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Keynote Systems, Inc. (NASDAQ:KEYN)

F1Q07 Earnings Call

January 30, 2007 5 pm ET

Executives

Kirsten Chapman - Investor Relations

Umang Gupta - Chairman & CEO

Drew Hamer - CFO

Analysts

Eric Martinuzzi - Craig-Hallum

Douglas Whitman - Whitman Capital

Justin Cable - B. Riley

Presentation

Operator

Good afternoon, everyone and welcome to Keynote's conference call for the first quarter of fiscal year 2007 ending December 31, 2006. Today's call is being recorded. At this time, I would like to turn the call over to Kirsten Chapman for opening remarks and introductions.

Kirsten Chapman

Thank you, April. Good afternoon everyone, and welcome to Keynote's conference call for the fiscal 2007 first quarter ended December 31, 2006. I am here with Umang Gupta, Chairman and Chief Executive Officer; and Drew Hamer, Chief Financial Officer. Umang and Drew will review our accomplishments for the quarter and then we'll be available to answer questions.

Hopefully, by now, you have seen our press release that was distributed over Business Wire and the major news wire services. For your convenience, the press release has also been posted on our website at www.keynote.com.

A replay of this call will be available by telephone by dialing 1-800-642-1687. The pass code is 5680745, or available 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 risks and uncertainties and actual results might differ materially from those projected in 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 and 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 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 a provision for income taxes less cash tax expense, stock-based compensation and amortization of purchased intangibles.

Non-GAAP net income per diluted share equals non-GAAP net income divided by weighted or basic diluted share count as of the period ending, depending on whether there is a loss or income, respectively. Keynote SIGOS revenue recognition policy requires the amortization of most of Keynote SIGOS' software license revenues over an approximate 24-month period. Therefore, Keynote's consolidated GAAP and non-GAAP earnings are likely to remain negative until quarterly GAAP revenues normalize with 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 would like to introduce Umang Gupta, Chairman and Chief Executive Officer of Keynote, who will review the Company's quarterly highlights, and then Drew Hamer, Chief Financial Officer of Keynote, will provide the financial details for the first quarter and guidance for the second quarter 2007. Afterwards, Umang will summarize the Company's vision and open the call for questions. Please go ahead, Umang.

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Umang Gupta

Thanks, Kirsten. Welcome, everyone and thank you for joining us today. We posted a great start to fiscal 2007. First quarter results exceeded all of our previous guidance. We believe our strong financial results are the culmination of improved execution and strong market opportunity, especially Mobile Testing which is served by Keynote SIGOS.

Total first quarter revenue reached $15.8 million increasing 15% compared to the same period last year. Total net deferred revenue reached $14.7 million, increasing over 140% compared to the same period last year. And our gross deferred revenue, defined as sum of net deferred revenue and unpaid deferred revenue, reads $23.6 million, up 185% compared to the same period last year.

When one looks at our gross deferred revenue increase during the past quarter of almost $12 million, that's 83%, it is important to realize that Keynote did even better in terms of new business growth in this past quarter than was reflected purely by our GAAP reported revenues of $15.8 million. Much of this increased deferred revenue will flow through to our topline results in the coming quarters.

Keynote's SIGOS is clearly outperforming our expectations and fueling our growth. We are extremely pleased that the increased revenue combined with cost controls we implemented drove cash flow, GAAP income and non-GAAP net income. Providing that Keynote SIGOS continues to perform at the same level as last year for the remainder of the fiscal year 2007, we expect to deliver non-GAAP net income throughout 2007. Drew will provide more details in his financial review.

I will now review the operations of each of our businesses, Mobile Test and Measurement, Internet Test and Measurements, and Customer Experience Test and Measurements. Our Mobile Test and Measurement revenue was $3.2 million in the first quarter compared to $2.4 million for the fourth quarter.

Additionally, total deferred revenue increased by approximately $4.1 million during the quarter, most of which was driven by Keynote SIGOS, that's net deferred revenue growth. Keynote SIGOS solutions supply users with valuable customer data.

We replicate the exact mobile network transaction experience, voice of data, and provide detailed performance and quality metrics to enable our customers to make cost effective decisions to improve their networks and their customer service. We are obviously thrilled with Keynote SIGOS' performance as it has exceeded our expectations and complemented our Mobile Device and Application Perspective services.

In the last quarter alone, Keynote SIGOS obtained orders from 14 new customers including major telecom operators across the globe in the following countries, Austria, Australia, Bulgaria, Croatia, Iceland, Luxembourg, Mauritania, Romania, Russia, Slovenia, Spain, South Africa and the United Arab Emirates. And in the last nine months since the acquisition, Keynote SIGOS has obtained 13 new customers for the SITE Test System and 23 new customers for Global Roamer service.

Additionally, today we announced an expanded relationship with Vodaphone. Our new strategic direct sales team and [fresh] Keynote as Vodaphone's preferred supplier for end-to-end Mobile Network Test and Measurement systems in Germany, the UK and Spain and more than 15 additional countries. With our new worldwide master agreement signed with Vodaphone Global, we anticipate a long and fruitful business relationship with one of the largest telecom operators in the world.

Now on to the Test and Measurement for the Internet. This quarter, Internet grew to $10.4 million, above the $10.2 million last quarter. Our Internet subscriptions generated $8.9 million, up from $8.8 million a year ago and down slightly from the $9.1 million last quarter. Our Internet engagements increased to $1.5 million from $1.1 million both a quarter and a year ago, reflecting greater acceptance of our load testing services.

In the first quarter, Keynote Internet deals included American Honda, Hallmark Insights, Hertz, McKesson, MTV and Autobuytel. Additionally in early November, we launched Transaction Perspective Version 7.0. Customer reception has been especially strong with users citing Last Mile and High Frequency Monitoring as useful features.

Now, I'll provide an update on our customer experience test and measurement business, or CEMUX. CEM revenue was $2.2 million compared to $2.6 million last quarter and $3.3 million last year. While we were disappointed with the sales of our syndicated competitive research studies, our custom engagement's revenue was the highest in four quarters. We also have a plan for increasing the number of competitive studies to be delivered in the second quarter and in the remainder of the fiscal year.

We forged ahead signing a number of deals this quarter including AOL, Expedia, Hilton, HP, MetLife and Union Bank of California. Also, our mid November launch of WebEffective Version 5.0 has received excellent reviews from customers. This version delivers combined benefits of online market research, usability labs and web analytics into a single on-demand solution.

With that, I will now turn the call over to Drew Hamer, our Chief Financial Officer. Drew?

Drew Hamer

Thank you, Umang. Now I will review the financial details for the quarter and, of course, year-to-date. Our total revenue for the December quarter was $15.8 million compared to $13.7 million in the same period last year and $15.2 million last quarter. Total subscription services revenue was $12.7 million or 80% of total revenue for the quarter.

Subscription revenue posted a 29.5% increase compared to the same period last year and a 4.6% increase compared to last quarter reflecting greater demand for Keynote/SIGOS, as well as transaction, broadband and mobile monitoring services. Professional services revenue was $3.1 million, or 20% of total revenue for the quarter and declined 20% compared to last year and increased 2% compared to last quarter.

Now, I will discuss our customers. Our customer count was approximately 2,650 companies at the end of December 2006, up from approximately 2,300 companies at December 31, 2005, and approximately 2,600 at the end of September. 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 85, and the percentage of revenue from these customers was 75%.

In the fourth quarter of 2006 and the first quarter of 2006, we had 79 and 82 customers, respectively, purchasing over $100,000 on an annualized basis, both representing 76% of revenue. At the end of December 2006, we measured over 10,000 pages through our Internet test and measurement business compared to over 8,800 in the quarter a year ago and over 10,000 last quarter. For the fiscal quarter 2007, overall average monthly revenue per page for the quarter was $221. This compares to $242 and $235 for the quarter a year ago and last quarter, respectively.

Now, I will review our expenses. Total expenses were $17.7 million including $920,000 in stock based compensation expenses and a $759,000 charge for amortization of intangible assets. Last quarter, 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.

The reduction in expenses reflects our cost controls and a $1.1 million decrease in G&A costs relating to reductions in outside auditor and consultancy fees now that the SIGOS acquisition integration is completed. In the fourth quarter of 2005, total expenses were $13.5 million, which included $796,000 in stock based compensation expenses.

Now, I will discuss the effect of certain annual income tax related adjustments. During the quarter ended December 31, 2006, we recorded a $1.3 million tax benefit, which is reflected in our total net deferred tax liability. This reflects the impact of FAS 123(NYSE:R) on our overall tax rate for the year. For the quarter ended September 30th, 2006, we had a $3.9 million charge for the adjustment of net deferred tax assets on our balance sheet. For the quarter ending December 31, 2005, we recorded a $732,000 tax provision.

For the first quarter of fiscal year 2007, the net income was $264,000 or $0.01 per diluted share on a GAAP basis, which included the aforementioned charges. For the first quarter of fiscal year 2006, the net income was $587,000 or $0.03 per diluted share on a GAAP basis. For the quarter ending September 30th, 2006, the net loss was $6 million or $0.35 per share on a GAAP basis, which included the aforementioned charges.

The non-GAAP net income for the quarter was $551,000 or $0.03 per diluted share compared to non-GAAP net loss of $797,000 or $0.05 per share for the quarter ended September 30th, 2006, and non-GAAP net income of $2.4 million or $0.12 per diluted share for the same quarter a year ago.

Now, moving to the balance sheet and our cash performance metrics. At December 31, 2006, our cash and short term investments balance was $95.6 million, up from $90.8 million at September 30th, 2006. For the quarter, cash provided by operating activities was $5.1 million compared to $1.2 million for the last quarter. We invested $1.1 million in property, equipment and software this quarter and $874,000 last quarter. Also, we generated free cash flow of $4 million for the quarter compared to $357,000 for the fourth quarter of 2006.

As of December 31, 2006, accounts receivable net was $7.7 million. DSOs were 45 days and 98% of accounts receivable were less than 90 days old. Total net deferred revenue at December 31, 2006 was $14.7 million, up 38% compared to $10.6 million at September 30th, 2006, and up 144% from $6.2 million at December 31st, 2005.

As mentioned earlier, gross deferred revenue increased $23.6 million at December 31st, 2006, up 83% compared to $12.9 million at September 30th, 2006, and up 185% from $8.3 million at December 31st, 2005. Also in December, Keynote entered a 10b5-1 stock repurchase plan that will enable the Company to repurchase up to 2 million shares by the end of 2007.

Now, I would like to provide some general guidance for the March 2007 quarter. The Company consolidated Keynote/SIGOS' financial reporting under US GAAP rules starting April 3rd, 2006. US 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 as revenues only a fraction of Keynote SIGOS' sale during 2007. Accordingly, the acquisition will be dilutive to Keynote's US 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 second quarter ending March 31st, 2007. Total revenue is expected to be between $16.2 million and $16.7 million. Net earnings loss per diluted share is expected to be between $0.02 loss and $0.02 earnings.

Non-GAAP earnings per diluted share are expected to be between $0.05 and $0.08. Cash provided by operating activities is expected to be between $3 million and $3.5 million. Free cash flow is expected to be between $2 million and $2.5 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 million, assuming no material changes in interest rates.

Cash paid for income taxes is expected to be approximately $400,000. Cash paid to SIGOS' shareholders for acquisition-related performance fees under the terms of the acquisition agreement for SIGOS is expected to be approximately $10.6 million.

And basic average shares outstanding are expected to be approximately 17.1 million shares, and diluted weighted average shares outstanding are expected to be approximately 17.7 million shares.

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

Umang Gupta

Thank you, Drew. We were obviously very pleased with our execution during the quarter. We continue to expand our products and services and broaden our customer base. Our mobile business is growing rapidly, which is supported by continued progress in our Internet subscription and CEM businesses.

And our future prospects look quite promising. We believe the mobile test and measurement market is still in its infancy, and its eventual size will be determined by the number of ways people can use mobile technology to improve communications in business.

With Keynote SIGOS technology, we are an in an excellent position and now have more than 85 customers representing major telecom operators worldwide. As these companies continue to increase penetration rates and number of mobile applications offered, their need for testing will only grow.

Cell phones have become ubiquitous and essential for consumers and for businesses. And as our customers serve these end users and as mobile content and services continue to proliferate, our telecom customers must differentiate themselves.

Poor customer experience is not an option. Keynote SIGOS stands ready to provide solutions to ensure our high quality mobile experience. Complementing Keynote SIGOS will be the growth that will come from mobile content developers and portals, plus our enterprise customers. All of these companies will have a growing need for testing their content across the myriad mobile platforms and operators of the world.

And Keynote's Mobile Device Perspective and Mobile Application Perspective Services offer a very cost effective and geographically distributed on-demand testing and measurement capability that is unmatched by any other competitor today.

In the long run, we are quite confident that our mobile business can grow to be as large as our Internet business and possibly larger. We ended the quarter with a revenue run rate of almost $16 million per quarter, the highest in the Company's history. We believe we are poised to show continued growth in the coming quarters.

Drew and I would be more than happy to take any questions you may have. Thank you.

Question-and-Answer-Session

Operator

[Operator Instructions]

Your first question comes from the line of Eric Martinuzzi with Craig-Hallum.

Eric Martinuzzi - Craig-Hallum

Good afternoon, gentlemen, and congratulations on your successful quarter. My question has to do with the mobile side of the business. You do a nice job of breaking out the historic GAAP -- segment revenue.

But I was curious as far as an organic growth rate, can you just sort of -- taking into consideration, SIGOS as an independent company and sort layering that on for December, how do the two quarters stack up in the mobile business, December '06 versus December '05.

Umang Gupta

Yes. Well, first of all, there are some pieces of data we can provide you, because they have been provided publicly, other possibly not. But when it comes to SIGOS' revenue, we mentioned when we acquired the company that SIGOS' revenue last year, that least year meaning -- sorry, in the calendar 2005, was approximately 12 million euros.

In this last year, if SIGOS had just remained an independent company under its own sections, et cetera, that business turned out to be more than 17 million euros. So in effect, from their viewpoint and not US GAAP or nothing like that, but just based on what they did, that's what it was.

Clearly, that's now have to be translated to US GAAP and US dollar, it was about that we provided you with those, clear significant organic growth that occurred in the SIGOS business. Much of it, by the way, that occurred after the acquisition. Clearly, we would love to be able to say to you that everything was because of us.

No, it is due to the tremendous efforts of the SIGOS team and what they did. But I would like to think that some of that growth clearly came as a result of the acquisition itself and the resulting strong effect of having a strong corporate parent, and therefore, the result of that on buying decisions and buying behavior by customers around the world.

Eric Martinuzzi - Craig-Hallum

So is the earn-out a maximum payment or some discount there too?

Umang Gupta

In this point, the earn-out is the maximum payment that we could have paid them, and they were basically at that maximum.

Eric Martinuzzi - Craig-Hallum

Okay. A little bit more detail on Vodafone business. Was that a renewal and expansion -- how is it different now than it was in the prior contract.

Umang Gupta

Good question. Vodafone Germany has been a customer of Keynote SIGOS for almost a decade, I believe, or possibly more than a decade. But what different is that in the past, many other Vodafone companies were purchasing Keynote equipment through in between layer, essentially this was being done as part of an arrangement, which I've also revealed in the past, I think.

What has changed now is that Vodafone Global has an agreement with us, with Keynote SIGOS, which allows any Vodafone OpCo to purchase Keynote SIGOS equipment directly from Keynote SIGOS under, of course, a corporate worldwide master agreement.

And as a result, we have received orders from the UK and Spain. There will -- I hope there will be orders from many others over time. But the one from UK and Spain were a part of what occurred last year.

Eric Martinuzzi - Craig-Hallum

Okay. And then it looks like the CTM business on a year-on-year basis down about 32%. Do you expect this to be a base or is there potential for continued erosion there?

Umang Gupta

Yes, Eric, I think that right now, we seem to be range bound in the CEM business, you know, about 2.25 at the bottom end of the range, 2.5, it seems to be. But if you take a look at the last few quarters, that's about the range. And right now, sitting where I am, I have no reason to believe that would be different in this current quarter. Beyond that, we don't give guidance.

Eric Martinuzzi - Craig-Hallum

Okay. And then one last housekeeping on the tax rate for '07. I understand you have about 400,000 of cash taxes implied for or expected for Q2. What does that anticipate now that you have had this sort of FAS 123(R) adjustment baked in?

Umang Gupta

So the cash tax is actually separate from the FAS 123, we backed that out to get to the non-GAAP number and the FAS 123 effect. The cash tax, just so, you know, is fundamentally, there are two components to the cash tax. One is that we here at Keynote pay, which I believe is still in the 6% to 7% kind of range.

Eric Martinuzzi - Craig-Hallum

That's right.

Umang Gupta

In other words, we have such a huge amount of tax benefits in the past that I don't think our cash taxes are going to change very much for awhile. They will stay in the 6% to 7% range. However, we do owe German government taxes because of Keynote SIGOS and those taxes are a significant part of that cash tax number that we revealed.

Eric Martinuzzi - Craig-Hallum

Right. Thank you.

Operator

Your next question comes from the line of Douglas Whitman with Whitman Capital.

Douglas Whitman - Whitman Capital

Spectacular quarter, guys. Can you talk a little bit about what -- you know some of the trend that calls the quarter and a little bit also about what you did as far as internal execution, because something seems to be hitting on so many fronts.

Drew Hamer

Let he me start by saying. That the Mobile front and the CEM fronts and the Mobile front and the internet front and the CEM front. We are range bound and we still need fixing up to do and -- but we made changes in personnel like this, which we hope it will effect us. Usually after you make changes, it takes six months to see the effect.

So in the CEM business ,we're -- it's still kind of in the mode where we are waiting to see the results of the changes that are made and starting to see significant effects of the changes we have made in the internet business and of course, the Mobile business, you can already see that.

In the internet business, the fundamental changes that were made was a change of sales force, change of leadership. About a year ago, when we did that we now have a total of I believe, it's either 11 or 12 territories filled in the United States. And the folks have been there on the job, a minimum of six months. Most of them, many of them for a year and two years or so.

They are starting to hit the stride and we're starting to see the effects of that in the number of deals we are winning. We're still dominated in the internet business by a few large customers. So you saw some slight reduction in revenues this quarter and that was expected by us, by the way. It was simply because the one very large customer who has kind of gone off in their numbers last year and in the fourth quarter and kind of reached a peek and then went out a little bit this quarter.

But overall, we are comfortable in saying that our internet business and subscription business has had a turn positively at -- while it may not be at the, you know, 10% or 15% growth rate per year, it does seem to be operating right now in the 5% growth rate and more than 50% of the revenue is multi URL testing.

And multi -- excuse me -- multi-URL transactions and brand back and they are all on the up swing. They are all going up and since more than 50% is going up, but less than 50% is going down. I do believe that overtime, this business has good growth possibilities.

The VoIP and Streaming business is going great. I mean we've just done really well and that business is starting from a small base but we're very comfortable. That overtime that could be a decent portion of our internet business. We also have dedicated people helping us in the VOIP and Streaming business. And those investments have paid off.

In the engagement business, which is low testing, there is something going on in the last six months that's making me feel pretty good. Because this business for a long time, I'll talk on our engagement business was range bound to roughly a $1 million a quarter. And we have now, you know, kind of had an $1.5 million quarter and where all the forecasting, at least internal forecasting is telling me that we should do pretty good this quarter.

So there is something changing there and it could be just the change of the sales force. We have got more sales people. They've done a better job. And that certainly is affecting it. It could also be the exiting of mercury as a standalone company might be part of HP might be positively affecting us. But net-to-net our overall internet business is certainly in the positive up swing.

And our Mobile, you know, clearly see those that's dominated backed business and done very well. But also our Mobile application device perspective business is doing quite good. Those are growing too from a smaller base, but again because of the nature of these businesses, their service rather than software, and the slow -- the base can just continue to grow over time. And I expect that should be a pretty nice up swing in the next few quarters.

Douglas Whitman - Whitman Capital

That sounds pretty great when you are executing well and good available market. So we look for continued great stuff. Thank you for the great quarter.

Drew Hamer

Thank you, Doug.

Operator

Your next question comes from the line of Justin Cable with B. Riley.

Justin Cable - B. Riley

Thanks. I think most of my questions have been answered but I do have few question here. As far as SIGOS earn out when does that get paid, is that this quarter?

Drew Hamer

Yes.

Justin Cable - B. Riley

Okay. In terms of the metrics you provided on the metrics per page. You gave us the numbers there and it looks like some decline if you look at year ago or sequentially. And I guess can you talk about the trends that you are seeing there.

Drew Hamer

Yes. Excellent question and I am glad you asked about it. One of the fundamental strategic things we are doing today to ensure that we continue to grow our business, is to get our price point at a point where they can cause demand elasticity to take off. So it’s a little bit of historical perspective.

When we exited the bubble, three, five years ago, we had like a $300 for URL average price. Most of it was single paged business. Website perspective, that business now is less than -- you know, I think it's certainly less than 50% single page and the website perspective portion of that is, you know, maybe about 25% or so.

So, as a result of moving from website perspective to transaction perspective and more couple of years ago to application perspective, we have increased the number of URLs but the average price per page on transaction perspective is, you know, more like 200, 250. And the average price per page on the application perspective is more like 100 bucks per page. So the blended price continues to come down.

And right now at 220, it’s likely to go down even further. Because our goal is to really increase the dollar volume. Not that and so, as long as you get more dollar volume to compensate for the price reduction. We will be fine. And we recently came out with a new product just a few months ago for transaction perspective.

High frequency and that will continue to accelerate the strength and my goal really is to take market share from the competition here. And ultimately the only way I am going to take market share from competition. It’s too effectively recognized that we gave right to that competition of about few years with our very high pricing and they started coming out with lower prices

But overtime, they’ve been kind of going after a higher price market and as long as we can make sure and we can current take market share away from them. We will continue to do that.

Justin Cable - B. Riley

Right. Okay. All right. That is helpful. And In terms of future acquisitions, is there anything that’s imminent and near term. That is part of the overall strategy. Where would you like to add businesses?

Drew Hamer

Yes. I must tell you that now that we have, I really believe that at this stage. We have kind of we are pretty full off and technology we acquired. I am not saying we would acquire it and make sense, but it is not like we are looking to enter a new segment, I think the Mobile segment and the Internet segment and even the sea US segment, if we can get start executing right, are all good segments at various levels of maturity.

So it’s not like, we don't need to enter into a new segment. Within this segment, I think of got plenty of technology. Frankly, we got more technology than sales force to be able to cell it at this stage. And so my investments are the leaver or lightly to in sales of marketing oriented decision.

And if we were to buy another company, it is less likely to be for technology and more for market reach. So I would not rule out the possibility of acquisition, in markets we don’t exist in today, possibly Europe and elsewhere.

Justin Cable - B. Riley

Okay. Obviously you are starting to show leverage again in the model and even though, there is still some revenues you haven't been able to recognize yet. EBITDA margins for the quarter were over 5% and historically it reached as high as 20%. How soon do you they you can back to those levels. I know you don't want to give longer term guidance, but maybe just a directional level.

Drew Hamer At a directional level, I am going to ask you just and I am going to suggest that in your models or any other models that are produced that you start to think at least for the and the next few quarters until we get to the stage where our GAAP revenues are roughly consistent with kind of new order of low coming in SIGOS. No significant difference between the amount we recognize and the amount we get a new.

Until we get there, which could very well be another, I am going to guess right now, we set for the 24 hour period and it as 24 a month cycle. Given nine months already so given what’s going on. It could be another nine months and it could be another 15. Sorry 15 months I guess. So whatever, it is between that cycle.

Until that time, I would strongly suggest that you look at EBITDA and all these numbers with a degree, if you really create a model where you adjust the EBITDA to recognize there is a bunch of revenue that didn't show up at the topline and that showing up in our deferred revenue and yet, pretty much most of it is revenue.

There is very little -- probably no more than a cost with that deferred revenue. So ultimately, you could create a model where you will show that our adjusted revenues. And our adjusted EBITDA are much higher than actually showing up on the gap side. I can't do it for you but you should be able to create that out of the numbers we provided you.

Justin Cable - B. Riley

Yeah. I guess it would have been more fair question to say on and on a normalized basis. I after this next year, SIGOS would be more or more or less in line with what should be reported on a GAAP basis.

But certainly there is additional bookings to get in a given quarter that would get deferred in terms of recognition. And that’s part of the equation too. But it just seems like you’ve got a substantial leverage here in the model and with incremental growth. A lot of that is going to fall to the bottom line. And okay. Thank you.

Operator

[Operator Instructions].

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

Umang Gupta

Okay. Ladies and gentlemen, thank you for joining us today. As usual, we very much appreciate your support and we are quite pleased with our execution and the direction of our business and especially in the mobile test and measurements area.

And as for upcoming investor events, Drew will be conducting investor meetings in February. Please call Lippert Heilshorn & Associates to raise a visit, and both Drew and I will actually be presenting at the B. Riley conference in Las Vegas in mid-March.

We look forward to speaking with you about the third quarter in late April. Thank you, now.

Operator

This concludes today's conference call. You may now disconnect.

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Source: Keynote Systems F1Q07 (Qtr End 12/31/06) Earnings Call Transcript
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