Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

The KEYW Holding (NASDAQ:KEYW)

Q1 2013 Earnings Call

April 30, 2013 5:00 pm ET

Executives

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

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

Chris Fedde

Analysts

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

Patrick J. McCarthy - FBR Capital Markets & Co., Research Division

Tobey Sommer - SunTrust Robinson Humphrey, Inc., Research Division

James Patrick McIlree - Dominick & Dominick LLC, Research Division

Brian Kinstlinger - Sidoti & Company, LLC

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

Christopher Mecray

Stephen S. Unger - Lazard Capital Markets LLC, Research Division

Operator

Good day, ladies and gentlemen, and thank you for your patience. You joined KEYW's First Quarter 2013 Financial Results Call. [Operator Instructions] As a reminder, this conference may be recorded.

I would now like to turn the call over to your host, CEO of KEYW Corporation, Mr. Len Moodispaw. Sir, you may begin.

Leonard E. Moodispaw

Well, thank you, Kylie, and welcome, everybody. Before we begin, we will do the obligatory disclaimer, and I have asked a guest to do it for us today. Jen, would you do the disclaimer, please.

Unknown Executive

Sure. Under our Safe Harbor disclaimer, statements made in today's call that are not historical facts are considered forward-looking statements and are made pursuant to the Safe Harbor provisions of federal securities laws. Actual results may differ. Please see today's press release and our SEC filings for a description of some of the factors that may cause actual results to vary materially from anticipated results.

Leonard E. Moodispaw

Well, thank you kindly. And again, welcome, everybody. We'll comment briefly on the financials that you've seen and the other press release that went out. And then I'd be pleased to answer some questions. So we're generally pleased with the first quarter, particularly in view of this economy that we're dealing with today. In the area of services, we are still seeing new opportunities with existing and new customers. Everybody knows about and hears about thinks about sequestration. It has had minimal impact in the first quarter on us, but the future is unknown. Because of uncertainty, we are seeing customers' slow spending, they're kind of hoarding funds until they know the full impacts of sequestration. In my view, any company who's doing business with the Federal government, with the search, they won't see any impact from the foolishness of Washington and just kidding themselves. Perhaps they've been spending too much time at Mad Hatter's tea party, but who knows what shoes will drop in the future.

In terms of products, I'm very happy to have Chris Fedde join us. Over 30% of our business has been applying commercial techniques to products in the Federal government and law enforcement, and we provide total integrated solutions to customers, not just services or products. So Chris has strong commercial experience; to save that, along with that, are Joe Gottlieb, who joined us with Sensage. He will guide us down this horizontal path that we've been talking about, applying the tools and techniques developed by Steve Donald and our other experts.

Further, in terms of products, Sensage continues to win marquee accounts. Our same-year products are gaining traction with diverse customers. And G is on track. One functional G platform has already been delivered and another is on the loading dock to be delivered, waiting on customers' delivery instructions. We expect to deliver 2, perhaps 3 more in the next couple of months. I will tell more about G in more detail here in a few moments, but I'll turn it over to John to review the financials. John?

John E. Krobath

Thanks, Len. Revenue for Q1 was $77.9 million, that breaks into 2 sections: the Services segment, which is about $59 million; and the Integrated Solutions of $19 million. For purposes of this call, we're going to talk about how that compares to the pro forma numbers from Q1 last year, since we're more comparable to the GAAP numbers due to the acquisitions that we did in Q4.

For the pro forma numbers for Q1 of 2012, Services was $51.8 million and the Integrated Solutions was $18 million in revenue. That's a growth rate in the Services side of about 14%. That came through a combination of prime vehicles, some of which, with the radio programs that came through total, which now has 146 people working on it, as well as some of our other prime programs that we had in place predominantly in Virginia that showed revenue growth from some of those programs of over 50% between the 2 periods.

As Len said, we've had limited sequestration impact at this point. We've lost some people and some jobs in terms of 1 or 2 people on different contracts that have come through, but there hasn't been a wholesale impact across any one program or a series of programs with significant numbers on us. However, as we look out, the ambiguity with which Len spoke is limiting some of the hires that we would like to see on some of our programs. We're still going, as we can tell 14% of where we were last year, but not in terms of the numbers that we were hoping for. We figured by the time they get through the negotiations that they had to go through on sequestration and get it straight, we will be fine and we'll continue to expand along the lines of what we've seen, which is the mid-teens pro forma growth rate on the Services side for the remainder of this year as we look back to last year. So as we look at Q2, we're looking at the mid-teens for Services' growth rate.

We look at Integrated Solutions. We're up $1 million on the pro forma number from last year. The biggest thing about the Integrated Solutions is the seasonality or the lumpiness of what we have. Typically, our license sales are lowest in Q1 and Q2, growing into Q3 and Q4. We also have the product business, that when we get a large order, it comes in. While we have an undercurrent of recurring work and things we do on the products, we get into a situation where, in April, as we've talked about previously on other calls, we did more in product sales in April than we did during Q1. So that happens. We have the same situation with our license sales. The numbers aren't significant, but the volume in Q2 is greater than what we've seen in Q1. It's not significant. We're not talking in excess of $1 million in license sales here, but the volume is there, so the trend is different than what we've seen. We still have the underlying air services business due the FLD acquisition that's continuing to move along, as we've seen in the past. But, again, as we look at the entire picture, we're looking at comparable comparisons, Q2 2013 to the pro forma Q2 2012 of somewhere in the 15%, 16% growth rate for the total company.

Gross margin for Q1, as we've previously discussed, our gross margin's 24.5%, that's down from where we were due to the reliance we have on subcontracted labor, predominantly from the Poole acquisition. So that's brought us down, we were about 25% gross margin in Q4. The actual number varies as it comes through pending how many subcontractors we use in a number of hours. So we expect that number to continue as we move forward into Q2.

Integrated Solutions, we were just over 50%. That's comparable with where we were last year. That number will grow as our license sales grow. Obviously, our license sales have a higher margin portrait than the rest of our business does. So as we move forward as the Sensage licenses grow and as G comes online and that license revenue grows, we'll see some push to the gross margin to increase that number. As Len discussed, we don't anticipate seeing a significant amount of G license revenue in Q2. So we expect margins to go up a little bit, but not significant in the ISP sector.

Operating expense increased on a pro forma basis of about $2.3 million. There's really 3 numbers that are driving that. One, we've made the decision to invest in people to support the infrastructure and the sales cycle as we prepare for the commercialization of G and the general availability. So we've invested in the people all throughout the organization to be able to the CAAs, to handle the sales cycle and the actual sales folks themselves. There was a press release we put out with the new head of sales through Sensage.

We're doing that, so we're ready when we hit general availability to have all the pieces in place to deliver on what we've put out there. That costs money, we're investing that now. We've also got an increase in our facility cost as we've expanded, businesses has almost doubled. Part of that is the investment we have and the infrastructure to do that. But also, as we're growing, we've got more facility funds. The other number that's out there that increased on us is our stock compensation. As you know, we give every employee options and/or restricted stock when they come on board. As we went through, it was for Q1, it was about $1.3 million. We're going to see that number grow into Q2 and Q3 to the $1.5 million to $1.6 million range without any further acquisitions. So we should hold somewhere in that range for the remainder of the year. If we do a significant acquisition, that's going to come up. Right now we've got about $10.3 million of stock compensation expense to be amortized over the next roughly 3 years. We anticipate taking $4.6 million to $4.7 million of that during the remainder of this year.

We've also got the intangible amortization that's $6.9 million for the quarter, up from $4.9 million last year. We've hit the peak of that number as we look out, again, barring any additional acquisitions and the finalization of the ideal intangibles that we've got a placeholder in it, $3 million right now. We anticipate that number coming down to $6.3 million in Q2, further dropping to $6.1 million in Q3 and $5.8 million in Q4.

In accordance with the acquisition, the TI acquisition from December of 2011, there was an accrued earnout of about $2 million that was included on the balance sheet and also had a related intangibles associated with it. Based on the criteria to achieve that earnout, we determined that it's highly unlikely that, that earnout would be achieved. In Q1, we wrote off that $2 million payable, as well as that $1.85 million of intangibles associated with it. So there was a small net gain in the nonoperating aspect of the income statement. But based on what we know now, that's the best scenario we have for it, and we just started to treat it in Q1.

As we look at cash flow for the first quarter. First quarter tends to be our worst cash flow quarter due to the timing of bonus payouts, tax payments and payroll. That was no exception this year. Our cash from operations was basically 0 for the quarter, which was significantly better than it was last year. We tend to improve as we go through Q2 and Q3. So we're on a similar track to where we have been in the past years. Our debt was up less in Q1. The only real increase in debt was about $6 million, and we paid just under $7 million for the Ideal acquisition. So we feel good about where we are from a debt perspective and expect that number to bump out as we move through Q2. Our DSOs for the quarter are down. We only added $1.5 million in AR, that increased revenue by over $3 million, so DSOs are continuing to go down. Len, I think that's it for the financials.

Leonard E. Moodispaw

Okay. A few more comments and I'm going to concentrate on G, since that's an item of interest to everybody. All right, first, I'm going to talk about what we've learned to-date and then talk about what we're going to do in the near future. Over the years, the KEYW employees have spent a lot of time and intelligence business to pooling systems around the world and very complex networks. And we learned from that, as well as well from these early CAAs that every network is different: different sizes, different complexities, different number of users, different requirements. So it requires expensive system engineering to prepare for and deploy platforms. Our goal is to minimize operations and avoid false alarms. So we've earned that in the past, we're applying that to G. So we are looking to make sure that we minimize any impact on networks as we install Gs. To talk about the future of G and what's going to happen in the short term, I'm going to compare it to the recent event I had. I've had the pleasure of being in Nashville to see the first Jimmy Buffett concert. And so, imagine before the concert, there's a crowd of people milling around for hours, wanting to get in to start the show. But then as that crowd is managed, as it gets closer to showtime, a few select Parrotheads are allowed in during sound check, and they're strategically placed around the arena. The show involves very sophisticated electronics and imagery, so the early attendees make sure the lighting is good, the videos can be seen, the volume and tone of electronics are right. And when everything's right and the time is right, the doors are opened and people go in and enjoy the show. So G is managed much the same way. G is ready to go. As I said, one platform's already been delivered and another's on the loading dock ready to be shipped. Before we ship and install each G, we need to know that such things as power availability, policies, operational diversity. We need to understand the network and we need the customers to understand the networks before Gs are actually installed. We don't want to make the same mistake others have made. For example, financial institution install some equivalents out, and considering the impact on the network, they shut down the trading for 4 hours. That wasn't the product's fault, but it was the environment in which it was placed for that consideration of the entire network. So we're making sure it's done right before we go out and really open the doors.

We're continuing to add staff to provide the kind of services we need for the earlier assessments and for the installation and deployments. We will continue to do more cyber-analytic assessments. However, we're not planning to install and deliver more G platforms until we're satisfied that these initial deliveries are working smoothly. Thus, as I said before, we don't expect significant revenue for G in 2013, particularly Q2 and Q3. We will buoy several more in the next several months. But again, we'll work very careful -- watch them very carefully to make sure that the -- we understand how they fit into customers' networks. G is a very powerful platform. Customers do have to learn how to use it effectively. It's not -- effectively. It is a like parameter defense or antivirus products which sit at the edge of a network, it's inside the network and thus touches the entire enterprise. So these first 4 of installations are in effect to shake down crews or, to use my metaphor, sound check. We're going to know the impact on networks before we distribute G platforms through a broader market. That's what we'll be doing over the next few months. To quote an old blue song, "You never make your move too soon." We're being very careful.

Happy to take questions. And contrary to what we usually do, in addition to John and I answering questions, Chris Donaghey is here, available to answer questions. And the newly announced Chris Fedde is here who will answer questions, if we decide to let him. So we're happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Mark Jordan of Noble Financial.

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

A question relative to G. You mentioned that it seems like there's a tremendous amount of work that's done prior to installation to analyze the network or to formalize policies and understand the functionality of that environment? Could you talk a little bit about the sort of the pricing structure that you have? How are you getting -- how do you envision being paid for that upfront analysis work? What is the -- what's the structure for licensing and then sub-installation maintenance?

Leonard E. Moodispaw

I knew you would ask that. Yes, I have to -- I will distinguish between these first installations and the normal practice. The first installations, we are less concerned about pricing, although we'll be charging for the time as we've said before. The upfront, the upfront labor is charged on an hourly basis, and then we'll be charging for the Gs and so on. But the way we're working these first ones is to get those systems installed and to make sure they're working before we beat the customer up for the cost thereof. So yes, we're going to get paid under the kind of pricing algorithms we've talked to you, we've told you about before, but it is less important to us right now to have that paid upfront before we open the doors -- before we do the installations and delivery.

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

Okay. And a second question for me. Relative to Sensage's legacy business, you, I think, alluded to the fact that, that was continuing. Could you talk a little bit about what your goals and objectives would be for, again, the legacy products at Sensage in 2013?

Leonard E. Moodispaw

We don't have specific financial goals. We do expect that because the Sensage SIM products along with G have -- are in a real sweet spot for the kind of thing they do. We see a lot of interest in the product and we expect that to grow, but we haven't set, nor if I did, give you any guidance on any specific goals for it. We do see a bright future there though. And let me use that as an opportunity to clarify or to make sure I'm clear on what I said a few minutes ago in my remarks. We consider that the pace we're on with G is ahead of the pace. We said we would be delivering and installing in mid-second quarter. It's early second quarter. We're delivering and installing Gs. The -- we've said before, we don't expect a significant revenue. Nothing's changed in that regard. We will have revenue and it will ramp up at the end of the year. So we actually believe G is ahead of pace as opposed to being behind schedule.

Operator

Our next question comes from Patrick McCarthy of FBR.

Patrick J. McCarthy - FBR Capital Markets & Co., Research Division

So the work that you've been doing on G clearly, again, as you just mentioned ahead of schedule, can you talk a little bit about the future sales and the selling cycle, and what you've learned as you've gotten deeper into the process about what that may look like, what shape that might take over maybe the next year or so?

Leonard E. Moodispaw

If you permit me to put G in a box as it was on a whiteboard as opposed to really in a box, I would say, as I said, G's functional and it's being deployed. What we learned, however, is the necessity for very thorough upfront analysis is -- could be more extensive than we anticipated. And so in terms of the sales cycle, we'll do those kinds of assessments now and stack them up, if you will, before we actually install G. So we have the demand out there, it's growing and backing up. And so in terms of sales cycle, once we are ready to open the doors to have it -- to satisfy those demands, I don't see it as a long sales cycle to be placing Gs out there for the foreseeable future. Perhaps, next year, at the end of this year, we will extend and expand our marketing efforts to bring on more customers, but we got more than what we're ready to deal with right now.

Patrick J. McCarthy - FBR Capital Markets & Co., Research Division

Okay. And I think in the release you said there were 23 people hired in the quarter related to G, is that correct? And if so, could you give us a sense as to what they're doing? Are they doing the CAAs or...

Leonard E. Moodispaw

They are a few developers, because you never can have enough developers. But for the most part, it's rounding out the team who will do CAAs and will do the deployments and installations. So it's a combination of both.

John E. Krobath

Hey, Patrick, it's John. We've also added some sales folks as well in order to prime the pipeline to help both Sensage and G.

Patrick J. McCarthy - FBR Capital Markets & Co., Research Division

And would you think that's a good number to carry for a little while? Or are you going to continue to grow that body count over the next couple of quarters?

Leonard E. Moodispaw

We intend to grow the capably, whether it's hires or will we continue to add subcontractor teams to support us, remains to be seen. I would like to have a number of subcontractor teams to support the installations and deployments and the CAAs, so that if in the future, it reaches a point where we're in between, we're not paying people to sit around. So we're building up a combination of both.

Patrick J. McCarthy - FBR Capital Markets & Co., Research Division

Okay. And then just one final, if you don't mind. On the Poole, the big Poole contract, you mentioned a number of people you have in the program now. Do you have a sense as to what that would grow to by the end of the year, given the sequestration and the headwinds that might be out there on the government side?

Leonard E. Moodispaw

It's difficult because of sequestration. So it's slowed down because of that. I believe that once we get through the uncertainty and the ambiguity of our sequestration, it's going to pick up and grow significantly. But I can't give you a real number.

Operator

Our next question comes from Tobey Sommer of SunTrust.

Tobey Sommer - SunTrust Robinson Humphrey, Inc., Research Division

My question has to do with CAAs. So just to understand, you shipped one in Project G, you got another one on the loading dock. Is my understand that you kind of have a queue of interested potential customers that have sort of requested CAAs and to start the process? And could you describe that a little bit more?

Leonard E. Moodispaw

Yes, we do have a queue of people interested in Gs. And therefore, we will do some sort of assessment. And we're dividing the assessments into 2 parts. One, is let's call it a full-blown cyber-analytic assessment. And then one might be a little more narrow with companies who say, "Yes, I care about what's going on in my network, but I really want a G, so what's it take to install a G?" So yes, we have a backlog of people wanting those. And again, we're building up the team to be able to do multiple CAAs in one time.

Tobey Sommer - SunTrust Robinson Humphrey, Inc., Research Division

Len, I imagine that a potential customer's knowledge and sophistication about kind of being over to hand over information about their network on a dime is kind of a gating factor. Of those interested parties that are kind of talking to you about CAAs now, how are you finding their networks? Are they -- is their own self knowledge of their network at a level that facilitates a quick CAA? Or is that kind of the bottleneck that you're describing?

Leonard E. Moodispaw

You're going to get me in trouble with some of our customers, so we might add. So let me just speak very generally. We find diverse capabilities on their part. Some have no written policy, some have detailed policy, some are very well prepared and some don't know what they have. Some have stacked up a bunch of firewalls thinking that will answer the problems, and if 1 works, 5 must work. And that really doesn't help. So there's an education part that we're going through with them. So yes, it's quite diverse. And we do find that it takes some diplomacy to tell somebody their network isn't quite up to snuff. But I'll emphasize that this is no different for us than years of doing exact same thing for intelligence community customers when we show up overseas to people who've been running a field site and we tell them we're here to help. And we have to diagnose with their problem and help get their networks or whatever their system's straight before we install anything. So to us, it's just another customer.

Tobey Sommer - SunTrust Robinson Humphrey, Inc., Research Division

Okay. My last question, I'll get back in the queue is, Len, when you think about capital deployment now, how do you kind of bifurcate investing in project G and perhaps other technologies that may be helpful for you to hone relative to that versus looking at traditional services businesses that may be out there and available for sale, but kind of don't further, at least directly, project G?

Leonard E. Moodispaw

Tobey, did you mean that in the acquisition context? It wasn't...

Tobey Sommer - SunTrust Robinson Humphrey, Inc., Research Division

Yes I did, exactly.

Leonard E. Moodispaw

Okay. Well, we continue to look for the right opportunities be they on the services side or on the commercial side. However, my preference, my priority certainly is for things that take us to further down the path with G. That said, we don't need another thing in terms of acquisition. It would be helpful to find, I don't know, a particular company that has some skills that would be useful to us to support some of the CAAs or deployments. But if we don't make an acquisition in either side, we're going to continue to grow and be successful.

Operator

Our next question comes from Jim McIlree of Dominick & Dominick.

James Patrick McIlree - Dominick & Dominick LLC, Research Division

Can you talk about generally, from a general perspective, can you talk about the split in revenues in the Integrated Solutions between products, FLD and commercial? I know you don't want to give numbers, but if you did want to give numbers, that would be great. But if you don't, can you just talk about directionally up, down, sideways?

John E. Krobath

I think we can talk about it directionally. I know you'd like to get some specifics, but we won't get into that kind of detail. We still have 6 planes flying on the FLD side. We're expecting the match show to come online. Shortly, we're waiting, tasking on it and final testing now. So if you go back to and kind of look at what we've done in the past in terms of the FLD revenue, that's kind of continuing on where it is. Obviously, they jump by leaps and bounds when we get something new in place in terms of a new plane. So they're pretty much status quo for where we are. The products business, again, we have a nice order in, in April that improved the products number from where we were. But the numbers that we're seeing there, as you can tell, but growth was from $18 million to $19 million last year to this year in terms of the overall growth within ISP. So if you go back and take a look at it and then kind of get back to where those numbers are. There is one thing I do want to touch on. We've been talking about G and we've been talking about commercial availability a little bit. One of the things that you should be aware of as we move forward is, once we hit general availability, the cost that we've been capitalizing with respect to developing G will become exactly that cost. We capitalized about $1.3 million in Q1. If we hit general availability towards the end of May, then you can figure a commensurate amount of cost for 1 month or somewhere around $500,000. As an expense, will start bearing on the income statement that we haven't before. So as you look within the ISP sector, both top line in terms of revenue and what we're talking about and cost, we've got that cost coming once we hit general availability.

James Patrick McIlree - Dominick & Dominick LLC, Research Division

Okay. And Len, you talked about shipping out, I don't know what numbers you used, 2 to 3, or 3 to 4 more units after the one that's on the loading dock gets shipped out. Was that for the rest of the year but shipping in the next few months? Or was that in the next few months and then there's more to come for the rest of year?

Leonard E. Moodispaw

The latter. We could ship more soon as we add all the equipment together now. But it's 2 to 3 more over and above the 2 that I talked about initially. So one's going, one's on the loading dock. 2 or 3 more in the next couple of months is all I want us to do. But I expect to open the doors, making it more broadly available later at the year, perhaps in the fourth quarter, late third quarter.

James Patrick McIlree - Dominick & Dominick LLC, Research Division

I see. Okay. And I think you gave some numbers about the number of employees you have on the radio contract. Do you have those numbers at the end of the prior quarter, as well, so we can calculate how many you added?

Leonard E. Moodispaw

I remember it. I think it was in the neighborhood of 135 to 140. So we've added somewhere between 5 and 10 for the quarter.

John E. Krobath

Yes, Jim, I'll get back to you with that number. I think the number at the time of the Analyst Day was in the 140-ish range. But the December 31 number, I don't have that right off hand.

James Patrick McIlree - Dominick & Dominick LLC, Research Division

Okay, great. And John, on this capitalization of the G cost, what line is that showing up in on the balance sheet?

John E. Krobath

Right now, it's coming through, I believe, in the fixed asset line. And we'll move it out over to an inventory line once we actually finished the completion of it. And you can see the dollars that we're spending on it showing in the cash flow statement.

James Patrick McIlree - Dominick & Dominick LLC, Research Division

Right, right, okay. And so that 500k per month you said is it, will be expensed when you go to GA, whereas right now it's being capitalized? I just want to make sure I have that right.

John E. Krobath

That's correct. We capitalized about $1.3 million in the first quarter. So obviously, we're spending more in March than we did in the first part of the month, so we're ballparking that at about 500k once we hit general availability. Now some of those folks, if they're subcontractors, and their role is done, they would roll off and we wouldn't use them. Other folks would roll into direct of their doing CAAs or installs. So it's a matter of where that cost is going to show up as we roll out. Others will still be doing the R&D functions, so their costs would show up in our R&D line.

Operator

Our next question comes from Brian Kinstlinger of Sidoti & Company.

Brian Kinstlinger - Sidoti & Company, LLC

Just curious if you could initially breakdown core engineering revenue versus radio?

John E. Krobath

Brian, the math is pretty straightforward. I mean, we're not going to give you the exact number, but the map is still roughly per employee a little over or somewhere around 250k per person. So that should give you the pretty rough run rate. The purpose of putting out the numbers that we did at the Analyst Day was to give you a feel for what the major categories of revenue are going to be. But it wasn't intended to be a here's-how-we're-going-to-report-going-forward, that's not -- that wasn't the objective -- that wasn't the purpose of doing that at the time.

Brian Kinstlinger - Sidoti & Company, LLC

Okay. When you do you expect Project G's going to adopt the name for branding? I would expect with you soon being readily available for sale, that would already happen. So I guess I'm wondering at what point do you expect to make an announcement on that?

Leonard E. Moodispaw

I don't know that we'll actually make a big announcement. In fact, I believe the marketing folks had come up a name for it. I can't remember it. I always use Project G, Brian. So we're trying to be a little bit more vocal about the branding on that.

John E. Krobath

Brian, the names have been established. We're in the process of putting the data sheets together now, so you shouldn't be surprised to see that in the -- at least sometime in the second quarter.

Brian Kinstlinger - Sidoti & Company, LLC

Now the customers that are getting installs or have already installed, are those all the beta customers? Are they -- is the second -- is it 1 customer setting 2 Gs? Just give us a sense for how many customers and if they were beta customers.

Leonard E. Moodispaw

One customer is one of the early adopters and another one is a brand new customer that came along. So it's one of each, if you will.

Brian Kinstlinger - Sidoti & Company, LLC

Do you expect all the beta customers are going to move forward with G? Or have some communicated that they may not move forward?

Leonard E. Moodispaw

I don't. I wouldn't define anybody as a beta customers. So the early adopters, we had 3. One, we were able to talk about which is AT&T, which is going through reorganization but is reemerging and ready to start work, so we really haven't gone far with them. I expect however, that all the early adopters to be installing Gs.

Brian Kinstlinger - Sidoti & Company, LLC

Okay. Can you talk about the sort of range in a number of assessments you expect in the next 3 or 6 months, given you have such a heavy queue and you have been hiring? Is that going to slow like you talked about taking the whole effort slower? Or are you going to pick up the number of assessments?

Leonard E. Moodispaw

We will pick up the pace on assessments. And I'm making up the number because I haven't really looked at the list, but I'm going to say that we've got 10 potential customers for CAAs without really trying. We're not going to do all 10 at once, we don't have the capability to do that. We'll ramp up the capability and we will do more of them over the next of -- over the rest of the year. So the number will grow and we'll work through that, those initial ones plus more will be added.

Brian Kinstlinger - Sidoti & Company, LLC

Great. And in radio, how many people do you actually have today on that contract?

John E. Krobath

146.

Brian Kinstlinger - Sidoti & Company, LLC

So it's no different than the end of the quarter? That was [indiscernible]. The K-8 number versus the end of the quarter number?

John E. Krobath

It's the same.

Brian Kinstlinger - Sidoti & Company, LLC

It's the same.

John E. Krobath

It's the same number.

Brian Kinstlinger - Sidoti & Company, LLC

Now on the FLD flights, I'm curious, are you receiving any revenues or monies for the planes that are in certification? Or is all the revenue once those 2 planes and whenever they get into the production, will they all be incremental?

Leonard E. Moodispaw

No, we're collecting revenue on 6 planes now, which as they move through certification, that's part of what they're doing under contract. So the 6 planes that we've had up and flying are continue to up and flying, they just rotate in and out, so there's no incremental boost beyond that. The boost for us will be when the metro comes online and picks up an assignment, that will put a seventh plane in the air force.

Brian Kinstlinger - Sidoti & Company, LLC

And you do have and 8th one in certification process as well, is that right?

Leonard E. Moodispaw

We have an 8th one in the process, but not the same certification process, so it's not included in those revenue totals.

Operator

Our next question comes from Josh Sullivan of Sterne Agee.

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

On G, can you talk about the learning curve for the CAAs? Just understanding that there's probably different buckets for the larger versus smaller organizations, but is there a metric such as days or man hours that you can point a learning curve that you guys are moving down?

John E. Krobath

Josh, if I don't answer the question, you'll tell me so. By learning curve, I tend to think we learn as we do each one, and that's true. But it doesn't mean that it took us 2 weeks and it will soon take us 1 week. What we're trying to do is automate it as much of it as we can and have been trying to do that, just the lack of time and resources to get that much done. But the all of the preparation -- but it helps prepare us for each CAA, but it'll still depend on the size of the enterprise and all of the operational aspects of that to know how long it's really going to take.

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

Okay, yes. I think you had talked about maybe a generic architecture policy box for some of those CAAs that weren't prepared for G. And do you have an idea of what percentage of potential CAAs might require that?

Leonard E. Moodispaw

No. I think until we get into each one, we won't know.

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

Okay. And then you spoke earlier about doing multiple CAAs. What's the current capacity to do a CAA in the quarter? And then just how do you see that progressing?

Leonard E. Moodispaw

Well, once again, I haven't thought of that in that context. So I'm going to say we probably have the capacity to do 3 or 4 more this quarter, this second quarter -- whatever, yes, second quarter. We got enough subcontractors ready to go and teams that could help us out in addition of our own staff. So that's my guess as to what we could easily do.

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

Okay. And then just lastly on the commercial front, I mean, how is the competitive market reacting? Do you see similar products coming forward. Are you approaching partners, both on the consulting side for the CAAs or on the technology side for the product?

Leonard E. Moodispaw

What's been interesting is -- well, a couple of things, I'll say. When we hear people allude to similar products, but upon examination, we find it they're not really doing what we're doing. In the combination, particularly of the Sensage SIM and G. And secondly, we find that as these potential customers come to us, many of them have installed many of the other products out there, the firewalls, et cetera. And have found that, that isn't fixing their problems, so it makes them an even riper customers for us. So we've seen nothing that would deter us or alarm us that somebody is doing what we do. We've spent a lot of time with a lot of companies working on that, talking about partnering. We try and make such companies' firewalls comfortable and we're not competing with them, we can work with them. And I think we're having good success at it. I'm going to put Chris Fedde on the spot. Chris has been around this business for a long time. He's seen lots of competitors, and ask him to comment on what I just said on what you asked out.

Chris Fedde

Yes, this a Chris Fedde. It's a very good question. What I had seen looking into this from my perspective is there's some very unique parts of G that you will not find anyplace else. Now G, of course, covers a spectrum of capabilities, and some you may find other people claiming to do those and others not. But the things that make it very unique are truly unique. Coming from a security background myself and having been a consumer of high-end security for 2 decades, I can tell you this has some built-in advantages that are not going to be equaled by other competitors for the foreseeable future. And that's a real draw for me, as well as the people that I've had the privilege of talking to about G so far. So it's been very eye-opening to see what some of these capabilities are. So I think you're going to find that there's a sophisticated spectrum of users out there that have been doing everything they can on the perimeter. They're going to continue to do everything they can on the perimeter, but they know that will never be 100%, which means that threat will get inside some percentage of the time. So finding the threat and reacting to it fast, that's what it's all about. And that's what really makes G unique. And so that's why we're really anxious to see this thing on live and to demonstrate it with some of these early adopters that Len's been talking to. And that's why we've very careful to pick early adopters that represent the spectrum of users out there. Because small networks aren't necessarily the easy ones, small networks sometimes are the hard ones, if they're distributed geographically diverse. So we really want to see this thing in action, demonstrate its capabilities in a fairly good spectrum of use cases. And so that's the real excitement here with G and the capabilities that have been built on top of the Sensage SIM that enables so much of the G capability.

Operator

[Operator Instructions] Our next question comes from Chris Mecray of BlackRock.

Christopher Mecray

Len, I wonder if you could comment on the significance to you of the establishment of this new DoD Cyber Command, whether it's an opportunity for you or whether it represents competition for cleared personnel who you would otherwise like to hire?

Leonard E. Moodispaw

It's actually a great opportunity for us. We do a lot of training already on Cyber Command. So as it grows, we expect our training business to grow. And so we're actually looking to expand our facilities even further to accommodate that growth. And we're fortunate to have great relationships with Cyber Command, and we go really close to them. And no, we don't see it as competition, because for the most part, they're training military people and going to place them out in various commands. We look at it actually as a source of resources for us in the future. Because our folks would really like to train military people, partly because we train them, but because they're so disciplined and have the kind of skills and discipline it takes to really do a good job on the cyber kind of world. So we think it's an opportunity.

Operator

We have a follow-up question from Mark Jordan of Noble Financial.

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

Just a technical one. I just noticed on the share-based calculation, the diluted share base is 36.4 million in the press release. In the fourth quarter, it was 38.8 million. I was curious as to why that declined sequentially?

John E. Krobath

Because we get a net loss, Mark. We have to exclude any of the options, even if they're in the money, because they would be anti-dilutive. So the fact that it went down, we're simply having, per GAAP, excluding any options or warrants, that would have converted to be outstanding shares as of the end of March.

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

Okay. So return to profitability would bounce back to that previous term line?

John E. Krobath

That's correct. And if you go back and take a look at the option footnote, which I believe, is note 10, it's either 10 or 11. You'll see the full detail of what's out there in the shares, and it's very similar to what we've disclosed in the past.

Leonard E. Moodispaw

Mark, before you get off the phone's lend, I want to try and clarify a terminology, because I think, between us all, we may have confused things. So for some time, we've been talking about G being generally available in the second quarter. And when I said we're on track, we're ahead of the game, it's because my definition of that has been, and I think we've said this, when the platform is ready to go out to customers. And I don't want to get hung up on terminology of what's an early adopter, when is it generally available. The product is ready to go, is gone, is out being installed, it might be ahead of pace. We could be installing more, if that meets somebody's definition of general availability, so be it. It's not because of G, the platform itself, that we're not installing more right now. It's because of the methodology, the process, that I insist that we go through. So again, I don't want to get hung up on terminology. I believe we're headed on -- ahead of schedule.

Operator

Our next question comes from Steve Bowman (sic) [Unger] of Lazard Capital.

Stephen S. Unger - Lazard Capital Markets LLC, Research Division

I apologize if I missed this, but I wondered if you can just talk a little bit more about the ideal technology acquisition that you did in January? And specifically, kind of what capabilities that adds to the product offering?

John E. Krobath

Yes. Sure, no problem, Steve. So they will be folded into the government products group. The primary capability that they have is a rapid response forensics analysis type of capability. So you've heard us talk in the past about the geolocation devices that we used for finding bad guys' cell phones. So imagine when you take down one of the safe houses, you go into this room. What you want to do is, as quickly as possible, take the electronic devices that you see in that room or the electronic media that's in that room, and do a real quick scan as fast as possible of the information on those devices and prioritize it based on timestamps. So look at the most recent data and communications that came in. Because you may find that there are some very valuable information from some very time-sensitive types of data sources that would allow you to make another move without tipping off other operatives that may be in the area. So in general, it's a rapid-scan-forensics type of capability for special military type users. Does that answer your question?

Stephen S. Unger - Lazard Capital Markets LLC, Research Division

Yes, that helps some, Chris. Is this a pre-revenue company or have you guys really bought a business here?

John E. Krobath

No, we bought a business. They had ongoing revenue before we bought them. We figured, we find that they are in good faith with some of the things we're already doing the government, product side. They expand some platforms we were working on across both the Android market and the Apple market as well, so they are a alternative contributing number of society, but they are a real business with real revenue.

Stephen S. Unger - Lazard Capital Markets LLC, Research Division

Okay. So John, is it possible for you to kind of quantify kind of multiples of in which you guys pay these on a revenue basis or on an EBITDA basis?

John E. Krobath

I would say that it's consistent with what we've paid for businesses in the past where we're in the 6x to 7x EBITDA range. And there was a strong -- they were in a position where they like what we're doing, and some of the contacts we had that would enable them, one of the reasons they took stock, to grow their market share. They had kind of hit a cap in some ways in terms of what they have accessible. So the combination of some of the technologies we had that they were interested in, as well as the markets we could help them access was one of the draws that brought them on over to us.

Stephen S. Unger - Lazard Capital Markets LLC, Research Division

Okay. So if I'm doing math here in my head correctly on kind of a quick basis, which -- well, honestly, there's a low probability that I am doing it correctly. We're talking maybe kind of mid-single hundreds of thousands of EBITDA contribution in the quarter. And consequently, maybe $1 million or $2 million of revenue contribution in the quarter?

John E. Krobath

I think -- I don't think your revenue -- you math's too far off.

Operator

And at this time, I'd like to turn the call back over to Mr. Moodispaw for any closing remarks.

Leonard E. Moodispaw

I have none other than I hope everybody has a good day. And thank you for your interest. Good night.

Operator

Thank you, sir. And thank you, ladies and gentlemen, for your participation. That does conclude your program. You may disconnect your lines at this time. Have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: The KEYW Holding Management Discusses Q1 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts