Keynote Announces Fiscal Second Quarter 2007 Results

Keynote Systems (Nasdaq:KEYN), the global leader in Internet and mobile test and measurement services, today announced financial results for its fiscal second quarter ended March 31, 2007. Umang Gupta, chairman and CEO of Keynote, said: "Our team once again delivered strong financial results with solid execution across most business units. Our Mobile Test and Measurement (MTM) business continues to exceed projections; our Internet Test and Measurement business performed in line with company expectations; and although Customer Experience Test and Measurement revenue declined, our stringent cost containments created efficiencies resulting in positive contribution margins.” Gupta continued, "During the past 12 months, we have achieved synergies between our existing Keynote mobile business and our acquired SIGOS software, particularly with customer acquisitions and technology exchange. Our MTM business, most of which is attributable to Keynote SIGOS, has grown significantly and now contributes 26 percent of our total revenue. The second quarter MTM GAAP revenue grew to $4.3 million, an eight fold increase compared to second quarter 2006. Also net deferred revenue reached $19.5 million at March 31, 2007.” Second Quarter 2007 Financial Summary Revenue for the second quarter of fiscal year 2007 was $16.7 million, an increase of six percent compared to the preceding quarter and a 31 percent increase compared to the second quarter of fiscal year 2006. Net income for the second quarter of fiscal year 2007, which included $1.0 million in stock-based compensation expenses, a $193,000 income tax benefit, and a $760,000 charge for amortization of intangible assets required under generally accepted accounting principles (GAAP), was $30,000, or $0.00 per diluted share. This compared to net income of $264,000, or $0.01 per diluted share, for the preceding quarter, and net loss of $154,000, or $0.01 per basic and diluted share, for the second quarter a year ago. The non-GAAP net income for the quarter was $1.4 million, or $0.08 per diluted share, compared to non-GAAP net income of $551,000, or $0.03 per diluted share, for the preceding quarter, and non-GAAP net income of $1.5 million, or $0.08 per diluted share, for the second quarter a year ago. The company defines non-GAAP net income or loss as net income or loss adjusted for provision for income taxes, less cash tax expense, stock-based compensation expense, and amortization of purchased intangibles. Non-GAAP net income per share equals non-GAAP net income divided by the weighted diluted share count as of that period end. Cash, Free Cash Flow and Deferred Revenue Summary Keynote SIGOS’ revenue recognition policy under GAAP requires the amortization of most of Keynote SIGOS’ software license revenue over a 12-month to 36-month period depending on the length of a contract. As such, until Keynote SIGOS’ revenue normalizes with quarterly billings, management believes cash provided by operating activities, free cash flow and deferred revenue are also important metrics to measure and manage Keynote’s financial performance. For the quarter, cash provided by operating activities was $6.9 million, compared to $4.7 million in the prior quarter and $2.5 million in the second quarter of 2006. Cash used for purchases of property, equipment and software totaled $1.4 million for the second quarter of 2007, compared to $704,000 in the prior quarter and $640,000 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 $5.5 million for the quarter, compared to $4.0 million in the prior quarter and $1.9 million for the same period last year. Keynote’s net deferred revenue was $19.5 million at March 31, 2007, up 33 percent compared to $14.7 million at December 31, 2006 and up 174 percent from $7.1 million at March 31, 2006. "Strong contributions from Keynote SIGOS drove cash from operations and free cash flow to an all time high,” said Gupta. "Based on the last six months’ performance and third quarter expectations, we believe fiscal 2007 will be a record year for cash from operations.” The company had $93.2 million in total cash, cash equivalents and short-term investments as of March 31, 2007. As previously announced, $10.6 million was paid out in the second fiscal quarter as a performance earn-out to SIGOS’ shareholders under the terms of the purchase agreement for the acquisition of SIGOS by Keynote. Operational Metrics Summary As of March 31, 2007, Keynote’s total worldwide customer base was approximately 2,650 companies, up from approximately 2,400 companies in the same quarter a year ago. Keynote currently provides its services to 68 percent of the comScore Media Metrix’s top 50 Web sites and approximately half of the Fortune 100 companies. As of March 31, 2007, Keynote measured approximately 10,500 Internet pages, as compared to 9,300 Internet pages in the same quarter a year ago. Expectations for the Third Quarter of Fiscal Year 2007 The following company outlook for the third quarter of fiscal 2007 also includes expectations for Keynote SIGOS. The company consolidated Keynote SIGOS’ financial reporting under U.S. GAAP rules starting April 3, 2006. U.S. GAAP requires Keynote SIGOS’ system license revenue to be ratably recognized over the initial duration of each customer contract, which ranges from 12 months to 36 months. As a result of the aforementioned accounting, Keynote will be able to recognize as revenue only a fraction of Keynote SIGOS sales during fiscal 2007. Accordingly, the acquisition will be dilutive to Keynote’s U.S. GAAP net income, although cash flow from operations is expected to be positive. 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 third fiscal quarter ending June 30, 2007: Total revenue is expected to be between $16.7 million and $17.2 million. Net earnings (loss) per share are expected to be between $(0.02) and $0.02. Non-GAAP earnings per share are expected to be between $0.05 and $0.08. Cash provided by operating activities is expected to be between $3.5 million and $4.0 million. Free cash flow is expected to be between $2.0 million and $2.5 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 $1.0 million, assuming no material changes in interest rates and currently planned uses of cash. Cash paid for income taxes is expected to be approximately $400,000, assuming no changes in required tax payments. Basic weighted average shares outstanding are expected to be approximately 17.3 million shares and diluted weighted average shares outstanding are expected to be approximately 18.0 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, May 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 #4925751. 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 #4925751. 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, earnings per share, cash flow from operations, income tax rate 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 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 SIGOS, Keynote’s ability to operate SIGOS and manage related costs successfully, Keynote’s ability to retain key employees, including key employees of SIGOS particularly after the payment of the earn out payment is made, pricing pressure with respect to Keynote’s services, Keynote’s ability to increase sales of its CEM services, and the risk that its prior organizational changes will not result in improved results, unforeseen expenses, competition in Keynote’s markets, integration of acquired companies or technologies and costs associated with any future acquisitions, Keynote’s ability to manage expanded 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 test & measurement solutions that improve mobile communications and online business performance. 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, we have 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, our 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 geographic locations around the world. Keynote also maintains one of the most representative panels of online users consisting of 160,000 consumers. Our 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. We help over 2,600 corporate customers become "the best of the best” by helping them improve online business performance and mobile communications quality. Our customers represent top mobile and Internet 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 is a trademark 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 Six months ended Mar 31 Dec 31 Mar 31 Mar 31 Mar 31   2007    2006    2006    2007    2006  Revenue: Subscription services $ 13,936  $ 12,713  $ 9,947  $ 26,649  $ 19,767  Professional services   2,778    3,102    2,792    5,880    6,688  Total revenue 16,714  15,815  12,739  32,529  26,455    Expenses: Costs of subscription services 2,840  3,141  1,552  5,981  3,011  Costs of professional services 2,207  2,123  2,210  4,330  4,655  Research and development 2,877  2,872  2,091  5,749  4,080  Sales and marketing 5,037  4,629  4,020  9,666  7,389  Operations 1,948  1,842  1,847  3,790  3,494  General and administrative 2,378  2,379  1,702  4,757  3,911  Excess occupancy income (21) (27) (40) (48) (50) Amortization of identifiable intangible assets   760    759    418    1,519    815  Total expenses   18,026    17,718    13,800    35,744    27,305    Loss from operations (1,312) (1,903) (1,061) (3,215) (850)     Interest income and other, net   1,149    1,121    1,280    2,270    2,388    (Loss) income before provision for income taxes (163) (782) 219  (945) 1,538    (Provision) benefit for income taxes   193    1,046    (373)   1,239    (1,105)     Net income (loss) $ 30  $ 264  $ (154) $ 294  $ 433    Income (loss) per share: Basic $ 0.00  $ 0.02  $ (0.01) $ 0.02  $ 0.02  Diluted $ 0.00  $ 0.01  $ (0.01) $ 0.02  $ 0.02    Weighted average common shares outstanding: Basic 17,284  17,116  18,902  17,199  18,812  Diluted 17,986  17,686  18,902  17,827  19,762  Keynote Systems, Inc. and Subsidiaries     CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) (unaudited)   March 31, 2007   September 30, 2006   Assets Current assets: Total cash, cash equivalents and short-term investments $ 93,240  $ 90,751  Accounts receivable, net 6,002  7,122  Inventory 1,157  876  Prepaids, deferred costs and other current assets 3,487  2,655  Deferred tax assets   1,452    1,389  Total current assets 105,338  102,793    Deferred costs 970  -  Property and equipment, net 34,444  34,464  Goodwill 60,666  48,676  Identifiable intangible assets, net 8,959  10,105  Deferred tax assets   4,352    3,114    Total assets $ 214,729  $ 199,152      Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 791  $ 1,558  Accrued expenses 10,777  10,748  Current portion of capital lease obligation 22  31  Deferred revenue, net   16,485    9,691  Total current liabilities 28,075  22,028    Long term portion of capital lease obligation 40  50  Long term deferred revenue, net 3,057  958  Long term deferred tax liability   2,866    2,727  Total liabilities   34,038    25,763    Stockholders' equity: Common stock 17  19  Treasury stock -  (21,150) Additional paid-in capital 314,467  330,398  Accumulated deficit (137,284) (137,578) Accumulated other comprehensive income   3,491    1,700    Total stockholders' equity   180,691    173,389    Total liabilities and stockholders' equity $ 214,729  $ 199,152  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   2007    2006    2006    2007    2006      Cash flows from operating activities: Net (loss) income $ 30  $ 264  $ (154) $ 294  $ 433  Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization 1,086  1,093  919  2,179  1,824  Stock-based compensation 1,004  920  908  1,924  1,704  Charges to bad debt and billing adjustment reserves 65  83  33  148  116  Amortization of intangible assets 760  759  418  1,519  815  Deferred tax assets and liabilities (1,412) 525  283  (887) 891  (Accretion) amortization of debt investment premium (50) (245) 118  (295) 265  Changes in operating assets and liabilities, net of acquired assets and liabilities: Accounts receivable, net 1,682  (648) 771  1,034  (4) Inventories (454) 217  -  (237) -  Prepaids and other assets (712) (1,021) (422) (1,733) 81  Accounts payable and accrued expenses 201  (1,108) (1,471) (907) (468) Deferred revenue   4,675    3,841    1,123    8,516    789  Net cash provided by operating activities   6,875    4,680    2,526    11,555    6,446    Cash flows from investing activities: Purchase of property, equipment and software (1,383) (704) (640) (2,087) (1,392) Purchase of businesses and assets (28) (307) (142) (335) (2,662) Payment of earnout from acquisition (10,587) -  (10,587) Sales (purchases) of short-term investments, net   (4,967)   1,033    19,720    (3,934)   19,506  Net cash provided by (used in) investing activities   (16,965)   22    18,938    (16,943)   15,452    Cash flows from financing activities: Repayment of credit facility (8) (15) (11) (23) (20) Repurchase of outstanding common stock -  -  (107) -  (1,586) Proceeds from issuance of common stock and exercise of stock options   2,545    745    1,025    3,290    2,796  Net cash provided by financing activities   2,537    730    907    3,267    1,190    Effect of exchange rate changes on cash and cash equivalents   117    83    20    200    20    Net (decrease) increase in cash and cash equivalents (7,436) 5,515  22,391  (1,921) 23,108  Cash and cash equivalents at beginning of the period   51,177    45,662    47,651    45,662    46,934    Cash and cash equivalents at end of the period (1) $ 43,741  $ 51,177  $ 70,042  $ 43,741  $ 70,042    (1) Excludes $49.5 million, $44.4 million, and $67.2 million of short-term investments at March 31, 2007, December 31, 2006, and March 31, 2006, respectively. Keynote Systems, Inc. and Subsidiaries     GAAP TO NON-GAAP RECONCILIATION (In Thousands, except per share data) (Unaudited)   Three months ended Six months ended Mar 31 Dec 31 Mar 31, Mar 31 Mar 31,   2007    2006    2006    2007    2006  Revenue categories:   Internet Subscriptions $ 9,040  $ 8,884  $ 8,876  $ 17,924  $ 17,658  Internet Engagements   1,333    1,497    905    2,830    2,032  Subtotal Internet Revenue 10,373  10,381  9,781  20,754  19,690  Mobile Subscriptions 4,316  3,203  488  7,519  1,027  Mobile Engagements   -    -    -    -    -  Subtotal Mobile Revenue 4,316  3,203  488  7,519  1,027  CEM Subscriptions 580  626  583  1,206  1,082  CEM Engagements   1,445    1,605    1,887    3,050    4,656  Subtotal CEM Revenue   2,025    2,231    2,470    4,256    5,738  Total Revenue $ 16,714  $ 15,815  $ 12,739  $ 32,529  $ 26,455    Non-GAAP net income and income per share:   GAAP net income (loss) $ 30  $ 264  $ (154) $ 294  $ 433  Provision (benefit) for income taxes (193) (1,046) 373  (1,239) 1,105  Stock based compensation (a) 1,004  920  908  1,924  1,704  Amortization of purchased intangibles 760  759  418  1,519  815  Non GAAP income before income tax 1,601  897  1,545  2,498  4,057  Cash tax expense   240    346    80    586    187  Non GAAP net income $ 1,361  $ 551  $ 1,465  $ 1,912  $ 3,870    Weighted average common shares outstanding (diluted): 17,986  17,686  18,902  17,827  19,762  Non GAAP income per share $ 0.08  $ 0.03  $ 0.08  $ 0.11  $ 0.20    (a) Stock based compensation by category: Costs of subsciption services $ 40  $ 41  $ -  $ 81  $ -  Costs of professional services 128  136  161  264  282  Research and development 209  210  215  419  401  Sales and marketing 316  280  255  596  501  Operations 144  146  183  290  333  General and administrative   167    107    94    274    187  $ 1,004  $ 920  $ 908  $ 1,924  $ 1,704  Keynote Systems, Inc. and Subsidiaries     REVENUE DETAIL (In Thousands) (Unaudited)   Three months ended Twelve months ended Dec 31 March 31 June 30 Sept 30 Sept 30   FY 2007   Internet Subscriptions $ 8,884  $ 9,040  Internet Engagements   1,497    1,333        Subtotal Internet Revenue 10,381  10,373  Mobile Subscriptions 3,203  4,316  CEM Subscriptions 626  580  CEM Engagements   1,605    1,445        Subtotal CEM Revenue   2,231    2,025        Total Revenue $ 15,815  $ 16,714          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  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     DEFERRED REVENUE (In thousands, except per share data) (Unaudited)     March 31, 2007 December 31, 2006 March 31, 2006   Deferred revenue, net Domestic $ 6,639  $ 6,659  $ 6,472  International   12,903    8,050    661  Total $ 19,542  $ 14,709  $ 7,133    Add back: unpaid deferred revenue Domestic $ 4,608  $ 1,820  $ 1,273  International   1,993    7,090    11  Total $ 6,601  $ 8,910  $ 1,284    Deferred revenue, gross Domestic $ 11,247  $ 8,479  $ 7,745  International   14,896    15,140    672  Total $ 26,143  $ 23,619  $ 8,417