Keynote Reports Earnings On Tuesday; Faces Uphill Battle

| About: Keynote Systems, (KEYN)

Keynote Systems (NASDAQ:KEYN) will report Q2 earnings on Tuesday, May 1, 2012. Analysts are expecting revenue of $29.8 million (down from $33.1 million in Q1, but still up from $24.1 million year over year). On the last earnings call, CFO Curtis Smith indicated his expectation for revenue to range between $29 and $31 million.

Among the highlights from the last earnings call, CEO Umang Gupta reported that KEYN's mobile business grew to $17.6 million (up $5.7 million from Q1 fiscal 2011). Also, Internet revenue reached a record $15.5 million in the quarter.

Mr. Gupta stated that revenue growth was primarily being driven by demand for e-commerce and cloud computing. KEYN started fiscal 2012 stronger than expected with its DeviceAnywhere business "going well", according to Mr. Gupta. Management reported that several existing customers started using KEYN's enterprise mobile services including BestBuy (NYSE:BBY) and Kelley Blue Book. DeviceAnywhere also succeeded winning business at General Motors (NYSE:GM) and Ford (NYSE:F) among others.

That being said, Mr. Smith conveyed that Q2 fiscal results are "seasonally lower than other quarters" and several "early acceptances" were included in Q1 results. These deals were originally slated for Q2. Management also identified that the foreign exchange rates will have a negative impact on Q2 results, along with depreciation ($1.3 million) and interest income (negative $100,000).

Overall, Q1 was a great quarter for KEYN, but management gave several strong hints that Q2 results may not be on par. Furthermore, keep in mind that KEYN is seeing increased competition from Compuware (NASDAQ:CPWR), along with several private companies. The upstarts are of particular concern. These vendors are attacking the market with newer approaches and technologies. This could suggest that management's warnings about a softer Q2 could actually be a sign of tougher times to come.

With analyst estimates sitting just below the mid-point of company guidance, there's room for upside, but caution is warranted on either side of the trade. KEYN's shares have greatly underperformed thus far in 2012.

Disclosure: I am short KEYN.

Additional disclosure: I may adjust my position at any time prior to the earnings release.