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Keynote Systems (KEYN)

Q2 2013 Earnings Call

April 30, 2013 5:00 pm ET

Executives

Kirsten F. Chapman - Managing Director and Principal

Umang Gupta - Chairman and Chief Executive Officer

Curtis H. Smith - Chief Financial Officer and Secretary

Analysts

Joseph Fadgen

Matthew L. Williams - Evercore Partners Inc., Research Division

Sarkis Sherbetchyan - B. Riley Caris, Research Division

Ryan Macdonald

Presentation

Operator

Welcome to the Keynote Systems Second Quarter of Fiscal 2013 Results Conference Call. My name is Ellen, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded.

I will now turn the call over to Kirsten Chapman, Ms. Chapman, you may begin.

Kirsten F. Chapman

Thank you, Ellen. Good afternoon, everyone, and welcome to Keynote's conference call for the second fiscal quarter ended March 31, 2013. I'm here today with Umang Gupta, Chairman and Chief Executive Officer; and Curtis Smith, Chief Financial Officer.

Hopefully, you have seen our press release that was distributed over the major wire services. For your convenience, the press release has been posted to our website at www.keynote.com. The replay of this call will be available by telephone by dialing (888) 843-7419, passcode 34598660#, or by webcast at the Investor Relations section of our website at www.keynote.com.

I would like to remind you that statements made during the course of this call that are not purely historical are forward-looking statements regarding the company or management's intentions, hopes, beliefs, expectations and strategies for the future. Because such statements deal with future events, they are subject to various risks and uncertainties, and actual results may differ materially from those projected in the forward-looking statements. Important factors that could cause actual results to differ from those in the forward-looking statements are discussed in today's press release and in the company's most recent annual and quarterly reports filed with the SEC.

Today, we have provided detailed guidance on our quarterly press release. This guidance assumes no acquisitions, no material changes in interest rates or foreign currency exchange, no impairment of goodwill or intangibles and no other significant or extraordinary transactions. We will not comment on this guidance during the quarter, but may provide an update to this guidance in the event of a material change during the quarter.

Before the company reviews the financials, I will review definitions for some metrics the company provides which are not in accordance with generally accepted accounting principles, commonly known as GAAP. Non-GAAP net income is calculated as GAAP net income or loss adjusted for the provisions or benefit for income taxes, cash taxes from ongoing operations, stock-based compensation expense, amortization of purchased intangibles and any unusual items.

In the first quarter of fiscal 2012, the change of fair value of acquisition-related contingent consideration was considered an unusual item. Non-GAAP net income per diluted share equals non-GAAP net income divided by the diluted weighted average shares outstanding for the period. Adjusted EBITDA is defined as earnings before interest income, taxes, depreciation, amortization of purchased intangibles, stock-based compensation and other income or expense net and any unusual items.

In the first quarter of fiscal 2012, the change in fair value of acquisition-related contingent consideration was considered an unusual item. Adjusted EBITDA margin is defined as adjusted EBITDA as a percentage of the net revenues. Free cash flow is defined as cash flow from operations, less cash used to purchase property, equipment and software.

During the call, Umang Gupta, Chairman and CEO, will review recent accomplishments; and Curtis Smith, CFO, will detail the financial results and provide guidance for the next quarter. Then Umang will deliver closing remarks and open the call for questions.

It's now my pleasure to welcome Umang Gupta. Please go ahead, sir.

Umang Gupta

Thank you, Kirsten. Welcome, everyone. For the second quarter of fiscal 2013, we posted revenue of $29.3 million, GAAP net income of $0.02 per diluted share and non-GAAP net income of $0.09 per diluted share. While the results reflect the operational challenges we discussed during our April 15 call, we would like to emphasize the following: For the second quarter of fiscal 2013, we posted $4.6 million of free cash flow, one of the strongest quarters in several years. For the first half of fiscal 2013, as a whole, we delivered solid results with revenues of $63.2 million, non-GAAP net income of $0.42 per diluted share and an adjusted EBITDA margin of 18%. And the Board of Directors confirmed the previously announced 17% increase in the quarterly cash dividend to $0.07 per common share to be paid in June.

Today, we also announced that our Board of Directors has authorized the repurchase of up to $10 million of Keynote's common stock over the next 12 months. We have a long history of returning capital to our shareholders. In fact, our dividend and stock buyback programs should return over $200 million to stockholders.

Looking forward, we believe we have compelling market opportunities in all 3 of our businesses, and we are committed to capturing them through improved operational effectiveness and through exciting new product offerings.

Now I will review each business. First, our Internet Cloud business. For the second quarter of fiscal 2013, Internet revenue was $15 million compared to $14.4 million in the same year -- quarter a year ago. The increase reflects our flagship Web Measurement subscriptions growing 15% on a year-over-year basis.

This quarter, new Internet deals included option.com, Barclays bank, CARFAX, Cancer Research UK, Car and Driver, Deloitte Consulting India, First Republic Bank, Lane Crawford (Hong Kong) Ltd., Nestlé Deutschland AG, Tommy Bahama and Vodafone Netherlands. The e-commerce market continues to evolve and expand, and we are taking advantage of that with a continually evolving and expanding product line.

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