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Keynote Systems (NASDAQ:KEYN)

F4Q06 Earnings Call

October 31, 2006 5:00 pm ET

Executives:

Kirsten Chapman, Investor Relations

Drew Hamer, CFO

Umang Gupta, Chairman and CEO

Analysts:

Douglas Whitman, Whitman Capital

Matt Hewitt, Craig-Hallum Capital

Kevin Liu, B. Riley & Company

Operator

Good afternoon everyone and welcome to Keynote’s conference call for the fourth quarter and year end of fiscal year 2006 ending September 30, 2006. Today’s conference is being recorded. At this time, I would like to turn the call over to Kirsten Chapman for opening remarks and instructions.

Kirsten Chapman, Investor Relations

Thank you, Catera. Good afternoon everyone and welcome to Keynote’s conference call for the fiscal 2006 fourth quarter and year end for the period ended September 30, 2006. I’m here today with Umang Gupta, Chairman and Chief Executive Officer, and Drew Hamer, Chief Financial Officer.

Hopefully by now you have seen our press release that was distributed over business wire and the major wire services. For your convenience, the press release has also been posted to our website at www.keynote.com. The replay of this call will be available by telephone by dialing 800-642-1687. The pass code is 8354422, or by webcast at the Investor Relations section of our website at www.keynote.com.

I would like to remind you that statements made during the course of this call that are not purely historical are forward-looking statements regarding the Company or management’s intentions, hopes, beliefs, expectations, and strategies for the future. Because such statements deal with future events, they are subject to various risks and uncertainties and actual results might differ materially from those projected in the forward-looking statements.

Important factors that could cause actual results to differ materially from those in the forward-looking statements are discussed in today’s press release and in the Company’s annual and quarterly reports filed with the SEC. We have provided detailed guidance in our earnings release today as we have in prior quarters. This guidance assumes no additional acquisitions or other significant or extraordinary transactions other than those described in our earnings release. We will not comment on this guidance during the quarter but may provide an update to this guidance in the event of material changes during the quarter. Before the Company reviews the financials, I will review definitions for some metrics which are not in accordance with Generally Accepted Accounting Principles, commonly known as GAAP.

The Company defines non-GAAP net income as net income adjusted for provisions for income taxes, cash tax expense, stock-based compensation, and amortization of purchased intangibles and for in-process research and development associated with acquisitions.

Non-GAAP net income per diluted share equals non-GAAP net income divided by the weighted basic or diluted share count as of that period end depending on whether there was a loss or income respectively.

Keynote’s SIGOS revenue recognition policy requires the amortization of most of Keynote SIGOS software licenses revenues over an approximate 24-month period. Therefore, Keynote’s consolidated GAAP and non-GAAP earnings are likely to remain negative until quarter GAAP revenues normalize with the quarterly billings. Consequently, cash provided by operating activities, free cash flow, and deferred revenue will be important metrics to measure Keynote’s financial performance during that period. Free cash flow is defined as cash flow from operations less cash used for purchases of property, equipment, and software.

Now I’d like to introduce Umang Gupta, Chairman and Chief Executive Officer of Keynote who will review the Company’s quarterly highlights. Then Drew Hamer, Chief Financial Office of Keynote will provide the financial details for the quarter and year and guidance for the first quarter 2007. After that Umang will summarize the company’s vision and open the call for questions. Please go ahead Umang.

Umang Gupta, Chairman and CEO

Thank you, Kirsten. Welcome everyone and thank you for joining us today. We’re extremely pleased with our fourth quarter revenue of $15.2 million, as recent changes we implemented in the sales and marketing grew across all of our business segments.

As noted in our press release today, we renamed the three components of our business to Internet Test and Measurement, Customer Experience Test and Measurement, and Mobile Test and Measurement to better reflect our focus on global test and measurement for mobile communications and internet performance.

Our internet business includes all of our internet measurements, monitoring, and management services, and comprising our traditional benchmarking services, enterprise private agent solutions, Voice-over-IP, streaming, load testing, and professional services engagements.

This quarter, Internet Test and Measurement revenue grew to $10.2 million, the highest level in the past five years. If you look within our internet subscriptions business, you’ll find that our Multipage and Broadband Measurements grew approximately 25% compared to the corresponding quarter a year ago. This compares to our Legacy Single Page Single Device business which declined by 21%.

Our customers today are demanding in greater numbers our advanced products such as Application Perspective, Production Perspective, Streaming Perspective, and increasingly Voice Perspective. These products currently make up 62% of our overall internet subscriptions compared to 51% in the prior year quarter.

Our internet engagements revenue increased to $1.1 million, up 54% compared to last quarter, primarily due to many companies utilizing our load testing services in advance of the anticipated online holiday buying season.

In the fourth quarter, Keynote internet deals included Chevron Texaco, McKenzie & Co, and Research In Motion.

Our Mobile Test and Measurement revenue was $2.4 million for the quarter compared to $1.9 million in the prior quarter. Total deferred revenue increased by approximately $900,000, most of which was driven by Keynote SIGOS. We also saw increased demand for our Mobile Device and Application Perspective Services.

Customer wins in the fourth quarter for Keynote Mobile Perspective Services included MobiTV, and we were also awarded major orders from Agilent for Keynote SIGOS Systems to meet the mobile project needs at Telstra, Australia’s telecom and information services company, and Bharti Airtel, India’s leading provider of mobile telecom services.

The SIGOS acquisition has significantly contributed to our overall mobile business growth and we also believe that SIGOS’ business growth has been positively impacted by being a part of the Keynote family. Our stability, public company status, and quality reputation with customers has enabled the mobile business to attract and close certain deals faster than when SIGOS was a standalone company.

We are very pleased with the progression of Keynote SIGOS and continue to see success in our efforts at leveraging our customer base and our brand to bring Keynote SIGOS products to market across the world.

Now, I would like to provide an update on our Customer Experience Test and Measurement business, or CEM. As you’re aware, we’ve been making adjustments to our sales and marketing strategies to improve our revenue performance in this area. This quarter we began to experience the initial benefits from these efforts. Notable was the recent appointment of Don Aoki as Senior Vice President and General Manager of the CEM group.

Don has been with Keynote for over eight years as a senior executive and has served in various positions including VP of Engineering, Senior VP of Product and Operations, and Head of Corporate Development. His leadership has already started to have an impact in the CEM group. We are seeing higher morale, higher revenues, and low attrition. Our CEM revenue of $2.6 million this quarter is a good start to getting us back on track to our historical levels and beyond.

Additionally, Don is keeping a close eye on expenses and I’m happy to report we achieved a 51% gross margin this quarter from that business. Our CEM group signed a number of deals this quarter with key customers including Best Buy, Check Free Services, Merrill Lynch, and MTV Networks.

As we shared with you on our last conference call, our goal is to transform CEM into software and subscription plus consulting. Our WebEffective product Version 5.0 is currently slated for launch in the middle of November. This new version will offer a fully self-serviced functionality which is expected to increase the license subscription component. It is worth noting that in the most recent quarter the total CEM subscriptions revenue was $647,000, which is the highest it has ever been since we entered this business.

Before I turn the call over Drew I’d like to highlight a couple of other key products we will be releasing this quarter. We are focusing on the upcoming launch of Transaction Perspective Version 7, which features advanced web diagnostics, last mile performance, and increased value for the same price. With Transaction Perspective 7.0 we believe we now offer the industry’s most advanced internet measurement service for capturing the true experience of Web 2.0 applications across the globe.

We will also be releasing Mobile Device Perspective Version 2.0, which we recently demoed at CTIA. This new service will provide both automated monitoring and interactive testing capability using real handsets from multiple locations and multiple operators across the world.

Finally, as part of our aggressive move to refresh the Keynote brand, this morning we launched a new website that details Keynote’s value proposition for our four-solution areas -- Mobile quality, web performance, VoIP and streaming, customer experience UX, and our new endorsed brand Keynote Competitive Research. We encourage you to visit www.keynote.com. An important new element of this campaign is to convey that Keynote is not just a pioneer of internet performance measurement but today is the global test and measurement leader for mobile communications and internet performance.

In summary, all our business segments did well last quarter. Keynote SIGOS is contributing strong growth to our business and our subscription services revenue continue to show positive traction. We are optimistic about our growth opportunities in fiscal 2007.

I’ll now turn the call over to Drew Hamer, our Chief Financial Officer.

Drew Hamer, CFO

Thank you, Umang. Now, I will review the financial details for the quarter and the year. Our total revenue for the September quarter was $15.2 million compared to $13.5 million in the same period last year and $13.9 million last quarter.

Total subscription services revenue was $12.2 million or 80% of total revenue for the quarter, which is the highest amount of subscription revenue for the quarter in the past five years. Subscription revenue posted a 22.7% increase compared to the same period last year and a 6.1% increase compared to last quarter, reflecting greater demand for transaction, broadband, and mobile monitoring services as well as the Keynote SIGOS acquisition.

Professional services revenue was $3.0 million or 20% of total revenue for the quarter, and declined 15% compared to last year and increased 25% compared to last quarter.

Now, I will discuss our customers. Our customer count was approximately 2600 companies at the end of September, up from over 2300 from September 30, 2005, and consistent with 2600 at the end of June.

Excluding Keynote SIGOS, the number of customers that purchased in the recently completed quarter on an annualized basis at least $100,000 or more of our services was 79, and the percentage of revenue from these customers was 73%.

In the fourth quarter of 2005 and the third quarter of 2006, we had 83 and 71 customers purchasing over $100,000 on an annualized basis, representing 71% and 70% of revenue respectively.

At the end of September 2006, we measured over 10,000 pages through out Internet Test and Measurement business, which we previously referred to as Service-Level Management, SLM, subscription services. This compares to 8307 in the quarter a year ago and 9671 last quarter. For the fourth quarter 2006, overall average monthly revenue per page for the quarter was $235 compared to $246 and $235 for the quarter a year ago and last quarter respectively.

Now, I’ll review our expenses. Total expenses were $18.4 million including $1.1 million of stock-based compensation expenses and a $771,000 charge for amortization of intangible assets. Last quarter, total expenses were $18.1 million including $925,000 of stock-based compensation expenses, a $798,000 charge for amortization of intangible assets, and an $840,000 charge for in-process research and development associated with the SIGOS acquisition.

In the fourth quarter 2005, total expenses were $12.7 million, which did not include any stock-based compensation expenses. The increases in expenses are primarily due to the Keynote SIGOS acquisition and investments that we are making in Keynote’s sales and marketing infrastructure.

Now, I’ll discuss the effect of certain income taxes related adjustments. For the period ended September 30, 2006, we had a $3.9 million charge for the adjustment of net deferred tax assets on our balance sheet. Last year, for the period ending September 30, 2005, we recorded $3.1 million benefit for the corresponding adjustment.

For the fourth quarter of fiscal year 2006, the net loss was $0.6 million or $0.35 per share on a GAAP basis, which included the aforementioned charges. For the fourth quarter of fiscal year 2005, the net income was $4.3 million or $0.21 per diluted share on a GAAP basis, which included the income tax benefit associated with a partial recognition of net deferred tax assets.

The non-GAAP net loss for the quarter was $797,000 or $0.05 per share, compared to non-GAAP net income of $2.2 million or $0.11 per diluted share for the same quarter a year ago.

Now, moving to the balance sheet and our cash performance metrics – at September 30, 2006, our cash and short-term investments balance was $90.8 million. Please note this was after we acquired SIGOS for approximately $30 million in cash on April 3rd.

For the quarter, cash provided by operating activities was $1.3 million, compared to $3.6 million for the same period last year. We invested $874,000 in property, equipment, and software this quarter and $1.2 million in the same quarter last year. Also, we generated free cash flow of $415,000 for the quarter compared to $2.4 million for the fourth quarter of 2005.

During the fourth quarter we repurchased approximately 624,000 shares for approximately $6.6 million. As we mentioned in the press release, as of this quarter, we’ve completed the stock buyback program. In total, Keynote has spent $135.3 million in the last six years under its stock repurchase program to purchase a total of 14.3 million shares.

As of September 30, 2006, accounts receivable net was $7.1 million. DSOs were 43 days and 98% of accounts receivable were less than 90 days old.

Long and short-term deferred revenue at September 30, 2006, was $10.6 million, up 9% compared to $9.7 million at June 30, 2006, and up 71% from $6.2 million at September 30, 2005.

For the full year ending September 30, 2006, total revenue was $55.5 million. We generated $10.7 million in cash from operations and $7.6 million in free cash flow. GAAP net loss for the year was $7.5 million or $0.41 per share, which included the aforementioned $3.9 million charge associated with net deferred tax assets, $3.7 million of stock-based compensation expenses, a $2.4 million charge for intangible assets amortization, and an $840,000 charge for in-process research and development associated with the SIGOS acquisition. Non-GAAP net income for fiscal year 2006 was $2 million or $0.10 per diluted share.

Now, I would like to provide some general guidance for the December 2006 quarter. The company consolidated Keynote SIGOS’ financial reporting under U.S. GAAP rules starting April 3, 2006. U.S. GAAP requires Keynote SIGOS’ system license revenue to be ratably recognized over the initial duration of each customer contract which averages approximately 24 months. As a result, Keynote will be able to recognize its revenues only a fraction of Keynote SIGOS sales during fiscal 2006 and 2007. Accordingly, the acquisition will be dilutive to Keynote’s U.S. GAAP net income, although cash flow from operations is expected to be positive throughout.

That said, management is providing the following guidance for the 2007 fiscal first quarter ending December 31, 2006. Total revenue is expected to be between $15.0 million and $15.5 million. Net loss per share is expected to be between $0.06 and $0.09. Non-GAAP loss per share is expected to be between $0.01 and $0.04. Cash provided by operating activities is expected to be between $2.0 million and $2.5 million. Free cash flow is expected to be between $1 million and $1.5 million.

The above guidance was based on the following assumptions: total stock-based compensation expense and amortization of intangible assets is expected to be approximately $1.8 million. Interest income net is expected to be approximately $1.0 million, assuming no material changes in interest rates. Cash paid for income taxes is expected to be approximately $550,000. And basic weighted average shares outstanding are expected to be approximately 17.1 million shares.

With that I would like to return the call to Umang.

Umang Gupta, Chairman and CEO

Thank you, Drew. Over the past few years our goal has been to position Keynote to take advantage of new opportunities presented by the rapidly evolving internet and mobile markets. In the last year, we made great progress of this goal with significant technology enhancements across our flagship products in internet performance, customer experience, and mobile testing. During fiscal 2006 we furthered our strategy by completing the very exciting acquisition of SIGOS in the rapidly expanding mobile industry.

Additionally, we made internal investments and we saw the results of those in the fourth quarter through organic growth and revenue across all of our segments. We continue to be a strong generator of cash flow. For the fiscal year 2006, we generated cash flow from operations of $10.7 million and free cash flow of $7.6 million. As a matter of fact, Keynote has generated cash flow from operations of over $40 million and free cash flow of nearly $30 million in the aggregate over the past four years. These cash flows have supported our acquisition strategy and buyback strategy for our stock.

We ended fiscal 2006 with a revenue runrate exceeding $15 million per quarter, the highest in the company’s history. We are continuing to lead in developing innovative test and measurement technologies for Web 2.0 and have broadened our scope to include mobile quality test and measurements. We close fiscal 2006 on a strong note demonstrating growth in each of our business segments. We are now seeing early signs from our customers that are investments should pay off well in the coming years. Now, Drew and I would be more than happy to take any questions you may have. Thank you.

Question-and-Answer Session

Operator

If you would like to ask a question at this time please press * and then the number 1 on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Douglas Whitman with Whitman Capital.

Douglas Whitman, Whitman Capital

Well, we have to say thank you, what a great quarter guys, it’s nice to see. You’ve talked in your public release about the sale changes and you talked about the upcoming product, but you seemed to do well across the board, is the environment improved, is it just better execution or there are some features that you brought out in the last couple of quarters that are driving this?

Umang Gupta, Chairman and CEO

I’d say just two words, better execution. The environment really couldn’t have changed that much in the last two or three quarters, and as you know we had a dip a couple of quarters ago, it was an execution problem, and we’ve come back this quarter, it’s an execution benefit. And really we’ve made some management changes six months ago. Those changes percolated all the way through the rest of the sales and marketing organization, and with a great new management and sales level and also in marketing new activities being done, and with frankly a beefed up team of sales folks across the board we’re now starting to see the results of that. And in some ways the fact that it occurred across the board, to my way of thinking I keep asking myself could it be just one particular thing that’s happening, but the fact that it happened across the board tells me that it is more sales execution more than anything else in the environment, because across the board we were able to do that.

Douglas Whitman, Whitman Capital

And when you talk about beefed sales, are you talking about an increase in the head count or better people, more experienced people, more hungrier people, can you give a little color there?

Umang Gupta, Chairman and CEO

A little bit of both. We clearly have more sales territories still today than we did six months ago. To give you some perspective, we currently have about 14 or 15 territories across the world that typically would consistent of a direct sales individual called a NAM, National Account Manager, a telesales person, and an SC, and the plan is really to be able to fill all 15 territories both here in the United States and Europe. With the exception of one territory, all of them are filled today. With both the range and experience with us anywhere from let’s say about three-month experience at the shortest, probably a two-month experience at the shortest to a five-year and six-year experience. Six months ago my recollection, and I’ll do this from memory, is that we probably had no more than about 8 or 9 of those territories filled, and even those were pretty new people.

Douglas Whitman, Whitman Capital

So, in short, given the stronger than expected revenues, are you increasing your sales head count further?

Umang Gupta, Chairman and CEO

At the present moment, we are I believe pretty close to full op relative to the sales head count we wanted. Clearly, if we could start to see more effects…the way we plan is we plan for a certain amount of head count for the year and a certain amount of revenue for the year. If it turns out we’re able to do better on the revenue side, we’ll add more head count. On the other hand, if we maintain the revenue that we thought we would do, then we keep that head count until we reach a certain level where we say we need more head count.

Douglas Whitman, Whitman Capital

Thank you.

Operator

Again if you would like to ask a question, please press * and then the 1 on your telephone keypad. Your next question comes from the line of Matt Hewitt with Craig-Hallum.

Matt Hewitt, Craig-Hallum Capital

Congratulations on the quarter. Just a couple of quick questions for you; first of all, there appeared a spike in the G&A line in this last quarter, is that just a result of all that additional hiring that was done over the last six months or was there something else involved there?

Umang Gupta, Chairman and CEO

There was no hiring issue. Ultimately the spike occurred largely because of the fact that when we bought SIGOS there was a bunch of work that had to be done related to auditing, tax planning, and other activities that all pretty much piled up over the last quarter. Some of the work started in the quarter before, but the bills and everything else the way it just worked out ended up being seen in this quarter or so, and that was the spike. I expect that spike will in fact subside and so we’ll have lesser cost next quarter of G&A than we did this quarter. There were also some accruals and other things that had to be done at the end of the year relative to audit expenses. As you know Sarbanes-Oxley and everything else has hit everybody including us, and clearly there were certain expenses that we ended up taking this quarter that we were not anticipating.

Matt Hewitt, Craig-Hallum Capital

Okay, so do you expect that to go back to the $2 million quarter which was more of a historical range?

Umang Gupta, Chairman and CEO

Drew, do you want to provide certain…we don’t give guidance on an individual line item level, so I’d be hesitant to provide you guidance, but I will say that it will be less next quarter than this quarter.

Matt Hewitt, Craig-Hallum Capital

Okay. Another quick question here, the CEM business, would you say that that troughed in the last quarter in the third quarter and that you’re starting to see that business climb because of the initiatives that you’ve taken in the sales and marketing?

Umang Gupta, Chairman and CEO

I certainly believe that it went down to about $2.3 million I think in the previous quarter and now it is about $2.6 million, so I’d like to think it has troughed. Clearly, we have a better pipeline in the number of custom deals that we’ve got, some of our license business has clearly done very nicely, our competitive research studies go up and down, and last quarter were very good. If we continue to maintain the rate of those, we should do well this quarter also, but that business does have a certain amount of volatility, so I would say that you should look at it on a quarter-to-quarter basis. It does make sense to look at it on an annual basis. And last year we did $10.6 million or so and clearly our goal is to do better, and at $2.6 million it would imply that we were a little over average of that quarterly average in the previous quarter, and we hope to do better in the coming year.

Matt Hewitt, Craig-Hallum Capital

Okay, one last question. You mentioned that you still have approximately $91 million in cash investments, any near term plans for that or are you just kind going to wait and see what develops in the market?

Umang Gupta, Chairman and CEO

I think at this point there’s a wait and see towards the question of cash.

Matt Hewitt, Craig-Hallum Capital

You know what, I do have one more. Competitive landscape, especially given that you guys have had a very strong quarter here, are you starting to see any competitors into the market, and if so what are you doing to differentiate yourself there?

Umang Gupta, Chairman and CEO

Well, let’s separate out the three segments -- web performance, internet performance that is, and mobile testing, and of course customer experience testing. In the internet performance, our primary competition for years and years has really been only two companies, a smaller company than us called Gomez and a bigger company than us called Mercury. As you know, Mercury just got bought by HP. HP is in fact a big customer of ours and we are hopeful at least going forward that we’ll actually see less competition from that side, because Mercury by and large was more focused on software than services, and now with HP buying them I think there’s an even great focus on software license model than a software of the services model. So, our assessment today is we’ve seen less competition from the Mercury side. However, we are seeing more competition from the Gomez side, and I think that’s largely a result to the fact that the two of us really fundamentally shared the market in the United States, we’re the bigger player, but there’s price competition for that business. It is a hotly competitive business, and we continue to come out with new products. So, I don’t expect to see new competition in that space, it’s not a big enough market in my opinion to sustain new competitors, but I do believe that there will always be competition because customers always have a choice. In the area of customer experience, our real competition by and large has rarely ever been somebody else building different technologies. It is much more either the customer deciding to do things the old fashioned way, let’s say with a focus group survey or with experts coming in and studying a website and suggesting improvements while there’s a quantitative testing approach that we espouse, and sometimes it’s also maybe usability labs, people who actually come out to a usability lab and study how a website is being used. So, I have not seen very much changes in that situation. There are a couple of emerging players who attempt to claim similar technology as ours, but so far at least we have not seen much direct technology competition, though there is clearly enough competition for the same dollars to go into other ways of achieving the same goal of usability testing or customer experience testing. And then lastly in the mobile world, this is an interesting area. The competition for SIGOS is a company in the northwest called Casabyte, much smaller than SIGOS. We had been tracking up with them a while ago as a possible acquisition and ended up choosing SIGOS, and there are a couple of other smaller players but none of whom are significant in that space. It’s a niche market and clearly the Keynote SIGOS product dominates that niche market certainly more than anybody else. We do have smaller venture capital backed companies trying to emerge in this space. In mobile testing for example we compete against a smaller company called Mobile Complete that is a venture capital backed company. On the other hand there are other venture capital backed companies that are going out of business too, who will sometimes come to us and want to be acquired. But, I can tell you right now that while we see some competition emerging it’s not significant enough for me to be too worried at the competitive level, though we always of course pay attention to any new competitors if they come.

Matt Hewitt, Craig-Hallum Capital

Thanks again, and great quarter guys.

Operator

Again, if you would like to ask a question, press * and then the number 1 on your telephone keypad. Your next question comes from the line of Kevin Liu with B. Riley & Company.

Kevin Liu, B. Riley & Company

Hi, good afternoon. You mentioned sales execution as the primary reason for the strength in revenues this quarter, I’m just wondering if you could dig a little bit more into the pipeline and talk about kind of where you’re seeing the strongest demand with regard to either products or services, and also whether you could kind of compare the size of that pipeline heading into ’07 versus where you guys maybe were six months and where you were prior to this quarter.

Umang Gupta, Chairman and CEO

So, the way to think about business is there’s a set of things that happen without necessarily a big pipeline of big deals. It’s a subscription business and when people buy they buy more…you signed up a customer and they bought a little bit from you, they liked what you did, and then they buy more over time. So, what we’ve seen is definitely an increase in the number of high profile customers, companies like Google for example who wasn’t a customer a year ago is now a customer of our subscription services. Companies like Microsoft continue to buy more of those services from us, as have companies like Yahoo, HP, and others. So, we’ve seen definitely increases in our subscription business over the past year; however, they are absolutely offset by reductions also in our legacy subscriptions business of single paid website testing or single device monitoring such as red alert, etc. I expect to see that continue to happen in the coming quarters and I would not be surprised that we might actually see a little bit of a dip in our subscriptions business in this coming quarter, because I know in some customers’ cases when they buy a little less in a particular quarter it might occur, but then it comes right back a quarter or two later. So, you can always see that happening and all I can say is that over the last six months at least we saw generally nice increases, but I wouldn’t base it on pipeline as much as just general activity among customers buying more. Relative to the mobile business, clearly there’s a bigger pipeline. We are seeing some great increases in sales from SIGOS. I cannot even mention certain big named companies with whom we have signed deals or about to sign deals that are really big for us, because we’re not allowed to talk about those particular companies. But I can tell you that the pipeline is the best SIGOS has ever seen for a while, and certainly we are very, very pleased with how things are going in the mobile business. In fact on the mobile testing front here, and I’m talking about mobile products from Keynote itself, we’ve also done quite well with companies like Sprint and U.S. Cellular and others. So, across the board, the mobile business definitely has more pipeline. And then lastly in the customer experience business, it’s a better pipeline than it was before, but not as good as I want it to be, so we still have work in progress and we think we can do better.

Kevin Liu, B. Riley & Company

All right, thanks that helps. Finally, I may have missed this if you mentioned earlier, but I’m just wondering what portions of revenues you are going to recognize from SIGOS were, because of their acquisition accounting rules?

Umang Gupta, Chairman and CEO

We talk about deferred revenue and clearly the number you’ve got is I think deferred revenue went up about $900,000; however, while deferred revenue is a good way to look at the revenue for which we collected cash but were not able to recognize the revenue, it is not a full representation of all the bookings or billings that we had, because in many cases we’ll do a deal and under German GAAP it might have been recognizable, but under U.S. GAAP it would not be recognizable even though it was invoiced to the customer. We do not reveal that number, but I can say to you that in the previous year, and I’m talking now about the calendar year 2005, that number was about 12 million Euros or so, but have included a pretty significant chunk of business that came from one big OEM customer, Agilent. This year our expectation is that we will equal or beat that 12 million Euro number with not very much help from Agilent at all.

Kevin Liu, B. Riley & Company

Okay, thank you.

Operator

At this time, there are no further questions, are there any further remarks?

Umang Gupta, Chairman and CEO

Okay, thank you ladies and gentlemen for joining us today. As usual, we appreciate your support. Drew is going to be conducting investor meetings in November including at the AEA Conference on November 7th in Maryland and 8th, and also at the UBS 2006 Global Communications and Technology conference on November 15th in New York. We hope to see some of you there. Thank you.

Operator

This concludes today’s Keynote Systems fourth quarter and year end fiscal 2006 results conference call. You may now disconnect.

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