KEYW Holding Corp Conference Call to Discuss its Definitive Agreement to Acquire Sensage, Inc. - Final

Transcription

1 Factiva KEYW Holding Corp Conference Call to Discuss its Definitive Agreement to Acquire Sensage, Inc. - Final 4184 words 13 September 2012 CQ FD Disclosure FNDW English 2012 by CQ Transcriptions, LLC. All rights reserved. Presentation OPERATOR: Good day, ladies and gentlemen, and thank you for standing by and welcome to the KEYW analyst conference call. At this time, all participants are in a listen-only mode. Later we'll conduct a question-andanswer session and instructions will follow at that time. (Operator Instructions) As a reminder, today's conference may be recorded. Now my pleasure to turn the call over to Len Moodispaw, Chairman and CEO. Sir, the floor is yours. LEN MOODISPAW, CHAIRMAN AND CEO, THE KEYW HOLDING CORPORATION: Thank you kindly, welcome, everybody, and we have to do the obligatory disclaimer, so John would you take care of that please? JOHN KROBATH, CFO, THE KEYW HOLDING CORPORATION: Sure. Under our Safe Harbor Disclaimer, statements made in today's call that are not historical fact are considered forward-looking statements and are made pursuant to the Safe Harbor Provisions of Federal Securities Law. Actual results may differ. Please see today's press release and our SEC filings for a description of some of the factors that may cause actual results to vary materially from anticipated results. Len? LEN MOODISPAW: Thank you kindly, thanks, everybody, for dialing in

2 particularly on such short notice but you're used to that. And other things you're used to from us are the fact that we seize opportunities when we see them, and this is a great example of that. We've been working with Sensage on our Project G from the early stages of Project G. They have a disruptive technology that we think is -- we have found is head and shoulders above everybody else out there including some much larger and better known companies. So we were pleased and we had the opportunity to have them join us and to acquire them and we grabbed that opportunity and have been working on getting to this point since that time. I think most folks know that G is still in the early adopter phase but we have strong demand for it and for general availability. So the acquisition of Sensage accelerates our peace and our ability to respond to that demand. Picture giving some steroids to the parrot in his food and see how fast it can go, that's what Sensage helps us do. So we're going to get further and faster than we would have without Sensage. The fact that they do bring some revenue to us is a bonus, but we really acquired them for their disruptive technology, their commercial experience which includes a strong customer base, good sales force and knows how to do a commercial and good leadership. Joe Gottlieb who will be on the phone here in just a moment for us to introduce, has a good strong commercial background that we look forward to helping us go down our horizontal path. So before we take questions, Joe, I'll turn it over to you and if you'll say a few words about your background and how we got together. JOE GOTTLIEB, CEO, SENSAGE: Sure thing, thanks, Len. I'm Joe Gottlieb and I've been in the IT industry for about 25 years now. The last 15 of those have been with security vendors, started out in the security appliance division of Nokia where we built the first security appliances working with Check Point Software, a very, very prevalent firewall software company at the time. And moved from there over to McAfee where I was leading corporate strategy and technology alliances. I was charting their course of acquisitions as well as I built their Security Innovation Alliance, their technology partnering ecosystem. One of the partners I brought into that ecosystem was Sensage, and I liked them so much, I decided to join them. They were a very, very interesting company even at that time.

3 As Len mentions, disruptive technology in the area of highly scalable security event, storage, analysis, filtering and reporting. And that sector has been very active, security information and event management, for several years now, serving compliance requirements, so a lot of legislative compliance things like Sarbanes-Oxley, PCI and others, HIPAA in the healthcare arena. But increasingly, people that are more proactive are using these events to better understand what's happening in their networks and their applications so that they can take a more informed posture in defending those networks and applications and systems. And so that's what we've been helping our commercial and government customers do worldwide. And we are thrilled to start to partner with KEYW and now to become part of their family, which is where the intent is here, so that we can not only accelerate our own penetration in the market with our disruptive capability, but become a more intimate component of the project G offering which we think is going to be very, very disruptive in the cybersecurity world. So those are some quick thoughts, background and where we're headed. Very thrilled to be part of the family and looking forward to the future beyond. LEN MOODISPAW: Great thanks very much, Joe. And some of you came to the open house may have met Joe who was there and chimed in. So we'll take questions now, but before we do, I caution you that we're kind of spread around the country. Joe is with Ed Jaehne out in California and I am out of the office and John and Chris are there, so if we sound -- if you hear some gaps while we point fingers over the phone as to who is going to answer, that's because of it. And just as we did the other day in the Poole announcement, if you were to ask financial questions, we will not let Joe answer them, so we don't avoid our guidance rules and neither John or Chris will answer them. So please, we'll take questions now. Questions and Answers OPERATOR: Thank you, sir. (Operator Instructions) Mark Jordan with Noble Financial. MARK JORDAN, ANALYST, NOBLE FINANCIAL GROUP: The first

4 question, with this acquisition structure is a little unique in that it seems to have approximately 30% of the potential remuneration as a contingent, but a very short-term contingent just through the last four months of the year. Could you explain what risks are out there that caused such a large percentage of the purchase price to be contingent? LEN MOODISPAW: This is Len, I'll take a shot at it, Mark. And while there's always risk, I think it's more a question of us trying to move quickly to get a deal done and rather than spend a lot of time negotiating over what might happen, we thought this was a way to do it. But John, Chris and you want to add something to that? JOHN KROBATH: No, I think that is a fair way to put it. There were some as we looked at it-- as we look at the sales pipeline and where we thought they should be, one of the things with the revenue for them is it's fairly cyclical in terms of where the revenue comes from Q1, Q2, Q3 and Q4. It tends to be a little more back loaded for them in the second half than the first half. And rather than waiting to get through it and get to it a definitive number, we figured an earn out way-- an earn out was a fair way to get to the purchase price that they wanted and a level we were comfortable with based on performance. MARK JORDAN: Okay. Second question, I know it is foolish to ask you what you might do in terms of project G revenues next year. But a somewhat related question, do you have a sense of how much revenue you might do through Sensage of say their legacy products that would not be included in G, but would be just their traditional customer base that they might be working with today? JOHN KROBATH: Mark, it's John, I'll answer that, I'll give you half an answer on that to be honest. As we go forward and as Len mentioned, while the existing customer base and the existing products set is an added bonus for us, what we really want is the combination with G to move forward on the G path and really get that contribution rolling for 2013 and beyond. So the base business they have today, we're still going to embrace it, we're still going to use it, we're still going to move forward on it. But we haven't sat down and said okay we expect X or Y because of how

5 much effort we may need to put into G as we go into It's tough to put a hard number on that. There is a recurring maintenance stream of revenue that we'll receive as we go forward, it's not an insignificant number but it's not huge either. But that number is also dependent on the revenue they bring in during the rest of this year and the licensed sales as they go out. So it's a combination of things, but their base business wasn't the main reason behind us getting together, it's their impact that they're going to have on G. To give you an illustration, back in 2011, their total revenue was about $12 million. MARK JORDAN: All right. Could you give us a range of revenue that Sensage might do for this year? JOHN KROBATH: I think as you sit here and look at this year, they are back loaded in terms of where their licensing revenue is and exactly how it falls. We don't know, which is part of the reason why we went to the earn out. So any number I gave you would be a guess. I think as we look at it and it comes together and we progress through Q4 where the majority of their revenue is coming in, we'll know better. But right now, I couldn't give you an honest answer Mark that would give you something to rely on. MARK JORDAN: Okay, thank you. OPERATOR: Josh Sullivan with Sterne, Agee. JOSH SULLIVAN, ANALYST, STERNE, AGEE & LEACH: Good afternoon. Can you just give us a sense of the margins and the profitability of this type of business? Obviously it's going to be different from your past endeavors and if we could just kind of get some idea or some book ending of that might be helpful. JOHN KROBATH: Yes, this is John, I think when you sit here and take a look at their financials, I think you'll see that overall their operating loss, it's going to be based on scale. They have a small operating loss for the first half of the year again because their revenue is backend loaded. But again that's not-- what their existing business is is not what we envisioned rolling forward. So their contribution and how they roll into G and the revenue

6 produced for G is going to be what drives a lot of what we have. If you look at the gross margin, the gross margins are similar to what you'd see in a lot of software businesses. But the operating margin, to get to an economy of scale level, they were getting to that level, but we're focusing them in a different way as we roll into 2013 on G. So I think from the gross profit side, you're going to see normal software, margins on that end. But I think to look at the operating income is not a fair comparison as we go forward. CHRIS DONAGHEY, VP- CORPORATE DEVELOPMENT, THE KEYW HOLDING CORPORATION: Yes, Josh, this is Chris. I would reemphasize that point as well. Remember this is a commercial technology business model where the objective is to try to maximize your sales and marketing and research and development costs as much as you can in order to drive revenue growth. Because the revenue is such higher margin than what you get out of a traditional services business, the objective is obviously to try to get leverage by growing revenue. So again, just as a quick correction, that nominal operating profit loss was for Again, margins at the gross level though are very attractive based on the traditional commercial software technology company model. JOSH SULLIVAN: Okay, great. And then just as far as headcount? LEN MOODISPAW: Joe, headcount? JOHN KROBATH: Joe, your headcount is what about 34? JOE GOTTLIEB: Yes, 35. JOSH SULLIVAN: Great, thanks. OPERATOR: (Operator Instructions) Brian Kinstlinger with Sidoti. BRIAN KINSTLINGER, ANALYST, SIDOTI & COMPANY: Hello, guys, sorry I'm on a speaker here in a car, but if you do hit the targets and consideration [had stayed], what will the revenue at that point have been for the Company for the year? CHRIS DONAGHEY: Brian, we're not going to discuss that right now. That's -- we're not prepared to go there right now.

7 BRIAN KINSTLINGER: Okay. Is the revenue that you generate this year relevant to next year? And what I mean by that is, is it just being -- as part of G, will it be priced any differently? Will G be priced any differently? Will your percentage of the revenue coming to you be higher and you would have been paying Sensage a large portion? Explain how the revenue will be generated along with G? CHRIS DONAGHEY: Sure, Brian. Yes, we do not-- we're not abandoning the Sensage product, that is going to remain a full fledged product line. But we are now going to be able to more deeply integrate the Sensage product into project G. So there will be an ongoing Sensage business that will service their customers. They have a strong presence in the healthcare market. We do hope that as we roll out the new message, we'll be able to get some penetration of those customers. But Sensage does have an ongoing business that we will retain. This just now gives us the opportunity to more deeply embed them into the project G architecture going forward as well. BRIAN KINSTLINGER: And you say it'll be profitable or marginally accretive to this year's fourth quarter, is that [taken into] consideration? Or either way and since you're protected that if they don't, you'll still be profitable in the quarter for that? CHRIS DONAGHEY: That calculation was done based only on their numbers, their anticipated numbers for Q4. BRIAN KINSTLINGER: Meaning you would hit the consideration? JOHN KROBATH: Yes. BRIAN KINSTLINGER: Okay. And then should we assume that you think that it'll be profitable to -- or accretive to GAAP earnings next year as well? JOHN KROBATH: I think the way to look at that is we're not going to measure them as a separate stand-alone business as we roll into 2013 with the rollout of Project G. Their contribution will not solely be from their continuing in legacy product and revenue base, but also in their contribution to G. So we won't have a way to specifically segregate out that

8 number. But we believe with their contribution, it will enhance the profitability and speed with which we could roll out G. Which at the end of the day makes G more profitable for us. BRIAN KINSTLINGER: Okay, thank you. OPERATOR: Mark Jordan with Noble Financial. MARK JORDAN: If you could share what as you integrate Sensage into the Company and integrate your cybersecurity initiative with Sensage, is there going -- can you give us a view as to what the Managerial structure will be once that integration is done? LEN MOODISPAW: This is Len, I'll answer that. But is that your final, final question today Mr. Jordan or is this --? MARK JORDAN: Well I can come back in line again later. LEN MOODISPAW: (Laughter) Yes, we intend that the sector that we call G for right now, which is our horizontal path structure, will be led by Joe and then with our Technical Advisor, our Chief Technical guy, Steve Donald working side by side with Joe and Ed will remain involved as well as Dick Schaeffer and others helping put the team together. But Joe will have that leadership role. MARK JORDAN: Thank you very much. OPERATOR: (Operator Instructions) Josh Sullivan with Sterne, Agee. JOSH SULLIVAN: -- all acquisitions, can we assume that this is the lead into the commercial world? Are you guys looking at any other opportunities at the moment? LEN MOODISPAW: We have a steady flow of opportunities, Josh. We narrowed them down to this, these two, the one we did the other day plus this one right now. So the one complements us on the government services side, this on the commercial services side. There are more at which we are looking, if that's proper English, certainly nothing imminent, but we will keep looking.

9 JOSH SULLIVAN: Great, thanks. OPERATOR: Tobey Sommer with SunTrust. TOBEY SOMMER, ANALYST, SUNTRUST ROBINSON HUMPHREY: Thank you. I missed part of the call so I apologize for asking you to repeat yourself, but you commented on accretion, could you repeat that comment for me, please? CHRIS DONAGHEY: Yes, all we said Tobey is that based on our expectations, we expect it to be accretive to GAAP EPS in Q4. TOBEY SOMMER: Okay, thank you. And I was wondering if you could orient me a little bit of around the customer base that exists right now in Sensage, and whether that customer base may represent a next set of potential customers kind of more likely customers if all of your beta efforts bear fruit and are successful that that's how you would intent on exploiting those 450 enterprise and government customers? LEN MOODISPAW: This is Len, I'll take a shot at it, but Joe can describe the customer base certainly better than I can, so I'll ask him to do that. But yes, but that's an added bonus to it. My concern has been the demand already for G from large entities, both government and commercial. So we're not suffering from lack of potential customers. However that said, we always can use more, and the Sensage customer base will certainly be part of that as you described. But Joe, can you give a brief description? I know you can, would you give a brief description of the kind of customers you have now? JOE GOTTLIEB: Sure. So we've got some nice distribution across defense and intelligence but also telco. Healthcare is very strong for us through our partnership with Cerner who is a healthcare IT provider. Also banks and those are the usual suspects in terms of aggressive technology adoption. We also show up in all of the other verticals secondarily. I would echo the comments about the opportunity to leverage that customer base for Project G sales. And given that inside each Project G deployment, is a large event collection and analysis engine, which is

10 Sensage, has a very natural follow on. So we get to sell into the fact that there's a bunch of security technology out there, it has to be monitored, that's what we do, oh by the way, look what more you can do with monitoring with project G. So it's a very natural offering that we can extend to our customers and we believe they'll be excited about it. Our initial discussions with them have borne out, has had excitement and frankly we've had to hold back a little bit because we want to make sure that we go through the early adopter program properly as Len alluded. TOBEY SOMMER: And then a question about the staffing levels. I think you mentioned 35 people. But was -- currently was Sensage at a point where everybody was entirely stretched or was there some bandwidth there? Or do you -- kind of getting at, do you expect growth and investment in the people kind of right off the bat at Sensage or will that grow just kind steady state as revenue and sales come in the door? LEN MOODISPAW: Let's see, Joe you want to comment on that? JOE GOTTLIEB: Sure. I would say that at the highest level, one of the reasons we were motivated to hook up with KEYW was the fact that we felt like we had a market opportunity that we could not address organically with the sort of pace, not only the expansion but also general investment. So indeed, we believe that there's an opportunity for investment. However, as John alluded, we'll do that sensibly according to how we're able to start to achieve our milestones and growth so that we can make sure we're watching the bottom line. That's pretty typical of a company as mature as Sensage and so we'll pursue that path. CHRIS DONAGHEY: Yes and keep in mind, Tobey, as well that we have our development team here that has been working on Project G. So the R&D staff should be pretty robust as a result of the combination. TOBEY SOMMER: Thank you, that's helpful. And then my last question, and I've got my hand raised here, has to do with catalysts and milestones that we should be thinking about it. You provided a flurry of activity here recently in a couple of calls to give us some insight as to what's transpiring in the business and your progress. Are there other known either dates or

11 events that we should be looking for for additional updates above and beyond standard earnings calls? LEN MOODISPAW: Tobey, I think you're asking that in the context of G in a commercial side of things, so is that correct? TOBEY SOMMER: Absolutely, thank you. LEN MOODISPAW: Yes, okay. Well as we've been saying, and as we have been saying, I'm muttering a bit about what to say next, we are -- this early adopter phase is going to take us through the fall, so to the end of the year. And so there won't be announcements saying that we're -- there's really nothing to say until we finish that early adopter phase. So I'm afraid we won't be able to give you a monthly update or a periodic milestone because we got to go through that phase which has its orderly process. So I think you won't see much in terms of announcements related to G til the end of the year or early spring when we say it's now generally available. OPERATOR: (Operator Instructions) Presenters, I am showing no additional questioners at this time. I'd like the program back over to Mr. Moodispaw for any closing remarks. LEN MOODISPAW: The only closing remark is once again thank you for your interest and your attention and for your very good questions and we look forward to talking to you soon. So thank you all very much, so we'll end the call. OPERATOR: Thank you, sir. Ladies and gentlemen, this does conclude today's program. Thank you for your participation and have a wonderful day. Attendees, you may disconnect at this time. [Thomson Financial reserves the right to make changes to documents, content, or other information on this web site without obligation to notify any person of such changes. In the conference calls upon which Event Transcripts are based, companies may make projections or other forward-looking statements regarding a variety of items. Such forward-looking statements are based

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