Transcript
Good afternoon. Welcome to WidePoint's First Quarter 2022 Earnings Conference Call. My name is Holly 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 CFO Robert George. 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 [email protected]. 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 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-10Q 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 ending March 31, 2022. Our call today will be a bit shorter than normal, given that it's only been roughly a month and a half since our last earnings call. That said, it does not at all mean we haven't been busy here at WidePoint. We remain committed to making strategic investments internally with the ultimate goal of executing our organic and inorganic growth strategy, which is to grow the top-line and operate profitably and stably to maximize our company's potential. Before I provide you with the additional updates, I am once again obliged to share that there are still macroeconomic headwinds out of our control affecting our business. Whether it be COVID, supply chain disruptions, labor market shortages, or geopolitical issues, WidePoint, similar to almost every other corporation in the U.S., is impacted to some extent. Nevertheless, we continue to do what we can to implement proactive action to combat these headwinds. For example, with respect to supply chain issues, one thing we recently started instituting was proactively looking for alternative sourcing methods within the U.S. by way of M&A or partnerships. We currently have various IT equipment, mobile devices, accessories, and other supplies that are being provided by offshore companies. To limit the number of variables within our supply chain, we are looking to secure sources here in the States. We will continue to be nimble, flexible, and resilient in combating uncontrollable macroeconomic headwinds. Next, I'd like to highlight some recent encouraging updates. As you might have seen from our latest press release, we successfully established the commercial certificate authority infrastructure and we're now able to issue the most secure Multi-Factor Authentication or MFA credentials to our commercial customers. We recently implemented, tested, and deployed all of the hardware and software necessary to issue these credentials for our commercial customers in the beverage industry and a large research institution. We also provided the necessary training and drafted the policy documentation for our customers to ensure that the most secure MFA solution operates in a secure manner. Suffice it to say, our IBM solution is starting to take root in the commercial sector. Also, we continue to capture additional business on our DHS CWMS 2 contract vehicle. I'm happy to report that DHS has committed a substantial amount of their contract procurement authority under our CWMS 2 contract. And I'm cautiously optimistic that we will successfully capture substantially all of the funding allotted for this contract. There are several large opportunities we are pursuing under this contract and once awarded, may precipitate a contract modification to increase the ceiling. I will share more details of these opportunities as they move past the inception stage and into the task order request for quote stage. Additionally, we have submitted our price adjustment requests to DHS to help offset the increases in labor costs we are experiencing from the unprecedented increase in labor rates caused by labor shortages and the great resignation. We remain cautiously optimistic that we can maintain or improve upon our current financial performance through these tough times. As it relates to our ESG initiatives, we're continuing to find success in our recycling program. As we stated in our previous calls, our subsidiary WidePoint Mobile Corporation received the R2V3 certification from the Sustainable Electronics International or SERI. And we're continuing to gain traction as we build profitable revenue by responsibly recycling mobile and other smart devices, whether they be at the end of life or those that can be recycled back into inventory. We see this effort to be a win-win for our environment, and a win for our company as we are receiving profitable revenues from these activities and keeping these devices out of the landfill. I am optimistic that this part of our business will continue to grow as more and more mobile devices are placed into service and reach the technical refresh phase of their life cycle. As we stated in our previous call, we were in the FedRAMP ready state. I'm happy to report today that we recently received a verbal commitment from one of our customers that they will sponsor us for the full FedRAMP certification. Please stay tuned on our progress on this front. The FedRAMP certifications are tests that our Intelligent Technology Management System or ITMS meets all of the cybersecurity standards prescribed by the federal government for protecting our customers' data. Attaining this full FedRAMP certification will place us in rare company as we compete for work within the federal government. Additionally, this level of security demonstrates to our potential customers, especially those in the commercial sector and those verticals where security compliance is key, that WidePoint brings a high level of confidence when it comes to protection of their data and systems. All in all, we're still executing our strategy for profitable growth through organic and inorganic means. We remain in line with our budget expectations and are encouragingly trending towards our top-line forecast. Our team is certain that the strategic investment we are making in the company will translate to profitable revenue growth. With that overview completed, I will now turn the call over to Jason to provide you with some details on the investments we are making on the sales and marketing front.
Thank you, Jin, and good afternoon, everyone. I'd like to start by sharing some of the progress we've made as a result of our acquisition of ITA. From a high level, I am pleased to share that the onboarding process has been going as planned, and we expect to have them fully integrated on the back-end sometime here in Q2. As mentioned on our prior call, we found early success in leveraging synergies, whether that be cross-selling or up-selling our services and solutions to ITA's base of customers, and vice versa. We have seen these joint sales and marketing initiatives continue to expand and are in fact in line with our internal expectations for ITA revenues for the first quarter. We see no signs of slowing down and also expect to see improving results in the quarters going forward. That said, as Bob will further expand on his updates, there are some acquisition costs incurred in Q1 as we continue the integration process. This will impact our operating expenses in the short run, but I am very confident that there will be far greater returns in the long term as ITA fully becomes a part of WidePoint. One example of a win we previously shared was with the beverage company that has engaged us for our identity and access management as a service. This project is also important to WidePoint strategically as it introduces our new DOD grade EKI identity and access management solution to the commercial sector. We are diligently working with them to expand our managed services to potentially add telecom lifecycle management. The second win we shared on the prior call was with a large marketing multimedia rights holder for some of the most prestigious sports venues across the country. Due to ITA making such a good impression, we are in the latter stages of expanding our agreement. More specifically, the customer shared that they would like to use WidePoint's IT as a service offerings for even more of its subsidiaries throughout its organization. The third win is with the financial institution that ITA closed as a new customer, which they also added our identity and access management as a service option. Next, we continue to maintain our Microsoft Co-Sell certification status and have combined it with ITaaS Microsoft Gold Partner certification, which gives us quite an edge as we continue to push into the commercial markets. Overall, we are continuing to reap the benefits of our ITA acquisition and look forward to maximizing the synergies as we near the completion of the integration process and strive towards profitable growth. Furthermore, I wanted to share that our identity and access management solution is being implemented at a major research university and a District of Columbia government agency. All in all, we are seeing progress on all fronts of the sales and marketing side and are encouraged by what we've been able to accomplish and by our healthy, growing pipeline. With that, I will hand the call over to Robert.
Thank you, Jason. Good afternoon everyone. I'm pleased to share more details of our first-quarter 2022 financial results. For the first quarter, our revenue was $22.4 million, compared to $20.7 million reported for the same quarter last year. Carrier services revenues increased by $1.6 million to $12.9 million from $11.3 million in the first quarter of last year. This is largely due to carrier credits carried over from 2020 into Q1 of 2021 that we did not experience in Q1 of 2022. Managed services revenues increased 2% to $9.5 million from $9.3 million compared to the first quarter of last year. The increase in Managed Services was primarily due to reselling activities. Our gross profit for the first quarter of 2022 was $3.9 million compared to $4 million in the prior quarter and $4.7 million in the first quarter of 2021. The decline in gross profit compared to last year was due to increased labor costs, particularly in our ITaaS business. Gross margin decreased to 17% in the first quarter of 2022 from 23% in the first quarter of 2021. In the first quarter of 2022, operating expenses increased 13.5% to $4.6 million from $4 million in the first quarter of last year. The increase in operating expenses was primarily due to the inclusion of ITA for the full first-quarter of 2022 versus not being a part of our Q1 2021 results. For the first quarter of 2022, GAAP net loss was $497,000 or a loss of $0.06 per diluted share. A decrease from net income of $609,000 or a gain of $0.07 per share in the first quarter of 2021. On a non-GAAP basis, EBITDA for the first quarter of 2022 was $164,000 compared to $1 million last year. Our non-GAAP adjusted EBITDA was $345,000 in the first quarter compared to $1.2 million in the same period in 2021. Shifting to the cash flow and balance sheet, we exited the quarter with $7.3 million in cash and approximately $5 million available to draw on our credit facility. An approximately $800,000 increase in cash flow in the prior quarter resulted from positive cash flows related to working capital, partially offset by capital investment and our stock repurchase program. Our balance sheet continues to remain strong and our current ratio at the end of March remains around 1.2 to 1, compared to 1.3 to 1 at the end of the previous quarter. Furthermore, although we have an ATM at our disposal, we have no current plans to execute any orders on the ATM, and we'll be opportunistic and act when the situations are favorable. This completes my financial summary. For 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.
Thank you, Bob, and thank you, Jason. Now, let me touch upon our M&A strategy. Our executive team continued to search for and vet M&A targets and are currently reviewing a considerable number of exciting opportunities. With the slowdown of the pandemic, we have begun to meet with prospects in person and have a few strong contenders, and we look forward to providing you updates as events unfold. However, we have nothing definitive to announce at this time. Moreover, I want to share that we have currently paused our repurchase program to preserve our cash balance as we look to invest back into our technology and prepare for potential acquisitions. Long-term, we still intend to leverage the buyback program when we feel the time is right. Finally, as you might have seen in our earnings release, we officially provided guidance figures for the full year 2022. From a top-line perspective, we are forecasting $92 million to $98 million and from the adjusted EBITDA standpoint, we're projecting $2.5 million to $3.5 million. The adjusted EBITDA number is a bit lower than what we would have recognized, but due to the investments we're making back into the business and the integration expenses from the ITA acquisition, we are forecasting those figures. The investments we're making into our sales, marketing, and branding efforts, as well as the investment we're making into our technology solutions will translate to greater growth and profitability in the future. Overall, we're continuing to execute our plans for profitable growth through organic and inorganic means and have an exciting 2022 ahead of us. We appreciate the dedication from our employees and support from our investors and look forward to providing you all with additional updates when appropriate. That said, we're ready to take questions from our analysts and our major shareholders. Operator, will you please open the call for questions.
Ladies and gentlemen, the floor is now open for questions. We kindly ask that if you are listening on speakerphone, please pick up your handset to ensure the best sound quality. Please hold while we gather questions. Your first question today is from Barry Sine with Spartan Capital Securities. Barry, you are now live.
Good evening, gentlemen. Jin, I want to start with if you don't mind, and your second or last comment was on your M&A strategy. If I compare what you just said today, versus how you phrased that in prior quarters. Trying to do a little tea leaves reading, it sounds like you're a little closer to announcing something than you were previously or a little more optimistic. The board is obviously, I think that was in March pause the buyback program, and I think that leaving flexibility for acquisition was one of the factors that they had looked at. You said you have a few strong contenders. One of the things you've mentioned as an impediment in the past is while you've seen strong contenders, the price wasn't right. Are all the stars aligning now? What's different now and am I reading your comments correctly that you're a bit closer now than you may have been in prior quarters?
Hi, Barry. Thank you for that question. The answer is, I think that things are getting closer and the stars are aligning, but I'm also mindful of acquisition targets always looking for unrealistic valuations. There's always room for these opportunities to go sideways. While I'm more optimistic that we will have some opportunities here in 2022, there is no luck, if you will. I'm more optimistic than I was a quarter ago, but we've still got a long way to go.
Okay. And then Jin, your last comment was on the guidance you've just given and by the way thank you for that. I think I have my math right, the midpoint for full-year EBITDA guidance is $3 million and you just reported $344,000 in EBITDA for the first quarter, which is not even half of that run rate for the full year. So what changes over the next three quarters in terms of profitability? I guess some of it may be ITA. I think Jason talked about completing the integration during the second quarter, presumably that eliminates some duplicative costs.
Yes, we will be removing some duplication and redundancies. The other things that happened are some opportunities that shifted to the right that we expected to come in the first quarter. So we have those elements happening and we see ourselves getting back into our forecast and making up over the next several quarters.
Okay, so when you say opportunities pushed to the right; that would be on the revenue side. Not so much on the cost?
Correct.
So you have the costs, but the revenue may come a little bit later than you were originally thinking?
Yes.
Okay. Got it. My last question is just the headwinds that you're facing. And I want to focus in on handset availability and maybe supply chain issues. Apple makes their phones in China; there's a lockdown in Shanghai and somewhat in Beijing. If I look at the disclosure in the 10-Q, it talked about managed carrier down a million. ITA was positive 1.6. So it sounds like a negative 2.6, and I think that was called out to recycling. And the way I'm reading that is if you don't sell a new phone, you don't get the revenue for recycling an old phone. So if you could talk about what specifically you are seeing in terms of handset availability headwinds and how that impacted the numbers we're looking at in the quarter?
We are seeing some slowdown in some of the handsets and we're not quite sure what is going to happen with these renewed lockdowns in Beijing, I think it is. There are some impacts there and that's why we are looking for sourcing opportunities in the U.S., not specifically handsets, but there are various add-on accessories that we provide that have a fairly good margin for us. So we do see that there may be some slowdown in the handsets, but I think so far it has been manageable, and we're cautiously optimistic that things will free back up here in the next couple of months. If there is a slowdown in the second quarter, we should be able to catch up on the handsets in the third quarter. A lot of these orders are already placed, and so far we have been able to fulfill those orders, but it remains to be seen what the impact is going to be going forward with these renewed lockdowns over in China.
And if you could speak specifically about what I talked about in the disclosure, the managed services disclosure in the 10-Q and down $1 million and then ITA 1.6. So am I reading that right organically excluding ITA that would've been down 2.6?
Did you want to cover that, Bob? As far as I know, I thought our managed services revenue was slightly ahead. I take that back. Our revenue excluding the carrier services was slightly ahead and the ITA revenue was slightly behind. The revenue was probably like $70k below what we projected. We thought that our revenue was fairly consistent or slightly higher than it was in Q1 last year, right?
Yeah. We had lower volumes due to the recycling and accessory sales, and that was offset by the IT sales. So there is a negative million in the recycling and accessories, but offset by the positive 1.6 in ITA.
Okay, so our overall revenue was slightly ahead, right?
It's $200,000 ahead overall within the managed service fee line, is a million down, which is the accessories and recycling.
In terms of recycling going down, is that related to sales? I assume you recycle when selling a new handset, so I'm unclear on why recycling has decreased.
I can explain that. The recycling was down because one of the main customers, the tech refresh, pushed to the second quarter. We should see the recycling revenue catch-up in the second quarter, but it's not related to any slowdown in selling any new handsets.
Got it. Okay. Thank you for taking my questions.
Sure thing.
At this time, this concludes our question-and-answer session. If your question was not taken, please contact WidePoint's IR team at [email protected]. I'd 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 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.
Thank you for joining us today for WidePoint's first-quarter 2022 conference call. You may now disconnect.