WidePoint Corp (WYY) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the Widepoint Corporation first quarter 2012 earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions.

(Operator Instructions).

I would now like to turn the conference over to David Fore of Hayden IR. Please go ahead.

Thank you, operator. Good afternoon to all participants in Widepoint's first quarter 2012 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 2012 results, and Jim will provide additional financial details. Then we will open up the call to questions from participants.

Before I turn the call over to Steve, I would like to remind all participants that during this conference call any forward-looking statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Expressions of future goals including financial guidance and similar expressions including, without limitation, expressions using the terminology may, will, believe, expect, plans, anticipates, predicts, forecasts, and expressions which reflect something other than historical facts, are intended to identify forward-looking statements.

These forward-looking statements involve a number of risks and uncertainties including factors discussed in the risk factor section of Widepoint's annual report on Form 10-K, in its quarterly reports on Form 10-Q, and in other SEC filings and Company releases. Actual results may differ materially from any forward-looking statements, due to such risks and uncertainties. The Company undertakes no obligation to revise or update any forward-looking statement, in order to reflect events or circumstances that may arise after this conference call, except as required by law.

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

Thank you, David, and good day to everyone who has joined us this afternoon. As we are fond of pointing out, we sincerely do appreciate your active and continuing interest in Widepoint Corporation.

As you are all no doubt aware, 2011 was a difficult year for Widepoint, due to stagnation in our government markets, and delays and deferrals of targeted projects and programs. While we managed to retain our bottom line profitability for 2011, certainly our expectations were a continuation of 2010's revenue growth, and resulting enterprise valuations were disappointing.

As we worked through this period, management was also focused on strategies that would lessen our dependence on our core government market focus, while broadening our footprint of services and products within our key strategic business segments. During the first quarter of 2012, we benefited from these efforts, particularly in the area of our Telecommunications Life-cycle Management business, which we significantly expanded at the end of 2011 with the acquisition of the customers, staff, and assets of Avalon Global Solutions Inc., which operates today as Widepoint's Solutions Corporation or WSC.

WSC greatly improved our customer and market reach by adding 70-plus commercial market customers, and over $9 million in annualized revenues to our Widepoint products and services mix. Elsewhere in the Telecommunications segment, we were successful in securing a new life-cycle management $10 million four-year contract with the state of Nevada, and a three-year Telecommunications management master contract with the 15-member Western States Contracting Alliance. More recently, in April, an award was finalized to provide similar services to agencies and departments of the State of Utah, confirming our accelerating success in penetrating state and municipal markets.

At the same time, our CyberSecurity business has performed quite strongly in the first quarter. We witnessed rising demand for the trusted identity assurance credentialing services of our ORC business, largely generated by recent and increasing government mandates requiring the use of digitized credentials for continued access to various federal government sites and information gateways, which contributed to significantly higher monthly certificate issuance volumes to meet Department of Defense and OMB 11-11 access requirements.

And further, by the continued expansion and support of the Transportation Workers Identification Credentialing program, otherwise known as TWIC, in the form of a substantial block of additional credentials issued and delivered during the first quarter of 2012. And finally, by expanded additional work with leading Northeastern states, in support of emergency or first responder systems, featuring the resource and attribute management software and services of our Advanced Response Concepts, or ARC, product and support solutions.

Looking briefly at the first quarter financial results, net revenue grew 30.1% to $13.7 million from $10.5 million in the first quarter of 2011; as well, almost better than, or almost 35% better than the preceding fourth calendar quarter of 2011. Although there is an element of seasonality in this performance, I believe it is indicative of the improved results we may expect over coming quarters. This revenue increase was materially the result of revenue growth in all of our business segments, driven by additional revenues generated from our existing customers, as well as the impact of the purchase of Avalon Global Solutions on December 31, 2011.

Gross profit for the first quarter of 2012 was $3.3 million, with a net income of approximately $86,000 in the first quarter of 2012, an improvement in net income of over $400,000 from the first quarter 2011's net loss. As we progress in 2012, we plan to continue to expand our Telecommunications Management business, with an emphasis on enhanced sales efforts in, and marketing activities to commercial and municipal markets. This will involve the goal of increasing and optimizing our channel partner and alliance partner distribution network, as a supplement to the breadth and reach of our direct sales force.

We are already witnessing an accelerating trend of contract awards from commercial customers thus far in 2012, accompanied by a robust and growing pipeline. We are on track with our long-term strategy to broaden our customer base by adding a mix of state and local municipalities, commercial enterprises, and internationally-based companies and organizations using our proprietary solutions. Within our CyberSecurity business, we fully expect several CyberSecurity initiatives to generate new revenue growth in the future, as additional federal agencies and venues seek greater levels of identity assurance and management, and better protection of the federal information technology infrastructure.

In addition to the credential demand created by OMB 11-11 and the TWIC port workers requirements, more recent developments of the expanded interest of the Department of Defense relating to secured access for military retirees and dependents, and a March 2012 policy statement by the Department of Health and Human Services initiating secured credential requirements for the transmission of all citizen health records. The groundwork we laid over the past two years will continue to provide us with a platform to leverage opportunity in all segments of our business. We have significant initiatives and RFPs in our pipeline, and we have contracts that have been awarded recently that we are now enthusiastically beginning to implement.

With that, I would 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 short summation of the key aspects and focal points of Widepoint's strategic vision for the future direction of the Company. Jim, the floor is yours.

Hello, everyone, and thank you, Steve.

We are pleased to report that our first quarter met our financial expectations and set the stage for what we hope will be our most successful year. We enter 2012 with a number of positive challenges and new opportunities that we believe will further define our differentiators, and showcase a financial model that can be supportive of our customer needs and our investor desires; one that supports a model for continued growth in top line results, margin improvements, bottom line leverage, as well as one that will provide capital for additional operational investments and acquisitions.

Demonstrating this, and what we hope will be the first of many positive quarter-to-quarter comparisons, is our first quarter, which produced quarter-over-quarter growth of approximately 30%, driven by a successful quarter from our CyberSecurity area with 73% growth, followed by our Telecommunications Life-cycle Management segment with 31% growth. And wrapping up, with our Consulting and Software reselling segment with 15% growth. Our growth in this quarter was positively affected by growth in our credentialing business, as a result of further implementation of the federal government's requirements to expand the need for certified credentials for access, further sales and support of the TWIC project, and continued work that was delivered in support of our work with first responders.

Looking out to the rest of 2012 in this area, we believe we will see continued growth with TTAC, an expansion of our TWIC program, comes online and other systems start to adopt required certified credentials for access. While this growth may be choppy at times, the overall trend appears to be definitely improving and solidifying, as the accepted and required path for access (inaudible) by the federal authorities. Our growth in the quarter was also positively affected by the asset acquisition of Avalon Global Solutions, as well as our expansion into the commercial area in the Telecommunications segment, which was met by positive accolades from the clients of AGS, as well as us witnessing the assignment over 90% to date of their client base. We are presently wrapping up the completion of this task, and making sure that the assignment of 100% of that customer base is completed in the first half of this year.

Gross profit in the first quarter of 2012 was also up $3.3 million or 24.3% of revenues, as compared to gross profit of $1.8 million or 17% of revenues for the first quarter of 2011. Gross profit, excluding amortization and depreciation expense and cost of sales, was approximately $3.8 million or 28% of revenues, as compared to gross profit excluding amortization, depreciation expense and cost of sales of $2.1 million or 20% of revenues for the first quarter of 2011. Longer term, we anticipate gross profit as a percentage of revenue should continue to increase, as cost of sales as a percentage of revenue decreases, resulting from a greater mix of higher-margin services.

We also reported income from operations of approximately $128,000 in the first quarter of 2012, compared to a loss from operations of $504,000 in the first quarter of 2011. This represented an improvement of $633,000 from last year's comparable period. In this reporting period, we are also providing non-GAAP operating metrics to allow our shareholders to better compare us against our public peers. On a non-GAAP basis, our adjusted EBITDA was also approximately $743,000, compared to a loss of $245,000 last year, an improvement of almost $1 million, or $988,000 over last year's comparable period. Net income was approximately $57,000 in the first quarter of 2012, compared to net loss of approximately $317,000 in the first quarter of 2011, which included at that time a one-time $203,000 income tax benefit during that prior-year period.

So given this overall positive performance we have witnessed, we are also glad to see a positive benefit to our balance sheet. We have witnessed debt against the note we took out to acquire the assets of Avalon Global Solutions already being paid down materially year-to-date; our working capital increasing, as we witness positive adjusted EBITDA; which also, by the way, included investments we made, in making improvements to our data center and our CyberSecurity segment; in support of further growth, as Steve mentioned; positive integration efforts and investments we made in support of our acquisition of AGS to integrate our infrastructure seamlessly; along with efforts to start addressing the continued expansion improvements we wished to make in our branding and sales and marketing efforts throughout the rest of this year.

We believe that the positive financial results we are currently witnessing, and the financial goals we expect to achieve this year, will allow us to continue to fund our investment in support of our growth, as well as allow us to strategically acquire assets that will significantly grow our customer base, technological capabilities, and reach, in supporting our customers internationally.

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

Thank you, Jim; appreciate that.

I like to take a few additional minutes to talk about what we believe is the future of Widepoint Corporation. From a macro perspective, we believe that we will be an industry leader in the integrated delivery of mobile communication solutions, and secured identity-based information and data protection solutions, all delivered globally via a cloud-based environment. We further believe that there will be a natural convergence of these two business segments, as their respective markets mature, and as customer-driven requirements become more clear and more demanding.

Those are pretty aggressive statements. But we believe we need to take real steps now, to further position ourselves for success, as these massive markets and opportunities continue to develop. Several related initiatives we are already focusing on in 2012 include further expanding our commercial market footprint in a currently-fragmented marketplace for our key solutions; enhancing the capabilities of our cloud-based trusted device and identity assurance solutions; providing cost effective state-of-technology expanded mobile device management and mobile security offerings to our Telecommunications Life-cycle Management customers; and expanding our geographic reach in support of our international and multi-national customer and prospect demands.

We will achieve this through a combination of organic growth, reinvestment in existing proprietary technologies, a unified branding and sales marketing approach, and strategically leverageable mergers or acquisitions. An ambitious agenda, but we are convinced that this is where the future lies, both for the benefit of Widepoint, and for the benefit of its investors.

Thank you. I would like to now open the call to your questions. Operator, if you can assist us in opening the lines, for any comments or questions?

Thank you.

(Operator Instructions).

And the first question comes from the line of Mike Malouf with Craig-Hallum Capital Group. Please go ahead.

Hi, nice quarter, thanks.

Thank you, Mike.

I was wondering if you could talk a little bit about the TWIC program, with regards to the block that you sold. How big of that -- how much was that, and is there more to come as far as that? Does that portend some more visibility in some other blocks of credentials? Or perhaps maybe on the negative side, would that be a sale that took (inaudible) away from the second quarter or third quarter, and pulled it a little forward?

Well, to use a comment that Jim sometimes uses, that particular transaction can have a lumpy effect. In other words, yes, there are timing issues associated with that, Michael. It was a substantial transaction in the first quarter. There is the potential for an additional order of certificates and credentials in the second quarter. There definitely will be an ongoing need, because amongst other things, we are coming to the end of the life of many of the original licenses. So there will be a renewal quotient for the existing population that is credentialed.

So I think in one sense, we have to be a little cautious and say, we did get a $0.75 million-plus benefit in the first quarter, and yes we did. And will we get exactly that in the second quarter? I don't know the answer to that, but there is the pipeline of additional opportunity out there.

And Jim mentioned the TTAC follow-on contract. The award of that is currently up in the air, which would indicate to us that there will be an additional extension of the existing TWIC contract. So my projection is that there is more good news there than bad, and we expect to see a continuing revenue cycle coming out of that.

Hi, Mike, it's Jim.

Okay. Yes.

Just to make sure this is seamless for you. TTAC is going to -- has been awarded. There may be a protest. Lockheed Martin is not an awardee or a down selective of TTAC. TTAC, we have relationships with all three vendors that were down selected, as well as the initial one that it was awarded to.

TWIC, that Lockheed Martin had, comes up for the life in August. If there is a protest, they are probably going to be more done with TWIC, while the protest has worked out. So we are in a win-win situation in the whole scenario right now, because they can't have the one go delinquent, without the other being in place. So they are going to have to satisfy both.

So we did see some of the growth, but not all of the growth in cyber come from that TWIC award in the first quarter. There could be some lumpiness between the second and third quarter, depending on what happens with TWIC and TTAC. But for the year, no matter what, we are in good shape.

Also, just so you are aware, because I know you track this closely, the JPAS system came online in January. That also added a lot of ECA sales, and we have seen a lot of credentials. This summer also, another major program is coming online, which for the year should continue to give us a push in credentialing.

Now the bigger question is, is with that program coming in on June 30, will that see a bump in June, or will it see a bump in July? And that drives some of the lumpiness that we see quarter to quarter, but not for the year.

Okay, that's helpful. That's great. Thanks --

So the indicators and all the things that we are seeing is, we are seeing all positive trends, all positive performance across the board, in the federal government's desire to continue to push the expansion of credentialing services, and expand it in fact. We just have to -- we are going through the lumpiness. We are happy with where it is going for 2012 overall. We have a -- we are feeling really good for the year. Does that help?

Thanks for the color. Yes, it does. If I could just move to the mobile telecoms side. I am wondering if you can touch on a macro question. How is the market broken out now? You have done -- focused a little bit on acquisitions with Avalon. You have stated that perhaps there will be some more in the future for Widepoint. How does it look out there for acquisitions? What is the competitive environment now? I know Gartner just had a 2012 telecom expense management -- I don't know if you have seen that. Can you just give us a sense of that? Thanks.

Yes, Mike, two things. Well, predominately we have cut our teeth the on the mobile side with the federal clientele, and we have done well there. About a year ago, we expanded and started focusing on how to take the services of what we are doing into the state and local municipalities. And we are seeing and starting to realize some success this year in that. And then finally, we did the acquisition, asset acquisition of Avalon on the commercial side.

So right now, there is three areas within the telecommunications lifecycle management area that we are playing. One is on the federal side. Two, is on the state and local municipalities side. And three, is in the commercial side. Now we are there in the life cycle is -- presently we have about nine agencies, and the federal side is slowly growing. And we are seeing some positive activity there, and we continue to see -- probably picking up one or two more additional agencies this year on the federal side as that naturally expands.

On the state and local side, we are just coming in, and the first phase of the local award with WSCA or the Western States Contracting Alliance, is really doing the audit work. The State of Utah is on lead with that, and we have won that contract vehicle. We were one of the awardees, and we won the first task order with the lead state, Utah, to do the auditing. We also won it with the State of Nevada, and we also are presently working on other task orders with other states. There are approximately 10 states that have shown interest and opted in to do this.

You are not going to see tremendous huge revenues at first, in the first year, because it is going to be the auditing and finding out what is there, in which case, it is success-based. And we will see some decent margins, and we will see some revenues come out of it this year. But really, you are going to see the migration in year two and three to managed services, which is the ability to capture those cost savings on an ongoing basis, instead of a look-back basis which is the audit cycle.

And what is really good about this is there is a lot of demand, latent demand, as well as a lot of interest in doing this. And we are in a very good position and place right now to demonstrate how we can transfer that capability from our federal customer base, into the state and local municipality base. On the commercial side, to wrap this up quickly, so you have a good understanding, the first quarter for us was really getting all of the customers from Avalon converted and assigned over, supported, and start marketing under the Widepoint brand.

And we have started successfully doing that. We have won five or six new customer clients. We have a number of customer clients that we have in the pipeline, as well as some major customer wins that we are waiting on hearing from, presently. Our goal is to continue to build out the branding of Widepoint, to continue to expand our channel partners, marketing, collateral and efforts to take that international and trans-national, with multi-currency and multi-issues, so we can really do that.

As well as do a convergence of some of our credentialing capabilities onto smart devices, to show differentiation of what we can provide that customer base that presently we do not believe exists. And that is to give you a profile. Does that work, or do you need more?

Just a quick follow-up. With regards to competition, how does it play out there for you? Are there a lot of acquisitions, still a lot of acquisitions opportunities for you? And in particular on competition, can you comment how if you go in to the commercial side, you stack up against someone like Tango, or even IBM's recent purchase of Quark? Thanks.

Well, I think I will make a comment or two on that. I think we all recognize the, call it the 800-pound gorilla in the marketplace, which is Tango. And who by the way, has done a very nice job of delivering some enterprise value. But they are a substantial player in the marketplace.

But we believe, number one, that the market today still remains very fragmented, with a big differentiation between Tango and then perhaps us and one other player, as being mid-tier players. And then a series of, quote, unquote, the mom and pops, around the country. So I think there is an opportunity for continued acquisition. How we go up against Tango is yet to be determined, recognizing them to be a significant competitor.

On the other hand, in some of the areas of our focus, where we are working hard at delivering MDM and MSM capabilities, as well as hopefully an international direct presence, we are working hard to differentiate ourselves from Tango, and basically not want to be a Tango look-a-like, but bring a more substantive and more broad spectrum product solution. We are feeling reasonably good about it. Whether we will be able to deliver that or not is an open question. I will tell you we are working hard at it, and I think we have got a good story to tell versus Tango.

Okay, great. Thanks a lot for the color.

Thank you, Michael. I appreciate it.

(Operator Instructions).

And the next question comes from the line of Sam Donaldson. Please go ahead.

Gentlemen, again, congratulations on coming out of last year, which was a disastrous year in so many ways, and doing very well. And also on expanding our base to other areas than the federal government. But I want to come back to the federal government. You have touched on it two or three times in two or three different ways, and seem to be fairly optimistic about the way things are going.

But as we all know, by the end of this year, Congress has to undo the deal made on raising the debt ceiling last August, and the Republicans are saying they are going to do it again That is, they are going to have another debt ceiling crisis. So my question broadly is, as our people talk to the purchasing agents, and the people in the federal government who last year were almost traumatized, came to a halt. What do they tell us about the ongoing possibility, that we will have to do it again? The awful thing that happened last year, this year?

Sam, this is Jim. Hi, by the way. Thank you for joining the call. The federal government is going to be an interesting place to do business, probably for the next five years plus. The good news for us on a lot of the cyber initiatives, the federal government is basically making the contractors pay, and/or making the parties pay externally for access. So a lot of that is starting to shift away from that budget morass.

For instance, on the TTAC and TWIC, there is a high likelihood a lot of that money, while some of it will come from the DHS or TSA budget, you are going see a lot of it also come from people that are the users. On the ECA and the credentialing work that we're doing, we are seeing the federal government require contractors to pay. That is outside of the budget cycle.

So we don't have as much concern there, and they are long-term initiatives and projects that continue, no matter what has happened over the last couple of years. So we know they are going to continue because it is important, and it is a mandate from both parties to continue to strengthen our cybersecurity profile.

On the communications lifecycle management side, remember, we are saving them money. And while that has slowed their ability to enter into contracts, it has not been lost on them that we are saving them money. So again, we would hope that having some potential timing impact here or there on awards, will not stop this effort. In fact, it will at some point accelerate the effort to embrace it even more widely. So we're doing the best we can with these outside influences.

We think we have positioned ourselves of strategically, as well as we can with this customer base. And Sam, honestly, that is really where we are spreading our wings, and getting into state and local municipalities, where saving money is even more important, because they have a requirement in most cases to balance their budgets.

As well as reaching into the commercial side, because of the continued growth there, as well as what we believe the cybersecurity convergence issues that are going to be dominated in the commercial world, and how they are going to address it. It is just a natural play for us. All right? That is about as clear as we can be.

No, I understand the uncertainty there. And again, I think by, as you say spreading your wings, you reduce the problem, if it comes once again. I am just fixated because of the federal government and what is going on here. I have papers from the Agriculture Department in Alamogordo, New Mexico. And I usually fax them back when they come. And the lady said to me this time, you cannot fax them, because we have no ink for the fax machine. I said, what you mean? Well, our purchasing agent says he doesn't have any money to buy the cartridges, ink cartridges for the fax machines here. And I thought, by God, this government is broken.

Good Lord, and that's for sure, good Lord.

Sam, the only other comments that I can offer is, we and some of our business development people attend a number of conferences, many of them with the arms of the military within the DOD. And what we are hearing from three- and four-star generals responsible for IT and security, and in some cases more generalized expenditures within DoD, are saying, yes, yes, there are cuts coming. They are going to be substantial.

But everyone is sitting there saying that they expect little or no cuts associated with anything in the cybersecurity theater, because of the importance of those initiatives to security of the company -- of the country. Having heard all that, cynicism is probably appropriate, and it is one of the reasons that we are modifying our strategy to be less reliant on that market

Well, Steve, I think you are right. I mean, if the rule of reason were applied, we would not be having this problem. But people are just not reasonable, and they are not thinking ahead. And that's why I keep saying it. But I am going to let you go now. Again, congratulations to all of the management. I think you have a terrific team there.

Wonderful. Thank you Sam. Appreciate it.

And I am showing no further questions. I would like to hand it over to management for any closing remarks.

Thank you, operator. In closing, let me allow -- allow me to reiterate our positive sense about recent trends and related trajectories early in 2012, and the positive impact we believe this will have on full-year 2012 financial results. We remain quite excited about the expectations for base business performance, as well as new business building opportunities for the remainder of this calendar year and beyond.

Supplementing that, Widepoint will aggressively pursue the vision and strategies that I have summarized earlier in this call. I would like to thank you all once again, for your time and interest in Widepoint. We appreciate your continued commitment to us, and we will look forward to talking with you again for a progress report at our next quarterly conference call in mid-August. Thank you, and have a great evening.

Ladies and gentlemen, this concludes the conference call for today. Thank you for your participation, and you may now disconnect.