Good afternoon. Welcome to WidePoint's First Quarter 2021 Earnings Conference Call. My name is Kate, and I will be your operator for today's call. Joining us for today's presentation are WidePoint's President and CEO, Jin Kang; Executive Vice President and Chief Sales and Marketing Officer, Jason Holloway; and Executive Vice President and CFO, Kellie Kim. Following their remarks, we will open up the call for questions from WidePoint's publishing analysts and major investors. If your questions were not taken today and you would like additional information, please contact WidePoint's Investor Relations team at wyy@gatewayir.com. Before we begin the call, I would like to point WidePoint's -- I would like to provide WidePoint's safe harbor statement that includes cautions regarding forward-looking statements made during this call. The matters discussed in this conference call may include forward-looking statements regarding future events and the future performance of WidePoint Corporation that involve risks and uncertainties that could cause actual results to differ materially from those anticipated. These risks and uncertainties are described in the company's Form 10-K filed with the Securities and Exchange Commission. Finally, I would like to remind everyone that this call will be made available for replay via a link in the Investor Relations section of the company's website at www.widepoint.com. Now I would like to turn the call over to WidePoint's President and CEO, Mr. Jin Kang. Sir, please proceed.

Thank you, operator, and good afternoon to everyone. Thank you for joining us today to review our financial results for the first quarter ended March 31, 2021. After completing what was, by many metrics, the most successful year in WidePoint's history, we enter 2021 with solid momentum and with a considerable task ahead of us, to maintain and ultimately to grow our profitability after our work on the 2020 Census project wound down. Today, I'm pleased to report that we started the year on the right foot with the first quarter. In the first quarter, despite Census winding down, our high-margin managed services revenue increased sequentially to $9.3 million. Our gross profit remained fairly steady relative to this time last year at $4.7 million and in line with our projections and expectations. Our gross margin improved substantially to 22.8% as Carrier Services revenues from Census trickled away. We also earned $585,000 in net income for the quarter, which, on a per share basis, was a slight improvement compared to Q1 of last year. While we all knew that 2021 would be a difficult comparison to last year, the profitability metrics demonstrate that even without Census, our core business and our business' fundamental growth drivers remain intact. Additionally, we finished the quarter with $17.1 million in cash, which provides us with a great deal of flexibility as we now have greater opportunity to put capital to work and to better position our business for success in the coming quarters. Our primary objective for 2021 is to add new high-margin sources of revenue to our business. And one of the ways we intend to do that is by investing back into our technical infrastructure to make our services and our solutions even more appealing to a greater number of prospective clients. We've…

Thank you, Jin. For 2021, our sales strategy is based on the same tactics we've successfully implemented in the past several quarters, team with systems integrators and expand our presence with both prominent players in the commercial and federal sectors. But as Jin mentioned, we are leaning into the strategy and investing back into our business more aggressively, which we are able to do, thanks to our strong balance sheet, our high customer retention rate and the momentum we've built over the past several years. We started the year by receiving our first task orders under the Department of Homeland Security Cellular Wireless Management Services 2.0 contract, which were valued at $86 million in aggregate. The total CWMS 2.0 contract, which we secured last November, has a $500 million ceiling and a contract period of 5 years. Almost immediately after the contract vehicle was put in place, task orders started to be awarded. For example, the CISA or Cybersecurity and Infrastructure Security Agency award is new. It's important to note that CISA is a relatively new division within DHS that has been growing, and so there may be opportunities for us to expand our work with them. When we secured the first CWMS 1.0 contract, we spent the first 7 years getting the majority of the DHS components under the contract vehicle. Now that those components are already onboarded, we can focus on expanding services to bring additional value to DHS, like focusing on the 5G technologies and helping enable DHS missions through newly expanded professional services, which we are working diligently to ensure that every major component of DHS puts in place a 1 base year plus 4 option year contract such that we can maximize the CWMS 2.0 contract. If you've followed our press releases, you'll notice that…

Thank you, Jason. Good afternoon, everyone. I'm pleased to share more details on the first quarter 2021 results. For the first quarter, our revenue was $20.7 million compared to $39.7 million reported for the same quarter last year. The year-over-year decline was primarily driven by a reduction in Carrier Services revenue, primarily due to the wind-down of our work on the Census project and the final tranche of carrier credits discussed in our Q4 call. As a refresher on these carrier credits, we discovered that the carriers had overcharged one of our clients, which does happen in a normal course of business. We filed the dispute with the carriers on behalf of our clients, which the carriers ultimately accepted. As a result, the carriers issue credits to us, and we pass on the credits directly to our customers. Ultimately, our actions saved our client money, which is one of many benefits we provide. As a reminder, these carrier credits have not and will not impact our profitability. Looking at the revenues in more detail, Carrier Services decreased to $11.3 million from $28.1 million in the first quarter of last year. Managed Services for the first quarter of 2021 were $9.3 million compared to $11.5 million in the first quarter of last year and $8.9 million in the fourth quarter of last year. The decrease in managed services compared to last year was primarily due to lower revenue from reselling third-party products and services related to the timing of sales that slipped into 2020. When we exclude the third-party reselling revenue, the managed services revenues in the first quarter of 2021 of $9.3 million increased 6% compared to the first quarter of 2020 and 9% from the fourth quarter of 2020. These increases demonstrate that our core business is still growing…

Thank you, Kellie, and thank you, Jason. As I stated at the outset of this call, our primary focus for 2021 is profitably growing our business by adding more high-margin sources of revenue. One part of our strategy to accelerate the development of more profitable revenues is through strategic acquisitions, which we've been very transparent about on our last few calls. The search continues, and there are several potential opportunities that are currently under review. Once we have a material update to announce, we will be sure to share it. In the meantime, we are continuing to meticulously vet targets to ensure that when we do find the right match, we can act swiftly and with purpose and for the betterment of our organization and our shareholders. In the meantime, while the search continues, we are pushing to organically improve our profitability and to expand our revenue streams. But as a reminder, the Census contract was materially completed in Q4 2020 as anticipated. This contract was hugely successful and displays our capabilities to deliver on large-scale projects as well as scale down quickly. As a result, it has positioned us well as we endeavor to win new large-scale work over the long run. However, in the near term, it does make for a difficult comparison for 2021. To more objectively evaluate our performance in 2021, we believe it may help to bear in mind how our expectations for this year compare to our performance from last year, excluding the short-term bumps from Census. With that context said, today, we are issuing guidance for the full year 2021. For 2021, we expect our revenue to be approximately $103 million compared to $180 million in 2020. Excluding Census, our 2021 revenue projections represent growth of 16% compared to our 2020 results. We…

[Operator Instructions] Our first question today is coming from Barry Sine at Spartan Capital Securities.

And first, couple of questions, if you don't mind, please. In your first bullet, the $86 million in task orders from the Department of Homeland Security, I'm assuming that, that will be recognized into revenue over several years. That's not all 2021 revenue.

That is correct. The period of performance for that contract or the task order is 1 base period with 4 1-year option period. So it will be recognized over the 5-year period.

Okay. Understood. So obviously, a very different focus now versus 2020. You talked about the investments you're making in the sales force as well as technology. On the sales force, do you have -- could you give us maybe a hard metric, how many quota-bearing salespeople do you have now versus a year ago? Is it a doubling, 5% increase? How significant is it? And then what are they going after? In the past, you've been able to talk about, on the conference calls, potential, very big contracts that you may or may not win. And obviously, the re-upping of DHS was one such big contract. Are there any big contracts on the horizon? Or are you just mainly hunting for a large number of smaller contract wins?

So there were a couple of questions. So in terms of the size of our sales force, it's roughly 14 total. We've added, I think, around 3 over the past 6 months. In terms of large contracts within our sales pipeline, there are some sizable ones that are there. There are some with some state and local. There's also some with commercial customers. And because we are a small organization, some of these things -- some of these contracts could have a material impact on our numbers.

Okay. And then obviously, you mentioned that this is going to be a bit of a down year revenue-wise. And I understand everything around that. But oftentimes, the market is not as kind to companies with declining revenue. They don't -- the market doesn't look beyond that. You mentioned on this call and you've mentioned in the past that one potential solution to that might have been M&A, adding an acquisition so that at least optically, it would look like the company is growing. We are, what, 3/8 of the way into the year with nothing announced. I'm kind of reminded of the old country and Western song, Looking For Love in All the Wrong Places. There's an $88 trillion global economy. Surely, there's got to be some companies out there that would be a fit for you. Why can't you find them?

Well, there are out there, and we're certainly not looking for love in the wrong places. I think we're looking at the right places, but I think that there's a big headwind against us on this, and that's because there's so many SPACs, and there's so much liquidity in the market. The multiples that some of these companies are looking for just seem to be astronomical. And we know of one software company that received 37x EBITDA. I mean so that seems pretty rich to us. And so we may have to broaden our nets here so that we could look at companies and potentially pay a higher multiple. But that also comes with risk in that we don't have a whole lot of money to waste. And that's the last thing we need to do, is to do a bad acquisition. Although we are down in top line revenue, our gross margins are improving. It went from 17%, 18% to 22%, 23%. So that's a -- and then we're going to continue to remain profitable. So I think we have a little bit of time. But yes, we are mindful that we do need to do some acquisitions and have some organic growth so that it will ease the decline in top line revenues because of all of these algorithmic traders that are out there. But as I said, our goal is to remain profitable and increase our gross margins, and we're going to do that this year. That's our goal. And so we are looking seriously at a lot of opportunities, a lot of acquisition targets. We're right now looking at several of them right now, and some of them look promising. But when you look under the covers, things change. So we just want to be very careful because we feel that no acquisition is better than a bad acquisition.

So one of your parameters in the past, and correct me if I'm wrong, if I can kind of characterize what I think you've said in the past, is you were looking for quality acquisitions and that you were averse to looking at fixer-uppers. If you found a company that seemed to have a good product portfolio but perhaps was mismanaged and you could manage it better, you might be able to get it for a lot less than 37x EBITDA. Would you consider loosening some of your parameters and maybe looking at something like a fixer-upper in order to find an M&A partner?

Yes. I mean we have to look at those, and we are looking at some of those. I think we are looking at strategic acquisitions, things that we can cross-sell and upsell our solutions to. And so they don't have to be exactly in our business area, and we are looking at a couple of those. Yes, perhaps a fixer-upper, as long as we don't have to pay such a high multiple, that would be interesting to us, something that we could see the light at the end of the tunnel. In other words, we can look at the opportunity. And if we can eliminate the duplication and we can eliminate some of the unprofitable pieces and make them profitable and accretive, we are considering those as well.

And my last question is kind of a macro question -- or 2 macro questions. So first of all, we've had a very, very large stimulus bill passed and signed by the President in effect and then also a very large infrastructure bill that's being proposed. So are there any goodies in there that would benefit WidePoint? And then the other macro factor, for the first time really since the Reagan administration, people are talking about inflation again. How does inflation impact your business? Do you have riders in there, for example, on the big DHS contract? If inflation hits, are you able to raise your prices?

There are incremental like COLA adjustments, cost of living adjustments, and escalators in there. It depends on what the inflation rate is, but it's modest. And so depending on what the inflation rate is, that would make a determination. But in terms of our costs, I think our costs are reasonably fixed. Of course, the labor rates will increase in the case of inflation. So we'd have to manage that very carefully. And the labor rates on our DHS contract does have some room. We don't always hire the people always at the top level. So we do have some room for increasing salaries if we need to. There was also one -- an executive order that was signed by President Biden about cybersecurity. I think that, that helps. I think people are starting to realize and companies are starting to realize that cybersecurity is real and the cyber threat is real with the latest break-in over at the Colonial pipeline. I think our solution, our Identity Management solution, would have potentially thwarted that, the cyberattack. We believe that our Identity Management solution essentially is the first firewall that would mitigate some of those risks associated with people coming in and locking all your data files down. And so if you can identify the endpoints, in which case you can eliminate the threat of having people break into your system if you only allow those people that are recognized by your system onto your infrastructure. So we feel that, that executive order will help us. It will create some tailwinds because I think commercial companies are starting to look at that. And so in terms of the additional liquidity and the funds that are out there, I think it's -- it will be all be helpful. I think that there was another piece of legislation that we're in both of the relief packages. I think that was into the tune of like the first one had $1 billion, the second one had $1 billion on cybersecurity improvements. So all of those things will create some tailwind for us.

[Operator Instructions] At this time, this concludes our question-and-answer session. If your question was not taken, please contact WidePoint's IR team at wyy@gatewayir.com. I'd now like to turn the call back over to Mr. Jin Kang for his closing remarks.

Thank you, operator. We appreciate everyone taking the time to join us today. As the operator mentioned, if there were any questions that we did not address today, please contact our IR team. You can find their full contact information at the bottom of today's earnings release. Also, we will be presenting at the 16th Annual Needham Virtual Technology and Media Conference on Tuesday, May 18 at 8:45 a.m. I hope you're all able to listen in on our presentation. Thank you again, and have a great evening.

Thank you for joining us today for WidePoint's First Quarter 2021 Conference Call. You may now disconnect.