WidePoint Is An Attractive Growth And Value Play

WidePoint (WYY) provides SaaS services such as identity, managed mobility, and access management. Its revenue is 80% derived from the U.S. government and 20% from commercial, state, and local customers. Almost all of its revenue is predictable recurring revenue.

The stock sells at a steep discount to its peer group due to lower margins, as a large percentage of its revenue is pass-through with zero margin. This masks double-digit revenue growth, positive adjusted EBITDA over the last seven years, and four consecutive quarters of free cash flow. 

Expanding government contracts, a new certification, a new product introduction, and a new strategic partnership are potential catalysts for the stock to rerate.

U.S. Government Contracts

WidePoint's largest customer is the Department of Homeland Security ("DHS"). The company won the first two five-year DHS cellular wireless managed services ("CWMS") contracts, with the second valued at $754 million and ending in November 2025. CWMS 3.0 is expected to be extended to 10 years and worth $1.5 billion. CEO Jin Kang cited at the recent earnings call that the president-elect may be a headwind in his stated goals of improving corporate efficiency and expanding the role of DHS.

I think that we'll have some tailwinds there. The big focus on efficiency. I think that there was a lot of talk about Elon Musk coming on and now Vivek Ramaswamy going to be leading that effort as part of a commission.

I think because of that, we always tout that we saved our customers on the order of 15% to 35% in their telecom costs. And that is still a message that continues to resonate. So I think that that will also provide some tailwind for our business. And as I said, you know, during the election cycle, the immigration and the undocumented immigration was, you know, was a huge point in the election.

And because of that, I think CBP, Customs and Border Protection and the Immigration and Customs Enforcement, those two agencies probably, and probably others that are related to the Department of Homeland Security, will continue to get, you know, a lion's share of the attention.

WidePoint was selected in May for the managed services portion of the $2.7 billion U.S. Navy Spiral 4 contract. The company was also a subcontractor for the NASA SEWP V contract. SEWP stands for solutions for enterprise-wide procurement. WidePoint is bidding as a prime contractor for portions of the 10-year, $60 billion SEWP VI. Other federal agencies beyond the Navy and NASA have utilized the Spiral and SEWP platforms to secure IT services.

FedRAMP Authorization

The Federal Risk and Authorization Management Program ("FedRAMP") is designed to encourage government agencies to use standardized and secure cloud services. WidePoint has applied for FedRAMP certification, which requires compliance with the National Institute of Standards and Technology security controls. Certification will strengthen the company's competitive edge in bidding for new contracts.

MobileAnchor

MobileAnchor, a digital credential solution for mobile devices, was commercially introduced just a few months ago. Pricing was not disclosed, but the device is expected to have a high-profit margin. It provides enhanced security and cost-cutting as it is applied to smartphones already in use. Chief Revenue Officer Jason Holloway said at last week's earnings call:

The timing of MobileAnchor, with the hybrid work component that exists now, actually the timing couldn't be better because MobileAnchor has the ability to be put on those smart devices, which is going to help facilitate that hybrid work environment with the most secure multifactor authentication solution available today.

The device has attracted new customers, including the Department of Education, for securing K-12 schools. 

Device as a Service Partnership

The company announced a new strategic partnership with Cisco (CSCO) for a Device-as-a-service program. This partnership will be instrumental in adding commercial clients. $1.7 million in new contracts have already been signed and will begin adding to the revenue mix in Q4. These new customers include beverage distributors, a sports marketing firm, a popular Florida attraction, and research centers.

Financial

2024 Q3 revenues were $34.62 million, a 35% increase over the same period in 2023, beating estimates by $4.21M. The company also beat bottom-line estimates by $0.03 with an EPS of -$0.04. The company reported $511 thousand in free cash flow for the quarter, an attractive 14% yield, and a 120% improvement over the prior year. Revenues for the first three 2024 quarters were $104.9 million, an increase of $27.1 million, or 35%, from the $77.8 million in the same period last year.

The company reports revenues in two segments: carrier services and managed services. Carrier services are primarily pass-through, zero margin revenue for providing phones on the DHS contract. The overall gross margin was 14%. Gross margin excluding carrier services revenue was 33%

Carrier services were $$22,412,970 and Managed Services were 12,207,463 from the Q3 10Q

The company is well capitalized to fund operations. Due to a change in government billing, large sums are in accounts receivable and unbilled accounts receivable. The company expects to resolve this issue in the short term.

Cash: $5,636,057

Accounts receivable: $8,498,243

Unbilled accounts receivable: $24,784,036

From the Q3 10Q

Valuation

The stock's price-to-sales ratio is .26, compared to its peer group ratio of 3x. Applying just the managed services revenue reported for the first three months of 2024 implies $57 million for the year. It should increase as new contracts have been gained, impacting Q4 revenue. Let's be conservative and divide $57 million by the market cap of $33.52, and we will get a P/S ratio of about .5. At 1x managed services revenue, the stock price is $7.42 per share. The upside is 100%, and the stock would still be trading at a modest multiple.

Technical

The stock price is in a clear uptrend, moving up above the major moving averages.

Risks

The company has not experienced a security breach for any of its clients. Should one occur, such an event would be catastrophic to the stock price. The company is highly dependent on U.S. government contracts, and a loss of existing agreements would heavily impact the stock price. It needs to be clarified what effect the new administration will have on this company, if any. One potential negative would be eliminating the Department of Education, which the President-Elect has mentioned.

Conclusion

The company has established lucrative government contracts and is now pursuing to gain higher margin commercial contracts. The introduction of a new product and partnership with Cisco advance commercial opportunities. The pending advanced certification will further validate the company's offerings. Pass-through revenue masks the company's discount to its peer group based on meaningful revenue.