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WidePoint Corporation (NYSEMKT:WYY)

Q4 2013 Earnings Conference Call

March 31, 2014 04:30 PM ET

Executives

David Fore – IR, Hayden

Steve L. Komar – Chairman and CEO

James T. McCubbin – EVP and CFO

Analysts

Ross L. Licero – Craig-Hallum Capital Group LLC

Mike Crawford – B. Riley & Co. LLC

Operator

Good day, ladies and gentlemen and thank you for standing by. Welcome to the WidePoint Corporation Full Year 2013 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)

This conference is being recorded today, March 31 of 2014. I would now like to turn the conference over to David Fore of Hayden, IR. Please go ahead, sir.

David Fore

Thank you operator. Good afternoon to all participants in WidePoint's full year 2013 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 2013 results and Jim will provide additional financial details. Then, we'll open the call to questions from participants.

Before I turn the call over to Steve, I'd like to remind all participants that during this conference call any forward-looking statements are made pursuant to the Safe Harbor provision 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 factors and uncertainties, including those discussed in the Risk Factor sections of WidePoint's Annual Report on Form 10-K and its quarterly reports on Form 10-Q and other SEC filings the company releases.

Actual results may differ materially from any forward-looking statements due to such risks factors 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 now turn the call over to WidePoint's Chairman and CEO, Steve Komar for opening remarks.

Steven L. Komar

Thank you, David, and good afternoon to all of you that have joined us today. As has been our past practice, we’d like to continue to express our appreciation to all of you for your continued interest in WidePoint Corporation.

Let me start by saying that 2013 proved to be a challenging, a critically important year for WidePoint. Early in the year, we announced the launch of a number of programs that would change the way we did business and pursued revenue growth as a company. This range from increased investment in our sales and marketing organization and resources, to building of a national direct sales force, growing our alliances and channel partner programs, reinvesting in our product development and infrastructure capabilities and fundamentally changing our management structure to better meet the needs of an accelerated revenue growth environment.

In effect, it was a conscious commitment to reinvest our targeted annual profits during the year in order to position the company for the future and we share those plans and expectations with you in our quarterly calls during the year. I am pleased to state that we’ve achieved these objectives and have primed WidePoint for accelerated growth in the years ahead.

With my opening comment as a backdrop, I’d like to spend a few minutes telling you why the company has a dramatically different profile than it did a year ago. I am quite proud to say that WidePoint entered 2014 as a much stronger, much more diversified company, with a much larger market opportunity available to us than when we began 2013. We’re now at an inflection point, driven by accelerating business momentum and the increasing adoption of our newly launched Managed Mobility Solutions platform.

Given its obvious importance to us, I’d like to spend a few minutes focusing on the drivers for this accelerating growth in 2014. First and foremost late in December 2013, WidePoint was awarded a $600 million single awardee Blanket Purchase Agreement by the Department of Homeland Security for Cellular Wireless Managed products and services.

We actually won the contract much earlier in the year, but due to not one, but two sequential protests from one of our competitors, the final awarding and release of this contract did not occur until almost the end of the calendar year and the expected revenue ramp associated with it was delayed until 2014.

As I mentioned on our last quarterly call, this contract is transformational for the company. Total contract value was up to $600 million over five years and it covers all DHS component agencies and organizations; Transportation Security, Customs and Border Protection, Immigration and naturalization, the U.S. Coast Guard, FEMA and the secret service amongst others, and mandates that all DHS component entities use this vehicle for mobile managed telecommunication services.

We held our kick-off meetings with DHS during the first quarter of this year and we expect to see an initial revenue contribution from this contract by the end of the second quarter of this year. In fact, last week, we received our first two task orders under the DHS, BPA to deliver $2.3 million in services to the federal protective service, federal law enforcement agency within DHS and from Customs and Border Protection, which further expands our existing relationship with this agency. We are forecasting a four to eight quarter revenue ramp for the contract up to an annualized run rate of approximately $75 million to $100 million.

DHS is already one of our larger customers and this new award will allow WidePoint to dramatically increase its presence and importance to the department. We see at least 100,000 devices available for our managed service offering under this agreement and that’s just for our core service. Over time, we expect to offer traditional products and services from our solutions portfolio as well as those of our alliance partners in order to capture even greater incremental revenue opportunities.

Moving on from DHS, we are also very excited about our channel partner strategy to pursue opportunities in the commercial market space. In November 2013, we executed a global agreement with Compass Group PLC one of the world’s largest food and support services companies, headquartered in the UK with annual revenue and excess of $27 billion and over 500,000 employees working in and spread across 50 countries.

Compass has been a telecommunications management customer in the U.S. since 2005 and this new agreement provides Compass an expanded full menu scope of managed mobility solutions to support their locations worldwide. We will be providing our integrated MMS global solution for expanse and procurement management to Compass in order to standardize their telecommunication reporting policies and cost controls. We expect to support approximately 30, 000 internal Compass mobile devices that suggest the recurring revenue opportunity to WidePoint of well over 100,000 a month by the end of this year.

Even more importantly and on topic as regards channel partner strategies, Compass has committed to offer WidePoint’s products and services to its global network of suppliers and customers through its international partner program. This base represents the potential of over 500,000 additional devices for us to manage.

This year, we planned to rollout our services to Compass’s top 10 countries and we will incorporate the remaining countries in 2015. Over time, we plan to up-sell our base wireless offerings with other WidePoint managed mobility offerings.

More recently in January of this year, we launched our secured cloud-based Identity-as-a-Service Certificate-on-Device to deliver secured digital certificates for all types of mobile devices and sensors.

In the work environments of today and tomorrow with an increasingly mobile workforce, enterprises are being forced to extend their IT infrastructures well beyond their internal firewalls and into the cloud environment. And workers are accessing corporate information from multiple devices including their own personal mobile devices.

This is what is referred to as a Bring Your Own Device or BYOD environment. This phenomenon creates a new range of expanded challenges to corporate IT management. Our Cert on Device solution addresses these challenges head-on. This cloud-based solution provides federally compliant assured information security, well beyond a simple username and password, password based VPN solution.

It can securely identify smartphones, tablets, IP cameras, POS terminals and sensors, and it has both EMV and near-field communication capabilities.

We see an addressable market of over 100 million devices across multiple industry verticals for Cert on Device. We are currently developing partnerships with both carriers and major device manufacturers for deployment on handsets and other mobile devices. Our solution can be delivered on an SD or micro SD card or on a CPM or trusted platform module and we also are pursuing an opportunity to add the security chip directly into the device hardware.

We view Cert on Device as a unique, competitively differentiated solution that has the potential to disrupt the market and further enhance our MMS offerings and at a range $1 to $5 per device per month across a potential base of over $100 million devices, needless to say this is an extremely large addressable revenue opportunity for us. Beyond DHS, Compass and Cert on Device, we continue to sign on new customers and commercial partners.

In January, we were awarded wireless managed service contracts by the Centers for Disease Control and Prevention, the CDC and the Federal Communications Commission, the FCC. The CDC has been a customer since 2006 and we were very pleased to be selected by the FCC, the very agency responsible for our nation’s communications policies and infrastructure.

In February, we partnered with Truphone, a global mobile network operator to provide local communications functionality to our customers as they travel internationally and we expanded our channel relationship with a U.S.-based national professional services company to provide our managed mobility solution as a private label service onto their own national brand.

We expect to gain 30 to 40 new commercial plants annually as this partner alone aggressively ramps up the training of the 700 person national sales force. Also in March, we partnered Mount Airey Group to provide ePassport certification management and validation services to the airports, airlines, and regulatory agencies in order to effectively, securely and efficiently verify ePassports.

In anticipation of these and other contract wins, we invested substantially in our sales and marketing effort in 2013. We made several key sales and marketing hires during the year to broaden our skills and expertise and to improve our market awareness and sales reach into our target markets.

John Atkinson joined us early in 2013 as Chief Sales and Marketing Officer and has led the effort to grow and reposition our sales and marketing talent to best meet our aggressive sales goals and objectives.

In addition, we expanded our indirect distribution channel partner program and revised our commission payment programs to drive sales growth toward our higher margin services. We now have deployed national direct sales force continually growing pipelines and backlogs and increasingly an embedded sales culture and mindset.

Clearly, we have very substantial opportunities ahead of us both in the U.S. and abroad. The recent pace of new contracts and new relationships has been frenetic. We expect that pace to continue and we know that our challenges to execute and deliver and our management team has motivated and incentive to maximize the realization of these growth opportunities.

In order to better address these opportunities, also in March, we completed a $12.5 million capital raise. We successfully issued approximately 9.1 million shares at a per share price of $1.38. This offering was substantially over subscribed with investor demand totaling more than double the number of shares that were actually issued. We were very pleased with the exceptionally positive response from interest in investors that we witnessed and these new proceeds will allow us to support and broaden our growth strategy.

With that financial reference as a segway, I’d now like to turn the call over to Jim McCubbin, WidePoint’s CFO for an in-depth discussion of our full year financial results. Following Jim’s analysis, I will add a few summary comments and we’ll then be opening up the call for all of your questions. Jim, the floor is yours.

James T. McCubbin

Thank you, Steve. Hello everyone. Again thank you all for joining our call today. This past year has been truly interesting, challenging, fulfilling and definitely filled with enough drama intrigue to fill the pages of a long novel. Through it all, the one thing we can say is that we leave 2013 financially stronger than we entered it with more assets, customers and opportunity than we have seen in our past.

The financial challenge for us today is to build upon our new customer contracts and awards that we won late in 2013 to build a recurring and sticky new set of revenues streams that will bolster our financial foundation in 2014 and beyond.

Looking at 2013, we witnessed the decrease in revenues of approximately 16% to $46.8 million as compared to $55.8 million in 2012 revenues. This decrease was attributable in part to a shift in our sales strategy that Steve has already discussed along with a combination of other factors such as delays in government product resell transactions, customer implementations, commercial market attrition and a subsequent delay of a major contract award with the DHS that we originally received in April of 2013, but did not see release until December of 2013.

All-in-all, a perfect storm of events, given government sequestration, debt ceiling threats and economic malaise that we had to work our way through, while at the same time, shifting our entire revenue strategy. Given all of that, we did demonstrate that we have a base of sticky revenues of approximately $45 million in which over 75% of that is with customers that have been with us for greater than five years, not a bad base to build a solid foundation from, especially given the awards and some of the milestones that we actually achieved in the end of 2013.

Looking at gross profit for the year, we had gross profit of approximately $12.1 million or 26% of revenues as compared to approximately $13.9 million or 25% of revenues in 2012. The dollar basis decrease in gross profit was due to the lower revenues, but the percentage increase was due to the shift in mix of services and products that we sell.

Should be noted that we may continue to see periods of variability in margin growth as a result of lower margin government resale transactions that may occur from time-to-time and the fact that the timing of government transactions is uncertain given the sequestration related delays that we have experienced over the last four quarters.

Nonetheless, it should be noted that our focus though will remain on growing sales of higher margin recurring services and not be as susceptible to federal government awards over time.

Sales and marketing expense in 2013 was approximately $3.1 million or 7% of revenues as compared to approximately $2.7 million or 5% of revenues in the same period last year. The increase predominantly reflects how we invested our sales infrastructure to expand our growth opportunity here in the U.S. and abroad. It also showcases our hiring of John Atkinson as our Chief Sales and Marketing Officer along with additional marketing lead generation sales professionals and a shift from one set of sales cost to another set of infrastructure sales cost that is focused on winning stickier longer life revenue streams. While this impacts revenue growth as we transition the company to higher margin longer life revenue streams, we believe we should realize a higher value revenue stream in the future given this change.

General and administrative expenses in 2013 were approximately $9.8 million or 21% of revenues as compared to approximately $9.8 million or 18% of revenues in 2012. General and administrative expenses included non-cash gains of approximately $1.25 million that reflected a reduction in the fair value of the contingent obligation that we had as measured at the reporting date that offset a number of increases in costs associated with the legal defense of our DHS contract that was protested and other increases in fringe and other costs associated with maintaining a work force sufficient to support many of our late 2013 contract awards.

Given all of this, the loss from operations in 2013 was approximately $1.2 million compared to income from operations of approximately $1 million in 2012. Looking though, at adjusted earnings before amortization and depreciation, the company realized a loss of approximately $142,000. As we have stated in January of 2013, our goal for 2013 was to invest predominantly all of our cash earnings in the both paying down debt and making the necessary investments to position the company for the future.

Factoring in the tax adjustments, depreciation interest costs, our net loss for the year was approximately $1.7 million as compared to net income of approximately $0.8 million in 2012. Given this as well as the challenges we face in 2013, we manage through it all, while investing heavily in our business in order to position the company for growth and profitability in 2014 and beyond.

We paid down our debt in 2013, almost reducing it perhaps $2.5 million and with our recent $12.5 million capital raise last month, we have ample working capital in hand to aggressively pursue new business and partnership opportunities in the U.S. and abroad. Looking ahead to 2014 financially, we believe that the first quarter represent a bottoming for us as we work through the start-up phase of our new contract awards and product launches.

As we enter the second quarter, we believe we’ll receive a number of task orders from the major components from DHS to start and upward lifting of revenues that will build revenues in each subsequent quarter. We believe we’ll start to see this positive reign start in the end of the second quarter 2014 as we have just started to be notified of task order awards from the DHS components.

We further believe that we’ll start to reorganize initial revenue starting in the beginning of the second half of 2014 related to Cert on Device, Compass as well as other initiatives that we’re launched in the beginning of 2014. Given this, we firmly believe we’re the crossroads of a financial churn in the portions of WidePoint, one that will showcase how we can finally demonstrate to leveraging our financial model to not just grow revenues, but one that will ramp operating income and demonstrate the leverage ability in that model.

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

Steve L. Komar

Thanks Jim. To sum-up our growth strategy, I wanted to highlight our top five key initiatives for 2014 and beyond; number one, to accelerate sales and marketing results by showcasing our integrated managed service offering product suite. In support of that effort, we bought on our earlier mentioned Chief Sales and Marketing Officer, centralized our sales and marketing and deployed a national direct sales force as well as unifying our branding strategy. The building blocks are in place to drive this acceleration in new business successes.

Number two, is to expand our channel partners and third-party relationships to increase our geographic breadth and distribution reach and coverage. I have already mentioned Compass and Truphone, but we are also very excited about new partners like Xceedium [Indiscernible].

Number three, to strengthen our international and multinational position, we plan to enter Europe/Middle East and Asia-Pacific markets via partnerships, joint ventures and/or acquisitions.

Number four, to displace competitors with our broad cloud-based products suite; we are the only player in the market that can overlay a combined telecommunications lifestyle, mobile device management and mobile security solution, also featuring our proprietary cyber security offerings.

Number five, to pursue acquisitions in the U.S. and abroad; this goes hand in hand with strengthening our international positioning particularly in supporting our U.S. based multi-national customers, but we are also actively looking for complementary both on solutions to expand and enhance our managed service offerings.

I hope this gives everyone the framework for how we plan to grow and pursue the market opportunity ahead of us in 2014 and beyond. We definitely believe that we are in the right place at the right time and that we have taken the necessary steps that will give us the tools to achieve our growth goals and our success in building the future value of our business.

I’d like to now open the call to our listeners’ questions. Operator, if you can assist us by opening the line and sequencing the questions and comments from our listeners that would be appreciated.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session (Operator Instructions) and our first question comes from the line of Mike Malouf with Craig-Hallum Capital Group. Please go ahead.

Ross L. Licero – Craig-Hallum Capital Group LLC

Hi this is Ross Licero on for Mike.

Steve L. Komar

Hi Ross.

Ross L. Licero – Craig-Hallum Capital Group LLC

Hi. Could you give us a little color on gross margins? It looks like they are down pretty notably from the first half at about 29.2% down to the second half. Was that just government resale or is there something else going on there?

James T. McCubbin

That was just a bit of a shift to the mix to a little bit higher in the fourth quarter specifically margins on the resale, software resale for the end of the year. Overall, that was a blip that caused a little bit of an overall decline that's all.

Ross L. Licero – Craig-Hallum Capital Group LLC

Okay, great, and touching on that the fifth bullet point for growth looking forward to next year, how is the pipeline for acquisitions looking, are you close to anything and I guess where specifically are you looking?

Steve L. Komar

Ross, I think my answer to that has to be couched a little bit in what I can and can’t say. I will say that we have an active pipeline. We have identified approximately three potential opportunities for us to consider and put in place in the course of 2014. The timing is different on each and they comprise both what I refer to as a bolt-on acquisition and also as a potential international markets or geographic expansion beyond that obviously for reasons of confidentiality I can’t say more.

Ross L. Licero – Craig-Hallum Capital Group LLC

Okay thanks, I appreciate the color.

Operator

Thank you. Our next question comes from the line of Mike Crawford with B. Riley & Company. Please go ahead.

Mike Crawford – B. Riley & Co. LLC

Thank you. Steve you talked about a frenetic pace of activity and growing pipelines and backlogs, is there any way you could quantify backlog or vendor proposal pipeline?

Steve L. Komar

I will start with frenetic pace, what I was referring to is that in the course of the last four months we have basically embodied and put in place major new relationships and I think that’s indicative of not only the pace but our expectations going forward. In terms of pipelines and backlog, backlog is a difficult thing for us because like for instances, we just talked to you about $600 million BPA, the backlog value of that today is $2.3 million.

So the reality is our backlogs tend not to measure where we are effectively. If we go to pipeline, I will tell you that we have put a number of disciplines in place that we did not have before and when I look at a pipeline report from our sales and marketing organization today, it is in the area of pushing between $125 million and $150 million. That does not include the major, other circumstances that we have talked you about on this call.

It involves a normal day-to-day customer building relationships, new opportunities. That number is dramatically higher than it was a year ago. So we view that as a very positive directional statement.

Mike Crawford – B. Riley & Co. LLC

Okay, thank you Steve. Then Jim, is there a way - how much can you differentiate among revenue between what one might call it a low margin pass through or carrier services revenue versus everything else for Q4 in 2013?

James T. McCubbin

Well Mike in general I can’t comment on the fourth quarter. I can estimate - for the full year 2013 and that number would probably be around $18 million as an estimate. We put in new tracking capabilities where in the first quarter, we will start reporting on carrier services as a portion of our business and then tracking it forward and where we expect it to go.

Mike Crawford – B. Riley & Co. LLC

Okay, thank you, and then just on your technology, clearly you invested on many fronts in 2013, you have also historically acquired some companies that had done a lot of investing in products and services in platforms in the past, yet where this all shows up in say GAAP reporting line it’s less clear because it’s a R&D line itself - well, I mean there isn’t a specific R&D break up, but can you just talk a little bit about the level of investment spending that WidePoint is doing today and maybe has been done historically by the companies that comprise WidePoint today?

James T. McCubbin

Well, let’s kind of approach it in a couple of different ways. On a lot of the credentialing work that was done with the DoD and various components parts of that, the federal government invested just to one of our subsidiaries alone over a period of time probably in excess of $35 million in consulting services, on a design and build capability as well as what they invested themselves.

So, if you look at that that would be off balance sheet because it would have ramped through the P&L, but there is just in that one line item alone if you kind of would assemble all those costs, we believe far greater than $35 million just there that’s off balance sheet. As it goes to just maintaining, okay, the authority to operate for example, of some of the credentialing services that we offer and the testing and auditing and new capabilities it last year alone was well in excess of $1 million.

We put that into our G&A is where a lot of that shows up, when we turn around and look at the telecom expense and mobile management that was developed by TSA [for us] [ph], we see another multi-million dollar effort that was done through consulting efforts where we built it no longer with them where we got to keep the commercial rights. This past year we have been working on a consolidation and a unification of some of the platform work there in which case again we invested, probably not quite $1 million, but in continuing telecom – continuing telecom and R&D support in this area probably touching it.

We did that because we’re consolidating and unifying a lot of our software into this new platform. So we continue to do that. It’s a big component part of our G&A that you see in it. We have not broken it out in the past because we haven’t broken out different components of G&A. Does that help?

Mike Crawford – B. Riley & Co. LLC

Yes. That’s very helpful. Thank you. And then final question, you mentioned you expected Compass to ramp in the second half of 2014, but by that did you mean just deploying internationally in several markets for Compass itself or do you think we can also see some success on their channel partner initiative where they’re marketing your relations to their customers?

Steve L. Komar

Well, I think Mike in the frame of reference that we talked about in this call, I think it’s fair to say that we expect - to clarify it, it’s fair to say that we expect to see the international deployment of Compass services through 10 countries in the second half of 2014. We have a number of plans in place to accelerate and take advantage of this partner relationship. Honest conversation is that we have not factored that into our numbers because we need to get a little further along to better understand how this partnership is going to work and also we want to take a little bit of extra care to make sure we don’t screw it up because there are – there is an awful lot of revenue potential out there and right now we have just not put anything into the forecast for 2014. We clearly expect that to be a ramp up in 2015.

Mike Crawford – B. Riley & Co. LLC

Great. Thank you, Steve. Thank you.

Steve L. Komar

Thank you.

Operator

Thank you. (Operator Instructions) And I’m sure we have no further questions. Please continue.

Steve L. Komar

Thank you, operator. It appears we have taken all requests and operator thank you for your assistance. As a closing comment, I just want to say that we’re very, very positive about our presumptions for revenue growth and profitability and the future outlook for WidePoint in 2014 and beyond. The management of your company is obsessively focused on building the business through the future and maximizing enterprise value in the years ahead. So until we speak again, we thank you very much for your interest and wish you a pleasant evening.

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