WidePoint Corporation (NYSE:WYY) Q1 2023 Earnings Conference Call May 15, 2023 4:30 PM ET

Company Participants

Jin Kang - Chief Executive Officer & President
Jason Holloway - Chief Revenue Officer
Robert George - Chief Financial Officer

Operator

Good afternoon, and welcome to WidePoint's First Quarter 2023 Earnings Conference Call. My name is Ali, and I will be your operator for today's call.

Joining us for today's presentation are WidePoint's President and CEO, Jin Kang; Chief Revenue Officer, Jason Holloway; and Chief Financial Officer, Robert George. Following their remarks, we will open up the call for questions from WidePoint's publishing analysts and 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 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 involves risk 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-Q 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.

Jin Kang

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, 2023. We concluded Q1 much better than we had anticipated, both quantitatively and qualitatively. A big contributing factor to our stronger-than-expected Q1 was due to sales deals crossing the finish line sooner than expected. One of the more prominent deals we've previously shared is the Soft-ex deal with CSG International that continues to gain increased traction and has contributed significantly to our top line.

We have signed 3 key deals with our partner, CSG, as announced in our press releases, and we have been ahead of schedule in completing the implementations. We have also received 3 new task orders for key third-party software applications for the text capture capabilities with our federal government clients. A bump up in several orders with CSG being filled sooner than expected, which has also played a role in the stronger-than-anticipated quarter. A major catalyst that has helped us accomplish some of these wins was a result of our clients re-engaging with us post-COVID and our diligence in betting new mobile capabilities such as the text capture capabilities for our federal clients. As you may have read in the news, preservation of text messages and other data for archival purposes for those in public office has become a topic that is front and center.

We have capitalized on this opportunity, and we see great potential ahead. I was particularly encouraged because we were able to achieve these wins despite several gating factors which includes continual investments being made back into our business, the historically slower Q1 and especially following the rightsizing of our workforce.

As it pertains to the last point, the rightsizing we initiated in Q4 is having a clear positive impact on our profitability as we experienced a full quarter of the benefits and continue to operate with a leaner staff. Additionally, though the pandemic has added the modes of working in the post-pandemic environment are drastically different as more workers are accessing their corporate IT infrastructure from remote locations. We see this as an ongoing tailwind for our business as there will be continuous pressure for companies to secure and manage their mobility assets.

Next, as I stated on our last call, our Intelligence Technology Management System, or ITMS, has achieved FedRAMP In Process status. There is no new status to share with you at this time other than we expect to complete the assessment to earn the FedRAMP Authorization status which, again, will open up new contract opportunities for us. Speaking of new opportunities, we have continued to invest in our technology infrastructure to capture new opportunities. Some highlights in our investments include Unified Communication Analytics solution set that has been recently approved for Microsoft commercial marketplace and has been launched in the Ingram Micro Marketplace. Ingram Micro Marketplace is the world's largest one-stop shop for cloud-based solutions.

Remote issuance of certificates, also known as soft certificates will allow WidePoint to issue identity certificates over the air. This, along with our remote vetting process, will allow WidePoint flexibility in modes of certificate issuance that will result in increased higher-margin revenues. This capability is scheduled to complete in Q3. Development of a hybrid issuance capability will allow our clients to retain their Personally Identifiable Information, or PII, in their possession. These clients are required by law to maintain control of their PII and therefore, were off limits to us, that is up till now. Our hybrid issuance capability will now allow us to issue identity certificates and allow our clients to keep possession of their PII. This capability is scheduled to complete in Q3. As you can see, a majority of our capital projects have either been completed or are in the last stages of completion. I am pleased to share that the associated expenses for these investments will slow down starting from Q4 of this year. Given the progress we've made so far this year, despite the gating factors, it boosts our confidence when looking at our 2023 full year forecast, I'll dive deeper into our forecast for the rest of the year later on in the call.

But first, I will turn the call over to Jason to provide you with some details on the sales and marketing front. Jason?

Jason Holloway

Thanks, Jin, and good afternoon, everyone. To echo Jin's sentiment, there are a multitude of exciting developments with respect to our sales and marketing initiatives that I would like to share with you all today. To simply put it, the execution of our sales and marketing strategy is going as planned. To date, we have displayed a number of our major competitors within the managed mobility space and Identity and Access Management space, thanks to our robust technology. Beginning with managed mobility, we continue to close commercial deals along with expanding our DHS CWMS IDIQ contract.

We are very pleased with our strategic partners as they continue to bring us a multitude of managed mobility opportunities based on our excellent past performance as well as our accreditation that give us a clear advantage over our competitors. Commercial entities are coming to the realization that the cheapest price isn't always the best choice. It's about the total breadth of services along with security at the forefront. We should start realizing revenue from these efforts in Q2 and into Q3. Recently, we partnered with a very large Identity and Access Management, or IAM, company to absorb a portion of their existing clients within the federal sector.

To date, the partnership is proceeding on track, and I will have further details on our upcoming calls. Additionally, I recently attended a 3-day event where a larger number of K-12 schools were in attendance to which our discussion around our digital soft search was well received. Our IAM pilots are still progressing and as stated previously, we are targeting the end of Q3 to have our digital soft search capabilities completed. Not only do we plan to market these solutions to K-12 but to commercial entities as well. I am also excited to report that we are working on a proof of concept for the General Services Administration, or GSA, in order to demonstrate our derived credential capability.

As a result of this project, multiple opportunities have surfaced. We are hopeful we can make progress as a result of this project and look forward to keeping you all apprised of our success. To provide you all with additional context, we are working with the most influential technology researching firm regarding our IAM and soft search for K-12 and the commercial sector. This firm has been instrumental in sharpening our message, and we are also planning on including certain key individuals from the firm in strategic upcoming meetings. This strategic relationship also bodes well with our large systems integrators, in which we partner to resell our solutions.

As you can see, we're leveraging the continued momentum we've been building up from the past quarters as they have resulted in executed deals or are in the process of being completed. I look forward to providing additional updates on upcoming calls.

With that, I will hand the call over to Bob.

Robert George

Thank you, Jason. Good afternoon, everyone. I'm pleased to share the details of our first quarter 2023 financial results. Thanks to the continuous ability of our team to execute, we achieved our 23rd consecutive quarter of being EBITDA positive. In the first quarter, our revenue was $25.3 million, an increase of $2.8 million or 13% from the $22.5 million reported for the same period last year.

Now I'll provide a further breakdown of our first quarter revenues. Our carrier services revenue was $13.6 million, an increase of approximately $700,000 from the $12.9 million in the same period in 2022. The increase was primarily due to a large federal government client increasing the number of phone lines we manage by approximately 75% in the second quarter of 2022.

In the first quarter of 2023, our managed services revenue, combined with our billable services fees revenue, remained relatively consistent with the same quarter last year at $8.1 million and $8.4 million, respectively. Reselling and other services revenue was $3.6 million, an increase of $2.5 million from $1.1 million in the same period last year. The increase was primarily due to the resale of text capture capabilities provided by a third-party partner to two large federal clients. While reselling and other services are transactional in nature, we expect to have additional sales of these new technical capabilities throughout the year, although the amount and timing of revenue could vary significantly from quarter-to-quarter.

Gross profit for the first quarter was $3.8 million or 15% of revenues as compared to $3.9 million or 17% of revenues in 2022. The more significant metric of gross profit percentage, excluding carrier services, was 33% for the first quarter in 2023 compared to 41% in the same period last year. The lower comparative gross margin percentage, excluding carrier services, was almost entirely related to the resale of the third-party partner capabilities previously mentioned. As a reminder, our gross profit percentage will vary quarter-to-quarter due to our revenue mix.

For the first quarter, general and administrative expenses were $3.7 million or 15% of revenue compared to $3.7 million or 17% of revenues in the same period of 2022. We believe our general and administrative expenses will be consistent with 2022 levels, but lower as a percentage of revenue as the result of the organizational efficiencies achieved in 2022.

For the first quarter of 2023, our GAAP net loss was $950,000 or $0.11 of diluted loss per share compared to a GAAP net loss of $393,000 or $0.04 of diluted loss per share in the same period last year. The main driver of the change in earnings was an increase in depreciation and amortization expenses as capital projects were completed later in 2022 and began to be amortized in 2023. On a non-GAAP basis, our adjusted EBITDA for the first quarter of 2023 was $20,000 compared to $344,000 in the same period last year. The lower EBITDA was a result of investments being made in preparation to deliver under new contracts later in the year.

Shifting to cash flow and the balance sheet. Our current ratio at the end of March 31, 2023, and December 31, 2022, was 1.1:1. We closed the first quarter with $4.6 million in cash, which is down from $7.5 million at December 31, 2022. The reduction in cash was a result of temporary delays in billing as a result of process realignments in our TLM business. Given the tightening credit posture of regional banks, we do not expect to renew our revolving credit agreement with Atlantic Union Bank in June of this year. As an alternative, we entered into a factoring agreement with Republic Capital Access, a recognized leader in factoring in the government services sector. This factoring facility provides up to $4 million of receivable sales at any point in time and can be expanded to $10 million if needed. The factoring agreement gives us more flexibility to execute our strategic plan. We believe our operating cash flows, cash on hand and available funding through our factoring agreement gives us ample liquidity.

This completes my financial summary. For a more detailed analysis of our financial results, please reference our Form 10-Q, which was filed prior to this call.

So with that, I'll turn the call back over to Jin.

Jin Kang

Thank you, Bob and Jason. Before I dive into the overview of the remainder of the year, I'd like to talk a bit about M&A. In keeping with what I shared last quarter, we have carefully narrowed down a list of potential candidates and are thoroughly evaluating these companies for potential M&A opportunities. To support our inorganic growth strategy, we are actively collaborating with multiple investment banks and will persistently work alongside them. As mentioned previously, given the uncertain state of the broader economy, and the increase in interest rates, the M&A market has become more competitive as companies explore strategic alternatives.

We look forward to the continued progress with our inorganic growth strategy and we'll be sure to notify the public accordingly when the time is right.

Looking ahead at the rest of the year, we are expecting revenues to range between $103 million and $108 million and adjusted EBITDA range between $1.1 million and $1.5 million. We are expecting a GAAP net loss of between $2.8 million and $3.2 million or $0.32 to $0.36 loss per diluted share, respectively. A major contributor to the loss per share is noncash depreciation and amortization, which has increased as a result of investments being placed into service. Furthermore, I am proud to share that we expect to finish off the year cash flow positive.

Our positive outlook for the remainder of this year is driven by a combination of factors. Firstly, our sales and marketing efforts, along with our business development strategy, continue to grow, which has undoubtedly contributed to our ongoing success. Second, we have been successful in resigning and retaining our clients as we consistently provide them with valuable and indispensable solutions. It is worth noting that we often expand the range of services we offer to our existing clients, solidifying our position as a reliable and preferred choice. These collective factors indicate that we are witnessing favorable trends moving forward.

With that said, we are ready to take questions from our analysts and major shareholders. Operator, will you please open the call for questions?

Question-and-Answer Session

Operator

[Operator Instructions] And while we wait, we have had a question that was sent in to us earlier today. If the debt limit problem is not solved, I understand there may not be any new orders. But to the extent you keep supplying them with products and services under the contract, are there funds available to pay WidePoint?

Jin Kang

Thanks for that question, operator. I doubt that anyone has a certain answer to this question as we are in uncharted territory. However, our supposition is that the Feds will continue to have revenue coming in into their coffers from various sources. They will undoubtedly prioritize the use of such revenue, where WidePoint's customers fall on that priority list is hard to determine. However, our work is funded, which means that funds have been obligated to our contracts, we are the federal government's internal accounting systems.

We don't understand all of the intricacies of their accounting system, but we strongly believe that we should be paid and will be paid for services rendered and products delivered. There may be some slowing of payments if the government shuts down and reopens, but we are in a pretty safe position.

Operator

At this time, as we have no questions in the queue at this moment, I will hand it back over to Mr. Kang for any closing remarks you may have.

Jin Kang

Thank you, operator. We appreciate everyone taking the time to join us today. As the operator mentioned, if there were any questions 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. Thank you again, and have a great evening.

Operator

Thank you. This concludes today's conference, and you may disconnect your lines at this time, and we thank you for your participation.