##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended December 31, 2009
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number: 000-27241
 KEYNOTE SYSTEMS, INC.
 (Exact name of registrant as specified in its charter)
 Delaware
(State or other jurisdiction of 
incorporation or organization)
    
    94-3226488
(I.R.S. Employer
Identification No.)
 777 Mariners Island Blvd., San Mateo, CA
(Address of principal executive offices)
    
    94404
(Zip Code)
 Registrants telephone number, including area code: (650) 403-2400
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ
  Class
    
    
    Shares outstanding as of February 3, 2010Common Stock, $.001 par value
    
    
    14,608,049 shares




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##### 



KEYNOTE SYSTEMS, INC.
  
 PagePART IFINANCIAL INFORMATIONItem 1.
    
    Unaudited Condensed Consolidated Financial Statements
    
    
    3Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    23Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risks
    
    
    35Item 4.
    
    Controls and Procedures
    
    
    35PART IIOTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    36Item 1A.
    
    Risk Factors
    
    
    37Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    45Item 3.
    
    Defaults Upon Senior Securities
    
    
    45Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    45Item 5.
    
    Other Information
    
    
    45Item 6.
    
    Exhibits
    
    
    46Signatures
    
    
    
    
    47EX-31.1EX-31.2EX-32.1EX-32.2
  2




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##### Table of Contents



PART IFINANCIAL INFORMATION
 
 Item 1. Unaudited Condensed Consolidated Financial Statements
 KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES
Index to Unaudited Condensed Consolidated Financial Statements
 PageCondensed Consolidated Balance Sheets as of December 31, 2009 and September 30, 2009
    
    
    4Condensed Consolidated Statements of Operations for the three months ended December 31, 2009 and 2008
    
    
    5Condensed Consolidated Statements of Cash Flows for the three months ended December 31, 2009 and 2008
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7
 3




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KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
 December 31,
    
    
    September 30,2009
    
    
    2009ASSETSCurrent assets:Cash and cash equivalents
    
    $
    25,226
    
    
    $
    51,383Short-term investments
    
    
    30,713
    
    
    
    6,585Total cash, cash equivalents and short-term investments
    
    
    55,939
    
    
    
    57,968Accounts receivable, less allowance for doubtful accounts of
$127 and $112, respectively, and less billing reserve of $199
and $150, respectively
    
    
    7,026
    
    
    
    6,403Prepaids, deferred costs and other current assets
    
    
    3,901
    
    
    
    3,517Inventories
    
    
    1,246
    
    
    
    1,222Deferred tax assets
    
    
    2,854
    
    
    
    2,913Total current assets
    
    
    70,966
    
    
    
    72,023Deferred costs and other long term assets
    
    
    2,721
    
    
    
    3,024Property, equipment and software, net
    
    
    34,483
    
    
    
    34,778Goodwill
    
    
    65,156
    
    
    
    66,078Identifiable intangible assets, net
    
    
    5,740
    
    
    
    6,255Long-term deferred tax assets
    
    
    144
    
    
    
    61Total assets
    
    $
    179,210
    
    
    $
    182,219LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,004
    
    
    $
    1,147Accrued expenses
    
    
    8,801
    
    
    
    8,450Current portion of capital lease obligation
    
    
    11
    
    
    
    16Deferred revenue
    
    
    13,969
    
    
    
    17,661Total current liabilities
    
    
    24,785
    
    
    
    27,274Deferred rent and other long-term liabilities
    
    
    3,423
    
    
    
    3,344Long-term deferred revenue
    
    
    682
    
    
    
    1,167Long-term deferred tax liability
    
    
    431
    
    
    
    414Total liabilities
    
    
    29,321
    
    
    
    32,199Commitments and contingencies (see Note 14)Stockholders equity:Common stock
    
    
    15
    
    
    
    14Additional paid-in capital
    
    
    283,072
    
    
    
    282,653Accumulated deficit
    
    
    (138,633
    )
    
    
    (139,614
    )Accumulated other comprehensive income
    
    
    5,435
    
    
    
    6,967Total stockholders equity
    
    
    149,889
    
    
    
    150,020Total liabilities and stockholders equity
    
    $
    179,210
    
    
    $
    182,219
  4




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##### Table of Contents



KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
 Three Months Ended 
December 31,2009
    
    
    2008Net revenue:Subscription services
    
    $
    12,209
    
    
    $
    11,473Ratable licenses
    
    
    5,956
    
    
    
    6,043Professional services
    
    
    2,544
    
    
    
    3,121Total net revenue
    
    
    20,709
    
    
    
    20,637Costs and expensesCosts of revenueDirect costs of subscription services
    
    
    2,208
    
    
    
    2,256Direct costs of ratable licenses
    
    
    1,728
    
    
    
    1,488Direct costs of professional services
    
    
    1,467
    
    
    
    1,678Development
    
    
    3,145
    
    
    
    3,083Operations
    
    
    1,891
    
    
    
    2,162Amortization of intangible assets  software
    
    
    298
    
    
    
    288Total costs of revenue
    
    
    10,737
    
    
    
    10,955Sales and marketing
    
    
    6,328
    
    
    
    6,180General and administrative
    
    
    2,642
    
    
    
    2,820Excess occupancy income
    
    
    (308
    )
    
    
    (220
    )Amortization of intangible assets  other
    
    
    182
    
    
    
    269Total costs and expenses
    
    
    19,581
    
    
    
    20,004Income from operations
    
    
    1,128
    
    
    
    633Interest income
    
    
    86
    
    
    
    334Other income, net
    
    
    7
    
    
    
    339Income before provision for income taxes
    
    
    1,221
    
    
    
    1,306Provision for income taxes
    
    
    (240
    )
    
    
    (420
    )Net income
    
    $
    981
    
    
    $
    886Net income per share:Basic
    
    $
    0.07
    
    
    $
    0.06Diluted
    
    $
    0.07
    
    
    $
    0.06Shares used in computing basic and diluted net
income per share:Basic
    
    
    14,514
    
    
    
    14,186Diluted
    
    
    14,756
    
    
    
    14,302Cash dividends declared per common share
    
    $
    0.05
    
    
    $
    
  5




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KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 Three Months EndedDecember 31,2009
    
    
    2008Cash flows from operating activities:Net income
    
    $
    981
    
    
    $
    886Adjustments to reconcile net income to net cash provided by (used
in) operating activities:Depreciation and amortization
    
    
    1,197
    
    
    
    1,328Stock-based compensation
    
    
    1,003
    
    
    
    1,041Amortization of identifiable intangible assets
    
    
    480
    
    
    
    557Amortization of prepaid tax asset
    
    
    201
    
    
    
    106Charges to bad debt and billing reserves
    
    
    92
    
    
    
    137Amortization of debt investment premium
    
    
    60
    
    
    
    3Deferred tax provision (benefit)
    
    
    (66
    )
    
    
    20Collection of tax credit receivable within deferred tax assets
    
    
    
    
    
    
    181Loss on disposal of equipment
    
    
    7
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (779
    )
    
    
    (1,393
    )Inventories
    
    
    (52
    )
    
    
    (148
    )Prepaids, deferred costs and other assets
    
    
    (398
    )
    
    
    69Accounts payable and accrued expenses
    
    
    1,178
    
    
    
    (785
    )Deferred revenue
    
    
    (3,999
    )
    
    
    18Net cash provided by (used in) operating activities
    
    
    (95
    )
    
    
    2,020Cash flows from investing activities:Purchases of property, equipment  and software
    
    
    (775
    )
    
    
    (661
    )Payment of acquisition costs for Zandan S.A.
    
    
    
    
    
    
    (170
    )Maturities and sales of short-term investments
    
    
    2,218
    
    
    
    2,380Purchases of short-term investments
    
    
    (26,609
    )
    
    
    (9,880
    )Net cash used in investing activities
    
    
    (25,166
    )
    
    
    (8,331
    )Cash flows from financing activities:Repayment of capital lease obligation
    
    
    (5
    )
    
    
    (4
    )Proceeds from issuance of common stock and exercise of stock options
    
    
    160
    
    
    
    752Cash dividends declared and paid
    
    
    (727
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    (572
    )
    
    
    748Effect of exchange rate changes on cash and cash equivalents
    
    
    (324
    )
    
    
    (892
    )Net change in cash and cash equivalents
    
    
    (26,157
    )
    
    
    (6,455
    )Cash and cash equivalents at beginning of the period
    
    
    51,383
    
    
    
    42,546Cash and cash equivalents at end of the period
    
    $
    25,226
    
    
    $
    36,091Supplemental cash flow disclosure:Income taxes paid (net of refunds)
    
    $
    164
    
    
    $
    150Noncash operating and investing activities:Acquisition of property, equipment and software on account
    
    $
    190
    
    
    $
    167
  6




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KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 (1) Summary of Significant Accounting Policies
 Basis of Presentation
    Correction of Classification of Short-Term Investments
   7




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KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  (Continued)
 Recently Adopted Accounting Pronouncements
 Fair Value Measurements and Disclosures Fair Value Measurements ,
 Business Combinations Business Combinations
 Noncontrolling
Interests in Consolidated Financial Statements  an amendment of Accounting Research
Bulletin No. 51
 Disclosures about
Derivative Instruments and Hedging Activities
 Determination of the
Useful Life of Intangible Assets Goodwill and Other
Intangible Assets
 Recently Issued Accounting Pronouncements
 Software (Topic 985): Certain Revenue Arrangements That Include Software Elements Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements
 8




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KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  (Continued)
  Stock Based Compensation
 (a) Summary of Plans
   (b) Restricted Stock Units
    (c) Stock Options
  Three Months EndedDecember 31,2009
    
    
    2008Volatility
    
    
    
    
    
    
    37.9
    %Risk free interest rate
    
    
    
    
    
    
    2.6
    %Expected life (in years)
    
    
    
    
    
    
    4.50Dividend yield
    
    
    
    
    
    
    
 9




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KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  (Continued)
  AverageWeighted
    
    
    Remaining
    
    
    AggregateAverage
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    Term (years)
    
    
    ValueOutstanding at September 30, 2009
    
    
    4,802
    
    
    $
    11.65
    
    
    
    5.8
    
    
    $
    820Granted
    
    
    
    
    
    
    Exercised
    
    
    (15
    )
    
    
    10.55Forfeited or canceled
    
    
    (6
    )
    
    
    11.04Expired
    
    
    (22
    )
    
    
    11.45Outstanding at December 31, 2009
    
    
    4,759
    
    
    $
    11.66
    
    
    
    5.6
    
    
    $
    2,016Vested and expected to vest at December 31, 2009
    
    
    4,653
    
    
    $
    11.66
    
    
    
    5.5
    
    
    $
    1,993Exercisable at December 31, 2009
    
    
    3,939
    
    
    $
    11.60
    
    
    
    5.2
    
    
    $
    1,852
   (d) Employee Stock Purchase Plan
 st st
 Three Months EndedDecember 31,2009
    
    
    2008Volatility
    
    
    61.3
    %
    
    
    43.4
    %Risk free interest rate
    
    
    0.7
    %
    
    
    2.3
    %Expected life (in years)
    
    
    1.25
    
    
    
    1.25Dividend yield
    
    
    
    
    
    
    
 (e) Stock based Compensation Expense
  Three Months Ended December 31,2009
    
    
    2008Direct costs of ratable licenses
    
    $
    26
    
    
    $
    29Direct costs of professional services
    
    
    111
    
    
    
    80Development
    
    
    229
    
    
    
    230Operations
    
    
    134
    
    
    
    123Sales and marketing
    
    
    364
    
    
    
    365General and administrative
    
    
    139
    
    
    
    214Total
    
    $
    1,003
    
    
    $
    1,041
 10




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KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  (Continued)
 Excess Occupancy Income
  TotalFiscal years:2010 (remaining nine months)
    
    $
    1,8192011
    
    
    2,3942012
    
    
    1,7142013
    
    
    2172014
    
    
    89Thereafter
    
    
    Total future minimum rents receivable
    
    $
    6,233
 (2) Revenue Recognition
  
    
    Persuasive evidence of an arrangement exists.The Company considers a customer signed
quote, contract, or purchase order to be evidence of an arrangement.
    
    Delivery of the product or service.For subscription services, delivery is considered to
occur when the customer has been provided with access to the subscription services. The
Companys subscription services are generally delivered on a consistent basis over the
period of the subscription. For professional services, delivery is considered to occur when
the services or milestones are completed. For ratable licenses, delivery occurs when all
elements of the arrangement have either been delivered or accepted, if acceptance language
exists.
    
    Fee is fixed or determinable.The Company considers the fee to be fixed or determinable
if the fee is not subject to refund or adjustment and payment terms are standard.
    
    Collection is deemed reasonably assured.Collection is deemed reasonably assured if it
is expected that the customer will be able to pay amounts under the arrangement as payments
become due. If it is determined that collection is not reasonably assured, then revenue is
deferred and recognized upon cash collection.
  Subscription Services Revenue:
 Revenue Recognition Revenue Arrangements with
Multiple Deliverables
  11




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KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  (Continued)
   Ratable Licenses Revenue: Software Revenue Recognition Applicability of AICPA
Statement of Position 97-2 to Non-Software Deliverables in an Arrangement Containing
More-Than-Incidental Software
   Professional Services Revenue:
  Deferred Revenue:
 12




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KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  (Continued)
 Deferred Costs:
 (3) Other Comprehensive Income (Loss) and Foreign Currency Translation
 Reporting Comprehensive Income),
  Three Months EndedDecember 31,2009
    
    
    2008Net income
    
    $
    981
    
    
    $
    886Net unrealized loss on available-for-sale investments
    
    
    (131
    )
    
    
    Foreign currency translation loss
    
    
    (1,401
    )
    
    
    (963
    )Other comprehensive loss
    
    $
    (551
    )
    
    $
    (77
    )
  (4) Financial Instruments and Concentration of Risk
    13




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KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  (Continued)
  (5) Cash, Cash Equivalents, and Short-Term Investments
 Statement of Cash Flows
   Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Market ValueCash
    
    $
    21,039
    
    
    $
    
    
    
    $
    
    
    
    $
    21,039Money market funds
    
    
    4,187
    
    
    
    
    
    
    
    
    
    
    
    4,187Total cash and cash equivalents
    
    $
    25,226
    
    
    $
    
    
    
    $
    
    
    
    $
    25,226Fixed-term deposits
    
    $
    4,295
    
    
    $
    
    
    
    $
    
    
    
    $
    4,295Treasuries and agencies
    
    
    6,100
    
    
    
    
    
    
    
    (39
    )
    
    
    6,061Municipal and corporate bonds
    
    
    20,449
    
    
    
    
    
    
    
    (92
    )
    
    
    20,357Total short-term investments
    
    $
    30,844
    
    
    $
    
    
    
    $
    (131
    )
    
    $
    30,713
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Market ValueCash
    
    $
    20,492
    
    
    $
    
    
    
    $
    
    
    
    $
    20,492Money market funds
    
    
    30,891
    
    
    
    
    
    
    
    
    
    
    
    30,891Total cash and cash equivalents
    
    $
    51,383
    
    
    $
    
    
    
    $
    
    
    
    $
    51,383Fixed-term deposits
    
    $
    6,585
    
    
    $
    
    
    
    $
    
    
    
    $
    6,585Total short-term investments
    
    $
    6,585
    
    
    $
    
    
    
    $
    
    
    
    $
    6,585
 InvestmentsDebt and Equity Securities, Recognition and Measurement, Impairment
 
    
    If management intends to sell an
impaired debt security, the impairment
is considered other than temporary. If
the entity does not intend to sell the
impaired debt security, it must still
assess whether it is more likely than
not that it will be required to sell
the security.
 
    
    If management determines that it
is more likely than not that it will be
required to sell the security before
recovery of the amortized cost basis of
the security, the impairment is
considered other than temporary.
 
    
    If management determines that it
does not intend to sell an impaired
debt security and, that it is not more
likely than not that it will be
required to sell such a security before
recovery of the securitys amortized
cost basis, the entity must assess
whether it expects to recover the
entire amortized cost basis of the
security.
 14




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KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  (Continued)
   EstimatedCost
    
    
    Fair ValueDue in less than one year
    
    $
    9,780
    
    
    $
    9,775Due in more than one year and less than two years
    
    
    21,064
    
    
    
    20,938Total
    
    $
    30,844
    
    
    $
    30,713
 (6) Fair Value Measurements
   
    
    Level 1 inputs are based on quoted prices in active markets for identical assets or
liabilities.
    
    Level 2 inputs are based on quoted prices for similar instruments in active markets,
quoted prices for identical or similar instruments in markets that are not active, and
model-based valuation techniques for which all significant assumptions are observable in the
market or can be corroborated by observable market data for substantially the full term of
the assets or liabilities.
    
    Level 3 inputs are generally unobservable and typically reflect managements estimates of
assumptions that market participants would use in pricing the asset or liability. The fair
values are therefore determined using model-based techniques that include option pricing
models, discounted cash flow models, and similar techniques.
  Quoted Pricesin Active
    
    
    SignificantMarkets for
    
    
    Other
    
    
    SignificantIdentical
    
    
    Observable
    
    
    UnobservableInstruments
    
    
    Inputs
    
    
    Inputs(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    TotalCash and cash equivalents:Money market funds
    
    $
    4,187
    
    
    $
    
    
    
    $
    
    
    
    $
    4,187Short term investments:Fixed- term deposits
    
    
    
    
    
    
    4,295
    
    
    
    
    
    
    
    4,295Bonds
    
    
    20,357
    
    
    
    
    
    
    
    
    
    
    
    20,357Treasuries and agencies
    
    
    6,061
    
    
    
    
    
    
    
    
    
    
    
    6,061Total assets measured at fair value
    
    $
    30,605
    
    
    $
    4,295
    
    
    $
    
    
    
    $
    34,900
  15




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KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  (Continued)
 (7) Consolidated Financial Statement Details
 Prepaids, Deferred Costs and Other Current Assets
 December 31, 2009
    
    
    September 30, 2009Prepaid expenses
    
    $
    1,437
    
    
    $
    1,554Deferred costs of revenue
    
    
    957
    
    
    
    580Income tax receivable
    
    
    1,078
    
    
    
    971Other assets
    
    
    207
    
    
    
    369Security deposits, advances, and interest receivable
    
    
    222
    
    
    
    43Total
    
    $
    3,901
    
    
    $
    3,517
 Property, equipment and software
 December 31, 2009
    
    
    September 30, 2009Computer equipment and software
    
    $
    30,304
    
    
    $
    29,551Furniture and fixtures
    
    
    2,159
    
    
    
    2,169Land
    
    
    14,150
    
    
    
    14,150Building
    
    
    21,908
    
    
    
    21,875Leasehold and building improvements
    
    
    1,169
    
    
    
    1,179Construction in progress
    
    
    405
    
    
    
    38370,095
    
    
    
    69,307Less accumulated depreciation and amortization
    
    
    (35,612
    )
    
    
    (34,529
    )Total
    
    $
    34,483
    
    
    $
    34,778
 Deferred Costs and Other Long-Term Assets
 December 31, 2009
    
    
    September 30, 2009Prepaid tax asset
    
    $
    1,472
    
    
    $
    1,710Deferred costs of revenue
    
    
    427
    
    
    
    421Tenant rent receivable
    
    
    259
    
    
    
    280Deposits
    
    
    262
    
    
    
    264Prepaid expenses
    
    
    301
    
    
    
    349Total
    
    $
    2,721
    
    
    $
    3,024
 Accrued Expenses
 December 31, 2009
    
    
    September 30, 2009Accrued employee compensation
    
    $
    3,040
    
    
    $
    3,096Accrued audit and professional fees
    
    
    715
    
    
    
    388Income and other taxes
    
    
    609
    
    
    
    479Other accrued expenses
    
    
    4,437
    
    
    
    4,487Total
    
    $
    8,801
    
    
    $
    8,450
 (8) Inventories
  16




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##### Table of Contents



KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  (Continued)
 (9) Goodwill and Identifiable Intangible Assets
   :
 Balance at September 30, 2009
    
    $
    66,078Translation adjustments
    
    
    (922
    )Balance at December 31, 2009
    
    $
    65,156
  Technology
    
    
    TechnologyBased-
    
    
    Based-
    
    
    CustomerSoftware
    
    
    Other
    
    
    Based
    
    
    Trademark
    
    
    Covenant
    
    
    Backlog
    
    
    TotalAs of December 31, 2009:Gross carrying value
    
    $
    8,071
    
    
    $
    11,845
    
    
    $
    8,153
    
    
    $
    1,399
    
    
    $
    40
    
    
    $
    119
    
    
    $
    29,627Accumulated amortization
    
    
    (3,718
    )
    
    
    (11,845
    )
    
    
    (7,459
    )
    
    
    (768
    )
    
    
    (24
    )
    
    
    (73
    )
    
    
    (23,887
    )Net carrying value
    
    $
    4,353
    
    
    $
    
    
    
    $
    694
    
    
    $
    631
    
    
    $
    16
    
    
    $
    46
    
    
    $
    5,740As of September 30, 2009:Gross carrying value
    
    $
    8,125
    
    
    $
    11,845
    
    
    $
    8,190
    
    
    $
    1,407
    
    
    $
    40
    
    
    $
    121
    
    
    $
    29,728Accumulated amortization
    
    
    (3,422
    )
    
    
    (11,834
    )
    
    
    (7,391
    )
    
    
    (733
    )
    
    
    (23
    )
    
    
    (70
    )
    
    
    (23,473
    )Net carrying value
    
    $
    4,703
    
    
    $
    11
    
    
    $
    799
    
    
    $
    674
    
    
    $
    17
    
    
    $
    51
    
    
    $
    6,255
  17




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##### Table of Contents



KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  (Continued)
  TotalFiscal years:2010 (remaining nine months)
    
    $
    1,8472011
    
    
    2,2772012
    
    
    1,4032013
    
    
    213Total
    
    $
    5,740Weighted-average remaining useful life as of December 31, 2009 (years)
    
    
    2.9
 (10) Lease Abandonment Accrual
  Lease abandonment liability, September 30, 2009
    
    $
    696Lease payments to lessor
    
    
    (66
    )Sublease proceeds
    
    
    Payment of lease termination costs
    
    
    (63
    )Lease abandonment liability, December 31, 2009
    
    $
    567
 (11) Net Income (Loss) Per Share
   Three Months EndedDecember 31,2009
    
    
    2008Numerator:Net income
    
    $
    981
    
    
    $
    886Denominator:Weighted average shares outstanding
    
    
    14,514
    
    
    
    14,186Effect of dilutive stock options, RSUs and employee stock purchase rights
    
    
    242
    
    
    
    116Denominator for diluted net income per share
    
    
    14,756
    
    
    
    14,302Basic and diluted net income per share
    
    $
    0.07
    
    
    $
    0.06
  (12) Stockholders Equity
 Dividends
  (13) Income Taxes
  18




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##### Table of Contents



KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  (Continued)
    Accounting for Uncertainty in Income Taxes  an interpretation of FASB
Statement No. 109
   (14) Commitments and Contingencies
 Leases
  Operating
    
    
    CapitalLeases
    
    
    LeasesFiscal year:2010 (remaining nine months)
    
    $
    701
    
    
    $
    112011
    
    
    725
    
    
    
    2012
    
    
    528
    
    
    
    2013
    
    
    421
    
    
    
    2014
    
    
    347
    
    
    
    Thereafter
    
    
    502
    
    
    
    Total minimum lease payments (a)
    
    $
    3,224
    
    
    
    11Less amounts representing interest
    
    
    
    
    
    
    Present value of minimum lease payments
    
    
    
    
    
    
    11Less current portion of capital lease obligation
    
    
    
    
    
    
    (11
    )Long-term portion of capital lease obligation
    
    
    
    
    
    $
    
 
 (a)
    
    Future minimum lease payments exclude sublease proceeds of approximately
$1.2 million. 19




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##### Table of Contents



KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  (Continued)
  Commitments
 ,
  Legal Proceedings
   Simmonds v. JPMorgan Chase & Co.,
et al.
 20




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##### Table of Contents



KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  (Continued)
   Warranties
  Indemnification
  (15) Geographic and Segment Information
   Subscription
    
    
    Ratable
    
    
    ProfessionalServices
    
    
    Licenses
    
    
    ServicesInternet Test and Measurement:Application Perspective
    
    
    XDiagnostic Services
    
    
    XEnterprise Adapters
    
    
    XFinancial Industry Scorecards
    
    
    X
    
    
    
    
    
    
    
    XLoadPro
    
    
    X
    
    
    
    
    
    
    
    XNetMechanic
    
    
    XPerformance Scoreboard
    
    
    XProfessional Services
    
    
    
    
    
    
    
    
    
    
    XRed Alert
    
    
    XStreaming Perspective
    
    
    XTest Perspective
    
    
    XTransaction Perspective
    
    
    XVoice Perspective
    
    
    X
    
    
    
    
    
    
    
    XWebEffective
    
    
    X
    
    
    
    
    
    
    
    XWeb Site Perspective
    
    
    X
 21




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##### Table of Contents



KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  (Continued)
 Subscription
    
    
    Ratable
    
    
    ProfessionalServices
    
    
    Licenses
    
    
    ServicesMobile Test and Measurement:Mobile Device Perspective
    
    
    XMobile Application Perspective
    
    
    XSIGOS SITE
    
    
    
    
    
    
    XSIGOS Global Roamer
    
    
    X
  Three Months Ended December 31,2009
    
    
    2008Internet Subscriptions
    
    $
    9,835
    
    
    $
    9,664Internet Engagements
    
    
    2,544
    
    
    
    3,121Total Internet net revenue
    
    
    12,379
    
    
    
    12,785Mobile Subscription
    
    
    2,374
    
    
    
    1,809Mobile Ratable Licenses
    
    
    5,956
    
    
    
    6,043Total Mobile Subscriptions net revenue
    
    
    8,330
    
    
    
    7,852Total net revenue
    
    $
    20,709
    
    
    $
    20,637
  Three Months EndedDecember 31,2009
    
    
    2008United States
    
    $
    11,308
    
    
    $
    12,048Europe*
    
    
    6,652
    
    
    
    6,525Other*
    
    
    2,749
    
    
    
    2,064Total net revenue
    
    $
    20,709
    
    
    $
    20,637
 
 *
    
    No individual country represents more than 10% of total revenue.  December 31,
    
    
    September 30,2009
    
    
    2009United States
    
    $
    33,353
    
    
    $
    33,685Europe
    
    
    1,122
    
    
    
    1,084Other
    
    
    8
    
    
    
    9Total
    
    $
    34,483
    
    
    $
    34,778
  (16) Subsequent Events
   22




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 The following discussion of the financial condition and results of operations of Keynote
Systems, Inc. (referred to herein as we, us, Keynote or the Company) should be read in
conjunction with the Condensed Consolidated Financial Statements and the Notes thereto included in
this report as well as in our Annual Report on Form 10-K for the year ended September 30, 2009, and
subsequent filings with the Securities and Exchange Commission.
 Except for historical information, this Form 10-Q contains 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. These forward-looking statements involve risks and uncertainties, including, among
other things, statements regarding our anticipated costs and expenses and revenue mix. These
forward-looking statements include, among others, statements including the words expects,
anticipates, intends, believes and similar language. Our actual results may differ
significantly from those projected in the forward-looking statements. Factors that might cause or
contribute to these differences include, but are not limited to, those discussed in this section,
the section entitled Risk Factors in Item 1A of Part II of this report, and in our annual report
on Form 10-K for the fiscal year ended September 30, 2009 and elsewhere in that report. You should
carefully review the risks described in other documents we file from time to time with the
Securities and Exchange Commission, including the quarterly reports on Form 10-Q and current
reports on Form 8-K that we may file during the current year. You are cautioned not to place undue
reliance on the forward-looking statements, which speak only as of the date of this quarterly
report on Form 10-Q . Except as required by law, we undertake no obligation to publicly release any
revisions to the forward-looking statements or reflect events or circumstances after the date of
this document.
 Overview
      23




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##### Table of Contents




    
    continuing to drive growth in our Internet and Mobile revenue, as we believe that these
areas represent the greatest growth opportunities for our business in light of the decline
in revenues from our legacy single page measurement services;
    
    growing multiple page/broadband related revenue, such as Transaction Perspective and
Application Perspective, without corresponding reductions in unit price in order to increase
Internet revenues and margins, as growth in these services will be important to growing our
Internet revenue;
    
    maintaining and growing the overall size of our customer base
to support the growth of our Internet and Mobile revenue;
    
    continuing to control our expenses in fiscal 2010 to maintain and improve profitability,
particularly because of the economic uncertainties that continue to exist in the current
fiscal year; and
    
    the challenges faced due to the current economic global downturn as this effects our
customers ability to purchase our services through reduced budgets.
  www.keynote.com
 24




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##### Table of Contents



Critical Accounting Policies and Estimates
  
    
    Revenue recognition
    
    Allowance for doubtful accounts and billing allowance
    
    Inventories and inventory valuation
    
    Allocation of purchase price for business combinations
    
    Goodwill, identifiable intangible assets and long-lived assets
    
    Stock-based compensation
    
    Income taxes, deferred income taxes and deferred income tax liabilities
  25




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##### Table of Contents



Results of Operations
  Three Months Ended
 December 31,2009
    
    
    2008Net revenue:Subscription services
    
    
    58.9
    %
    
    
    55.6
    %Ratable licenses
    
    
    28.8
    %
    
    
    29.3
    %Professional services
    
    
    12.3
    %
    
    
    15.1
    %Total net revenue
    
    
    100.0
    %
    
    
    100.0
    %Costs and expenses:Costs of revenue:Direct costs of subscription services
    
    
    10.7
    %
    
    
    10.9
    %Direct costs of ratable licenses
    
    
    8.3
    %
    
    
    7.2
    %Direct costs of professional services
    
    
    7.1
    %
    
    
    8.1
    %Operations
    
    
    9.1
    %
    
    
    10.5
    %Development
    
    
    15.2
    %
    
    
    14.9
    %Amortization of intangible assets  software
    
    
    1.4
    %
    
    
    1.4
    %Sales and marketing
    
    
    30.6
    %
    
    
    29.9
    %General and administrative
    
    
    12.8
    %
    
    
    13.7
    %Excess occupancy income
    
    
    (1.5
    )%
    
    
    (1.0
    )%Amortization of intangible assets  other
    
    
    0.9
    %
    
    
    1.3
    %Total costs and expenses
    
    
    94.6
    %
    
    
    96.9
    %Income from operations
    
    
    5.4
    %
    
    
    3.1
    %Interest income and other, net
    
    
    0.5
    %
    
    
    3.2
    %Income before provision for income taxes
    
    
    5.9
    %
    
    
    6.3
    %Provision for income taxes
    
    
    (1.2
    )%
    
    
    (2.0
    )%Net income
    
    
    4.7
    %
    
    
    4.3
    %
 Net Revenue
 For the three months ended December 31,2009
    
    
    2008
    
    

% Change(In thousands)Subscription services
    
    $
    12,209
    
    
    $
    11,473
    
    
    
    6
    %Ratable licenses
    
    
    5,956
    
    
    
    6,043
    
    
    
    (1)
    %Professional services
    
    
    2,544
    
    
    
    3,121
    
    
    
    (18)
    %Total net revenue
    
    $
    20,709
    
    
    $
    20,637
    
    
    
    0
    %
 Subscription Services
 26




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##### Table of Contents



Ratable Licenses.
 Professional Services
    Subscription
    
    
    Ratable
    
    
    ProfessionalServices
    
    
    Licenses
    
    
    ServicesInternet Test and Measurement:Application Perspective
    
    
    XDiagnostic Services
    
    
    XEnterprise Adapters
    
    
    XFinancial Industry Scorecards
    
    
    X
    
    
    
    
    
    
    
    XLoadPro
    
    
    X
    
    
    
    
    
    
    
    XNetMechanic
    
    
    XPerformance Scoreboard
    
    
    XProfessional Services
    
    
    
    
    
    
    
    
    
    
    XRed Alert
    
    
    XStreaming Perspective
    
    
    XTest Perspective
    
    
    XTransaction Perspective
    
    
    XVoice Perspective
    
    
    X
    
    
    
    
    
    
    
    XWebEffective
    
    
    X
    
    
    
    
    
    
    
    XWeb Site Perspective
    
    
    XMobile Test and Measurement:Mobile Device Perspective
    
    
    XMobile Application Perspective
    
    
    XSIGOS SITE
    
    
    
    
    
    
    XSIGOS Global Roamer
    
    
    X
  For the three months ended December 31,2009
    
    
    2008
    
    

% Change(In thousands)Internet Subscriptions
    
    $
    9,835
    
    
    $
    9,664
    
    
    
    2
    %Internet Engagements
    
    
    2,544
    
    
    
    3,121
    
    
    
    (18)
    %Total Internet net revenue
    
    
    12,379
    
    
    
    12,785
    
    
    
    (3)
    %Mobile Subscription
    
    
    2,374
    
    
    
    1,809
    
    
    
    31
    %Mobile Ratable Licenses
    
    
    5,956
    
    
    
    6,043
    
    
    
    (1)
    %Total Mobile net revenue
    
    
    8,330
    
    
    
    7,852
    
    
    
    6
    %Total net revenue
    
    $
    20,709
    
    
    $
    20,637
    
    
    
    0
    %
 27




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##### Table of Contents



Internet Revenue.
 Mobile Revenue.
  Costs and Expenses
 Direct Costs of Subscription Services, Ratable Licenses and Professional Services
 For the three months ended December 31,2009
    
    
    2008
    
    
    

%
Change(In thousands)Direct costs of subscription services
    
    $
    2,208
    
    
    $
    2,256
    
    
    
    (2
    )
 %Direct costs of ratable licenses
    
    $
    1,728
    
    
    $
    1,488
    
    
    
    16
 
    %Direct costs of professional services
    
    $
    1,467
    
    
    $
    1,678
    
    
    
    (13
    )
    %
 Direct Costs of Subscription Service
  Direct Costs of Ratable Licenses.
  Direct Costs of Professional Services.
 28




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##### Table of Contents



Development
 For the three months ended December 31,2009
    
    
    2008
    
    

%
Change(In thousands)Development
    
    $
    3,145
    
    
    $
    3,083
    
    
    
    2
    %
   Operations
 For the three months ended December 31,2009
    
    
    2008
    
    

% Change(In thousands)Operations
    
    $
    1,891
    
    
    $
    2,162
    
    
    
    (13)
    %
   Sales and Marketing
 For the three months ended December 31,2009
    
    
    2008
    
    

%
Change(In thousands)Sales and marketing
    
    $
    6,328
    
    
    $
    6,180
    
    
    
    2
    %
   29




---



##### Table of Contents



General and Administrative
 For the three months ended December 31,2009
    
    
    2008
    
    

% Change(In thousands)General and administrative
    
    $
    2,642
    
    
    $
    2,820
    
    
    
    (6
    )%
   Excess Occupancy Income
 For the three months ended December 31,2009
    
    
    2008
    
    

% Change(In thousands)Rental income
    
    $
    (690
    )
    
    $
    (627
    )
    
    
    10
    %Rental and other expenses
    
    
    382
    
    
    
    407
    
    
    
    (6
    )%Excess occupancy income
    
    $
    (308
    )
    
    $
    (220
    )
    
    
    40
    %
   Amortization of Identifiable Intangible Assets
 For the three months ended December 31,2009
    
    
    2008
    
    

% Change(In thousands)Amortization of identifiable intangible assets  software
    
    $
    298
    
    
    $
    288
    
    
    
    3
    %Amortization of identifiable intangible assets  other
    
    
    182
    
    
    
    269
    
    
    
    (32
    )%Total amortization of identifiable intangible assets
    
    $
    480
    
    
    $
    557
    
    
    
    (14
    )%
  30




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##### Table of Contents



Technology
    
    TechnologyBased 
    
    Based 
    
    
    CustomerSoftware
    
    Other
    
    
    Based
    
    
    Trademark
    
    
    Covenant
    
    
    Backlog
    
    
    Total$
4,353
    
    $
    
    
    
    $
    694
    
    
    $
    631
    
    
    $
    16
    
    
    $
    46
    
    
    $
    5,740
  Interest Income and Other Income, net
 For the three months ended December 31,2009
    
    
    2008
    
    

% Change(In thousands)Interest income
    
    $
    86
    
    
    $
    334
    
    
    
    (74)
    %Other income, net
    
    
    7
    
    
    
    339
    
    
    
    (98)
    %Interest income and other income, net
    
    $
    93
    
    
    $
    673
    
    
    
    (86)
    %
   Provision for Income Taxes
 For the three months ended December 31,2009
    
    
    2008
    
    

% Change(In thousands)Provision for income taxes
    
    $
    240
    
    
    $
    420
    
    
    
    (43)
    %
  Stock based Compensation Expense
   Three Months Ended
 December 31,2009
    
    
    2008(in thousands)Direct costs of ratable licenses
    
    $
    26
    
    
    $
    29Direct costs of professional services
    
    
    111
    
    
    
    80Development
    
    
    229
    
    
    
    230Operations
    
    
    134
    
    
    
    123Sales and marketing
    
    
    364
    
    
    
    365General and administrative
    
    
    139
    
    
    
    214Total
    
    $
    1,003
    
    
    $
    1,041
 31




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##### Table of Contents



Non-GAAP Financial Measures and Other Operational Data
  Non-GAAP Net Income and Non-GAAP Net Income Per Share.
 Three Months Ended
 December 31,2009
    
    
    2008GAAP net income
    
    $
    981
    
    
    $
    886Stock based compensation
    
    
    1,003
    
    
    
    1,041Amortization of intangible assets  software
    
    
    298
    
    
    
    288Amortization of intangible assets  other
    
    
    182
    
    
    
    269Provision for income taxes
    
    
    240
    
    
    
    420Cash taxes from on-going operations
    
    
    (164
    )
    
    
    (150
    )Non-GAAP net income
    
    $
    2,540
    
    
    $
    2,754Weighted average diluted common shares outstanding:
    
    
    14,756
    
    
    
    14,302Non-GAAP net income per share
    
    $
    0.17
    
    
    $
    0.19
 Adjusted EBITDA.
 Three Months Ended
 December 31,2009
    
    
    2008GAAP net income
    
    $
    981
    
    
    $
    886Stock based compensation
    
    
    1,003
    
    
    
    1,041Amortization of intangible assets  software
    
    
    298
    
    
    
    288Amortization of intangible assets  other
    
    
    182
    
    
    
    269Depreciation
    
    
    1,197
    
    
    
    1,328Provision for income taxes
    
    
    240
    
    
    
    420Interest income and other income, net
    
    
    (93
    )
    
    
    (673
    )Adjusted EBITDA
    
    $
    3,808
    
    
    $
    3,559
 32




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##### Table of Contents



Free Cash Flow.
 Three Months Ended
 December 31,2009
    
    
    2008Cash flow provided by (used in) operations
    
    $
    (95
    )
    
    $
    2,020Purchases of property, equipment and software
    
    
    (775
    )
    
    
    (661
    )Free cash flow
    
    $
    (870
    )
    
    $
    1,359
 Gross Deferred Revenue.
 December 31, 2009
    
    
    September 30, 2009
    
    
    December 31, 2008Net deferred revenue
    
    $
    14,651
    
    
    $
    18,828
    
    
    $
    19,826Unpaid deferred revenue
    
    
    8,796
    
    
    
    3,475
    
    
    
    7,477Gross deferred revenue
    
    $
    23,447
    
    
    $
    22,303
    
    
    $
    27,303
 Other Operational Data.
 December 31, 2009
    
    
    December 31, 2008Worldwide customers
    
    
    2,800
    
    
    
    2,800Average monthly internet pages measured
    
    
    19,100
    
    
    
    15,000Average monthly revenue per internet page
    
    $
    110
    
    
    $
    160
  Liquidity and Capital Resources
 December 31,
    
    
    September 30,2009
    
    
    2009(In thousands)Cash, cash equivalents and short-term investments
    
    $
    55,939
    
    
    $
    57,968Accounts receivable, net
    
    $
    7,026
    
    
    $
    6,403Working capital
    
    $
    46,181
    
    
    $
    44,749Days sales outstanding (DSO) for the three months ended (a)
    
    
    31
    
    
    
    30
 
 (a)
    
    DSO is calculated as: (ending accounts receivable, net / total net revenue for the three
months period) multiplied by number of days in the period
 Three Months Ended December 31,2009
    
    
    2008(In thousands)Cash (used in) provided by operating activities
    
    $
    (95
    )
    
    $
    2,020Cash used in investing activities
    
    $
    (25,166
    )
    
    $
    (8,331
    )Cash (used in) provided by financing activities
    
    $
    (572
    )
    
    $
    748
 Cash, cash equivalents and short-term investments
  33




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Cash provided by operating activities
   Cash used in investing activities
  Cash used in financing activities
  Commitments
    34




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Off Balance Sheet Arrangements
  Recently Issued Accounting Pronouncements
 Software (Topic 985): Certain Revenue Arrangements That Include Software Elements Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements
 
 Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risks
 Interest Rate Sensitivity.
 Foreign Currency Fluctuations.
 
 Item 4.
    
    Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  35




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Changes in Internal Control Over Financial Reporting
  
 PART IIOTHER INFORMATION
 
 Item 1.
    
    Legal Proceedings
   Simmonds v. JPMorgan Chase & Co.,
et al.
 36




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##### Table of Contents



Item 1A.
Risk Factors
 We have incurred in the past and may, in the future, incur losses, and we may not sustain
profitability.
 Share-Based Payment
 The success of our business depends on maintaining a large customer base, either by customers
renewing their subscriptions for our services and purchasing additional services or by obtaining
new customers.
   Our business could be harmed by adverse economic conditions or reduced spending on information
technology.
  Our quarterly financial results are subject to significant fluctuations, and if our future results
are below the expectations of investors, the price of our common stock may decline.
  37




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##### Table of Contents




    
    Fluctuations of foreign exchange rates;
    
    The rate of new and renewed subscriptions to our services, particularly large customers;
    
    The effect of the global economic downturn on customers and partners;
    
    The amount and timing of any reductions by our customers in their usage of our services;
    
    Our ability to increase the number of web sites we measure and the scope of services we
offer for our existing customers in a particular quarter;
    
    The timing and service period of orders received during a quarter, especially from new
customers;
    
    Our ability to successfully introduce new products and services to offset any reductions
in revenue from services that are not as widely used or that are experiencing decreased
demand such as some of our Internet services;
    
    The level of sales of our Mobile products and services and timing of customer acceptance
during the period;
    
    The timing and amount of professional services revenue, which is difficult to predict
because of its dependence on the number of professional services engagements in any given
period, the size of these engagements, and our ability to continue our existing engagements
and secure new engagements from customers;
    
    The timing and amount of operating costs, including unforeseen or unplanned operating
expenses, sales and marketing investments, and capital expenditures;
    
    The timing and amount, if any, of impairment charges related to potential write-down of
acquired assets in acquisitions or charges related to the amortization of intangible assets
from acquisitions.
    
    The cost associated with and the integration of future acquisitions or divestures;
    
    Future accounting pronouncements and changes in accounting policies; and
    
    Future macroeconomic conditions in our domestic and international markets, as well as the
level of discretionary IT spending generally.
  The market price of our common stock can be volatile.
  If we were required to write down all or part of our goodwill, our net income and net worth could
be materially adversely affected.
  38




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##### Table of Contents



If our Mobile services decline, we may not be able to grow our revenue and our results of
operations will be harmed.
  Improvements to the infrastructure of the Internet and mobile networks could reduce or eliminate
demand for our Internet and Mobile services.
  If we do not continually improve our services in response to technological changes, including
changes to the Internet and mobile networks, we may encounter difficulties retaining existing
customers and attracting new customers.
   We face competition that could make it difficult for us to acquire and retain customers.
    39




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A limited number of customers account for a significant portion of our revenue, and the loss of a
major customer could harm our operating results.
  Our investment in sales and marketing may not yield increased customers or revenue.
  Our cash, cash equivalents and short-term investments are managed through various banks around the
world and recent capital and credit market conditions have been extremely volatile.
   If we do not complement our direct sales force with relationships with other companies to help
market our services, we may not be able to grow our business.
    40




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##### Table of Contents



We must retain qualified personnel in a competitive marketplace, or we may not be able to grow our
business.
  If the market does not accept our professional services, our results of operations could be harmed.
  The success of our business depends on the continued use of the Internet and mobile networks by
business and consumers for e-business and communications and, if usage of these networks declines,
our operating results and working capital would be harmed.
  
    
    security concerns, including the potential for fraud or theft of stored data and
information communicated over the Internet and mobile networks;
    
    inconsistent quality of service, including outages of popular web sites and mobile
networks;
    
    delay in the development or adoption of new standards;
    
    inability to integrate business applications with the Internet; and
    
    the need to operate with multiple and frequently incompatible products.
 The inability of our services to perform properly could result in loss of or delay in revenue,
injury to our reputation or other harm to our business.
   A disruption to our network infrastructure could impair our ability to serve and retain existing
customers or attract new customers.
  41




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##### Table of Contents



Our measurement computers and mobile devices are located at sites that we do not own or operate,
and it could be difficult for us to maintain or repair them if they do not function properly.
  Others might bring infringement claims which could harm our business.
  Our business, which includes our operating results and financial condition, is susceptible to
additional risks associated with international operations.
    42




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##### Table of Contents




    
    currency exchange rate fluctuations;
    
    seasonal fluctuations in purchasing patterns;
    
    unexpected changes in regulatory requirements;
    
    maintaining and servicing computer hardware in distant locations;
    
    longer accounts receivable payment cycles and difficulties in collecting accounts
receivable;
    
    difficulties in managing and staffing international operations;
    
    potentially adverse tax consequences, including restrictions on the repatriation of
earnings;
    
    the burdens of complying with a wide variety of foreign laws;
    
    reduced protection for intellectual property rights in some countries; and
    
    political or economic instability, war or terrorism in the countries where we are doing
business.
  Industry consolidation may lead to stronger competition and may harm our operating results.
  Failure to maintain effective internal controls may cause us to delay filing our periodic reports
with the SEC and adversely affect our stock price.
  We may face difficulties assimilating, and may incur costs associated with, any future
acquisitions.
  
    
    difficulties in assimilating acquired personnel, operations and technologies;
    
    difficulties in managing a larger organization with geographically dispersed operations;
    
    unanticipated costs associated with the acquisition or incurring of additional unknown
liabilities;
 43




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##### Table of Contents




    
    diversion of managements attention from other business concerns;
    
    entry in new businesses in which we have little direct experience;
    
    difficulties in marketing additional services to the acquired companies customer base or
to our customer base;
    
    adverse effects on existing business relationships with resellers of our services, our
customers and other business partners;
    
    the need to integrate or enhance the systems of an acquired business;
    
    impairment charges related to potential write-down of acquired assets in acquisitions;
    
    failure to realize any of the anticipated benefits of the acquisition; and
    
    use of substantial portions of our available cash, or dilution in equity if stock is
used, to consummate the acquisition and/or operate the acquired business.
 We have anti-takeover protections that may delay or prevent a change in control that could benefit our stockholders.
  
    
    our stockholders may take action only at a meeting and not by written consent;
    
    our Board must be given advance notice regarding stockholder-sponsored proposals for
consideration at annual meetings and for stockholder nominations for the election of
directors; and
    
    special meetings of our stockholders may be called only by our Board of Directors, the
Chairman of the Board, our Chief Executive Officer or our President, not by our
stockholders.
  If we need to raise additional capital and are unable to do so, our business could be harmed.
  If the protection of our proprietary technology is inadequate, our competitors may gain access to
our technology, and our market share could decline.
  44




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##### Table of Contents



Changes to existing accounting pronouncements or taxation rules or practices may cause adverse
revenue fluctuations, affect our reported financial results or how we conduct our business.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  45




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##### Table of Contents



Item 6. Exhibits
 EXHIBIT INDEX
 Exhibit
    
    
    
    Incorporated by ReferenceFiledForm
    
    File No.
    
    Filing Date
    
    Exhibit No.
    
    Herewith31.1
    
    Certification of
Periodic Report by
Chief Executive
Officer under
Section 302 of the
Sarbanes-Oxley Act of
2002
    
    
    
    
    
    
    
    
    
    X31.2
    
    Certification of
Periodic Report by
Chief Financial
Officer under
Section 302 of the
Sarbanes-Oxley Act of
2002
    
    
    
    
    
    
    
    
    
    X32.1
    
    Certification of
Chief Executive
Officer Pursuant to 18
U.S.C. Section 1350 as
Adopted Pursuant to
Section 906 of the
Sarbanes-Oxley Act of
2002 *
    
    
    
    
    
    
    
    
    
    X32.2
    
    Certification of
Chief Financial
Officer Pursuant to 18
U.S.C. Section 1350 as
Adopted Pursuant to
Section 906 of the
Sarbanes-Oxley Act of
2002 *
    
    
    
    
    
    
    
    
    
    X
 
 *
    
    As contemplated by SEC Release No. 33-8212, these exhibits are
furnished with this Quarterly Report on Form 10-Q and are not
deemed filed with the Securities and Exchange Commission and are
not incorporated by reference in any filing of Keynote Systems,
Inc. under the Securities Act of 1933 or the Securities Act of
1934, whether made before or after the date hereof and irrespective
of any general incorporation language in such filings. 46




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##### Table of Contents



SIGNATURES
  KEYNOTE SYSTEMS, INC.By:
    /s/ UMANG GUPTAUmang GuptaChairman of the Board and Chief
Executive Officer
(Principal Executive Officer)By:
    /s/ ANDREW HAMERAndrew HamerVice President and Chief Financial Officer
(Principal Financial and Accounting
Officer) 47




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##### Table of Contents



EXHIBIT INDEX
 Exhibit
    
    
    
    Incorporated by ReferenceFiledForm
    
    File No.
    
    Filing Date
    
    Exhibit No.
    
    Herewith31.1
    
    Certification of
Periodic Report by
Chief Executive
Officer under
Section 302 of the
Sarbanes-Oxley Act of
2002
    
    
    
    
    
    
    
    
    
    X31.2
    
    Certification of
Periodic Report by
Chief Financial
Officer under
Section 302 of the
Sarbanes-Oxley Act of
2002
    
    
    
    
    
    
    
    
    
    X32.1
    
    Certification of
Chief Executive
Officer Pursuant to 18
U.S.C. Section 1350 as
Adopted Pursuant to
Section 906 of the
Sarbanes-Oxley Act of
2002 *
    
    
    
    
    
    
    
    
    
    X32.2
    
    Certification of
Chief Financial
Officer Pursuant to 18
U.S.C.Section 1350 as
Adopted Pursuant to
Section 906 of the
Sarbanes-Oxley Act of
2002 *
    
    
    
    
    
    
    
    
    
    X
 
 *
    
    As contemplated by SEC Release No. 33-8212, these exhibits are
furnished with this Quarterly Report on Form 10-Q and are not
deemed filed with the Securities and Exchange Commission and are
not incorporated by reference in any filing of Keynote Systems,
Inc. under the Securities Act of 1933 or the Securities Act of
1934, whether made before or after the date hereof and irrespective
of any general incorporation language in such filings. 48