Keynote Announces First Quarter Fiscal Year 2005 Financial Results

Keynote Announces First Quarter Fiscal Year 2005 Financial Results

    Business Editors

    SAN MATEO, Calif.--(BUSINESS WIRE)--Jan. 25, 2005--Keynote Systems, Inc. (Nasdaq:KEYN)

--	Diluted EPS of $0.04 Meets Company's Guidance
--	Revenue of $13.6 Million up 40% Compared to the Same Quarter Last Fiscal Year
--	Performance Management Solutions Revenue Up 143% Compared to Same Quarter Last Fiscal Year
--	Sixth Consecutive Quarter of Increased Revenue and Sixth Consecutive Quarter of Profitability
--	Twelfth Consecutive Quarter of Positive Cash Flow from Operations
--	Entering into a plan to repurchase up to 2.0 million shares of common stock

    Keynote Systems, Inc., The Internet Performance Authority(R), today announced financial results for its first quarter of fiscal year 2005, which ended December 31, 2004.
    Revenue for the first quarter of fiscal year 2005 was $13.6 million, a 12% increase compared to the preceding quarter and a 40% increase compared to the first quarter of fiscal year 2004. Net income for the first quarter of fiscal year 2005 was $791,000 or $0.04 per diluted share, compared to net income of $1.3 million, or $0.06 per diluted share, for the preceding quarter, and net income of $667,000, or $0.03 per diluted share, for the first quarter a year ago.
    Keynote generated cash flow from operations for the first quarter of fiscal year 2005 of $2.8 million. Cash flow from operations was $3.0 million for the preceding quarter and $4.3 million for the first quarter of fiscal 2004. Cash used for purchases of property, equipment, and software totaled $712,000 for the first quarter of fiscal year 2005 compared to $2.3 million for the preceding quarter and $405,000 for the first quarter of fiscal 2004. The Company generated free cash flow, defined as cash flow from operations less cash used for purchases of property, equipment, and software, of $2.1 million for the first quarter of fiscal year 2005 compared to $682,000 for the preceding quarter and $3.9 million for the first quarter of fiscal 2004. The Company believes that free cash flow is an important measure of its performance as it provides investors with an additional method for evaluating its operating performance and liquidity, and reflects the resources available for the Company to invest in acquisitions or to repurchase stock.
    "During the last six months, we made a change upwards in the scope and size of our business. Our quarterly revenues now are approximately 40% higher than they were a year ago, and our headcount during the same period has gone up approximately 36% from 165 to 225 people," said Umang Gupta, chairman and CEO of Keynote. "In the past quarter, approximately 48% of our business came from our more complex, higher value Management solutions compared to a year ago, when it was around 27%. During the coming few quarters, our focus will be on integrating the Hudson Williams, NetRaker and Vividence consulting organizations tightly into the rest of our business."
    As of December 31, 2004, Keynote's total worldwide customer base was over 2,100 companies and approximately 17,000 individual subscribers. During the first quarter, Keynote averaged a 99% monthly customer retention rate. New customers during the quarter included Bloomberg, Covad, Realnetworks, Softchoice, and Visible Path.
    Keynote currently provides its services to 74% of the comScore Media Metrix top 50 Web sites and over half of the Fortune 100 companies. As of December 31, 2004, Keynote measured 8,661 URLs through its Perspective(R) services and 7,451 Internet-connected devices through Red Alert. On average during the first quarter of fiscal year 2005, Keynote captured over 60 million Internet performance measurements daily.
    Keynote also announced that it is entering into a trading plan with a securities broker, intended to qualify under Rule 10b5-1 of the Securities Exchange Act of 1934. The trading plan will instruct the broker to repurchase for Keynote, , in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, up to 2 million shares of Keynote's Common Stock representing approximately 10% of Keynote's outstanding common shares, over a period of twelve months commencing as soon as March 1, 2005.

    Expectations for the Second Quarter of Fiscal Year 2005

    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 that for the second fiscal quarter ending March 31, 2005:

    -- total revenue will be between $13.0 million and $13.6 million;

    -- total expenses will decrease by approximately 2% to 4%
    compared to the first quarter of fiscal 2005;

    -- interest income, net will be approximately $700,000, absent
    any additional transactions, and assuming no material changes
    in interest rates;

    -- effective income tax rate will be approximately 6.5%;

    -- diluted weighted average shares outstanding will be
    approximately 21.5 million shares, assuming no additional
    acquisitions using shares of Keynote stock as the
    consideration and no other significant transactions involving
    Keynote's equity securities;

    -- diluted earnings per share will be between $0.03 to $0.06;

    -- cash flow from operations will be between $2.0 million to $2.5
    million; and

    -- capital expenditures will be approximately $1.0 million,
    absent any acquisition costs or other extraordinary
    transactions.

    Keynote will host a conference call and simultaneous Web cast at 2:00 pm (PDT), today January 25, 2005. The web cast of the call will be available at the Investor section of our web site at www.keynote.com. The replay will be available after the call by telephone by dialing (800) 642-1687, and the pass code is #3280131 or by Web cast at the Investor section of our 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 revenues, total expenses, 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 develop and introduce new services in a timely manner and customer acceptance of new services, the extent to which demand for Keynote's performance measurement services fluctuates and the extent to which revenue from other service lines, including performance management services, can continue to increase, the extent to which existing customers renew their subscriptions and purchase additional services, particularly enterprise customers, Keynote's ability to retain customers of acquired businesses, Keynote's ability to operate acquired businesses and manage related costs successfully, which businesses may be in areas in which Keynote has little experience, Keynote's ability to retain key employees of acquired companies as well as its own key employees, pricing pressure with respect to Keynote's services, unforeseen expenses, competition in Keynote's markets, integration of acquired companies, including its recently-completed acquisition of Vividence, or technologies and costs associated with any future acquisitions, Keynote's ability to keep pace with changes in the 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, 2004, 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.

    About Keynote

    Founded in 1995, Keynote Systems (Nasdaq "KEYN"), The Internet Performance Authority(R), is the worldwide leader in e-business performance management services. Over 2,100 corporate IT and marketing departments and approximately 17,000 individual subscribers rely on Keynote's growing range of measurement and monitoring, service level and customer experience management services to improve e-business performance by reducing costs, improving customer satisfaction and increasing profitability.
    Keynote is viewed as The Internet Performance Authority(R) due to the company's global infrastructure of over 1,600 measurement computers in more than 50 cities worldwide that capture and store on a daily basis over 60 million Internet performance measurements, frequent media citations quoting Keynote's Web performance data and analysis, the company's market-leading Web performance indices for vertical markets and leading customer research that provides critical business insight into online customer experiences, industry trends and competitive Web strategies.
    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 and Perspective are registered trademarks of Keynote Systems, Inc. Other trademarks are the property of their respective owners. (C) 2005 Keynote Systems, Inc.

Keynote Systems, Inc. and Subsidiaries ----------------------------------------------------------------------

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited)

Three months ended Dec 31 Sep 30 Dec 31 ---------------------------------------------------------------------- 2004 2004 2003

Revenue: Subscription services $10,283 $10,162 $8,671 Consulting and support services 3,305 1,985 1,052 -------- -------- -------- Total revenue 13,588 12,147 9,723

Expenses: Costs of subscription services 1,351 1,425 1,506 Costs of consulting and support services 2,609 1,690 803 Research and development 1,962 1,964 1,624 Sales and marketing 3,548 2,975 2,709 Operations 1,384 1,322 1,255 General and administrative 1,793 1,431 1,164 Excess occupancy costs 134 156 266 In-process research and development and amortization of identifiable intangible assets 664 783 362 -------------------------- Total expenses 13,445 11,746 9,689

Income from operations 143 401 34

Interest income and other, net 703 685 663 --------------------------

Income before provision for income taxes 846 1,086 697 --------------------------

Provision for income taxes (55) 231 (30) --------------------------

Net income $791 $1,317 $667 ==========================

Income per share: Basic $0.04 $0.07 $0.04 Diluted $0.04 $0.06 $0.03

Weighted average common shares outstanding used: Basic 19,866 19,697 19,031 Diluted 21,357 21,267 20,435

Keynote Systems, Inc. and Subsidiaries ----------------------------------------------------------------------

CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) (unaudited)

December 31, September 30, 2004 2004 ----------------------------------------------------------------------

Assets Current assets: Cash and cash equivalents $26,129 $19,338 Short-term investments 123,554 128,779 ---------------- ---------------- Total cash, cash equivalents and short-term investments 149,683 148,117 Accounts receivable, net 5,912 6,138 Prepaid and other current assets 2,210 2,329 ---------------- ---------------- Total current assets 157,805 156,584

Property and equipment, net 34,492 34,573 Goodwill, net 24,665 24,442 Identifiable intangible assets, net 5,467 6,131 ---------------- ----------------

Total assets $222,429 $221,730 ================ ================

Liabilities and Stockholders' Equity Current liabilities: Accounts payable 1,495 $1,692 Accrued expenses 9,722 10,188 Current portion of capital lease obligation 78 80 Deferred revenue 7,228 7,741 ---------------- ---------------- Total current liabilities 18,523 19,701

Long term portion of capital lease obligation 29 35

---------------- ---------------- Total liabilities 18,552 19,736 ---------------- ----------------

Stockholders' equity: Common stock 19 19 Treasury stock (29) (29) Additional paid-in capital 341,033 339,734 Accumulated deficit (136,618) (137,409) Accumulated other comprehensive loss (528) (321) ---------------- ----------------

Total stockholders' equity 203,877 201,994 ---------------- ----------------

Total liabilities and stockholders' equity $222,429 $221,730 ================ ================

Keynote Systems, Inc. and Subsidiaries ---------------------------------------------------------------------- CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (unaudited)

Three months ended Dec 31 Sept 30 Dec 31 ---------------------------------------------------------------------- 2004 2004 2003

Cash flows from operating activities: Net income $791 $1,317 $667 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 793 802 1,088 In-process research and development 0 241 Amortization of intangible assets 664 542 362 Amortization of debt investment premium 794 1,132 1,017 Changes in operating assets and liabilities, net of acquired assets and liabilities: Accounts receivable, net 226 (686) (331) Prepaids and other assets (120) (591) 116 Accounts payable and accrued expenses 122 635 (40) Deferred revenue (497) (376) 1,439 -------- -------- -------- Net cash provided by operating activities 2,773 3,016 4,318 -------- -------- --------

Cash flows from investing activities: Purchase of property, equipment and software (712) (2,334) (405) Proceeds from (Purchase of) businesses and assets (385) (22,026) (582) Sales / (Purchases) of short-term investments, net 4,224 21,083 (3,693) -------- -------- -------- Net cash provided by (used in) investing activities 3,127 (3,277) (4,680) -------- -------- --------

Cash flows from financing activities: Repayment of Credit Facility (8) (658) - Proceeds from issuance of common stock 899 1,553 3,358 -------- -------- -------- Net cash provided by financing activities 891 895 3,358 -------- -------- --------

Net increase in cash and cash equivalents 6,791 634 2,996 Cash and cash equivalents at beginning of the period 19,338 18,704 23,242 -------- -------- --------

Cash and cash equivalents at end of the period (1) $26,129 $19,338 $26,238 ======== ======== ========

(1) Excludes $123.6 million, $128.8 million, and $139.4 million of short-term investments at December 31, 2004, September 30, 2004, and December 31, 2003, respectively.

Keynote Systems, Inc. and Subsidiaries

Revenue Metrics (In thousands) (Unaudited)

3 months 3 months 3 months 3 months ended ended ended ended Dec 31 March 31 June 30 Sept 30 ---------- ---------- ---------- ---------- 2004 2005 2005 2005 ---------- ---------- ---------- ---------- Performance Measurement Services 7,087 NA NA NA Performance Management Solutions 6,501 NA NA NA ---------- ---------- ---------- ---------- Total Revenue $13,588

2003 2004 2004 2004 ---------- ---------- ---------- ---------- Performance Measurement Services 7,053 6,867 7,040 7,199 Performance Management Solutions 2,670 2,952 3,674 4,948 ---------- ---------- ---------- ---------- Total Revenue $9,723 $9,819 $10,714 $12,147

2002 2003 2003 2003 ---------- ---------- ---------- ---------- Performance Measurement Services 7,595 7,237 7,247 6,886 Performance Management Solutions 2,163 2,321 2,185 2,628 ---------- ---------- ---------- ---------- Total Revenue $9,758 $9,558 $9,432 $9,514

2001 2002 2002 2002 ---------- ---------- ---------- ---------- Performance Measurement Services 8,258 7,898 7,822 7,653 Performance Management Solutions 1,331 1,311 1,652 2,015 ---------- ---------- ---------- ---------- Total Revenue $9,589 $9,209 $9,474 $9,668

% Change from Twelve months % of Total Prior Year ended Sept 30 Revenue Period --------------- ------------- -------------- 2005 2005 2005 --------------- ------------- -------------- Performance Measurement Services NA NA NA Performance Management Solutions NA NA NA --------------- ------------- -------------- Total Revenue

2004 2004 2004 --------------- ------------- -------------- Performance Measurement Services 28,159 66% -3% Performance Management Solutions 14,244 34% 53% --------------- ------------- -------------- Total Revenue $42,403 100% 11%

2003 2003 2003 --------------- ------------- -------------- Performance Measurement Services 28,965 76% -8% Performance Management Solutions 9,297 24% 47% --------------- ------------- -------------- Total Revenue $38,262 100% 1%

2002 2002 2002 --------------- ------------- -------------- Performance Measurement Services 31,631 83% NA Performance Management Solutions 6,309 17% NA --------------- ------------- -------------- Total Revenue $37,940 100%

--30--MC/sf*

CONTACT: Keynote Systems, Inc. Dan Berkowitz, 650-403-3305 (Public Relations) dberkowitz@keynote.com Jack Andrews, 650-403-3431 (Investor Relations) jandrews@keynote.com

KEYWORD: CALIFORNIA INDUSTRY KEYWORD: HARDWARE SOFTWARE INTERNET E-COMMERCE EARNINGS CONFERENCE CALLS SOURCE: Keynote Systems, Inc.

Copyright Business Wire 2005