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Tech stocks - Wednesday, July 9, 2008

Tech:stocker - The Keynote Here Is Not To Invest In This Stock

With the price of oil taking a nice dip today and Washington Mutual (WM:NYSE) enjoying a healthy 16% gain along with many of its financial brethren, many of you might be tempted to take the money and run tomorrow. Don't do it. We at tech:stocker strongly advocate buying a stock and holding it for a minimum of 12 months unless an unexpected disaster occurs. Stay the course and enjoy further gains. Remember, we at tech:stocker expect another crash in the bond market as there are still many subprime and other types of exotic mortgages out there in a housing market that is not increasing in value. Stay the course. You'll be fine.

This brings us to Silicon Valley's Keynote Systems (KEYN:NASDAQ), a company that looks good on the surface but reminds us that looks aren't everything.

As a provider of on-demand test and measurement products for mobile communications and the Internet, Keynote's business appears relevant and necessary. The company touts tech:stocker favorite Cisco (CSCO:NASDAQ) as a client along with several other interesting names like YouTube, Edgecast, and Careerbuilder.com. In addition, Keynote is about halfway from its 52 week high and low. The combination of business relevance, good customers, and a decent price usually makes us feel better about diverting money from our kids' college fund. So why aren't we slapping a buy rating on this stock?

For its second quarter, Keynote reported revenue for their fiscal second quarter of $17.6M which was only slightly off the $17.7M they reported in their first quarter and a respectable increase from the $16.7M reported in the second quarter of 2007. This will probably leave even more readers wondering why we aren't giving the green light to this stock.

From the second quarter of 2007 to present Keynote has decided to spend freely on marketing and sales. We at tech:stocker have no problem employing strategic marketing and sales programs in unstable economic times, especially when most companies retreat or even layoff marketing people to keep their company profitable. Our issue is that Keynote went from posting a miniscule $30,000 profit in the second quarter of 2007 to a noticeable $1.3M loss in the second quarter of 2008.

The increase in marketing and sales spending is being led by Anshu Agarwal, a dedicated Keynote employee who has held several marketing positions within the company. We find this extremely troubling as he has been a part of the marketing spending that has helped the company achieve negative profits. And with Mr. Argawi releasing press releases stating that "online retailers need to prepare their Web sites NOW for onslaught" when discussing the upcoming holiday season. Aside from the questionable grammar, we are wondering if Mr. Argawi has some insight on a second round of government checks that will be issued in November as this year's shopping season looks to be anything but cheerful for traditional and online retailers.

While CEO and Chairman Umang Gupta continues on his path of ignoring his shareholders needs and entrusting his increased marketing spending to an unproven commodity instead of hiring an experienced marketing professional who has a track record of delivering results, we recommend staying away from Keynote, far away. This is definitely not a buy until If you have to invest in this sector to round out your tech portfolio, we recommend Omniture (OMTR:NASDAQ). At least they seem to care about making a profit.