David Fore - IR Steve Komar - Chairman & CEO Jim McCubbin - CFO

Mike Crawford - B. Riley & Company Gregg Hillman - First Wiltshire Security Management

Please stand by, we're about to being. Good day and welcome to the WidePoint Corporation First Quarter 2016 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the call over to David Fore of Hayden IR. Please go ahead, sir.

Thank you, operator. Good afternoon to all participants in WidePoint's first quarter and full year 2016 financial results conference call. With me today are WidePoint's Chairman and CEO, Steve Komar; and Chief Financial Officer, Jim McCubbin. Steve will provide an overview of the quarter's developments and accomplishments and Jim will provide additional financial and operational review and outlook. Then we will open the call to questions from participants. Before I turn the call over to Steve, I would 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, expects, plans, anticipates, predicts, forecast, 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 our WidePoint's Annual Report on Form 10-K, its quarterly reports on Form 10-Q and other SEC filings the company releases. Actual results may differ materially from the 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 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 Chairman and CEO, Steve Komar, for opening remarks. Steve?

Thank you, Dave, and good afternoon to all you that have joined us for this quarterly earnings and investor call today. As always I would like to express our appreciation to all of you for your continued interest and support of WidePoint Corporation, and particularly for giving us the opportunity today to share with you our progress toward realizing both our strategic goal targets and our march towards sustainable profitability and investment returns to our stockholders. The first quarter's financial results represent a strong start to the year for the company. With double-digit year-over-year growth in both revenue and gross profits. And perhaps more importantly to note that that represents sequential improvement in each of those measurement points versus the prior two calendar quarters. The combination of this revenue and gross profit result led to a substantial reduction in our net operating and EBITA losses for the first quarter results that we are sharing with you today. In terms of specifics, we're delighted to report that first quarter revenues increased to a record $20.5 million, a 16% increase from the $17.7 million during the first quarter of 2015 and frankly somewhat better than our own internal first quarter revenue projections. This improvement was accompanied by gross profit performance of $4.2 million, roughly $1 million better than the immediately preceding fourth quarter of 2015. And finally we experience material reductions in our operating losses, cutting our net operating loss in half and putting those within striking distance of breakeven on our EBITA basis. These metrics are an indication of our growing positive trajectory which Jim will discuss in the course of his financial comments. This quarter's revenue increase was primarily driven by growth from our ongoing penetration and broadening of existing agency relationships under the Department of Homeland Security BPA. During the first quarter, we received five new task orders, up from a lesser amount in the first quarter of 2015. Also during this quarter we witnessed an increase in our higher margin, identity management contracts and sales, which from a revenue perspective was partially offset by seasonal weakness we experience in our lower margin software reselling efforts. This overall revenue mix led to a sequential improvement in our gross margins versus the two prior quarters and we anticipate that identity based certificate solution revenues will continue to increase as we fully roll out our mobile device and derive certificate solutions to a more receptive and security-conscious marketplace in 2016 and 2017. These are all good early indicators as we work toward achieving our 2016 stated goals which we believe should continue to drive our progress in building investor and stakeholder enterprise value for all of us involved with WidePoint. Beyond the DHS BPA opportunity on the government side, the outlook for the cyber sprint identity assurance initiative mandated by the U.S. Federal Government should present additional ECA and [ph] certificate sales potential that will favorably impact our business positively at some point within this government fiscal year. In addition, efforts are well under way to add to the roster of federal agencies utilizing our telecommunications management solutions. We have several alternative contracting vehicles that are available to us. On the commercial or enterprise market side of our business, we believe we have now reached the level of maturation with some of our large key partner relationships such as AT&T and Samsung. We are actively co-marketing with them and others in verticals such as financial services, healthcare and pharmaceuticals with rapidly expanding pipelines in each. In addition, during the first quarter we launched a new relationship with yet another large partner, Hewlett Packard Inc. It is planned that via this partnership, WidePoint and HPI will promote solutions that incorporate the WidePoint certificate on device, secured environment solution set for the full lineup of HPI mobility products, including the recently announce HP Elite X3, popularly referred to as a phablet. Similar to our other large partners, the HP relationship will initially focus on healthcare and financial services. But we also have the opportunity to jointly pursue the education vertical in which HPI possesses and entrenched competitive position. Obviously we're very excited to have another world class organization working with us to penetrate our target and new markets. Lastly, we continue to pursue the expansion of our European community based data analytics and electronic bill presentment software capabilities into the US market via our Soft-ex communication Subsidiary while simultaneously expanding our telecom expense management solution into European markets to meet the increasing global support demanded by some of our larger US and multinational customers. Additionally on the more day to day front, Soft-ex continues to add customers in European and Mid-East markets where it's now in trenched and well regarded analytics solutions. And during the first quarter, Soft-ex won a contract to supply the business customers of Dublin Ireland based EIRCOM or EIR as it's branded, the largest telecom provider in the Republic of Ireland. With an Online Bill Presentment and Analytics solution, we remain very aware that our formula for success not only includes not only revenue and gross margin growth but an optimized and efficient delivery infrastructure. We are continuing to make progress with a series of initiatives to ensure operational profitability including some changes to our sales source and strategies. We have also reduced non-critical spending and are deferring non-core product expenditures as well as implementing expense control programs in both our support and administrative areas. While these expense reduction programs had little immediate impact during the first quarter, we expect that this should be a continuing process throughout the year and we anticipate seeing a more visible and more meaningful impact of these activities during the second and third quarters. The operational achievements and our progress towards our 2016 goals are of course satisfying and speak well to the outlook for WidePoint but I think it quite important to take a minute or two to better understand the management team feels, we thus position WidePoint for the future. What this means to me is that we must have a very clear vision. Not only for the next few years but of the value proposition to differentiate our core products and solution set in the market place and from our competitors. We do believe that we are at the threshold of new opportunities driven by customers and markets now realizing the threats and the complexities and costs associated with managing and securing their mobile communication environments. And that includes access, identity as well as the growing mobile communications environment. Our recent experience affirms that we are in a unique position to help customers and prospects meet these challenges with a cost effective and secured set of converged identity and TLM solutions that we in fact offer today. Think about it, WidePoint offers the most effective and affordable high security answer to stopping data thieves at the door or at the mobile device and is the same high level of tested proven security now in use by the NSA, the department of Defense, and the US Treasury. WidePoint is the leading provider to the US Government for telecommunications lifecycle management services. Rigorously tested to be compliant with the US Data security regulations. Bundling these core capabilities gives us a distinctive perhaps unique advantage. Not only does WidePoint have these solutions in place and available but it provides them in multiple flavors to meet customer needs and desires and has done it multiple times for government, industrial and commercial enterprises. That is our value proposition. We believe that it is best expressed with the phrase WidePoint - we are your trusted partner; which by the way will become our theme and focus of our strategy with partner's customer and our marketing efforts, as we move forward to exploit future market and other growth opportunities. Finally, to ensure that you don't think we have lost focus on our more day to day goals and before I turn the call over to Jim for his financial analysis, I would like to confirm that we remain very committed to a number of key 2016 quantified goals we put in place earlier this year which include delivering incremental revenue growth between 10% to 20%. Improving gross margin performance to over 25% on a runway basis before the end of the year, reducing sales, marketing & general administrative expenses to 20% revenue to a cost rationalization program combined with revenue growth. Delivering meaningful new revenue from our large partner distribution channel programs. This has been a long time coming that we really believe we are in the threshold and the cusp of providing some significant new news in the course of the coming quarters. Also accelerating the penetration of unserved Federal agencies and state and local business opportunities, creatively marketing and ultimately delivering initial cash quarters for the remaining two DHS agencies under our DHS BPA. Launching a fully productized certificate on device solution featuring either internet or remote enrollment capabilities by the second half of 2016. Rolling out our enhanced GUI and feature functionality for the TLM platform by the end of the third quarter of 2016. And accelerating the platform of migration of 50% of TLM customers by revenue to the i-10s TLM platform by calendar year end. Finally, launching a US penetration market and pipeline build of our Soft-ex data analytics and electronic bill presentment offers all while we continue to explore avenues to further accelerate the realization of increased Enterprise value for the benefit of our stockholders. In summary, we could not be more excited for what the future holds for WidePoint both in 2016 and the years to come. I would like to thank you for your attention and support of WidePoint. I would now like to turn the call over to Jim McCubbin, WidePoint CFO for an in depth discussion of our quarterly financial results for the first quarter of 2016. Jim?

Thank you Steve, hello everyone. Thank you again for joining our call today. Today in my remarks I am going to discuss and review our first quarter 2016 financial results. In the first quarter revenue grew approximately 16% to $20.5 million from $17.7 million in the same period last year and approximately 10% as compared to our fourth quarter 2015 revenues of $18.7 million. Steve mentioned we were awarded 5 task order under the DHS BPA contract during the first quarter in the first quarter of 2016 as compared to four task orders in the first quarter of 2015. And these task orders issued included increased sales of higher margin device and necessary products. In the first quarter of 2016 we continued to see growth in carrier services. Carrier services growing approximately 40% to $12 million over first quarter 2015 revenues of $8.7 million and 20% over fourth quarter 2014 revenues of $10.1 million. Managed services saw slight decrease in the respective periods as we witnessed to shift higher margin services that did not quite offset a reduction in lower margin software selling activities as well as lower unit pricing as we hit volume threshold levels under our DHS BPA agreement. In the first quarter profit grew approximately 18% to $4.2 million from $3.6 million in the same period last year and approximately 30% as compared to our fourth quarter 2015 gross profit of $3.2 million. Again the increase in gross profit was largely related to higher ratio of higher margin devices as necessary sales. Expansion of higher margin managed services with existing customers which were partially offset by reduction in lower software margin reseller revenues. In reviewing our SG&A expenses, SG&A remained inline approximately $4.5 million between both periods. Our SG&A costs do not generally fluctuate materially as many of our costs are fixed but we have recently undertaken a project to optimize our SG&A expenses as we drive to find further efficiencies within the organization with the focus on driving towards operational profitability in 2016. Our product development for the quarter were approximately $257,000 or 1% of revenues as compared to $69,000 or again 1% of the revenues in the same period last year. We escalated our go-to-market development activities associated with our certificate under the device identity management solution during the period. We do consider the cost associated in maintaining and developing new products and services as vital to our ability to compete in the marketplace. And deliver the solutions that we believe our clients desire. That said, we view the current spike in expenses relative to the first quarter of 2015 as non-recurring over the longer term as these expenses may rise and fall periodically as we continue to support the go to market of our channel partners. As a result of greater revenues and gross profitability, relatively flat SG&A expenses, along with slightly higher product development expenses, we witnessed improvements in our adjusted EBITDA losses, operating losses and net losses in the first quarter of 2016 as compared to both first quarter of 2015 and the fourth quarter of 2015. Adjusted EBITDA losses improved approximately $500,000 to a loss of $169,000 from a loss of $665,000 for the loss of respective first period of 2016 versus 2015 and adjusted EBITDA losses improved approximately $700,000 from an adjusted EBITDA loss of $881,000 in the fourth quarter of 2015 as compared to an adjusted EBITDA loss of $169,000 in the first quarter of 2016. It should also be noted that if we exclude the approximately, $250,000 expense in product development, efforts in the first quarter of 2015, adjusted EBITDA loss would have been positive. Given these results, net losses also improve from approximately $1.2 million in the first quarter of 2015 and $1.1 million in the fourth quarter of 2015 to a net loss of $659,000 in the first quarter of 2016. Now for a quick comment on liquidity. We ended the period with cash and cash flow approximately of $6.3 million and with working capital of approximately $7.8 million. During the first quarter we witnessed and unusual reduction in accounts payable and the billed in the unbilled receivables which should correct in the second quarter. We view the reduction of cash in the second quarter as aberration. In addition, it should also be noted that we also renewed our current credit facility with Cardinal Bank as of April 27, 2016 and extended the maturity date of the facility through April 30, 2017. So looking forward for the remainder of 2016, the first quarter has clearly advanced our drive to meeting our goals of achieving our new growth of between 10% and 20% over fiscal year 2015. Given our current concentration of customers and timing issues with task orders driven of course by our customers, it's difficult for us to project order by order results but we do believe we are on a clear path to reaching our annual goals. Our first quarter revenues exceeded our expectations and we are pleased with the results. As we continue to focus on driving higher margin services and optimizing our SG&A expenses, we continue to drive towards our goals of achieving operational profitability in 2016. So with that, I would like to turn it back to you Steve.

Thanks, Jim. I would like to now open the call to our listener's questions. Operator if you can assist us by opening the line for questions and comments by our listeners that would be greatly appreciated.

[Operator Instructions] And our first question will come from Mike Crawford from B. Riley & Company.

Nice to see you on track for the revenue target of 10% to 20% growth. I understand that's a pretty wide band particularly with carrier services fluctuating somewhat based on use but is there a way you can provide some additional color on what you expect to see in relation to managed services which are much higher margin?

Well, there's no question Mike in our minds that that's the pathway and the key to our meeting our goals this year. All the emphasis on that, I have made a couple of references to some near terms ECA and EKI opportunities. We clearly are focused upon generating additional sales and services in the managed services base. Literally across the board in terms of our security obligations and that's why the telecom sector in terms of some of the higher margin opportunities so yes, it is the pathway, it is the focus if not the very major focus of our efforts going forward. And although we had an okay performance for that in the first quarter, we are all well aware of the fact that we need to increase that and we continue to grow that sector for us to be able to succeed.

Okay. Thank you and then regarding HP can you just describe a little bit about process that you have undergone to get to this stage with that company?

Basically it was a function of engaging with their marketing and development organization. And passing some additional or initial snip tests in our ability to work together and whether in fact we could come up with a common strategy that would interest both parties. We then got engaged with some of their product planning people to talk about how we could bring the product capability together. That is all gone well, but honestly Mike it's most recent of our initiatives and it's got its way to go yet. So from my expectations, I would not expect to see any revenue performance until the latter part of this year at the earliest. But, the process is moving along, there is a lot of enthusiasm on both sides and we hope that's going to turn concrete in the course of the next couple of quarter.

Okay. Thank you just two quick questions. If you don't mind. Some of your other partnership efforts that at one point were referred to pilots or more recent as systems architecture analysis or earlier stays in pilots but do you envision some of these analysis leading towards pilots that provide WidePoint monthly recurring services, revenues for certain storage derived managed?

Yes, we do, perhaps we have allowed a little confusion on terminology Mike and maybe I can try to clarify that. The original pilots that we talked about were on the government side and those were pilot programs for search and roll-outs through several of the agencies. For plenty of any number of reasons those have either been suspended or waiting additional funding. In the interim we pushed forward with our large partner relationships specifically with AT&T for openers and put in place a number of new relationships that focused on rolling out security environments. Because of the profile of some of these customers, this involved us getting very deeply involved and not only providing the search, the capabilities but also providing systems architectural support to these organizations to allow them to implement and use the capability. And we have got literally three of those that are ongoing. They are on the commercial side in terms of enterprises but they are on the security side in terms of the product capability being offered. So we view this quite positively, we hope that, it is our hope that we will be able to restart the government' side pilots but in the interim I am moving forward very aggressively on these system's architectural solution that should translate into ongoing search and managed services environment revenues.

Okay. Thank you and then final question related to strategic alternatives which is a word I believe you used in the last conference call. The board turned thinking is regarding that subject?

Well, Mike there is an easy answer and I think I am going to give it a lot more time in response to the question that I did in the original statement. But to try and answer succinctly, this has not been a topic for discussion at our board. There is no desire or interest to pursue that as a current alternative what we are trying to do, to bring a business of profitability and maximize our opportunities in the marketplace. It was a statement that was made in sensitivity to shareholders that had been around for quite a while, and our comments to them was we will keep our options open to discussion or all opportunities to allow us to accelerate return to shareholders but there is no current plan, there is no board involvement and all this is, is a signal that we are always open to create an alternative but nothing more.

Okay. Thank you very much.

Thank you Mike.

Our next question comes from Gregg Hillman with First Wiltshire Security Management.

Hi, first all for Soft-ex, did you break that up? Is it running on the run-rate when you bought it, can you comment on that, its profitability, its prospects.

Yes, I can comment on the number. It is at or better than that run-rate we purchased it. It is a slow growth business but it has grown. Yes, we are also talking about the fact that we are also dealing with a Euro and British Sterling UK environment that anything has become a drag in the last 3 or 4 months in terms of reportable profits in US dollars. This has nothing to do with the underlying business itself and its dynamics so revenue share growing, business is solid. We definitely have it at a higher revenue level when we acquired it. We think we made a very wise purchase and we still in the leverage of processing it to cover. I don't really see any bad news on that front at all.

Okay. And in terms of your relationships with systems and which your value-added resellers [ph] apart from like you said you had a relationship with AT&T, Samsung, Kyocera which could end up being big, you have any like relationships with value added resellers or system integrators that will get you into geographies you are not into. Basically, important relationships that could give you revenues.

Well, that's bit of a hard one to answer. We do have existing relationships with large system integrators such as large system integrators, Northrup and Lockheed and we continue to try to leverage those into new opportunities. We do not advertise them as our “800 lbs. Gorilla Partners” because relationships are bit more passive and tied to individual deals and opportunities instead of AT&T and Samsung who have a very pro-active partnership with us and we are co-marketing together. We are seeking opportunities together and we have a structure that we think brings a higher level of opportunity both across the board and in the longer term. We also have some relationships with value added resellers but frankly and some of those are reasonably well known names but candidly and frankly that's not a business that we are pursuing aggressively because of its low margins and it's just not a focal point for us going forward.

Okay. I will get back in the queue. Thanks.

Our next question will come from Sam Donaldson, private investor.

Gentlemen, congratulations on a terrific start. For me, I couldn't be more pleased and particularly want to just note, that given the perfect storm of things that went wrong last year, some would have just hunkered down and tried to lie low and tried to buy time but you didn't do that because you lie low, you don't go anywhere. So I just say again congratulations to you. And I have a question of this business about the potential sale of the company, lot of speculation as you know about that. Some people say that we get profitable, we get good price and making good profit and that's good. Some think wait a minute, if we are going to profitable and keep adding to that let's way to get the best try and I know you are not going to give us any specific but just talk generally about your view of a possible sale somewhere down the road.

Well, first Sam thank you very much for the kind words about the first quarter. We are comforted by it in terms of it projecting us in the path and the direction of where we need to go and we are also little humbled because we know we have a lot of challenges to get there.

Let me just say you have a number of investors this year as you know who stuck with you, this management and this company and will continue to do so and I only speak for myself but I bet you that I reflect their view.

Well, thank you I appreciate that on your part and on their parts. As to your second question, I don't know where to start. Let me tell you why. There's nothing going on, there are no activities, there's no discussions about selling the company and frankly and candidly, it will be the wrong time and a foolish move. We think we are at the threshold in the cusp of some really good performance. We have got a very exciting market waiting for us out there to exploit and that's where we are spending all our efforts. And if you ask me how I feel 2 years or 3 years from now, my answer is going to be I really don't know and all we are going to do is stay focused on building this enterprise and maximizing the return to shareholders. There is no plan, we are building the enterprise.

Well, I think that's the right thing to do. We aren't day traders. But if down the road these objectives are fulfilled and WidePoint continues to grow, dominate the field is so big, getting bigger, the potential of this company is unreal and may just benefit my estate at my age. But doesn't matter. I think down the road there is a big payoff day and you keep going.

Well, I think we are consistent on that. That's the way we feel over here as to the long term future, we will see. But right now I think we have got a great opportunity waiting for us and frankly that's the only focal point that I will allow for any of our people to go. We are more than busy enough just trying to get through the goals this year and frankly stay focused on the future in terms of the market opportunity. I tried to cover that in a few of my comments about how we are viewing ourselves going forward and how we are going to get to the next stage or level which will allow us to have very effective, a very impressive enterprise valuations and I think that's in everybody's best interest. That's where we are spending our time Sam.

Again, I thank you and Jim and the entire team, and some of the team that left WidePoint may have regretted their decision. Okay, Bye.

Thank you Sam, appreciate it.

And next we have a follow-up on Gregg Hillman from First Wiltshire Security Management.

Can you comment on alternative solutions other than search for security for mobile communications? What could it be positioning itself against?

Well there are two or three alternative solutions out there. Some of them pretty visible commercially if you turn on your TV, but we are talking about any entirely different level of security as it relates to mobile phones which has become probably one of the primary points of intrusion and hacking. It becomes increasingly evident that a very large portion of the total mobile phone, mobile device, mobile communications environment, really needs a much higher level of security. Perhaps not in full customer retail market place today but certainly in anything associated with access to intellectual property, access to commercial enterprises and certainly to Federal Government interaction. Without being arrogant, we really just don't think there is anything out there that can match up to the capability that we offer today as a proven, tested, delivered product.

I think there was something on CBS two or three weeks ago, there was flaw in the cellphones, it's the protocol that the carriers set out for cellphone communication, think it was F2 or something, do you know what I am talking about, you remember that?

I do recall seeing that and I thought that a fix has been put in place for it. And frankly we do see several of these instances but maybe that's a little outside my purvey in the sense that we are talking about a different level of access into the device that is structural in terms of the motherboard and whatever else. That would have to be addressed by the manufacturer and the service provider but we would do that in collusion with them to ensure that the service that we bring to the mobile device would not be compromised.

Right okay. That's all I have right now. Thanks.

Great, thank you very much.

At this time, I would like to turn the call back to Steve Komar for any additional or closing remarks.

Thanks Operator. It appears we have addressed all of our listener's questions and operator thank you for your assistance. As a closing comment to our attendees, we are really very excited for the outlook to our business growth and the realization of our goals this year. So we continue to thank you very much for your interest in WidePoint. On a side note, for those of you that might be attending the event we will be presenting the upcoming B. Riley Investor Conference in Los Angeles on May 26. Again, thank you for your time and commitment, and your presence today, and we wish you a very pleasant evening.

And this does conclude today's conference call. Thank you for your participation.