WidePoint Q4 2023 Earnings Call Transcript

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Provided by Quartr
March 26, 2024

There are 5 speakers on the call.

Operator

Good afternoon. Welcome to WidePoint's 4th Quarter and Full Year 2023 Earnings Conference Call. My name is Matthew, 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 Analyst and Major Investors.

Operator

If your questions were not taken today and you'd like additional 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 the future events and future performance of WidePoint Corporation that involves 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 ks filed with the Securities and Exchange Commission. Finally, I'd 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.

Operator

Jin Kang. Sir, please proceed.

Speaker 1

Thank you, operator, and good afternoon, everyone. Thank you for joining us today to review our financial results for the Q4 and full year ended December 31, 2023. This past year was a pivotal one for WidePoint marked by successful execution of our financial and operational plans and initiatives. We closed out 2023 on a strong note pertaining to both our financials and operations with approximately $106,000,000 in revenue, positioning us at the higher end of our full year 2023 guidance. Simultaneously, we achieved 26th consecutive quarter of positive adjusted EBITDA and demonstrate a sequential quarter over quarter growth in 2023.

Speaker 1

Additionally and more notably, we concluded the 4th quarter free cash flow positive, a trend that we anticipate maintaining throughout 20 24 beyond, and something that is vital for the company, especially within this high interest rate environment. This momentum we anticipate carrying into 2024 is backed by multiple initiatives and developments made throughout fiscal year 2023. First, a robust demand for our solution and services remain evident with the Q4 alone witnessing more than 30 contractual actions amounting to more than $70,000,000 in contract value. These wins include new awards, contract renewals, expansions and extensions in all of our solution lines. As you know from the news headlines, the federal government budget battle is and will be an ongoing issue.

Speaker 1

However, we continue to successfully mitigate this risk by proactively engaging with our government counterparts to renew contracts early and ensuring that they are fully funded. Currently, all affected contracts are successfully awarded and carried over into the New Year. With this, a significant catalyst for our anticipated growth in 2024 lies in our substantial contract backlog totaling 359,000,000 dollars as of December 31, 2023. Furthermore, WidePoint continues to solidify its position as the most secure premier choice for trusted mobility management solutions, evidenced by our strong contract renewal and customer retention rates of over 90%. With these initiatives driving our momentum, we confidently forecast double digit percentage growth in the teens for top line revenues and double digit percentage growth in the high teens for managed services revenues.

Speaker 1

In addition to achieving positive free cash flow for the full year 2024. Another factor driving our growth is the recent completion of the majority of our capital investments made in 2023. With this, we anticipate having minimal capital expenditures for 2024, strengthening our balance sheet, enabling us to concentrate fully on various operational growth initiatives. More specifically, I'd like to emphasize 2 previous investments that are in their final phases nearing completion. Last earnings call, we mentioned our Intelligent Technology Management System or ITMS was in the FedRAMP in process status.

Speaker 1

We continue to see positive news on this front throughout the quarter. With ITMS now nearing its final FedRAMP authorized designation, We anticipate certification in the first half of twenty twenty four. However, the timelines may change based on General Services Administration's workload for FedRAMP processing. The good news is that we already have all the necessary authorization to operate or ATOs from our current customer agencies, which attests to our strong cybersecurity posture that places us ahead of our competition. As a reminder, attaining full FedRAMP certification will uniquely position our ITMS platform and grant WidePoint a substantial competitive edge in competing for new business with the federal government and large enterprises.

Speaker 1

This certification indicates that our solutions align with federal cybersecurity standards for protecting our customers' data. Moreover, it will showcase the robust security levels offered by WidePoint solutions to both existing and prospective customers, particularly in commercial sectors and industries where data and system security are paramount. We look forward to announcing the completion of our FedRAMP process and anticipate this to be a significant factor to continue differentiating our solutions and serve as a catalyst to fuel new wins in the near future. Another investment nearing completion is in our delivery system, more specifically enhancements to our continuity of operations site or COOP, which we also anticipate completion by the first half of twenty twenty four. These COOP site enhancements will further differentiate us from our competitors and provide additional resiliency to our delivery systems.

Speaker 1

Our enhanced COOP site will have automatic failover capabilities and data replication such that if there is a system outage of our primary operation site, the secondary site will immediately come online to greatly reduce the system recovery time ensuring that we meet and exceed all of our service level agreements with our customers. In addition to these investments, we are excited by the potential for artificial intelligence to streamline our everyday business operations. And we are developing a strategy aimed at leveraging AI. The potential to improve our customer service experience by reducing response time, increasing the accuracy of those responses, as well as increasing our overall capacity are all being explored. Furthermore, there's potential to enhance our IT as a service by integrating AI to detect cybersecurity vulnerabilities and enhance behavior based security measures.

Speaker 1

There are other areas of our business that could benefit from the implementation of AI, such as software development, responding to proposals, invoice audits and leveraging our knowledge base to serve our customers' requirements better. We are in the process of sifting out the noise from the real AI capabilities. We will share more on this front as we evolve our strategy to meet our business needs. With our investments out of the way, I'd like to highlight just a few of our contract wins achieved recently that we believe will have the potential to grow into substantial revenue generators over the coming years. At the federal level, we saw roughly $60,000,000 in governmental contracts won in the Q4 alone.

Speaker 1

While we are bound by non disclosure agreements and unable to disclose specific government clients, Jason will talk to one of our recent federal contract wins, which has the potential to grow into one of our largest federal contracts, 2nd only to our contract with the U. S. Department of Homeland Security. On the commercial side, we have won contracts with a nationwide professional services firm and a major Florida attraction and research center, both of which have the potential to grow into a material IT as a service customer over the next 12 months. On the sales and marketing side, our strategy to expand market presence has proved to be fruitful, especially in a year with challenging macroeconomic headwinds affecting the whole market.

Speaker 1

Jason will dive deeper into this topic shortly, but we are proud to say that these efforts contributed significantly to WidePoint's success this past fiscal year. Lastly, the sales of WidePoint's business solutions have maintained their momentum, playing a significant role in the company's growth and reach. WidePoint has shown year over year growth and we anticipate this positive trajectory to persist in 2024 as we continue to grow our sales pipeline. The potential for cross selling and up selling within WidePoint's comprehensive suite of trusted mobility management solutions creates further avenues for business expansion and advancement. These business solutions remain pivotal in our sustained long term growth and in fortifying our competitive advantage.

Speaker 1

I will now hand the mic over to Jason, who will dive into the progress made on the sales and marketing front. Jason?

Speaker 2

Thanks, Jin, and good afternoon, everyone. As Jin stated earlier, our concentrated efforts year. This past quarter alone, WidePoint was awarded over $70,000,000 in contract wins, approximately $65,000,000 dollars of which were considered new business wins. This showcases our commitment to continuously drive new business into WidePoint and the trust our current and new customers have for our solutions. Recently, we closed a deal with a commercial entity to provide a full range of managed telecom solutions on behalf of its U.

Speaker 2

S. Government and customer. This deal is approximately $20,000,000 with a 3 year base period and 2 1 year option periods. As Jen mentioned, although we cannot disclose this client's name, we are proud to state this contract can become one of our most significant. Additional information can be found in our SEC Form 8 ks filed January 2024.

Speaker 2

We remain committed to advancing these sales and marketing initiatives into 2024. The strong results this past year have prompted us to develop a new internal plan to allocate additional resources and budget towards enhancing our staff and capabilities to secure additional high margin contracts like the one mentioned just now. Specifically, we look to add an additional senior level commercial sales resource an established federal business development resource with a proven track record within the DC area and a vendor partner manager for the expansion of strategic partners. With ample funding and guidance from new senior staff members, we are confident in carrying this momentum into fiscal year 2024 to garner more contracts. On the K-twelve side, we continue to accelerate our market penetration.

Speaker 2

We recently engaged expert within the K-twelve secondtor to facilitate our partnership program aimed at integrating WidePoint's IAM solution into existing offerings for numerous sector entities. I also want to note that our identity and access management pipeline is equivalent to our managed mobility pipeline in terms of the number of opportunities. As Jen mentioned earlier, we have a robust contract backlog of $359,000,000 in value. A large part of this backlog and success seen this year can be attributed to our flagship contract with DHS, the Cellular Wireless Management Services 2.0 contract. Based on our current contract run rate, we are nearing the contract ceiling of $500,000,000 As such, we are working closely with DHS to review options for continuing to perform under this contract.

Speaker 2

With the additional resources and staff, we will increase our investments in the sales and marketing efforts as we look to win additional impactful contracts like this for WidePoint's financial growth. Lastly, I wanted to recognize the IT Authorities team. As you know, we acquired IT Authorities in 2021. Even though the integration took a little longer than expected due to challenges faced during the COVID pandemic and external macro headwinds, the team has been closing deals at a pretty rapid pace. They have been working extremely hard, and we are excited about their tremendous momentum in 2020 4.

Speaker 2

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

Speaker 3

Thank you, Jason, and thanks to everyone for joining us today. I'd also like to express my gratitude to the entire WidePoint team on how they executed in 2023, a year where WidePoint saw significant improvements in both top line revenue and free cash flow. Now I'm pleased to share the details of our Q4 and full year 2023 financial results. Revenues for the quarter were $28,300,000 up 21% from the same quarter last year. Revenues for the year were $106,000,000 an increase of 13% from last year.

Speaker 3

Now I'll provide a further breakdown of our 4th quarter and full year revenues. I'm pleased to say that period over period, we saw increases across all our revenue categories. Our carrier services revenue for the quarter was $15,700,000 an increase of 14% from the same quarter last year. Our carrier services revenue for the full year was $58,300,000 an increase of 9% from last year. The increase is due to growth in contracting activity with our federal customers where we pay carrier invoices on their behalf for the telecommunications devices that we manage.

Speaker 3

While pass through, paying carrier invoices is a federal customer requirement in an area where we differentiate our services and provide measurable savings to our customers. Our managed and billable services revenues for the quarter were $4,400,000 a 23% increase from the same quarter last year. Our managed and billable services revenue for the year were $31,000,000 a 10% increase from last year. The increase in 4th quarter and full year were related to increased professional services being utilized by our TLM customers and new projects in our Identity and Access Management customers. Our reselling and other services revenues for the Q4 were $8,100,000 an increase of 37% from the same quarter last year.

Speaker 3

Our reselling and other services revenues for the year were 16.89%, a 33% increase from last year. The increase in both the quarter and full year was a result of selling third party software for recording and storing text messages to our federal customers, which is now required under an expansion of the Federal Records Act and also selling an identity management solution to a new federal customer. I do want to highlight that reselling and other services are transactional in nature and the amount and timing of revenue could vary significantly from quarter to quarter. Gross profit for the Q4 was $4,000,000 or 14% of revenues compared to $3,600,000 or 15% of revenues in 2022. Gross profit for the year was $15,600,000 or 15% of revenues compared to $14,600,000 and 15 percent of revenues last year.

Speaker 3

In the 4th quarter, the more significant metric of gross profit percentage excluding carrier services was 32% compared to 37% in the same period last year. For the full year, gross profit percentage excluding carrier services was 33% compared to 36% in the same period last year. The lower gross margin percentage excluding carrier services in both the Q4 and the year relate to increased depreciation and amortization related to our delivery platforms that have substantially reached completion and are beginning to be amortized and the previous noted increases in reselling and other services, which have a lower gross margin profile. Accordingly, our gross margin percentage will vary from period to period based on our revenue mix. In the Q4, general and administrative expenses were $4,200,000 or 15 percent of revenue compared to $3,600,000 or 15 percent of revenue in the same period of 2022.

Speaker 3

Much of the dollar increase relates to increase in non cash share based compensation expense compared to the same period last year. General and administrative expenses for the year were $15,900,000 or 15 percent of revenue compared to $14,700,000 or 16 percent of revenue in 2022. We expect to see general and administrative costs as a percentage of revenue to continue to trend lower in the future. Our net loss for the Q4 was $1,300,000 or a loss of $0.15 per share compared to a net loss of $8,900,000 and a loss of $1.02 per share in the same period last year. The difference in the net loss between the Q4 of 2023 2022 is predominantly related to a non cash valuation allowance placed on our net operating loss carry forwards of 8,500,000 taken in the Q4 of 2022.

Speaker 3

Our net loss for the full year was $4,000,000 compared to a net loss of $23,600,000 in 2022. The principal difference in the net loss from 2023 compared to 20 $16,300,000 taken in the Q2 of 2022 and the non cash valuation allowance placed on our net operating loss carryforwards in the Q4 of 2022. Moving to our balance sheet, I am excited to share the successful results of our cash management efforts over the past year. Although during the year, we invested approximately $1,100,000 to substantially complete our delivery platform, we still finished 2023 with $6,900,000 in cash and no bank debt. Further, we reduced our days sales outstanding or DSO from 83 days in 2022 to 76 days in 2023.

Speaker 3

Our free cash flow, which we define as EBITDA minus capital investments, was just over $300,000 in the 4th quarter, and we expect to continue to be free cash flow positive throughout 2024. Additionally, we have entered into a new revolving credit facility with Old Dominion National Bank, which is further described in our Form 10 ks filed prior to this call. The facility provides us with an additional $4,000,000 of potential borrowing capacity. We believe our cash on hand, credit facility and the expected free cash flow generated in 2024 will be sufficient to fund our anticipated growth and allow us to pursue the strategic initiatives outlined by Jen and Jason earlier. This completes my financial summary.

Speaker 3

For a more detailed analysis of our financial results, please refer to our Form 10 ks, which was filed prior to this call. So with that, I will turn the call back over to Jen.

Speaker 1

Thank you, Bob and Jason. Our efforts and results this past year show significant year over year improvement seen and we anticipate carrying this momentum into 2024 and beyond. As Bob mentioned, we are well equipped with ample cash to pursue the different initiatives Jason and I mentioned earlier. Additionally, I want to reiterate that AI will be a big disruptor for the foreseeable future and we are taking careful aim to sift through all the noise and hype to implement elements of AI that will have the greatest impact on our business. We look to forming strategic relationship with leaders in the field of AI and especially those with existing tools to deepen our solutions and operational capabilities.

Speaker 1

We also continue to look out for strategic M and A opportunities that provide synergistic opportunities and value to WidePoint. Given that we are well funded, we have the resources necessary to pursue any opportunities I'd like to touch on our ESG initiatives. Specifically, WidePoint has developed a robust device recycling program that includes conserving precious resources and minimizing electronic waste, while committing to reducing carbon emission through energy efficient practices. WidePoint is also participating in efforts to preserve green space by converting unused property around one of our office locations into a rewilding area. Through these ESG initiatives, WidePoint is dedicated to environmental stewardship and sustainable business practice for a greener future.

Speaker 1

Looking ahead into fiscal year 2024, we expect revenue to range between $120,000,000 $133,000,000 and adjusted EBITDA range between $2,100,000 $2,400,000 Additionally, we expect free cash flow to range between $2,000,000 $2,300,000 We are proud of the significant steps taken this year to enhance our financial health through a series of strategic initiatives and investments made this past year, as evidenced by our positive cash flow in Q4 2023 and improving margins projected for 2024, especially with our managed services. WidePoint is at a turning point and with a solid foundation and clear vision in place and the management team to execute our growth plan, we remain steadfast in our commitment to driving sustainable growth and creating long term value for our shareholders, employees and communities we serve. With that said, we are ready to take questions from our analysts and major shareholders. Operator, will you please open the call for questions?

Operator

Certainly. Everyone at this time, we'll be conducting a question and answer session. Your first question is coming from Scott Buck from H. C. Wainwright.

Operator

Your line is live.

Speaker 4

Hi, good afternoon guys. Thanks for taking my questions. Jen, I'm curious with the 2024 guide and the contracts that you guys have in place, can you give us a little idea of maybe what's already in the bag, I guess, for 2024 versus what you might have to go out and still earn to reach your guided revenue level?

Speaker 1

In terms of our guidance on the top line, I would say 60%, 65% of that is in the bag. And we also have things that we have a fairly high confidence in. And so in terms of what we call percentage win, RP win. And so 65%, 70% in the bag and we have the other portions of it at a very high win percentage. So we feel pretty confident to be able to hit within the guidance provided.

Speaker 4

Great. That's helpful. And how should we think about the cadence of revenue through the year?

Speaker 1

The cadence of revenue should be like it was in 2023. We should see sequential improvements as we head throughout the year. There may be some lumpiness in like the end of the Q1, beginning of Q2, because there are some one time value added resale stuff that comes in. And depending on the timing of that, it could be lumpy, but we still see sequential improvements in revenue and profitability quarter over quarter.

Speaker 4

Great. And then turning to OpEx, besides the some of the investments you're making on the sales side, can you support the growth you're expecting with the existing cost infrastructure or are there other places where you need to spend a little bit more to help support that?

Speaker 3

Hey, Scott. This is Bob George. In terms of infrastructure, we don't see a whole lot more spending. I mean, we do have inflation adjusters in our forecast, but no significant spend on anything in the OpEx side, a little bit more on the sales and marketing side, which I think we talked about in terms of strategic hires, but nothing significant.

Speaker 4

Okay, perfect. And then last one for me. Jane, you talked about M and A a little bit in your prepared remarks. I'm just curious if we could dive in there a little bit more and you could talk about what kind of criteria you would be looking at to potentially get a deal done?

Speaker 1

Yes. In terms of our M and A and potential acquisition is that that's kind of on back burner. I mean we're not But we are every now and then out there kicking the tires, looking at opportunities. And what we're looking for in terms of capabilities are companies that either do the same thing that we do and essentially buying their customers and moving them on to our delivery infrastructure and eliminating the redundancies and making those deals immediately accretive or looking for companies that potentially can deepen our capabilities like those companies that have specific capabilities in artificial intelligence that could help us deepen our capabilities. And so those are the types of capabilities that we're looking for and we are also looking for companies that are stable and profitable.

Speaker 1

And we don't want to look for companies that are sort of pre revenues, if you will, because that may endanger our financial performance. So, we're looking for safe bets, singles and doubles. We're not swinging for the fences when we're looking for these opportunities.

Speaker 4

Great. Well, I appreciate that and congrats again on the results guys.

Speaker 1

Great. Thank you. Operator, any additional questions?

Operator

Question on the U. S. Federal government budget. Now that President Biden has signed for the fiscal year 2024 budget into law, what does that mean for WidePoint?

Speaker 1

Thanks for that question. As you know, the ink is barely dry on the budget bill. And so there are very few details on the federal budget and especially the Department of Homeland Security budget. However, what we do know is that our contract is considered essential services and contract funding was approved by all of our approved for all of our current task orders. And as such, we expect our contract to be fully funded and it will be business as usual for us.

Speaker 1

We will inform you of any material changes to the status of our contract with the Department of Homeland Security and our federal government agencies by issuing press releases as necessary. The status of our contracts with all of our customers are essentially very similar to that of our DHS contract. And again, we'll keep you all informed. We have press releases if anything material happens.

Operator

Thank you. A follow-up question on the U. S. Federal government budget. There has been a lot of discussions specific to the Department of Homeland Security budget and potential budget cuts too.

Operator

Can you provide some additional color as to how the new budget impacts WidePoint and specifically to your contract with DHS?

Speaker 1

Right. And as I said, the ink is barely dry, but we have heard in the news that the budget of DHS was one of the sticking points. We have very few details about DHS's budget. However, we can tell you that all of our current task orders with DHS are fully funded. There is also some good news on our DHS contract front that we can share.

Speaker 1

As you know, the contract has a ceiling of $500,000,000 and I'm happy to report that based on our current contract run rate and funding commitments on our task orders with DHS, we are nearing the contract ceiling. So we are in communication with our counterparts at DHS to chart a course forward for the remainder of the contract period until the end of 2025. The likely course of action will be to raise the contract ceiling or recompete the contract earlier or maybe even extend the contract for a few more years. These are all potential options that will help WidePoint. As we learn more, we will provide additional detail.

Speaker 1

But suffice it to say that it is good news that we are running up against the contract ceiling.

Operator

You mentioned in your remarks that you have won another contract with the federal government that may grow into one of your largest government contracts except for your DHS contract. Can you please provide additional details on this contract?

Speaker 1

Sure. We did talk a little bit about that and Jason talked about it as well. But we can tell you that we did win a material new contract with a quasi federal government entity And we also mentioned that we team with 1 of our strategic partners to win this contract. I'm happy to report that the implementation is going well and we are already in talks with the end customer who is interested in the optional services that we offered in our proposal. As we upsell these optional services, we should see a material increase in the contract value.

Speaker 1

We will provide additional details as they become available, but suffice it to say that we are very excited about this opportunity as well as our new strategic partnership and we will name the end customer and the strategic partner as we are allowed to and we should be doing that through a press release coming up shortly. We also have identified several opportunities that we are already pursuing with this strategic partner. And I will mention that we displaced one of our main competitors to win this quasi government organization's business. And so we feel pretty good about our future prospects there.

Operator

You mentioned in your comments that your capital investments are largely completed and that WidePoint will be free cash flow positive. If so, what is your plan for capital allocation?

Speaker 1

Yes, I can confirm that our CapEx was materially completed at the end of Q4 2023. Also in Q4, we experienced free cash flow of approximately $300,000 and see this trend continuing for the foreseeable future. We should see our cash balance grow throughout 2024. The management team is weighing various options along with input from our input and guidance from our Board to including increased investment in sales and marketing, strategic hires, stock repurchase program among others. As we validate our forecast and analyze our options, we will be forthcoming with additional information on that front.

Operator

You mentioned in your comments that your sales pipeline is large and growing. Can you quantify or provide some additional color on this front?

Speaker 2

Yes, sure. I can take that. So, we've seen a substantial increase in our pipeline due to recent wins of material contracts. So, those closures, they've created transportation sector win we announced in Q4. On the MMS front, with our recent wins in displacing our direct competitors, as Jin mentioned earlier, that has paved the way through our systems integrator partnerships to get a number of new opportunities.

Speaker 2

And lastly, as I stated in my prepared remarks, IT authorities has been on a roll closing new deals and this is largely due to a successful channel partner program created to help supplement boots on the street while keeping overhead costs at a minimum.

Operator

At this time, this concludes our question and answer session. If your question was not taken, please contact WidePoint's IR team at www.wygateway grp.com. I'd now like to turn the call back over to Mr. Jin Kang for his closing remarks.

Speaker 1

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 for joining us today for WidePoint's 4th quarter and full year 2023 conference call. You may now disconnect.

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