The KEYW Holding's (KEYW) CEO Leonard Moodispaw on Q2 2014 Results - Earnings Call Transcript

Jul.31.14 | About: KEYW Holding (KEYW)

The KEYW Holding (NASDAQ:KEYW)

Q2 2014 Earnings Call

July 31, 2014 5:00 pm ET

Executives

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

Philip L. Calamia - Chief Financial Officer and Executive Vice President

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

Chris Donaghey - Vice President of Corporate Development and Communications

Analysts

Steven Cahall - RBC Capital Markets, LLC, Research Division

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

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

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

Michael K. French - Drexel Hamilton, LLC, Research Division

Operator

Good day, ladies and gentlemen, and welcome to KEYW Second 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 and thank you, everybody for dialing in. Sorry for the brief delay. We are awaiting for people to get through the queue with the operator. I will give you a few highlights for the quarter. But first, I will ask Jennifer [ph] to do her fine job of reading the Safe Harbor statement to us. Jennifer [ph]?

Unknown Executive

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 the actual results to vary materially from anticipated results.

Leonard E. Moodispaw

Thank you, Jennifer [ph]. A few highlights and then I'll pass it on to Phil and Chris Fedde. I'm very pleased with the progress in the second quarter across the entire company. In the Government Solutions, the growth from the first quarter to the second quarter was 18%. Most of that was Services and most of the Services growth is a result of the new hires and the subcontractors being added to our new and existing work as we discussed at Cyberitaville we would be doing.

We're on track to add new products on the Government side in late Q4 and into 2015 in the areas of geolocation, radar technologies, some tracking and locating technologies, those kinds of things we do well and have been doing for quite some time. Ordinarily, I'd be quoting Jimmy Buffett. Today, I'm going to quote somebody that's maybe older than many of you are. But I want to quote Hannibal Smith, and say, "I love it when a plan comes together." So when we bought FLD, the idea was that we would combine their technology with the synthetic aperture radar technology that we've been working on for quite some time.

On FLD, as we indicated, the planes have been pulled out of Afghanistan. We anticipated that when we bought the company. We also anticipated that they would be redeployed. Several have been redeployed to other parts of the world. And the rest are doing work in-country, still getting paid for it while they do their -- while waiting for overseas deployments.

We had an outstanding test recently for our synthetic aperture radar technology where we did a bit of a runoff against other companies looking for things under deep canopy and trees and we found things that not only were we supposed to find, but found some things that folks didn't even know were there. So it was a very successful test. So we're getting a lot of attention on this SAR technology and we expect to see growth on that in the future, both in the military side, as well as integrating it with our FLD work. So the Government side is growing nicely.

On the Hexis side, since the last call, we've added new pilots, new customers, the pipeline continues to build up. We'll be adding a new national reseller that will be a big boost to the sales. And we should have some significant new product announcements coming out over the next week or so related to HawkEye G.

With those highlights, I'll turn it over to Phil Calamia.

Philip L. Calamia

Thanks, Len. Good evening, everyone, and thanks for joining the call. So I'll run through the P&L for the quarter on a consolidated level and then touch on our reporting segments, and then hand it off to Chris Fedde.

So on a consolidated basis, total revenue was $74.2 million during the quarter versus $78.3 million for the prior year period. Gross profit for the period was $23.8 million or 32% as compared to 26 -- $25.6 million or 33% for the second quarter of 2013. Operating expenses for the second quarter were essentially flat versus the prior year period.

Our GAAP basis consolidated net loss for the quarter was $1.7 million or $0.05 per weighted average share. This compares to a GAAP net loss of $2.4 million or $0.06 per weighted average share for the second quarter of 2013.

Our consolidated rights -- our consolidated results on an adjusted EBITDA basis were $5.1 million or 7% for the quarter as compared to $6.5 million or 8% for the second quarter of 2013.

On a sequential basis, consolidated revenue increased $10.4 million or 16% and adjusted EBITDA increased by $2.7 million to the $5.1 million.

Turning now to each of our reporting segments. Revenue for Government Solutions was $72 million for the period versus $75.8 million for the second quarter of 2013, representing a decrease of $3.8 million, driven primarily, as everyone is aware, by sequestration-related reductions in spending across various programs. Sequentially, Government Solutions revenue increased by $10.7 million, driven by, as Len had touched on earlier, increased staffing levels under various programs, additional training courses delivered, and to a lesser extent, incremental product sales.

Gross profit for Government Solutions was $22.2 million or 31% versus $23.6 million or 31%, as well, for the second period of 2013.

Adjusted EBITDA for Government Solutions was approximately $12.2 million or 17% for the quarter versus $8.2 million or 11% last year and $8.9 million or 14% as compared to the first quarter of 2014.

Looking now at the results of our Commercial Cyber Solutions segment. Revenue for the quarter was $2.2 million versus $2.4 million for last year, reflecting a decrease of 11%, driven by lower license revenue of our legacy product, partially offset by HawkEye G sales. Revenue was down sequentially by $300,000, also due to lower license revenue this quarter versus the first quarter of 2014.

Bookings for the second quarter of $2.2 million were essentially flat to last year and represented a decrease of $1.2 million as compared to the first quarter, primarily due to the timing of renewal dates on maintenance contracts being heavily weighted to the first quarter.

Adjusted EBITDA for the Commercial segment was a loss of $7.1 million versus a loss of $1.7 million for the second quarter of 2013.

On a sequential basis, our EBITDA loss for the Commercial business increased by approximately $700,000, reflecting low gross profit and increased spending in various functional areas as we continue to build out the Commercial segment infrastructure.

Turning now to the balance sheet. Our net working capital was $15.9 million as of the end of the quarter, representing a $3 million increase on a sequential basis. Our total debt was $89.5 million at the end of the quarter.

And a little bit more on the balance sheet. As most folks have seen, on July 21, we issued $130 million of convertible senior notes due in July of 2019. The notes bear interest at a rate of 2 1/2% per year. Interest is payable semiannually beginning January 2015. The proceeds from the notes were used to refinance our previous credit facility, fund the cap call premium and certain other costs associated with the note offering. Based on quarter-ending cash of $4.1 million and net proceeds from the note offering, we now have an excess of $20 million of cash on hand.

At the same time, we entered into a senior credit agreement, providing a $42.5 million revolving credit facility. With the issuance of the convertible notes and the new revolver, we believe we have a capital structure that will provide the company the ability to execute on growth opportunities in the Government segment and to continue to invest in the Commercial segment at current levels.

Lastly, before I turn it over to Chris, looking ahead, while keeping in mind our visibility of programs and customer needs as balanced against the impact of the vacation schedule in our Services business and the timing of customer commitments and certain opportunities, we expect third quarter consolidated revenue to be within a range of $73.5 million to $77.5 million and adjusted EBITDA to be in a range of $4.7 million to $5.2 million.

And now I'll turn it over to Chris Fedde. Chris?

Chris S. Fedde

Thank you, Phil. So let me start with an update to the metrics that we used to measure our ability to grow this business. These will be the same metrics that I updated you all on, on the last quarter call. And number one, in that category, of course, is our pipeline. These are the qualified opportunities that we're tracking. That pipeline is now exceeding 350 opportunities, which is up 75% over what we had on the last call. So we're very pleased with our qualified pipeline.

And the second one, of course, our pilots. If you recall, late in our sales cycle, we generally assume we have to go install HawkEye G in our customer enterprises. In other words, they need to see it in their enterprise in order to make their final buy decision. We had expected these pilots to take in the neighborhood of 3 to 6 months when we did our planning. We are finding that it's taking nominally 6 months and sometimes as long as 9, so we don't like the fact that the pilots are taking longer than we had hoped. But nonetheless, that's still an essential step in our sales process.

So as far as those pilots, we now have over 35 pilots in various stages here, ranging from some that are installed, some that are getting ready to be installed, but that queue now is about 35. We're still pleased -- very pleased with the verticals that they're going in. They're going into the targeted verticals that we talked about last time: energy, defense, medical, government, city governments. We are adding another category this time, too. We have 2 companies that are managed service companies that are getting ready for pilots. So they are managed service companies, one in Europe and one in the U.S., that intend to use HawkEye G as part of their managed service. So we're pleased that we're expanding in that direction also.

In the second quarter, we added 2 new customer orders to our list and those have subsequently been installed also. In the second quarter, we did have about 3 opportunities slip to the right. These are large opportunities that we were hoping to book in the second quarter. We didn't lose them. We still expect to win all 3 of these. But this is more evidence that the length of the sales cycle is affecting our top line. So it's nothing that we're concerned about. Like I said, we didn't lose them. As a matter of fact, we have subsequently booked one of those 3 and we expect to get the other 2 in short order. So it did have the negative effect on our Q2 that Phil mentioned just a moment ago.

We also said we were building out our channel partners. We are 100% going through channel partners. I'm real pleased to tell you that we're now -- we now have over 20 partners in North America. So that's about the target we were looking for. We're there. We're still talking to some more, but were at a real healthy number now.

I also mentioned that we were looking to book some national partners. And here, again, I can tell you we've been successful. We booked 2 new national partners. One, I'm ready to announce and one is not quite ready to announce. But the one I can announce this evening is that we have a lease agreement with Accuvant, so they are coming onboard. As you may know, they are one of the leading suppliers of security through the channel partner process and so we're really delighted to have them onboard as our channel partner.

The second one we'll be announcing hopefully in a few days. The second one, by the way, is a distributor. It's a national distributor. You may recognize that, that's our first distributor as opposed to channel partner reseller. Why are we -- why did we sign up a distributor? It's for this reason: we are about to introduce a new product line. So I'm not going to jump the gun here, you will hear about it next week. But this new product line is going to be introduced, which really lends itself to distributors also and that's why we now have a national distributor that we'll be announcing. The new product line is going to take advantage of intellectual property we had in-house. It's IP that we can use to drastically reduce the cost of network awareness in small and medium-sized networks. So we're looking forward to that.

As Len mentioned, we're getting ready for new releases. I can tell you this, you're going to hear about next-generational releases for both HawkEye G and HawkEye AP, the details of which you'll start hearing about next week and we're really excited about that.

So in summary, we've had good progress across the board. New customers, new channel partners are responding well. We've got new versions coming. We've even got a new product coming. And the only thing we were disappointed in is the slowness of the pilots has caused some of our second quarter opportunities to slip to the third quarter. But unfortunately, that's the nature of the beast here at this stage of our business. So that's where our Commercial business stands.

Now back to Len.

Leonard E. Moodispaw

Thank you, Phil and Chris. We'll now take questions. Chris Donaghey is here and will manage the question-and-answer parts. So feel free to ask Chris questions, as well as the others. So please go ahead.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from Steven Cahall from Royal Bank of Canada.

Steven Cahall - RBC Capital Markets, LLC, Research Division

Maybe first question for Chris Fedde. It looks like that the bookings were down in the quarter sequentially, but you mentioned the ones that slipped to the right with one of them being booked. Would bookings have been up in the quarter had those come in or had that one that you booked maybe in July come in on time?

Chris S. Fedde

It's anyone of the 3. We would have -- would have an increase in the second quarter, yes.

Steven Cahall - RBC Capital Markets, LLC, Research Division

Okay. And then just as a corollary to that, the targets that you talked about at Cyberitaville, I think that was around 75 bookings that have value around $30 million. Are you still confident in that? And what's the time line for that target that we should be thinking about?

Chris S. Fedde

Well, that's still absolutely our target and I think the only thing that concerns us is getting the pilot process to be shorter. The thing is, with the pilots, the reason they're taking longer is not because they're evaluating them longer. What we're finding is from the time a company says yes, I want to see a pilot so I can make my decision, from the time they want to see a pilot until we're allowed in to start implementing the pilot can take 3 months. And that's the nature of the fact that we're talking about financial institutions, energy companies, highly regulated companies, highly methodical. And so we're just finding that it can take 1, 2, even 3 months to even get started. Once we get started, things go kind of according to plan. So to answer your question, that is absolutely still our target and the only thing we have to manage is that pilot process and try to get that expedited wherever we can.

Steven Cahall - RBC Capital Markets, LLC, Research Division

Okay. And then maybe just one last one for Len. Len, I was just wondering if you could talk about what you're seeing from your customer in terms of certainty around funding. It looks like there wasn't a lot of growth in employees coming through this quarter. Is that just because of where we are in the season? Is there uncertainty in the funding? Or is that just a bit of an anomaly and you're actually seeing things stabilize a bit like some of your competitors have suggested? And you expect to see growth in your major programs from here?

Leonard E. Moodispaw

Steven, I don't know what numbers you're comparing with. So we did have substantial growth in the number of hires, net employees, over this quarter. So maybe we lost some, but the ones we lost were in an area of systems engineering and technical assistance area where we expected the loss. But we are growing and the 18% growth from Q1 to Q2, I think, is a good reflection of that. We expect that and what we hear from customers is that they are marching ahead with various RFPs that we'll be bidding on in the -- this quarter, the next quarter and next. And throughout the end of the year, we have a number of things in the pipeline. I don't think that is a general point that many companies can make because there is a concern across the, I'll just call it, our business for very large programs. But once again, we still get substantial work added to the existing vehicles. So we're comfortable about the future. I can't speak for the whole industry.

Chris Donaghey

Yes, Steve. This is Chris Donaghey. I would just add to that to echo Len's point. The actual billable staff did see some improvement versus last quarter where you saw. And this is in the press release, you can see the operating expense reduction from last year to this year is pretty significant. So while the gross headcount number is down, a lot of that was related to efficiency moves that we did to reduce the operating expense burn rate in the Government business.

Steven Cahall - RBC Capital Markets, LLC, Research Division

Okay, that's very helpful. Maybe just, Len, if you could maybe recharacterize that one more way. Do you feel like the customers are now to a point where they're getting back to the levels of billable hours and staffing that they were presequester? Or do they now have enough confidence to actually grow their programs in the sort of ways that we were talking about in late 2012 and early 2013?

Leonard E. Moodispaw

We're, by no means, back to where we were. And again, the we in this is the royal we are, customers and us, we're not back to where we were presequestration. There is still uncertainty about what's going to happen in the future. But funding for the kind of thing we do, cybersecurity and counterterrorism, is increasing and our customers are spending more in that area. So it's an improvement. We're not yet back to where we were and I don't know how long it will take us to get back there, but it will be more gradual than it will be a big boost.

Operator

Our next question comes from Tobey Sommer from SunTrust.

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

The EBITDA and EBITDA margin in the Government Services business was pretty high and improved in the quarter. Is this kind of margin sustainable on an annual basis?

Philip L. Calamia

Tobey, I think that as the year wears on, we'll see that getting back to more in line with the historical performance on the Government business. So we think it can certainly be north of 10%, but I think in, if you recall, Q4, we were at about 14%. So somewhere between that 10% and 14% is probably where we'll track for the rest of the year.

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

Okay. And curious from a -- how does the number of billing days in 3Q, given holidays and what have you, compare to 2Q and 3Q a year ago? Any significant shifts from one quarter comparing to the other?

Chris Donaghey

Yes, Tobey. This is Chris. So I can tell you that the general trend from Q1 to Q4 from a billable day perspective, if you just look at the actual number of working days, is generally in the 62-ish range for Q1, the 64-ish range for Q2, 64 for Q3 and then back down to 62 for Q4. Now those are the actual possible number of billing days. But in Q3 and Q4, you have to reduce those numbers because of vacation. So in Q4, for example, that can go down by as many as 5 or 6 days if you kind of looked at it on an effective basis. And for Q3, it's generally down 3 or 4 or 5 days. So there's no real precise answer. There is very predictable ways to look at the actual number, potential days just by looking at the calendar. But vacations are heavier in Q3 and then vacation days even heavier in Q4.

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

Okay. Regarding FLD, it sounded like you're confident, in fact some of the planes are operating in new geographies. To what degree do you have confidence that you'll be getting paid for all existing planes as we head into '15?

Chris Donaghey

Well, Tobey, the existing contract vehicle goes through September of 2016. The first option here on that contract runs through the end of March of 2014 -- I'm sorry, the contract vehicle actually goes through September of 2016, I thought I said '15. So the actual contract vehicle extends out for another couple of years. So we've heard that the demand is fairly high. The real issue is working the logistics of how you get the planes deployed because the -- it's a little bit different when you're meeting more emergent requirements. In Afghanistan, it was pretty predictable. You go to the space and you hang out for a couple of years and you fly around and take pictures. When you start to deploy to other geographies, those collection requirements aren't necessarily a year in length. So you have to be a lot more judicious about how you plan your deployment orders and how you rotate through different deployment schedules. So I've heard some numbers that are pretty high in terms of the different places that would like to see these aircraft come in. The real question for our customers is going to be can we do it in a cost-effective way. But we are very glad that deployment orders have come in for the aircraft to start pushing those out to other parts of the world.

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

Okay. And a couple of questions related to Hexis. Will you need incremental infrastructure to add new product lines?

Chris S. Fedde

No, we're using the folks we have. Now the product line we're about to introduce, we kind of treat as, I'm not sure if carve out is quite the right word, but it has got a dedicated salesperson on it that does just this. But as I mentioned, it's going to go through multi-tiered distribution. So that's really something we can leverage just a single person on. And then the rest of the organization is accepted from a tech support standpoint. So I mean, as you know, once we have the infrastructure, which we do have, the more products we can put on it, the more efficient it is. And so the tech support, professional services, all of those sorts of things, they are ready for additional products and so that's no problem.

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

Chris, when you talked about maybe trying to shorten the length of a pilot, have you found that sales leads that originated maybe as direct sales leads, have they have been -- have they tended to be in a shorter pilot duration than using channel partners or perhaps the opposite of that?

Chris S. Fedde

No, it is -- they've been the same is the short answer, Tobey. It's really a matter of how long it takes from a time they say, we want a pilot until we work with their IT, with their security folks, with all of the departments and get them ready for a new enterprise scale product, if that takes 2 or 3 months, it takes 2 or 3 months. There's not a lot we can do about that and it's not really dependent on whether it was found directly or through a channel partner. So that's not an issue. We have had some cases where customers have bought without a pilot. And obviously, we like that model much better where they come in, they get demonstration, we have very technical discussions and they make their buy decision. So there are examples of 0 pilot days and the more we can do with that, the better. And like I say, I hope a year from now pilots are the exception, not the rule.

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

And my last question, are there any features that you include in new iterations or versions of G that could shorten the pilot process in any way except that you did mention something about new versions of existing products coming in soon.

Chris S. Fedde

What you -- unfortunately, no. What you're going to read, I think, Monday, you're going to see what's coming and it's going to be very impressive. It's going to ramp up our pilot queue, I believe -- it will ramp up our pipeline and our pilot queue because it's going to have capabilities that are going to appeal to more people. I don't have any reason to think it'll shorten the pilot process. It'll just have us hopping on more pilots.

Chris Donaghey

Tobey, this is Chris. If you're so inclined, we'll have a lot of this new capability that we can talk about next week at the Black Hat Conference in Las Vegas. I think, it's Tuesday, Wednesday, Thursday.

Operator

Our next question comes from Mark Jordan from Noble Financial.

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

A question, first, relative to the pipeline that you have with the 35 customers. Could you contrast the relative size? And when you count that 1 customer -- potential customer, does that represent, given the complexity of the size of the organization, multiple installations potential over time?

Chris S. Fedde

Almost always, yes. The pilot, they'll pick a piece of their network. We don't go -- these are large customers, most of them, to answer that question. Most of these are really large customers. And they don't -- we don't want and they don't want us to try to put HawkEye G on the entire network. They will identify a particularly critical network or a particularly manageable network or sometime it's geographical. But they'll pick something for us to go install, get it working, make their buy decision and then, exactly as you mentioned, then they need to build out throughout the rest of the network. And so that will be follow-on sales.

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

If you were looking at, say, a large energy company that would have, say, multiple operational subsidiaries. How long will that build-out process take if there were 3 to 5 subsidiaries and geographically dispersed?

Chris S. Fedde

If they're ready, in other words, there's not their internal obstacles, those things can be done in a few weeks.

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

Okay. Relative to the announcements you have, the enhanced SAR products that will be available late this year and into 2015, will you be -- will those be used by the DoD or your customers? Will you be providing the platforms or will you be outfitting platforms for other service providers? And what would be an ASP of one of these integrated systems?

Chris Donaghey

Yes. Mark, it's Chris Donaghey. So the purchase price for these things is generally several million dollars per system. There's actually going to be several versions ranging in size and weight and power. So depending on how high you want to fly and those types of things and what kind of ground penetration capabilities you want to get, you would choose the appropriate sized radar. But for that -- for the one that we've been talking about, it's several million dollars per radar and we've identified a potential market opportunity over a 5- to 7-year time period of somewhere between $200 million to $250 million. Now that is a mix of radars going on to government planes. In fact, they would account for probably the majority of the demand. But we also expect and we're equipping our existing fleet to be able to handle this particular radar as well. So the idea is to be able to provide collection capability on demand using one of our own platforms if the requirement is there. But we're also going to be selling radars to government customers, integrating those on to platforms ranging from manned to unmanned aerial systems.

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

Okay. A final question from me for Len addressing what your outlook is for new contract awards and funding. Obviously, you get a little bit of a vacation headwinds through the second -- third and fourth quarters. That can be potentially offset with new contracts, new funding. How do you see the contracting and funding activity as we move through the end of the governmental fiscal year and into the fourth calendar quarter?

Leonard E. Moodispaw

We have bids that will be going in. But how fast the government moves on is a big question. So I think that the pipeline of RFPs coming out is growing. The big question is how fast the government will move. It's not really end of the year kind of thing where they have to award them by the end of September. So there's no rush on their part. They want to do it right. I think they will continue into 2015 and we'll see more growth in 2015 because they will have more funds and they'll be pushing harder to get to spend the money. So not much help to you in terms of quantifying it, Mark. But it's hard to be specific.

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

Okay. And from a competitive standpoint, is -- are these really -- are these competitive bids? Or is this just things that are in your sweet spot that if it's funded, it will come to you?

Leonard E. Moodispaw

There are certainly competitive bids that we're chasing and we're chasing many of them as a prime or more as a prime contractor. However, things happen, as you know, historically, where national crises arise and money gets put on existing contracts we don't even think about today. That continues to happen and we fully expect that to happen. It's really not a question of availability of funds, it's reacting to the crisis of the day that necessitates an effort, so we expect it to be in both areas.

Chris Donaghey

Mark, it's Chris Donaghey. I would just add to Len's comments that from a bigger picture perspective, the total pipeline right now of opportunities that we're tracking is somewhere in the $1.5 billion range. But those are bids that are expected to go in over the course of 2014 and 2015. And as Len was saying, it always comes down to how quickly can the government get through their decision-making process.

Operator

Our next question comes from Josh Sullivan from Sterne.

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

With these 13 installed HawkEye programs, what percentage are revenue-generating at this point?

Chris S. Fedde

Six of the 7 -- 6 of the 13.

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

Okay. And at the Analyst Day, you had talked about contracting structure for some of the larger deals to potentially be multi-year deals. As you book these, will we see the whole multi-year value in bookings or just the 12-month value?

Chris S. Fedde

That'll depend on how the PO is structured, right?

Philip L. Calamia

Yes, what we're going to be -- what we'll be doing Josh, is including in our bookings the value of the PO. So if the PO is a 3-year transaction, that will be part of that total. If it's only an annual bid, then it will only be the annual bid.

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

Okay. And then just given the recent announcements of the leading intelligence provider and the demo platform you guys have announced, how has the customer breakdown for HawkEye between kind of the quasi-government and the more tiered commercial customers evolved?

Chris S. Fedde

The last order was government, but that's been the only government order, just the only government installation anywhere is just that one.

Chris Donaghey

And the thing to keep in mind, Josh, is even though this is a government customer, we are selling these products to government agencies under commercial terms. These are not typical government contracts.

Chris S. Fedde

We quote it and we accept the PO.

Operator

[Operator Instructions] And our next question comes from Michael French from Drexel Hamilton.

Michael K. French - Drexel Hamilton, LLC, Research Division

First question I have is about the OpEx run rate at Commercials. It was $9.3 million during the quarter. How should we think about it because you said you've ramped up the staff that you need and some of the expense was sales and some was related to technical. Do you have the staffing resources? Have you reached a sustainable level there? Or should we -- or do you think OpEx will continue to move in upward direction?

Philip L. Calamia

So we think that we've got everything just about where we need it to be, Michael. And obviously, we were ramping in the first half of the year. But as we look to the second half of the year, we see that flattening at about the similar levels to what we reported for this quarter. There may be 1 or 2 things that we may want to get after that would be opportunistic. But we're planning to keep that relatively flat to where we were for Q2.

Michael K. French - Drexel Hamilton, LLC, Research Division

Okay, great. And the guidance you talked about for the third quarter, the revenue range and the EBITDA range, can you break that down by segment? Or do you think we'll see essentially the same breakdown that we've seen the last couple of quarters in terms of the segment results?

Philip L. Calamia

Yes, so we're not going to go in to segmented guidance. But just think through some of the commentary that we've shared with regard to where see things rolling for the Services business, some of the nuances that come into play in the summertime months with vacations and so forth and then us working hard to ramp the Commercial business.

Michael K. French - Drexel Hamilton, LLC, Research Division

Okay. And next is a follow-up for the last question on the revenue-generating installed base. So that's 16 -- of the 13 installed -- 6 of the 13 installed systems were -- either were or are generating revenue. So I guess the question is how many of the 6 were generating revenue throughout 2Q? And were a couple of them just maybe the last month and maybe some of them have turned on since the end of the quarter.

Chris S. Fedde

So let's see. Two turned on late in the quarter. The rest of them would have at least been on their subscription for the entire quarter. Did I answer your question.

Michael K. French - Drexel Hamilton, LLC, Research Division

Okay. Yes, yes. I was just trying to get a sense of sort of the per-customer quarterly run rate. And I mean, I think really what we're looking at is 4 of them. And I suppose we still don't know is how much, and you probably would have provided if you wanted to, but how much of the revenue in the quarter was new business versus the legacy product?

Chris Donaghey

Yes, so Michael, we haven't really gone into that. But the thing to keep in mind is that the majority of that revenue is still associated with effectively the HawkEye AP product and renewals there. And in fact, if you look at the Q1 number, that was essentially all -- well, substantially all HawkEye AP. So there's 90 or so. Actually, I don't know the number exactly. But there's quite a few HawkEye AP customers that are routinely paying maintenance that go into that aggregated number.

Michael K. French - Drexel Hamilton, LLC, Research Division

Okay, great. That's helpful. And last one here, on use of proceeds for the convert. How much went towards the cap call premium?

Philip L. Calamia

The $16 million, Michael.

Michael K. French - Drexel Hamilton, LLC, Research Division

$16 million. And is that buy program, is that wrapped up now?

Philip L. Calamia

The cap call transaction?

Michael K. French - Drexel Hamilton, LLC, Research Division

Right.

Philip L. Calamia

Yes, that's been closed. That was closed coincident with the initial closing of the notes.

Operator

And we have a follow-up question from Tobey Sommer from SunTrust.

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

Just 2 quick points. I think you said 6 of the 13 pilots are revenue-generating. Would there be a seventh now that you had one of the 3 that got pushed out in the quarter sign up in July?

Chris S. Fedde

That -- the one that we just booked of the 3 was actually a new AP customer.

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

Okay, okay. And then I'm curious, of the pilots that you've installed, have any of them been, I guess, uninstalled where the customer just kind of moved on into passing?

Chris S. Fedde

We had one customer that decided he wasn't ready for a solution of this scale. And we had one customer that asked to take a hiatus because they had some real significant compliance issues that just had to take priority and it was kind of all hands on deck on their compliance. So we'll reengage with them later in the year.

Operator

Our next question comes from Mark Jordan from Noble Financial.

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

Just following up on the cost of the notes. Obviously, there's 2 1/2% coupon on them. What other extensions and do you -- for the cap or the hedge, is that expensed or is that capitalized? Or in another way, what will be the fully loaded cost for a full 1/4% of interest and expenses related to the notes?

Philip L. Calamia

So we're still sorting through the final accounting on the notes. I mean, it's an equity-linked transaction so we've got to make sure that we tie everything up as it relates to derivative accounting and all that type of an analysis, Mark. But straight up, we would expect to amortize the cap call ratably over the note period. So that'll just work its way in quarter-by-quarter over the 5-year term.

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

So simplistically, we could say -- it'll be safe to say $16 million divided over by the 5 years plus the 2 1/2?

Philip L. Calamia

Yes, that would be the starting point, for sure.

Operator

And I'm showing no further questions at this time. I'd like to hand the conference back over to management for closing remarks.

Leonard E. Moodispaw

Thank you very much everybody, and we'll see you next time. Goodbye.

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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