WidePoint: The Road Ahead And Takeaways From Q4 Earnings
Summary
- Takeaways from the fourth quarter.
- A look at why shares have fallen and why they should bounce back.
- WidePoint's partnership with Intercede hints at big things to come.
- Task orders jumped 88% year-over-year to $26.3 million in Q1.
After three consecutive quarters of beating analyst expectations on both the top and bottom lines, WidePoint (NYSE:WYY) — a leading provider of technology-based management solutions — reported mixed Q4 earnings with revenues coming in below estimates.
Q4 revenues came in at $28.4 million, up 1% year-over-year, but well below analyst estimates of $39.6 million. The biggest takeaway here is that the company didn't disclose the reasoning for the revenue drop in the earnings release. Instead, management only explained what happened on the earnings call, noting that they issued a one-time credit of $10.6 million to a customer. Without the credit, the company would have met analyst expectations with revenue around $40 million.
On the bottom line, the company reported non-GAAP earnings per share of $0.01, missing Wall Street estimates of $0.02. WidePoint did report GAAP EPS of $0.94 beating estimates by $0.92. This was due to the company being able to use a one-time tax allowance reversal.
Below is a look at WYY's earnings performance over the past four quarters.
| WYY Revenue History | March Q4 | Nov. Q3 | Aug. Q2 | May Q1 |
| Actual Revenue | $28.4M* | $57.5M | $54.8M | $39.7M |
| Revenue Estimates | $39.6M | $44.8M | $42.7M | $25.8M |
| Difference | - $11.2M | + $12.7M | + $12.1M | + $13.9M |
* A one-time $10.6M credit was issued, bringing revenue unexpectedly down
Why Shares Have Fallen
Since Q4 earnings were released, shares have plunged more than 20%. We believe the two biggest reasons for the price drop are due to the lack of communication surrounding the $10.6 million credit, as well as management not issuing 2021 guidance... yet.
The $10.6 Million Credit
Not surprisingly, investors sold first and asked questions later. And because the $10.6 million credit wasn't mentioned in the earnings release — and was only mentioned on the earnings call — many investors only saw the headlines saying that WYY missed significantly on the top line. And in a market where investors and algorithms trade on headlines, WidePoint missed the mark by not disclosing that important detail.
For a company that just posted revenues of $28.4 million, a $10.6 million credit is a big deal, especially when it's not factored into analyst estimates.
Here is what WidePoint CFO Kellie Kim had to say about the credit during the earnings call:
Towards the end of the fourth quarter, a significant portion of savings to a large carrier services customer came through, resulting in a reduction in carrier services revenue. If it were not for a $10.6 million credit issued to our customer, our total fourth-quarter revenue would have been closer to $40 million.
We reached out to the company to get more clarification and were told that the credit was entirely for carrier services revenues. So while it impacted the top line, it did not have much of an impact on the bottom line and that is why they choose not to include the $10.6 million credit in the earnings release. We disagreed, and the market showed that.
It's important to note that management explained that there were no payment issues on the customer's end. The company found a credit for a major customer and provided it.
Now, this begs the question... what was the reasoning for doing so? Yes, we are just speculating, however, the credit was likely given to the United States Census Bureau as part of the 2020 Census — which continues to wind down. The Census Bureau has been one of WYY's top customers in 2020 and would make the most sense when it comes to giving a customer a one-time credit.
The move was likely done to sweeten the pot to government agencies. Because census revenue is very low margin (2%-4%), it's possible the company did so to gain favor, knowing that it doesn't do much for the bottom line anyways.
2021 Revenue Guidance
Yes, we anticipated the company would issue 2021 revenue guidance and were disappointed that it wasn't given. But it's also not the end of the world. With Census revenue dropping off, the global pandemic still raging on and the company looking to ramp up on its partnership with SYNNEX (SNX) among other initiatives and partnerships, management wanted to wait a bit to see more clearly on how things would likely go before issuing guidance.
Yet, the market perceived this as doom and gloom and is now expecting the absolute worst. We still expect to see revenue growth this year compared to 2019 and 2020 (when adjusted for removing Census revenue which was a once-a-decade event), and caution investors not to freak out while we wait to get revenue guidance.
Remember, the underlying business has not changed, just because the stock price has changed. Profitability will drive the story in 2021 and management has repeated several times that this year will be more profitable than last year.
We believe the company will issue 2021 guidance within a month or so. Whether it's a press release or when Q1 earnings are released next month remains to be seen, however, seeing what has taken place over the past six months to set the company up for what should be a strong year this year, shares are severely undervalued.
Having covered WidePoint in-depth for a year now, we believe the market severely overreacted to the credit and postponement of 2021 revenue guidance. But that's the stock market for you. Sometimes shares trade higher than they should and sometimes shares of a company trade lower than they should. But in due time, the market comes back to its senses and we believe shares of WidePoint will rebound soon from these oversold levels.
Many investors are just waiting on the sidelines and will jump in once revenue guidance is announced and that unknown is removed. The same thing played out with WYY's $500 million government contract in November and we all know what happened after that.
Q4 Takeaways
With an understanding of why shares dropped, it's now time to look at the many positives the company has going for itself.
Managed Services
As a reminder, managed services is WYY's high-margin business with margins in the 50%-60% range. This is the part of the business the company continues to focus on growing to improve profitability. Instead of focusing solely on the top line, the company has transitioned to the "work smarter, not harder" philosophy by delivering meaningful results on the bottom line.
The good news is that the Census project, although it was very low margin, should pay big dividends in the quarters and years to come. Here's what management had to say about it:
This was the single largest managed mobility services project in the country. For this project, we delivered, managed and are now decommissioning approximately 700,000 devices in support of the 2020 decennial census. This project will serve as an excellent customer reference for us in the quarters to come as it perfectly demonstrates our ability to scale, adapt to changing circumstances and deliver quality service under pressure on an essential project. As we pursue larger, higher-margin business opportunities, such a use case will be integral to our future success.
The other good news is that management revealed how much the 2020 Census was part of managed services. On the Q4 earnings call, management noted that just 10% of managed services came from the project. If we take away Census revenue, to make a true comparison, managed services still grew 17% on a year-over-year basis, and will likely grow just as much, if not more, this year.
IBM Hire
To help grow managed services and the company's sales pipeline even more, the company brought in "Jim from IBM." During the Q4 earnings call, it was revealed that Jim, who used to work at IBM as a high-level commercial sales director, recently came to WidePoint. Management was very excited about the hire and believe he will be key addition that will help grow the sales pipeline even more. We assume the company will likely send out a press release soon about the hire and his qualifications. But safe to say, things appear to be going well.
Here's what Jason Holloway, WidePoint Vice President and Chief Sales and Marketing Officer had to say about the hire:
I am excited that we were able to strategically recruit a very strong commercial enterprise sales director from IBM, who has added to our already strong pipeline of opportunities. Suffice it to say that with our current sales momentum, our enhanced team and macro tailwinds driving our industry forward, WidePoint remains an incredibly strong position.
Cash
The company further strengthened its balance sheet as it reported $16 million in cash, no debt and continues to have positive cash flow each quarter. The company also utilized its at-the-market ("ATM") offering to raise $5.4 million by selling 500,000 shares at an average share price of $11.62 from the end of the fourth quarter through the second week of January.
Breaking it down, that's $17.1 million in cash or $1.98 in cash per share. Based on the price action in Q1, it's very likely that the company sold more shares through the ATM from mid-January through the end of Q1. We wouldn't be surprised if they sold another $5 million or so worth of shares during that time frame. That would put cash at $23.1 million, or $2.57 in cash per share.
M&A Activity
It's no secret that management has been eyeing an acquisition since last summer. We pointed this out in our article, of which management later confirmed.
The COVID-19 global pandemic has hurt some companies, while others have thrived. We believe management is looking to take advantage of the situation by finding an undervalued company that can quickly bounce back as the economy starts to reopen and COVID-19 cases start to diminish as more people get vaccinated.
Like it's been said from the start, management is looking at profitable companies that will be immediately accretive. Companies that do not fit that mold won't be considered. After vetting a number of companies and doing due diligence, management noted on the Q4 earnings call that the prospects were not ideal candidates and opted to move in a different direction.
That direction is towards larger companies as most companies they were looking at were around $10 million or so. For us, we like that management is being picky and selective right now and that they are willing to continue looking for a company that makes the best fit (growing and profitable).
Margin Improvement
In our Q4 earnings preview, we noted that margins would be up as Census revenues continues to wind down. For Q4, gross margins were 17%, a bit higher than we had anticipated.
Margins have been around 17%-18% (before Census), however, with better margins now from the DHS contract and managed services growing nicely, margins will likely be 20%+ this year. WidePoint CEO Jin Kang cemented that thinking as he noted on the earnings call that he believes the company will be above its traditional margin rate this year.
Partnership News
On March 31, 2021, WidePoint partnered with Intercede on a new managed services contract to supply a Fortune Global 500 corporation with identity management credentialing services.
For WidePoint, growing managed services — the company's high-margin business — is the focus for 2021 and this partnership is the third major contract win the company has signed since the start of the year.
What stood out to us in the press release is that the partnership between both WidePoint and Intercede hints at big things, and that this is likely just one of many more deals to come between the two companies.
Image: Company Press Release
As you can see in the highlighted section above, Intercede's CEO Klaas van der Leest stated, "WidePoint's managed services offering is a natural fit for MyID as it provides the manageability and compliance to federal standards that many organizations in the United States must meet. The fast turnaround of this deployment, from initial discussions to operation in under 30 days, underlines the simplicity of WidePoint's managed services offering, which is something I expect will bring confidence to prospective customers who have concerns about entering into long and complex PKI deployments. We look forward to many new customer wins together."
Intercede is a cybersecurity company specializing in digital identities, credential management and secure mobility. The company is headquartered in the United Kingdom, with offices in the United States.
Like WidePoint, Intercede works with governments and large enterprises to issue and manage digital identities using the most secure method of multi-factor authentication. Some of its customers are the Department of Homeland Security, Boeing (BA), Wells Fargo (WFC), T-Mobile (TMUS) and Lockheed Martin Corporation (LMT) just to name a few.
Image: Company website
With the partnership coming together so quickly, and with what WYY can offer — and the ability to scale quickly as demonstrated by the 2020 Census project — we wouldn't be surprised to see several new contract wins with Global 500 corporations from this partnership.
Conclusion
Using data from the
Federal Procurement Data System (FPDS), we've been keeping track of all the contracts and awards that WYY has received. For those not familiar with FPDS, the system contains detailed information on contract actions across all government agencies. The system identifies who bought what, from whom, for how much, and when and where. In short, it shows what the government is spending money on.So how did Q1 compare to what the company did last year?
In the most recent quarter, WYY received more than $26.3 million in task orders. This is significantly higher than last year when the company received $13.9 million in task orders. Overall, task orders jumped 88% on a year-over-year basis, and demonstrates the company's ability to grow both the top and bottom lines.
| Task Orders | Q1 2021 | Q1 2020 |
| $26,313,382.95 | $13,993,608.05 |
Investors should know that just over half of WYY's revenues comes from the DHS contract, which was recently renewed in November and is worth up to $500 million over several years. The company also negotiated better margins on the contract which will help boost the bottom line. Overall, seeing the increase in task orders is a welcome sign and a great start to the year.
Lastly, when factoring in all the option periods in the contracts so far, the company has been awarded more than $86 million in task orders since the end of November.
These new task order awards form a solid foundation from which WidePoint can continue to build," said Todd Dzyak, a WidePoint executive leading the DHS CWMS program. "While most of these contracts are logical follow-on awards, the awards from CISA are new as are some of the expansions with ICE and DHS HQ, and they demonstrate that we have opportunities to grow even within our existing relationships. The fact that these task orders came to fruition so quickly after the contract vehicle was put in place indicates that there is currently a large appetite for our solutions, and we, therefore, may see similarly material orders in the near future.
Taking away Census revenue for a true year-over-year comparison, the company recorded roughly $38 million from managed services for growth of 17% year-over-year. With what the company has going on this year, we believe managed services could hit $50 million this year, which would represent year-over-year growth of 30%.
Based on this scenario, the market would likely reward the company at 2X sales, giving the company a market cap of at least $100 million, or $11.11 per share. This also doesn't include the roughly $2.00 in cash per share at the moment or any bumps from other revenue streams such as the DHS contract.
Putting it all together, the company's value should be a minimum of $13 per share. And based on Thursday's stock price of $9.13, that represents at least 43% upside from current prices. We still feel the value is a lot higher than that, however, the company will have to remove the unknowns for shares to trade higher, such as giving 2021 revenue guidance.
At current prices, we believe shares of WidePoint are a low-risk/high reward opportunity right now. Doom and gloom has been priced in at current levels and any positive announcements should provide a catalyst for shares to get back and test the trading range ($12-$15) that shares were in from the start of January to the end of February.
Lastly, in August last year, shares climbed as high as $9.60. This was before WidePoint won the $500 million government contract, before the reverse split, before raised EBITDA guidance and before many other things. That fact that shares are trading lower right now is mind boggling and shows just how much the market overreacted. The company is in the strongest position that it has ever been and we are optimistic that the market will get back to its senses soon and shares will rebound from these oversold and undervalued levels.
Risk Factors
With a market cap just over $80 million, WYY currently falls into the micro-cap sector. Companies in this range come with a higher degree of risk compared to more well-known and established companies. And with a low float, shares can move quickly in either direction.
Because WYY competes in a competitive market and against both private and public companies, some competitors are able to offer more scale, which can enable them to significantly discount their services to maintain market share. If the company has to resort to deals with lower margins, profitability would suffer. Lastly, WYY's revenue from government contracts is quite large. A change in government spending policies or budget priorities could cause the company to lose revenues. The loss of any contract would also have big implications for the company.
This article was written by
Analyst’s Disclosure: I am/we are long WYY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (34)
The product is still good though and they keep executing calmly.
Any news regarding Jim from IBM?
