WidePoint Corporation (WYY) Q3 2017 Earnings Report, Transcript and Summary

Greetings and welcome to the WidePoint Corporation 2017 Third Quarter Financial Results Conference Call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn the conference over to Kimberly Rogers with Investor Relations. Please go ahead.

Thank you, Rob. Good afternoon and thank you for joining WidePoint's 2017 third quarter financial results conference call. With me today on the call are WidePoint's President and CEO, Jin Kang; as well as Jason Holloway, Chief Sales and Marketing Officer; and WidePoint's Interim Chief Financial Officer, Kito Mussa. Jin will provide an overview of the quarter's recent developments, accomplishments and an overview of the strategy. Jason will provide a sales and marketing update, and Kito will provide a financial overview and outlook. At that point, we'll open the call to questions from analysts and institutional shareholders. Before I turn the call over to Jin, I'd like to remind all participants that during this conference call any forward-looking statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Expressions of future goals, including financial guidance and similar expressions, including without limitation, expressions using the terminology may, will, believe, expect, plans, anticipates, predicts, forecasts, and expressions which reflect something other than historical facts, are intended to identify forward-looking statements. These forward-looking statements involve a number of risk factors and uncertainties, including those discussed in the Risk Factors sections of WidePoint's Annual Report on Form 10-K, its quarterly reports on Form 10-Q and other SEC filings and the company's press releases. Actual results may differ materially from any forward-looking statements due to such risk factors and uncertainties. The company undertakes no obligation to revise or update any forward-looking statements in order to reflect any events or circumstances that may arise after this conference call, except as required by law. I would now like to turn the call over to WidePoint's CEO, Jin Kang for opening remarks. Jin?

Thank you, Kim, and good afternoon to you all. Thank you for joining us today and for your continued interest in WidePoint. We have successfully executed and are continuing to execute the plans we discussed in our second quarter call in August. I'm very pleased with our performance this quarter and we anticipate continued improvements in operational efficiency and profitability in the fourth quarter. Since being appointed CEO in July, we've been implementing our strategy to stabilize the business, return to organic growth and land new contracts and refresh our product offerings. This strategy is getting traction and producing tangible results for our company. Our team is committed to executing our strategy and delivering improved shareholder value. I am also pleased to note that we successfully implemented additional expense reduction measures during the third quarter. As a result, we exited the third quarter on a run-rate that is adjusted EBITDA positive. That was a high priority goal. I am very pleased to report that we have achieved that goal. We are now on track to be adjusted EBITDA positive for the entire fourth quarter 2017. So far, we met the guidance that we issued during our second quarter earnings call. We anticipate the operating expense reduction actions we have taken during the quarter will result in a reduction of our operating expenses by approximately $1.6 million annually. As such, improvement in EBITDA is anticipated to continue into 2018. Kito will provide additional details of our financial performance in his prepared remarks. In the fourth quarter of 2017 and the first quarter of 2018, we expect to implement additional expense reduction measures that will further reduce our annual operating expenses by approximately $0.8 million. After completing all of our planned expense reductions, we anticipate total annualized cost savings of approximately $3.3 million. These actions will enable us to enter 2018 with a more streamlined and profitable business. At this time, we do not foresee any material reductions in revenues or material client attrition as a result of these expense reductions. We are pleased that we have reached our priority goal to stabilize our company by taking the necessary cost savings action. Now, let me tell you a little bit about our key contract wins. We have captured two new key customers under the DHS CWMS BPA, namely the long awaited U.S. Coast Guard and the Federal Emergency Management Agency or FEMA. With these two customers, we now provide services to all of our major components of DHS. These two customers greatly improve the probability that we will re-win the DHS CWMS BPA contract. Additionally, we have captured over $22 million in new work in the third quarter. We have cut our operating cost and we are capturing new business. We are poised for growth. Again, we are very happy with the results of our cost cutting measures, one of our short-term goals. However, it will take more than cost savings in order to reach our long-term goals. Our long-term goals include: retaining our current customer through excellent performance; increasing the wallet share of our current customers by up-selling and cross-selling; growing our business pipeline with new customer opportunities and capturing those opportunities; growing our high margin services revenues; streamlining our service delivery system that will allow us to expand our capacity faster without a significant investment of capital; and growing our strategic partnership and acquisitions. As we focus on these goals, we will not lose sight of our near-term goals and success. We will continue to watch our bottom line profitability as we work diligently to grow our top line revenues. We will continue to provide excellent value for our customers in all aspects of our solution delivery. In the end, it is our excellent performance, our staff of subject matter experts and our unique solutions that differentiates WidePoint from our competitors. We will continue to make improvements in our service delivery platforms for operational efficiency. We will continue to make improvements in our sales and marketing processes to increase our sales pipeline and closure rates. Successes in these two areas will ensure that WidePoint will remain a going concern for the foreseeable future. As we stated in our second quarter call, we are implementing our Trusted Mobility Management or TM2 vision and framework. Our staff members are working as a tight-knit group, leveraging the strength of all of our solution lines. While we are in the early stages of our efforts, we have already experienced some up-selling and cross-selling successes by implementing our TM2 framework. Our TM2 strategy has led to several strong up-selling opportunities and leads. We have closed a sizeable up-selling opportunity with our current customer. A press release is coming soon to announce this mobile security management services contract for our $340,000. For those of you monitoring the Federal Procurement Database System or FPDS, you can look that up for yourself. In addition to these successes, we as a management team, and our company as a whole are working better as a cohesive team. And our cross-solution-line communications have improved dramatically. We want to ensure all of you that our senior management team remains focused on taking the necessary action to reach a state of sustainable profitability while growing our top line revenues. In Jason's prepared remarks, he will expand upon our recent successes in building our sales pipeline, creating new opportunities and driving new and more productive partnerships that will ensure the establishment of sustainable growth and profitability. So to sum up, we have made good on our goal of exiting the third quarter 2017 on a run rate that is adjusted EBITDA neutral or positive, mostly positive. We have launched our TM2 framework that is improving communication and operational efficiency and helping us capture new contracts. We have entered into teaming agreements with strategic partners that has resulted in new contracts as well. And lastly, we can count U.S. Coast Guard and FEMA as our customers. Now, I'd like to yield the floor to Jason Holloway, our Chief Sales & Marketing Officer and CEO of our Cybersecurity subsidiary to provide some additional information concerning the implementation of our TM2 vision and strategic growth objectives. He will also provide additional information on our pipeline and future sales opportunities. Jason?

Thank you, Jin, and what's up fellow shareholders. I am going to discuss recent contract wins, discussed at high level our sales growth strategy and market differentiators. During the third quarter, we closed deals with a total contract value of over $22 million. Given the length of our sales cycle, our top line sales growth priority is to ensure that we have a sufficient number of high value prospects in our pipeline to meet our short-term and long-term growth targets. First on short-term. To improve our short-term sales growth prospects, we're continuing to grow wallet share with our current loyal customers, in addition to prospecting for new customers. Their successful approach has expanded our services and has added an additional $540,000 in contract value just in the last 30 days. Our expanded services included additional mobility options such as tablet management and multi-currency international management services. All of which are high margin services that have been integrated into our Intelligent Telecommunications Management System or ITMS platform. To improve our new customer sales growth initiative, we are working with partners that have known customer demands and requirements that our current solutions can immediately serve. Let's now address our long-term sales growth initiatives and our progress from the last earnings call. We implemented our search engine optimization or SEO and our Pay Per Click initiatives, which are now driving significant traffic to the website and call centers. This is yielding positive results like our recent large credential sale in which we initiated a press release. We are now developing and launching new digital marketing initiatives to generate new business leads and build brand awareness. We have continued to work with our key strategic partners and major mobile carriers to identify new opportunities. Any potential deals on this front will require us to state in front of the customer that's important. We are actively responding to RFPs or request-for-proposals on a number of new opportunities both commercial and government that our direct result of our partner relationships. Although, it's too early to talk specifics. We are very encouraged by the increased in our pipeline as a result of this initiative. As I discussed on the Q2 earnings call, we implemented our strategy to streamline our identity management offering at the end of the second quarter. I am happy to report that we did not experience a significant decline in our revenues as a result of our shift in focus and cost reductions implemented instead we were able to increase our sales of identity management services. Now to our marketing and market differentiators. We've pushed forward with marketing to our partners and perspective customers, our platform of mobile-centric solutions in support of our strategic Trusted Mobility Management or TM2 push. We are showing our partners and perspective customers have seamlessly our solution capabilities can be integrated into their operations, and support their internal and external compliance requirements. We are also adding differentiators that enhance the security of our Intelligent Telecommunications Management System or ITMS platform. In summary, we have made a significant push during the third quarter of 2017 to introduce our Trusted Mobility Management or TM2 vision and strengthen our competitive differentiators. We implemented strategies to adjust our marketing and sales approach to meet our sales growth initiatives. Although, we have gained ground in Q3, we still have a ways to go to meet our long-term sales and profitability goals. Listen, I can assure you that we are working very hard as a cohesive team. With that, I'd like to now ask Kito Mussa, WidePoint's interim CFO to provide a financial perspective on the results of our assets during the third quarter and to provide an outlook going forward. Go Kito?

Thank you for that introduction Jason. Hello, everyone. For those you have not met me before, I have been with WidePoint since 2012, and served as the Vice President and Controller for many years. During that time, I've been deeply immersed in a number of areas of the business including the financial administration of the company. Today my prepared remarks, I'll first discuss the progress we made towards achieving our financial goals then dive into the details of our third quarter results and then turn it back over to Jin. You can also find additional information on our third quarter 2017 Form 10-Q report, which was filed with the U.S. Securities and Exchange Commission just prior to our earnings call. Now, before diving into the quarter-over-quarter comparisons, let's first expand on comments made by both Jin and Jason regarding achieving positive adjusted EBITDA. Our adjusted EBITDA was approximately $33,000 as compared to $340,000 in 2016. Our achievement of positive adjusted EBITDA for the third quarter of 2017 shows that our cost reductions had a meaningful impact that enabled us to exit the third quarter with the positive adjusted EBITDA for the entire third quarter, with additional top line revenue growth from successful implementation of our sales growth strategies and appropriate long-term cost controls in place. We can continue to move forward with our goal of sustainable and profitable growth. Now let's discuss our financial line-item results during the third quarter that led us to an EBITDA positive run rate as we exited third quarter. Our revenues for the third quarter of 2017 were approximately $18.5 million, a decrease of approximately $3.7 million or 17% as compared to $22.1 million in the same quarter last year. Now the decrease in revenue was due to fewer task orders for carrier services, savings optimizations implemented that lowered the amount of carrier services required by our customers, and timing related delays that pushed recognition of mobile accessory and reselling orders into the fourth quarter of 2017. It is important to note that we were able to maintain our core customer base and closed new deals all while we implemented our cost savings initiatives during the second and third quarter of 2017. Gross profit for the third quarter of 2017 was approximately $3.4 million as compared to approximately $4.0 million in 2016. The decrease in gross profit was driven by supplier related delays that pushed delivery of mobile accessories and reselling orders into the fourth quarter of 2017, and onetime credentialing sales in 2016 that did not this repeat this year. These decreases were partially offset by savings we realized as a result of restructuring that occurred within our credentialing sale. Sales and marketing expense for the third quarter of 2017 was approximately $533,000 as compared to approximately $625,000 in 2016. The decrease was directly attributable to your efficiency streamline our sales and marketing labor costs. We do not anticipate a significant increase in sales and marketing expense in the near-term. However, that could change as we accelerate our sales and marketing plans in the future and as we become more profitable. General and administrative expenses for the third quarter of 2017 were approximately $3 million as compared to approximately $3.4 million in 2016. The decrease in G&A was largely driven by cost savings realized as a result of decisions we made during the second and third quarter of 2017. Looking ahead to the fourth quarter, we expect to report approximately $300,000 in severance costs related to the resignation of our former CFO. Excluding that one item, our general and administrative costs on a run rate basis will be comparatively lower as we go into 2018. All of this, culminated in a net loss of approximately $315,000 for the third quarter of 2017 as compared to approximately $148,000 in 2016. Now let's talk about our financial position. Our net working capital decreased approximately $2.8 million during the third quarter of 2017 due to short-term receivable collection timing differences, which we manage this in our line of credit. It is important to note that our net working capital should improve, as we realized savings from our cost reduction initiatives over the last nine months. We estimate that cost reduction initiatives should save us approximately $3.3 million annually, as we enter 2018. We expect to finalize one additional office consolidation during the first quarter of 2018 after we complete the conversion of our remaining telecom customers in our ITMS platform. We anticipate this office closure will further reduce our annual cost by approximately $200,000 once fully implemented. Before I turn it back over to Jin, I'd like to reiterate that as a company, we made the tough decisions, reduced our cost, and those actions enabled us to exit the entire third quarter with a positive adjusted EBITDA. This is a great first step and we encourage all of our investors to stay tuned for more. So with that, I'd like to turn it back over to Jin.

Thank you, Kito, and thank you, Jason. At this time, I would like to open up the call for questions from our participants. Operator, will you please open up the call for questions?

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question is from the line of Mike Crawford with B. Riley. Please proceed with your question.

Thank you, Mike Crawford from B. Riley FBR. A couple of specific questions and then maybe a couple of broader ones; one, can you provide carrier services revenue in the quarter?

Hi, Mike, this is Kito. Yes, we did provide carrier services for the quarter. It was approximately $11.2 million for the third quarter.

Okay. Thank you, Kito. And then, when you talk about a $3.3 million expense reduction, is that relative to the operating expenses in 2016 or the run rate at the end of the first half of 2017?

Hi, Mike, this is Kito again. It's not necessarily relative to 2016. What we're looking at is, we're looking at the total pool of cost that we took out. So if we had started the year fresh and we didn't have any of these costs, we would have saved out of our model about $3.3 million if we made all these costs effective January 1.

Okay, thanks. And then, just broadening the scope a little bit, it's good to see FEMA and Coast Guard on board and to know that positions you to retain the DHS contract. When it comes for RFP next year is there any changes to that timing?

So far, there is no change. As we said in our second quarter call, we are looking at a draft RFP that's coming out either at the end of this year or beginning of next year. And that may be delayed, because there has been a change in the Contracting Officer for the Department of Homeland Security. So there may be some delays, but we're still holding to our tentative schedule of having everything completed and awarded by government fiscal year 2019. So that will be September 30 time - 2018.

Okay. Great, thank you. And then, Jin, the company last week filed 8-K with an updated investor deck. And not only does it go through some of the tactical and strategic changes you've made, but it also ends with an optimal financial model with margins much higher than you have today or would really be contemplated I think in 2018, given the trajectory of the business right now. So, could you perhaps help walk through how - what it takes to get to that model and maybe even talk about that model, please?

Hi, Mike, this is Jay, if I - go ahead, yes.

This is Kito again. Great, great question. One of the things that we are looking to try to do is on the past we wanted to try and make a few changes and try to have some directional targets. Now, the optimal targets - they're really - they are target ranges. This is what we'd like to be in a perfect world. And as a management team, we definitely have to set some objectives and certainly have some stretch goals to let people know what we're thinking in terms of how we view the business and what it takes to be best in class. So when we set those optimal targets up these are things that we're looking at internally. Obviously, we won't be able to achieve this in a single-year period. But over time, we're looking to try to make sure we do have identified targets that we can move after and also keep these targets close to ourselves and as well as our folks internally to let them know that this is what we're looking for and this is - these are the results that we'd like to achieve in the future.

Right, and so just to add to that Mike, it's that - in terms of our gross margins how are we going to increase that. I mean, one of the things that we have been doing is we've been focusing on our higher margin revenues. So our gross margins are running somewhere around 17, 18 right now. I think we can do that through some of the cost cutting obviously. But we are concentrating on higher margin sales and we're also looking at automation to reduce our cost of delivery. In terms of our General and Administrative, as you can see we're way out of range in terms of our industry average. I think as we enter 2018, we made all of the corrections, so that as we enter 2018 we weigh within that range, within the range of 12% to 14%. And our net operating margins, we're looking at 10% to 15%. And we're not going to get there all in one fell swoop. But we'll get there step-by-step by concentrating on higher margin sales.

Okay. Thank you. And then, final question relates to your channel where in the past several years there have been some very high hopes for maybe AT&T or Samsung or couple of others. And are any of these channels seemingly more likely to be productive today?

Sure, sure, Mike. Let me just try to answer that and I'll start and then Jason will finish and add to that. We had some pretty good success here. The one of the new awards that we got from Customs and Border Protection was with one of our channel partner, Samsung. This was for mobility security management. And they are using their sales channels to sell within our CWMS contract vehicle. There is another significant development that has happened, and we will have a press release that will be coming up. I am going to say, probably in a month, because the company that we're dealing with this fairly large company. CDW, we are in the process of getting it to an MPSA, which is a Master Professional Services Agreement, and they will be using our solutions as one of their - as they go out to market with their customer. So there are some significant things that are happening, and there are also some significant awards that are on the horizon. I can't talk about it, because we're sort of under an NDA right now with them, but rest assure that there are some bright spots that are just over the horizon.

Mike, add - so add to that, Mike. AT&T, we both - we do have both cyber and telecom relationship with them. So I just want to be clear everybody that we are actively working with AT&T, we are partnered with them on a major airline. We are providing device certificates through the major airline. But the other thing we are doing is, we're using our leverage relationship with them, and we're actually in some really good discussions with them regarding FirstNet. So FirstNet is a single award for AT&T, and it's pretty much centered around expense management and inventory. So like Jin said, with our recent success with Samsung, what we're doing with AT&T and other sets going to continue to grow, so just stay tuned there will be additional press releases.

Yeah. Great. Thank you very much.

Thank you, Mike.

Our next question is from the line Sam Donnells [ph] a private investor. Please proceed with your question.

Gentlemen, I think some of is probably booked with the smaller loss - net loss than you have the third quarter. But I like the idea that you have put the best place on it, and in fact you tell us that there are good things coming. And I am satisfied with that and probably I'm going to stick with you let's see what happened. I do have a question on the old bone that I've been on for the last two or three quarters and that's the Coast Guard. Am I correct? That this Pilot program is not just a program and which the Coast Guard at the end of the Pilot as well, now let's see, I don't know whether we've got to renew or not, but in fact will lead to that first and second step, I understand the third step is negotiation. Tell me about it?

So we got the Pilot project and the period of performance on that Pilot project goes out until June of next year. The contracting officer wanted to do it until actually March of next year, but he extended that three months to make sure that we can get the follow-on piece to it. So the Pilot is going really well, we had Coast Guard that came in, we trained all of their staff all over the country, they are ready to come on board, now it's just a matter of going through the task order process to issue the full Coast Guard task order. They are moving in the direction of modifying the task order as opposed to issuing a new task order, which is order of magnitude less complicated to do that. On another note, the contracting officer and the program manager for that Pilot program is already talking about taking us into the rest of the Coast Guard for our identity management solution. So this is another situation where we are leveraging our Trusted Mobility Management solutions through up-sell and cross-sell our current customers.

But if I understand you things are going well, and you anticipate they will continue to go well, but they have to go well or the Coast Guard does have the opportunity of saying thanks, but no thanks for the risk. Am I right?

Right. Right. I mean, the government always has that card that they can play to say thank you, but we're not going to exercise the options. That is a true statement however, we are very confident that we will get the follow-on task. As I said in my prepared remarks is that what differentiates us from our competitors is our past performance - our excellent past performance, and the contractor performance database, CPARS, everyone of their responses that we have received so far has been exceptional in terms of our performance. So we are very confident.

Okay. Good. So the option from the Coast Guard is extended to June, but things going well, and I don't think that I'm telling you that I think it won't, I'm just asking. Then it was after that with that $1 million a month might occur. Is that correct?

That $1 million a month will include some high margin managed services fee, and it will also include some carrier services that will be lower margin. So yes, it could be up to $1 million a month.

Okay. Final question, it has to do with, I think, Mike asked about it. Samsung, AT&T. When all of you restructured the goals of the company from the standpoint of what you put the money into, as I understand it, it was on what we do - what you do. And you're doing it. Rather than put a lot of money and then we had to write-off some of the AT&T. But you've talked about Samsung and AT&T. Now, explain to me, a non-sophisticated person, what's the difference? Are we back now believing we can leverage those larger companies in the same way that we thought three years ago we could. And if so, how come we're optimistic now?

Well, we are - we - our focus is a little bit different than before. Our focus is on selling the services that we currently have and leveraging the intersection of all of our services. And so in terms of our relationship with Samsung, we have a prime contract vehicle and we manage the mobile devices that Samsung wants to put their identity management and security management software. So we were able to convince the CTP to use Samsung's mobile management suite that will also incorporate some of our identity management solution into this purchase order. So that's one part of the equation. The other part is, is that we have been investing in a lot of future technology and future solutions like Certificate-on-Device. What we have done since is that we have the Certificate-on-Device solution, which is waiting for the government policy wants to approve. Until that happens, it will be very difficult for us to implement the Certificate-on-Device solution and along with the right-cert [ph] and so forth and so on. So we are ready with that solution and we're ready to spin that solution up along with the help from our systems integrators and our partners. But until there is a policy statement, we won't be able to roll that out. So we are working with our partners with our currently available solution set if that makes sense. And, Jason, would you like to add a few words to that?

Absolutely. So, Sam, regarding COD like Jin explained, we are just waiting for the appropriate time to come back and attack that, okay? But what I wanted to add to it is you also asked about AT&T. That's not a relationship that started and then went away. We've had a very long-standing relationship with AT&T. So I do want to clarify that. I mean, obviously, before we were working on AT&T with a much larger project regarding IoT that didn't pan out. But in terms of the relationship, the relationship has been there and it's been strong. So this is something that we've been working with them on, especially with a major airline. So I wanted to add that as well, so, Jin, back to you.

Again, these are relationships that we are continuing to leverage, like for example, on AT&T we're talking with them about using our telecom lifecycle management or the FirstNet. And we're working with some of their subcontractors to work on the FirstNet, which is a single award contract for AT&T, which is in orders of billions of dollars, right? And so, we are working with various carriers in the U.S. AT&T is just one. We are working with others. We have an NDA in place, so - but we have a lot of things as I said on the horizon, lot of bright spots that you will see coming out in press releases. And hopefully, you were all happy with the level of press releases that you were getting from us, because we want to be as transparent as possible.

Thank you. We've reached the end of our time for question-and-answers now. I'll turn the floor back to management for concluding remarks.

Thank you, operator. I thought that there will be more questions. But, thank you, operator. One administrative note, if we could ask the investors to please take the time to review the proxy-statement that were sent out and to be sure to vote, vote early and often. I like to thank all of you for joining us today on our third quarter call. And we look forward to talking to all of you for our next quarter call in March of 2018. We appreciate everyone taking the time to join us on the call today to listen and ask questions. And we look forward to your continued interest and support of WidePoint and its future. Thank you very much and have a great evening.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.