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Keynote Systems, Inc. (NASDAQ:KEYN)

F4Q07 Earnings Call

November 1, 2007 5:00 pm ET

Executives

Umang Gupta – Chairman and Chief Executive Officer

Drew Hamer – Vice President and Chief Financial Officer

Kirsten Chapman - Investor Relations

Analysts

Brian Kislinger - Sidoti

Derrick Wood - Pacific Growth Equities

Kevin Liu - B. Riley & Co.

Douglas Whitman - Whitman Capital

Matt Hewitt - Craig-Hallum

Leo Choi - Ferris Baker Watts

Presentation

Operator

Good afternoon everyone and welcome to Keynote's conference call for the fourth quarter and full fiscal year 2007, ending September 30, 2007. Today's call is being recorded.

At this time, I would like to turn the call over to Kirsten Chapman for opening remarks and instructions.

Kirsten Chapman

Good afternoon everyone and welcome to Keynote's conference call for the fourth quarter and full fiscal year 2007 ending September 30, 2007.

Today's call is being recorded. At this time, I'm 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 will be available to answer questions.

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 on our website at www.keynote.com. The replay of this call will be available by telephone by dialing 1-800-642-1687 - the passcode is 19147857 - 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's or management's intentions, hopes, beliefs, expectation and strategies for the future. Because such statements deal with future events, they are subject to various risks and uncertainties, and actual results may 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've 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 financial statements, 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 loss, or net income or loss adjusted for provision for income taxes less cash tax expense, stock-based compensation expense and amortization of purchased intangibles.

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

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 CEO.

Umang Gupta

Thank you Kirsten. Welcome everyone, and thank you for joining us today. Fiscal year 2007 was the best ever year for Keynote on many levels. First, revenue: our full-year revenue 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 our expectations in each quarter of the year. Additionally, the year's revenues were supported by year-over-year growth in our flagship Internet Test and Measurement business.

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

I'll start with Mobile Test and Measurement. The main driver of our Mobile Test and Measurement 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 end of the fourth quarter were $22 million.

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

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

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

With the new shared infrastructure, which will grow in the next year to 20 cities globally, small to medium-sized mobile content developers across the globe now have an economical way to test their mobile content across all the markets they serve.

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

Our new Mobile Indices extend and strengthen our industry position as the preeminent mobile and Internet performance authority, and will, for the first time, establish industry benchmarks for mobile internet performance, where previously there had been none.

Now on to Internet Test and Measurements business. ITM, which comprises the majority of our business, grew 6% over 2006 to approximately $42 million in 2007. Most of our growth in ITM revenues was attributable to Internet engagements in low-testing, SLM and VoIP-related services and engagements.

Key subscription and engagement deals done in fiscal year 2007 included American Express, Chevron-Texaco, Comcast Cable, Embark, Morgan Stanley, Neiman Marcus and Sabre Travelocity.

In fiscal 2007, we were also successful in reducing the number of single-page, single-device subscription, from 38% of our ITM subscription revenues in the fourth quarter of 2006 to only 22% in the fourth quarter of 2007. This occurred while we grew our multi-page broadband services by 23% in the corresponding period. Our overall page count grew by 16% from last year. And by the end of 2008, we expect to reduce single-page, single-device subscription revenues to less than 10% of Internet subscription revenues.

We also announced this week the launch of the next versions of our Web Performance Test and Measurement product offerings: Transaction Perspective 8.0 and Application Perspective 5.0. These greatly enhanced versions of our flagship Website Monitoring services have many new and exciting features that make them especially appealing and useful for measuring the end-user experience on Web 2.0 sites that feature Ajax and asynchronously downloaded content.

With the introduction of 8.0 and 5.0, we've also introduced our new Keynote Internet Testing Environment or KITE. KITE is a new desktop-based test and measurement tool for recording, analyzing and editing the performance of sites using Web 2.0 technologies. It bridges the gap between developers, QA and web operations teams by providing a consistent testing and measurement environment throughout a Web 2.0 application's life-cycle.

Most importantly, KITE features an embedded version of the Transaction Perspective 8.0 and Application Perspective 5.0 measurement software, allowing web developers and performance analysts to execute rapid performance analysis and validation directly from their desktop. By doing so, KITE reduces web transaction script validation time from hours to mere minutes, thereby significantly reducing the provisioning time for new Keynote measurements.

Taken together, the release of 8.0, 5.0 and KITE are watershed events in our product development history, and will help keep Keynote ahead of both the technology curve and the competition.

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

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

The recent launch of WebEffective 6.0 introduces unique capabilities allowing website marketers and researchers to easily track user interaction with client site events, including DHTML, Ajax and Flash. With WebEffective 6.0, we are now in a position to take advantage of the explosive growth in interactive advertising and marketing microsites that are built using Web 2.0 technology. We will be demonstrating our unique solution for advertising research at the upcoming ad:tech conference in New York on November 5 and 6.

One of our key goals in 2008 is to sign up more customers, specifically interactive advertisers in every industry vertical, for site license and custom research agreements. As a reminder, WebEffective employs unique and proprietary technologies combining the best aspects of usability, behavioral and attitudinal research into one integrated, on-demand research solution, in effect, delivering an online usability lab without walls.

WebEffective 6.0 now also allows marketers to better understand how websites are performing using any of Keynote's 160,000 member panel desktops. Marketers will be able to see connection speed, page load time and browse time. These valuable insights will help facilitate discussion between marketing departments and web operations groups as they work to improve the online experience, thus providing our salespeople with the ability to do a more effective job of cross-selling our ITM and CEM services to multiple audiences.

With that, I'd now like to turn the call over to Drew for a more detailed discussion of our financials.

Drew Hamer

Thank you, Umang. Ladies and gentlemen, I'm going to start by reviewing the financial details for the quarter and year, and then follow with our financial outlook for next quarter.

For the 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 or 84% of total revenue for the quarter, which increased 23% compared to the same period last year and 4% compared to last quarter, reflecting continued success in our Mobile Test and Measurement products.

Professional services revenue of $2.9 million or 16% of total revenue for the quarter was down 3% compared to last year and 4% compared to last quarter due to the completion of a large voice over IP deal last quarter.

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

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

At the end of September 2007, we measured approximately 11,600 pages through our Internet Test and Measurement business. This compares to over 10,000 pages in the quarter a year ago, and approximately 11,100 last quarter. For the fourth quarter 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 $1.0 million in stock-based compensation expenses and a $717,000 charge for amortization of intangible assets. Last quarter, total expenses were $18.8 million, including $1.1 million of stock-based compensation expenses and a $713,000 charge for amortization of intangible assets.

Expenses in the current year's quarter were down sequentially due primarily to an increase in our excess occupancy income and year-end adjustments to network and equipment costs. In the fourth quarter 2006, 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.

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

Reflecting the aforementioned charges and income tax adjustments, for the fourth quarter of 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.

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

For the quarter, cash provided by operating activities was $2.9 million, compared to $1.2 million for the same period last year. We invested $1.3 million in property, equipment and software this quarter and $874,000 in the same quarter last year.

Our free cash flow for the quarter was $1.6 million, up approximately $1.2 million when compared to $357,000 for the fourth quarter of 2006. We also received approximately $3.9 million from the issuance of common stock and exercise of stock options in the quarter, compared to $497,000 in the same period last year.

During the quarter, the company repurchased approximately 92,000 shares for approximately $1.2 million. The total weighted average shares outstanding net of treasury shares as of the end of September 30, 2007 was $18.1 million, as compared to $17.1 million as 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 million increased 22% over 2006's $55.5 million. We generated record cash from operations of $20.3 million and record free cash flow of $14.8 million.

Our expenses of $73.1 million were up 15% from $63.7 million in the fiscal year 2006. This was primarily a reflection of our including the costs of the SIGOS acquisition for full year, as well as incremental investments we made in sales and marketing.

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

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

Now, moving to the balance sheet:

At September 30, 2007, our cash and short-term investments balance was $107.9 million. As of September 30, 2007, accounts receivable net was $6.0 million. DSOs were 31 days and 98% of accounts receivable were less than 90 days old.

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

As of September 30, 2007, total shares outstanding net of treasury shares were approximately $18.3 million. We are entering into a trading plan to repurchase up to 2.0 million shares or approximately 11% of our outstanding shares over the next 12-month period. 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 is expected to be between $17.8 million and $18.3 million. Net income or loss per share is expected to be between a loss of $0.02 and income of $0.02.

Non-GAAP earnings per share are expected to be between $0.06 and $0.09. Cash provided by operating 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 last quarter, the first fiscal quarter 2008 cash flow guidance reflects the seasonality inherent in our European business.

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 $1.3 million, assuming no material changes in interest rates and currently planned uses of cash.

Also in October, Keynote signed long-term agreements with tenants for the remaining unoccupied portion of the building, bringing the occupancy of the building to 100% when including the portion occupied by Keynote. The company estimates, as a result of this new occupancy rate, it will generate approximately $270,000 in excess occupancy income in the first quarter of fiscal 2008.

Cash paid for income taxes is expected to be approximately $300,000, assuming no changes in required tax payments. Basic weighted average shares outstanding are expected to be between approximately 18.1 million shares and diluted average weighted shares outstanding are expected to be approximately 19.1 million shares, assuming no additional issuances of equity or equity-related securities.

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

Umang Gupta

Thank you, Drew.

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

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

This sales force will be supported by one of the strongest new product introduction cycles in each of our businesses: Mobile Test and Measurement, Internet Test and Measurement and Customer Experience Test and Measurement. We are excited about our opportunities, and we look forward to sharing our future successes with you.

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

Question-and-Answer Session

Operator

Your first question comes from the line of Brian Kislinger - Sidoti.

Brian Kislinger - Sidoti

The first question I have is related to the mobile segment. Can you talk a little bit about why it's seasonally weak in the December quarter, but also, you're a month-in in what seems to be the highest amount of capital spending for your clients in telecom, so given that you will add incremental bookings, would there be any reason to see that the mobile segment revenue would be down quarter-to-quarter?

Umang Gupta

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

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

Brian Kislinger - Sidoti

Let me revise the question. I thought Drew had mentioned cash flow being seasonally weak in Europe in your first quarter. Why is that?

Drew Hamer

In our 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 the September quarter. And that's all it is. Typically, our cash flows lag by 90 days, and they should be very good a quarter later.

Brian Kislinger - Sidoti

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

Umang Gupta

We give 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, you can actually take a look now and see that we are separating out the SIGOS license revenues under a new line item called ratable licenses. Previously, they were all part of subscriptions because they were not material in the previous year. But starting this year, they are now material enough to be separately broken out.

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

For example, a year ago, we were only recognizing a few hundred thousand dollars a quarter, and clearly we were bringing in a lot more. But we're not at that point yet. I think we probably have another maybe a couple more quarters before we 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

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

Umang Gupta

That's a fair statement. Given the seasonality, there is every expectation to believe that this quarter that should happen.

Brian Kislinger - Sidoti

You both alluded to, and I don't think it was a surprise, that you're investing in sales and marketing. There's leverage in each one of your line items. How many quarters will it take to invest? For example, will you be having a couple of teams? Will that happen in the first half of the year? Will that happen throughout the year? Give us a sense of the trajectory of your timing of investments.

Umang Gupta

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

I'm hopeful that, by the end of this quarter, at least on the Keynote side, we will have 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 people this quarter, or next quarter, the quarter beyond will be more kind of linear depending on how good we are at being able to hire those people. So, I think that 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 a salesperson to be productive is six months. Oftentimes, for a business like ours, it can be as much as 12 months. And I'm talking about our field salespeople. People we hire in the headquarters telesales group, usually they should be definitely productive within 90 days, and certainly no later than six months.

Brian Kislinger - Sidoti

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

Umang Gupta

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

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

Brian Kislinger - Sidoti

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

Umang Gupta

All I can say is that, certainly, we hope to be able to buy the full 2 million shares. And whereas we will be entering into a plan in the next few days that will have some price points associated with them, and clearly, we have not revealed that price point - it's unfair for me to do that - but I certainly expect that certain levels around where we are, maybe slightly lower, that would be reasonable. If we got very much higher than this, it would have to be one of those things that depends on the Board.

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

Brian Kislinger - Sidoti

What was the average price that you bought the shares at?

Umang Gupta

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

Operator

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

Derrick Wood - Pacific Growth Equities

I wanted to drill down again on the cash flow for next quarter and show if you should have good bookings from the mobile side, you should see a strong deferred revenues. So, what's offset in terms of giving guidance for only slightly up quarter-over-quarter for cash flow? Do you see a kind of a dynamic going on in the accounts receivable that's a little negative?

Umang Gupta

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

Derrick Wood - Pacific Growth Equities

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

You talked about the investments on the sales force. Did you indicate what your sales rep head count is in the quarter and how many you expect to hire in coming quarters?

Umang Gupta

We did not indicate this time what our sales rep head count is, but I can tell you that, by and large, in the non-SIGOS side, which is the Keynote side, our goal is to have 15 fully functional sales teams. A team consists of a field rep, a telesales rep and an FT in operation by the end of this calendar year, and we'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't provide that number. But by and large, you can expect we'll see growth there too.

Derrick Wood - Pacific Growth Equities

Any comments around the pricing environment on the Internet side?

Umang Gupta

Sure. If you take a look at our business - and I'm talking about Internet subscriptions now -they clearly have been going down in revenue for URL. Last quarter, 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 the reason is that we're replacing the higher-priced Legacy Measurements that were single-page measurements with lower-priced per page measurements but with larger unit volume.

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

Derrick Wood - Pacific Growth Equities

Any thoughts on what level that can get to?

Umang Gupta

We have not provided guidance, but my judgment is that it could certainly go down by another 10% or 20%.

Derrick Wood - Pacific Growth Equities

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

Umang Gupta

Let me start by saying the Mobile Indexes are not revenue-generating indexes, by and large. We could, under certain conditions, sell the results in detail to certain customers who are interested. But by and large, they are intended as a PR vehicle, as a marketing tool to generate publicity and interest in our product, and also as a useful benchmark for customers who get it essentially on their graph. For example, if you happen to be AOL, you might see your measurements, 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.

Of course, if you want the details about all your competition, then you would pay for it. So, we think that the real benefit of all of this is to get the publicity and the awareness up about performance of content suppliers on mobile, just as it was ten years ago on the Internet. And hopefully, that will drum 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 out there that you announced also, and that's $500 per measurement. Can you talk about the opportunity there, and do you see more opportunity in Mobile, in general, from the carrier side or from the content creators?

Umang Gupta

Let me start with the first question regarding the infrastructure side. The public infrastructure measurement started at $500 by the way; they could go up depending on volume and what people buy. We believe that they will have a nice sizable increase in revenue.

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

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

As far as the question of content versus carriers, it is overwhelmingly carrier today. I would say 95% of our revenues today or more in mobile are carrier-based. That's because SIGOS is the bulk of our business. However, in the Keynote portion of our mobile services, today, it's still carrier-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

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

Umang Gupta

Only because it's the end of the year, it's a complicated end-of-the-year cycle process, and we wanted to make sure that we got it right. It will be in the 10-K. We're very confident of the overall tax position and consolidated statements. But the details, we want to make sure we get them right, so we wait for the 10-K.

Operator

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

Kevin Liu - B. Riley & Co.

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

Umang Gupta

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

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

It's really 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, it reduces some sufficient revenues, but it clears the decks for growth we hope.

Kevin Liu - B. Riley & Co.

And then, as we look out to the next quarter, should we continue to expect kind of a seasonal boost on the engagement side just given the retail season, and perhaps, some retailers wanting to make sure they can handle some higher traffic loads?

Umang Gupta

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

Kevin Liu - B. Riley & Co.

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

Umang Gupta

We have not seen anything that I would attribute to economic softness or even in the financial industry softness, so far.

Kevin Liu - B. Riley & Co.

I want you to move into the infrastructure investments you talked about. I think you're doubling the number of cities that you're in. I just want to get a sense for the timing and anything you can give in terms of the incremental spending on that.

Umang Gupta

The doubling the number of cities refers to the Mobile infrastructure. Clearly, on our Internet infrastructure, we're in so many cities already that it's unlikely we double those. But on the Mobile infrastructure, we're in ten cities, the ones I just mentioned. Our goal is really to get to about 20, and I'm hopeful that maybe 15 of them we might 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.

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

Drew Hamer

I think that should be in the P&L.

Kevin Liu - B. Riley & Co.

I saw the amortization number.

Umang Gupta

You want the amortization or depreciation?

Kevin Liu - B. Riley & Co.

Depreciation.

Umang Gupta

Can we get back to you offline if that's okay?

Kevin Liu - B. Riley & Co.

Sure, not a problem.

Umang Gupta

It should be in the published financials.

Kevin Liu - B. Riley & Co.

All right. Thank you.

Operator

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

Douglas Whitman - Whitman Capital

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

Umang Gupta

That's correct. The distinction is clearly driven by accounting rules that say that when it gets to a material level, you need to separate those two, which we've done. However, practically speaking from our business viewpoint, we just think of it as total mobile revenue. In a sense, it's largely driven by what's going on in SIGOS. The subscription portions of our business is relatively small compared to the license portion.

Douglas Whitman - Whitman Capital

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

Umang Gupta

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

Operator

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

Matt Hewitt - Craig-Hallum Capital

Congratulations on the quarter. A couple of questions here, maybe just a little bit of a clarification. The Internet Test and Measurement - and you've already alluded to this a little bit but I just want to make sure I'm understanding this correctly - it was down sequentially a little bit. Does that have to do with the lumpiness and timing that you discussed last quarter regarding shifting customers from the Legacy products to the newer products? And if so, do you expect that to kind of stabilize here in Q1, or are you expecting that to remain lumpy here for a couple more quarters?

Umang Gupta

Great question, Matt. And the answer is yes to both. First one, yes, it was directly a result of the fact that the lumpiness occurs when we shift customers from single-page to multi-page, and that's what happened in this last quarter. And my belief is that we can expect to see some more for probably a couple of quarters 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 marketing expense declined a little bit. Whereas, typically, if a company outperforms, you would expect bonuses and what-not to add on, and so you wouldn't necessarily see the leverage. And it doesn't appear that that happened. Could you explain that or add a little bit of color as to why there wasn't a correlation there?

Umang Gupta

First of all, I think, for a lot of companies, they're back-end loaded in their revenues, and they're back-end loaded in their commissions. That's not true about us as a business. By and large, we attempt to kind of structure our commission plan so there's not that much back-end loading. There should be no reason to believe that it will suddenly all occur in the fourth quarter.

And then, second is that there were some one-time situations, probably having more to do with how we had approved for some marketing expenses and maybe other sales expenditure situations, where somebody might have been paid for recruitment fees in the previous quarter, and last quarter, we didn't have many recruitment fees and those kind of things that might have affected it.

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

Matt Hewitt - Craig-Hallum Capital

And then that would roll through the year, obviously, especially if you're going to continue to add sales force.

Umang Gupta

Yes.

Operator

Your next question is a follow-up from Brian Kislinger - Sidoti.

Brian Kislinger - Sidoti

I heard the listing of the ten different cities that you expanded in the Mobile segment. And I don't understand it. Most of your customers are outside 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 cities that you started on a shared infrastructure plan in the U.S., as opposed to more spread out across -

Umang Gupta

First of all, the number of places you want to put your infrastructure should not have to do with where your customers are, but where your prospects are. And ultimately, our whole idea of building a public infrastructure is that if you build it, they will come.

We believe that there are lots of developers all over the United States who are quite interested in knowing what their measurements are likely to be. And they are likely to want them from the United States. It's also easier, frankly, for us to start our first 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 next ten are all going to come from outside the United States.

Brian Kislinger - Sidoti

As a follow-up, you mentioned that there's a lot of different potential customers in 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 mobile Internet 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 represents 95% of our revenues in mobile, and there's a mobile content business, which is 5%. The entire mobile infrastructure that we are putting together is intended to grow that 5%.

Operator

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

Leo Choi - Ferris Baker Watts

Could I get a breakdown between single-page and multi-page revenue.

Umang Gupta

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

And if you take a look at the press release and the accompanying data, you will find that there will be a chart that will show you what our Internet subscription revenues are, quarter-by-quarter for the last 4 years. So, you should be able to calculate from that what the exact dollars would be.

Leo Choi - Ferris Baker Watts

One of the questions mentioned before, the lumpiness of the Internet Measurement revenue, I was wondering, is that going to affect the long-term goal of getting the 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 to get it down quickly. Hopefully, faster than 12 months, if we could, but certainly 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 that declines will not be outweighed by the increases. And those risks go away once there's nothing to decline. So, that's what we're trying to do is to manage that risk.

For the past four years, we've managed it quite well, as you've seen. And no single year 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's our goal again for the year as a whole. But for each quarter, sometimes that cannot be managed.

Operator

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

Matt Hewitt - Craig-Hallum Capital

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

Umang Gupta

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

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

Operator

At this time, there are no further questions. Management, do you have any closing remarks?

Drew Hamer

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

Umang Gupta

Ladies and gentlemen, thank you again for joining us today. As usual, we appreciate your support and look forward to discussing our company with you at various investor conferences that we've scheduled in the upcoming months, including AEA next week on November 6 and 7 in Monterey, where Drew and Vik Chaudhary, VP of Product Management and Corporate Development, will be presenting our story. Thank you very much.

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Source: Keynote Systems F4Q07 (Qtr End 9/30/07) Earnings Call Transcript
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