KEYW: Spinning A Broken Record For Fans Awaiting A Dubious Encore?

| About: KEYW Holding (KEYW)

As a fanatical "ParrotHead" with an encyclopedic knowledge of Jimmy Buffett songs, KEYW (NASDAQ:KEYW) Chief Executive Officer Leonard Moodispaw often seems more inclined to share catchy lyrics penned by his idol than useful details about the actual business conducted by his glorified rollup company. While Moodispaw likes to present snippets from those upbeat tunes as metaphors for noteworthy developments at his tightlipped cyber-security firm, however, he has somehow managed to overlook the very title that perhaps delivers the most fitting message of all: "Math Suks."

No matter how well Moodispaw might spin its record or how much he tries to promote its next big hit, KEYW remains a bleeding defense contractor that has spent a fortune on acquisitions and - now down to its last $3 million and already burdened by plenty of debt (with limited available credit left) - still needs to prove itself.

Practically broke after raising almost $100 million through a dilutive secondary offering last fall, the war chest supplied by its initial public offering two years earlier basically gone, KEYW traveled all the way to Europe last week in an effort to strike up fresh interest in the company by hosting an apparent road show for investors halfway around the globe. A somewhat rare courtesy that largely escaped the attention of investors back home, left puzzled (but understandably pleased) by the energetic gains that KEYW recorded once that distant road show began, the move nevertheless struck some of the more cynical followers of the company as an obvious - if desperate - reach by the bleeding firm for additional funds.

While KEYW never bothered to openly publicize that important event on its official schedule, let alone divulge the actual intentions behind it, a corporate cheerleader helpfully volunteered that enlightening update from Europe himself. A former analyst who spent the end of his Wall Street career stubbornly clinging to his relentless faith in Force Protection, one of the more notorious flameouts that stained his record, KEYW Vice President of Corporate Development Chris Donaghey originally originally fell in love with the first rollup company that Moodispaw built before joining him in the executive suite at the next.

Focused since then on promoting KEYW alone, Donaghey surprised even TheStreetSweeper with news of the foreign road show when it contacted him on Tuesday seeking input from the company ahead of this story. Tied up with potential investors at the time, Donaghey promised to address probing questions from TheStreetSweeper - seeking detailed information to supplement the vague and/or opaque material that the stingy company normally chooses to share - by early this week for inclusion in follow-up stories. (Since KEYW emailed its somewhat vague responses to the questions that it chose to answer right as the market opened today, beyond the deadline that would have allowed reasonable time for their full incorporation into this story, TheStreetSweeper will simply provide a link to the information supplied by the company at the present time.)

The first in a series of articles on the incredibly secretive cyber-security firm (with the second currently scheduled to follow in a matter of days), this broad introduction challenges the rosy image that KEYW has long enjoyed by presenting thorny evidence that pokes holes in the compelling story often sold to trusting investors as the absolute gospel. By combing through voluminous piles of regulatory filings and comprehensive databases full of revealing media coverage, TheStreetSweeper has gathered enough disturbing material to shatter some of the most powerful illusions that surround the company and in turn undermine some of the most critical arguments that favor its stock. As the opening installment in that series, this story serves as a general overview that summarizes overlooked contradictions to popular myths about the company, with the most relevant of those - related to its business strategy, its leadership team and its track record - detailed more extensively in the remaining sections of the report.

'If you take one look behind the shine, it doesn't always gleam'

-- Jimmy Buffett (from "Diamond as Big as the Ritz")

If possible, try to tune out the deafening buzz that KEYW has triggered with its celebrated expansion plans for a moment. After all, KEYW has so far merely promised to launch a new cyber-security platform for the lucrative commercial market and - despite a big-ticket acquisition supposedly designed to accelerate that process - now looks poised to do so (absent further delays) almost a full year behind its original schedule. Since KEYW owes so much of its swollen $540 million market capitalization to the intoxicating hype generated by that elusive breakthrough -- co-developed with the help of a longtime money-loser that wildly overestimated the demand for its existing services - the company better produce some legitimate evidence of an imminent success fairly soon if it hopes to avoid a nasty hangover.

For now, at least, KEYW continues to lean on the credentials of its well-connected leaders for the outsized respect that the company has yet to actually earn and the generous support for its stock price that has automatically come along with it. Long before KEYW ever burst onto the stage a few years ago, Moodispaw began capitalizing on his handy government connections while serving as the "turnaround CEO" of another rollup company that - with its stock already punished over past disappointments and its leaders increasingly worried about future contracts -- ultimately sold itself to giant Northrop Grumman (NYSE:NOC) after a couple of other potential suitors took a close look at the defense contractor and quietly passed. With its CEO still applauded for the rescue of his first rollup company and now surrounded by a familiar band of corporate veterans who agreed to join him for a second act, KEYW has taken advantage of that lingering fame to effectively bill itself as a returning star practically destined to reward its adoring fans with a marvelous encore.

A $15 highflier that has staged a remarkable comeback from an early disaster, KEYW has fully doubled in price since the young defense contractor suddenly decided to broaden its reach in an effort to reinvent itself early last year. Graciously forgiven for ongoing delays to the official launch of its commercial platform -- so far tested by a mere handful of "early adopters" under an extended development program known only as "Project G" -- KEYW remains as popular as ever among the chorus of fawning analysts who have sung its praises from the very start. So determined to maintain their bullish views on KEYW that they often sound like parrots themselves, dutifully echoing management every time that it decides to change its tune, those influential cheerleaders have not only shrugged off a series of relentless cuts to their financial projections for the pampered company but have also found new excuses to inexplicably raise their target prices on the stock along the way.

While its share price has ballooned along with those swollen targets and even managed to shoot right past one of them at its high, KEYW would technically qualify as a humble penny stock -- languishing below the $5 cutoff that institutional owners often regard as the bare minimum -- if it traded at the same multiple assigned to even the profitable leaders that dominate its current peer group.

'You have to purge that urge to merge'

- Jimmy Buffett (from "Bank of Bad Habits")

KEYW actually took a hairy dive toward that danger zone a couple of years ago, when the company weathered such a humiliating setback that its stock plunged well into single-digit territory and looked hopelessly stuck there for a while.

As a young public company instilled with remarkable confidence for its tender age, KEYW boldly pursued a high-profile $700 million contract known as "AURA" - a key attraction for early investors who placed their faith in management and their bets on the pricey stock - in a fruitless attempt to make a big splash by landing a major government contract of its own. Stung by rejection and still waiting for a lucky break almost a full year later, KEYW effectively decided to create its own by spending an outright fortune - more than it had initially commanded, in fact, as a brand-new public company - to buy a cash-strapped rival at a steep premium and then settling for the low-margin $150 million contract snagged by that competitor instead.

Indeed, thanks to a relentless shopping spree financed largely by the proceeds from stock sales (totaling almost $200 million) and further supplemented by a mountain of debt (its entire $70 million bank loan depleted and more than half of its $50 million revolver drained, all in a matter of months), KEYW has managed to buy the exhilarating top-line growth that Wall Street inherently craves by embracing the same hazardous strategy that has already doomed so many other rollup companies over the years. Take a look at Swisher Hygiene (NASDAQ:SWSH), for example, a former highflier that debuted with its own decorated leaders and exploded on lofty hopes for a winning sequel to some particularly famous rollup chains. A double-digit stock before TheStreetSweeper exposed a mountain of dirt at the cleaning company - starting with the felony conviction that had landed its namesake founder behind bars - Swisher has long since plummeted to barely $1 a share and now looks permanently stained after adding layers of fresh mud to its name.

For its part, with its own shining reputation still intact, KEYW has so far merely tested the limits of the bountiful trust that it enjoys. The last time that KEYW felt a powerful urge to indulge its shopping habit, for example, the company took a chance that now seems downright reckless in hindsight.

When KEYW decided to splurge on Sensage (the partner on its commercial project) and Poole & Associates (the winner of that low-margin government contract) in back-to-back deals last fall, the company could hardly afford to cover even one of those pricey acquisitions on its own. Despite the paltry $235,000 left in its dwindling bank account, however, KEYW nevertheless offered to pay a combined $160 million for those two security firms - negotiating both of those buyouts within the span of a week -- and then, shrinking the massive loan that it had arranged to present itself as a legitimate buyer, shifted much of its new financial burden onto public investors by sticking them with yet another gigantic shopping bill.

'Got a lot to drink, a lot to think, a lot to drink about'

-- Jimmy Buffett (from "A Lot to Drink About")

By the time that it returned to the capital markets for a fresh mountain of cash, KEYW had already swallowed at least a dozen companies in a deliberate effort to bulk up and better compete as a prime contractor for big-budget government projects. For some curious reason, though, that expensive strategy - long regarded by KEYW as vital to its success -- has apparently backfired in recent years to somehow produce the opposite results.

Back when KEYW originally went public in the fall of 2010, for example, the company generated almost two-thirds of its revenue (on a pro forma basis) from government projects that it steered as the prime contractor. Although KEYW indicated that its share of those high-margin contracts had at least held at similar levels while it remained in the hunt for the lucrative AURA project early the following year, however, the company never reported figures anywhere near that high again.

In a downright jarring reversal, overlooked by supportive analysts hopelessly blinded by glorious visions of future success, KEYW has endured so much deterioration in its business mix that the company spent last year serving as a lowly subcontractor on government projects that accounted for the overwhelming majority of its revenue. Simply put, despite the costly strategy that it has pursued to elevate its status (at great expense to its charitable investors), KEYW actually looks far less like a prime contractor - collecting barely one-quarter of its revenue last year for overseeing those coveted, high-margin projects - than it did the day that the company arrived on the Nasdaq begging for the massive resources necessary to finance its elusive dream.

Of course, KEYW also bought plenty of companies that fell short of their own lofty goals along the way. Look what happened after KEYW purchased Sensage, the bleeding company that serves as its partner on "Project G," for a particularly telling example.

While KEYW offered to pay almost $35 million for Sensage when it originally struck that deal, the company also expected its partner to generate a lot more business than it ultimately mustered in order to collect that entire sum. By withholding almost one-third of that payment until Sensage closed the books on its next quarter a few months later, KEYW left even some of its trusting followers on Wall Street worried about looming problems on the horizon. Although KEYW shrugged off those concerns at the time, the company soon wound up saving a bundle of money when Sensage fell so short of reaching its financial targets that the firm barely even qualified for an earn-out payment at all.

Granted, in order to collect the entire $10.5 million earn-out payment that KEYW included in that deal, Sensage apparently needed to triple its sales on a sequential basis during the busy fourth-quarter season when it normally lands so many of its accounts. Unable to approach the lofty target that KEYW set for its final quarter of the year, however, Sensage collected a mere $77,000 - or less than 1% of its potential earn-out bonus - in the end.

In fairness, since KEYW has written off earn-out payments to several acquisition targets that missed their financial goals by now, Sensage hardly deserves special blame for that failure alone. When KEYW gave up on Sensage and cut that tiny bonus check after witnessing its performance for barely a quarter, however, the company also gave up on its original plans to finish Project G in time for its "general release" to commercial customers early this year. KEYW has since followed up by steadily pushing the launch date for that crucial platform toward the end of the year, while missing financial targets of its own - and swinging back to a loss once again - along the way.

'The canons don't thunder; there's nothin' to plunder'

- Jimmy Buffett (from "A Pirate Looks at Forty")

If not for a fortunate detour away from its core business, taken the month before management officially broke the crushing news about the AURA contract, KEYW would have struggled to muster even the fleeting profits that made the young public company appear somewhat healthy for a while. Despite all of the firms that it has collected in recent years, KEYW often relied on just one -- which now looks particularly vulnerable itself - for most, if not all, of the operating profits that it recorded before it recently sunk right back into the red.

Immediately abandoned by its own turnaround CEO once he convinced KEYW to purchase the company and then broke his promise to stay, Flight Landata (FLD) specializes in gathering intelligence by air to bolster the security of American troops stationed in danger zones. For two years, KEYW banked on FLD as both a booming source of growth and a rare source of profits while it looked beyond Afghanistan - once a hotbed of military activity that has cooled with the commitment to that former war zone - for similar opportunities elsewhere that failed to materialize. Even with FLD dependent upon steady demand for its services in Afghanistan under a contract subject to renewal this fall, however, KEYW continued to stubbornly dismiss the obvious threat posed by budgetary pressures that would soon crush an immediate peer set to drop a bombshell on the market without any advance warning.

"I can't say more emphatically that we have seen no slowdown and we have seen no impact and don't anticipate it," Moodispaw proclaimed the month before fellow defense contractor AeroVironment (NASDAQ:AVAV) tanked on news of a stunning halt in its own government orders. "I hope that's strong enough …

"The funding is there, if you have solutions to hard problems," he further insisted at the time. "The distinguishing factor is the kind of work we do and the kind of skill sets we have and our ability to respond very quickly to them - which is why money flows to us."

With AeroVironment still nursing the deep wounds that it suffered after blindsiding the market a few months later, however, KEYW sounded less like carefree Jimmy Buffett and more like a practiced singer of the blues.

"Because of uncertainty, we are seeing customers slow spending," Moodispaw suddenly volunteered this spring after KEYW delivered a smaller miss of its own. "They're kind of hoarding funds until they know the full impact of sequestration.

"In my view, any company who's doing business with the federal government (that claims) they won't see any impact from the foolishness of Washington is just kidding themselves," he then boldly added. "Perhaps they've been spending too much time at the Mad Hatter's tea party. But who knows what shoes will drop in the future?"

'Call me a liar … Believe me or not'

-- Jimmy Buffett (from "That's My Story, and I'm Stickin' to It")

If the wrong shoe drops, KEYW might want to blast a soothing Buffett song just to protect its tender ears from the unfamiliar pounding of footsteps finally on the run.

At times, KEYW has counted on FLD for the equivalent of 120% of its operating profits (if not more) - enough to compensate for the losses suffered across the rest of its portfolio and literally push the entire company into the black - so it obviously cannot afford to spare that lucrative business. Still heavily dependent upon FLD after scoring an expanded contract that ranks as a rare but shaky victory, since it faces a looming renewal process with no guarantees, KEYW continues to lean on that business as a crucial source of profits and obviously needs it to last beyond the third quarter of this year.

No wonder KEYW prefers to change the subject and talk about the future instead. In a rather convenient move, KEYW has basically asked Wall Street to look past both this year and the next and value the company based upon its lofty projections for 2015 instead.

Despite all of the risks that already threaten its government contracts, let alone any challenges that might hinder its success in the commercial marketplace, KEYW has predicted a healthy surge in business throughout the company that will allow it to double its 2012 sales -- and actually clear a sustainable profit on that surging revenue in the process - a couple of years on down the road. Even if KEYW manages to keep those lofty promises by achieving its financial targets for a change, however, the company would still look overvalued at its current price when compared to leading defense contractors in its peer group. Unless KEYW makes a big splash in the commercial marketplace - with an unproven technology that has yet to generate any legitimate revenue -- by successfully competing against established players that sport rich premiums, hit days ago by a stunning wake-up call from a key player in the group, the company cannot reasonably justify its swollen valuation at all.

Ironically, back when KEYW still felt content to focus on its core business as a defense contractor and less pressure to reinvent itself, its confident CEO practically ridiculed both the rising upstarts and the giant powerhouses that it would later chase into the commercial marketplace.

"I think, if you're a smaller company - or a company doing commercial stuff - it's hard to break in," Moodispaw confessed in a revealing interview with The Washington Post about a year before he went on to radically change his tune. And "what I find the big guys doing is running around (saying): 'There's this pot of gold here. What are we doing that we can call cyber?'"

In other words, he pointedly concluded, "There's just a lot of hype."

* Important Disclosure: The owners of TheStreetSweeper hold a short position in KEYW and stand to profit on any future declines in the stock price.

* Editor's Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Melissa Davis, the senior editor of this website and the author of this story, please send an email to

Disclosure: I am short KEYW. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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