Keynote Systems (KEYN) 8-K Results of Operations and Financial Condition

Exhibit 99.01

Keynote Reports Fiscal Third Quarter 2008 Results

• Total Revenue of $20.5 Million Increased 17.9%, Compared to Fiscal Third Quarter 2007
• GAAP Loss Per Share Was $0.03, Compared to GAAP Loss Per Share of $0.09 in Fiscal Third Quarter 2007
• Non-GAAP EPS Was $0.09, Compared to Non-GAAP EPS of $0.07 in the Fiscal Third Quarter 2007
• Results Exceeded Company’s Revenue and Non-GAAP Earnings Guidance and Met GAAP Earnings Guidance

SAN MATEO, Calif.--(BUSINESS WIRE)--Keynote Systems (Nasdaq:KEYN), the global leader in on-demand mobile and Internet test & measurement solutions for continuously improving the online experience, reported financial results for its fiscal third quarter ended June 30, 2008.

Umang Gupta, chairman and CEO of Keynote, said: “During the quarter, we reported revenue of $20.5 million, achieving the highest quarterly level in the company’s 13-year history. Our mobile business grew 81 percent, compared to third quarter 2007, and reached a record of $8.3 million in revenue.”

“Equally noteworthy, the Internet test and measurement (ITM) migration from single-page, single-device measurements reached our stated goal of 10 percent of ITM subscription revenue a quarter ahead of plan. As such, we anticipate any future declines in this legacy product line should have only a modest impact on our overall revenue growth. Our Internet revenue in combination with strong mobile revenue growth is expected to result in approximately 12 percent total revenue growth in fiscal 2008 revenues when compared to 2007,” concluded Gupta.

Third Quarter 2008 Financial Summary

Revenue for the third quarter of fiscal year 2008 was $20.5 million including $74,000 from the Zandan products and services resulting from the acquisition in April. Total revenue increased from $17.6 million in the second quarter of fiscal year 2008 and increased from $17.4 million in the third quarter of fiscal year 2007. Net loss for the third quarter of fiscal year 2008 was $407,000, or $0.03 per share, reflecting both top-line growth and better operating efficiencies. The net loss included $1.1 million in stock-based compensation expenses, an $849,000 charge for amortization of intangible assets, and a $140,000 charge for estimated income tax expense required under generally accepted accounting principles (GAAP). This compared to a net loss of $1.3 million, or $0.08 per share, for the second quarter of 2008, which included $1.2 million in stock-based compensation expenses, a $753,000 charge for amortization of intangible assets, and a $45,000 charge for estimated income tax expense. Net loss for the third quarter of 2007 was $1.5 million, or $0.09 per share, which included $1.1 million in stock-based compensation expenses, a $713,000 charge for amortization of intangible assets, and a $1.3 million charge for income taxes.

The non-GAAP net income for third quarter of 2008 was $1.3 million, or $0.09 per diluted share, compared to $496,000, or $0.03 per diluted share, for the second quarter of 2008, and $1.3 million, or $0.07 per diluted share, for the third quarter of 2007. The company defines non-GAAP net income as net income adjusted for provision for income tax, stock-based compensation expense, and amortization of purchased intangibles less cash tax expense. Non-GAAP net income per share equals non-GAAP net income divided by the weighted diluted share count as of the period end.

Cash Flow and Deferred Revenue Summary

In the third quarter of 2008, cash provided by operating activities was $2.1 million, which was negatively impacted by approximately $900,000 for payments of assumed liabilities that were incurred as part of the acquisition. This is compared to $2.5 million in the prior quarter and $5.9 million in the third quarter of 2007. Cash used for purchases of property, equipment and software totaled $1.6 million for the third quarter of 2008, compared to $1.0 million in the prior quarter and $2.1 million for the same period last year. Keynote generated free cash flow, defined as cash flow from operations less cash used for purchases of property, equipment, and software, of $482,000 for the quarter, compared to $1.5 million in the prior quarter and $3.8 million for the same period last year. At June 30, 2008, Keynote had $53.9 million in total cash, cash equivalents and short-term investments.

Keynote’s net deferred revenue was $24.2 million at June 30, 2008, compared to $24.1 million at June 30, 2007. Keynote’s gross deferred revenue, defined as the sum of net deferred revenue and unpaid deferred revenue, was $29.5 million at June 30, 2008 and up 5.8 percent from $27.9 million at June 30, 2007.

The total shares outstanding, net of treasury shares, at June 30, 2008 was 13.8 million, compared to 17.9 million at June 30, 2007.

Operational Metrics Summary

As of June 30, 2008, Keynote’s total worldwide customer base was approximately 2,800 companies. Keynote currently provides its services to 52 percent of the comScore Media Metrix’s top 50 Web sites and approximately 45 percent of the Fortune 100 companies. As of June 30, 2008, Keynote measured approximately 13,900 Internet pages, as compared to 11,100 Internet pages in the same quarter a year ago.

Expectations for the Fourth Quarter of Fiscal Year 2008

The statements in this section of this press release are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Keynote currently expects the following for the fourth fiscal quarter ending September 30, 2008:

• Total revenue is expected to be between $20.3 million and $20.7 million.
• GAAP earnings per share are expected to be between ($0.02) and $0.02.
• Non-GAAP earnings per share are expected to be between $0.09 and $0.13.

The above guidance was based on the following assumptions. Total stock-based compensation expense and amortization of intangible assets is currently expected to be approximately $2.0 million. Depreciation is expected to be approximately $1.5 million. Interest income, net is expected to be approximately $500,000, assuming no material changes in interest rates and currently planned uses of cash. Cash paid for income taxes is expected to be approximately $500,000, assuming no changes in required tax payments. Basic weighted average shares outstanding are expected to be approximately 14.1 million shares and diluted weighted average shares outstanding are expected to be approximately 14.6 million shares, assuming no additional issuances of equity or equity-related securities and significant changes in the company’s stock price.

Conference Call

Keynote will host a conference call and simultaneous webcast at 2:00 pm (PDT) today, July 29, 2008. To access the call in the U.S., please dial (866) 271-6228; international callers please dial (706) 679-4457, approximately 10 minutes prior to the start of the conference call. The webcast of the call will be available at the investor section of the company’s web site at www.keynote.com. The replay will be available after the call by telephone by dialing (800) 642-1687 in the U.S. and (706) 645-9291 internationally; the pass code is # 55216017. The webcast is at the investor section of the company’s web site at www.keynote.com.

Forward-Looking Statements

This press release contains forward-looking statements that are not purely historical 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 could differ materially from the Company’s current expectations.

Forward-looking statements in this release include, but are not limited to, forecasts concerning Keynote’s expected revenue, GAAP and Non-GAAP earnings per share, and the related underlying assumptions in calculating those amounts, future acquisitions and other future financial results. It is important to note that actual outcomes and Keynote’s actual results could differ materially from those in such forward-looking statements. Factors that could cause actual results to differ materially include risks and uncertainties such as Keynote’s ability to successfully market and sell its current services to new or existing customers, Keynote’s ability to develop and introduce new services in a timely manner and customer acceptance of new services, the extent to which demand for Keynote’s various services fluctuates and the extent to which revenue from other service lines can increase, the extent to which existing customers renew their subscriptions and purchase additional services, particularly enterprise customers, Keynote’s ability to attract and retain new customers, Keynote’s ability to operate SIGOS and its other international operations and manage related costs successfully, Keynote’s ability to retain key employees, pricing pressure with respect to Keynote’s services, Keynote’s ability to increase sales of its other services, and the risk that its prior organizational changes will not result in improved results, unforeseen expenses, competition in Keynote’s markets, costs associated with the Zandan acquisition or any future acquisitions, the effect of acquisitions by competitors in Keynote’s target markets, Keynote’s ability to keep pace with changes in the mobile and Internet infrastructure as well as other technological changes, and the success of Keynote’s international operations. Readers should also refer to the risks outlined in Keynote’s reports filed with the Securities and Exchange Commission, including its Annual Report on Form 10-K for its fiscal year ended September 30, 2007, and its quarterly reports on Form 10-Q and any current reports on Form 8-K filed during the fiscal year.

All forward-looking statements and reasons why results might differ included in this release are made as of the date of this press release, based on information available to Keynote as of the date of this press release, and Keynote assumes no obligation to update any such forward-looking statement or reasons why results might differ.

Non-GAAP Measures

This press release includes information on Non-GAAP net income, non-GAAP net earnings per share, free cash flow and gross deferred revenues. These measures are not based on any standardized methodology prescribed by U.S. generally accepted accounting principles (“GAAP”) and are not necessarily comparable to similar measures presented by other companies. Non-GAAP net income is calculated by adjusting GAAP net income for provision for income taxes less cash tax expense, stock-based compensation expense and amortization of purchased intangibles. Non-GAAP earnings per share are calculated by dividing Non-GAAP net income by the weighted average number of diluted shares outstanding for the period. Free cash flow is defined as cash flow from operations less cash used for purchases of property, equipment, and software. Gross deferred revenue is defined as the sum of net deferred revenue and unpaid deferred revenue. These measures should not be considered in isolation or as a substitute for measures prepared in accordance with GAAP, and because these amounts are not determined in accordance with GAAP, they should not be used exclusively in evaluating its business and operations. Because the Company has made a number of acquisitions in the past, as well as because of the effect of SFAS 123(R), the Company’s financial statements have changed significantly from prior periods. Accordingly, the Company believes that this non-GAAP information is useful as an additional means for investors to evaluate the Company’s operating performance, when reviewed in conjunction with the Company’s GAAP financial statements. Management also reviews this information as an additional means for measuring the performance of the Company. The Company compensates for these limitations by realizing that these amounts are not determined in accordance with GAAP and therefore, should not be used exclusively in evaluating its business and operations.

About Keynote

Keynote Systems (Nasdaq “KEYN”) is the global leader in on-demand test & measurement solutions for continuously improving the online experience. As an independent and trusted third-party, Keynote provides IT and marketing executives with an unbiased view into their Internet services from around the world. For over a decade, Keynote has been providing measurement data and testing capabilities that allow companies to understand and improve their customer’s online and mobile experience. Keynote has four test and measurement businesses: Web performance, mobile quality, streaming & VoIP, and customer experience/UX. In addition, Keynote’s industry analysis group called Keynote Competitive Research publishes proprietary studies measuring customer experience and service levels across a wide range of industries.

Known as The Mobile and Internet Performance Authority™, Keynote has a market-leading infrastructure of 2,500 measurement computers and mobile devices in over 240 locations around the world. Keynote also maintains one of the most representative panels of online users consisting of 160,000 consumers. Keynote’s on-demand, hassle-free infrastructure allows businesses to access services they need, when they need them to pinpoint and fix mobile quality and Internet problems before they impact customers.

Keynote helps over 2,800 corporate customers become “the best of the best” by helping them improve online business performance and mobile communications quality. Keynote’s customers represent top Internet and mobile companies including American Express, BP, Caterpillar, Dell, Disney, eBay, E*TRADE, Expedia, Microsoft, SonyEricsson, Sprint, T-Mobile, Verizon and Vodafone.

Keynote Systems, Inc. is headquartered in San Mateo, California and can be reached at www.keynote.com or by phone in the U.S. at (650) 403-2400.

Keynote, The Internet Performance Authority, Perspective and Customer Experience Rankings are registered trademarks and The Mobile and Internet Performance Authority and True Experience are trademarks of Keynote Systems, Inc. Other trademarks are the property of their respective owners. © 2008 Keynote Systems, Inc.

Keynote Systems, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
				Three months ended									Nine months ended
				Jun 30			Mar 31			Jun 30			Jun 30			Jun 30
				2008			2008			2007			2008			2007
Net revenue:
	Subscription services			$	11,441		$	11,092		$	10,881		$	33,405		$	32,121
	Ratable licenses				6,426			4,605			3,443			15,033			8,852
	Professional services				2,631			1,937			3,063			7,414			8,943
		Total revenue, net			20,498			17,634			17,387			55,852			49,916
Costs and expenses:
	Costs of revenue:
		Direct costs of subscription services			2,235			2,225			2,175			6,571			6,343
		Direct costs of ratable licenses			1,526			1,111			1,456			4,240			3,269
		Direct costs of professional services			1,762			1,794			1,947			5,361			6,277
		Operations			2,270			2,024			1,853			6,297			5,643
		Development			3,232			3,160			2,950			9,525			8,699
		Amortization of intangible assets - software			281			211			191			697			561
			Total costs of revenue		11,306			10,525			10,572			32,691			30,792
	Sales and marketing				6,697			6,529			5,243			18,993			14,909
	General and administrative				2,834			2,501			2,490			7,822			7,247
	Excess occupancy income, net				(297	)		(309	)		(33	)		(887	)		(81	)
	Amortization of intangible assets - other				568			542			522			1,647			1,671
		Total costs and expenses			21,108			19,788			18,794			60,266			54,538
		Loss from operations			(610	)		(2,154	)		(1,407	)		(4,414	)		(4,622	)
Interest income and other, net					343			881			1,168			2,374			3,438
Loss before provision for income taxes					(267	)		(1,273	)		(239	)		(2,040	)		(1,184	)
Provision for income taxes					(140	)		(45	)		(1,294	)		(429	)		(55	)
		Net loss		$	(407	)	$	(1,318	)	$	(1,533	)	$	(2,469	)	$	(1,239	)
Net loss per share:
		Basic		$	(0.03	)	$	(0.08	)	$	(0.09	)	$	(0.15	)	$	(0.07	)
		Diluted		$	(0.03	)	$	(0.08	)	$	(0.09	)	$	(0.15	)	$	(0.07	)
Weighted average common shares outstanding:
		Basic			13,747			16,130			17,662			16,039			17,353
		Diluted			13,747			16,130			17,662			16,039			17,353

Keynote Systems, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
			June 30, 2008			September 30, 2007
Assets
Current assets:
	Cash and cash equivalents		$	49,648		$	42,875
	Short-term investments			4,291			65,060
		Total cash, cash equivalents and short-term investments		53,939			107,935
	Accounts receivable			7,310			5,988
	Prepaids, deferred costs and other current assets			3,834			2,703
	Inventories			1,242			1,059
	Deferred tax assets			4,064			3,922
		Total current assets		70,389			121,607
Deferred costs and other assets				1,765			1,301
Property and equipment, net				36,167			35,480
Goodwill				69,559			63,129
Identifiable intangible assets, net				7,028			7,963
Deferred tax assets				604			-
	Total assets		$	185,512		$	229,480
Liabilities and Stockholders' Equity
Current liabilities:
	Accounts payable		$	1,614		$	2,285
	Accrued expenses			14,863			11,656
	Current portion of capital lease obligation			16			24
	Current portion of notes payable			287			-
	Deferred revenue			23,086			19,824
	Total current liabilities			39,866			33,789
	Long-term portion of capital lease obligation			23			31
	Deferred rent and other long term liabilities			2,043			292
	Long-term deferred revenue			1,083			2,136
	Long-term deferred tax liability			1,503			2,347
	Total liabilities			44,518			38,595
Stockholders' equity:
	Common stock			14			18
	Treasury stock			-			(1,151	)
	Additional paid-in capital			271,558			325,525
	Accumulated deficit			(142,576	)		(140,188	)
	Accumulated other comprehensive income			11,998			6,681
	Total stockholders' equity			140,994			190,885
	Total liabilities and stockholders' equity		$	185,512		$	229,480

Keynote Systems, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
					Three months ended						Nine months ended
					Jun 30			Jun 30			Jun 30			Jun 30
					2008			2007			2008			2007
Cash flows from operating activities:
	Net loss				$	(407	)	$	(1,533	)	$	(2,469	)	$	(1,239	)
	Adjustments to reconcile net loss to net cash provided by operating activities:
		Depreciation and amortization				1,249			1,132			3,808			3,311
		Stock-based compensation				1,126			1,127			3,386			3,051
		Charges to bad debt and billing adjustment reserves				51			48			149			196
		Amortization (accretion) of debt investment premium (discount)				14			(629	)		(423	)		(983	)
		Amortization of identifiable intangible assets				849			713			2,344			2,232
		Deferred tax benefit				-			1,062			-			175
		Changes in operating assets and liabilities, net				(798	)		3,963			(1,854	)		10,667
				Net cash provided by operating activities		2,084			5,883			4,941			17,410
Cash flows from investing activities:
	Purchase of property, equipment and software					(1,602	)		(2,073	)		(3,987	)		(4,160	)
	Purchase of businesses and assets, net					(1,202	)		-			(1,202	)		(307	)
	Earnout payment for acquisition of business					-			-			-			(10,587	)
	Sales (purchases) of short-term investments, net					13,184			(14,163	)		61,159			(18,097	)
			Net cash provided by (used in) investing activities			10,380			(16,236	)		55,970			(33,151	)
Cash flows from financing activities:
	Payment of capital lease obligations					(6	)		(4	)		(21	)		(27	)
	Repurchase of outstanding common stock					(1,099	)		-			(60,070	)		-
	Proceeds from issuance of common stock and exercise of stock options					785			5,206			3,857			8,497
			Net cash provided by (used in) financing activities			(320	)		5,202			(56,234	)		8,470
Effect of exchange rate changes on cash and cash equivalents						(72	)		121			2,096			320
Net decrease in cash and cash equivalents						12,072			(5,030	)		6,773			(6,951	)
Cash and cash equivalents at beginning of the period						37,576			43,741			42,875			45,662
Cash and cash equivalents at end of the period (1)					$	49,648		$	38,711		$	49,648		$	38,711
(1) Excludes $4.3 million and $64.4 million of short-term investments at June 30, 2008 and June 30, 2007, respectively.

Keynote Systems, Inc. and Subsidiaries
GAAP TO NON-GAAP RECONCILIATION
(In thousands, except per share data)
(Unaudited)
		Three months ended									Nine months ended
		Jun 30			Mar 31			Jun 30			Jun 30			Jun 30
		2008			2008			2007			2008			2007
Revenue categories:
	Internet Subscriptions	$	8,908		$	8,881		$	9,129		$	26,666		$	27,053
	Internet Engagements		1,374			1,019			1,720			3,989			4,550
Subtotal Internet Revenue			10,282			9,900			10,849			30,655			31,603
	Mobile Subscriptions		1,912			1,654			1,158			4,906			3,268
	Mobile Ratable Licenses		6,426			4,605			3,443			15,033			8,852
Subtotal Mobile Revenue			8,338			6,259			4,601			19,939			12,120
	CEM Subscriptions		621			557			593			1,833			1,800
	CEM Engagements		1,257			918			1,344			3,425			4,393
Subtotal CEM Revenue			1,878			1,475			1,937			5,258			6,193
Total Revenue, Net		$	20,498		$	17,634		$	17,387		$	55,852		$	49,916
Non-GAAP net income (loss) and income (loss) per share:
GAAP net loss		$	(407	)	$	(1,318	)	$	(1,533	)	$	(2,469	)	$	(1,239	)
	Provision for income taxes		140			45			1,294			429			55
	Stock-based compensation (a)		1,126			1,160			1,127			3,386			3,051
	Amortization of intangible assets - other		568			542			522			1,647			1,671
	Amortization of intangible assets - software		281			211			191			697			561
Non GAAP income before income tax			1,708			640			1,601			3,690			4,099
	Cash tax expense		404			144			295			770			881
Non GAAP net income		$	1,304		$	496		$	1,306		$	2,920		$	3,218
Weighted average common shares outstanding (diluted):			14,238			16,459			18,800			16,594			18,156
Non GAAP income per share		$	0.09		$	0.03		$	0.07		$	0.18		$	0.18
(a) Stock-based compensation by category:
Direct costs of ratable licenses		$	68		$	66		$	64		$	183		$	145
Direct costs of professional services			108			124			99			347			363
Operations			158			178			148			481			438
Development			237			274			265			741			684
Sales and marketing			393			413			356			1,133			952
General and administrative			162			105			195			501			469
		$	1,126		$	1,160		$	1,127		$	3,386		$	3,051

Keynote Systems, Inc. and Subsidiaries
REVENUE DETAIL
(In thousands)
(Unaudited)
		Three months ended								Year ended
		Dec 31		March 31		June 30		Sept 30		Sept 30
FY 2008
	Internet Subscriptions	$	8,877	$	8,881	$	8,908	$	-	$	26,666
	Internet Engagements		1,596		1,019		1,374		-		3,989
Subtotal Internet Revenue			10,473		9,900		10,282		-		30,655
	Mobile Subscriptions		1,340		1,654		1,912		-		4,906
	Mobile Ratable Licenses		4,002		4,605		6,426		-		15,033
Subtotal Mobile Revenue			5,342		6,259		8,338		-		19,939
	CEM Subscriptions		655		557		621		-		1,833
	CEM Engagements		1,250		918		1,257		-		3,425
Subtotal CEM Revenue			1,905		1,475		1,878		-		5,258
Total Revenue, Net		$	17,720	$	17,634	$	20,498	$	-	$	55,852
FY 2007
	Internet Subscriptions	$	8,884	$	9,040	$	9,129	$	8,858	$	35,911
	Internet Engagements		1,497		1,333		1,720		1,426		5,976
Subtotal Internet Revenue			10,381		10,373		10,849		10,284		41,887
	Mobile Subscriptions		997		1,113		1,158		1,080		4,348
	Mobile Ratable Licenses		2,206		3,203		3,443		4,368		13,220
Subtotal Mobile Revenue			3,203		4,316		4,601		5,448		17,568
	CEM Subscriptions		626		580		593		603		2,402
	CEM Engagements		1,605		1,445		1,344		1,503		5,897
Subtotal CEM Revenue			2,231		2,025		1,937		2,106		8,299
Total Revenue, Net		$	15,815	$	16,714	$	17,387	$	17,838	$	67,754
FY 2006
	Internet Subscriptions	$	8,782	$	8,876	$	8,909	$	9,096	$	35,663
	Internet Engagements		1,127		905		714		1,103		3,849
Subtotal Internet Revenue			9,909		9,781		9,623		10,199		39,512
	Mobile Subscriptions		539		488		855		962		2,844
	Mobile Ratable Licenses		-		-		1,094		1,447		2,541
Subtotal Mobile Revenue			539		488		1,949		2,409		5,385
	CEM Subscriptions		499		583		590		647		2,319
	CEM Engagements		2,769		1,887		1,705		1,931		8,292
Subtotal CEM Revenue			3,268		2,470		2,295		2,578		10,611
Total Revenue, Net		$	13,716	$	12,739	$	13,867	$	15,186	$	55,508
FY 2005
	Internet Subscriptions	$	8,625	$	8,783	$	9,160	$	8,883	$	35,451
	Internet Engagements		822		1,082		881		1,026		3,811
Subtotal Internet Revenue			9,447		9,865		10,041		9,909		39,262
Mobile Subscriptions			803		338		442		585		2,168
	CEM Subscriptions		595		531		441		432		1,999
	CEM Engagements		2,743		2,431		2,541		2,548		10,263
Subtotal CEM Revenue			3,338		2,962		2,982		2,980		12,262
Total Revenue, Net		$	13,588	$	13,165	$	13,465	$	13,474	$	53,692

Keynote Systems, Inc. and Subsidiaries
DEFERRED REVENUE
(In thousands)
(Unaudited)
		June 30, 2008		March 31, 2008		June 30, 2007
Deferred revenue, net
	Domestic	$	6,300	$	6,818	$	9,609
	International		17,869		18,409		14,540
	Total	$	24,169	$	25,227	$	24,149
Add back: unpaid deferred revenue
	Domestic	$	2,288	$	2,276	$	799
	International		3,054		4,043		2,933
	Total	$	5,342	$	6,319	$	3,732
Deferred revenue, gross
	Domestic	$	8,588	$	9,094	$	10,408
	International		20,923		22,452		17,473
	Total	$	29,511	$	31,546	$	27,881

CONTACT:
Keynote Systems, Inc.
Dan Berkowitz, 650-403-3305 (Public Relations)
dberkowitz@keynote.com
or
For Keynote Systems, Inc.
Kirsten Chapman, 415-433-3777 (Investor Relations)
kchapman@lhai.com