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Moodispaw's legacy guiding KEYW as it looks to grow

When Leonard Moodispaw died in June, KEYW Corp. lost not just its top executive, but its founder and visionary — the brains behind its Margaritaville-inspired spin on federal contracting.

The publicly traded company also was at a crossroads. With about $300 million in annual sales, KEYW is bigger than most cybersecurity startups but still fighting to compete with the biggest of software companies and defense contractors.

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As growth has plateaued, Hanover-based KEYW has poured money into Hexis Cyber Solutions, a subsidiary focused on selling security software to companies looking to avoid costly data breaches, an investment that has yet to pay off. The parent company continues to lose money — more than $35 million in the quarter that ended June 30.

A month into leading KEYW, William J. Weber, the new CEO, sees a way forward that stays true to Moodispaw's vision of a laid-back company that's serious about its technology.

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The company will be more aggressive and selective in competing for government jobs, while pursuing new customers in the intelligence world, Weber said. Though he hinted that Hexis could show signs of momentum as soon as a third-quarter earnings release Monday, he acknowledged that if the business doesn't take off, it might be better off apart from KEYW.

Weber takes the helm at a difficult time for KEYW and its competitors to turn a profit — the companies must pay top dollar to retain their best employees, yet customers are pinching pennies at the same time. Meanwhile, private-sector opportunities are booming as more businesses spend to secure their customers' data, but startups and larger corporations alike are vying for market share.

"How we [increase revenue] from $300 million to $500 million will be significantly different from getting from $100 million to $300 million," Weber said. "We won't be a whipsaw organization where we're doing some of this and some of that."

KEYW had a strong reputation among defense and intelligence agencies from its start in 2008, largely based on the Moodispaw name. Previously a National Security Agency senior manager and trial lawyer, Moodispaw was chairman and CEO of defense contractor Essex Corp. when Northrop Grumman bought it for $580 million in 2007.

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That translated into rapid success for KEYW, which in 2010 hit $100 million in sales and went public in a $91 million stock offering. The company became known both for its technological prowess and for its Key West-inspired ethos, complete with a multicolored parrot logo.

Moodispaw's death came as a shock. In May, the company announced he was "reluctantly" stepping down for health reasons; the 72-year-old died less than three weeks later. The company did not disclose the cause of death.

But after the company mourned, it was back to business.

"He would be the first to say, 'Finish what we started,'" interim CEO Mark Willard told analysts on a quarterly conference call in August. "So it's our commitment to do just that and finish what he started back in August of 2008."

Weber, who joined KEYW as CEO on Oct. 1, said he isn't out to replace Moodispaw, diminish his influence or rewrite his vision for KEYW. Weber said his specialty is leading companies that are in transition and in search of "critical mass." A former Army Signal Corps officer and Airborne Ranger, he most recently served as president and chief operating officer of XLA, a Northern Virginia software company that works for the federal government.

"I am not a founder and entrepreneur," he said. "I'm also not a CEO of a huge corporation."

His vision to grow KEYW organically involves an emphasis on "three to five things we can do better than anyone else" in the government space, and a business development team that is strategic and aggressive in pursuing contracts that play to those strengths.

He said he also wants the company's sales efforts to reach more broadly across the intelligence industry, where he estimates KEYW isn't reaching about 75 percent of potential customers.

Weber said there are sign Hexis has "turned a corner" in winning new business, evidence of which could show up in KEYW's financial results for the second half of the year. Hexis makes up about 3 percent of KEYW's revenue, company officials said.

Analysts are watching Hexis' performance closely as a source of value for shareholders, and a potential liability to the company if it doesn't improve. At the same time, competition in government contracting poses a risk for investors.

Mark Jordan, a senior research analyst at Noble Financial Capital Markets in St. Louis, said, "What [Weber is] doing is examining the business and saying, 'We've got all this stuff going on. Where are we going to have the strongest competitive advantage and the most significant untapped demand out in the marketplace for our services?'"

KEYW's stock has lost a quarter of its value this year, trading between $7 and $8 per share in recent weeks after falling as low as $5.75 on Oct 1. One analyst's report blamed the dramatic drop at the end of September on an announcement that defense contractor Raytheon had won $1 billion in Department of Homeland Security contracts.

"With KEYW wrangling in contracts in the low tens of millions recently, seeing a billion-dollar deal go to a sector competitor is heart-wrenching for its shareholders," an article on financial website The Motley Fool said last month.

Losses haven't helped. The company, on pace for yet another $300 million year in sales, posted a $41 million net loss for the first half of 2015. In the same period last year, the net loss was less than $5 million.

The stiff competition makes it harder for cybersecurity contractors to turn a profit in two ways, said Art Jacoby, founder and chairman of the Cybersecurity Association of Maryland Inc., a trade group.

Government agencies are facing pressure to accept the lowest bid offered, regardless of any considerations of quality of work. At the same time, retaining the most qualified employees with the highest security clearances requires offering big paychecks and lots of perks.

"The government wants to pay as little as possible, and there's only so many people with clearances that are good at their jobs," Jacoby said. "There is a constant war over hiring and retaining those people."

Weber is cognizant of those hazards. While he said he is crafting a road map to profitability, he is also constantly aware of how the company's compensation and benefits line up in the industry. He said they compare favorably, but doesn't rest on that. The company employs about 1,100 people, including 770 in Maryland.

"We're going to behave as if we always need to do something to improve retention," he said.

Moodispaw's philosophy could help KEYW continue to strike the balance between pleasing both customers and employees. The Key West flavor helps employees relax — one break area is lined with palm trees, and the office's main thoroughfares share names with streets in the Florida beach town.

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"As Len said, the only ties we worry about are Mai Tais," Weber said.

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But another side of Moodispaw's style also remains — evidenced by plaques in one conference room that read "Good things come to those who can't wait" and "Instant gratification takes too long."

"You can't possibly not feel his presence," Weber said.

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