Keynote Announces Second Quarter Fiscal Year 2005 Financial Results

Keynote Announces Second Quarter Fiscal Year 2005 Financial Results

    Business Editors/High-Tech Editors

    SAN MATEO, Calif.--(BUSINESS WIRE)--April 26, 2005--Keynote Systems, Inc., (Nasdaq:KEYN)

--	Diluted EPS of $0.05 at High End of Range of Company's Guidance
--	Revenue of $13.2 Million Up 34% Compared to the Same Quarter Last Fiscal Year
--	Performance Management Solutions Revenue Up 101% Compared to Same Quarter Last Fiscal Year
--	Seventh Consecutive Quarter of Profitability
--	Thirteenth Consecutive Quarter of Positive Cash Flow from Operations
--	Initiated Plan to Repurchase 2.0 Million Shares of Common Stock

    Keynote Systems, Inc., (Nasdaq:KEYN), The Internet Performance Authority(R), today announced financial results for its second quarter of fiscal year 2005, which ended March 31, 2005.
    Revenue for the second quarter of fiscal year 2005 was $13.2 million, a 3% decrease compared to the preceding quarter and a 34% increase compared to the second quarter of fiscal year 2004. Net income for the second quarter of fiscal year 2005 was $997,000, or $0.05 per diluted share, compared to net income of $791,000, or $0.04 per diluted share, for the preceding quarter, and net income of $1.2 million, or $0.06 per diluted share, for the second quarter a year ago.
    Keynote generated cash flow from operations for the second quarter of fiscal year 2005 of $1.8 million. Cash flow from operations was $2.8 million for the preceding quarter and $4.1 million for the second quarter of fiscal year 2004. Cash used for purchases of property, equipment, and software totaled $723,000 for the second quarter of fiscal year 2005 compared to $712,000 for the preceding quarter and $531,000 for the second quarter of fiscal year 2004. The Company generated free cash flow, defined as cash flow from operations less cash used for purchases of property, equipment, and software, of $1.1 million for the second quarter of fiscal year 2005, compared to $2.1 million for the preceding quarter and $3.5 million for the second quarter of fiscal year 2004. Cash flow from operations and free cash flow for the second quarter of fiscal year 2005 decreased primarily as a result of an increase in accounts receivable of approximately $1.8 million at March 31, 2005 compared to December 31, 2004. This increase was due to the fact that management solutions revenue has increased to close to 50% of total revenue this quarter, and a large percentage of management solutions billings are generated in the last month of the quarter. 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.
    "Our second quarter numbers represent Keynote's seventh consecutive quarter of profitability and thirteenth consecutive quarter of positive cash flow from operations. Our total revenue was thirty four percent higher compared to the same quarter last fiscal year, partly as a result of acquisitions, and also because our large base of measurement revenue grew organically by 5% compared to a year ago," said Umang Gupta, chairman and CEO of Keynote. "We are also pleased with our ability to keep costs under control while driving profitability from our acquisitions. We are now focused on generating organic revenue growth from products we have acquired or developed internally over the past year."
    As of March 31, 2005, Keynote's total worldwide customer base was approximately 2,200 companies and approximately 17,000 individual subscribers. During the second quarter, Keynote averaged a 99% monthly customer retention rate. New customers during the quarter included Edmunds.com, eMusic.com, Inc., Hotels.com L.P., and Vonage Networks.
    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 March 31, 2005, Keynote measured 9,097 URLs through its Perspective(R) services and 7,719 Internet-connected devices through its Red Alert services. On average during the second quarter of fiscal year 2005, Keynote captured over 60 million Internet performance measurements daily.
    During the quarter, Keynote entered 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 instructed the broker to repurchase for Keynote, in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, up to 2.0 million shares of Keynote's Common Stock representing approximately 10% of Keynote's outstanding common shares, over a period of twelve months commenced March 1, 2005. As of March 31, 2005, 200,131 shares of common stock had been repurchased under this plan.

    Expectations for the Third 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 third fiscal quarter ending June 30, 2005:

    -- total revenue will be between $13.0 million and $13.4 million;

    -- interest income, net will be approximately $700,000, absent
    any additional transactions, assuming no material changes in
    interest rates, and assuming Keynote continues to repurchase
    common stock under its approved plan;

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

    -- diluted weighted average shares outstanding will be
    approximately 21.0 million shares, assuming no additional
    acquisitions using shares of Keynote stock as the
    consideration, assuming Keynote continues to repurchase common
    stock under its approved plan, and no other significant
    transactions involving Keynote's equity securities;

    -- diluted earnings per share will be between $0.04 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 p.m. (PDT), today April 26, 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 #5205189, 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 plans to increase revenue from organic growth and its 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 successfully market and sell its current services to new or existing customers, Keynotes 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 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. Approximately 2,200 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 Six months ended Mar 31 Dec 31 Mar 31 Mar 31 Mar 31 ---------------------------------------------------------------------- 2005 2004 2004 2005 2004

Revenue: Subscription services $9,962 $10,452 $8,941 $20,414 $17,736 Professional services 3,203 3,136 878 6,339 1,806 ------------------------ ------------------ Total revenue 13,165 13,588 9,819 26,753 19,542

Expenses: Costs of subscription services 1,309 1,351 1,298 2,660 2,804 Costs of professional services 2,440 2,428 765 4,868 1,437 Research and development 2,074 1,962 1,634 4,036 3,258 Sales and marketing 2,987 3,548 2,278 6,535 4,987 Operations 1,440 1,565 1,360 3,005 2,746 General and administrative 1,843 1,793 1,221 3,636 2,385 Excess occupancy costs 114 134 254 248 520 Amortization of identifiable intangible assets 675 664 372 1,339 734 ------------------------ ------------------ Total expenses 12,882 13,445 9,182 26,327 18,871

Income from operations 283 143 637 426 671

Interest income and other, net 783 703 662 1,486 1,325 ------------------------ ------------------

Income before provision for income taxes 1,066 846 1,299 1,912 1,996 ------------------------ ------------------

Provision for income taxes (69) (55) (130) (124) (160) ------------------------ ------------------

Net income $997 $791 $1,169 $1,788 $1,836 ======================== ==================

Income per share: Basic $0.05 $0.04 $0.06 $0.09 $0.10 Diluted $0.05 $0.04 $0.06 $0.08 $0.09

Weighted average common shares outstanding used: Basic 20,096 19,866 19,341 19,979 19,187 Diluted 21,214 21,357 20,833 21,276 20,637

Keynote Systems, Inc. and Subsidiaries ---------------------------------------------------------------------- CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) (unaudited)

March 31, September 30, 2005 2004 ----------------------------------------------------------------------

Assets Current assets: Total cash, cash equivalents and short-term investments $149,345 $148,117 Accounts receivable, net 7,746 6,138 Prepaid and other current assets 1,894 2,329 ------------- ------------- Total current assets 158,985 156,584

Property and equipment, net 34,415 34,573 Goodwill, net 26,494 24,442 Identifiable intangible assets, net 4,854 6,131 ------------- ------------- Total assets $224,748 $221,730 ============= =============

Liabilities and Stockholders' Equity Current liabilities: Accounts payable 1,624 1,692 Accrued expenses 10,903 10,188 Current portion of capital lease obligation 70 80 Deferred revenue 7,397 7,741 ------------- ------------- Total current liabilities 19,994 19,701

Long term portion of capital lease obligation 25 35 ------------- ------------- Total liabilities 20,019 19,736 ------------- -------------

Stockholders' equity:

Common stock 20 19 Treasury stock (2,345) (29) Additional paid-in capital 343,348 339,734

Accumulated deficit (135,621) (137,409) Accumulated other comprehensive loss (673) (321) ------------- ------------- Total stockholders' equity 204,729 201,994 ------------- ------------- Total liabilities and stockholders' equity $224,748 $221,730 ============= =============

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

Three months ended Six months ended Mar 31 Dec 31 Mar 31 Mar 31 Mar 31 ---------------------------------------------------------------------- 2005 2004 2004 2005 2004

Cash flows from operating activities: Net income $997 $791 $1,169 $1,788 $1,836 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 801 793 925 1,594 2,013 Amortization of intangible assets 677 664 372 1,341 734 Amortization of debt investment premium 999 794 1,120 1,793 2,137 Changes in operating assets and liabilities, net of acquired assets and liabilities: Accounts receivable, net (1,713) 226 12 (1,487) (319) Prepaids and other assets 346 (120) 92 226 208 Accounts payable and accrued expenses (415) 122 387 (293) 347 Deferred revenue 145 (497) (25) (352) 1,414 ------------------------ ------------------ Net cash provided by operating activities 1,837 2,773 4,052 4,610 8,370 ------------------------ ------------------

Cash flows from investing activities: Purchase of property, equipment and software (723) (712) (531) (1,435) (936) Proceeds from (Purchase of) businesses and assets (296) (385) 22 (681) (560) Sales/(Purchases) of short-term investments, net (2,415) 4,224 (5,672) 1,809 (9,365) ------------------------ ------------------ Net cash provided by (used in) investing activities (3,434) 3,127 (6,181) (307) (10,861) ------------------------ ------------------

Cash flows from financing activities: Repayment of credit facility (12) (8) - (20) - Repurchase of outstanding common stock (2,322) - - (2,322) - Proceeds from issuance of common stock and exercise of stock options 2,322 899 1,697 3,221 5,055 ------------------------ ------------------ Net cash provided by (used in) financing activities (12) 891 1,697 879 5,055 ------------------------ ------------------

Net increase (decrease) in cash and cash equivalents 19,767 6,791 (432) 26,558 2,564 Cash and cash equivalents at beginning of the period 26,129 19,338 26,238 19,338 23,242 ------------------------ ------------------

Cash and cash equivalents at end of the period (1) $24,520 $26,129 $25,806 $24,520 $25,806 ======================== ==================

(1) Excludes $124.8 million, $123.6 million, and $144.3 million of short-term investments at March 31, 2005, December 31, 2004, and March 31, 2004, respectively.

Keynote Systems, Inc. and Subsidiaries (In Thousands) (Unaudited)

Three months ended Six months ended Mar 31 Dec 31 Mar 31 Mar 31 Mar 31 2005 2004 2004 2005 2004 -------------------------- ------------------

Performance Measurement Services $7,235 $7,087 $6,867 $14,322 $13,920 Performance Management Solutions 5,930 6,501 2,952 12,431 5,622 -------- -------- -------- -------- -------- Total Revenue $13,165 $13,588 $9,819 $26,753 $19,542

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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 NETWORKING EARNINGS CONFERENCE CALLS SOURCE: Keynote Systems, Inc.

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