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The KEYW Holding (NASDAQ:KEYW)

Q1 2014 Earnings Call

May 01, 2014 5:00 pm ET

Executives

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

Philip Luci - General Counsel

Philip L. Calamia - Chief Financial Officer and Principal Accounting Officer

Chris S. Fedde - Executive Vice President and President of Hexis Cyber Solutions Inc

Chris Donaghey - Vice President of Corporate Development and Communications

Analysts

Frank Atkins - SunTrust Robinson Humphrey, Inc., Research Division

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

Brian Kinstlinger - Sidoti & Company, LLC

Steven Cahall - RBC Capital Markets, LLC, Research Division

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

James Patrick McIlree - Chardan Capital Markets, LLC, Research Division

Marcelo Desio - CrossLink Capital, Inc.

Wes Cummins

Operator

Good day, ladies and gentlemen, and welcome to your KEYW Corporation First Quarter 2014 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to hand the conference over to Mr. Len Moodispaw, Chairman and Chief Executive Officer. Sir, you may begin.

Leonard E. Moodispaw

Thank you, Kylie, and I thank everybody for dialing in. Before we begin, we must do the obligatory disclaimer. So Phil Luci, our General Counsel, will read that for us.

Philip Luci

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 law. 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

Thank you for that elucidating and different disclaimer. Well, thank you everybody for dialing in. I will be brief and then I will turn it over to other people and then I'll come on at the end. The theme I would like for you all to remember, the context for this conversation, is one that we've been espousing since the beginning, which is we say what we mean, we mean what we say and we do what we say. So we told you when we did the secondary, we were going to go down the horizontal path, taking the technology that came out of the Government business to the commercial path. We're doing that, we're doing it with some vigor and some tremendous results, which you'll hear about.

The government work did flatten out, as we told you. We actually went down a little bit in the fourth quarter, flattened in the first quarter because of the very loose term I use for our government, a very nice term, which is foolishness because of sequestration and furloughs. However, we are seeing an uptick in that and we're trying to hire 150 people to accommodate the new work that's coming in. So we expect that to grow back to the areas where we were used to.

Margins in the first quarter were very good. I think it's a challenge to people to find somebody else doing 14% EBITDA on government work. We will continue to do that. Getting great response to Project G, HawkEye G. I'm the guy who has a sign on his desk that says, "instant gratification isn't fast enough," so nothing happens as fast as I'd like, but the response is tremendous. You'll hear more about that from Chris.

I will come back on and talk to you some more about this and put all this in context. Now when I turn it over to Phil Calamia, who we announced not long ago to be our CFO. And Phil, when you start, I'd ask you to just give a little bit of your background, emphasizing the commercial aspects of it, please?

Philip L. Calamia

All right. Well, thanks, Len, and good afternoon, everyone. So as Len mentioned, I come from the commercial versus the government world, spent a lot of time with technology companies ranging from pre-revenue start-up companies to publicly traded companies. And I'm excited about being on board and joining the team with Len and the broader group and leveraging the great work that's been done and playing a part in moving things forward.

I try to focus as much as possible at kind of bringing visibility into the business and doing as much as we can to be forward looking. So again, I'm excited about being onboard and leveraging from some of the great work that we've done in the past already.

So I'll sort of jump in here and speak on a recap. I'll hit the consolidated numbers first and then revert to specific reporting units of the government solutions in the cyber -- Commercial Cyber Solutions, which everyone knows as Hexis.

So on a consolidated basis, total revenue for the quarter was $63.8 million versus $77.9 million for the prior year period. Gross profit for the period was $21.5 million or 34% versus $24.1 million or 31% as compared to the first quarter of 2013.

Operating expenses for the first quarter were $24.4 million versus $27.7 million during the prior year period.

Our GAAP basis consolidated net loss for Q1 was $3.1 million or $0.08 per weighted average share. This compares to a GAAP net loss of $2.1 million or $0.06 per weighted average share for the first quarter of 2013.

Our results on an adjusted EBITDA basis were $2.4 million or 4% for the quarter as compared to $6.8 million or 9% for the first quarter of 2013, and $7 million or 10% on a sequential basis, reflecting our continued investments in the commercial segment.

So turning now to our reporting segments. Revenue for Government Solutions was $61.3 million for the period versus $75.8 million for the first quarter of 2013, representing a decrease of $14.1 million, driven primarily, as Len had mentioned, by sequestration, reductions in certain programs along with a reduced direct labor resulting from inclement weather in the greater D.C. area during the winter. Sequentially, Government Solutions revenue decreased by $5 million, driven primarily by a reduction in pricing with the new contract for our airborne collection services, along with the weather-related impact. Gross profit for Government Solutions was $19.5 million or 32% versus $22.5 million or 30% for the 2013 period, reflecting a proportionately lower level of subcontracted-related revenue. Adjusted EBITDA for Government Solutions was approximately $8.8 million, or as Len mentioned, 14% for the quarter versus $8.5 million or 11% last year and $11 million or 7% as compared to the fourth quarter of 2013.

Looking at the results of our Commercial Cyber Solution segment. Revenue for the quarter was $2.5 million versus $2 million last year for an increase of approximately 24%, driven by higher license revenue. Revenue was down sequentially for Hexis by $1 million due to lower license revenue for this quarter versus the fourth quarter of 2013 and this is a typical seasonality pattern for our Commercial business.

As we have mentioned previously, bookings is our key metric for the Commercial segment and we'll continue to provide as much transparency here as we can.

Bookings for the first quarter were $3.5 million, representing a 67% increase over the $2.5 million from the first quarter of 2013. And adjusted EBITDA for the Commercial segment was a loss of approximately $7 million versus a loss of approximately $1.6 million for the first quarter of 2013. On a sequential basis, the EBITDA loss for our Commercial segment increased by $3 million, reflecting increased spending in all functional areas as we built the commercial infrastructure.

Turning now to the balance sheet. We finished the quarter with $12.9 million of net working capital, which was essentially flat to December. As we have done in the past, our focus is to manage working capital so as to reduce borrowings against the revolver as aggressively as possible.

Our total debt at the end of the quarter was $85 million. And related to net liquidity, as most folks have probably seen, we've recently filed a shelf registration providing the ability to raise up to $150 million of new capital. We took the step so as to provide the company with optionality as we look to continue to build out our Commercial segment.

Lastly, looking ahead, we see the following factors affecting our business. As it relates to our Government Solutions segment, with the Congressional budget matters seeming to have been settled, we're seeing quite a bit more in the way of RFPs, and as Len had mentioned, we have in excess of 150 positions to fill. We'll continue to focus on our sweet spot so as to realize the best possible margins and work to balance out any rate pressures. We expect Q2 revenue from our Government Solutions segment to be slightly up sequentially and both gross margin and adjusted EBITDA margin to be consistent with Q1.

For our Commercial segment, as Chris will touch on in a moment relative to pipeline and pilots, we expect continued momentum on the bookings front in pursuit of the previously stated $30 million annual booking targets for this year as our sales organization settles in and our channel network continues to ramp up.

We expect our investments in operating expenses across both segments to be flat to slightly up in Q2 over Q1.

Now over to Chris Fedde for additional coverage on the commercials of business. Chris?

Chris S. Fedde

Thanks, Phil. In Hexis, we've made good progress pretty much across-the-board. In the last 2 public occasions, we've told you what we're driving and measuring as a start-up business, so let me start with those.

So our growth indicators that we're pleased to report to you are these. The first one, of course, is the Q1 bookings, as Phil just told you, is up 67%. So let me get to the future trends here. Our pipeline is now over 200. And let me remind you that we're very disciplined in what we call our pipeline. Our leads turn into quality opportunities. Our quality opportunities turn into pipeline and we track those as a management team. So we're very rigorous on that and that is now over 200. I will tell you this also, it's increased 35% in the last month. So from March to April, pipeline went up 35% and it's continuing at that same slope.

The other thing we'd said that we track very closely are the pilots. So we have pilots in various stages, ranging from a handshake that, yes, we're going to do a pilot, to some that are in place. And if you look at how many are in that queue there, there's 26 and counting, but there's 26 right now.

We're also real pleased with where those pilots are. They are in the major verticals that we're targeting. They're in energy, finance, a defense company, medical, there's a city, there's a foreign government, there's U.S. government. So they're going exactly to the places that we had hoped as the target verticals for our products here.

So how do we attribute these success factors? Well, here, again, it's good news. There's really 3 driving those trends. The first, of course, is sales. We originally had a target of building up the sales team to 30 by the end of the second quarter. We raised that a little bit on the last call to 35. So I'll tell you, as we stand right now, we're at 30 and that's up 13 for the year. So we've essentially filled out the sales team. We've left some headroom in there for some real silver bullets, but we've essentially filled out the sales team and I'm happy with those that are onboard.

The second attribute here is the partners. We've told you we're switching over to 100% partner-driven organization. We've been signing them up at a steady rate. We're using those partners to expand the pipeline. In North America, we've added 7 in the first quarter and we've got 15 more in serious discussions. So our first priority was the regionals and that's the 7 that we signed up and the 15 that we're talking to. Our second priority were the U.S. national channel partners and those we're entering discussions with now and there are several that we're discussing on a national basis. So the partner progress has been very good.

And the third element is the rest of the organization. Starting with the fact that we filled out our last product marketing position, the rest of the organization, I told you last time, was already filled out and solid. So we have no key positions we need to fill out for the rest of the organization.

So between the sales progress, the partners progress and the organization itself, we expect that we'll be able to continue driving those growth factors for KEYW and Hexis here.

We completed the transition of getting Hexis under the holding company, so that we don't have the government structures anymore. We're a completely commercial structure, so that's good across the board. And as far as the products themselves, there will be good news coming out in the second quarter. We're going to beta with a next-generation HawkEye AP. It's got a brand-new analytics head on it. So we're going to go to beta with that. That's very exciting. We've got some new capabilities coming out of HawkEye G. So we're not taking our eye off the ball as far as product development. The road maps are strong, the road maps are being executed on in a timely matter.

So in summary, this is a start-up in virtually every aspect, except maybe we don't have to lurch from tranche-to-tranche here. But for those of you that do follow start-ups, I think you'll recognize that we are driving the things that we have to drive to grow our performance. We're tracking the right metrics. And the trends are right. I'm very pleased with the trends that I'm reporting to you. Those are what we hoped and that's the things that's going to lead us to our future success here. So that's the state of Hexis Cyber right now.

Leonard E. Moodispaw

Thank you, Chris. Thank you, Phil. Just a few more comments and then we'll take questions. I want to comment on a couple of things that Phil and Chris said. With Phil, talking about the weather, picture myself or whoever's COO standing at the window when it snows, counting every dollar and every flake that comes down. Because for every day that we had to close, we almost lost $1 million in revenue. In addition, the 4 days we were closed, there were 6 days of liberal leave, late reporting, which also affected revenue. So those are the things you can't plan on. It was an unusual year for that. That's the impact we're talking about, about the weather in the fourth quarter.

I also want to comment on the balance sheet. I think that those people who know me know I don't like debt, so we could be building up more cash and not paying down the debt. But I insist that we pay down the debt as fast as we possibly can. We have plenty of room in the revolver. We have no issues in that regard. We have a great banking relationship with our syndicate and team and we know that we have their support as we go forward. So those are just a couple of things I want to comment on in Phil's comments.

I want to go back what I said earlier about the horizontal path and moving down towards the commercial environment. Those of us who have been following us know from the beginning we built KEYW from day 1 with the infrastructure to support a much larger organization. We have taken the same approach with Hexis and HawkEye G and HawkEye AP and the other products. We have put the infrastructure in place to support the growth rather than try and catch up later, thus, the expenses for the sales force and other folks that are coming in and it'll pay off when the sales and the bookings and all that start coming. So we are consistent. We are doing the same thing we did when we started KEYW on the government side.

We wanted to be considered as a commercial company. We wanted people to recognize the commercial products that we have. And sometimes you get what you ask for. So now we are tracking precisely with the tech stocks. So they went up, we went up to 22. They came down, we came down to wherever we are. We didn't say anything. We didn't make any announcements. We're just steady working away, doing what we said we're going to do.

So I recognize there are people out there who in the investment community that like to look for skinny bears behind trees and find reasons to justify their short positions or whatever their take of the day is. I do applaud those investors who tell me as recently as inside Ritaville, don't change a thing. Keep doing what you're doing because we're supporting the plan. Once again, we're doing exactly what we said we're doing, and we're making great progress.

So with that, we'll turn it over to questions. As always, Chris Donaghey is here to help with answering questions. And we'll begin now.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Tobey Sommer from SunTrust.

Frank Atkins - SunTrust Robinson Humphrey, Inc., Research Division

This is actually Frank in for Tobey. Wanted to ask in the remarks, you called out, not only sales investment, but also support in engineering. Can you give us a little color about where you are in terms of those investments and what we could see going forward with that?

Philip L. Calamia

Are you talking on the, specifically, on the Commercial side, Frank?

Frank Atkins - SunTrust Robinson Humphrey, Inc., Research Division

Yes, I believe so.

Philip L. Calamia

So as I think as you draw from, say, Chris's comments, we've, by and large, built the backbone of the Commercial segment out. So there might be some specific positions that we'll look to fill, but as we look to the balance of the year, generally, we would expect OpEx to be just up slightly compared to where we were in Q1.

Frank Atkins - SunTrust Robinson Humphrey, Inc., Research Division

Okay. And then also in terms of the pipeline, you mentioned the 200 there. Can you give us a little bit of color about how the ramp may proceed going forward there. What have you seen in terms of how quickly?

Chris S. Fedde

Well, I'm not going to predict 35% a month. We are seeing an uptick from the -- in part from the new partners and in part we're still seeing an uptick from RSA, which gave us a tremendous boost in leads, which are now converting -- some of those are converting the pipeline. So I would say that we expect that pipeline to just continuously go up. And like I say, 35% was probably higher than we should expect, but it'll still continue to go up double digits and I think the contribution to the partners is going to start overtaking our own lead generation here pretty soon.

Operator

Our next question comes from Patrick McCarthy from FBR Capital Markets.

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

My first question is on the HawkEye AP beta. I was wondering if you could give us a sense as to maybe how you would expect for that to roll out over the next year or so and maybe size that opportunity for us.

Chris S. Fedde

I'm not prepared to size it yet. It is adding a lot of analytic capability, which has been asked for by our larger customers and our expectation is it will make it a lot more accessible to our medium-sized customers. Our larger customers provide their own analytics and they -- and it's been -- they've got their own standing teams to do that. With the additional analytics that are being added, the additional analytic capabilities, which are highly graphical, our expectation is people can add their own analytics without having very, very trained dedicated staff for it. So I think it'll expand into some of the medium-sized markets that are just not reachable for us now. It's fully -- it can be fully added to existing HawkEye AP. So it doesn't have to replace it. It can be added to, so that, for our betas we're going to some of our large customers and adding these capabilities to their functioning products.

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

Okay, great. And Chris, on the pilots, the 26 pilots that you have, I know in the past you've talked about the pilot program lasting generally anywhere from 30 days to 90 days. Do you have a sense for how long the average days these pilots have?

Chris S. Fedde

We've continued to have examples at 30 and continue to have examples at 90 days. That's still the right window. We've even got a couple that I would say are longer than 90 days. The pilot, itself, will be 90 days, but their procurement cycles are longer than that. So the active pilot phase is still 30 to 90 days and that's still what we're witnessing today.

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

Okay. And then just my final question is on FLD. I'm just trying to get a better sense or some more insights into have you guys have any expectations of when those assets will go out in the field? Actually, where they are today, they're still in New Hampshire and if you have any sense as to when they'll go out into the field.

Chris Donaghey

Patrick, it's Chris. Yes, we're working with the customer to make sure that the planes are ready when they are. They have active discussions going on with multiple different combatant commander areas and different AORs. So we expect that it's going to happen sometime over the next couple of months. But again, a lot of that is work that our customer has to do to go out and prep the combatant commands for it.

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

And they're still paying for the assets today?

Chris Donaghey

That's correct.

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

And do you have a sense when you start renegotiating -- or negotiating for any funds after your March 15 contract -- March 2015 contract. Is that something you'll wait till the end of this year or...

Chris Donaghey

Again, that's one that's going to be driven by the customer itself. We know they have budget beyond the end of the current task order, so I'm not too real concerned there. They've got plenty of money to get us through 2015 as well.

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

And the plan is still for a program of record in '16 as far as we know?

Chris Donaghey

Well, I doubt it's going to be able to make the 2016 budget -- planning cycle, but the plan is definitely still to make it a program of record as soon as possible. But I don't know that the paperwork is moving fast enough to be able to get to 2016 budget year.

Operator

And our next question comes from Brian Kinstlinger from Sidoti & Company.

Brian Kinstlinger - Sidoti & Company, LLC

The first question is for Chris. He went from 18 pilots in various stages, including handshake to 26 since the Analyst Day. At the Analyst Day, you said the split was -- you thought roughly 5 were active pilots and 13 wanted pilots. Can you give us that split today?

Chris S. Fedde

The split was what again? I didn't catch the...

Brian Kinstlinger - Sidoti & Company, LLC

The 26 -- you had 18 and you had said that you thought 5 at the time were active ongoing pilots were -- they were installed and trying them and 13 that were asking to take the pilots. Could you give that split today on the 26?

Chris S. Fedde

Yes, I didn't go do the math. I know we've added about 4 active pilots in the last 3 -- last month or so. So that's probably the closest I can come off the top of my head.

Brian Kinstlinger - Sidoti & Company, LLC

And then could you add any customers of the ones that were actually in pilot. I think before you had 4 customers. Have any accepted and maybe we'll start generating revenue that haven't yet?

Chris S. Fedde

The pilots we had at that time are still pilots.

Brian Kinstlinger - Sidoti & Company, LLC

Okay. And maybe you can update us on that large city. I think, like you said, some have taking more than 90 days. I think that's probably the one. Do you think -- has there been communication about their intentions on taking the system? Are they running into a procurement issue of money? Do you -- maybe you could give a sense of what's happening now?

Chris S. Fedde

My understanding and belief is that they made the decision to buy it. And they now have to roll it into their financial planning process.

Brian Kinstlinger - Sidoti & Company, LLC

Got it, great. And then on the Government side, you said the first quarter was hurt by the weather, which meant less billable hours or days, however you want to look at it. And I guess I'm wondering, then you mentioned, in the second quarter, there's a slight sequential uptick. But with the more billable hours and the 150 open positions, why is that just a modest sequential uptick since it was so depressed?

Leonard E. Moodispaw

Len here, Brian. Because if I said more than that, you'd go crazy with projections. So we expect it to be a nice increase by saying slight. We're trying to tamper your expectations.

Brian Kinstlinger - Sidoti & Company, LLC

Instead of worrying about my projections, maybe tell us what you think slight -- maybe quantify slight?

Leonard E. Moodispaw

You're a persistent guy, you know that?

Philip L. Calamia

Yes. I think that we're going to stick to slight. I mean, while we were impacted by the weather in the first quarter, there's a finite amount of work that can be done. And as to the hiring, while we're certainly glad and fortunate to have the ability to fill these positions, we do have to get after and fill them.

Leonard E. Moodispaw

To be serious, and that was a serious comment as opposed to my flip comment, Brian. But yes, we were seeing more RFPs. We're seeing more money on its way and it is the government so it takes a while for some of this to get here, but it's coming.

Brian Kinstlinger - Sidoti & Company, LLC

Okay. You talked about the well -- some of the well-known cyber security companies that some of us know as public companies as potential partners. One you mentioned at the Analyst Day had -- you thought you already had an agreement. Can you just take us through maybe some of the partners that you've added, maybe the well-documented ones that we know?

Chris S. Fedde

So there's 2 categories here. The partners I was referring to are the go-to-market partners that their business is taking products to market and they're well entrenched, especially regionally, they're well entrenched with the verticals in those regions. Some of those have rules around when we can announce who they are and when we can't. So I probably won't go there extemporaneously here. But on the other category, it's other security companies for whom we complete the security story because keep in mind there's a lot of companies out there that do what they can to detect advanced threats, but they can't remove advanced threats and they certainly can't remove them automatically. And the tighter we work with them, the more complete security solution you have. And I'll tell you that for the 2 biggest ones, I'll let you figure out who the 2 biggest ones are, we are in very active discussions on how to make those products work ever tighter. So we've got a close integration of things that they find being handed to HawkEye G, so HawkEye G can automatically remove it.

Brian Kinstlinger - Sidoti & Company, LLC

Great. The last question I've got, you talked about your -- you paid for debt and the shelf registration. I just want to make clear your cash needs that you're not hitting, maybe go over the debt covenants to ensure that you're not hitting any of those, and show that this shelf had nothing to do with that.

Philip L. Calamia

Well, I think just kind of circling back to what we said about that. Len mentioned that we've got a real good working relationship with the credit group and the filing of the shelf was to provide us with the optimum flexibility as we continue to move forward against the business plan.

Brian Kinstlinger - Sidoti & Company, LLC

Are you rubbing -- coming up against any of the debt covenants right now?

Philip L. Calamia

We reported Q1 in accordance with the debt covenants, so we're fine there.

Leonard E. Moodispaw

Brian, it's Len again. Could I be a little more helpful and say you could think about the Government growth as double digits. Does that help you any?

Operator

And our next question comes from Steven Cahall from Royal Bank of Canada.

Steven Cahall - RBC Capital Markets, LLC, Research Division

I was wondering if you could maybe just initially talk a little bit more about the shelf filing. My sense is that clearly you'd see some things on the horizon related to the commercial business plan that makes you think there may be a need to bring in fresh capital. Can you talk about what that event looks like? Chris mentioned that the organization currently looks the way he wants it to so, whether it's a bookings number or whether it's a pilot number, where is it that you decide that the current scope of the Government business is insufficient to fund the investment in Hexis?

Leonard E. Moodispaw

This is Len, Steven. I don't know that we've come to any such conclusions, but wise people like some of the people in your bank keep saying you ought to be in a position in case you need it. So Phil used a word a little while ago I've never heard of, call it, optionality. I don't know of an event. I have no event in mind that would trigger this. We just thought it's wise to be prepared. And again, I'm not looking for any skinny bears behind trees to say I've got to go do something. It just seemed to be wise to prepare.

Chris Donaghey

And Steve, this is Chris Donaghey. I would just say that if you recall the kind of metrics that we talked about at the Analyst Day and the pipeline number, in particular, and the way that converts to pilots and then ultimately to bookings, 35% growth in the pipeline number in a very short period of time is a very positive indicator. And ultimately, if the growth continues to be in that range, we want to have the flexibility to be able to do something quickly as necessary.

Steven Cahall - RBC Capital Markets, LLC, Research Division

Okay. Then actually sort of related to that, with the significant sequential growth in the pipeline, I know Chris talked about sort of the industry standard conversion rate but that conversion rate probably shouldn't be applicable to the business that you're in, I know it's still early on in the process, but Chris, can you give us an idea of what your sense of conversion is at this point? And how it may be baselined against the metrics you gave in Q1?

Chris S. Fedde

The conversion rate, we haven't had enough conversion to set our own norm yet. So I'm still using 20%, 25% conversion rate as my own rule of thumb.

Steven Cahall - RBC Capital Markets, LLC, Research Division

Okay. And then just maybe a final one on the Government side. Some very, very helpful color there. Can you give us any sense of the phasing of the key growth programs, particularly those that came from Poole. And I know they've been a little bit slow to start. On those, in particular, are we seeing the turn yet or is the turn in whether it's the training business, other businesses, anything qualitative you can give us on some of the buckets within Government.

Leonard E. Moodispaw

In both areas, Steve, the training business is really growing. In fact, we may have said this before, we're looking for additional space. We're going to take at least 2 floors in another building to accommodate that. That's just how much growth we're seeing there on the training side. And the program you know as radio that we got from Poole that is growing and is growing, A, because of the work that they do there but it's also a nice contractual vehicle where others are -- where there are parts of our customers can use. And then, lastly, we announced a geospatial contract, a win within our geospatial side of our business, which is a very nice contract and very good base to grow. As you know, from the Government gain, having contractual vehicles that you can grow is important. Those 3 areas are the major ones for growing.

Operator

Our next question comes from Josh Sullivan from Sterne Agee.

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

So Chris, just looking at the -- when you look at the $3.5 million in bookings, could you just expand on that a little bit? How much of that was new customers or maybe what size or type?

Chris S. Fedde

Well, I can tell you there was a mix. I mean, there was new customers, there was recurring, there was services -- maintenance services and active service in there and it was a mix of HawkEye G and HawkEye AP.

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

Okay. And then as we look out through the year to that $30 million, I don't want to call it, guidance, what do we think about the cadence throughout the year? Is that second quarter where you see the inflection still? Are we looking at third? Or what are your thoughts on that right now?

Chris S. Fedde

We're going to need a good ramp, a good solid bookings ramp in the third quarter to get to $30 million. And that's -- its back end loaded, that's the nature of the business. But I do believe, with the indicators that we've talked about here this afternoon, that we should start seeing some good, healthy conversions in the third quarter and see that ramp start heading for $30 million.

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

Okay. And then at the Analyst Day, I think you were looking for 100 heads and now you're looking for 150. Where is that incremental?

Leonard E. Moodispaw

I think the difference between then and now and we probably confused the numbers, the 100 is really a net number. We're trying to hire 150. But we're, in some areas, particularly in some functional areas we're trying to reduce costs. So it's net hires of 150 total of net staffing, if you will, over this period of time. Coming and going is around 100, but trying to hire 150. So it's probably about the same except that it keeps growing everyday.

Operator

Our next question comes from Jim McIlree from Chardan Capital.

James Patrick McIlree - Chardan Capital Markets, LLC, Research Division

Chris Fedde, you talked about a conversion ratio earlier and that's 20% to 25% of pipeline that you think is a likely conversion?

Chris S. Fedde

Yes, pipeline to booking is industry standard for this kind of business and I have no reason not to use industry standard till we have more data.

James Patrick McIlree - Chardan Capital Markets, LLC, Research Division

Right. And is there -- do you have any indication yet as to the size of deals that your partners in North America would be bringing you relative to the size of the deals that you have targeted to date? And I'm referring to the regional partners, not the national partners.

Chris S. Fedde

They're the same size as what we had -- because we had -- prior to getting the partners plugged in, we had opportunities that ranged from, at the low end, $0.25 million to around $2 million. So we were already seeing the full gamut. And when I look at the opportunities that they are now bringing in, it's the same thing. So I think it's just more of them and higher probability of capture because they bring us people, they bring us customer opportunities from whom they have relationships.

James Patrick McIlree - Chardan Capital Markets, LLC, Research Division

Right, okay. And Len, you said that government growth should be double digit. Were you referring to quarter-over-quarter or year-over-year?

Leonard E. Moodispaw

Quarter-over-quarter.

Operator

Our next question comes from Todd Halis [ph] from GCM [ph].

Unknown Analyst

Quick question on the covenants. Looking at the recent Q filed, it looks like you guys amended your credit agreement on March 14 to temporarily adjust some of the financial covenants. Can you just explain what's changed in terms of the financial covenants? And how we should be thinking about that in regards to the shelf?

Philip L. Calamia

So I guess, as far as what's changed, we revisited some of the financial covenants in terms of total leverage ratios and fixed charge ratios and so forth. So that's what's changed within the credit agreement. And how you should look at that in relation to the shelf, nothing to add to what's been said previously on the call in that we put the shelf out there for flexibility for us.

Leonard E. Moodispaw

This is Len speaking. I want emphasize that the revisions came because our bank reached out to us and so, again, because of our great relationship, it wasn't like we were saying we're going to have a problem here. We all agreed that in order to give us more flexibility, knowing all the good things we have coming for us, let's go ahead and make the change now.

Unknown Analyst

Okay, got it. And then so you're fully drawn on your term loan at this point, is that correct?

Philip L. Calamia

Yes, but there's headroom on the revolver.

Unknown Analyst

How much headroom do you got?

Philip L. Calamia

The revolver is about $50 million. And at the end of the quarter, we were at $24 million.

Unknown Analyst

Okay, got it. And then do you need to pay down that term loan?

Philip L. Calamia

It has scheduled payments.

Unknown Analyst

And what those look like?

Philip L. Calamia

It's at 1 7.

Unknown Executive

It's 1.750 each quarter.

Unknown Analyst

Sorry, say that again?

Philip L. Calamia

1.7 each quarter.

Unknown Analyst

Okay, got it. So starting the June quarter?

Philip L. Calamia

Well, it's already started. So that's -- it's part of our current business plan.

Unknown Analyst

Okay. How much did you pay down in Q1?

Philip L. Calamia

1.7.

Operator

Our next question comes from Marcelo Desio from CrossLink Capital.

Marcelo Desio - CrossLink Capital, Inc.

I just wanted to ask a similar the question in terms of your liquidity. Given that you're fully drawn on your bank loan, will you use your revolver? Or use -- or go to the public market to raise capital, you think?

Philip L. Calamia

So we'll just want to reemphasize. We have headroom on the revolver, and our practice has always been to manage working capital to try to pay down the revolver as aggressively as possible. And we're going to sound a little bit like a broken record, right. We filed the shelf so that we had flexibility going forward.

Chris Donaghey

This is Chris Donaghey. If the question is a reference somewhat to the cash balance on the balance sheet, that was really just a timing issue. We had a large receivable come in a little later than what we had anticipated. And we had a payroll hit right at the quarter close. The $64,000 balance on the cash -- on the balance sheet today is not an issue.

Marcelo Desio - CrossLink Capital, Inc.

Okay. And just a follow-up. In terms of the Commercial revenues in the quarter that were down sequentially, I would think that given kind of your -- the trajectory, you talked about growth that -- you'd have sequential growth in that business. Can you just refer to that?

Chris S. Fedde

Except I'm not sure I understood the question.

Marcelo Desio - CrossLink Capital, Inc.

Wouldn't your revenues in your Commercial business be growing instead of being down sequentially even what you've talked about in terms of your growth?

Chris S. Fedde

We had started to see growth last year. And in the course of business, it is pretty much a constant -- fourth to first is a real struggle for a lot of reasons we can go into. But it's almost universal and it certainly did with us, too, although, again, our bookings were up substantially.

Philip L. Calamia

Marcelo, the other thing to consider is the new product was launched, in essence, in the beginning of the fourth quarter. So as far as getting the product ramped up, the sales team built and so forth, that was all a work in process during the fourth quarter.

Marcelo Desio - CrossLink Capital, Inc.

Okay. And sorry, one last thing. I just found on your Q that we filed that you have a settlement due in Q2 to Exelis. Can you tell us how much that settlement is, the payment due?

Chris S. Fedde

The balance.

Leonard E. Moodispaw

Bear with us. We're trying add 2 and 2. I believe it's $1.7 million is the remaining balance.

Chris Donaghey

And just for reference -- Chris Donaghey, again. We have about $3 million of cash on the balance sheet today.

Operator

And our next question comes from Wes Cummins from Nokomis Capital.

Wes Cummins

Just a couple of quick ones. Could you just kind of quantify what Flight Landata looks like year-over-year, Q1-to-Q1 just to kind of get an idea what the new contract looks like?

Chris Donaghey

I would say the pricing of the new contract would put the revenue down somewhere in the high single-digit range.

Wes Cummins

Okay. And then one last question. I know there's been a lot on the covenants. But Phil, just doing the addition quickly, if I do Q3 and Q4 and then Q1 on EBITDA, the new EBITDA covenant is 4x, which means, it looks like to me, you have to do about $5 million of EBITDA in Q2 to not trip that covenant, so would have to double sequentially. Is that reasonable? Or you think you can amend that again if you guys didn't do an offering?

Philip L. Calamia

So I think that you've rolled it appropriately, and as Len said, we're pretty confident with the relationship that we have with our credit group, so that's how we're sort of looking at life.

Operator

And I'm showing no further questions. I'd like to hand it back over for closing remarks.

Leonard E. Moodispaw

Well, thank you very much, everybody, and we'll see you next quarter. Bye.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program. You may all disconnect, and have a wonderful day.

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