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Keynote Puts SIGOS on Stage

In recent weeks, I've written that mobile data could be The Next Big Thing. Web performance monitor Keynote Systems (Nasdaq: KEYN  ) had better hope so. This morning, the firm announced it had acquired SIGOS, a German company that specializes in testing the reliability and performance of mobile networks. Keynote will initially pay $30 million in cash to acquire the firm, with as much as $9.6 million more on the line if performance targets are met.

The deal comes on the heels of management's announcement that second-quarter revenue would fall at least $1 million short of January's guidance. That could impact the bottom line, according to Keynote CEO Umang Gupta. Speaking this morning in a conference call with analysts, Gupta noted that because the majority of Keynote's costs are fixed, lower sales are likely to result in lower income.

Accordingly, investors are treating Keynote's stock with the enthusiasm my six-year-old reserves for a steaming hot plate of lima beans. (The shares are down more than 4% as I write today.)

Are they right? The answer lies in the opportunities created by the SIGOS deal. SIGOS is a network monitor, operates out of Europe, and, unlike Keynote, earns very little of its revenue on a subscription basis. It offers valuable services to operators who wish to deliver more content over their networks in the way of games, videos, music, chat, and clear calls.

I find that combination compelling, because SIGOS offers Keynote plenty that it doesn't have already -- including an entry to Europe. It's also poised to take advantage of a surging mobile data market. (Music downloads to mobile devices, including cell phones, are expected to reach $9.3 billion within five years. That would be up from -- get this -- $251 million during 2005, according to ABI Research.)

Investors shouldn't expect miracles, however. Management says the SIGOS deal will likely be dilutive to earnings for the next three quarters. But by 2007, the German subsidiary could add roughly $10 million in new revenue. That would certainly help. Keynote's trailing-12-month sales, after a light Q2, will come in at about $53.6 million -- at or around 2005's total of $53.7 million.

In other words, Keynote needs something in order to get back on the stage with investors. SIGOS, with its deep relationships with Deutsche Telekom's (NYSE: DT  ) T-Mobile and Vodafone (NYSE: VOD  ) , among others, could be a helpful addition to the script.

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Fool contributorTim Beyershopes to buy out a MacBook Pro later this year. That's as bold as his acquisition strategy gets these days. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out what is in his portfolio by checking Tim's Foolprofile. The Motley Fool has an ironcladdisclosure policy.

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6/18/2010 4:00 PM
DT.DL $11.83 Down +0.00 +0.00%
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