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KeynoteSystems, Inc. (NASDAQ:KEYN)

F4Q07Earnings Call

November 1, 2007 5:00 pm ET

Executives

UmangGupta – Chairman and Chief Executive Officer

DrewHamer – Vice President and Chief Financial Officer

KirstenChapman - Investor Relations

Analysts

BrianKislinger - Sidoti

DerrickWood - Pacific Growth Equities

KevinLiu - B. Riley & Co.

DouglasWhitman - Whitman Capital

MattHewitt - Craig-Hallum

LeoChoi - Ferris Baker Watts

Presentation

Operator

Goodafternoon everyone and welcome to Keynote's conference call for the fourthquarter and full fiscal year 2007, ending September 30, 2007. Today's call isbeing recorded.

Atthis time, I would like to turn the call over to Kirsten Chapman for openingremarks and instructions.

Kirsten Chapman

Goodafternoon everyone and welcome to Keynote's conference call for the fourthquarter and full fiscal year 2007 ending September 30, 2007.

Today'scall is being recorded. At this time, I'm here with Umang Gupta, Chairman andChief Executive Officer, and Drew Hamer, Chief Financial Officer. Umang andDrew will review our accomplishments for the quarter, and then we will beavailable to answer questions.

Hopefully,by now, you have seen our press release that was distributed over Business Wireand the major wire services. For your convenience, the press release has alsobeen posted on our website at www.keynote.com. The replay of this call will be availableby telephone by dialing 1-800-642-1687 - the passcode is 19147857 - or bywebcast at the Investor Relations' section of our website at www.Keynote.com.

Iwould like to remind you that statements made during the course of this callthat are not purely historical are forward-looking statements regarding thecompany's or management's intentions, hopes, beliefs, expectation andstrategies for the future. Because such statements deal with future events,they are subject to various risks and uncertainties, and actual results maydiffer materially from those projected in the forward-looking statements.

Importantfactors that could cause actual results to differ materially from those in theforward-looking statements are discussed in today's press release and in thecompany's annual and quarterly reports filed with the SEC.

We'veprovided detailed guidance in our earnings release today, as we have in priorquarters. This guidance assumes no additional acquisitions, or othersignificant or extraordinary transactions other than those described in ourearnings release. We will not comment on this guidance during the quarter, but mayprovide an update to this guidance in the event of material changes during thequarter.

Beforethe company reviews the financial statements, I will review definitions forsome metrics, which are not in accordance with Generally Accepted AccountingPrinciples, commonly known as GAAP. The company defines non-GAAP net income asloss, or net income or loss adjusted for provision for income taxes less cashtax expense, stock-based compensation expense and amortization of purchasedintangibles.

Non-GAAPnet income per share equals non-GAAP net income divided by weighted dilutedshare count as of that period end. Non-GAAP net loss per share equals non-GAAPnet loss divided by the weighted basic share count as of that period end.

Freecash flow is defined as cash flow from operations less cash used for purchasesof property, equipment and software.

NowI would like to introduce Umang Gupta, Chairman and CEO.

Umang Gupta

Thankyou Kirsten. Welcome everyone, and thank you for joining us today. Fiscal year2007 was the best ever year for Keynote on many levels. First, revenue: our full-yearrevenue of $67.8 million was up 22% compared to the prior year's $55.5 million,and was powered by our Mobile Test and Measurement business, which exceeded ourexpectations in each quarter of the year. Additionally, the year's revenueswere supported by year-over-year growth in our flagship Internet Test andMeasurement business.

Second,cash flows: for the full year, the Keynote team delivered total cash flow fromoperations of over $20.3 million and free cash flow of $14.8 million, which isa record-high for any 12-month period in our history.

I'llstart with Mobile Test and Measurement. The main driver of our Mobile Test andMeasurement or MTM revenues, was Keynote SIGOS. Revenues for the year were$17.6 million, up over 220% compared to last year. Our net revenues at the endof the fourth quarter were $22 million.

Dealssigned in fiscal 2007 expanded our possibilities for growth, especially beyond Europe and North America. Examplesinclude the worldwide master agreement with Vodafone, through which we becameVodafone's preferred supplier for end-to-end mobile network test andmeasurement systems in Germany, the U.K., Spain, and more than 15 additional countries.

Wealso signed important new Keynote SIGOS MTM deals in the United States and Canada, including deals of GlobalRoamer with AT&Tand Rogers. Our Keynote SIGOS customers now total 115 versus 79 last year, andwe served 68 countries compared to 47 last year. Additionally, we expanded ourMobile Content and Services deal to include American Express, AOL, Chase, GoodTechnology, ING Bank, MobiTV, MSN Mobile, Yahoo! and Zenprise.

Otherpositive news in our Mobile business was the announcement last week of theavailability of our Shared Mobile and Test Measurement infrastructure. The tencities from which Keynote customers will initially be able to test and measurethe performance of mobile content will include San Francisco, Dallas, New York,Chicago, London, Stockholm, Amsterdam, Paris, Nuremberg and Toronto.

Withthe new shared infrastructure, which will grow in the next year to 20 citiesglobally, small to medium-sized mobile content developers across the globe nowhave an economical way to test their mobile content across all the markets theyserve.

Lastweek, we also announced the world's first Mobile Performance Indices, whichwill provide a weekly performance ranking of ten popular U.S. mobile sites compiled from measurements taken onmultiple carriers from ten different cities in the U.S. We have also built a similar Mobile PerformanceIndex populated by leading European mobile websites that will take measurementsfrom the major cities of Europe.

Ournew Mobile Indices extend and strengthen our industry position as thepreeminent mobile and Internet performance authority, and will, for the firsttime, establish industry benchmarks for mobile internet performance, wherepreviously there had been none.

Nowon to Internet Test and Measurements business. ITM, which comprises themajority of our business, grew 6% over 2006 to approximately $42 million in2007. Most of our growth in ITM revenues was attributable to Internetengagements in low-testing, SLM and VoIP-related services and engagements.

Keysubscription and engagement deals done in fiscal year 2007 included AmericanExpress, Chevron-Texaco, Comcast Cable, Embark, Morgan Stanley, Neiman Marcusand Sabre Travelocity.

Infiscal 2007, we were also successful in reducing the number of single-page,single-device subscription, from 38% of our ITM subscription revenues in thefourth quarter of 2006 to only 22% in the fourth quarter of 2007. This occurredwhile we grew our multi-page broadband services by 23% in the correspondingperiod. Our overall page count grew by 16% from last year. And by the end of2008, we expect to reduce single-page, single-device subscription revenues toless than 10% of Internet subscription revenues.

Wealso announced this week the launch of the next versions of our Web PerformanceTest and Measurement product offerings: Transaction Perspective 8.0 andApplication Perspective 5.0. These greatly enhanced versions of our flagshipWebsite Monitoring services have many new and exciting features that make themespecially appealing and useful for measuring the end-user experience on Web2.0 sites that feature Ajax and asynchronously downloaded content.

Withthe introduction of 8.0 and 5.0, we've also introduced our new Keynote InternetTesting Environment or KITE. KITE is a new desktop-based test and measurementtool for recording, analyzing and editing the performance of sites using Web2.0 technologies. It bridges the gap between developers, QA and web operationsteams by providing a consistent testing and measurement environment throughouta Web 2.0 application's life-cycle.

Mostimportantly, KITE features an embedded version of the Transaction Perspective8.0 and Application Perspective 5.0 measurement software, allowing webdevelopers and performance analysts to execute rapid performance analysis andvalidation directly from their desktop. By doing so, KITE reduces webtransaction script validation time from hours to mere minutes, therebysignificantly reducing the provisioning time for new Keynote measurements.

Takentogether, the release of 8.0, 5.0 and KITE are watershed events in our productdevelopment history, and will help keep Keynote ahead of both the technologycurve and the competition.

Now,on to Customer Experience Test and Measurement: we made a number of operationalchanges in our CEM business in fiscal 2007, and are seeing some signs of thoseefforts working. Quarterly revenues have now stabilized around $2 million. CEMrevenues for the year were $8.3 million, and are currently generatingapproximately a 50% gross margin.

Keynew CEM deals for fiscal year 2007 included AOL, Bank of America, Best Buy,Hertz, Mastercard, Merrill Lynch, MetLife, MTV Networks, Royal Caribbean andSony Ericsson.

Therecent launch of WebEffective 6.0 introduces unique capabilities allowingwebsite marketers and researchers to easily track user interaction with clientsite events, including DHTML, Ajax and Flash. With WebEffective 6.0, we are now in aposition to take advantage of the explosive growth in interactive advertisingand marketing microsites that are built using Web 2.0 technology. We will bedemonstrating our unique solution for advertising research at the upcomingad:tech conference in New York on November 5 and 6.

Oneof our key goals in 2008 is to sign up more customers, specifically interactiveadvertisers in every industry vertical, for site license and custom researchagreements. As a reminder, WebEffective employs unique and proprietarytechnologies combining the best aspects of usability, behavioral andattitudinal research into one integrated, on-demand research solution, ineffect, delivering an online usability lab without walls.

WebEffective6.0 now also allows marketers to better understand how websites are performingusing any of Keynote's 160,000 member panel desktops. Marketers will be able tosee connection speed, page load time and browse time. These valuable insightswill help facilitate discussion between marketing departments and weboperations groups as they work to improve the online experience, thus providingour salespeople with the ability to do a more effective job of cross-sellingour ITM and CEM services to multiple audiences.

Withthat, I'd now like to turn the call over to Drew for a more detailed discussionof our financials.

Drew Hamer

Thankyou, Umang. Ladies and gentlemen, I'm going to start by reviewing the financialdetails for the quarter and year, and then follow with our financial outlookfor next quarter.

Forthe quarter ended September 30, 2007, our total revenue was $17.8 million, compared to$15.2 million in the same period last year and $17.4 million last quarter.Total subscription services and ratable license revenue was $14.9 million or84% of total revenue for the quarter, which increased 23% compared to the sameperiod last year and 4% compared to last quarter, reflecting continued successin our Mobile Test and Measurement products.

Professionalservices revenue of $2.9 million or 16% of total revenue for the quarter wasdown 3% compared to last year and 4% compared to last quarter due to thecompletion of a large voice over IP deal last quarter.

Ourcustomer count was approximately 2,700 companies, up from approximately 2,650at both the end of June and March of this year, and 2,600 at the end of September 30, 2006.

Wetracked the number of customers, excluding Keynote SIGOS, that purchased on anannualized basis at least $100,000 or more of our services. In the quarter, itwas 97 customers that represented 79% of total revenue, compared to 79customers representing 73% of revenue and 80 customers representing 72% ofrevenue in the fourth quarter of 2006 and the third quarter of 2007,respectively.

Atthe end of September 2007, we measured approximately 11,600 pages through ourInternet Test and Measurement business. This compares to over 10,000 pages inthe quarter a year ago, and approximately 11,100 last quarter. For the fourthquarter 2007, overall average monthly revenue per page for the quarter was$202, compared to $235 and $218 for the quarter a year ago and last quarter,respectively.

Now,I'll review our expenses. Total expenses were $18.5 million, including $1.0million in stock-based compensation expenses and a $717,000 charge foramortization of intangible assets. Last quarter, total expenses were $18.8million, including $1.1 million of stock-based compensation expenses and a$713,000 charge for amortization of intangible assets.

Expensesin the current year's quarter were down sequentially due primarily to anincrease in our excess occupancy income and year-end adjustments to network andequipment costs. In the fourth quarter 2006, total expenses were $18.4 million,including $1.1 million of stock-based compensation expenses and a $771,000charge for amortization of intangible assets.

Alsoduring the quarter, we recorded a $2.8 million charge for the adjustment ofincome tax benefit associated with the partial recognition of net deferred taxassets. This compares to $3.9 million charge for the adjustment of net deferredtax assets on our balance sheet in the fourth quarter of fiscal year 2006.

Reflectingthe aforementioned charges and income tax adjustments, for the fourth quarterof fiscal year 2007, our GAAP net loss was $3.5 million or $0.19 per share,compared to the fourth quarter of fiscal year 2006, when the GAAP net loss was$6 million or $0.35 per share.

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

Forthe quarter, cash provided by operating activities was $2.9 million, comparedto $1.2 million for the same period last year. We invested $1.3 million inproperty, equipment and software this quarter and $874,000 in the same quarterlast year.

Ourfree cash flow for the quarter was $1.6 million, up approximately $1.2 millionwhen compared to $357,000 for the fourth quarter of 2006. We also receivedapproximately $3.9 million from the issuance of common stock and exercise ofstock options in the quarter, compared to $497,000 in the same period lastyear.

Duringthe quarter, the company repurchased approximately 92,000 shares forapproximately $1.2 million. The total weighted average shares outstanding netof treasury shares as of the end of September 30, 2007 was $18.1 million, as compared to $17.1 millionas of September 30, 2006.

Now,I'm going to talk about our full year ending September 30, 2007. Our record total revenue of $67.8 millionincreased 22% over 2006's $55.5 million. We generated record cash fromoperations of $20.3 million and record free cash flow of $14.8 million.

Ourexpenses of $73.1 million were up 15% from $63.7 million in the fiscal year2006. This was primarily a reflection of our including the costs of the SIGOSacquisition for full year, as well as incremental investments we made in salesand marketing.

Weexpect increasing investments in sales and marketing to continue into fiscalyear 2008. GAAP net loss for the year improved to $4.7 million or $0.27 pershare, which included the aforementioned $2.8 million charge associated withthe net deferred tax asset adjustment, $4.1 million in stock-based compensationexpenses and a $2.9 million charge for intangible assets amortization. Our 2006net loss was $7.5 million, or $0.41 per share.

Non-GAAPnet income increased in our 2007 fiscal year to $5.4 million, or $0.28 perdiluted share from $2.0 million, or $0.10 per diluted share in 2006.

Now,moving to the balance sheet:

AtSeptember 30, 2007, our cash andshort-term investments balance was $107.9 million. As of September 30, 2007, accounts receivablenet was $6.0 million. DSOs were 31 days and 98% of accounts receivable wereless than 90 days old.

Totalnet deferred revenue at September 30, 2007 was $22 million, up 106% compared to $10.6million at September 30, 2006 and down from $24.1 million at June 30, 2007 due to the expected seasonally weak summer periodin Europe for Keynote SIGOS bookings.

Asof September 30, 2007,total shares outstanding net of treasury shares were approximately $18.3million. We are entering into a trading plan to repurchase up to 2.0 millionshares or approximately 11% of our outstanding shares over the next 12-monthperiod. Purchases under the plan may commence as soon as November 6, 2007.

Now,I will provide some general guidance for the 2008 fiscal quarter ending September 31, 2007. Total revenue isexpected to be between $17.8 million and $18.3 million. Net income or loss pershare is expected to be between a loss of $0.02 and income of $0.02.

Non-GAAPearnings per share are expected to be between $0.06 and $0.09. Cash provided byoperating activities is expected to be between $2.5 million and $3.0 million.Free cash flow is expected to be $1.5 million and $2.0 million. Similar to lastquarter, the first fiscal quarter 2008 cash flow guidance reflects theseasonality inherent in our European business.

Theabove guidance was based on the following assumptions:

Totalstock-based compensation expense and amortization of intangible assets isexpected to be approximately $1.8 million. Interest income net is expected tobe approximately $1.3 million, assuming no material changes in interest ratesand currently planned uses of cash.

Alsoin October, Keynote signed long-term agreements with tenants for the remainingunoccupied portion of the building, bringing the occupancy of the building to100% when including the portion occupied by Keynote. The company estimates, asa result of this new occupancy rate, it will generate approximately $270,000 inexcess occupancy income in the first quarter of fiscal 2008.

Cashpaid for income taxes is expected to be approximately $300,000, assuming nochanges in required tax payments. Basic weighted average shares outstanding areexpected to be between approximately 18.1 million shares and diluted averageweighted shares outstanding are expected to be approximately 19.1 millionshares, assuming no additional issuances of equity or equity-relatedsecurities.

Withthat I would like to return the call to Umang.

Umang Gupta

Thankyou, Drew.

Ladiesand gentlemen, over the last four years in aggregate, Keynote has generatedcash flow from operations of over $57 million and free cash flow of over $40million. These funds have supported our active acquisition strategy and helpedcreate the Keynote we have today.

Wespent the last year of 2007 rebuilding our sales force, and we feel very goodabout our progress. In 2008, we will continue to make substantial investmentsin marketing and sales, putting in additional coverage to build a great salesforce to take advantage of the opportunities we see ahead.

Thissales force will be supported by one of the strongest new product introductioncycles in each of our businesses: Mobile Test and Measurement, Internet Testand Measurement and Customer Experience Test and Measurement. We are excitedabout our opportunities, and we look forward to sharing our future successeswith you.

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

Question-and-Answer Session

Operator

Yourfirst question comes from the line of Brian Kislinger - Sidoti.

Brian Kislinger - Sidoti

Thefirst question I have is related to the mobile segment. Can you talk a littlebit about why it's seasonally weak in the December quarter, but also, you're amonth-in in what seems to be the highest amount of capital spending for yourclients in telecom, so given that you will add incremental bookings, wouldthere be any reason to see that the mobile segment revenue would be downquarter-to-quarter?

Umang Gupta

Firstof all, we made no statement about seasonal weaknesses in the December quarter.The reference to seasonal weakness was the September quarter. The Decemberquarter, by the way, is the strongest ever quarter; it's the current quarterthat just finished, the September quarter that is seasonally weak, and usuallythat's because of European vacations.

Typically,what happens in Europe is people take long vacations, not just ourfolks, but customers. Oftentimes, POS and other things typically move into theOctober time frame. And so what happens is, historically, this is true eversince I've been in the software industry, and no difference about SIGOS is thatthe September quarter is usually seasonally weak.

Brian Kislinger - Sidoti

Letme revise the question. I thought Drew had mentioned cash flow being seasonallyweak in Europe in your first quarter. Why is that?

Drew Hamer

Inour first quarter, because of that August quarter, if you will.

Umang Gupta

So,in effect, cash flow collections in the December quarter reflect sales in theSeptember quarter. And that's all it is. Typically, our cash flows lag by 90days, and they should be very good a quarter later.

Brian Kislinger - Sidoti

Fairenough. So I guess the core of the question is back to, you're a month in, canyou give us a sense for how new bookings have been in terms of the mobilesegment and can you give a sense of what we might see through the rest of theyear?

Umang Gupta

Wegive guidance for one quarter at a time, and we don't give guidance on bookings.However, you can take a look at the revenues. Starting this last quarter, youcan actually take a look now and see that we are separating out the SIGOSlicense revenues under a new line item called ratable licenses. Previously,they were all part of subscriptions because they were not material in theprevious year. But starting this year, they are now material enough to beseparately broken out.

Ifyou take a look at that, you'll see that this most recent quarter, the oneended September, our ratable licenses from SIGOS site were, I believe, $4.4million. Clearly, we are getting closer to the point where our revenues inunder German GAAP or bookings are going to be roughly similar to the revenuesthat we recognized on our U.S. GAAP books.

Forexample, a year ago, we were only recognizing a few hundred thousand dollars aquarter, and clearly we were bringing in a lot more. But we're not at thatpoint yet. I think we probably have another maybe a couple more quarters beforewe would be at a point where revenues-in equals bookings. But at this point,we're still at a stage where we're not quite there.

Brian Kislinger - Sidoti

Butthis is the season where we should see bookings go up and deferred revenue goup on the balance sheet on this next coming up quarter.

Umang Gupta

That'sa fair statement. Given the seasonality, there is every expectation to believethat this quarter that should happen.

Brian Kislinger - Sidoti

Youboth alluded to, and I don't think it was a surprise, that you're investing insales and marketing. There's leverage in each one of your line items. How manyquarters will it take to invest? For example, will you be having a couple ofteams? Will that happen in the first half of the year? Will that happenthroughout the year? Give us a sense of the trajectory of your timing ofinvestments.

Umang Gupta

Firstof all, a lot of the investments have been going in the last year. If you lookback in history, we had a pretty difficult 2006, where a large part of oursales force was turned over, and we have to change top management, andtherefore, also change a fair amount of sales force. However, in the last 12months, the sales force has been largely rebuilt plus a little bit some. And inthis coming quarter, we expect to add the remaining touches to the growth ofthat sales force.

I'mhopeful that, by the end of this quarter, at least on the Keynote side, we willhave added whatever salespeople we had been looking to have join us. However,in the SIGOS side, it will be an ongoing process. We're likely to add peoplethis quarter, or next quarter, the quarter beyond will be more kind of lineardepending on how good we are at being able to hire those people. So, I thinkthat should give you a sense.

Now,generally speaking, how long does it take for salespeople to become productive?That was your other question. I would say the minimum you can expect from asalesperson to be productive is six months. Oftentimes, for a business likeours, it can be as much as 12 months. And I'm talking about our fieldsalespeople. People we hire in the headquarters telesales group, usually theyshould be definitely productive within 90 days, and certainly no later than sixmonths.

Brian Kislinger - Sidoti

Imight have missed it. You've touched on this before. From the percentages yougave, I see that you had about - and correct me if I'm wrong - about $2 millionalmost of revenue from single-page testing. Did you mention when you expect tohope to have that go to zero? Is that by the end of the March quarter, or doyou think it will take a little bit longer?

Umang Gupta

Ithink we have currently said by the end of this fiscal year, which is theSeptember quarter, our single-page business should be down to less than 10%. Itwon't be zero. I don't think it will go to zero this year. But the parts of itinclude the Red Alert and Net Mechanic, which are likely to stay on for longerperiods.

However,all of our single-page website perspective measurements will definitely be goneby the end of this fiscal year. How much of this? My guess is a lot of it willbe as quickly as we can make it happen. Our proactive strategy is to get thatdown as quickly as we can, and essentially replace that with our multi-URLbusiness. So, it clears the decks for us to go for growth from there on.

Brian Kislinger - Sidoti

Onelast question is related to share buyback. Does the stock need to fall, or whereit is right now, will that hit your requirements for you to be buying backstocks when the window is open for you to get back in the market?

Umang Gupta

AllI can say is that, certainly, we hope to be able to buy the full 2 millionshares. And whereas we will be entering into a plan in the next few days thatwill have some price points associated with them, and clearly, we have notrevealed that price point - it's unfair for me to do that - but I certainlyexpect that certain levels around where we are, maybe slightly lower, thatwould be reasonable. If we got very much higher than this, it would have to beone of those things that depends on the Board.

Iwould also add that we always have the right as a company to acquire shares outsideof our 10b5 plan. And in fact, 60 days ago, we did take advantage of that. Forall of last year, we didn't buy shares from the 10b5 plan because the shareprice never got hit. But a month or two ago, the share price went down enoughso that we ended up buying on the open market. And we certainly wouldn't shyaway from doing that again if that would occur.

Brian Kislinger - Sidoti

Whatwas the average price that you bought the shares at?

Umang Gupta

Ithink about 30 days ago we started buying them. We bought some in the $12 and$13 range.

Operator

Yournext question comes from the line of Derrick Wood - Pacific Growth Equities.

Derrick Wood - Pacific Growth Equities

Iwanted to drill down again on the cash flow for next quarter and show if youshould have good bookings from the mobile side, you should see a strongdeferred revenues. So, what's offset in terms of giving guidance for onlyslightly up quarter-over-quarter for cash flow? Do you see a kind of a dynamicgoing on in the accounts receivable that's a little negative?

Umang Gupta

LikeI just said, cash flow really is a 90-day cycle process. So, if you have lessrevenues in the September quarter, you will have less cash flow in the Decemberquarter. That's all. Let's say we basically signed up a very large amount inthis coming quarter. Most of that would occur, typically speaking, for SIGOS atthe end of December. So, chances are, that would all be collectible thequarters after that. This is, by the way, the same reason why, if you look backat our history, a large part of our cash flow collections occurred in the Marchquarter, in the June quarter.

Derrick Wood - Pacific Growth Equities

So,your deferred revenue tends to track pretty closely to the accounts receivablethen, I imagine? Okay.

Youtalked about the investments on the sales force. Did you indicate what yoursales rep head count is in the quarter and how many you expect to hire incoming quarters?

Umang Gupta

Wedid not indicate this time what our sales rep head count is, but I can tell youthat, by and large, in the non-SIGOS side, which is the Keynote side, our goalis to have 15 fully functional sales teams. A team consists of a field rep, atelesales rep and an FT in operation by the end of this calendar year, andwe're getting pretty close to that. The SIGOS side have their own sales force,and it's some combination of salespeople, project managers, etcetera, and we don'tprovide that number. But by and large, you can expect we'll see growth there too.

Derrick Wood - Pacific Growth Equities

Anycomments around the pricing environment on the Internet side?

Umang Gupta

Sure.If you take a look at our business - and I'm talking about Internetsubscriptions now -they clearly have been going down in revenue for URL. Lastquarter, it was $220 per URL; this quarter, it's $202; a year ago, it was $235.I'm telling you, like, five years ago, it was like $300 a URL. And part of thereason is that we're replacing the higher-priced Legacy Measurements that weresingle-page measurements with lower-priced per page measurements but with largerunit volume.

So,the result is that the price per page continues to go down, and my judgment isthat the price per page will go down further some as we continue to exhaust theinventory of higher-priced measurement. Once we're finished with those, at thatpoint, my hope will be that it will stabilize, but of course, it will depend atthat stage on what the competition does.

Derrick Wood - Pacific Growth Equities

Anythoughts on what level that can get to?

Umang Gupta

Wehave not provided guidance, but my judgment is that it could certainly go downby another 10% or 20%.

Derrick Wood - Pacific Growth Equities

Thenon the mobile side, you had a couple of announcements last week with the MobileOn-Demand Test and Measurement, and then the Mobile Index. On the Mobile Indexside, is that a big revenue opportunity? And are you selling to contentcreators here, or can you just give us some color on where you think thatproduct goes?

Umang Gupta

Letme start by saying the Mobile Indexes are not revenue-generating indexes, byand large. We could, under certain conditions, sell the results in detail tocertain customers who are interested. But by and large, they are intended as aPR vehicle, as a marketing tool to generate publicity and interest in ourproduct, and also as a useful benchmark for customers who get it essentially ontheir graph. For example, if you happen to be AOL, you might see yourmeasurements, but then you would also see the measurements of all your competition,but in a single line that gives the aggregate of all your competition.

Ofcourse, if you want the details about all your competition, then you would payfor it. So, we think that the real benefit of all of this is to get thepublicity and the awareness up about performance of content suppliers onmobile, just as it was ten years ago on the Internet. And hopefully, that willdrum up business and increase the value of what we provide.

Derrick Wood - Pacific Growth Equities

So,the Mobile On-Demand Test and Measurement is a new product that you have outthere that you announced also, and that's $500 per measurement. Can you talkabout the opportunity there, and do you see more opportunity in Mobile, in general, from the carrier side or from thecontent creators?

Umang Gupta

Letme start with the first question regarding the infrastructure side. The publicinfrastructure measurement started at $500 by the way; they could go updepending on volume and what people buy. We believe that they will have a nicesizable increase in revenue.

However,overall, our experience to date has been that the number of small developerswho will buy this product, even if the number can be high, the volume ofdollars may not be as much as the potential for each of those developers to buymore over time.

So,what you're doing is doing a lot of customer acquisitions. You're making iteasy for customers to come to the door, and then growing them over time. And togrow them over time, they could buy more measurements on the publicinfrastructure, or often, they could buy what are called private agents ordedicated agents, where they literally say, ‘you know what, I don't need to payby the drink, I just want to pay by the barrel. So, get me an entire agent thatwill do my measurements and nobody else's measurements, and we'll pay you x thousanddollars a month for all of that.’ So, that is really the strategy, to startwith public measurement, and over time, be willing to provide privatemeasurements when customers need them for higher volume.

Asfar as the question of content versus carriers, it is overwhelmingly carriertoday. I would say 95% of our revenues today or more in mobile arecarrier-based. That's because SIGOS is the bulk of our business. However, inthe Keynote portion of our mobile services, today, it's stillcarrier-dominated, but over time, I think it won't be. My judgment is that,over time, all of the Internet 500 have the potential to become a mobile 500.And they should be likely buyers for our Mobile Content Measurement services.

Derrick Wood - Pacific Growth Equities

Anyreason why you're not providing a cash flow statement on the press release?

Umang Gupta

Onlybecause it's the end of the year, it's a complicated end-of-the-year cycleprocess, and we wanted to make sure that we got it right. It will be in the10-K. We're very confident of the overall tax position and consolidatedstatements. But the details, we want to make sure we get them right, so we waitfor the 10-K.

Operator

Yournext question comes from the line of Kevin Liu - B. Riley & Co.

Kevin Liu - B. Riley & Co.

Ijust wanted to talk a little bit about the Internet subscriptions business.Everything else looked pretty solid, just that one segment looked to be downyear-over-year after you guys had been kind of up slightly for most of theyear. How did that track according to your internal expectations, and can youcomment on why it might be down this year?

Umang Gupta

Firstof all, year-over-year, comparing the entire 2007 to 2006, they were upslightly, Kevin, they were not down. However, Q4 of 2007 compared to Q4, theywere down. I think that's an important distinction. I believe our Internetsubscriptions have largely tracked up for the last 3 or 4 years on ayear-to-year basis, but very, very slightly.

So,in this last quarter of last year, what's really going on is we're driving downthe amount of single-paid, single-device measurements as quickly as we can. Andthere was one very large customer that has been a holdout for a long time - manyof them came from them - and there were other customers where we've actuallyreduced the single-paid, single-device measurements quite a bit.

It'sreally more a result of our proactive goals to get these customers to move,that we're willing to sacrifice the possibility that, in the short-term, itreduces some sufficient revenues, but it clears the decks for growth we hope.

Kevin Liu - B. Riley & Co.

Andthen, as we look out to the next quarter, should we continue to expect kind ofa seasonal boost on the engagement side just given the retail season, andperhaps, some retailers wanting to make sure they can handle some highertraffic loads?

Umang Gupta

Icertainly hope so. People lock down their sites by the middle to end ofNovember. So, a lot of what has to happen should have happened either by now orone more month from now. And I'm certainly hopeful that we'll get moreengagement this quarter. We'll just see.

Kevin Liu - B. Riley & Co.

Andthen, maybe just to dig on that matter a little bit more. On the other hand, inyour conversations with your customers, are you seeing some of the uncertaintyin the economy factoring in on their decision-making regarding engaging you inthese services?

Umang Gupta

Wehave not seen anything that I would attribute to economic softness or even inthe financial industry softness, so far.

Kevin Liu - B. Riley & Co.

Iwant you to move into the infrastructure investments you talked about. I thinkyou're doubling the number of cities that you're in. I just want to get a sensefor the timing and anything you can give in terms of the incremental spendingon that.

Umang Gupta

Thedoubling the number of cities refers to the Mobile infrastructure. Clearly, on our Internet infrastructure, we're in somany cities already that it's unlikely we double those. But on the Mobile infrastructure, we're in ten cities, the ones I just mentioned. Ourgoal is really to get to about 20, and I'm hopeful that maybe 15 of them wemight be able to do in the next 90 to 120 days or so. And then, the remainder,we'll do sometime over the coming year.

Kevin Liu - B. Riley & Co.

Justlastly, I'm wondering if you could provide the D&A for the quarter.

Drew Hamer

Ithink that should be in the P&L.

Kevin Liu - B. Riley & Co.

Isaw the amortization number.

Umang Gupta

Youwant the amortization or depreciation?

Kevin Liu - B. Riley & Co.

Depreciation.

Umang Gupta

Canwe get back to you offline if that's okay?

Kevin Liu - B. Riley & Co.

Sure,not a problem.

Umang Gupta

Itshould be in the published financials.

Kevin Liu - B. Riley & Co.

Allright. Thank you.

Operator

Yournext question comes from the line of Douglas Whitman - Whitman Capital.

Douglas Whitman - Whitman Capital

Thankyou for a great quarter and the strong DSO controls. I just want to make surethe distinction that you broke out in your categories between two that weshould be looking at, on the Mobile side, the total revenues is the way thatthe company looks at it so that we're looking at a growth sequentially to 5.4or 5 for the quarter from the 4.6 - or there's not a distinction between thetwo categories?

Umang Gupta

That'scorrect. The distinction is clearly driven by accounting rules that say thatwhen it gets to a material level, you need to separate those two, which we'vedone. However, practically speaking from our business viewpoint, we just thinkof it as total mobile revenue. In a sense, it's largely driven by what's goingon in SIGOS. The subscription portions of our business is relatively smallcompared to the license portion.

Douglas Whitman - Whitman Capital

Despitethe seasonality in SIGOS, that number there was ahead of most streetexpectations on what you would report for this quarter. Despite the seasonality,where was the strength coming from?

Umang Gupta

Idon't know because I think in terms of our own guidance, we were slightlyhigher, but not dramatically higher. And we've got a pretty good idea of whatwe expect from SIGOS revenues on a quarter basis simply because of the way themath works. We know what the deferred revenue balance is; we know how thetransformation occurs from German GAAP to U.S. GAAP. So, we are usually quitespot-on in our expectations here. So, it's possible somebody might not have hadit right in their models. But I don't believe that our expectations were off ofwhat we delivered.

Operator

Yournext question comes from the line of Matt Hewitt - Craig-Hallum Capital.

Matt Hewitt - Craig-Hallum Capital

Congratulationson the quarter. A couple of questions here, maybe just a little bit of aclarification. The Internet Test and Measurement - and you've already alludedto this a little bit but I just want to make sure I'm understanding thiscorrectly - it was down sequentially a little bit. Does that have to do withthe lumpiness and timing that you discussed last quarter regarding shiftingcustomers from the Legacy products to the newer products? And if so, do youexpect that to kind of stabilize here in Q1, or are you expecting that toremain lumpy here for a couple more quarters?

Umang Gupta

Greatquestion, Matt. And the answer is yes to both. First one, yes, it was directlya result of the fact that the lumpiness occurs when we shift customers fromsingle-page to multi-page, and that's what happened in this last quarter. Andmy belief is that we can expect to see some more for probably a couple ofquarters more as we exhaust the inventory of single-page URLs.

Matt Hewitt - Craig-Hallum Capital

Secondly,despite the strong quarter here in Q4, it appears that sales and marketingexpense declined a little bit. Whereas, typically, if a company outperforms,you would expect bonuses and what-not to add on, and so you wouldn'tnecessarily see the leverage. And it doesn't appear that that happened. Couldyou explain that or add a little bit of color as to why there wasn't acorrelation there?

Umang Gupta

Firstof all, I think, for a lot of companies, they're back-end loaded in theirrevenues, and they're back-end loaded in their commissions. That's not trueabout us as a business. By and large, we attempt to kind of structure ourcommission plan so there's not that much back-end loading. There should be noreason to believe that it will suddenly all occur in the fourth quarter.

Andthen, second is that there were some one-time situations, probably having moreto do with how we had approved for some marketing expenses and maybe othersales expenditure situations, where somebody might have been paid for recruitmentfees in the previous quarter, and last quarter, we didn't have many recruitmentfees and those kind of things that might have affected it.

Byand large, you should expect to see increase in sales expenses and marketingexpenses in this current quarter. We've definitely hired more people toward theend of the year, which means around September 30, who will start to show up onour payroll on October 1.

Matt Hewitt - Craig-Hallum Capital

Andthen that would roll through the year, obviously, especially if you're going tocontinue to add sales force.

Umang Gupta

Yes.

Operator

Yournext question is a follow-up from Brian Kislinger - Sidoti.

Brian Kislinger - Sidoti

Iheard the listing of the ten different cities that you expanded in the Mobile segment. And I don't understand it. Most of your customers areoutside of U.S. and North America,though you have two customers where it sounds like that are largely in North America. Help me understand why you have so many citiesthat you started on a shared infrastructure plan in the U.S., as opposed tomore spread out across -

Umang Gupta

Firstof all, the number of places you want to put your infrastructure should nothave to do with where your customers are, but where your prospects are. Andultimately, our whole idea of building a public infrastructure is that if youbuild it, they will come.

Webelieve that there are lots of developers all over the United States who are quite interested in knowing what theirmeasurements are likely to be. And they are likely to want them from the United States. It's also easier, frankly, for us to start ourfirst 4 or 5 in the United States, but we're done with the United States cities. We're at ten right now and all the nextten are all going to come from outside the United States.

Brian Kislinger - Sidoti

Asa follow-up, you mentioned that there's a lot of different potential customersin the U.S. I thought most of your target market was in Europe. Yes, there are a handful, at best, of carriers in North America, but for the most part, it would be mobileInternet customers, which is a small portion right now.

Umang Gupta

Yes.But on the other hand, that's where the targeted infrastructure is going to.Let me separate out once again. There's a carrier business, which represents95% of our revenues in mobile, and there's a mobile content business, which is5%. The entire mobile infrastructure that we are putting together is intendedto grow that 5%.

Operator

Yournext question comes from the line of Leo Choi - Ferris Baker Watts.

Leo Choi - Ferris Baker Watts

CouldI get a breakdown between single-page and multi-page revenue.

Umang Gupta

Weprovided just a little while ago. The end of the fourth quarter, we saidsingle-page, single-device revenues were 22% of our total Internet subscriptionrevenues and the multi-page revenues were 78% of Internet subscriptionrevenues.

Andif you take a look at the press release and the accompanying data, you willfind that there will be a chart that will show you what our Internetsubscription revenues are, quarter-by-quarter for the last 4 years. So, youshould be able to calculate from that what the exact dollars would be.

Leo Choi - Ferris Baker Watts

Oneof the questions mentioned before, the lumpiness of the Internet Measurementrevenue, I was wondering, is that going to affect the long-term goal of gettingthe single-page revenue down to maybe a 10% level in a 12 to 15-month scale?

Umang Gupta

No,not at all. In fact, it's the opposite. It's precisely because we're trying toget it down quickly. Hopefully, faster than 12 months, if we could, butcertainly no later than 12 months. The quicker we can get the single-page down,the more lumpiness -- lumpiness is the wrong word. The more risk there is thatdeclines will not be outweighed by the increases. And those risks go away oncethere's nothing to decline. So, that's what we're trying to do is to managethat risk.

Forthe past four years, we've managed it quite well, as you've seen. And no singleyear in the last four years have we ever decreased our overall subscriptions,even when single-page went down, other stuff would make up for it. And that'sour goal again for the year as a whole. But for each quarter, sometimes thatcannot be managed.

Operator

Yournext question is a follow-up from Matt Hewitt - Craig-Hallum.

Matt Hewitt - Craig-Hallum Capital

Theone large customer that had been a holdout on the single-page test andmeasurement, have they signed up for the multi-page, or is there a kind of alull here and you guys are negotiating?

Umang Gupta

Inthis particular case, they have signed up. At this point, virtually everybodywho are holdouts are long-time, good customers of Keynote. They've all knownthat we got the other product. It's just, for whatever reasons, internal reasons,etcetera, sometimes they hold out. That's all it was.

Ithink much of our current six-month process for the next few quarters is goingto be just taking good existing customers from one measurement cycle product tothe other. Now, one cannot guarantee that, at all times, they will be able tomove from an equivalent to an equivalent right away. So, there can always bethat lumpiness that occurs. But it won't be because they're not interested ingoing to the new measurement, it just maybe there's operational reasons whysometimes they have to hang on a little bit.

Operator

Atthis time, there are no further questions. Management, do you have any closingremarks?

Drew Hamer

Ifyou don't mind, I just want to jump in and answer Kevin Liu's question. So, thedepreciation last quarter was approximately $1.2 million, which is relativelyconsistent with our normal depreciation. Thank you.

Umang Gupta

Ladiesand gentlemen, thank you again for joining us today. As usual, we appreciateyour support and look forward to discussing our company with you at variousinvestor conferences that we've scheduled in the upcoming months, including AEAnext week on November 6 and 7 in Monterey, where Drew and Vik Chaudhary, VP of ProductManagement and Corporate Development, will be presenting our story. Thank youvery much.

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