The KEYW Holding's CEO Hosts Analyst Day (Transcript)

Mar. 1.13 | About: KEYW Holding (KEYW)

KEYW Holding (NASDAQ:KEYW)

Analyst Day

March 01, 2013 1:00 pm ET

Executives

Leonard E. Moodispaw - Founder, Chairman of The Board of Directors, Chief Executive Officer, President and Chairman of Ethics Committee

John E. Krobath - Chief Financial Officer, principal Accounting Officer and Executive Vice President

Joe Gottlieb - Sector Vice President and Chief Executive Officer of Sensage Inc

Chris Donaghey

Analysts

Mark C. Jordan - Noble Financial Group, Inc., Research Division

James Patrick McIlree - Dominick & Dominick LLC, Research Division

Josh W. Sullivan - Sterne Agee & Leach Inc., Research Division

Leonard E. Moodispaw

Good. All right. We're starting out with the usual disclaimer, and those who heard me do this before -- is Jonathan here? Our SEC counsel is around someplace. He always faints when I do this. But as I admit, I'm a lawyer, so my line is, you shouldn't believe anything I say anyhow, therefore, I don't have to read the disclaimer to you. If anybody objects to that, I can read the disclaimer to you.

All right. As I said to you earlier, and welcome, everybody, who's dialing in. If you are envious of us being in Key West, I would tell you, it's raining and cold and windy. So don't be envious.

Some of the early slides of things -- those of us -- those of you who know us have seen before. So we're going to make a few general points off them before we get to the future. What these 4 pictures depict are our main customers. So far as you well know, we have been a pure intelligence company. Over 90% of our revenue comes from those 4 major agencies. I'd mention their names, but I'm not allowed to, so you'd have to deduce what the words on the slide means. So it's not very coy, but the point is, that's our business and has been for years. You will see as the conversation goes on that we're moving further and further down this horizontal path, I give Ken Minihan [ph] credit for that, for calling it that, for taking the technology that we've developed in our work in the intelligence community down a horizontal path, and we'll tell you much more about that later.

And we also talk about the current budget difficulties later. But it turns out that it's somewhat serendipitous. I would like to tell you that I have a grand strategy, and this is playing out the way I planned it, but it's not quite that way. But in these very difficult budget times, the government looks to innovative, creative solutions meeting cost savings, and that's where we come in. So we thrive in these very difficult times. We're very well-positioned to take advantage of it.

What we do for our customers is solve wicked problems, and there's a definition of wicked problems on this slide, but there are the kind of problems that don't have a solution or an easy solution. That's what we thrive on. We have very high-end hardware, software engineers and integrators who work side-by-side with our customers working the hard problems. You'll see on another side, counter-terrorism and cyber are areas of focus. And you can imagine that they're not easy problems to work on. And particularly in the areas of cyber, when you think you might know who the bad guy is, but you find out it's somebody else. And you blow up somebody's computer and just had to be some innocent person in the way. So the challenges we face as a country are extremely difficult. That's where we thrive. That's where we're well-positioned. And if you look back in time, to the early days, we call it the Silicon Valley days, when there were a lot of government facilities out there. It created an environment out there of high-tech people with very creative solutions. That's now the East Coast. We were centered in the middle of the current Silicon Valley, if you will, and the real innovation in the country is coming out of the kind of work we do for the kind of clients we have here. Ordinarily, when I'm talking about wicked problems, I'm leaving it on the technical side, but it's no surprise to anybody, one of the wicked problems we're facing literally as we speak is this evil thing known as sequestration. We've spent a lot of time talking about that with our customers. And unfortunately, our customers are spending a lot of time thinking about it rather than solving some of these hard problems we have to face. So we can only hope that we'll get pass this and get on with life. It is having a significant impact already on business.

But as I said earlier, we're uniquely positioned because of the way we operate with our customers to take advantage of this. And we are seeing additional work come to us because -- obviously, in order to get through this process, our customers need to save money, and the kind of thing we are doing -- an example of that is, in the Intelligence Community, is cloud, are designed to help save money for our customer set. And everyday, literally, we are finding new things that come along where our customers ask, can you help us do this. So in general, we believe the intelligence business is going to be impacted less than the rest of the government, but is still going to be impacted. We think we're well-positioned to take advantage of where we are going down this dual path to make our way through that. There'll be more on that later in the conversation.

These are the areas of focus for us, which I have already alluded to. I roll it all up into counterterrorism. I think anybody intruding on your network is a terrorist, whether they're in the Starbucks down the street or whether they are overseas in some foreign country. There's been a lot of publicity recently about a study showing that the Chinese have been impacted networks. Well, those of us who've been doing it for years, none of that's a surprise. Some companies use that for advertising purposes. It's actually helped us pretty much. But these problems have been around for a long time. That's our area of focus. These are the kinds of the things we are growing in, hiring people and dedicating our resources to, both in the government side, as well as going down this commercial path.

So this is the future for us. We call it looking forward. And this is the horizontal path I alluded to earlier. We are taking all the smart things that we've learned and helped our government customers learn. And applying those to, I'll call it commercial, but very broad solutions, both on the civilian side of the government, as well as out to commercial customers. And there is very strong demand for that. It kind of sounds like it's a new thing, a new direction for us. But in fact, we've had products, and we've been working with the commercial side for quite some time.

So for example, everybody's heard, I think, about Project G, and there'll be more about that in a few minutes and certainly later. But Project G just happens to be there because Projects A through F are things that we didn't talk a whole lot about. And they are things that we have been applying to both commercial and law enforcement needs over the years. If you've seen our numbers, you know that the product side of our business is growing rapidly, and this has been a fairly small part of that. G is a very significant part of our future and will outgrow everything else, we believe, but we have a Project H, and if you look at our website, you will see that, that was just opened up about 2 weeks ago, I believe. And it's taking all the very smart training we've been doing for our government customers in the area of cyber out to commercial customers. So we're enabling commercial customers to learn about cyber through these coursework, which is online, but we also do it in-house. It's going to help us out on Project G because a more informed customer is going to be more responsive when we come talk to them about the needs and the urgency of doing something in the area of cyber. So that's just another one of our offerings that will be -- that we have embarked upon and be going down this commercial path, and we have other things that you see the area -- reference there to big data. We are doing that for our government customers. I realize that much of these terms, cyber and big data are things that everybody talks about. So we're going to try and explain to you why we are different and how we have different ways of looking at these things. We get tired of hearing people talk about how they have all the solutions in cyber when we've been doing it for a lot of years before there was really a name for it. So we pride ourselves on being in front of things -- in front of these things and having innovating answers to things.

I want to talk a little bit about Project G. We use the terminology find, fix and finish, which is what special ops folks do. There are a lot of products out there who find bad guys, find intrusions on your network. And the threat's out there. And we're going to give you a little data about that. It's in your networks. It's a rare network that hasn't been impacted upon. So what we do is take what we have been doing for quite some time for our government customers and improve what we call cyberawareness. We are letting people know what's going on in their networks, either through the G process, which we'll talk about here in a second. So we're finding these things. Now lots of guys can find it and they can charge big piles of money and say, woah, you've been intruded upon. But then what do you do next? They tell you, "Why have you been intruded upon?" And so finding solutions and then fixing them through these policy-based techniques that we use, and we'll be talking about, is a whole different category of solution and offerings in this business. And then we finish it somehow. We, through our automated response system, we fix the problem, and there is a lot more detail to go into on that, which I won't do right now. But that makes us unique.

The companies that do the finding will tell you, "We'll you can get some firewalls." Well, the firewall is still out there on the outside of your network and tell you, what, that you've got something unknown affecting your network, only if they know what it is. The solution seems to be, we've seen some companies say, "Well, if 1 firewall won't work, let me have 5 or 6." 5 or 6 are no better than 1, and if they don't talk to each other, it's virtually useless. What we do is not only use all of those things as our sensors, but we automate the response. You get away from a sys admin sitting there watching the screen and falling asleep or getting tired of seeing the lights flashing. We take care of as much as you'll let us take care of through automation. A recent anecdote we heard was, somebody's view of automation was they send an email saying you've got a problem. Well, who you're sending it to and who's going to pay attention in the middle of the night? So that's another key differentiator. Once again, based on all the work we do for our intelligence customers over the years, and we have been working these advanced persistent threats for years. That's a unique differentiator for us that I -- we haven't found anybody else who could do this. So find, fix and finish is what G does.

Let's see. We can talk for hours on this particular chart. But what it is showing -- and Chris if you just flip through it as you will -- is that it takes at least minutes before people even know that they have a problem, but really, the 95% of the companies that have intrusions are told that they have an intrusion by somebody outside the company. They're not even aware of the fact that they've been intruded upon. And when they find out, the typical number of length of time that the bot -- the bad guys been in the network is 400 days. Well, you can do a lot of damage in 400 seconds, much less 400 days. So it is a severe problem. What we're designing G to do is find it right away, fix it right away in milliseconds, that hopefully -- at least minutes, but down the millisecond, again, a key differentiator for G.

Comparing it to other companies, I've said there's firewalls out there, intrusion detection systems that watch the outside of your network and look for known bad guys. We assume that somebody is in your network. We sit inside your network, build up your behavior or description of it, so we are going from just the bottom left quadrant and then looking for what you know is bad, to the top right where we're doing the find, fix and finish. And you'll hear more about that from such experts as Joe and Ed Jaehne later, but we were able to compare for you the kind of companies who do the bottom left quadrant, all good companies, all companies we want to work with, all of which perform a useful functions, but do not do much in area of fix and rarely do anything helpful in the finish arena.

So where is all of this going to lead us? Oh, I'm sorry, one other point. This is the training I mentioned to you earlier. We call it Parrot Labs. I have no idea where that came from or why we would call anything such that. But it is our new offering in the way of training for commercial customers, unclassified training for anybody, really.

I think that's H. All right. So where is this headed? I'm going to talk to -- very briefly about this chart, and then turn it over to John. We're looking ahead to 2015. We will build up the components of our business, which we will explain to you in a second. So that in 2015, the company looks like this. At least $500 million of revenue. You could read the rest of the chart. Gross margin will be 17% to 19% and GAAP earnings per share of over $1 a share. John will go into each of those in a moment and back up to those and how we get there. But those are the components of it so. Since you know we don't give guidance, this is not guidance. But this is where I expect to be. And those of you who know me know that I'll be disappointed if we don't do better than that. That is without any further significant acquisition. We may make acquisitions, but they'll be relatively small in our estimation. So without further acquisitions, simply organic based on what we've got today, even in this difficult environment, this is where we expect to be. John?

John E. Krobath

So when we talk about revenue, we're going to have to look at where we were in 2012 and where we're going in 2015. And we've really broken it down into 4 distinct areas where we can identify specific targets in like business. The first block is our engineering services, where we did $165 million in 2012. That excludes the radio contract that we got from Poole. We're looking at that growing to about $230 million in 2015. Again, we come back, when we look at that, that is the headcount that we're talking about in our traditional services business. We evaluate when we add folks in that their revenue contribution is $225,000, $250,000 per person in revenue per year. So you can go back and do the math and figure out how many folks we have to add to get to those kind of targets over the next 3 -- 2.5 years. We feel we can do that. We've talked about how many job openings we have. How many positions we have where we can add folks. That's where we're talking about predominantly adding because this is a services-based model.

The second piece is the radio programs. We got about $7 million in revenue off of that in 2012. We envision that growing to the $100 million range by 2015. The $7 million represents most of the fourth quarter for that program, as we talked about on the earnings call. We have about 140 people on that project. And it's continuing to grow. They're continuing to add funding. It's a prime contract with a significant customer from the Essex days of the [indiscernible] company. It's similar to their contract they had back there. The growth path is there. Right now, we're staffing that, it's about 50-50 split between contractors and core KEYW. We'd like to grow that more in the KEYW side for self-performed services. But we're not there yet. The third piece is our Integrated Solutions, which is the segment that we are breaking out now. As reported in 2012, it would have been $72 million, and we had about $4 million from our commercial cyber activity, which is predominately the Sensage activity in Q4. We see that growing to $112 million range as we roll into 2015. This is our air services from the FLD acquisition. It's our hardware-type product that we've had since day 1 at inception. We've picked up a couple of acquisitions that add to that group as well. So we can see a nice growth path for that as we go out. I get into a little more detail on all of these.

The fourth piece is the commercial cyber. As Len talked about with Project G, with the acquisition of Sensage, we have a nice growth trajectory for that. And I'll get into that growth trajectory a little more. That's a little bit of a bigger jump than what we have in the others as we go through the slides.

Chris?

When we talk about the engineering services and the gross margin and what should drive it and where our risks are, we're talking about $230 million of what historically our services margin has been, is in the 27% to 28% range, excluding the radio programs. Most of that work is self-performed, even though we've acquired folks over the year. And we would do a lot of our work as subcontractors, we use a very few subcontractors ourselves with the exception of the radio program. So we don't see a significant change in our gross margin in this area, continuing about 27.5%. We do have the openings to continue to staff it. We've got a lot of spotlight in terms of what we do. And as Len talked about, consolidating and doing things better and quicker for the customer. That will help us. Also, our folks tend to be more senior, which means their solutions and their value to our customers is more highly recognized. Therefore, we feel like we've got a secure position there from which to grow, as well as bring in younger folks to learn from them in order to have the next generation of software engineers and the folks we need on the programs.

The risks. Staffing in our business is difficult. We pride ourselves on the benefit programs we have, being able to attract and retain. But the bottom line in the industry we're in, with the clearance levels we require, there's not a lot of bandwidth of people who aren't employed. So it's attracting people who are employed by other businesses who aren't as happy as they could be with us or getting the cutting edge work as we have on radio, which wouldn't apply here. But in the other area, where staffing is an issue as well, in order to be able to get the skill sets and give people challenging things to work on.

So that's really what we view as the growth. It's not tremendous if you look at a percentage over 3 years. But it is there, and it is a track record. The other thing we have in that number is there was roughly, on an annual basis, $30 million worth of revenue from the Poole acquisition, that's not fully reflected in 2012 number. That adds in as the starting base as we move out, moving towards 2015 as we get 3 additional quarters of that revenue in 2013 and beyond.

Chris? On the radio programs. This is a 5-year prime contract that Poole won and we brought over. It is not up for re-compete. It's out there for us through 2017. We are seeing now the customer adding additional funds to these programs to enable us to expand the scope of operations. As we talked about, a lot of what we do, whether it’s on the cloud side, whether it's regard to the various programs in there, we're providing high-end solutions that are innovative and effective for the customer. That's what draws us. That was the appeal to us to get this contract so that we had a vehicle in order to be able to use our solutions and our folks to help grow the business. As I said, it did about $7 million for us during 2012. We figure the programs as they go out are going to grow significantly. As I said, we're running 140 people on it right now. If you estimate $250,000 per head in terms of a billable rate, that gives you a run rate right now of $35 million a year as we sit here in the first quarter. And just the other day, we had another 12 openings to go ahead and staff additional folks in addition to the ones that we have. This program is continuing to grow. There's a demand continue to be there to go ahead and get us to the $100 million run rate. Again, as we talked about, staffing is key. That's why we're using subcontractors on here. We simply can't find enough people with the right skill sets and the right clearances. So we use our teammates in order to get it in. Would we like to drive it away from the 50-50 to 60-40 self-performed or 70-30, absolutely. But we may not be able to do that. We certainly don't want to drop below 50-50, but we're not going to hold off the spot and a solution for the customer just to get one of our own folks on. We would rather staff the position, more positions will come where we can put our own folks on there.

As we go -- thanks, Chris. Integrated Solutions. This is our group with the Flight Landata and the air services, the related camera and the associated services and hardware associated with that. Our hard products that we sell to law enforcement and other agencies, as well as our multiband synthetic aperture radar group. This incorporates basically anything that's not services, as we just talked about, anything that's not on the commercial software side. The big revenue driver in here as it has been from what we've found are the planes that we've got flying, various parts around the world. Right now, we've got 6 up and flying. We've got 2 more in modification. We anticipate this number growing. Obviously, we have potential issues with what goes on in Afghanistan. But as we look at this number, we put a conservative growth rate in terms of where we think we would be as we go out of the 9 to 10 plane issue. We think it could be more, but we're hedging on that based on what happens in Afghanistan. We just don't know beyond 2014. They've committed to keeping the planes in there, but we're not going to go out and put a big number out there, just to come back and say, we didn't do it. We'd rather put a number we feel is conservative and grow from that number. The rest of it's going to be an expansion of the multiband synthetic aperture radar, expanded markets for some of our products that we have. We've done a couple smaller tuck-in acquisitions that bring certain hardware technologies to us. That will help us grow this number as well.

We have a little less pressure here in terms of sequestration or reduced product orders. As we've been working under a continuing resolution for a while, and as we've talked about, some of our traditional government customers have ordered less than they traditional have, which has pushed us in the law enforcement, and which has been a very good market for us as we expand. So as we go here, we believe that once we can get through the budget issues, we've got pent-up demand within some of our federal customers to go ahead and update some of the things they've bought from us 2 or 3 years ago as we get to the next generation. So as we go out to 2015, and we've got 2.5 years to get there, there is a number of new areas we can go as we've updated our products and move them forward.

Chris? The commercial side of our opportunity. Project G and Sensage is a combination. We had Sensage for 1 quarter of revenue just under $4 million. Looking at going to $75 million at a gross margin of 75%. When we're trying to work out and go from the revenue base where we are and then get on a full year basis, Sensage did about $11 million or $12 million, up to $75 million on the commercial software side. There is a number of companies you can go out and look at that have done this type growth rate with these type of margins. You can look at Splunk, you can look at BorderNet Networks, Palo Alto Networks in terms of the growth trajectory they had with a similar software solution and similar margins. In fact, our margins -- we're anticipating it being a little lower. In this number, we obviously have a legacy Sensage business that has dedicated customers, deferred revenue and additional licensing sales on -- which is one component of what we have.

On the Project G side, that revenue really comes in from 3 areas. One is what we call the cyber assessments, call it, a physical for your network. That's where we go in and see what's going on with your network to determine, could it handle a G? Where are the holes in it from a security perspective that could compromise your network?

The second piece there is Project G itself, which is a hardware license sale. We're still working through as we're working through with the early adopters in terms of the type of license and obviously, the size varies on the size of the entity. But we're working with both small companies and large companies because small companies have the option of possibly a hosted network, maybe not owning a G. So we're working through the pricing components of that. And the third piece is, the ongoing maintenance and the information feed from all the other systems of what's going on and what type of attacks and persistent threats they are seeing. When we put it together and really look at where we are, we believe the 70 -- $75 million number is reasonable and very well could be a low number. It depends on how quickly the market accepts. And I'm going to bring Joe Gottlieb up here in a second to talk about the RSA Conference and the response we got in terms of Project G really, and where it is in the market. But we've seen other companies -- a number of other companies with a similar growth rate, with a similar product in terms of getting there.

The risks. Obviously, we've got to be -- we've got to enter the market and do as expected. We have not entered quickly. We have taken our time to do it right. We don't want to go out and fail. We'd rather take time and be 1 month late and have it right, than be 1 month early and have to go, oops. So were going through that. We're doing it slowly. The demand we have is very good. We only took 3 early adopters. We could have taken many more. But we need to make sure our resource is right, our folks are trained right, and that we have the right staff to do the right job. We believe we've got the best solution out there, and I'm going to invite Joe up. I think this is the last slide. Right, Chris? Joe if you want to come up and talk about G and RSA?

Joe Gottlieb

Sure. Thanks, John. So just a little bit of perspective. I just got here from the RSA Conference this morning. And I've been there all week. And overall, the show was very positive and up in traffic. So up in traffic about 25% to around 14,000 people. So very active show. I'd say the vibe was very positive. People are starting to spend money again. We know the economy is in a slow recovery. But IT has been bouncing back pretty solidly and security, as we've seen over the years, the most durable segment in IT, is bouncing back sooner than the rest of the IT sector. So very good vibe there. People talking about success as vendors and people talking about new budgets as end users in the enterprise space. We had a great showing there at the show. So it was good opportunity for KEYW to show up in force at RSA, really for the first time, and have attracted a lot of visitors to our booth. We had great attendance in the booth. And in particular, we had demos going on for Project G and our other Sensage offerings. And so had a lot of really, really intense meetings with easily 20-plus Tier 1 companies that we believe are excellent prospects for G and probably 30 or more Tier 2 companies that we think will also be qualified prospects that we'll pursue over time. Overall, we had over 250 meetings there in our booth. And therefore, lots of good traffic and people getting on our list that will go into our nurturing pipeline. The reactions to G we're very, very interesting. Everyone clearly resonated with the overall approach. There's a lot of hype going on right now in the areas of big data for security, and they love the way we've combined the big data crunching of Sensage, with the sophisticated analytics and the policy-based countermeasures of the G architecture to deliver on a new value proposition. This is what people -- the kind of thing people are looking for. And the kind of conversation that happens around this sort of scenario is, how do I leverage budget that I have for my existing portfolio and start to use it for these things that are really addressing the next operational approach to dealing with these threats. So clearly, a big problem out there to solve, and we've got a lot of good validation on the way that we were approaching it with G.

A couple of other things that may be -- might think are secondary, what we found to be very, very useful in the discussions. One is, they love the way that we had invested in the user experience and really advanced user interface for the offering. These things are handling a lot of data. They're surfacing a lot of information and filtering a lot of information, so being able to take the types of techniques that we've been using in the Intelligence Community for years and surfacing them in the type of diagrams that bring people right to the resonant points in that sort of security operation was very, very useful and they liked that. Secondly, they even pointed out, as we showed them how G even allows you to conduct manual operations, but in a way that's just a matter of clicking through. So even if you don't want to automate a countermeasure, but in fact, you want the condition of interest to be surfaced, so that you can look at it and agree to go forward as G has recommended, they pointed out that even that will save them tons of time as opposed to the manual operations they have today. So okay, G is saying, I should expire this person's credentials, where normally, I'd have to go in and log into access directory and take that person's credentials down for a period of time. That takes a long time. With G, it's just a click. And then as you see the pattern, you can then say, "Okay, as you're recommending G, I'd like to automate that operation for this particular condition." So what we're tapping into there is the behavioral learning that goes on in the organization and the security operation, so that they can start to advance more and more automation and therefore their finite staff can have more impact with their daily work. So all in all, we were really excited about the showing that we had. Obviously, we're in early adopter phase now. We come away from the show knowing we've got several more companies, very Tier 1, great, great, companies to have that will be going into the second wave for Project G and a lot of those are brand-new pure prospects and, of course, several of the Sensage faithful that have been coming around our booth for years got really excited about Project G and want to be on that list as well. So good overall show, and we'll be looking to give you more updates as we go further.

Leonard E. Moodispaw

Thank you, Joe, and I imagine you shouldn't go far away because I bet in Q&A somebody has a question for you. So be nice to him because he just flew overnight from West Coast to get here. A couple more points, then we'll move into question-and-answer. So I hope it's apparent to you that the areas that we are moving into, particularly with G in the cyber, are the latest, pick your term, Cold War. It's the greatest threat facing this country today. And while we may line down in Afghanistan and be in the other parts of the world, this kind of efforts that we are involved in is a huge threat to the country, and we believe we're way ahead of everybody else. Again, well positioned to take advantage of what we've learned over the years of working with the government and being a dual government company, as well as a commercial company with ever-growing importance.

One last point I want to make to you all who watch such things, I could preach for about 3 days, I'm sure, and everybody would nod and then go away and still be beat me up about it. We're showing you 2015 because we think that's where we’re going to be. Everybody knows we don't give guidance. We're growing till we get there. If I have to spend money to further the investment on G, I will do that and not worry about somebody saying, "Well, you didn't do as much EBITDA as you said you're going to." And the first quarter is likely to be an example of that because getting G generally available in the second quarter is so important to us because RSA cost us a lot of money and because we want to keep and must keep our development team focused on G, and I need other help to come in, not only to help them but to do some of these other things because the demand we have for the cyber analytics assessment is such that we had to bring in more people to do that. So we're going to do that. We are going to make those investments. If you're one of the aforementioned commercial companies who spends money on R&D, everybody says, "Wow, that's great," and will up their valuation. Well we're at the same mode. We're spending for the future. It's good stuff, and I can't worry about whether somebody cares about quarter-to-quarter. So when somebody says, "Why don't you mention numbers." Well, it's kind of odd since I don't give numbers. But that's maybe I missed everybody else's numbers. But our focus is building to 2015 and doing it the right way. And we will continue to take that approach and if that causes some folks pain, we're sorry about that -- not very. But that’s the path we’re on, and the reason we're focusing on 2015 is so you know where we're headed and we're very comfortable with that.

So with that, we'll take questions. And Chris, you want to come up and manage that process.

Question-and-Answer Session

Chris Donaghey

Okay. So that will end it for the kind of formal presentation time. We have the line open for about an hour or so. So we want this to be an engaging session for you. So feel free to ask questions to these guys. And I'll try to be make sure that I remember to repeat the questions so the guys on the webcast can -- the people on the webcast can hear it. So Mark, go ahead.

Mark C. Jordan - Noble Financial Group, Inc., Research Division

Well, first is [indiscernible] aspects of G, but [indiscernible] product. Could you talk specifically about [indiscernible] Sensage sensibility as with regards to monitoring massive data and say -- try to be encouraging [ph] and say, hey, well, someone else in the market might recognize [indiscernible]?

Chris Donaghey

And so the question is essentially about the competitive landscape for Project G and other guys doing bits and pieces of it, how does our system fit in that context?

Joe Gottlieb

Sure. So in particular, comparing Sensage as an advanced security and information event management system to other players in the marketplace. You mentioned Splunk. Splunk is a very well-known name. They've done a very nice job bringing forward a tool that's really an index search for logs. And that allows people to hunt for things when they know what they're looking for, and they know what to ignore like you do when you search with Google every day. You know the results that don't match, right? That's not a methodical, deterministic, automatable method for analyzing data. So now Splunk is having to build a system similar to ours to actually handle that more deterministic method, and that's not always understood in the Splunk adoption scenario. So it’s a nice tool to be putting on the tool belt about -- mostly for IT operations and those who like to poke around. But that manual operation, which also is happening in the log management world today, just is not scale. So if you look at an Arcsight, the other big name in the space, right, good realtime monitoring, but they can't handle historical correlation over long time horizons and they can't handle all the data. So big data for security, I would say, was the biggest hype theme of the entire RSA show, and I'd tell you, the hype to delivery ratio this year might hit a new high just because I know full well in operating in the marketplace that people can't crunch this data. So Sensage has been uniquely capable of taking huge amounts of data and then analyzing it in an automotive fashion. That's exactly what Project G is using it for. When we explain to people what we're doing with that, we're literally building a profile for every user in every device over a time period and then comparing the realtime events to that historical profile in real time. And to do that, we have to do the data crunching in Sensage and then publish in advance all those profiles into the G systems so they can do those realtime analytics. So really powerful combination of something that wasn't available to anyone else other than -- from anyone else other than Sensage in the big data market now coming into the realtime form and so that other people that are starting to do some of these automated remediation things lack the deep analysis, many people that are just doing monitoring lack the automated countermeasures. So the way these 2 things come together, pretty exciting.

Leonard E. Moodispaw

Before we take the another question. I want to point out, Dick Schaeffer, who I introduced earlier, was the former -- he is the former Director of NSA for Information Assurance, and I think is unparalleled when it comes to knowledge about all this. I consider Dick to be the father of G. But Dick knows everybody is doing things in this arena, introduced us to Sensage and one of the other partners. So I don't know if you were looking to asking Dick questions, and Dick, if you want to jump in at any time, feel free.

Unknown Attendee

Excellent.

Chris Donaghey

Question?

Unknown Attendee

[indiscernible]

Chris Donaghey

So the question is the development timeline for Project G.

Joe Gottlieb

Yes. So we're right now on course to be able to go GA in the second quarter with the primary use cases that we've identified. Those are the use cases 1 through 6, right, and with the critical scope of how those use cases operate inside the network. So primary sources include Cisco, Juniper, Microsoft, and of course, Active Directory, and we have the surrounding infrastructures that are part of those initial analytics and those use cases. We will be adding more use cases in the form of combinations of sources that can be part of the behavioral detection and data crunching that I mentioned earlier, policies analytics and countermeasures. So that's what's nice about the Project G system, is that all those items inside this architecture allow us to easily extend the power and the impact and the usefulness of the system by extending it into each of those particularly structured areas.

Chris Donaghey

Am I going to find that I just need to leave Joe up here for a little while. Jim?

James Patrick McIlree - Dominick & Dominick LLC, Research Division

[indiscernible]

Chris Donaghey

So the question is, with that -- to hit that $75 million, do we need to make additional commercial acquisitions? Or do we have all of the pieces in place to be able to deliver that?

James Patrick McIlree - Dominick & Dominick LLC, Research Division

[indiscernible]

John E. Krobath

That's a great question. So when we talked about that number, imagine various scenarios and the way we would pursue it. We absolutely believe we have the key building blocks to deliver this solution. And the reason is because of -- with Sensage, you can just continue to add sources, and it’s very extensible in terms of just building another adapter for the source and then pulling that data into the columnar database that is really the heart of that particular technology. And then with G, what we're doing then is adding these analytics for policies and the countermeasures. Now that said, I'm sure we'll discover areas that may end up having -- requiring maybe some special work to get there the depth of their data into our system, but for the most part, that's going to be an adapter. I'll give you an example. The database security companies have basically heavy agents for monitoring database activities, and it actually became a category, database activity monitoring. That category is now being absorbed into some other security products, which then in turn are still surfacing up events. So a lot of these things go the way of surfacing a lot of what they can tell us via their log event format, which allows it to set them in. The virtualization arena is an area where that's another example of where we want to leverage some existing companies that are out there that are surfacing those events from the virtual world. As you might imagine, the physical world is duplicated in the virtual space. So network switching, security that has to be present inside the virtual switch, and so we have a partner that we're working with in that particular area to make sure that sort of data into the system to address virtualization scenarios. But I tend to see it will be that kind of thing where there will be some fringe areas where we will be able to on lean some partners. Oftentimes, the other stuff gets absorbed into the other categories that we're able to include in our architecture. Another area of partnering that we're very active in is in threat intelligence. And if you survey the marketplace, what you'll find is that everyone has their own threat intelligence cocktail. And where that threat intelligence cocktail comes from is usually a utilization of a lot of the open-source feeds in threat intelligence that are readily available from various communities that build those feeds and identify blacklisted URLs and things like that. And then the company that has the capability will then look at those, choose its favorites, deduplicate and add some things to it and then to serve it up as a threat intelligence cocktail. We at KEYW are absolutely capable of having our own cocktail, and that's what we're including in the Project G system. And so when some man came up to me and asked, "Do you want to buy my threat intelligence feed?" I said probably not. But you can tell me all about it, and I'm happy to learn. But I don't intend to see [ph] us having to go out and spending money on such things in the foreseeable future.

Joe Gottlieb

And I would just add to that, Jim, that when the product goes commercially available, it's not like we just turn R&D spending off. We're going to continue to be developing new capability. And remember, a critical component to the Project G business model is the recurring revenue stream associated with the threat feed. So not only are you getting the latest behavioral signatures through this connection to the KEYW master system, that connection is also going to be used to deliver software. So we only intend to ever support and sustain a single version of the Project G software at any location where we have a customer. That means when use case #3 gets refined to do a better job doing road device detection, we're not going to wait and stack up a number of these things out and then push a CD out to our users and hope that they go install that new capability into the system. That new use case #3 will get pushed down through the KEYW master brain system into the ecosystem using a continuous delivery model. So we're capable of constantly evolving, hopefully at the speed of the threat.

Unknown Attendee

[indiscernible] how you [indiscernible] firewalls [indiscernible] firewall first of all [indiscernible] obviously, some people [indiscernible].

Chris Donaghey

Yes. I'll obviously let Joe answer that question, but one thing to keep in mind in terms of how we access these other devices is remember, our development team came from a part of the government world that does that kind of stuff remotely without being detected. So that's going to be one element of the secret sauce of how you even operate within an -- in your own environment.

Leonard E. Moodispaw

Chris, repeat the question.

Chris Donaghey

Sorry, the question is, how do we -- do we work with the firewall vendors? Do we work with the other -- the sensor manufacturers that we're going to tie G into? How do we work with those guys?

Joe Gottlieb

So I'll address the question really in a typical life cycle, right? So the first way we're going to interact with the firewall or any other security product or infrastructure product for that matter is in receiving their events. So the events are coming in, and that's -- the business that Sensage has been in for years is all about absorbing that data and understanding it and parsing it into our, columnar database so that we can analyze it. All right, so that -- we always are able to do that without any real help from the vendor. And we end up -- when we need to -- in some cases, we lean on our customer to give us some simple data or we can generate some sample data we're using from various SDKs, but it's pretty routine to go understand those log event formats and can get that data into the system. That's for visibility into what, in this case, let's stick with the example of what firewall is telling us. Meanwhile, then when we want to effect a countermeasure that may involve a firewall, we will, as Chris mentioned, we may have a clever technique to put the firewall to work for us. But ultimately, we see an opportunity to start to partner with these companies, and in fact, have discussions underway today with some of the usual suspects about how we might, in effect, send a control message to, let's say, a firewall and have it change a policy or conduct a particular operation, drop a particular session or user, et cetera. And in fact, we're starting to find some existing infrastructure that is already in place for some of these things. And I'll mention the Network Admission Control efforts that many vendors went through, or NAC. This was an effort to try to coordinate between endpoints, try to attach the network, and either being allowed or disallowed by various mechanisms in the switching infrastructure and firewall infrastructure, et cetera. So in some cases, there has already been an industry movement to try to expose some of these control interfaces by the security products that we'll be able to utilize. What that means is that we don't have to do special work with a vendor to make the interoperability happen. So we'll be looking for those clever ways, as well as existing opportunities to leverage APIs. And ultimately, where necessary and pushed by customers, we'll really actually get into some of the deeper stuff that may be more unique.

Unknown Attendee

[indiscernible] firewall [indiscernible] firewall [indiscernible].

Joe Gottlieb

So the question is, what if the firewall doesn't want to play ball, doesn't want to cooperate with us? There are scenarios where a vendor, particularly if they were concerned that we might be encroaching on their value, might not want to cooperate in this sense. And those scenarios will exist. And if we get to that point with some of those, we will exert customer pressure, as is typical in the industry, right? We'll get a common customer to say, "Hey, come on, quit being so protective of your value." We want to continue valuing you, and we value KEYW's offerings as well. So those will be some of the usual things that you will encounter. But along the way, what I'm finding is that a lot of these companies, the ones that will be most productive are the larger ones that tend to have interoperability requirements anyway across their portfolios and with their customers. So at times, it will take some work. But I don't see that to be a real obstacle. The other part about this that is exciting is that oftentimes, in security, the most innovative features are coming from the small startups that are addressing the new threats on the horizon, and they're very anxious to cooperate with someone like a KEYW who has presence in the marketplace and can really lift the presence of that smaller startup that's innovating. So that's one of the ways we get the bigger guys to pay attention and take notice, by getting some of the more innovative, hungry players to be part of the ecosystem. And I've seen that work well when I built McAfee's entire technology ecosystem before I joined Sensage. So we can play some of those tricks.

Unknown Attendee

A follow-up on that. [indiscernible] the next year or so [indiscernible] and that exposed a lot more than [indiscernible] and that's something that's been working on [indiscernible].

Chris Donaghey

The question is, how will we work in a software-defined network type of environment?

Joe Gottlieb

So nothing immediate right now because of the stage of where it is. But what I see happening as software-defined networks become more prevalent is that as you alluded, right, that makes it even easier. The smarter and more open networks and products and infrastructure become the better opportunity it is to have a very sophisticated interface between what G is delivering and what those existing offerings do. I'm glad you brought up networking because this interaction is not limited to security products. Absolutely a key part of the interaction is with the networking infrastructure, which as we know, is increasingly absorbing a lot of the security features, and if not also just it's a regular role as a player supporting bandwidth and connections, et cetera. So I think software-defined network is a great future opportunity for these sorts of architectures. And G won't be the only one. There will be others that enter the market over time. We don't see anything like G today, and we've been watching the industry carefully. But I'm sure there will be some interest over time. I think software-defined networks will help all of us.

Unknown Attendee

When I think about the business model for G, correct me if I'm wrong, but I think [indiscernible] why is there a sort of [indiscernible] generation for the hardware that's installed. There is a layer of service [indiscernible] network there [indiscernible] to the overall [indiscernible] data [indiscernible] 75 [indiscernible] business model [indiscernible].

Chris Donaghey

So the question is as we look at the Project G business model, we've got 3 basic components. There is the license, software, sale. There is the services aspect to it. And there is the recurring revenue stream of maintenance types of revenue streams. What does that look like and what do the percentages look like to get to $75 million?

John E. Krobath

I would've prefaced what Joe is going to say. Part of the early adopter phase is working through some of the sensitivity on this. So don't be surprised if it evolves over time, but we do have some initial perspective on how this is going to shake out.

Joe Gottlieb

Yes. So I'll first answer the question regarding to Sensage, what we've experienced over the years there. And Sensage is pure software. So -- and it is a perpetual license, which allows us to recognize all the license upfront, and then we have a traditional, typically, 20% of license price support and maintenance that's tacked onto that. And that's the annual recurring part, which, of course, goes on the deferred revenue books and realized over the period of the contract. With G, we do have some additional components, and some of those components will end up layering into the traditional Sensage offerings to expand the packaging that we do there. If I break down G, there's clearly some hardware that we're going to be furnishing because we want to control the operational environment, and you can refer to that as an appliance, right. And so I would say that's a big chunk of the -- in the starting point. There is a certainly a license, but with the way that we're going to continuously evolve the G capabilities, as Chris mentioned earlier, with a single version that everyone is getting updated to on a consistent basis, that's going to feel a lot more like an antivirus subscription. So if there is upfront license or a perpetual license, there'll be a bigger component in the back end because of all the features and capabilities that are going to come on a subscription ongoing basis there. And also, similar to antivirus, you have the content that's going to be supplied even before you get to any layers of service, right? So the content, which are the things that I mentioned earlier, those new sources, the analytics, the policy frameworks that we will allow our customers to start to share amongst themselves, we can facilitate. And then the countermeasures, all those are pluggable, extensible aspects of the system that we would be charging for as content. And then lastly, the personnel, right? so you could do everything from basic break fix [ph], support and maintenance, for do a do-it-yourself-er, all the way to completely managed. And we see -- we're very excited, I know I am, about -- and we had good reaction at the show this week, to hitting the scene in between those 2 things where we really are augmenting the teams of the customer that we're working with so that they get really strong knowledge transfer and we also get great collaborators in terms of what's going on in their environment, right? So we learn from them, they learn from us, we bring a broad perspective and a high expertise of all these things happening with the G brand that's seen across the entire community. And they are that last mile that really makes security interesting, what is happening in their unique environment, what new things are they trying that we can learn from, et cetera. That's been my vision all along, and that's what really makes it exciting. How can we start to get the industry working together to accelerate our defenses, our collection of analytics and our ability to automate things in concert with each other to defeat the adversary. So those are the components and as both John and Chris has mentioned, we're still sorting out what's going to have the most appeal, but as you can tell, there's definitely some good upfront component in there that will allow us to recognize revenue, but then there is also a healthy chunk, which is way more than typical support and maintenance at 20% that we're expecting to be recurring.

John E. Krobath

Let me follow up a little bit on that answer and talk about Sensage with history. They run about 2:1 license sales to support the ongoing deferred maintenance revenue. As we look out, the big chunk of deferred maintenance revenue, as you return -- referred to, the pot of gold, really starts for any implementation that's done by the end of December 2013 because generally, in the initial sale, you've got a year of maintenance and support before you really get into that recurring maintenance stream. The other piece of that equation is the cyber analytic assessment, which we do upfront in terms of the physical and the network to what's there, that's a recurring revenue stream. I'll say recurring as you get new companies to do it, that's also going to impact that number. But I think you're really going to, as you look at 2015 as the more implementations we get done before December 2013, the higher that revenue piece is out there, the deferred revenue piece, we've chosen to be more conservative in terms of our estimates of where we could be, in terms of how many installations we'll have done. But really the question is, how big is the installation, as Joe touched on. 40% of the upfront license fee, that depends on the size of that. So we envision that. As you move out really from 2014 to 2015, that deferred revenue piece starts to grow, that maintenance piece starts to grow. But we're still going to have a significant Sensage component at that point. They did $12 million in the last 12 months, not all of which was with us. That's the year-end financials for them. That piece is going to grow as well with the 2:1 split. Your CAs are going to grow. So I think you're going to start to switch the revenue model more towards the ongoing maintenance stream. As you head into 2015 and 2016, it continues to grow.

Chris Donaghey

Josh?

Josh W. Sullivan - Sterne Agee & Leach Inc., Research Division

[indiscernible]

Chris Donaghey

So the question is in order to achieve the forecast for 2015, how many customers -- or what is the addressable market size that we're going after that's going to enable us to hit those kinds of targets?

Josh W. Sullivan - Sterne Agee & Leach Inc., Research Division

[indiscernible]

Chris Donaghey

So maybe the question would be so if I'm going to break that $75 million into an average deal size kind of thing, how does that work out? Again, we think the mix is -- if you look at, say, a Splunk, and their revenue tends to be to like 2:1, like the Sensage, this was modeled for 2x license revenue to 1x the maintenance and services piece, we'll probably be at maturity more heavily shifted towards the maintenance and services because the recurring revenue is going after a higher percentage of the initial purchase price. But I'll let Joe talk to what he thinks an average deal size might be for a single system.

Joe Gottlieb

So I expect a steady state should be reached certainly in 2014. Prodigy sales, these are 7-figure deals. I mean, with Sensage, when we have a real qualified prospect, when we're going after solving their centralized logging problem and big data crunching problem, it's a 7-figure deal. So what that means is lower customer count, per se, needed to get to that number. And the point here is that, wow, that's the upside because if we suddenly get into a real frenzy with the first mover capability here, that unlocks a lot -- there's a lot more than 75 customers in the addressable market that would find use for this. So that part is exciting. I'll address the other comment that was made earlier about smaller companies. So smaller companies are ultimately in our addressable market. But we will be, for the foreseeable future, pretty careful to do those with partners that are going to handle, let's say, a captive industry where they've got great relationships and they're uniquely suited to bring this sort of capability to smaller customers. I don't want to distract our focus from solving the big problem, keeping the technology steaming full speed ahead. I want to rely on partners that can handle those smaller transactions. But as a result, I'll get to look at them as 7-figure opportunities as well, and I wouldn't want to even bother with someone that was going to be trickling anywhere near below that number. So from our vantage, that's kind of like the law of large numbers that we're looking at here. And I'm sure will learn as we go, but that matches our experience with Sensage. When you're talking to the right companies with the right value proposition, that's the kind of transaction you're looking at here.

Unknown Attendee

[indiscernible] 7-figure deals, would that be the [indiscernible] revenue [indiscernible] period in that 7-figure number?

Chris Donaghey

So typically, yes. So a 7-figure number is your first purchase order with that company, which is going to include the scope of the first deployment. And with G, the interesting thing, as we talked about earlier, is that there's a higher recurring component. And so more so even than Sensage, we'll see greater recurring revenue on those transactions that I still believe are going to be on the order of magnitude of $1 million, let's say, to get started. The other thing we'll see, like Sensage has seen, but I think we'll see it faster with G, is the expansion. All right, so you get started, and then you start to expand to more points of presence in the network, addressing all the entities. And that's where you take -- let's say it's $1 million transaction or a $1.5 million transaction, and you expand it by another $1.5 million or $1 million or even $500,000. So I think good lateral movement in the customer base as they absorb this because if you look at how we're initially pricing the product, and we haven't gotten outrageous, negative reaction thus far just in preliminary conversations, is that this unit of G is going to cover about 15,000 entities and 2 Internet gateways, and even that is going to be a healthy slug, not quite $1 million but approaching that.

John E. Krobath

Let me touch base on the revenue recognition on that upfront because it is different than what we've seen because we've moved into software accounting now. When we go through and when we split out the various components under VSOE for accounting recognition, we would pull out even if it's not spelled out separately in the agreement that first year maintenance or that feed piece would not be recognized at the time of sale. So when we're talking about, again, the size of the deal, if we say we have $1 million deal and there's 40% of it going to the maintenance because that's a recurring fee, which you would typically see at 600k upfront and that other 400k spread out over time. So when we go through with it, it's different than if we get a services contract and figure out how quickly we're going to turn it or a product contract where, since we deliver it, we recognize it. The revenue recognition for us is a little different as we move forward.

Unknown Attendee

Will it be visible on the balance sheet?

Chris Donaghey

It'll be -- the question was will it be visible on the balance sheet? It will in the growth from the deferred revenue balance. As that deferred revenue balance grows, you'll -- that's the revenue we've already collected on that we'll go ahead and recognize in the future. Normally, for us, and even with G, unless things change, that's going to be a 12-month number. Christine?

Unknown Attendee

[Question Inaudible]

Chris Donaghey

And so the question is, we talked about how, in the future, we would need customer to exert pressure to get certain firewall companies or other appliance companies to work with us. Do we need to have those agreements in place before we launch Project G?

John E. Krobath

So the short answer is no, and I'll give you a couple of examples, right? So the facilities that are readily available to us and are quite commonly used are things like turning off a switchport, so a machine is no longer on the network, or expiring someone's credentials. Those are readily available facilities that we can sort of automatically leverage as part of the policy and the basic countermeasures. There are other more specialized ones that can help us literally remove the thread or the process that's running in the machine. And those also are some of our own devices that don't require us to make any partnerships to deliver. So what's very important, it's a great question, is that our GA functionality that we're delivering does not depend upon any partnerships that we have not inked already and have already integrated to the system. And in fact, I think for the foreseeable future, we'll be able to deliver lots of additional functionality even on top of where we are today without some of those partnerships. Long term, as we talked about, I think the way that we want the industry to evolve is that we do have more variety, more options and, frankly, I think this will be driven by our customers who will want to see a more integrated mass, right? And that is why I think they'll able to help us put pressure on their vendors because they -- the things that they're spending money on, they're going to want to be involved because they're also -- those things are also reporting back the variable to perform, and I think that will help evolve but that will take some time. Any questions on the defense business? Frank?

Unknown Attendee

[Question Inaudible]

Chris Donaghey

Well, if you look at -- so the question is what -- based on what's happening in the budget environment, what is reflected in the 2015 expectations? Not really much changed versus where we are today. We still believe that because we have focused a lot of our existing organic capability on a relatively high-end skill set that while at the margins there may be some programs that are impacted over the coming few weeks or months because we have focus toward a skill set that is a relatively scarce commodity. So if your average software engineer in the D.C. area with 5 years of experience, with a TS/SCI clearance that's been working in the Intelligence Community, the unemployment rate for those guys is 0%. So we believe that if, at the margins, there are people who are impacted by what's going to play out over the next few weeks, we have a greater ability than most to take those resources, which are, for lack of a better term, a fungible asset. That guy is someone that we should be able to put to work in another place if he works for a program that is impacted. There may be that transition time period. But at the end of the day, it's transitory. And we don't think that the budget environment is necessarily going to have an impact on that 2015 outlook. Len, do you want to make any other comment there?

Leonard E. Moodispaw

No, I'm okay.

Chris Donaghey

Joe?

Unknown Attendee

What are the problems that you have [indiscernible] have come from the [indiscernible] getting those kind of people to do the project?

Chris Donaghey

Hit the numbers on which side? So let me -- so the question is, based on the fact that we said we've needed this very high-end skill set to deliver the work that we do for our legacy customer today in the intelligence business, and we're using those guys to -- as the initial development team for Project G, aren't we making it even more difficult by saying, well, we need more of these guys just on the government side to do this commercial work? In fact, it's the opposite and I can let Joe speak to this more clearly. But the key part to Project G was we needed a handful of the right guys out of that government business to be the guys who pull that kind of capability out or the initial platform concept itself. Going forward, those guys are going to stay involved but now we are able to recruit from unclassified sources at the college level or from the commercial industry standpoint. So we can have aggressive recruiting campaigns at MIT and Virginia Tech and Caltech that we -- or Georgia Tech that couldn't have had in the past because on the commercials side, we don't need the clearance but we do need innovation, we need new energy and we're able to tap resources now that we haven't been able to tap in the past. We can also cherry pick those guys and say, okay, this handful of guys, these are really good. Let's take those guys and start processing them for their security clearance and let's put them to work on the government side for a while to get some experience doing the government mission. And the last thing I'll add, then I'll let Joe kind of provide some additional color is that, for our highest spend cyber group in our government world, we've now achieved a critical mass that has put KEYW at the epicenter a lot of the things that are going in the really advanced cyber stuff, particularly in Maryland. And we're very well positioned to continue aggressively growing that business over the next few years. If you looked at our organization structure and you picked out the division that had the highest organic growth rate in 2012, that team is #1 or 2 on that list. And they are continuing to accelerate because they've achieved the right level of critical mass that is just drawing talent very quickly to that group. So I don't see it really as a problem on either side or -- Joe, do have any...

Joe Gottlieb

I don't have anything outrageous to add other than these are software developers, they're security assessors. That's a big business across the commercial space, all the verticals, right? So part of the reason I think KEYW will be useful to have a California operation to tap into that a talent pool, where there's just a lot of folks that are able to do these sorts of things. So it -- and I'll tell you, we've had -- a recruiting strategy is now becoming getting close to this cool stuff that gets done in IC, and even though my own employees in Sensage are keep saying when we're at work, when are we going to get training, when are we going to get training, all that cool stuff? So there's a nice, cool factor as well, but I think the sources here become much more tenable now that we can go broaden out of the commercial space.

Chris Donaghey

Steve?

Unknown Attendee

[indiscernible]

Chris Donaghey

So the question is, does the industry understand the severity of the threat at this point? And again, I'll let Joe provide further -- further expound on this. But I hate to give some of the commercial but the Mandiant report, the APT 1 report, goes a long way to really broadcasting and better defining what these guys do, what the advanced persistent threat does, how do they do it. And if anything, it should give those customers a deeper sense of hopelessness about what is available today to help mitigate that threat.

Joe Gottlieb

This is still a challenge. So I'll tell you, the 20 top Tier 1 prospects and the 30 Tier 2 prospects are the type of people that do step forward but they're in the minority still. And in fact, that's -- even Sensage has spent 3 years having to find these folks in -- and it's definitely the needle in the haystack, the people that are willing to be proactive. It's evolving and I think the Mandiant reports, the annual Verizon Business Data Breach Investigations Report, all these things are serving as more awareness and more reason to be aware. But the average corporations are just trying to keep their head down, unfortunately, and they are still rustling with budgets and I hear still people saying until I have to pay tons of money in fines, and I'm talking about real big money in fines, I'm just going to keep managing from crisis to crisis. That's still out there a lot. So we have work to do there. It's going in the right direction, if you have a business in this domain. But if you're people that are worried about the national interest and the way our life evolves, still a lot of educational part. And I think we're part of that, but there's some bigger factors there.

Unknown Attendee

I'd like to tap in on that a little bit deeper, John. [indiscernible] and that is [indiscernible] to what degree the government take a leadership role in addressing these things and then by doing that [indiscernible] fire under [indiscernible] and by that I really mean, [indiscernible] agency to [indiscernible] all day at this stuff that you work with. And what about Fire Act [ph]? What about social security [indiscernible]? People who have data that they don't want to talk about. Are they a customer now and they'd be the early adopter customer that the government says hold up and say, here's [indiscernible]

Chris Donaghey

And so the question is, how do the 3-letter agencies interact with the outside world in these more advanced scenarios? And are the other government agencies potential customers for a Project G-like capability?

Leonard E. Moodispaw

There are several reasons, one which is this is recorded, and second, there are smarter people in the room than me, including some former directors of those agencies, so I'm going to be very careful at how I answer that question. So one answer is they're -- particularly the 3-letter agencies we work with are constrained by law by what they can do. So they are trying to cooperate some by sharing of data. But they are quite limited and quite hesitant to reach out and do much. That was cyber security legislation that's been kicked around that will enable that, the President issued an executive order not long ago designed to help that but there's still a long ways to go. If you go down the path into the IRS and the other agencies, certainly, they are potential customers. The history of G actually got started when our intelligence customer said to us, let's use IRS as an example, but DHS in particular, needs help. They are a little weary of coming to these 3-letter agencies and having their help because it might -- who knows what the bad guys will do. So go help them if we would. So G was originally designed as a platform to go help those folks. What happened in the meantime is that demand from the commercial customers has overshadowed that. And then the last point I'll try and make in my delicate moment, which, as everybody knows is rare, is that what I believe is going to happen is a, it's going to take another Pearl Harbor on one of those agencies before they wake up, the legislation will be helpful, too. But once G is out there and the industry says this is a neat thing, it's working, then everybody in the government is, "Oh, I got to have one of those." So it's the customer ultimately, but I would lose what little hair I have left if we concentrated on those such customers.

Chris Donaghey

Yes, Steve Cahill [ph] ?

Unknown Attendee

[indiscernible] .

Chris Donaghey

Sure. So the question is about rate pressure on the government business.

Leonard E. Moodispaw

I don't think that was a question, but okay. So that was a hiring question, perhaps more, and so yes, there is rate pressure from government customers. However, if you've got a solution, they're going to find a way to work with you so we work around that. I also thought you were asking about -- the number of clear people is still a very small pool. But one of the, perhaps, sad consequences of the foolishness over the budget is small companies are going to be really impacted and sometimes maybe shutting down because you -- the way the receivable is very much, they can't afford it. So we are seeing that happen, and we're seeing the threat of that happen. It will lead people to look for companies with stability and the pool of people coming to us is increasing, actually, of good, clear people. And the last point is there are a lot of folks and some of us in here refer to us as the Northrop Grumman Alumni Association, those folks who work in the big companies who don't find the challenges that they find in smaller companies. So we are seeing, as those big companies have threatened to layoffs an ever-increasing pool of clear people also.

Chris Donaghey

Brian?

Unknown Attendee

[indiscernible] that's available [indiscernible] by availability. So I was curious [indiscernible] apparently underway to design the organization that they are now [indiscernible] at the age of [indiscernible] together that [indiscernible]

Chris Donaghey

Sure. Yes. So the question is, how many assessments are we involved in? And I think we will defer answering that question where we've had 3 early adopters. We have the 3 early adopter agreements signed. And as Len said, we will begun work on the commercial phase. We have, at least, one on the commercial side that is ongoing. The second question is about sales cycle and the ratio of converting CAAs to Project G sales. And I'll let Joe handle that one.

Joe Gottlieb

Sure. So I definitely believe that the cyber analytics assessment is going to be a nice front edge for us in terms of our pipeline development for G, and frankly, for traditional Sensage products on the Sen side. So the way that will work is the assessment actually comes in and not only gives you a bit of a grade on how you're doing your security operation but that it makes recommendations on how you could improve your cyber analytics awareness by putting analytics in place and we even included in it a security dashboard recommendation, which could easily dovetail into either a Sensage sale or a G sale or both potentially. So over time -- and by the way, assessments have to be done in a marketplace where there's lots of different types of assessments. And so we'll find ourselves competing even though we'll distinguish ourselves with how we're doing them. We'll find ourselves competing with a marketplace that has some expectation about what an assessment is, how long it takes. As for the length, we're seeing, so far, this is a few weeks' phenomenon. I think we can get this thing down to a couple of weeks. And we're also getting to a point where we can see opportunities to automate a lot of the technical data gathering that is needed to do an assessment and so that will help us compress it down as well. I think Len alluded to the fact that we've expanded our resources to be able to do assessments at a higher rate and that's because we sense that we'll be in some great demand as we sort of talk to folks and they've been asked, when can we get started. So I do believe it will accelerate. I do believe it will expand. I do believe also to be a great qualification vehicle. And we won't cover 100% for sure not. The number that I would guess would be a guess, but I could -- I would see easily it could be 50% or even lower. But it's great. It's great work to get because it will be profitable work that gets us in the door, establishes credibility and learn to talk about another environment, perfects our methodology, et cetera. So great way to earn while qualifying new prospects.

Leonard E. Moodispaw

And one last point on that even though I'd defer to Joe on these topics, but what we've learned in the first earliest adopter assessments is when we finished, the customer has things to do before they're ready for the G. It's not like the next day we install the G, go back and you say, there's some problems you have. We have one example of a company that we said, show us your policy and they said, they're not written and so okay, tell us how you handle these things since it's very ad hoc. So one of the recommendations for them is put some policy in place. We'll tell you what they should be to help you get there, but there's no sense in getting a G in until you get those basics in place.

Chris Donaghey

We have about 10 more minutes but I will just add to that. A phrase I've heard Joe use is, we can use the cyber analytics assessment especially in the early stages of the product as a ruthless qualification mechanism because the last thing we want to do is go in and do a cyber analytics assessment, have someone say, well, I don't have all of those policies but I still want you to install the software anyway and we go ahead and do that and they screw it all up. So we need to make sure that these organizations are truly prepared for this more advanced type of capability and not just try to crank them through a sausage-making machine because especially early on, reputation for success is going to be pretty critical. Okay? George, do you have a question?

Unknown Attendee

Yes. [indiscernible] to be a pioneer [indiscernible] right? [indiscernible]

Chris Donaghey

Yes. So the question is how much work do we need to do prepping the battle space before we go out with this, what are the policies and procedures that we need to have in the can and ready to overlay on top of an organization or we're going to have to do a lot of that work upfront and it's going to take longer than we anticipate.

John E. Krobath

So for the GAG, they call it "gag" but that stuff is already set, so we have those sources wired. And in fact, the thing -- the leading indicator here is that Sensage has way more sources already flowing into its chamber than G even plans to address. And that will probably remain true for the foreseeable future. There's a very, very broad catalog of things that we can pull into our event data warehouse at Sensage that then G can leverage when it actually has analytics and countermeasures that are pertinent to those sources. So I don't see that to be an issue. And when we run -- when we do run into one where, for example, a source, we suddenly elevated the priority of a source for G that for some reason is in a Sensage portfolio already, which is a matter of a couple of days work and...

Unknown Attendee

[indiscernible]

John E. Krobath

Absolutely. And Sensage was already distinguished for having the easiest architecture to rapidly add a source because of the way that we take the native data into our columnar database and that's just a matter of picking the best deals and stuff them into a source [indiscernible] table [ph] . So our architecture lends itself to speed in this domain whereas our competitors have had to do project work and project delay introduced into the sales cycle when a source of interest is pertinent to the customer's environment. So that's on the source side. We're undoubtedly one of the things like you said. We're going to hit unknowns for sure. We'll run into owners, single sign-on scenarios for G credentials. And those are the types of things you encounter in an enterprise world. But we've already picked up some of that feedback and maybe do fast work of some of the initial targets required for our early adopter wave, but those will continue to happen to your point you made about just the experience of fielding a new product.

Chris Donaghey

Yes, Christine?

Unknown Attendee

[indiscernible] .

Chris Donaghey

Okay. So the question is on the forecast for Integrated Solutions going from, I believe, $68 million to $112 million in 2015, what are the expectations embedded in that? As we've indicated in the past, we have 6 aircraft under contract today. Each aircraft tends to be around $8 million or so, $7.5 million to $8 million or so per aircraft. By 2015, we believe that number could easily be 9. Now let's talk about what goes into that number. Obviously, we have 5 aircraft flying in the operational environment today with the 6 aircraft that is kind of bouncing around, doing some conus work until we get through the budget issues, then that aircraft is more than likely going to be deployed to an operational environment as well. The key thing to understand about this business model is our -- the primary user of our data product is a special military guy that tends to be working very closely with a host nation, to help that host nation become more effective at doing the find, fix and finish mission on their own. It's not necessarily a mainline Army-type user. It tends to be a small unit special military guy. So again, working with the host nation. The reason why he likes our product, it's a white commercial tail aircraft. It doesn't have a lot of crazy antennas hanging off of it, doesn't have a gimbaled system hanging off of it. It doesn't look like a military aircraft. But that special military guy who may be there, not necessarily in a covert or clandestine type of situation, but is there helping a host nation having a system that is low visibility, small footprint, unclassified and dual use is a pretty valuable asset. Remember the data product is unclassified so we can share it with a host nation. So as we're doing a mission for tactical purposes, we can lay that imagery out on the hood of a Jeep and say, okay, let's plan this thing out, you tell us what's going on in these different areas and then we help them plan the mission and ultimately, we want them to go execute the mission. So if you think about the other parts of the world where we're seeing insurgent groups or al-Qaeda spinoffs or guerilla groups, particularly across Northern Africa, the geography of Northern Africa versus other operational theaters today is vast. And as we step up our participation in foreign internal defense missions there, we think it's pretty straightforward to map that capability from the current operational environment into these other operational environments, whether they be Africa or South America or the Pacific theater. It may take a slightly different structured aircraft, platform to do that. But the demand looks like it's going to be very high. One added element to that is we will also have a larger aircraft coming online in the near future. That new aircraft is going to have capabilities beyond the existing payload into some additional payloads like synthetic aperture radar, which is more useful in areas like Eastern Africa where you have some significant canopy issues and South America where you have significant canopy issues as well. Synthetic aperture radar will help you to see through those canopies to detect activity on the ground. So the opportunity is very, very big despite what the concentration in the operational environment that we see today. And a lot of that increasing opportunity size is due to the fact that success of the system and other in operational theaters is equally translated across to other operational theaters, as well as they emerge.

Chris Donaghey

One more question. One more question. Just maybe one, of course, not [indiscernible]

Unknown Attendee

As long as you [indiscernible] improvement [indiscernible] it will be more difficult for those agencies to add more funding in today's environment as maybe for the next [indiscernible]

Chris Donaghey

So the question is about the near-term ability to add people to contract given the budget environment.

Leonard E. Moodispaw

We really don't know what's going to happen with sequestration and so I imagine there will be some short-term ambiguity. The needs are there and the areas of cyber security, in particular, are the growth areas. If there's a dollar to be spent, it will be spent in that area. All right, thank you all very much. Do we need to sign off in any way or is it...

Chris Donaghey

No, I think that's pretty much it.

Leonard E. Moodispaw

Okay. Well, thank you all very much. We'll disconnect from this and then we'll carry on. Thank you.

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