The KeyW Holding's (KEYW) CEO Bill Weber on Q3 2017 Results - Earnings Call Transcript

The KeyW Holding Corporation (NASDAQ:KEYW) Q3 2017 Earnings Conference Call November 2, 2017 5:00 PM ET

Executives

Mark Zindler – Vice President-Investor Relations

Bill Weber – President and Chief Executive Officer

John Sutton – Chief Operating Officer

Mike Alber – Chief Financial Officer

Analysts

Matt McConnell – RBC Capital Markets

Brian Kinstlinger – Maxim Group

Tobey Sommer – SunTrust

Ben Klieve – NOBLE Capital Markets

Operator

Good day, ladies and gentlemen, and welcome to the KeyW Corporation’s Third Quarter 2017 Earnings Conference Call. My name is Charlotte, and I will be your conference operator today. This call is being recorded.

I would now like to turn the presentation over to your host for today’s call, Mark Zindler, Vice President of Investor Relations for KeyW. Please go ahead, Mr. Zindler.

Mark Zindler

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 CEO; John Sutton, our COO; and Mike Alber, our CFO, all of whom will deliver prepared remarks and then take your questions.

Before we begin our discussion, it’s important to remind you that during the overview of our third quarter 2017 financial results, our updated 2017 guidance and then our responses to your questions, 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 today’s 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 entitled Risk Factors in KeyW’s Form 10-Ks, Form 10-Qs and other filings we made 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, Mark. Good afternoon, everyone. Now is a good time to introduce everyone to Mark Zindler, KeyW’s new Vice President of Investor Relations. He is taking over for Larry Delaney, who you’ll likely know served as our Interim IR contact, as we sought a long-term leader to backfill Chris Donaghey’s position. To ensure a smooth transition, Larry will continue to support us on this earnings sequence and on future strategic projects.

Mark brings more than 20 years of experience in leading investor relations, corporate finance and strategic initiatives. Of note, in his career, Mark held senior investor relations leadership positions with NII Holdings and Nextel Communications. I’m sure many of you will be getting to know Mark over the coming weeks and months. So please join me in welcoming him to KeyW.

So on today’s call, I will provide an overview of KeyW’s third quarter results and the key drivers behind the numbers; color on recent awards and bookings during the quarter; a brief update on the Sotera integration process; our views on the macro environment, namely the budgetary climate we’re seeing in the marketplace; and finally, our decision to combine KeyW’s business development capabilities with strategic corporate development with the promotion of Kirk Herdman. John will then discuss Sotera integration process and key operational and growth initiatives now underway. Mike’s remarks will go deeper into our third quarter numbers and provide updated 2017 revenue and adjusted EBITDA margin guidance. I will then close with final remarks before taking your questions.

First, let’s talk about the results. Third quarter revenue came in below our expectation by approximately $8 million, which consisted of three components. First, product solutions revenue we anticipated closing in the third quarter associated with end of government FY spending that did not materialize for us in the quantities we expected. Now they’ve been pushed into Q4 and 2018. Next, a service solutions award we had expected to ramp up early in the third quarter, but was delayed until the end of Q3. And finally, a contract loss we had expected to contribute growth revenue beginning in the third quarter.

Adjusted EBITDA margin came in below expectations as well, largely because of the revenue shortfall I just mentioned and because of the lower product solutions content of the additional revenue, partially offset by improved cost efficiencies. Although as Mike will explain, adjusted EBITDA margins have increased quarter-over-quarter throughout 2017.

John will provide additional commentary on the Sotera integration as well as key operational initiatives we’re undertaking, but I’m pleased to report that we are beginning to achieve greater operational efficiencies as well as compelling business development and revenue synergies going into 2018, with the Sotera acquisition serving as the catalyst.

Now we’ll turn our attention to business development highlights. Third quarter bookings were solid for KeyW. Net additions to backlog totaled $273 million or 2.2x revenue. Trailing 12-month bookings totaled $547 million or 1.1x revenue. As September 30, our contract backlog stood at $1.26 billion, of which approximately $188 million was funded. As you note from the turnaround plan we’ve outlined in our past discussions, consistent and sustainable bookings in business development metrics are important milestones for KeyW at this stage in our life cycle. And from that standpoint, these signs are very encouraging.

As noted in our press release, KeyW’s third quarter awards are consistent with the company’s focus on our core competencies in cyber operations, affordable Intelligence, Surveillance and Reconnaissance solutions and mission IT and analytics support for the most critical national security challenges.

These are all areas where KeyW has unique proven technologies and differentiated skill and performance. And we put the company in a position to take full advantage of these strengths as we move forward.

Among our third quarter bookings, I want to focus specifically on two awards. First, KeyW received $136 million 2-year prime contract follow-on from an intelligence community customer. Under the terms of the award, the company will continue to deliver software development, cloud infrastructure services and cyber shared situational awareness.

We also received an award of $14 million from the Army’s Intelligence and Security Command that expands our current CAAS quarter contract. This important contract, initially awarded in 2016, expands our information operations contract to include social media monitoring for preparing and protecting DoD forces worldwide. This is the first of other scope increases and new task order competitions that we foresee in our existing contract base, again part of the strategy we’ve previously emphasized. The majority of our Q3 bookings were logical follow-ons and existing contract plus-ups. With these awards, we virtually eliminated a recompete risk in 2018.

Next, I’ll move on to key attributes of our sales pipeline. Management recently completed a thorough review of our total identified pipeline to refocus our efforts exclusively on KeyW’s core competencies over the next three years. Most importantly, KeyW’s total qualified pipeline is approximately $6 billion. As of today, the total bids submitted and awaiting awards is approximately $1.3 billion, most of which carries solid win rate probability and represents new growth for KeyW.

We also expect to submit another $350 million in bids over the remainder of this year, all growth opportunities. This will bring our total anticipated 2017 bids submissions to approximately $3.2 billion. With less than two months remaining in fiscal year 2017, we’re confident that full year bookings will exceed 1x revenue.

These business development metrics are critical for KeyW at this point in time. The company must continue to demonstrate strong pipeline advancement from biz development through contract awards. Our recent bookings and sales pipeline are further proofs that we’re building a long-term sustainable platform for growth and profitability. I now want to comment briefly on some of the budgetary trends we’re seeing and what that means for KeyW.

Right now, Congress is primarily focused on tax reform and budget. The current Continuing Resolution, or CR, expires on December 8. We expect the CR extension in March with low risk of a government shutdown. While the CR limits new program starts, we are seeing continued funding in our existing top programs within our Intelligence, DoD, FBI and Department of Homeland Security customers. We’re confident that government fiscal year 2018 budget priorities align with our core competencies, and we continue to expect modest increases in government FY 2018 spending, in particular low single-digit growth on the classified budgets that fuel KeyW’s growth.

Next, I want to take a moment to highlight one particular area of keen interest to us. KeyW’s addressable federal cybersecurity market is estimated to reach $22 billion by 2022 from its current $19 billion, an increase of approximately 12% during that time. As I mentioned last quarter, we’re also encouraged by the administration’s request for a significant increase in cyber funding, specifically for DHS in the new government.

One of the primary strategic reasons for acquiring Sotera was its impressive portfolio of prime contracts with DHS and other counterterrorism-focused customers, including the FBI. To further address that market, I’m pleased to announce KeyW is also a top echelon partner to Raytheon on the just awarded $1 billion DHS DOMino cybersecurity program. All of this emphasizes that the markets we serve are strong and growing.

Before I turn the call over to John, I’m also excited to report that during the third quarter, we announced the promotion of Kirk Herdman to lead our combined efforts in corporate strategy and business development. Kirk is a proven leader with an in-depth understanding of both KeyW and Sotera. His background and track record of large front contract wins within the intelligence and counterterrorism communities are a natural fit for KeyW. His experience and strategy in corporate development will also help us as we implement the 3-year growth plan resulted from our recent strategic offsite. We couldn’t be more pleased to have Kirk lead this newly combined function and I have the utmost confidence in his abilities.

With that, I’ll turn the call over to John for an update on the Sotera integration process and key operational highlights.

John Sutton

Thank you, Bill. I’m pleased to report that our Sotera integration is nearly complete. Key actions taken since the closing in April include: the combination of all service center functions; shutting down redundant facilities in Virginia and Maryland; and completing the integration of business systems for accounting, sales management, recruiting and human capital management.

We are also streamlining our operational units to bulk up our capabilities while sharpening our technical and account focus. By optimizing our facilities, we will reduce cost by approximately $2 million while increasing employee interaction and teamwork.

One benefit of moving quickly to make these changes is improving the speed of new higher on-boarding, which was reduced significantly for the new hires we started in the quarter. Through combining our business systems and aligning our enterprise to a single secure business network serving our global operations, we are also on track to meet new federal cybersecurity standards by 2018.

Moving to business development. As Bill commented, we’ve consolidated BD and strategy under a single leader. Moreover, we’ve aligned business development, catch and proposal teams with operational growth objectives and our core competencies in cyber, ISR, mission IT and intelligence analysis in our approving catch and proposals to increase our run rate. Since the end of Q2, our business development team, in partnership with operations, has submitted prime single work proposals with a total value of $1.5 billion, evenly distributed across our core competencies.

Q3 business development highlights of our services business include delivery of a very large single work proposal to the Army for cyber intelligence training and simulation and over $600 million of additional new proposals to the FBI and the intelligence community, leveraging our cyber and mission IT solutions. Underscoring these positive proposals is our continuous strong operational performance, anchored by high customer satisfaction, which directly leads to our very low recompete risk.

As an example of our strategic plan in our product solutions business, we signed and started four new development contracts with new customers. These new contracts have large long-term potential to deliver innovative subsystems and communication systems to space platforms. As you will recall, the primary reason for divesting the SETA business in early 2016 was to remove organizational conflict of interest barriers that existed within several key customers. These new contracts are a direct result of that strategic decision.

I’ll conclude by saying that we continue to be pleased with the cost, operational and business development efficiencies provided by our Sotera acquisition. We are confident that the actions we have taken thus far in 2017 have built the foundation for growth and profitability in 2018 and beyond.

With that, I’ll turn the call over to Mike.

Mike Alber

Thanks, John, and good afternoon. As a reminder, we’ll be discussing our financial results on an adjusted basis. We believe these non-GAAP metrics, especially adjusted EBITDA, are useful to understand KeyW’s underlying operational performance. We provide reconciliations to GAAP of both our third quarter adjusted EBITDA number as well as the adjusted EBITDA margin range in our updated full year 2017 guidance.

As Bill mentioned in his opening remarks, the third quarter was softer than anticipated. We reported revenue of $122.4 million, which is an increase of 70% over third quarter of 2016. The increase is largely attributable to revenue acquired with the Sotera acquisition. However, third quarter revenue came in below expectations due to lower than expected high-margin product and service solutions work of approximately $5 million, delayed program start-ups representing approximately $2 million, and the loss of rejected award that would have yielded about $1 million in additional revenue this quarter.

Operating income for the third quarter of 2017 was $2.4 million or 2% of revenue compared with operating income of $4.2 million or 5.9% of revenue for the third quarter of 2016. The decrease in GAAP operating income and margin resulted from higher operating expenses, primarily due to the acquisition costs and other onetime adjustments and higher amortization expense. Excluding $3 million of acquisition costs and other adjustments, operating income was $5.4 million or 4.4% of revenue.

As expected, KeyW reported significantly lower sequential operating expenses, primarily due to greater operational efficiencies achieved within the combined organization. These actions yielded sequential improvement and adjusted EBITDA margins for the quarter, and we will continue to take actions to further improve margins going forward.

We reported GAAP net loss from continuing operations of $4.2 million or negative $0.08 per diluted share for the third quarter of 2017, largely because of the factors affecting operating income. Once again, there were no discontinued operations in the third quarter of 2017.

Adjusted EBITDA from continuing operations was $11.6 million or 9.5% of revenue for the third quarter versus $8.4 million or 11.6% of revenue in the prior year period. Third quarter 2017 adjusted EBITDA increased year-over-year, primarily because of the additional revenue acquired with Sotera acquisition, partially offset by higher direct and indirect expenses. Adjusted EBITDA margin decreased primarily because of the increased service solutions mix of the additional revenue.

Furthermore, please note that our adjusted EBITDA for the third quarter backs out roughly $3 million of acquisition costs and other adjustments, down from more than $13 million in Q2.

As Bill noted, our sequential adjusted EBITDA margin has improved each quarter thus far in 2017. From 6.5% in the first quarter to 8.5% in the second quarter and 9.5% in the third quarter. We expect to report improvement – another improvement in Q4, which our updated guidance implies.

Cash flow provided by operations for the 9 months ended September 30, 2017, was $6.1 million, a decrease of $7.5 million compared with the same period in 2016. The decrease was primarily due to higher cash expenses related to the acquisition and integration of Sotera.

As we told you to expect on last year – on last quarter’s call, DSOs improved to 60 days, six days lower sequentially and more in line with our expected normalized DSOs in low 60s. In addition, true to our previous commitments to do so, KeyW also delevered the balance sheet by paying down about $12 million of debt during the third quarter.

Next, moving on to updated guidance. We are revising our anticipated 2017 revenue to a range of $435 million to $445 million versus our prior range of $455 million to $485 million. We’re lowering adjusted EBITDA margin to a range of 8% to 9% versus our prior range of 10% to 11%. We are revising our revenue and adjusted EBITDA margin guidance for effectively the same reasons as the Q3 shortfall. Approximately half of the reduction is attributable to delayed product solutions sales and the other half due to delays in losses of service solutions awards that Bill and I both commented on.

At the new revenue midpoint of $440 million, about 94% of the fourth quarter revenue to reach our annual guidance midpoint is an existing backlog and approximately 6% is assumed to come exclusively from identified product sales.

Key assumptions for our 2017 guidance include: an annual income tax expense of approximately $7 million, although, again, we won’t be a cash taxpayer in 2017; full year 2017 amortization to be about $9 million; and interest expense of approximately $17 million. Finally, we continue to believe that the Sotera acquisition will be significantly accretive to GAAP EPS in 2018.

With that, I’ll turn the call back over to Bill for closing remarks.

Bill Weber

Thanks, Mike. It’s never pleasant to report an operating shortfall and have lower – to have to lower our guidance as we’ve done today. As I commented in our earnings release, these actions don’t reflect the standards of performance I expect from KeyW. As we’ve said in the past, we knew that there will be bumps in the road in a fundamental turnaround story like KeyW. I want to assure everyone that the foundational elements are in place to produce organic growth and increase profitability in 2018.

We have virtually eliminated 2018 recompete risk. We are generating operational efficiencies that are not onetime items, but ongoing embedded reductions in operating expenses that will yield financial benefits moving forward. I’m encouraged that the win rate on bids decided year-to-date is almost 33%. And we’re expecting another strong bookings quarter in Q4 with several potential growth awards in the mix.

The key takeaway from our message today is that we’re on track to achieve our longer-term revenue and profitability goals, but that a degree of patience is necessary in the short term as we continue to rebuild KeyW and integrate the Sotera acquisition. I’m confident that we have the right people and processes in place for KeyW in the win column on valuable intelligence, cyber and counterterrorism award decisions.

With that, operator, let’s open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Matt McConnell from RBC Capital Markets. Your line is now open.

Matt McConnell

Thanks good afternoon.

Bill Weber

Hey, Matt.

Matt McConnell

So I appreciate how you quantified some of the revenue headwinds, but could you talk a little bit more about the drivers, so especially on the service wins that must have had, I guess, a fairly high probability in your planning if you had it in the guidance. So what happened there, what kind of program was that, why do you believe you didn’t win that? And then also on the product sales, what can you point to that it’s contributing to those pushouts and level of visibility that they come through in 4Q or next year?

Bill Weber

Sure. Okay, Matt. If I could, it might make sense to just take them in the order that they happened in the quarter, so that you can see where we got to the place of guidance where we are right now. Well, first – the first thing that we noticed post call the last time we got together with this group and clarified guidance is if there was, as you stated, a very high probability contract plus-up that we’ve been working on with our customer to do more for them as part of our plan, that took – we expected that, that was going to begin at very early stages of Q3. That took about 60 days to get all the contract terms and conditions finalized because they kept increasing the scope of exactly what we would be doing.

So as a result, we did not have the ability to on-board that revenue in Q3 with an appreciable increase as we had expected. That accounted for 30% of the miss that we were projecting in Q3. The second was the loss that I mentioned and that was an opportunity that we – in an existing customer with a tactical solution that we felt KeyW was in a really good spot to win. It came down – we were one of the last two awardees that they considered and it came down to a technical differentiation, and we lost. We did think there was a high enough probability of that award to put it in our Q3 numbers.

That’s about 10% of the miss and it also was in our Q4 projections. And we’ve done a thorough unpacking of that opportunity, as we do with everything that we finalize, either win or loss. And in that particular case, we’ve identified an approach that we think would better suit that customer set, we made those adjustments. There is more work coming out in that particular customer. We expect to make those corrections going forward, and we’ll be right there in the mix on future awards.

The final piece of Q3, and this came right down to the very end of the quarter, as those of you who have tracked KeyW for any length of time now, we are still in our revenue mix, as it exists today, very, very, very dependent on end of quarter product solutions sales, and in particularly, the Q3 time period, those are end of fiscal year budget flushes. And so we had expected and we’re tracking real tangible opportunity that we didn’t lose. They’re very much still in our pipeline, but there was an urgency around using end of fiscal year 2017 budget money in order to get those deals closed.

It literally went up to the final days of the quarter, and when the agencies and the organizations that we’re working with did not get the funding they expected for end of fiscal year, those pushed into Q4 and then on into early 2018. The sense of urgency that exists around an end of the year budget cycle isn’t quite what it would be for Q4 and on into 2018. That last component was about 50% of the miss for the quarter and that’s what led to us taking guidance to the place that we believe is responsible for the remainder of 2017. Does that help?

Matt McConnell

It does. That’s great. And then, if I just kind of look at the implied fourth quarter guidance, it looks like at the midpoint, your implying revenue would be up a little bit sequentially, but EBITDA down a little bit sequentially and margin down sequentially. Does that sound right?

Bill Weber

No, we actually believe that it’s a slight increase in EBITDA for the quarter. You are tracking appropriately on where we’re looking at revenue, but we do – as Mike pointed out, we are seeing the tangible signs of the steps that we’ve taken. You’ve seen it in the last three quarters of margin appreciation and we do expect that, that’s going to continue into Q4 as well.

Matt McConnell

Okay. All right. Got it. And then maybe last for me and then I’ll jump back in line. But I think you had your first big senior leadership offsite earlier last month, I guess, it would have been. Could you share anything about what were the key topics addressed there, any summary takeaways that you could share with us here?

Bill Weber

Sure. So the focus and the catalyst of that offsite was the company was about to begin its annual operating plan process not just for 2018, but new to both companies, a 3-year plan where we wanted to have headlights into 2019 and ‘20 as well that were backed by detailed market analysis and opportunities that KeyW would pursue. And so in that vein, we really tested the areas that we thought we had good core competency and strength against what the market tells us. So we brought a lot of outside resources in to validate other budget cycles and procurements and initiatives that are driving the things that KeyW is strongest in: cyber operations in the advanced form; intelligence, surveillance, reconnaissance in an affordable package that’s flexible; and analytics and mission IT requirements that drive lots of data to be able to get to the so-what as quickly as possible.

And so we spent the first couple of days really testing our theories if there is viable growth market for KeyW. Once we got that input, it was very encouraging. We started pulling that in and then we tested ourselves and said, what does that mean for the opportunities we’re pursuing in each individual sector? So that offsite was the foundation, to say, what do we expect out of our own business not just in 2018, but 2019 and ‘20 going forward?

Operator

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

Brian Kinstlinger

Great. Thanks. I’m curious the expense base of the products business and given the volatility, is there a plan to reign in on the expenses of that business, maybe if you can talk about. If there is not, what changes have been made given the performance over the last, maybe, 12 months of that company, how do you plan to maybe improve the business?

Bill Weber

Yes. So Brian, I’m going to let Mike comment, if there is anything he wants to add. But one of the – as you know, as somebody who’s been with us for a significantly long period of time, one of the key drivers in our product solutions is the former BuckEye contract. And as you know, this time last year, we received a long-, long-term extension, a follow-on program, a new construct entirely that stabilized that business going forward. It didn’t affect with a new contract on a completely new contract mechanism. And there are – there were some start-up costs in 2017 associated with that particular program.

It’s a big revenue and profit driver for KeyW. It also – in exchange for five years of stability, it has still very attractive, but more controlled profit structures than the previous contract mechanism did. So our expectation is this first year of operation on that program, the follow-on, that we would run through the cost structures that will require to get that program in place from a reporting and status requirement associated to the contract mechanism that’s being used for it. And then, we would continue to put efficiencies in place ongoing to adapt that program over time. We do believe that there is scope expansion opportunity.

We’re seeing that now that allows us to drive higher margin revenues through that program. And that, by the way, is going on entirely in the product business where we’re looking at all of our product lines afresh to see where we can combine, create some efficiencies in our buying mechanisms, in our – the process by which we go and procure, and really mature that piece of the business as well. And the signs are positive that we can make impact there as we move into 2018.

Brian Kinstlinger

But if I’m not mistaken, there’s shortfalls in products, wasn’t BuckEye. So I’m curious if there are changes to be made for the rest of the business or there is a way to lower the burden of that business, as maybe the returns haven’t met your expectations.

Mike Alber

Well, hey, Brian, this is Mike Alber. There – I mean, there is some ebb and flow to that business as well. And obviously if you are able to be able to run that business at a higher revenue run rate as well, then the profitability improves on that as well. To put a little bit of a finer point on Bill’s point is we did see some – we have seen some pressure on the gross margin or the gross profits on a couple of other programs that are currently experiencing the same startup phase that you mentioned on that particular program.

So we are looking – we are working very diligently on those programs to be able to add additional labor categories, begin to look to expand the scope of work as well in order to bring up the overall profitability of those programs. So it’s a bit of a tough slog. There’s – it’s definitely trench warfare when you’re dealing with them on a contract-by-contract basis. But that’s half the equation. The other half is that we continue to look at operational efficiencies, as John mentioned. We continue to take a look at OpEx and continue to kind of focus on that as well. That will aid – that will add to the profitability going forward for the overall organization as well.

Brian Kinstlinger

Okay. And then if I look at the awards, $273 million in the quarter. How much of that was for new business? I know your largest award was a recompete. So how much was for new and total?

Mike Alber

Well, so it may be a point of technicality, but I want to emphasize it was – it’s a logical follow-on. That program ended. And so we had to go through a solicitation process, submit proposals and win that award. And so that is an important note. But to your point, the vast majority of the revenue in that 2.2 book-to-bill is either logical follow-on or expansion of existing scope in our base contracts, which, as we said, the point and the – the point of pressure we wanted to relieve with any recompete risk in the company was much of it as possible in 2018. So that’s still a significant amount out on the table in terms of the bids that we’ve submitted, and all of those are growth opportunities and the Pwin, the probability of award on those, is particularly high for KeyW.

Brian Kinstlinger

And maybe just asking then differently. Was expansion more than a quarter of the awards or much lower? I’m just trying to get a sense for, I get the retention. It’s so important. You can’t lose contracts. But I’m curious how much is expansion work that’s going to drive potential recovery and back to growth?

Mike Alber

So the expansion, the contract plus-ups amount to about 25% of that number overall in that bookings number.

Brian Kinstlinger

Okay. So obviously, there has been a management change of the business development side, what’s being done differently? Obviously, you had your work cut out for you. You didn’t have a huge customer base when you took over. Now you’ve acquired Sotera. What’s being done differently with the new set of executives on biz dev that it was done before to improve the bookings trends from a new business perspective?

Bill Weber

Well, I want to emphasize that the change that we made was entirely because KeyW today is a different company than it was in Q1 of 2017. And so, as we put the two pieces together, I want to emphasize few people could have, in my opinion, could have gotten KeyW from where we were at the beginning of 2016 to the place where we were at the acquisition in terms of brand-new business development process and culture. And Michele Cook was a critical part of that. As we put the two pieces together, though, it was critical that we not only had a keen understanding of KeyW, but also of the Sotera side of the business which, on the pipeline side, represents roughly 50% of what we’re going to pursue going forward. As we looked at all of that and we looked at the strengths of the leadership team and their appropriate size, it makes sense to collapse those functions down to one.

And so Kirk and Michele carry a very similar philosophy in terms of how to build a sustainable pipeline going forward and then also how to have a considerable amount of cash flow awards that KeyW bids on a regular basis on large IT activities as well. So it’s not too much of a philosophy change. There is a overall understanding, however, of the entire business as we go forward in – with Kirk as the leader than what we had before. Most of the individual leaders – in fact, every individual leader below Kirk remains from before we made the announcement. So there is great stability in the business development team, a very aggressive nature to get out there and continue pipeline development. So we’re pleased with where that’s gone. Does that makes sense, Brian?

Brian Kinstlinger

Yes, absolutely. The last question I have is for Mike. If I could just go through the expenses, the onetime for Sotera nonrecurring, in the December quarter, do I understand you’ll have $3 million in SG&A again? And then, when we head to the March quarter, then those will disappear. And then, did I also hear that there’s $2 million of cost-cutting going on in biz dev? Or was there more cost-cutting? Just take me through how expenses are going to flow over the next couple of quarters from what you already know.

Mike Alber

So we had – Brian, we had, in the second quarter, we had about $13 million of what I would call acquisition-related expenses. So these are a number of things. These are for services – outside services, legal services that we had, banking services. These are severances. These are just a number of what I would call hard costs around the integration. We saw that number then decrease down to about $3 million for the third quarter and then we expect to see that kind of probably trail down again into the fourth quarter.

These are – a lot of these costs that are related around severances are going to translate to operational efficiencies going forward. So for purposes of guidance, we had said that we are going to achieve about $3.5 million in cost savings for the six months, for basically the second half of this year where, from an efficiency standpoint, we’ll probably recognize about $3 million of that and we’ll close out the balance of that going forward. All told, that equates to a run rate efficiency of about $7 million for next year.

Brian Kinstlinger

Right. But – and then the follow-on to that was, I think that there was discussions on costs around biz dev. As we look to 2018, is SG&A at a $21 million to $22 million type run rate? Is that where you are when all that smoke clears?

Mike Alber

We haven’t – obviously haven’t provided guidance for 2018 as well. We continue to see the SG&A decrease on a quarter-over-quarter basis as well. We also have not included in those numbers about $2 million of facility expenses that we expect to be dropping out of the SG&A for next year as well. So we do you expect to see, in the combined organization, improvements on SG&A on a year-over-year basis.

Brian Kinstlinger

Okay. Thanks so much.

Mike Alber

Thanks, Brian.

Operator

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

Tobey Sommer

Thank you. With respect to margins and profitability, can the company return to what I think – had previously been long-term EBITDA margin goals at the – in the low double digits? And if so, how do we map ourselves to try to get there?

Mike Alber

Sure. Hey, Tobey, this is Mike Alber. So there are two focuses that we are looking at right now. One is from working through some improvements on a contract level basis in terms of looking at kind of the delays for the gross profit coming from individual contracts. And as I mentioned earlier, we look at that from a standpoint of being able to improve profitability by adding additional labor categories, expanding current contract scope and then – and even more efficiently is to begin selling some of the legacy product solutions that we had from the KeyW into this new customer set that Sotera brings as well. So we’re looking for those revenue synergies to be able to increase gross profit. The other half of that equation is to continue to focus on OpEx and look at process efficiencies across the enterprise. John had touched on those that we’ve done. We continue to look at that on – each quarter and continue to focus on what improvements we can bring out of the organization.

Tobey Sommer

Okay. So I understand those are the levers. So kind of to restate the question, can we get back to double-digit EBITDA margins?

Bill Weber

So Tobey, this is Bill. You know that we do provide guidance. We intend to give you full year range on guidance as part of our annual operating planned process I talked about previously. That should lead us to a place where sometime, either on or before the Q4 call, we’re going to be able to give that to you in a full perspective. But it is absolutely the expectation of this leadership team that we will be a margin producer in the area that you just described. They’re – we see the mechanisms and it was part of our strategy when we locked up that base business to put those mechanisms in place to increase the gross margin and not be locked into a 5-year depleted gross margin structure. So we’re already seeing a lot of the results on that. We have a lot of great – the right kind of proposals that are still awaiting award. It is absolutely our expectation that we would be in that range.

Tobey Sommer

Okay. With respect to kind of your methodology for building up guidance, it seems like not just something endemic to the industry, not just KeyW’s product or solution sales that potentially kind of moved to the right with maybe not perfect consistency but relative frequency, any changes that you might consider to the methodology for building the guidance to somehow deemphasize the product sales so that, that kind of relative frequent pattern of having to move to the right doesn’t get in your way in the future?

Bill Weber

Yes. Tobey, that’s – obviously, you can imagine thats been significant amount of the conversation with this management team and back and forth with the board as well. It was one of the primary drivers of the Sotera acquisition is to take what is so great about KeyW, which is the really interesting value-driven, high-margin product solutions that are also extremely lumpy and difficult to predict over the long haul – or in the short term and mix that together with a bigger services base.

And so what we believe is, now that we have the two organizations integrated and now that we have an abundance of services opportunities of large scale that are proposed and awaiting awards as those begin to come in, it’s not that we will deemphasize product solutions, but they will naturally become a lower percentage of the overall revenue for KeyW. And as long as we keep them in the right range, we are still a margin producer in the industry or a sector-leading category. So – but we will still take a more conservative approach going forward on product solutions forecasting, particularly in Q3, and to a little bit lesser extent, in Q4. That’s where we see most of the volatility as you know.

Tobey Sommer

Okay. If I could just explore the bookings a little bit, the book-to-bill. You talked about locking in a bunch of stuff and getting the recompete kind of out of the way for next year. I’m trying to get a sense for whether this healthy book-to-bill of 2.2x, should we interpret that, that’s something that can drive growth? Or is that something that may be more accurately increases visibility, but doesn’t necessarily increase growth?

Bill Weber

Well, as you said, I think there was a question previous that asked what piece of that is the logical follow-on or lockup of the existing end-of-life programs into the next logical step. So it, in effect, replaces the revenue, maybe provides slight opportunity for expansion. About 25% of that book-to-bill number is scope expansion. So there is growth in that book-to-bill number. The significant upturn in growth for KeyW, though, is still out on the table in terms of the opportunities in the deals that we proposed. Those are expected, several of them, and there are more than a dozen of those opportunities that make up that – the remainder of that awards waiting to be adjudicated with a couple of big movers in that number. When we receive award notification on those, those provide the significant growth drivers for 2018.

Tobey Sommer

Okay. Thank you very much.

Operator

Our next question comes from the line of Ben Klieve from NOBLE Capital Markets. Your line is now open.

Ben Klieve

All right. Thank you. I have a few questions for you. First, regarding the product sales that got pushed out to the right. With your EBITDA guidance for the full year of 8.9%, and you’re assuming that at 8.4% through the first 9 months, it seems that the sequential improvement that you discussed, Mike, could certainly be there, but would be relatively minimal. And I guess, I’m curious if the – can I read into this, that the product sales that got pushed back or more likely the revenue in 2018 rather than the fourth quarter. Is that a fair assessment?

Mike Alber

We do have increased product sales in the fourth quarter, but some of it is, in fact, pushing to the first quarter or into 2018.

Ben Klieve

Okay. Also, you said before that the second half of the year would be particularly strong from booking standpoint, and certainly, this quarter, certainly it was strong. And I guess, I’m curious when you look at Q3 and the momentum building in the second half, do you see that spending into 2018? Or do you think there is a high concentration of opportunity that are going to be adjudicated here in the second half of the year, maybe it’ll slow down a bit when we get into 2018?

Bill Weber

Well, the reason that ramped up for KeyW collectively is because we began an initiative well over a year ago where we said, Listen, there is a sustainable pipeline that this company is chasing that gives us a quarter over quarter over quarter potential for really strong bookings and book-to-bill ratio. And that is an early indicator, not the only indicator but an early, good, strong indicator, of a growing business. And so, as we began proposing opportunities, those take time to get – first of all, hit the Street and get bid on and get adjudicated and then get awarded. We’re seeing the first end of that.

So while Q3 is always going to be a heavier quarter, particularly for a company like ours that has product awards, solutions awards that are in that mix, we do expect that, that bid pipeline while it will ebb and flow throughout year, there are some times in the cycle where less bids go in. But we do expect to sustain ongoing bids. As we said, there’s still another $350 million worth of proposals that this company will propose on in the fourth quarter. Those will be submitted, and those will replace some of the awards that have been adjudicated already. The intention is to continue to keep that engine driving at that volume so that when they start to turn the revenue, there is another line of those and any one individual loss in that group doesn’t impair the company. We’ll investigate them for sure, figure out what we did wrong and improve. But we will have another suite of opportunities right behind that, that we are tracking and awaiting award on. So this is not intended to be a spike and it’s either all or nothing. You get it now or you don’t ever get it. So does that make sense?

Ben Klieve

Yes, yes, absolutely. One last question for me and then I’ll jump back in queue here. The opportunities that you’ve discussed that are waiting adjudications, wondering if you can provide a little bit context around those in regard to what is – what takeaway business versus what completely new business there, about kind of the projected win rate that we have going forward of your resulting pipeline.

Bill Weber

I’m sorry, Ben, I didn’t hear the end of your question. And I want to get it right, so I can answer it.

Ben Klieve

Well, basically, I’m just wondering, of the opportunities that are still awaiting adjudication, to what extent are you looking at takeaway business versus completely new business [indiscernible] that doesn’t have an incumbents.

Bill Weber

Right. Sure. So the encouraging part of that remaining $1.3 billion that is awaiting award adjudication, and that’s before obviously we submit the additional $350 million. There is a component that belongs – the predecessor programs belong to somebody else, but in the highest probability awards and they make up the bulk of that number. It is the collapsing of two or three efforts, some of it greenfield, some of it work that KeyW is involved in today, either as a sub or as a smaller prime.

So it lowers the obstacle and increases our probability of award. And in a couple of cases, our product solutions are the differentiator in their next gen, and so they give us a significant deciding advantage going forward. Or at least that was the thesis that we proposed along. So their growth opportunities, which, by the very definition, means they’re not awards that KeyW delivers revenue – significant revenue on today, but they are not embedded 10-year incumbents that have always had the program. And we’re trying to do a significant takeaway that has a little profitability of award. We’re encouraged by the Pwin in that number.

Ben Klieve

Very good. Thank you very much. I’ll jump back in queue.

Operator

Our next question comes from the line of Matt McConnell from RBC Capital Markets. Mr. Matthew McConnell, if you could please check your mute button. And at this time, I’m not showing any further questions. I would like to turn the call back over to Bill Weber.

Bill Weber

Thank you, Charlotte. Well, again, we thank all of you for joining us tonight. We look forward to speaking with you and seeing you on the road in the coming months. We are planning an Analyst and Investor Day early next spring to showcase some of our latest technologies and articulate our 3-year growth plan. We hope to see you there. Good night, everyone.

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 great day.