WidePoint Corp (WYY) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen and thank you for standing by. Welcome to the WidePoint Corporation fourth-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 open for questions. (Operator Instructions). This conference is being recorded today, Monday, April 1, 2013. I would now like to turn the conference over to Brett Maas with Hayden IR. Please go ahead.

Thank you, operator. Good afternoon to all participants joining WidePoint's year-end 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 2012 annual results and Jim will provide additional financial details. Then we will open 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 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 risk and uncertainties, including factors discussed in the Risk Factors section of WidePoint's Annual Report found on Form 10-K and 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 statements in order to reflect events or circumstances that may arise after this conference call except as required by law. I would like to now turn the call over to WidePoint's Chairman and CEO, Steve Komar, for opening remarks.

Thank you, Brett. Good day to everyone who has joined us late on this post-holiday afternoon. As has been our practice in the past, we would like to acknowledge and reaffirm our appreciation to all of you for your continued interest in WidePoint Corporation.

During 2012, the Company made significant progress in addressing several of its strategic goals relating to the way we do business and our probability for success as we look to the future. These range from diversifying our revenue streams and redefining target markets to our commitment to add and reposition resources to emphasize a sales-driven corporate culture and delivering an optimized services and support environment.

Each of these initiatives is directly in support of our goals of intensifying revenue development, building more robust pipelines and backlogs and migrating to higher margin market opportunities in the years ahead.

On balance, we were pleased with our 2012 financial performance and feel we are on an accelerating new business trajectory that will have favorable impact throughout 2013 and beyond. Taking a tops-down look at 2012's annual results, net revenues increased by roughly 35% to $56 million from $41 million in last year's comparable period, reflecting increased revenues at each of our business segments.

In 2012, income from operations was approximately $1,020,000, an increase of $914,000 as compared to $105,000 realized in 2011 and net income totaling $830,000 was dramatically better than the prior year. Also worth mentioning is that non-GAAP adjusted EBITDA, an important yardstick in measuring the net contribution of business operations, was approximately $2.3 million in 2012, an over 100% increase compared to $1.1 million in the prior year.

I will leave the more detailed financial reporting and analysis to Jim McCubbin, but I'll offer a few comments about business performance at each of our segments.

Our telecommunications lifecycle management, or Managed Mobility Solutions segment, contributed roughly $32 million to our 2012 revenues, an $8 million increase to the prior year. A prominent contributor was our acquisition of Avalon Global Solutions now operating as WidePoint Solutions Corporation, which allowed WidePoint to meaningfully increase its presence in the commercial marketplace.

On the government side of this segment, we continued to shift away from lower margin revenue generated from billable reselling of minutes to our federal customers. We believe that growth strategies to expand our reach into commercial and state government sectors should provide us with the revenue mix and customer diversification necessary for us to meet our overall growth strategies, as well as managing the variability in revenue from federal government contracting.

Our Cyber Security segment continued to grow in 2012 driven primarily by increasing demand for credentials to support the government's Transportation Workers Identification Credentialing or TWIC contract and growing monthly volumes related to the ECA and [ACs] programs.

Consulting Solutions and Services recorded a very strong revenue performance year, characterized by increased software resale contracting and growth in commercial market IT consulting engagements. As a footnote, it should be no surprise that, going into the second half of the year, we had some degree of concern that we would see a slowdown in federal government spending due obviously to federal budgeting and sequestration concerns. We believe that these concerns still exist, but candidly we actually benefited from this to an extent during the last six months of the year as we saw government agencies aggressively spend available monies for our high-priority solutions, primarily so they would have access to them in the event of a slowdown or a shutdown of federal spending over coming quarters.

To provide some insulation for the Company related to that risk, we are continuing to focus on expanding our commercial market footprint, enhancing our cloud-based security management and telecommunications management solutions and expanding our geographic reach in support of our growing international client demands.

While we address risk, it is also appropriate to address opportunity in the form of a quick update of our strategies going forward. WidePoint has invested in bringing a robust mobile device management, or MDM, product to the marketplace. This new application will be fully integrated into our existing telecommunications management offerings to provide a seamless new capability to existing customers and target prospects. The MDM market is expected to almost quadruple in size, up to $1.8 billion in annual revenue during the next three years. MDM is a naturally synergistic offering for our existing TEM product suite.

The geographic demand is predominantly US-based with growing participation from European and Asian marketplaces. This meshes quite nicely with our strategy to expand solutions and services beyond US borders to meet the needs of our increasingly multinational client base.

On the cyber side, although this has been a slow adoption market over the past few years, the numbers for identified user populations are staggering. As an example, the current TWIC program has an enrollment of approximately 2.5 million users and is currently issuing new certs at the rate of 50,000 per month.

The successor TTAC contract has identified a target user population of up to 40 million users across multiple transportation sectors. Add to that the ECA and ACs, device ID and healthcare initiatives, to name several of many such programs and market demand as projected by Gartner and IDC is expected to at least triple over the coming three years.

Even with competition from established players such as VeriSign, IdenTrust and Cybertrust, we believe that WidePoint's Cyber Security's marketshare could yield $40 million to $50 million in high-margin recurring revenue over that timeframe.

To support these market opportunities, we have launched several investment initiatives to ensure our readiness to maximize these opportunities. To some extent, our short-term earnings potential may be impacted, but these actions are deemed critical to our realizing our full potential for growth and future success.

First, we have invested in bringing the MDM capability into our product portfolio. Second, we have made similar investments in launching development of an MSM, or mobile security management product, to meet the next anticipated emerging market opportunity. These investments reflect our convergent strategy or the coming together of these capabilities to provide trusted and secured communications environments that will be marketed on an enterprisewide level.

Reflecting that, we have established a corporate branding strategy unifying product and Company identifiers under a common WidePoint theme. In addition, we have invested in substantial additional sales and marketing personnel to carry our message to the markets and to prospects. This effort is being orchestrated and led by John Atkinson, our new EVP, Chief Sales and Marketing Officer.

Finally, we are in the process of completing an organizationwide transition to a functional management structure that will best utilize our available management talent and team members to support these aggressive growth strategies on a unified Company basis. With that, I would like to turn the call over to Jim McCubbin, WidePoint's CFO, for a more in-depth discussion of our calendar year financial results. Following that, we will open up the call to your questions. Jim, the floor is yours.

Thanks, Steve and hello, everyone. Today, I'm going to review and discuss our fiscal year-end 2012 financial results in a bit more detail than Steve just covered and focus on some of the financial challenges and opportunities we see in 2013 and beyond. Overall, the highlights from our 2012 financial results show that we achieved record levels of revenues that further bolstered improvements in our gross profit, income from operations, net income, non-GAAP adjusted EBITDAS, working capital, debt and stockholders' equity over our prior year that ended in calendar 2011, which is our fiscal year-end.

We were overall pleased with these results, especially given some of the challenges we faced in some of our marketplaces during the year, coupled with the evolutionary changes we initiated during the same period that set the stage for our sales and marketing expansion efforts, new MDM and MSM product offerings, as well as our push to functionalize our business creating what will be a cohesive WidePoint-centric enterprise.

For 2012, our revenues increased by approximately 35% to about $56 million, an increase of $14.4 million as compared to $41.4 million for our fiscal year ended 2011. We witnessed growth in all of our segments, as well as an expansion in both our state and local and commercial areas from our more meaningful entry into these market in 2011 and 2012.

For 2013, our challenge will be to address the results that sequestration may have on some of our federal consulting and reselling work, which we believe could put anywhere from $1 million to $5 million of revenues at risk depending upon the ultimate outcome of the 2013 and 2014 federal budget outcomes.

Offsetting these challenges and risk are several corresponding opportunities that we do see. In the federal area, we have already put in several meaningful RFPs that we expect to see results from in the second quarter. We are also presently working on several other RFIs and partnering opportunities that are focused in areas that our federal clients have indicated our strategic investment areas within our mobile and cyber areas.

In the state and local areas, we have also recently been notified of some expansion work within our Western States Alliance work and we believe, given the positive results we have shown with our clients within the states of Nevada and Utah, that we should see a continued multiyear positive outcome from the other various states that have been carefully watching our work.

In the commercial area, we have also been busy as we have witnessed a doubling of our commercial work in our Midwest region and the trend continues to look positive as we enter 2013. As we have entered 2013, we have also been working at expanding our international reach and we presently are working to meet the internal expansion needs of a global customer.

Given that we presently believe that the opportunities we are witnessing are greater than the risk we face potentially from sequestration, along with the investments we are making in sales and marketing, we believe that our pipeline of opportunities should provide us with the ability to grow our revenues materially in 2013, '14 and out years.

For 2012, our gross profit increased 50% to approximately $14 million, an increase of $4.6 million as compared to $9.2 million for 2011. As we expand our products and service offerings towards higher-margin services in the 40% to 60% range, we believe our losses of revenue from lower margin revenues due to the negative potential effects of sequestration will ultimately allow us to expand our gross profit as we shift our mix of products and services in 2013 and beyond.

For every $1 in corresponding revenue derived from our higher-margin services as compared to our value-added reselling services, we witnessed 3 to 6 times the amount of corresponding gross profit. This shift in sales mix is a material strategic effort we are making this year and while the new sales mix is comprised of multiyear services, those services will allow us to materially increase our gross profit as we exit 2013 with a much stronger recurring and higher-margin pipeline.

For 2012, our income from operations was approximately $1 million, an increase of $900,000 as compared to $100,000 for 2011. In 2013, we will start the year with a multitude of investments we are making to drive the greater shift of our revenue mix and pipeline. These may have negative impacts on our income from operations initially, but by the end of the year, we believe the incremental gross profit we realize will more than make up for the investment with a sizable high-margin multiyear pipeline that inherently will drive higher income from operations.

For 2002 (sic), our net income was approximately $830,000, an increase of $585,000 as compared to $247,000 for 2011. As a result of the investments we are making in 2013, we believe our net income initially could trend down, but given the kind of revenues we are adding to our pipeline, we believe the net income result will be materially improved as we progress through 2013 and into 2014.

For 2012, our non-GAAP adjusted EBITDA was approximately $2.3 million, an increase of $1.2 million, or over 100% plus increase, compared to $1.1 million for 2011. As a result of the investments we described above, we believe we will still generate sufficient returns for non-GAAP adjusted EBITDA to continue to pay down debt in 2013 and materially fund the base level investments we plan to make at this time.

At December 31, 2012, our working capital increased 13% to $2.6 million, an increase of approximately $300,000 as compared to approximately $2.3 million at 2011. Given our line of credit and the level of working capital along with our expected base level of business from operations, we believe we have sufficient working capital at this time, but could be limited if we receive a material contract award and/or realize a material reduction in work as a result of economic conditions that rapidly deteriorate, all predominately due to a material number of circumstances, which would be beyond our controls.

On December 31, 2012, our outstanding debt was approximately $6 million, a decrease of $1.7 million as compared to $7.7 million at 2011 year-end. We were pleased by this result and we continue to pay down debt from our free cash flow monthly. We anticipate the trend to continue into 2013 as we realize further reduction in debt levels materially associated with debt being reduced as part of a plan of set payments attributable to the asset acquisition of Avalon Global in January of 2012.

As a result of these efforts in 2012, we realized stockholders' equity growth on December 31, 2012 of approximately $1.1 million from approximately $22.8 million at December 11, 2011 to $23.9 million in 2012.

In closing, we believe the financial opportunity is ripe for us to continue on our path of expanding our product set, making the investments in the areas we have identified and shifting ultimately to a higher margin set of multiyear solutions as it will continue to improve the inherent value of our Company, a value that investors in the marketplace will reward with a much greater financial enterprise worth we believe. With that, I would like to turn it back to you, Steve.

Thank you, Jim. Very thorough. I would like to now arrange to open the call to our listeners for their questions or comments. Operator, can you assist us with that?

(Operator Instructions) Mark Jordan, Noble Financial.

Good afternoon, gentlemen. I was wondering if you could put a little more meat on the comments relative to the investments you are making in marketing. Specifically in sort of an aggregate dollar amount, what does it represent incrementally for 2013 and how are those investments split between the government, commercial and international markets?

Mark, let me take a shot at that. Recognizing that we need to differentiate between the annualized full-load cost and the fact that this is phasing in in the course of the year, the reality is we are talking about incremental sales and marketing and related headcount well in excess of 10 individuals, 10 full-time individuals. The total cost of these assorted investment programs are in the $3 million to $3.5 million range. So they are not insignificant for a company of our size. But again, we feel that they are absolutely critical to our being able to grow in the future.

In terms of distribution of headcount, and I am reaching on this, Mark, because I don't have the numbers right in front of me, but I believe that in terms of the telecommunications sector, we are talking six to seven individuals. In terms of the cyber sector, we are talking about three senior sales executives plus a redistribution of some of the technical support resources currently existing in the cyber side. And of course, we will have a corporate managing infrastructure in terms of a marketing director and of course, our Chief Sales and Marketing Officer. So again, pretty sizable.

Okay. Impressive for a company your size, clearly. In terms of focus of where you are turning these folks loose, are you separating it by commercial or governmental or are they just sort of moving to the area of hottest opportunity?

Well, it's definitely the latter. We have been using the terminology low-hanging fruit and opportunities that we haven't been able to respond to due to resource limitations. So that is definitely part of the short-term plan. I get to talk a lot about that a lot to our Chief Sales and Marketing Officer.

So we are definitely doing that, but there is a natural segmentation between the commercial and government markets. So when we array the organizations, we tend to focus individuals primarily on that market segmentation. We have talked a lot about synergism and cross-marketing and cross-selling capabilities and frankly, those are about maybe three to four months downstream.

Okay. Final question, if I may, Jim. You talked about the gross margin profit leverage and swapping out $1 of low price minute resale for a service type revenue stream. Could you give us an idea of the order of magnitude of that low-cost minute revenue stream in 2012 versus 2011?

Well, I don't think I have that right in front of me right now on the callable minutes. It is single digits respectively in both areas. Where I address my comments a little bit more on gross margin leveragability looking into '13, we are looking at displacing margins again in the single-digit levels with margins clearly in the 40% to 60% range. So it is a great swapout. Plus the nice thing about the revenues that we are targeting and actually we are starting to win is that they are multiyear, long life arrangements. So you get to recognize it as a pipeline upfront and really grow it over time. So once you win it, you kind of get built-in sales growth and margin growth year in and year out over a number of years.

And you know without growing sales and marketing too much, we are talking about a $3 million investment, but that $3 million investment in pipeline, you are talking about tens of millions of dollars of very high margin revenue with a long life. So you can see the leverage and how it drops to the bottom line as well.

Okay. Thank you very much.

Thank you.

Mike Malouf, Craig-Hallum Group.

Great, thanks, guys. Maybe I missed it, but what was the number on the consulting business for the quarter?

We actually didn't report on the quarter. Mike, I will get you your segmentation on the quarter later. We just reported on the year.

Okay, great. What was it for the year?

Hang on. So you are talking about just consulting? The consulting services area?

Correct, yes.

In the year, $17 million, $17.1 million

$17.1 million?

$17.1 million.

Okay, great. Thanks. If you are looking to add $3 million to $3.5 million in cost with this sort of new strategic direction that you are taking, did you say -- and I thought that you had said this -- that you still felt that we could break even in 2013 on an operating income basis?

What we said is if we would aggregate all of it and take it all at once. We are phasing this in over the year, so it is not happening all at once. So we brought on John and a few core people first in the first quarter. We are bringing on a number of sales people -- actually we started inprocessing today in the second quarter. So we are ramping it and timing it, okay, to increasing revenue streams as well.

So if you took it all at once, you would be breakeven, which means then obviously since the amounts will be lower, you will actually be above -- I mean you will be profitable on an ongoing basis?

Right. Mike, you know me. I am trying to use free operating cash flow to do two things -- continue to pay down debt and then make the investments because the ROI is just so huge into the infrastructure from that free cash flow for this year. Then as you get higher margins as you stagger it in, it starts becoming self-generating and then as you really go into '14, you have a great recurring financial model that just self-supports itself.

Perfect. Then just a little bit of a follow-up. On the sequester, on the $1.5 million -- $1 million to $5 million on the sequester impact, since we are at April 1 today, we are through the first quarter, why is it such a big wide range? Do we get a sense of -- what would be the parameters of it being at the low end or being at the high end? If you could just give us --?

We have identified anywhere from $1 million to $5 million at risk. The 2013 budget and continuing resolution passed and that addresses just some of the low end. Right now, they are trying to finish up the next budget and the Senate and the House have to reconcile. We just don't know the impact of that.

Then the other thing that we are seeing on the reconciliation, we are seeing them give an allowance to agencies to allow them to shift money around inter-agency within the organization to take away the impact. So it is just kind of a wait and see and I just wanted everybody to be aware of the size potentially. I mean, Mike, just so everybody knows, it is not a huge number based on our really book of business and two, that is the range we really see from a risk tolerance of what we can manage around easily as well.

I think I would just add that the message that we were trying to send and hopefully we articulated as well is that it is not a doomsday scenario and that to the extent that we can identify any potential risks to our assumed revenue streams, we feel it is manageable and very frankly, based on the experience of the past four to six months, it may not be a risk at all. But we feel the obligation to give you some ballpark sense of what might be the situation.

We just wanted to answer the question before the question became a question.

Yes, that makes sense. Then if I could, just on the mobile device management side, it looks like, based on your yearly number, that you grew year-over-year for the quarter and over 70% -- I think 74% to be exact. Was there any one-time things in there or --?

No, the commercial segment added most of that. Now what is interesting is, this year, we are having a hard time getting our hands around it because there are several large RFPs in existence right now. On the government side, that could deliver a multitude of different kind of results and we should hear about that April, May, June how that plays out.

Then the commercial side, we have added salespeople or continue to over the next month and we know that is going to drive a greater positive result as well. One of the things that we realized last year, Mike, was everything that we went after and bid on, we tended to win. We just had a real problem where we didn't have enough feet on the ground to get to all the opportunities out there and that was one of the reasons we really had to make these investments and really look at sales and marketing because we are at a perfect timing as all of this converge and the players get shaken out.

Okay, great. Thanks a lot, guys.

Thank you, Mike.

[Sam Donaldson], Private Investor.

Gentlemen, once again, I want to congratulate you on a very good year. I think going back to 2008 struggle (technical difficulty) the chaos that our economy was in, it was very difficult (technical difficulty) and just want to add a comment, but I don't really have a question today and that is, Jim and (technical difficulty) money now, as you are supposed to do, to add the staff and to expand our reach is exactly the right thing to do. Now is the time to seize those opportunities and spend the money so that next year, the year after that, it's really going to be a big company and I thank you for that. That is all I had to say.

Thank you very much, Sam. That is appreciated and it is nice to hear your thoughts and assessment on that. We kind of believe it and it is always great to hear someone confirm that for us.

Thanks, goodbye.

(Operator Instructions). Mark Foster, Kirr Marbach & Co.

Good afternoon, guys. In terms of 2013 in your prepared remarks, you said the -- talked about the accelerating new business trajectory. Does that imply that you think top-line growth in '13 will be at a higher rate than it was in '12?

That is a good question.

Well, honestly, here is the challenge we are having right now. We believe, like every year as we enter into it, that '13 should be better than '12. Now we have also spent the first quarter putting out a lot of RFPs and lining up a lot of new customers. We are just trying to get our hands wrapped around what is the sensitivity for the range of revenues that we could see this year and then we are also doing a shift in the kind of revenues that we are going after, where they tend to be three and five-year contract values. So we are really working on building that big pipeline, so we are just not prepared to discuss at what level we see that growth. We know it is going to be going in the right direction. With our first quarter coming up and reporting in just a little over a month, we want to really -- we will have the ability to address it then a little bit better.

I think I would just add that I think we are very hopeful that we are going to have a very strong revenue performance in 2013. We are also assuming in any projections that we make that that is essentially organic growth. It doesn't deal with acquisition growth at all in terms of our projections. And on the other side of the equation, I would just ask you to keep in mind that between 2011 and 2012, $8 million of that revenue increase was due to an acquisition. So it is a pretty substantial challenge for us to equal or better that performance on an organic basis. But absent risks and all the other things we talked about, that is our goal.

The marketplace right now, we are not going to see a better marketplace for the services that we are going to be rolling out this year. So we are very excited about it. We really are.

So as you look at some of these new services -- I know in the past, you have had a gross margin goal -- you said the business was capable of doing 35% to 40%. With some of these new services being higher margin services as you look out a couple of years, do you think that number is -- that you can exceed that 35% to 40%?

Like I said, a lot of the new services within MDM, within MSM and that's recurring in nature, they really are. They are 40% to 60% margin, gross margin work. So it just depends on how fast we grow that business, but clearly that is where the modeling goes and on some of it, it is even greater than that on some of the device work. And that is where the future of where we are building this. Also, on growth, please remember we are also offsetting potentially low margin sequestration losses on our blended growth. Okay?

So if we look at this from a big picture standpoint over the last four or five years, you have been able to grow revenues at a pretty good clip, some of that organic, some of that through acquisitions. Consistent profitability though has been a little elusive and it sounds like with these additional costs, 2013 might be a little bit more of the same. Sort of at what point do you really get to the profitability breakout? Is that a '14, is that a --?

Yes, it is really '14. It is a one year or less sales cycle we have. Depending on the product sets, we are seeing anywhere from three-month sales cycles to one-year sales cycles. We have started all of this, so we really do see a lot of that hitting in '14, but we also see some incremental benefit deploying itself in 2013 as well. It is good. It is all good.

Candidly, we are trying to optimize the 2013 number, recognizing that we are obviously reinvesting substantially. But if one looks to the payoff, candidly, it is probably -- real measurable payoff is going to be in 2014 and beyond.

In Steve's prepared comments, just on some of the credentialing work and the market size, $40 million to $50 million as an example of recurring revenues, that generates $20 million to $25 million in really scalable bottom-line growth. It is quite impressive as this all comes together and then as we see the marketplace converge with mobile security, mobile device, telecom expense management and some of it come together, it is really exciting just because of the sheer number of devices and handsets that are going to be prevalent just in the government and commercial environments that are going to need to be managed, optimized and secured. It is a big marketplace and it is big enough for a number of players.

So one last one then, you sort of touched on it earlier. In the past, you guys have given guidance for the full year. Do you think after that first quarter that you will do that or is this sort of a change in strategy that you don't want to do that anymore?

Well, if you notice, a number of years ago, we got stung, so we have tended to be conservative, so we are continuing on that path. The marketplace rewarded us negatively with honesty, so we just -- we are being extra careful, we are making all the right decisions. We are working within our means and we are taking the next balanced approach. Hopefully, in the first quarter, we will have the information to give you.

I think it is fair to say we have not adopted a different policy in terms of guidance, but as candid as I know how to be, I can't in good conscience offer any guidance given where we are today, what we are reinvesting, the short-term issues in our major marketplace. Frankly, any guidance probably wouldn't have a whole lot of credibility, but we are just not going to do it. It just doesn't make any sense at this point.

There is no benefit for us to do it at this moment in time.

Okay. Thanks.

You are welcome.

[Dale Miller], Morgan Stanley.

Great numbers. Good work. I was wondering if one of you could expand on Steve's comments. I had a couple questions actually, but about the branding and kind of consolidating some of those brands. From an investor relations point of view, I am sure you have this all the time. It is sometimes difficult to really connect each of these brand names you have out there with a specific line of business and kind of see how the hole fits. It takes a little while to get your head around that. So could you expand a little bit on what that looks like?

You also mentioned, as a parallel question, growth by acquisition versus kind of intent to foster things organically. I didn't hear you dismiss acquisition out of hand and obviously especially in the cyber area, it is a pretty hot growth area. So could you kind of address those?

Sure. I will certainly give it a shot. From the branding side, we are very well aware of call it the dissonance, whatever else, that one runs into when a good part of the company has been built through acquisition, that there are identities in the marketplace that are in effect multiple identities, sometimes often in the same markets and candidly, we have lived with that for a couple of years, but we really believe it is not the right answer going forward.

We believe we have to get the benefits of a consolidated branding strategy and we are going to be intelligent about the way we transition into that, but we launched this new branding strategy literally at year-end and the beginning of this year and we are implementing it on a daily basis primarily in the most simplistic terms. WidePoint being the dominant brand in all situations and we expect, as a subset of that, we will have product identifiers, literally a portfolio of WidePoint-branded products, but we will be moving away from subsidiary corporate identifiers and other marketplace signals that we think conflict with the commonality of brand. So it is merely one step, but I think an important one as we transition to a unified company. That would be it on branding.

With branding also, we are very excited because we also just brought on a new director of marketing and marketing communications today and she is an extremely talented woman and we are very excited to just see what she can do with collateral website and a whole lot of other work that we have her planned to do. John Atkinson has also done a tremendous amount of work with Ron Oxley to really make sure that we can deploy this and we can really optimize the messaging to the street, both commercially, state and local and federally.

Okay. And then on the acquisition, I don't expect you to comment on that in specific terms any because who knows what is out there, but is that (multiple speakers) prepared or are you just going to stick organic for now?

I think we have had a fairly consistent message on that, at least I believe so, which is that we are open to and ready to pursue an acquisition that fits in and definitely represents an enhancement to our existing strategy. We are not doing rollups, we are not spreading out for the sake of spreading out. Frankly, we are very focused this year on our organic building activities. We think it is the right thing to do, but I think, right at the end of your question, you said if an opportunity arises, would we be prepared to pursue it? I think the easy answer to that is if it is a strategic fit, the answer is yes.

But this year, we clearly want to stay to our knitting. We are focused, we have been working on this project now since last August when we got it started. We clearly want to get some real headway here and that is where our focus is right now.

Okay, thanks. Lastly, I had two quick questions on essentially your customer base. The state government contracts really intrigue me because obviously you are getting a tiny, tiny fraction of what is out there. So are what you have done for Utah and Nevada very easily something you could apply elsewhere? Is there something unique in those states and what do those business models look like? Is it a pipeline, is it a one-time contract that you install something and move on? What is replicatable?

And then lastly, you talked international, which obviously raised my antenna a little bit. Do you have specific countries you are going to be targeting, specific markets or at this point, are you (technical difficulty)? Then I have one more question (multiple speakers) I promise.

I will take number one. We do have to be a little sensitive to what we do say right now because we are in the midst of some discussions, so please understand we are not trying to be rude either. We have to balance what we do say. One is it goes to the state. It would be great if it was nice and simple, but with any government contract, federal, state, local, it never is. Right now, we are working within the Western States Alliance kind of infrastructure. It is much like a GSA schedule, but for those 15 states that also allow all the other states to purchase from it.

On there, there is a multitude of offerings from a short subset of providers that have been given the okay to actually provide the services. We have done exceptionally well at really getting the work, materially most of the work and it started with Utah and Nevada who has really been on point on demonstrating the cost savings.

There's a couple different components of it. First is really getting your hands around the auditability and what they have, identifying product set, identifying land lines, phone lines, devices and with that, seeing what kind of errors, mistakes or kind of inherent problems they have. That is phase one.

Phase two then is really moving it over to a managed service offering that then takes on a recurring base of savings that they realize upfront. So think of it this way. We get paid on the audit findings and the savings we realize on a performance basis, phase one. Phase two, then we basically say you are going to pay us to maintain and manage these devices for you and/or any other services we may do for you on an ongoing basis, so you are not collecting the monies later, but you are actually collecting the savings as you go along.

So with that, we also have the ability to add services and do different things with these contract vehicles. So the WSCA states, a lot of people have opted in and they really are looking at our performance and we are extremely pleased at how we performed last year at our demonstration and we are also pleased with some of the expansion work that we are getting because of those results. All that credit really goes to our team, which has just done a magnificent job.

By the way, the way I became aware of your Company is through a channel check where you were mentioned in one of those states, very positive.

That is interesting.

Well, hopefully you got some positive feedback. (multiple speakers) . That is outstanding.

I think your second question related to geographic expansion and I think there is a fairly simple answer to that. The first priority is probably Europe and we like to think that, in Europe, and we are basically following our customers, we have increasing multinational customers that have demands. We also have a presence in Europe associated with providing cyber type solutions to NATO and other forces. So I think that is number one and we'd like to think that we can offer English, although the British may not agree with us and we also have the capability for additional languages. So we are ready to go in Europe; that is the first target. Asia obviously follows, but has a longer timeline associated with it and probably will be done through alliances or channel partners.

Great. Thank you, gentlemen. Great quarter and year.

Thank you. Appreciate it.

Michael Potter, Monarch Capital Group.

Just a quick question on the Avalon. I understand 2013 was a transition year and then hopefully this year will be more of an organic growth and execution year, especially with the investments that you are moving forward with. When will we start hearing, I guess, about some of these contract wins and new relationships that we are developing on the commercial front?

Very soon.

Yes, second quarter.

So over the next 90 days, we are going to start hearing a lot more about our activity on the commercial end of the business?

Yes.

Okay. And the investment that we are making basically through our operating cash flow is, and the capital that we may need, the working capital that we may need for large contract wins, I am assuming that is still going to be on the federal side, not really on the commercial side?

Yes, right now, as you know, we have a line of credit with Cardinal Financial Bank. We have that available to us and one of the reasons we are phasing in our investments is we are trying to stagger it and manage around free cash flow.

Sure. Definitely the right thing to do. I don't think anybody really wants any dilution, especially at this point if we can avoid it.

Mike, if you get something big happens and there is a huge award or something positive, I don't think anybody is going to have a problem if we had to do something for $1 million or $2 million that is going to generate millions and millions. But remember, we do think that way because we are large shareholders ourselves and we don't like dilution.

Sure. Let's get it first and then we will figure out the problem.

Yes, it is a good problem to solve when we have it.

All right, guys. Thanks.

Thank you.

Steve Shaw, Sidoti & Co.

I missed it before, how many (inaudible) in sales and then also the marketing in sales changes, how does that impact us in 2013 numbers-wise for sales and marketing?

Steve, I need to get you and Mike some breakouts of the quarters and other numbers. I will do that and I will try to get you a phase-in or work with you so you guys can determine a phase-in on the sales and marketing. We are doing it over a year, so it is not all at once. It gradually comes into effect. We are trying to do it where we are getting sales results out of a few people. That kind of starts self-funding the new people that keep coming on. Okay? I will reach out to both you and Mike to backfill any of your other questions for your correspondence.

All right, thanks.

There are no further questions in the queue at this time. I would like to turn the call over to management for closing remarks.

Thank you, operator. I would just like to say that I hope we have been able to convey our excitement about our opportunities in 2013 and beyond. We believe we are in the right markets. We have got the right products and solutions and the personnel to support them. So we want to aggressively expand our presence in commercial markets, expand our participation in a trusted secured solutions marketplace and expand our service profile beyond our national borders.

I would like to thank you all for your time and interest in WidePoint. We appreciate your continued commitment to us and we will look forward to briefing you on our progress at our next scheduled conference call in May. Thank you and have a great evening.

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