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Tuesday, 03/23/2021 6:15:58 AM

Tuesday, March 23, 2021 6:15:58 AM

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WidePoint 2020 Q4 Earnings Preview: Expect Another Blowout Quarter

https://seekingalpha.com/

Mar. 22, 2021 4:25 PM ETWidePoint Corporation (WYY)SNX8 Comments4 Likes
Summary
Q4 earnings preview. Why another blowout quarter is in the cards.
Three things investors need to watch.
Recent company highlights and contract awards, including receiving more than $20 million in task orders in Q1.
Why shares are a no-brainer at current levels.
WidePoint (WYY), a leading provider of technology-based management solutions, will release its fourth quarter and full-year 2020 financial results after the close of the U.S. markets on Tuesday. The conference call will take place at 4:30 p.m. ET.

After beating analyst expectations on both the top and bottom lines the last three quarters, WYY looks to continue to keep the momentum going. So with that said, let's take a look at what Wall Street expects for the upcoming quarter.

Wall Street Expectations
Revenue: $39.6 million
Earnings Per Share: $0.02
WYY Revenue History
Nov. Q3

Aug. Q2 May Q1 March Q4
Actual Revenue $57.5M $54.8M $39.7M $28.1M
Revenue Estimates $44.8M $42.7M $25.8M $20.9M
Difference + $12.7M + $12.1M + $13.9M + $7.2M

WYY has beaten revenue expectations over the past four quarters with an average beat of $11.4 million. While past performance is never a guarantee of future performance, one can still gain a lot from studying the tendencies of companies and how they do on earnings day. We've demonstrated this in previous WYY articles here, here and here.

Most executives tend to “underpromise and overdeliver,” however, some companies do it more drastically than others. For example, WYY's new management team has always been pretty conservative with projections and expectations, and really loves overdelivering on earnings day as you can see in the table above.

Last quarter, revenues soared to a record $57.5 million, easily soaring past analyst estimates of $44.8 million. In our Q3 earnings preview — and knowing the tendencies of management — we projected revenues would come in around $53-$55 million. Once again, we were pretty close with our estimates, with Wall Street analysts continuing to live under a rock with their projections for the company.

Just looking at 2021 projections, Wall Street will be playing catch-up once again as current estimates aren't even close to what will likely take place. We believe WYY will see revenues around $150 million this year, while analysts see revenues coming in at just $120 million. As we noted in previous articles, the year-over-year drop in revenue is due to the 2020 Census project that was added last year.

Investors should remember that the company was already on track for strong revenue growth in 2020, however, adding the Census project — a one-time event — accelerated top-line growth even more. Taking this one-time event away, the company is still on track to deliver revenue growth for four consecutive years. While we don't know exactly what total census revenue was for 2020 just yet, we estimate that it brought in anywhere from $70-$80 million. If we remove census revenue from expected full-year 2020 revenues, the company would still report revenues in the $120-$130 million range, or 23% year-over-year growth at midpoint ($125 million). This is in-line with previous years as the company reported revenue growth of 22% in 2019.

Our readers know, we've been very bullish on the company and we have been spot on with our analysis. And with a strong start to the year so far, our estimates — $150 million in revenue for 2021 — could even be on the low end.

So what should investors expect with Q4 earnings?

Based on WYY's earnings history and full-year guidance, we wouldn't be surprised to see Q4 revenues come in around $48 million. This is well above Wall Street's estimates of $39.6 million and would represent year-over-year growth of more than 60%. And for a company with a market cap just over $90 million at the moment, this is very cheap and undervalued, especially in a market when so many companies are trading at sky-high valuations.

In June, the company announced that it was raising full-year 2020 revenue guidance to $185-$195 million. To date, the company has recorded revenues of $152 million. If WYY reports $48 million or more in Q4, the company will have surpassed $200 million, hitting our target just like we've been predicting.

We also expect the company to post earnings per share ("EPS") around $0.10. If this happens, it would mark the fourth consecutive quarter that EPS has been at least $0.10 and would easily beat current estimates of $0.02. As we've outlined before, this continues to be a major milestone for the company after years of breakeven or negative EPS. In our article back in May, we noted how EPS could hit $0.40 in 2020, while analysts at the time forecasted EPS of just $0.10.

Analysts continue to undervalue WYY based on their forecasts. Analysts raised their EPS forecasts in the fall from $0.10 to $0.26, but haven't raised them since, despite WYY having already delivered EPS of $0.33 through the first three quarters. The company stands to have another positive quarter in Q4, and will likely surpass our EPS target of $0.40.

What To Watch
Managed Services: During Q1 last year, WYY saw managed services — the company's high-margin business — jump from $7.5 million to $11.5 million. This represented a 53% year-over-year increase. In the second quarter, the company saw managed services revenue increase 22% year-over-year to $9.8 million. This was still solid in our view and investors should not get caught up in looking sequentially (Q1 vs. Q2) primarily due to the seasonality of contracts/awards. In Q3, managed services revenue soared 38% year-over-year to $12.5 million.

In total, managed services has grown 37% year-over-year to $33.8 million in 2020 and will likely top $45 million this year. Again, margins on managed services are more than 50% and is where investors should focus most of their attention to. If assigned a multiple of 3x or 4x, just based on its anticipated managed services revenues for 2020, WYY would be valued between $135 million and $180 million or $15.88 and $21.17 per share. We'll be watching to see if management gives an outlook for managed services as well as any additional color about its high-margin business.

Margins: Due to the 2020 Census project, revenues have grown while margins have dropped. A large portion of the Census revenue is on the company's carrier side — its low-margin business. In a past article, we explained the tradeoffs of this and how in the grand scheme of things, the project helps position the company better for future deals and success, which seems to be taking place with recent awards.

As you can see in the table above, margins have been trending down over the past three quarters due to the company taking on the 2020 Census project. As we've noted, margins for this project are really low and have dragged the company's overall margins down with it. We expect Q4 margins to be a little higher, although pretty comparable to Q2 and Q3. The good news is that margins will start trending higher in Q1 and will only get stronger throughout the year as the 2020 Census project winds down, along with better margins on the $500 million Department of Homeland Security ("DHS") contract the company was awarded in late November last year. We went into great detail about this and you can read more here in our previous article titled "Catalysts For WidePoint In 2021: More Profitable, ETF Inclusion, A Takeover Target And More."

SYNNEX Update + Revenue Guidance: Investors should also watch for any updates on the company's strategic vendor agreement with SYNNEX Corporation (SNX) that was announced back in May. As part of the vendor agreement, WYY has the opportunity to expand sales of its TM2 solutions to government and private enterprises.

This has the potential to be a huge revenue driver for the company. However, due to the global pandemic, it has complicated and delayed training for 800+ SYNNEX resellers who will be selling and issuing WYY's TM2 solutions. However, with COVID-19 slowing down, along with the vaccine rollout picking up steam, some states have already started reopening with many more states expected to do the same in the coming weeks. With the reopening underway, we expect the company to make a lot of progress on this front and can't wait to see where things are at.

In 2019, the company forecasted revenues to be in the $90.0 million to $93.0 million range. Revenues for the year ended up coming in at $101.7 million. In 2020, and even with raised guidance, it's looking like the company will land at least $10 million above its midpoint guidance ($190 million). Like we've said, the company is conservative and loves to underpromise and overdeliver. So if, for some reason, full-year 2021 revenue guidance comes in a bit lower than expected, investors should realize the company will likely easily surpass it like they've demonstrated over the years.

Conclusion
Two weeks ago, the company announced that it secured more than $10 million in Trusted Mobility Management (TM2) contracts during the fourth quarter. This includes new awards, renewals, contract extensions and exercised option periods. What's notable, is that the company continues to expand its TM2 footprint with new clients in new industries.

So far in Q1, the company is already building on that momentum by adding new strategic Identity Management credentialing clients. You can read more about it here and here.

Below are also some screenshots of some of the government awards that have come in this quarter as well. Last week, the company received a $7.27 million task order from U.S. Immigration and Customs Enforcement. The total contract is $81.7 million if all options are exercised. Other contracts include a $9 million order from the U.S. Coast Guard among many others.

So far, the company has received more than $20 million in task orders from the federal government in Q1 and we still have nearly two weeks to go.

Earnings Reaction/Post Earnings Move
Over the past year, shares of WidePoint have been notorious for a big pre-earnings run, followed by a selloff after earnings. Will the trend continue?

We don't believe so and here's why.

First, shares haven't had the big run going into earnings like it has in the past. Second, some of the reasoning for the post-earnings drop over the past two quarters was due to news about a potential delay in regards to the $500 million government contract (CWMS 2.0). With WYY being the incumbent, this spooked investors as they feared that a delay meant the company was not a lock for the award as they thought WYY was. And with half of the company's revenues tied to the contract, many waited on the sidelines.

But all of that is behind us now. The company was awarded a five-year, $500 million contract — if all options are exercised — and has removed a lot of risk for investors, and cleared the company's path going forward. With a lot of catalysts and tailwinds this year, combined with stability due to the recent government award, WYY is in a different position now than what it was in the past. For these reasons, we don't believe shares will see a selloff like they have in the past.

Lastly, WYY is debt free, cash flow positive and is on track to grow revenues 95% year-over-year ($200M) when the company reports results on Tuesday. The company had $11.4 million in cash at the end of Q3, and will likely have around $14-$15 million when earnings come out in a few weeks. With a market cap just over $90 million, current total cash ($11.4 million) represents 12% of the company's total market cap. Overall, we feel shares are in a low risk/high reward position right now heading into earnings and believe shares are a no-brainer at these levels.

Risk Factors
With a market cap just under $100 million, WYY currently falls into the micro-cap sector. Companies in this range come with a higher degree of risk compared to more well known and established companies. And with a low float, shares can move quickly in either direction.

Because WYY competes in a competitive market and against both private and public companies, some competitors are able to offer more scale, which can enable them to significantly discount their services in order to maintain market share. If the company has to resort to deals with lower margins, profitability would suffer. Lastly, WYY's revenue from government contracts is quite large. A change in government spending policies or budget priorities could cause the company to lose revenues. The loss of any contract would also have big implications for the company.
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