inefficiency in the stock. Given all the bad and negative news out there, and our inability to communicate anything new because of what was going on, you just had a heavy preponderance on the sales side, and it really has driven the stock down. And while we wanted to scream because we're shareholders as well, we're also handcuffed to an extent.

We are going to get out there. We're going on the road, but we needed information to be out there to talk about it, and that's why we're going to start with the Craig-Hallum conference. I'm going to be on the road with some analysts next week, and we'll start trying to raise awareness because our business model mid to long term still is very strong, we believe. Just was a short-term hiccup, and with that you see these events happen, and hopefully we can correct it by positive performance, okay, as well as communicating and raising awareness now that we're getting information out there, now that the budget impasse is starting to clear up, and we have something to talk about.

Great.

Well stated.

Thank you, guys.

Thank you.

[Sam Donaldson], private investor. Please go ahead.

Tough quarter, gentlemen. And we're all disappointed, but based on the reasons you've given and your excellent record in the past, it's my presumption that you handled this problem as well as -- probably better than any management could. So on that basis, I thank you.

I have a couple of questions. One you've already answered, but I just want to hear it again. So you're telling us that you're really certain that the problem in the first quarter was based on the uncertainty about government funding and not some other reasons and they just gave you that as kind of a pass reason?

Well, I mean, Sam, it's Jim. We can tell you what we witnessed. We saw things get pushed off. And you live in town, you saw everything that's happened. It was a mess.

No, I think -- believe me, not only is it logical but it would surprise me if there were any other reasons. I just wanted to hear you say that, yes, in effect, they said to you if not in so many words, we can't go through with this now because we don't know about the funding.

To the absolute best of our knowledge and experience, Sam, that was the core reason.

Okay. I accept that.

Classic paralysis across the board, nobody willing to take chances, raise their head above the trenches, and we sat there as frustrated as you could possibly imagine.

Well, I understand. Go ahead, Jim.

Sam, you'll get a kick out of this. It affected, all the way until just recently, we had clients who wanted to buy things from us, and it would save them money, but because of the procurement rules, they couldn't enter into something new. So we had to go back and rework it to make it look like it wasn't something new. It was just extremely frustrating, and it has been for a number of small- to medium-sized companies specifically in the area, but I tell you, Dan, Jim, everybody on the management team -- it forced us to get creative, it forced us to really look at it and figure out our work-arounds.

Well, look, creativity is the way the town works. I know that, which leads to my last question, and that is this. Today we hit the debt ceiling, but because of creativity, Geithner's going to take us, he says, until early August before -- if we go off the cliff, we go off the cliff. Now here's my question about that. John Boehner says he wants $2 trillion in order to have republican votes to raise the debt ceiling. I think it is a bargaining position and all that, but he's going to get something, and I realize that's mainly from the entitlements, but defense is on the table.

Secondly, we start the new budget process, what, on the first of October, and I think there will probably be as much uncertainty from the standpoint of the way that the people who want to just slice this budget across the board sometimes are going to present. So I want to hear, once again, you said late last fall, as I recall, that in our sectors you did not believe that even a reduction in permanent government funding from the standpoint of these budgets will not really adversely affect us. Is that still the way you see it?

All right, well, Sam, that was a couple, 2-, 3-part question.

Take any one you want.

All right. Simply enough, we all know that most of the cuts to be made will be in entitlement programs because that's where the money is, as you even said.

Yes, that's right.

Okay. The incremental other funding that will be cut, okay, will most likely be in areas non-security related and DoD. As you've already seen, DoD budgets have been approved for 2011, it'll get proved, and they've already have a 3-year blueprint for where that's going. DHS is pretty much already been worked out as well. Where you're going to see hits are probably in consulting services or the big body shops. You're going to see hits to the non-DoD, non-security world, okay? But I have to tell you, we were partially wrong with the statement we made to you that we would see no impact. We did see a timing impact, not because there wasn't a desire, not because it's not already in their line items for their budgets for 2011, 2012, and 2013, but because of the paralysis.

So we were caught off guard and caught short that way. Now, we got caught once doing that, we're not going to get caught a second time. We're going to broaden our pipeline of opportunities. We're going to take certain other measures to make sure that we diversify a way from having that kind of impact. But even with the impact that happened in the first quarter, what did we see? We saw revenues fall $1 million, okay? That's it, not even $1 million. So we did hedge ourselves, but we're going to learn to hedge ourselves better in the future so we have more out there. Okay? But, Sam, saving money, Wireless, Cyber Security, they're all initiatives that administrations both republican and democrat have both adopted, saying -- and they're pushing on. These are long-term tidal changes into how we live and do business, and we truly do believe we're not going to be impacted from the opportunity that that gives us.

Well, I understand that, and I've thought for the 2008, the fall of 2008 when we started going off the cliff, that we were lucky, those of us who invested in WidePoint, to be in this stock, even when it was down just a few cents because of the reasons you gave. And that is that with the uncertainty elsewhere in the market, and the economic condition of the world, we're in a stock that does business to such a large extent with a government in a way that it has got to be there, the money, that is. It has to be there and the contracts have to eventually be there. So I mean, I'm just reaffirming to you that I'm on board, and I'm staying on board. Thank you.

Well, I appreciate that. And I'd just like to reaffirm to you that we really still do believe what we have been saying for the past year or more, and this quarter was an aberration, and Sam, it's just what it was. It did catch us a little bit, there's no question about it. And as Jim said, we're going to get smarter about it going forward.

When we look at what's out there, we see some of the larger integrators, obviously the Northrops, the Lockheeds, the SAICs, they didn't suffer a short-term impact because, candidly, they have a longer contractual backlog, and they don't get a hiccup like we get as a young, growing company that's more dependent on a continued flow of new contracts and new business. So that's the reality.

But on the other hand, if you look at what's going on with the Northrops, the Lockheeds, and SAICs, they're all cutting staff because they know the reality of what's going to happen and what's going to come down. We, today, do not believe that we are in those segments of business. We have a product that is a dollar-for-dollar cost-saving product, a product and service to the government. We're competitively, advantageously positioned in the Cyber Security side with great products, differentiated. And you know what? As you said a little while ago, these things are going to happen, and we're very confident that they will.

And again, I thank you, and as I say again, I'm on board even before -- I suspected the quarter was not going to be terrific, and I bought in the close today even before I got your report, so I see you guys.

Thank you, Sam.

Thank you, Sam.

[John Groveman], private investor. Please go ahead.

Yes, my question's regarding the recent news releases from the government regarding a new appointee, Chris Painter, who is going to be the new cyber security chief. There's been some press and some news releases from the government that there's this new push going forward, and he's going to be heading the effort. And I want to know whether that impacts you, and whether you know the guy, and does this close doors or open doors, and that's really the question.

Well, actually, it is interesting that you bring that up. Our lobbyists and some of our support people are aware of him and do know him, number 1. Number 2, the initiatives that the White House, through the cyber czar, okay, and the new cyber czar are pushing are in the areas of healthcare, Medicare, in the areas of public safety, utilities, various areas that we had been working on for more than a year.

Well, that's what it would appear to me that it was right up your ally. I just wanted to know whether this Chris Painter is a guy that you're in with or out with, and who is he replacing or is this a new position?

No, this is a position that's been developed over the last year or 2, and literally, the impact, it's great that they're behind the initiatives. It's great that they're speeding the initiatives up, so that's all positive. He is one person in the cog that's another cheerleader for the reasons that we're doing it, so we don't view it negatively in any way.

Okay.

Thank you. And there are no further questions at this time. I would now like to turn the call back over to management for closing remarks.

Well, thank you. Number 1, thank you all for your time and continued interest in WidePoint. This was a bit of a tough call for us, we're not in the business of losing money. We've had 10, 11, 12 quarters of profitability and revenue growth, and we intend for that to continue going forward. And we appreciate your continued commitment to us, and we will look forward to chatting with you again at the end of the second quarter. Thank you, and have a great evening.

Ladies and gentlemen, this concludes the WidePoint Corporation 2011 first-quarter earnings conference call. Thank you for your participation. You may now disconnect.