Keynote Reports Fiscal Fourth Quarter and Year End 2007 Results

Keynote Systems (Nasdaq:KEYN), the global leader in on-demand mobile and Internet test & measurement solutions for continuously improving the online experience, announced financial results for its fiscal fourth quarter and year-end ended September 30, 2007. Umang Gupta, chairman and CEO of Keynote, said: "Fiscal year 2007 has been the best year ever for Keynote, powered mainly by our Mobile Test and Measurement business, which exceeded our expectations in each quarter of the year. Our team delivered total cash from operations of over $20.3 million and free cash flow of $14.8 million, which is a record high for any twelve-month period in our history. In fact, Keynote has generated cash flow from operations of over $57 million and free cash flow of over $40 million in the aggregate over the last four years. These funds have supported our active acquisition strategy and helped create the Keynote we have today.” Gupta continued, "As we enter fiscal 2008, we have one of the strongest product line-ups in each of our businesses: Mobile Test and Measurement, Internet Test and Measurement, and Customer Experience Test and Measurement. We also continue to make additional investments in our sales and marketing organization in order to capitalize on the opportunities ahead.” Fourth Quarter 2007 Financial Summary Revenue for the fourth quarter of fiscal year 2007 was $17.8 million, a three percent increase compared to the preceding quarter and a 17 percent increase compared to the fourth quarter of fiscal year 2006. Net loss for the fourth quarter of fiscal year 2007, which included a $2.8 million charge for deferred tax asset adjustment, $1.0 million in stock-based compensation expenses, and a $717,000 charge for amortization of intangible assets required under generally accepted accounting principles (GAAP), was $3.5 million, or $0.19 per share. This compared to net loss of $1.5 million, or $0.09 per share, for the preceding quarter, and net loss of $6.0 million, or $0.35 per share, for the fourth quarter a year ago. The non-GAAP net income for the quarter was $2.2 million, or $0.11 per diluted share, compared to non-GAAP net income of $1.3 million, or $0.07 per diluted share, for the preceding quarter, and non-GAAP net loss of $797,000, or $0.05 per share, for the fourth quarter a year ago. The company defines non-GAAP net income or loss as net income or loss 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. Non-GAAP net loss per share equals non-GAAP net loss divided by the weighted basic share count as of the period end. Fiscal 2007 Financial Summary Revenue for fiscal year 2007 was $67.8 million, a 22 percent increase compared to revenue of $55.5 million for fiscal year 2006. Net loss for fiscal year 2007 was $4.7 million, or $0.27 per share, which included a $2.8 million charge for deferred tax asset adjustment, $4.1 million in stock-based compensation expenses and a $2.9 million charge for the amortization of intangible assets. This compares to net loss of $7.5 million, or $0.41 per share, for fiscal year 2006, which included a $3.9 million charge for the adjustment of the income tax benefit associated with the partial recognition of net deferred tax assets, $3.7 million in stock-based compensation expenses, a $2.4 million charge for the amortization of intangible assets, and a $840,000 charge for in-process research and development associated with the SIGOS acquisition. The non-GAAP net income for the fiscal year 2007 was $5.4 million, or $0.28 per diluted share, compared to non-GAAP net income of $2.0 million, or $0.10 per diluted share, for the fiscal year 2006. Cash, Free Cash Flow and Deferred Revenue Summary For the quarter, cash provided by operating activities was $2.9 million, compared to $5.9 million in the prior quarter and $1.2 million in the fourth quarter of 2006. Cash used for purchases of property, equipment and software totaled $1.3 million for the fourth quarter of 2007, compared to $2.1 million in the prior quarter and $874,000 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 $1.6 million for the quarter, compared to $3.8 million in the prior quarter and $357,000 for the same period last year. For the fiscal year 2007, cash provided by operating activities was $20.3 million, compared to $10.6 million in fiscal year 2006. Cash used for purchases of property, equipment and software totaled $5.5 million for fiscal year 2007, compared to $3.1 million last year. Keynote generated free cash flow, defined as cash flow from operations less cash used for purchases of property, equipment, and software, of $14.8 million for the year, compared to $7.6 million for fiscal year 2006. Keynote’s net deferred revenue was $22.0 million at September 30, 2007, down nine percent compared to $24.1 million at June 30, 2007 and up 106 percent from $10.6 million at September 30, 2006. Keynote’s gross deferred revenue, defined as the sum of net deferred revenue and unpaid deferred revenue, was $26.6 million at September 30, 2007, down five percent compared to $27.9 million at June 30, 2007 and up 106 percent from $12.9 million at September 30, 2006. The reduction in deferred revenues was mainly due to the September quarter being a seasonally weak quarter in Europe for Keynote SIGOS. The company had $107.9 million in total cash, cash equivalents and short-term investments as of September 30, 2007. During the quarter, the Company repurchased approximately 92,000 shares for approximately $1.2 million. The total shares outstanding, net of treasury shares, as of the end of September 30, 2007 was 18.3 million as compared to 17.1 million as of September 30, 2006. The board authorized a repurchase program of up to 2.0 million shares of Keynote’s common stock, which represents up to approximately 11 percent of the Company’s currently outstanding common stock. Pursuant to the plan, the Company will enter into a trading plan with a securities broker that may commence as soon as November 6, 2007 and continue through October 31, 2008. Building Occupancy In October, Keynote signed long-term agreements with tenants for the remaining unoccupied portion of the building, bringing the occupancy of the building to 100 percent, when including the portion currently occupied by Keynote. The company estimates as a result of this new occupancy rate it will generate approximately $270,000 in excess occupancy income in the first quarter of fiscal 2008. Operational Metrics Summary As of September 30, 2007, Keynote’s total worldwide customer base was approximately 2,700 companies, up from approximately 2,600 companies in the same quarter a year ago. Keynote currently provides its services to 64 percent of the comScore Media Metrix’s top 50 Web sites and approximately 40 percent of the Fortune 100 companies. As of September 30, 2007, Keynote measured approximately 11,600 Internet pages, as compared to 10,000 Internet pages in the same quarter a year ago. Statement of Cash Flows With this press release, the Company is no longer providing a detailed statement of cash flows. A detailed statement of cash flows for the fiscal year 2007 will be available in the Form 10-K Annual Report filed with the Securities and Exchange Commission. Expectations for the First 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 first fiscal quarter ending December 31, 2007: Total revenue is expected to be between $17.8 million and $18.3 million. Net income (loss) per share is expected to be between $(0.02) and $0.02. Non-GAAP earnings per share are expected to be between $0.06 and $0.09. Cash provided by operating activities is expected to be between $2.5 million and $3.0 million. Free cash flow is expected to be between $1.5 million and $2.0 million. 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 $1.8 million. Interest income, net is expected to be approximately $1.3 million, assuming no material changes in interest rates and currently planned use of cash. Cash paid for income taxes is expected to be approximately $300,000, assuming no changes in required tax payments. Basic weighted average shares outstanding are expected to be approximately 18.1 million shares and diluted weighted average shares outstanding are expected to be approximately 19.1 million shares, assuming no additional issuances of equity or equity-related securities. Conference Call Keynote will host a conference call and simultaneous webcast at 2:00 pm (PST) today, November 1, 2007. 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 pass code is #19147857. The webcast 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 in the U.S. and (706) 645-9291 internationally; the pass code is #19147857. The webcast is 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 revenue, GAAP and Non-GAAP earnings per share, cash flow from operations, free cash flow, income tax payments 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 customers of SIGOS, Keynote’s ability to operate SIGOS 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 any future acquisitions, the effect of acquisitions by competitors in Keynote’s target markets, Keynote’s ability to manage international operations, 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, 2006, 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 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 2,400 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 2,700 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, ESPN Mobile, E*TRADE, Expedia, FedEx, 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 and Perspective 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. © 2007 Keynote Systems, Inc. Keynote Systems, Inc. and Subsidiaries                                         CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited)   Three months ended Year ended Sep 30 Jun 30 Sep 30 Sept 30 Sept 30   2007       2007       2006     2007       2006   Revenue: Subscription services $ 10,541 $ 10,881 $ 10,705 $ 42,662 $ 40,826 Ratable licenses 4,368 3,443 1,447 13,220 2,541 Professional services   2,929       3,063       3,034     11,872       12,141   Total revenue 17,838 17,387 15,186 67,754 55,508   Costs and expenses: Costs of revenue: Direct costs of subscription services 2,046 2,175 2,067 8,389 6,953 Direct costs of ratable licenses 1,329 1,456 666 4,598 1,233 Direct costs of professional services 1,887 1,947 2,006 8,164 8,975 Operations 2,030 1,853 1,842 7,673 7,203 Development 2,860 2,950 2,699 11,559 9,452 Amortization of intangible assets - software 193 191 163 754 360 Sales and marketing 5,218 5,243 4,814 20,127 16,856 General and administrative 2,609 2,490 3,486 9,856 9,840 Excess occupancy income, net (184 ) (33 ) (1 ) (265 ) (13 ) Amortization of intangible assets - other 524 522 608 2,195 2,024 In-process research and development   -       -       -     -       840   Total costs and expenses   18,512       18,794       18,350     73,050       63,723     Loss from operations (674 ) (1,407 ) (3,164 ) (5,296 ) (8,215 )     Interest income and other, net   1,312       1,168       983     4,750       4,558     Income (loss) before provision for income taxes 638 (239 ) (2,181 ) (546 ) (3,657 )   Provision for income taxes   (4,090 )     (1,294 )     (3,798 )   (4,145 )     (3,877 )     Net loss $ (3,452 )   $ (1,533 )   $ (5,979 ) $ (4,691 )   $ (7,534 )   Net loss per share: Basic $ (0.19 ) $ (0.09 ) $ (0.35 ) $ (0.27 ) $ (0.41 ) Diluted $ (0.19 ) $ (0.09 ) $ (0.35 ) $ (0.27 ) $ (0.41 )   Weighted average common shares outstanding: Basic 18,068 17,662 17,118 17,533 18,278 Diluted 18,068 17,662 17,118 17,533 18,278 Keynote Systems, Inc. and Subsidiaries                     CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) (Unaudited)   September 30, 2007   September 30, 2006   Assets Current assets: Total cash, cash equivalents and short-term investments $ 107,935 $ 90,751 Accounts receivable 5,988 7,122 Prepaids, deferred costs and other current assets 2,325 2,655 Inventory 1,059 876 Deferred tax assets   3,649     1,389   Total current assets 120,956 102,793   Long-term deferred costs 1,679 - Property and equipment, net 35,480 34,464 Goodwill 63,129 48,676 Identifiable intangible assets, net 7,963 10,105 Deferred tax assets   -     3,114     Total assets $ 229,207   $ 199,152       Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 2,285 $ 1,558 Accrued expenses 11,664 10,748 Current portion of capital lease obligation 24 31 Deferred revenue   19,824     9,691   Total current liabilities 33,797 22,028   Long-term portion of capital lease obligation 31 50 Deferred rent and other long term liability 292 - Long-term deferred revenue 2,136 958 Long-term deferred tax liability   2,066     2,727   Total liabilities   38,322     25,763     Stockholders' equity: Common stock 18 19 Treasury stock (1,151 ) (21,150 ) Additional paid-in capital 325,525 330,398 Accumulated deficit (140,188 ) (137,578 ) Accumulated other comprehensive income   6,681     1,700     Total stockholders' equity   190,885     173,389     Total liabilities and stockholders' equity $ 229,207   $ 199,152   Keynote Systems, Inc. and Subsidiaries                                 GAAP TO NON-GAAP RECONCILIATION (In Thousands, except per share data) (Unaudited)   Three months ended Year ended Sep 30 Jun 30 Sep 30, Sep 30, Sep 30,   2007     2007     2006     2007     2006   Revenue categories:   Internet Subscriptions $ 8,858 $ 9,129 $ 9,096 $ 35,911 $ 35,663 Internet Engagements   1,426     1,720     1,103     5,976     3,849   Subtotal Internet Revenue 10,284 10,849 10,199 41,887 39,512   Mobile Subscriptions 1,080 1,158 962 4,348 2,844 Mobile Ratable Licenses   4,368     3,443     1,447     13,220     2,541   Subtotal Mobile Revenue 5,448 4,601 2,409 17,568 5,385   CEM Subscriptions 603 593 647 2,403 2,319 CEM Engagements   1,503     1,344     1,931     5,896     8,292   Subtotal CEM Revenue   2,106     1,937     2,578     8,299     10,611   Total Revenue $ 17,838   $ 17,387   $ 15,186   $ 67,754   $ 55,508     Non-GAAP net income (loss) and income (loss) per share:   GAAP net loss $ (3,452 ) $ (1,533 ) $ (5,979 ) $ (4,691 ) $ (7,534 ) Provision for income taxes 4,090 1,294 3,798 4,145 3,877 Stock based compensation (a) 1,027 1,127 1,090 4,078 3,719 Amortization of intangible assets - other 524 522 608 2,195 2,024 Amortization of intangible assets - software 193 191 163 754 360 Amortization of in-process research and development   -     -     -     -     840   Non GAAP income (loss) before income tax 2,382 1,601 (320 ) 6,481 3,286 Cash tax expense   224     295     477     1,105     1,325   Non GAAP net income (loss) $ 2,158   $ 1,306   $ (797 ) $ 5,376   $ 1,961     Weighted average common shares outstanding (diluted): 19,055 18,800 17,118 18,382 18,926 Non GAAP income (loss) per share $ 0.11 $ 0.07 $ (0.05 ) $ 0.28 $ 0.10   (a) Stock based compensation by category: Direct costs of ratable licenses $ 45 $ 64 $ 52 $ 190 $ 94 Direct costs of professional services 107 99 117 470 518 Operations 146 148 178 584 662 Development 237 265 260 921 887 Sales and marketing 328 356 333 1,280 1,100 General and administrative   164     195     150     633     458   $ 1,027   $ 1,127   $ 1,090   $ 4,078   $ 3,719   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 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 $ 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 $ 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 $ 13,588 $ 13,165 $ 13,465 $ 13,474 $ 53,692   FY 2004   Internet Subscriptions $ 8,364 $ 8,416 $ 8,688 $ 8,957 $ 34,425 Internet Engagements   812   808   813   1,196   3,629 Subtotal Internet Revenue 9,176 9,224 9,501 10,153 38,054   Mobile Subscriptions 358 414 555 700 2,027   CEM Subscriptions 73 111 420 518 1,122 CEM Engagements   116   70   238   776   1,200 Subtotal CEM Revenue   189   181   658   1,294   2,322 Total Revenue $ 9,723 $ 9,819 $ 10,714 $ 12,147 $ 42,403 Keynote Systems, Inc. and Subsidiaries                                 CASH FLOW FROM OPERATING ACTIVITIES AND FREE CASH FLOW (In thousands) (Unaudited)       Three months ended Year ended Dec 31 March 31 June 30 Sept 30 Sept 30   FY 2007   Total Revenue $ 15,815 $ 16,714 $ 17,387 $ 17,838 $ 67,754   Cash Flow from Operations $ 4,680 $ 6,847 $ 5,883 $ 2,921 $ 20,331 % of Revenue 30 % 41 % 34 % 16 % 30 % Purchase of PP&E $ 704 $ 1,383 $ 2,073 $ 1,332 $ 5,492 Free Cash Flow (b) $ 3,976 $ 5,464 $ 3,810 $ 1,589 $ 14,839 % of Revenue 25 % 33 % 22 % 9 % 22 %       FY 2006   Total Revenue $ 13,716 $ 12,739 $ 13,867 $ 15,186 $ 55,508   Cash Flow from Operations $ 3,505 $ 2,941 $ 2,938 $ 1,231 $ 10,615 % of Revenue 26 % 23 % 21 % 8 % 19 % Purchase of PP&E $ 337 $ 1,055 $ 792 $ 874 $ 3,058 Free Cash Flow (b) $ 3,168 $ 1,886 $ 2,146 $ 357 $ 7,557 % of Revenue 23 % 15 % 15 % 2 % 14 %       FY 2005   Total Revenue $ 13,588 $ 13,165 $ 13,465 $ 13,474 $ 53,692   Cash Flow from Operations $ 2,773 $ 1,838 $ 2,788 $ 3,562 $ 10,961 % of Revenue 20 % 14 % 21 % 26 % 20 % Purchase of PP&E $ 712 $ 724 $ 1,019 $ 1,179 $ 3,634 Free Cash Flow (b) $ 2,061 $ 1,114 $ 1,769 $ 2,383 $ 7,327 % of Revenue 15 % 8 % 13 % 18 % 14 %       FY 2004   Total Revenue $ 9,723 $ 9,819 $ 10,714 $ 12,147 $ 42,403   Cash Flow from Operations $ 4,318 $ 4,052 $ 3,777 $ 3,016 $ 15,163 % of Revenue 44 % 41 % 35 % 25 % 36 % Purchase of PP&E $ 405 $ 531 $ 745 $ 2,334 $ 4,015 Free Cash Flow (b) $ 3,913 $ 3,521 $ 3,032 $ 682 $ 11,148 % of Revenue 40 % 36 % 28 % 6 % 26 %   (b) Keynote defines free cash flow as cash flow from operations less cash used for purchases of property, equipment and software Keynote Systems, Inc. and Subsidiaries                         DEFERRED REVENUE (In thousands, except per share data) (Unaudited)   September 30, 2007 June 30, 2007 September 30, 2006   Deferred revenue, net Domestic $ 7,511 $ 9,609 $ 5,936 International   14,449   14,540   4,713 Total $ 21,960 $ 24,149 $ 10,649   Add back: unpaid deferred revenue Domestic $ 3,085 $ 799 $ 804 International   1,564   2,933   1,453 Total $ 4,649 $ 3,732 $ 2,257   Deferred revenue, gross Domestic $ 10,596 $ 10,408 $ 6,740 International   16,013   17,473   6,166 Total $ 26,609 $ 27,881 $ 12,906