KEYW Holding's (KEYW) CEO Bill Weber on Q2 2016 Results - Earnings Call Transcript

| About: KEYW Holding (KEYW)

KEYW Holding (NASDAQ:KEYW)

Q2 2016 Earnings Conference Call

August 09, 2016 05:00 PM ET

Executives

Chris Donaghey - VP of Corporate Development

Bill Weber - President and CEO

Mike Alber - CFO

Analysts

Tobey Sommer - SunTrust Robinson Humphrey

Brian Kinstlinger - Maxim Group

Mark Jordan - Noble Financial

Michael French - Drexel Hamilton

Jim McIlree - Chardan Capital

Operator

Good day, ladies and gentlemen, and welcome to the KEYW Second Quarter 2016 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]

I would like to introduce your host for today's conference, Mr. Chris Donaghey, Vice President of Corporate Development. Sir, you may begin.

Chris Donaghey

Thank you. Good evening and thank you for participating in KEYW's conference call today. By now, you should have a copy of the press release we issued a short time ago. If not, it is available on our website at www.keywcorp.com. Speakers on today's call are Bill Weber, our President and Chief Executive Officer and Mike Alber, our Chief Financial Officer, both of whom will deliver prepared remarks and then take your questions.

Before we begin our discussion, it's important to remind you that on this call, we will make statements that do not address historical facts and are thus forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to factors that could cause actual results to differ materially from anticipated results and include the risks and uncertainties identified in our earnings press release under the caption forward-looking statements.

For a full discussion of these factors and other risks and uncertainties, please refer to the section titled Risk Factors in KEYW's Form 10-K and Form 10-Qs filed with the Securities and Exchange Commission. Finally, we would like to remind listeners that KEYW is under no obligation to update any of the forward-looking statements made on this call.

I will now turn the call over to Bill Weber.

Bill Weber

Thanks, Chris. Good evening and welcome to KEYW's Second Quarter 2016 Earnings Call. I'll start with brief comments and then, I'll turn it over to Mike Alber to take us through the financial results and update our 2016 financial guidance. Later, I'll provide color on our outlook for the remainder of the year and discuss the progress we're making on achieving our strategic plan.

As you'll hear in detail in a few minutes, our financial results were solid for the quarter. Revenue, adjusted EBITDA and EBITDA margin from continuing operations were at or above the plan. Funding actions of nearly $60 million were received in the second quarter, bringing our year-to-date funding actions to $176 million. Mike will further outline the year-over-year comparisons in our major financial metrics.

During the second quarter, we made tangible progress on the strategic initiatives presented at our Investor Day in April, including resolving Hexis, winning prime solutions awards for both new and existing customers, continuing the integration of our business development and operations teams, filling key management positions and continuing to strengthen our board.

Award activity for the second quarter was significant. When I come back online, I'll explain how our second quarter awards align to the strategy we shared in April to expand our footprint within the intelligence community and supporting agencies.

Most importantly, KEYW is further along the path to expanding our presence as a pure play end-to-end solutions provider to the U.S. intelligence and cyber communities. In addition, KEYW is delivering near-term incremental organic revenue growth while investing in initiatives that will be felt later this year and beyond.

Before I delve into these broader issues, I'll hand it over to Mike for a look at the numbers and guidance. Mike?

Mike Alber

Thanks, Bill. This is my first earnings call as CFO of KEYW, and I'm honored to be part of the team that Bill and the board are assembling here and to join a company that has such a rich history, serving important customers and addressing critical national security issues.

Today, we will be discussing our 2016 second quarter financial results on an adjusted EBITDA basis. We believe our adjusted numbers provide a meaningful comparison to our GAAP financial results and give a clearer indication of performance of our core government solutions business as we continue post SETA and Hexis. Please note that we have provided a GAAP reconciliation in our press release.

We are pleased with the second quarter results on a number of fronts, including adjusted EBITDA margin and operating cash flow. We've reported DSO of 49 days, which was significantly lower, both sequentially and year-over-year. We expect normalized DSO to be in the low-60s for the remainder of the year.

For the second quarter, we reported total revenue of $73.3 million, up by 1.3% after excluding the $3.5 million of revenue in the second quarter of 2015 from our divested SETA business. This slight increase was primarily the result of higher product sales in the second quarter, partially offset by lower revenue on certain solutions contracts that ended in the second quarter. On a sequential basis, revenue from continuing operations was essentially flat, but included a greater contribution of higher-margin product revenue, which increased adjusted EBITDA margins.

Gross margin for the second quarter of 2016 was 32.6% compared with 31% sequentially and 32% for the same period in 2015. Gross margin improved sequentially and year-over-year, primarily as a result of increased higher-margin product and cyber-training revenue.

Our second quarter operating income was $5.1 million or 6.9% of revenue compared with $6.3 million or 8.3% of revenue for the second quarter of 2015. The year-over-year decrease in operating income and margin resulted from higher facility costs, increased business development investments and professional services primarily related to the turnaround of the business.

We expect operating expenses to be in the range of $17 million to $18 million per quarter in the second half of the year as the company continues to invest in growth initiatives, primarily facilities and heightened bid and proposal activity.

KEYW reported GAAP net loss from continuing operations of $0.4 million or loss of $0.01 per diluted share for the second quarter of 2016. However, our GAAP tax rate in the second quarter was an implied 117%, which resulted from noncash tax amortization of goodwill.

On a normalized tax-adjusted basis with an implied tax rate of 39.5%, net income would have increased by $2 million or $0.05 per diluted share. We expect our full year effective tax provision for continuing operations to be approximately $2.7 million, which implies a tax benefit of approximately $1.7 million in the second half of 2016. GAAP net loss including loss including loss on discontinued operations related to our former Hexis business unit was $9.6 million or a loss of $0.24 per diluted share for the second quarter.

Adjusted EBITDA was $9.4 million or 12.8% of revenue for the second quarter of 2016 versus $11.7 million or 15.4% of revenue in the prior year period. Second quarter 2016 adjusted EBITDA declined primarily because of factors affecting operating income mentioned earlier.

Turning to the cash flow statement. During the six months ended June 30, 2016, we generated $12.1 million in cash flow from operations, which was better than expected and a significant increase from last year. As I mentioned, lower DSO and more efficient collections yielded a strong cash flow quarter.

Turning to the balance sheet. Our net working capital was $75.2 million, up sequentially from $72.2 million. There were no borrowings under our revolving credit facility. We ended the quarter with nearly $48 million in cash and cash equivalents. KEYW's board has directed senior management to present it with a capital-deployment strategy going forward. Bill will talk a little bit more about this when he comes back online.

Now I will discuss guidance. For the full year 2016, we now expect revenue from continuing operations to be in the range of $290 million to $300 million, which includes approximately $2.5 million of revenue in the first quarter of 2016 from KEYW's divested SETA business. We've narrowed our guidance range by $5 million at both the top and bottom ends. At our midpoint of $295 million, we now expect approximately $15 million to come from recompete wins and $18 million to come from new awards.

We've made progress by reducing our new awards target by $22 million this quarter.

Adjusted EBITDA margin is expected to be in the range of 10% to 13%, unchanged from previous guidance. Key assumptions in our 2016 guidance include a diluted share count of approximately 40.4 million shares. We also expect debt interest expense for the remainder of the year to be approximately $2.6 million per quarter and capital expenditures of approximately $2.5 million per quarter.

With that, I'll turn the call back over to Bill.

Bill Weber

Thanks, Mike. And before outlining the progress we've made in key elements for our strategic plan, I wanted to expand on our guidance, particularly what we expect to see in the second half of 2016.

As we mentioned, we narrowed our full year top line guidance and kept our full year EBITDA margin expectations unchanged. On our year end 2015 call and on last quarter's call, we told you to expect back-end loaded revenue as a result of increased product sales in the second of the year. We also said EBITDA margins would be at the lower end of guidance in the first half of 2016 because of higher business development costs, higher bid and proposal costs, and back-end loaded product sales.

At that time, we expected EBITDA margins to pick up in the second half of 2016, primarily as a result of higher product sales and increased leverage of our fixed costs, such as new advanced -- our new advanced cyber operations facility.

Today, we still expect product sales to figure prominently in the second half results. While this is a positive differentiator for KEYW, it can be challenging to forecast product sales on a quarterly basis in any given year. Sometimes customers will place immediate unanticipated orders ahead of our forecast. Other times, an expected product sale can be pushed back a quarter or two.

As for margins, a significant portion of the higher bid and proposal costs we expected to hit in the first half of the year are now slated for the second half of 2016 due to expanded scope and complexity of those opportunities. More importantly, we now plan to submit approximately $1 billion of bids in the second half of 2016. This figure is higher than we expected last quarter, as our BDN operations teams have aggressively moved to identify near-term opportunities for KEYW to pursue.

We view these higher B&P costs as a positive indicator because they represent investments in our growth strategy of pursuing and winning major new solutions awards with our cyber and intelligence community customers. So therefore, we now see second half 2016 revenue at or slightly above our first half reported revenue, and second half adjusted EBITDA margins coming in toward the lower end of the full year range we guided to, primarily as a result of the higher B&P spend.

Moving now to updates to our strategic plan. As most of you know, KEYW concluded the sale of our Hexis product lines in two separate transactions in May and June. The total value was approximately $20 million in cash and purchase of stock. Resolving Hexis was one of the first milestones in the strategic plan we outlined at our Investor Day on April 7 and in other investor forums. We are pleased to have this issue behind us and are moving forward with a sharp focus on being the pure-play solutions company I spoke of earlier.

Next, award activity for the second quarter was also strong. In May, we announced KEYW's win of a prime position on a 5-year multiple-award IDIQ with a $460 million ceiling value to support the U.S. Cyber Command mission.

Later in May, we announced our win of a prime position on a 5-year multiple-award IDIQ with a $245 million ceiling value to provide research and development support to the information technology division at the Naval Research Laboratory, also known as NRL.

Although we don't include IDIQ ceiling values in funding actions for the quarter, we believe that future cash quarter wins under these vehicles will contribute to revenue beginning in early 2017 and continue beyond.

We also believe that these awards represent two key favorable trends to KEYW. First, having U.S. cyber com and NRL as customers expands KEYW's footprint in growing areas of the federal procurement, where the demand for advanced cyber solutions is particularly robust. We will continue to focus our efforts on expanding our presence in other cyber and intel-related customers, such as U.S. combatant commands and other DoD agencies.

Second, the just-completed quarter was a period of maturation and integration of KEYW's business-development capabilities. Our pipeline of business opportunities now stands at approximately $11 billion. We are continuing to qualify that pipeline through various sales stages, but I can tell you that we expect both the total pipeline number and the qualified portion to increase in the coming quarters. Being able to report a total pipeline number at this stage represents significant progress for KEYW. And as we told you on past earnings calls, our goal is to begin to report other industry-standard metrics, including backlog and bookings later this year.

In addition, the major takeaway is that we expect to submit approximately $1 billion in proposals during 2016. Approximately $300 million of which are already in and approximately $700 million of which are in development and will be submitted later in the second half, as I mentioned earlier. This is a result of great work by our combined business-development and operations teams, and we're proud that they've responded so quickly.

Needless to say, we're focusing primarily on winning new business and generating organic growth. However, inorganic growth will be an option as well. As Mike said, we plan to discuss capital-deployment strategies with the board, which will certainly include options to generate greater scale and move KEYW into adjacent markets in the cyber and intel-related agencies.

Next, during the second quarter, we filled several key positions in our organization. You just heard from Mike Alber, the former CFO of Engility Corporation, who recently joined the KEYW team as Chief Financial Officer in June. Mike's deep background in the government solutions industry and large public companies will be essential as we execute our strategic plan to expand our presence in the U.S. intelligence and cyber community. Mike has already made significant positive changes in how we forecast, generate and report numbers. He'll also be invaluable as we consider capital-deployment options in the coming months.

Next, as you will recall, we announced last quarter that Mark Sopp joined our board and now, chairs the Audit Committee. We also made another key addition this quarter to our Board of Directors in June with the election of Chris Inglis. Chris served for 41 years in the Department of Defense, retiring in January 2014 after 28 years at the National Security Agency and over seven years as its senior civilian and Deputy Director.

As the NSA Deputy Director, Chris was the agency's Chief Operating Officer, responsible for guiding and directing strategies, operations and policies. We've already -- we're already benefiting from Chris' unique insights into the intelligence community's needs and challenges.

One further note on additions. When I arrived at KEYW last October, I was immediately impressed by our outstanding technologies and technologists. You've heard me say this many times, competition for our people is fierce, that's why recruiting and retention are vital to our future success. To address this need, we've also invested in key senior recruiting and communications personnel. How we tell the KEYW story to prospective employees and customers and communicate to our existing employees and customers are the benchmarks of these initiatives.

Finally, we expect to report continuing progress in executing our strategic plan in second -- in the second half of 2016, particularly in the areas of new product sales and pursuit of one or more large solution contracts. KEYW has also taken steps to better align employees' interest with investors with the stock option exchange launched in the second quarter, which we believe will strengthen our retention efforts.

As we've told you, 2016 is a transitional year for KEYW, and we put incentives in place for management to meet and outperform expectations during the transition. Strategic turnarounds like this never happen overnight, and we expect that much of the impact of actions we're taking this year will be felt in 2017 and beyond. However, I'm very happy to say that we're performing on plan and on time in nearly every facet of our strategic undertaking, and we'll continue to update you as events warrant.

With that, operator, we'll open the call up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of Tobey Sommer. Your line is now open.

Tobey Sommer

Thank you. I wanted to start off by asking a question on the pipeline. $11 billion seems like a very large figure for a company approximating $300 million in sales this year. Maybe you could give us a little bit more context -- you talked about $1 billion in bids this year. How much might that -- what would that compare to a year ago? And is $1 billion in bids about the right number on an annual basis? Thanks.

Bill Weber

Yes. So Tobey, let me explain what that $11 billion pipeline number represents. So mature business development organizations, and that's the way KEYW is behaving going forward, classify their entire pipeline in roughly six different stages, if you include the win stage after that's been announced. And so, of the first five, those are at various stages of development, beginning with identification all the way to source selection. So that $11 billion represents the entire hunting field that KEYW has identified that there are real tangible bids that KEYW could pursue. And they are in various stages of development, as we try to move those up the stack and through the various stages, so that we are bidding on the right amount of proposals that can continue to feed our ongoing revenue.

Now what that should result in is a proposal number every year that is anywhere between 4 -- 3 to 4 times the size of the revenue stream that we expect to generate as a company. So how that $1 billion equates is somewhere between a third or a quarter of that, if you use normal industry standards, should turn in to revenue. And so, in any given year, we want to be able to put proposals into our customer that would roughly generate 3 or 4 times what we expect to generate in revenue.

So as for your question on how does that compare in the past, KEYW did a great job in the past of bidding on and winning work that was very, very close to home in our core customers, and the win rate in the past was significantly high in those customers. However, that didn't represent a growth number, and it didn't expand the market enough for us to have realistic expectations that we could grow past that $300 million size. So it's difficult to go back and look at exactly what that total number was in the past, but I can just tell you that going forward, our expectation is that whatever our revenue number is for the given year, we want to be bidding anywhere between 3 and 4 times that number.

Tobey Sommer

Okay. From a personnel buildout perspective, do you have, at this point, most of the senior folks on the team? Or do you still have a couple of targeted positions that you need to fill?

Bill Weber

No, we absolutely have the people on the team that we think will drive this company going forward, and they're all engaged now and working towards the strategic plan.

Tobey Sommer

And then, maybe a question for Mike. If you're too fresh to give an answer, I'd understand. You talked about DSOs and cash generation, is there a rule of thumb that we should think about in terms of converting adjusted EBITDA to cash, absent the variation in DSO?

Mike Alber

Sure. I think from a global perspective, you would like to see a conversion factor of about 1x net income from -- to a cash-conversion factor. Where we're sitting right now, especially from a DSO perspective, represents some hard work that was done by the team, really, in the first and second quarter to reduce some receivable balances that had built up in the end of Q4 last year.

So you wouldn't expect to see that kind of -- that continued cash flush going forward. DSOs are in a 49-day range, currently. And where you expect to see a normalized DSO range for work such as this would be in a low to mid-60s is kind of best-of-breed, which you would expect to see with this kind of customer mix and this mix of work as well in terms of products and services.

Tobey Sommer

Okay. My last question is what might have changed in terms of your guidance range that lowered the probability for you to hit the higher end of the range?

Bill Weber

So Tobey, when we were looking at all that was possible for 2016, and that started with our - at the beginning of the year when we issued the initial guidance, there were several significant product procurements that we thought had an outside chance of being pulled into late 2016. And we thought that those had a reasonable possibility to come in, in the November or December timeframe. There were a couple of those. When we're looking at them now, while they're still very much alive and they represent 2017 numbers for us, it's just not realistic for us to pull those in. They're procurement cycles with organizations that we think are going to look more like a first quarter 2017 event.

In addition, what I would also add to that is one of the proposals that we're working right now that was expanded in scope and expanded in ceiling, Yorktown, we've talked about in the past. It's a larger proposal than it was when we were initially looking at it earlier this year. That's a great thing for KEYW because it's very much in a sweet spot of an area that we're going to be proposing, but it's going to be decided and awarded and then turned to revenue a little bit later in the year than we expected. So that won't be a 2016 event either.

Operator

Our next question comes from the line of Brian Kinstlinger with Maxim Group. Your line is now open.

Brian Kinstlinger

First, Mike, congrats on the job. I look forward to working with you again and Bill another nice quarter for you.

Mike Alber

Thanks, Brian.

Brian Kinstlinger

You mentioned the $80 [ph] million worth of new business you need to win to achieve your guidance. I'm wondering if this mostly products because services take a while to ramp, and we're already midway through 3Q. So maybe just give us a sense of that $18 million that you need to go get.

Bill Weber

Yes. You're correct. It is mostly product, and especially in the back half of the year for a company like ours, that's - that will probably be our consistent pattern. But of that $18 million, there is about $4 million of that, that we - that is a services - two services programs that we expect to close and begin revenueing in the back - two quarters of the year. So you're looking about $14 million of that, that's in product.

Brian Kinstlinger

Great. That makes sense. And can you quantify the portion of $1 billion in submissions that are new work versus recompetes? And then, can you - do you have a comparison - I know you don't necessarily have all the numbers from last year. Do you know how much you guys submitted in total last year?

Bill Weber

So the portion that's recompetes, 25% of that work that we are proposing this year is recompeted business for KEYW. The other 75% represents either brand-new work or unassociated follow-on to programs that we had a significant presence and it is the next generation of the program. So it's not accurate to call it a recompete, but KEYW is in a great spot to be able to go and win that. What I would say is, it's difficult to go back and look at the numbers and compare them and give an apples-to-apples comparison because as I explained earlier, we are categorizing the pipeline through different stages than we were before, Brian, and the numbers of where we bid this year will be significantly higher because we're trying to expand into new markets. When you go to expanded customers that aren't your core customers, you're win rate is going to be less, and so you have to hunt on a larger field than you did before. So the number that we proposed last year in order to get to the roughly $285 million in core business that represents the government solution business was significantly smaller than $1 billion.

Brian Kinstlinger

Yes, okay. Then another way to look at the $1 billion submissions, can you maybe talk about the percentage that is outside of your two main customers, which is the focus, I think, that you've added here? And then, as it relates to that, is mid-2017 too early to expect the evidence of that expansion? And I'm not including IDIQ wins. I'm talking about actual revenue evidence because I - eventually, you'll get that revenue there, but I'm just talking about in terms of revenue of expansion.

Bill Weber

Yes. I think you're in the right range in terms of when we are looking at the early signs of that expansion. Now we've always said that the back half of '17 and early '18 is really easily when lot of these - the expansion business will start to flow into our revenue. If you look at that $1 billion, 50% percent of it comes from our existing top two customers, and the other 50% is either expansion or other customers that are KEYW customers today.

Brian Kinstlinger

Great, that's helpful. And then finally, maybe if you can give us an update on new sales and hires. I think at the Analyst Day, you said you were waiting on one or two more with - you had offers out. Have they joined your team? Your sales teams, not management. I know you're planning additional personnel for business development.

Bill Weber

Yes. The team that we have built right now is fully staffed and is out and operating. Having said that, let me be clear, and it's the way that we look at our business, overall. We intend - just as we have the sharpest technologists and the best technologies in the industry, we intend to have the best business-development team that competes in the intelligence community as well. And if there are hires that we can make that get us into additional agencies than the presence that we have right now on the team, then we will find a way to bring those people on board because that is the early indicator to get you to new revenue opportunities. What I would say is the team that we built is the team working with our operations group. And with the sector vice presidents that run those businesses, that's the team that produced an $11 billion pipeline that we're now going after and trying to move upstage. So I'm confident that the team that we have in place right now can produce the kind of early-stage pipeline that will lead to the right amount of bids for this company to grow.

Operator

Our next question comes from the line of Mark Jordan with Noble Financial. Your line is open.

Mark Jordan

I'd like to talk a little bit about the tax rates. Obviously, the first two quarters were exceptionally high taxes. And now, you talk about a $1.7 million tax benefit in the second half, which obviously, will be very beneficial to GAAP profitability. A couple of questions around that. One, how is that - those tax benefits be generated? Or where are they coming from? Two, how will they be spread through the third and the fourth quarters? And the third question is how long will these benefits last, looking out into '17? Should we, from a modeling standpoint, just assume a normalized 39.5% normalized tax rate for '17?

Mike Alber

Yes, so Mark, I think the short answer for 2017 is yes. We would - for modeling purposes, we should, short of any other divestiture or acquisition or any other strange transaction taking place. So I think for modeling purposes, a 39.5% rate is the appropriate rate. Given the non-tax - noncash tax amortization of the goodwill, it's kind of done - gotten us in kind of a funky place with regards to our tax rate. We really expect to see - to get back on a more normalized basis, really, in the beginning of - the first or second quarter of 2017.

Mark Jordan

All right. A question relative to business development and the US Cyber Command and Naval Research Labs, IDIQs. Bill, as you'd mentioned, those are new customers to you. What gives you the sense of assuredness that your new business-development team is going to be able to really exploit and get meaningful penetration into those two accounts?

Bill Weber

Yes, Mark, that's a good question. So let me clarify. They are new customers for KEYW as a prime contractor, and I think that's the most significant piece. Now U.S. Cyber Command, as an entity, as a government agency, is relatively new, and this US Cyber Command IDIQ that we won was one of its first early-stage contracting actions that will allow cyber training and operations capabilities. So winning that was critical to establish the set of players that are going to provide services to US Cyber Command in the years ahead. Now our relationships, though, inside of Cyber Command, because of where it came from and because of the agency that it was closely aligned with, made us a very, very strong presence there.

So while it is a new customer for us in terms of a large-fund contract, we are very, very familiar with Cyber Command, and we expect to be very competitive on most if not all the task orders that come out on that IDIQ. Naval Research Laboratory has a similar story. KEYW's presence at NRL actually goes back - the people that are in this company, in this organization have ties back as deep as 22 years. We have been predominantly a subcontractor, providing a lot of valuable capability through subcontracts to NRL. This represented an opportunity for us to go and prime an opportunity. So we have relationships there, we just stepped up in a more meaningful way, and in my opinion, took a rightful place to provide solutions for the customer as a prime contractor.

Mark Jordan

Okay. CapEx, your $2.5 million a quarter is pretty high for a company of your size. Can you talk about what you are expecting on? Is this just kind of a onetime bubble? Or should we expect that this 3x - 3% of revenue type of a run rate is what you're going to be needing to invest to grow the business?

Bill Weber

Mike, do you want to take that?

Mike Alber

Sure, sure. So Mark, I agree with you. I mean, from a - if we were - if you were looking at a $300 million-a-year services company, that CapEx number would be very high. One of the things driving that number are the airframes that we're purchasing and adding to the fleet as well. So that's - we do see that this year adding to or being part of our CapEx as we go forward.

Mark Jordan

Okay. And looking out into '17, any thoughts - this $10 million run rate right now, is that - is it more normally be 1/2 that or given the growth you may have on the old site data - or data capture, whatever you're calling now, does that - may continue?

Mike Alber

I think on a normalized basis, Mark, yes, you're right in the ballpark. We're - we would look at $5 million to $6 million a year run rate for CapEx.

Operator

Our next question comes from Michael French with Drexel Hamilton. Your line is now open.

Michael French

Mike, welcome aboard. Good to see you again, so to speak.

Mike Alber

Thanks, Michael. Look forward to working with you.

Michael French

Likewise. So first question, going back to the bids that are out - and I understand the revenue showing up beginning and middle of next year. But perhaps, you could add a little color - provide some color on what the sales cycle looks like, depending on the different type of products or service you're selling. And kind of what I'm getting at, what - might there be other data points that show up before the revenue?

Bill Weber

Well, certainly, Michael, when we hear award announcements, as has been our history here recently, we're going to announce that. We're going to make sure that we give you the indicator that says, all right, what we just proposed, we now won. All right? So that would be the first thing. All of them, though, will not have to wait until mid-2017 and beyond to turn into revenue. It's the new customers and the large IDIQs that will take time to put task orders out and then turn into revenue. And those are the ones that we think that are more back-ended '17 and '18. But make no mistake, a significant part of the $11 billion - or excuse me, the $1 billion of proposal activity that's ongoing right now, we expect to turn into revenue in early 2017 as well. So it's in, we're - by the end of the second half, we will have submitted all of those proposals. They do take some time to get through procurement, but as we've said, several of them are in and few more are going in, in the coming days. So throughout 2017, those will begin turning into revenue.

Michael French

Okay. Thank you. And on capital deployment and M&A, in particular, you had said that possibly, after the divestiture of the commercial business, without the cash drain and without the distraction, potentially you would look at some small bolt-on-type acquisitions. And now that you've got Mike on board, and I believe he has got some experience in this area, and you've got management resource as well, should we be still thinking about that? Or should we be thinking that you're getting closer to doing something that - as you mentioned, with hiring salespeople who have access to new customers sometimes in the space, it's been done. There are companies that can provide market access as well. So just an update on potential for activity in this area, if you don't mind.

Bill Weber

Sure. Yes. Let me speak to that. We - I think it's very clear to everybody inside of KEYW that we needed and have and are executing on a sustainable organic growth plan to significantly grow this company somewhere between the $300 million of revenue, where we are today, to $400 million to $500 million of revenue over a period of time in the next three to five years. Now it's important to be able to execute on that plan and begin showing signs of health on that plan. Having said that, there is a significant amount of consolidation activity at the mid-level of our sector.

And we see opportunities all the time that are interesting opportunities, where you could draw very logical conclusions that it will continue us down the path that we've talked about in terms of growing the business. And it would accelerate us, either - as you described, a small tuck-under that gives us a presence in a particular agency or has a contract vehicle that would help us or something of significant size and scale that would help us accelerate that timeline. It's the responsible thing for this management team and for our Board of Directors to constantly look at those. So what we have to be able to do is show that we have an organic plan that by itself will grow the company, and I think we're largely executing on that. So you should see us more active in reviewing opportunities, but there is nothing for us to report at this time other than that.

Operator

[Operator Instructions] Our next question is from Jim McIlree with Chardan Capital. Your line is now open.

Jim McIlree

So I just want to make sure I understand the revenue and EBITDA outlook for the second half. Is there any significant difference that we should expect between Q3 and Q4? So is it a Q4-loaded second half?

Mike Alber

Jim, this is Mike. I think when you take a look at the second half of the year, there could be some perturbation between quarters and some lumpiness between quarters as a result of the products mix that we have. I think if you looked at, really, the second half as that and in terms of what we're looking to achieve, there may be some differentiation between quarters. But I think when you - in terms of ending the year or getting to that end point at the end of the year, we're still targeting the midpoint of the range.

Bill Weber

So you have scenarios that - and trust me, we're tracking all of them, where that - the product and solutions mix for the company is evenly spread across Q3 and Q4, very realistic buying patterns and timelines that we are actively involved in, where we feel very, very confident of the outcome. Some of those things, as we saw in Q2, can get accelerated. And that could bring more product into Q3, which would cause a more significant revenue and EBITDA impact in Q3. We are also tracking scenarios where good, solid opportunities for us may slide a little bit further into Q4 and it may be more back-end loaded. It's probably an unsatisfying answer, but it depends. The important thing to note is we feel confident in the range for second half of the year, and that's why we've tailored the guidance the way that we did that we think that, overall, Q3 and Q4 combined, we'll finish where we stated.

Jim McIlree

Okay. Yes, I get it. And it's not an unsatisfactory answer at all. I understand. The - and I'm trying to grasp this $1 billion dollars and when that starts hitting revenue versus when you start getting awards. Do I understand it correctly that there's at least 50% of those - of that $1 billion dollars that's due to the existing customer base? And so what you expect is that to turn relatively quickly into revenue, and so we might - assuming that awards get done on time, we might see some revenues from those bids start hitting Q1, but more likely Q2, is that right?

Bill Weber

That's right. In fact, there is a significant piece in that $1 billion dollars of proposals that are going in and - or that have already gone in that will turn into revenue immediately. And it represents a recompete of a significant piece of work for the company that we were tracking well throughout the year. We were in constant communication with the customer, and as we expected, it came out with a very short turnaround time on the proposal - or relatively short. We were more than prepared to respond to it. The proposal went in, and we expect to hear news on that at any time. And trust me, when we do, you will know. But you're right in saying that, that $1 billion dollars does have a spread spectrum in terms of when it's going to hit upon successful award. Some of them will be immediately. Some of it is out over time, as task orders start to come out of the IDIQs.

Jim McIlree

And so this recompte that you've just referred to is part of that $300 million that's already been submitted. It's not the entire $300 million of the - of what's been submitted, is it?

Bill Weber

No, it's not. Those are multiple [indiscernible]. But you're correct, it's already in. It's in source selection right now, and as I said, we are very confident that there'll be a favorable outcome for KEYW.

Jim McIlree

Okay. Well, I wish you best of luck on that one. And then finally, Mike, I think you talked about $17 million to $18 million of operating expenses in each of the next two quarters. I just want to clarify, that operating expense is excluding the amortization, correct?

Mike Alber

Correct. Yes, sir.

Operator

Mr. Donaghey, I'm not showing any further questions at this time.

Chris Donaghey

Okay, then. With that, I'd like to thank everybody who attended the call. As always, we appreciate the interest. And as we have said on the call and I think that you've seen from us as of late, when we have any news that supports the information that we know that you're tracking, you will see it in announcements from us. So thank you very much for joining us tonight.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a wonderful day.

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

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

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