##### 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 June 30, 2010
 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
    
    94-3226488(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)777 Mariners Island Blvd., San Mateo, CA
    
    94404(Address of principal executive offices)
    
    (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 August 4, 2010Common Stock, $.001 par value
    
    
    14,931,559 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
    
    
    24Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    37Item 4. Controls and Procedures
    
    
    37PART IIOTHER INFORMATIONItem 1. Legal Proceedings
    
    
    38Item 1A. Risk Factors
    
    
    39Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    48Item 3. Defaults Upon Senior Securities
    
    
    48Item 4. (Reserved)
    
    
    48Item 5. Other Information
    
    
    48Item 6. Exhibits
    
    
    48Signatures
    
    
    49EX-10.1EX-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 June 30, 2010 and September 30, 2009
    
    
    4Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2010 and 2009
    
    
    5Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2010 and 2009
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7
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KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
 June 30,
    
    
    September 30,2010
    
    
    2009ASSETSCurrent assets:Cash and cash equivalents
    
    $
    23,480
    
    
    $
    51,383Short-term investments
    
    
    36,883
    
    
    
    6,585Total cash, cash equivalents and short-term investments
    
    
    60,363
    
    
    
    57,968Accounts receivable, less allowance for doubtful accounts
of $5 and $112, respectively, and less billing reserve of
$399 and $150, respectively
    
    
    8,347
    
    
    
    6,403Prepaids, deferred costs and other current assets
    
    
    3,625
    
    
    
    3,517Inventories
    
    
    1,232
    
    
    
    1,222Deferred tax assets
    
    
    2,631
    
    
    
    2,913Total current assets
    
    
    76,198
    
    
    
    72,023Deferred costs and other long-term assets
    
    
    1,848
    
    
    
    3,024Property, equipment and software, net
    
    
    33,850
    
    
    
    34,778Goodwill
    
    
    59,069
    
    
    
    66,078Identifiable intangible assets, net
    
    
    4,356
    
    
    
    6,255Long-term deferred tax assets
    
    
    227
    
    
    
    61Total assets
    
    $
    175,548
    
    
    $
    182,219LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,319
    
    
    $
    1,147Accrued expenses
    
    
    8,393
    
    
    
    8,466Deferred revenue
    
    
    16,748
    
    
    
    17,661Total current liabilities
    
    
    26,460
    
    
    
    27,274Deferred rent and other long-term liabilities
    
    
    3,394
    
    
    
    3,344Long-term deferred revenue
    
    
    1,712
    
    
    
    1,167Long-term deferred tax liability
    
    
    457
    
    
    
    414Total liabilities
    
    
    32,023
    
    
    
    32,199Commitments and contingencies (see Note 14)Stockholders equity:Common stock
    
    
    15
    
    
    
    14Additional paid-in capital
    
    
    286,054
    
    
    
    282,653Accumulated deficit
    
    
    (139,092
    )
    
    
    (139,614
    )Accumulated other comprehensive income (loss)
    
    
    (3,452
    )
    
    
    6,967Total stockholders equity
    
    
    143,525
    
    
    
    150,020Total liabilities and stockholders equity
    
    $
    175,548
    
    
    $
    182,219
  4




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KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
 Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net revenue:Subscription services
    
    $
    11,950
    
    
    $
    11,455
    
    
    $
    35,831
    
    
    $
    34,269Ratable licenses
    
    
    5,159
    
    
    
    6,390
    
    
    
    16,906
    
    
    
    18,348Professional services
    
    
    2,164
    
    
    
    2,324
    
    
    
    6,601
    
    
    
    7,753Total net revenue
    
    
    19,273
    
    
    
    20,169
    
    
    
    59,338
    
    
    
    60,370Costs and expenses:Costs of revenue:Direct costs of subscription services
    
    
    2,109
    
    
    
    2,098
    
    
    
    6,446
    
    
    
    6,673Direct costs of ratable licenses
    
    
    1,677
    
    
    
    1,424
    
    
    
    5,129
    
    
    
    4,551Direct costs of professional services
    
    
    1,457
    
    
    
    1,293
    
    
    
    4,275
    
    
    
    4,466Development
    
    
    2,968
    
    
    
    2,863
    
    
    
    9,084
    
    
    
    9,137Operations
    
    
    1,935
    
    
    
    1,943
    
    
    
    5,761
    
    
    
    6,353Amortization of intangible assets  software
    
    
    433
    
    
    
    290
    
    
    
    1,166
    
    
    
    866Total costs of revenue
    
    
    10,579
    
    
    
    9,911
    
    
    
    31,861
    
    
    
    32,046Sales and marketing
    
    
    6,296
    
    
    
    5,665
    
    
    
    19,000
    
    
    
    18,162General and administrative
    
    
    2,652
    
    
    
    2,346
    
    
    
    7,830
    
    
    
    7,717Excess occupancy income
    
    
    (323
    )
    
    
    (258
    )
    
    
    (942
    )
    
    
    (729
    )Amortization of intangible assets  other
    
    
    146
    
    
    
    259
    
    
    
    484
    
    
    
    791Total costs and expenses
    
    
    19,350
    
    
    
    17,923
    
    
    
    58,233
    
    
    
    57,987Income (loss) from operations
    
    
    (77
    )
    
    
    2,246
    
    
    
    1,105
    
    
    
    2,383Interest income
    
    
    96
    
    
    
    157
    
    
    
    299
    
    
    
    744Other income (expense), net
    
    
    (143
    )
    
    
    (53
    )
    
    
    (93
    )
    
    
    403Income (loss) before provision for income taxes
    
    
    (124
    )
    
    
    2,350
    
    
    
    1,311
    
    
    
    3,530Provision for income taxes
    
    
    (191
    )
    
    
    (258
    )
    
    
    (789
    )
    
    
    (810
    )Net income (loss)
    
    $
    (315
    )
    
    $
    2,092
    
    
    $
    522
    
    
    $
    2,720Net income (loss) per share:Basic
    
    $
    (0.02
    )
    
    $
    0.15
    
    
    $
    0.04
    
    
    $
    0.19Diluted
    
    $
    (0.02
    )
    
    $
    0.15
    
    
    $
    0.04
    
    
    $
    0.19Shares used in computing basic and diluted net income (loss) per share:Basic
    
    
    14,799
    
    
    
    14,378
    
    
    
    14,640
    
    
    
    14,274Diluted
    
    
    14,799
    
    
    
    14,403
    
    
    
    14,905
    
    
    
    14,321Cash dividends declared per common share
    
    $
    0.05
    
    
    $
    
    
    
    $
    0.15
    
    
    $
    
  5




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KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 Nine Months EndedJune 30,2010
    
    
    2009Cash flows from operating activities:Net income
    
    $
    522
    
    
    $
    2,720Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    3,381
    
    
    
    3,864Stock-based compensation
    
    
    2,547
    
    
    
    3,400Amortization of identifiable intangible assets
    
    
    1,650
    
    
    
    1,657Amortization of prepaid tax asset
    
    
    542
    
    
    
    326Charges to bad debt and billing reserves
    
    
    218
    
    
    
    254Amortization of debt investment premium
    
    
    500
    
    
    
    3Deferred tax provision (benefit)
    
    
    (313
    )
    
    
    40Collection of tax credit receivable within deferred tax assets
    
    
    
    
    
    
    489Loss on disposal of equipment
    
    
    8
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (2,827
    )
    
    
    907Inventories
    
    
    (252
    )
    
    
    198Prepaids, deferred costs and other assets
    
    
    (131
    )
    
    
    (1,442
    )Accounts payable and accrued expenses
    
    
    481
    
    
    
    (6,441
    )Deferred revenue
    
    
    1,600
    
    
    
    1,445Net cash provided by operating activities
    
    
    7,926
    
    
    
    7,420Cash flows from investing activities:Purchases of short-term investments
    
    
    (45,791
    )
    
    
    (15,918
    )Maturities and sales of short-term investments
    
    
    14,062
    
    
    
    12,364Purchases of property, equipment and software
    
    
    (2,389
    )
    
    
    (2,596
    )Payment of acquisition costs for Zandan S.A.
    
    
    
    
    
    
    (170
    )Net cash used in investing activities
    
    
    (34,118
    )
    
    
    (6,320
    )Cash flows from financing activities:Repayment of capital lease obligation
    
    
    (14
    )
    
    
    (12
    )Repayment of notes payable
    
    
    
    
    
    
    (248
    )Proceeds from issuance of common stock and exercise of stock options
    
    
    2,993
    
    
    
    2,282Cash dividends declared and paid
    
    
    (2,201
    )
    
    
    Net cash provided by financing activities
    
    
    778
    
    
    
    2,022Effect of exchange rate changes on cash and cash equivalents
    
    
    (2,489
    )
    
    
    (388
    )Net change in cash and cash equivalents
    
    
    (27,903
    )
    
    
    2,734Cash and cash equivalents at beginning of the period
    
    
    51,383
    
    
    
    42,546Cash and cash equivalents at end of the period
    
    $
    23,480
    
    
    $
    45,280Supplemental cash flow disclosure:Income taxes paid (net of refunds)
    
    $
    339
    
    
    $
    4,276Noncash operating and investing activities:Exercise of non-employee stock options
    
    $
    81
    
    
    $
    Acquisition of property, equipment and software on account
    
    $
    307
    
    
    $
    23
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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
    Recently Adopted Accounting Pronouncements
 Subsequent Events (Topic 855)Amendments to certain
Recognition and Disclosure Requirements
  Fair Value Measurements and Disclosures Fair Value Measurements ,
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Business Combinations Business Combinations
 Recently Issued Accounting Pronouncements
 Software (Topic
985): Certain Revenue Arrangements That Include Software Elements Revenue
Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements
 Stock Based Compensation
 (a) Summary of Plans
   (b) Restricted Stock Units
  8




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(c) Stock Options
  Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Volatility
    
    
    
    
    
    
    46.8
    %
    
    
    
    
    
    
    42.9
    %Risk free interest rate
    
    
    
    
    
    
    1.9
    %
    
    
    
    
    
    
    2.2
    %Expected life (in years)
    
    
    
    
    
    
    4.5
    
    
    
    
    
    
    
    4.5Dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
  AverageWeighted
    
    
    Remaining
    
    
    AggregateAverage
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    Term (years)
    
    
    ValueOutstanding at September 30, 2009
    
    
    4,802
    
    
    $
    11.65
    
    
    
    5.8
    
    
    $
    820Granted
    
    
    
    
    
    
    Exercised
    
    
    (269
    )
    
    
    8.96Forfeited or canceled
    
    
    (61
    )
    
    
    12.44Expired
    
    
    (193
    )
    
    
    13.70Outstanding at June 30, 2010
    
    
    4,279
    
    
    $
    11.72
    
    
    
    4.9
    
    
    $
    376Vested and expected to vest at June 30, 2010
    
    
    4,225
    
    
    $
    11.72
    
    
    
    4.9
    
    
    $
    373Exercisable at June 30, 2010
    
    
    3,757
    
    
    $
    11.68
    
    
    
    4.6
    
    
    $
    355
   (d) Employee Stock Purchase Plan
  Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Volatility
    
    
    64.8
    %
    
    
    58.4
    %
    
    
    63.6
    %
    
    
    53.4
    %Risk free interest rate
    
    
    0.5
    %
    
    
    0.6
    %
    
    
    0.6
    %
    
    
    1.2
    %Expected life (in years)
    
    
    1.25
    
    
    
    1.25
    
    
    
    1.25
    
    
    
    1.25Dividend yield
    
    
    0.1
    %
    
    
    
    
    
    
    
    
    
    
    
 9




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(e) Stock based Compensation Expense
 Compensation  Stock Compensation,
 Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Direct costs of ratable licenses
    
    $
    12
    
    
    $
    27
    
    
    $
    61
    
    
    $
    51Direct costs of professional services
    
    
    81
    
    
    
    65
    
    
    
    258
    
    
    
    391Development
    
    
    199
    
    
    
    171
    
    
    
    604
    
    
    
    745Operations
    
    
    102
    
    
    
    91
    
    
    
    328
    
    
    
    424Sales and marketing
    
    
    299
    
    
    
    285
    
    
    
    936
    
    
    
    1,216General and administrative
    
    
    64
    
    
    
    123
    
    
    
    360
    
    
    
    573Total
    
    $
    757
    
    
    $
    762
    
    
    $
    2,547
    
    
    $
    3,400
  Excess Occupancy Income
  TotalFiscal years:2010 (remaining three months)
    
    $
    6722011
    
    
    2,5992012
    
    
    1,8232013
    
    
    4302014
    
    
    89Thereafter
    
    
    Total future minimum rents receivable
    
    $
    5,613
 (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.
 10




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
    
    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
    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
   11




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Professional Services Revenue:
  Deferred Revenue:
 Deferred Costs:
 12




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(3) Other Comprehensive Income (Loss) and Foreign Currency Translation
 Reporting Comprehensive Income),
  Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net income (loss)
    
    $
    (315
    )
    
    $
    2,092
    
    
    $
    522
    
    
    $
    2,720Net unrealized gain (loss) on available-for-sale investments
    
    
    (6
    )
    
    
    1
    
    
    
    (39
    )
    
    
    13Foreign currency translation gain (loss)
    
    
    (5,473
    )
    
    
    3,518
    
    
    
    (10,379
    )
    
    
    (465
    )Other comprehensive income (loss)
    
    $
    (5,794
    )
    
    $
    5,611
    
    
    $
    (9,896
    )
    
    $
    2,268
  (4) Financial Instruments and Concentration of Risk
 Fair Value Measurements and Disclosures,
    13




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(5) Cash, Cash Equivalents, and Short-Term Investments
 Statement of Cash Flows
   Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Market ValueCash
    
    $
    15,470
    
    
    $
    
    
    
    $
    
    
    
    $
    15,470Money market funds
    
    
    8,010
    
    
    
    
    
    
    
    
    
    
    
    8,010Total cash and cash equivalents
    
    $
    23,480
    
    
    $
    
    
    
    $
    
    
    
    $
    23,480Fixed-term deposits
    
    $
    8,560
    
    
    $
    
    
    
    $
    
    
    
    $
    8,560Treasuries and agencies
    
    
    4,604
    
    
    
    2
    
    
    
    
    
    
    
    4,606Municipal and corporate bonds
    
    
    23,758
    
    
    
    11
    
    
    
    (52
    )
    
    
    23,717Total short-term investments
    
    $
    36,922
    
    
    $
    13
    
    
    $
    (52
    )
    
    $
    36,883
  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.
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
    
    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.
   EstimatedCost
    
    
    Fair ValueDue in less than one year
    
    $
    23,400
    
    
    $
    23,371Due in more than one year and less than two years
    
    
    13,522
    
    
    
    13,512Total
    
    $
    36,922
    
    
    $
    36,883
 (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
    
    $
    8,010
    
    
    $
    
    
    
    $
    
    
    
    $
    8,010Short-term investments:Fixed- term deposits
    
    
    
    
    
    
    8,560
    
    
    
    
    
    
    
    8,560Municipal and corporate bonds
    
    
    23,717
    
    
    
    
    
    
    
    
    
    
    
    23,717Treasuries and agencies
    
    
    4,606
    
    
    
    
    
    
    
    
    
    
    
    4,606Total assets measured at fair value
    
    $
    36,333
    
    
    $
    8,560
    
    
    $
    
    
    
    $
    44,893
  15




---



##### Table of Contents



(7) Consolidated Financial Statement Details
 Prepaids, Deferred Costs and Other Current Assets
 June 30, 2010
    
    
    September 30, 2009Prepaid expenses
    
    $
    1,621
    
    
    $
    1,554Deferred costs of revenue
    
    
    838
    
    
    
    580Income tax receivable
    
    
    695
    
    
    
    971Security deposits, advances, and interest receivable
    
    
    361
    
    
    
    43Other assets
    
    
    110
    
    
    
    369Total
    
    $
    3,625
    
    
    $
    3,517
 Property, equipment and software
 June 30, 2010
    
    
    September 30, 2009Land
    
    $
    14,150
    
    
    $
    14,150Computer equipment and software
    
    
    31,239
    
    
    
    29,551Building
    
    
    21,908
    
    
    
    21,875Furniture and fixtures
    
    
    2,105
    
    
    
    2,169Leasehold and building improvements
    
    
    1,110
    
    
    
    1,179Construction in progress
    
    
    630
    
    
    
    38371,142
    
    
    
    69,307Less accumulated depreciation and amortization
    
    
    (37,292
    )
    
    
    (34,529
    )Total
    
    $
    33,850
    
    
    $
    34,778
 Deferred Costs and Other Long-Term Assets
 June 30, 2010
    
    
    September 30, 2009Prepaid tax asset
    
    $
    944
    
    
    $
    1,710Deferred costs of revenue
    
    
    251
    
    
    
    421Tenant rent receivable
    
    
    197
    
    
    
    280Deposits
    
    
    235
    
    
    
    264Prepaid expenses
    
    
    221
    
    
    
    349Total
    
    $
    1,848
    
    
    $
    3,024
 Accrued Expenses
 June 30, 2010
    
    
    September 30, 2009Accrued employee compensation
    
    $
    3,828
    
    
    $
    4,417Accrued audit and professional fees
    
    
    1,000
    
    
    
    429Income and other taxes
    
    
    864
    
    
    
    844Other
accrued expenses*
    
    
    2,701
    
    
    
    2,776Total
    
    $
    8,393
    
    
    $
    8,466
 
 
 (8) Inventories
  16




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##### Table of Contents



(9) Goodwill and Identifiable Intangible Assets
   Goodwill and Other Intangible Assets
 :
 Balance at September 30, 2009
    
    $
    66,078Translation adjustments
    
    
    (7,009
    )Balance at June 30, 2010
    
    $
    59,069
  Technology
    
    
    TechnologyBased-
    
    
    Based-
    
    
    CustomerSoftware
    
    
    Other
    
    
    Based
    
    
    Trademark
    
    
    Covenant
    
    
    Backlog
    
    
    TotalAs of June 30, 2010:Gross carrying value
    
    $
    7,756
    
    
    $
    11,845
    
    
    $
    7,930
    
    
    $
    1,347
    
    
    $
    34
    
    
    $
    103
    
    
    $
    29,015Accumulated amortization
    
    
    (4,413
    )
    
    
    (11,845
    )
    
    
    (7,454
    )
    
    
    (853
    )
    
    
    (23
    )
    
    
    (71
    )
    
    
    (24,659
    )Net carrying value
    
    $
    3,343
    
    
    $
    
    
    
    $
    476
    
    
    $
    494
    
    
    $
    11
    
    
    $
    32
    
    
    $
    4,356As 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



Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Amortization of intangible assets  software
    
    $
    433
    
    
    $
    290
    
    
    $
    1,166
    
    
    $
    866Amortization of intangible assets  other
    
    
    146
    
    
    
    259
    
    
    
    484
    
    
    
    791Total amortization of intangible assets
    
    $
    579
    
    
    $
    549
    
    
    $
    1,650
    
    
    $
    1,657
  TotalFiscal years:2010 (remaining three months)
    
    $
    5552011
    
    
    2,1922012
    
    
    1,3242013
    
    
    285Total
    
    $
    4,356Weighted-average remaining useful life as of June 30, 2010 (years)
    
    
    2.5
 (10)
    
    Lease Abandonment Accrual  Lease abandonment liability, September 30, 2009
    
    $
    696Lease payments to lessor
    
    
    (200
    )Sublease proceeds
    
    
    58Payment of lease termination costs
    
    
    (63
    )Lease abandonment liability, June 30, 2010
    
    $
    491
 (11)
    
    Net Income (Loss) Per Share   Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Numerator:Net income (loss)
    
    $
    (315
    )
    
    $
    2,092
    
    
    $
    522
    
    
    $
    2,720Denominator:Weighted average shares outstanding
    
    
    14,799
    
    
    
    14,378
    
    
    
    14,640
    
    
    
    14,274Effect of dilutive stock options, RSUs and employee stock purchase rights
    
    
    
    
    
    
    25
    
    
    
    265
    
    
    
    47Denominator for diluted net income (loss) per share
    
    
    14,799
    
    
    
    14,403
    
    
    
    14,905
    
    
    
    14,321Basic and diluted net income (loss) per share
    
    $
    (0.02
    )
    
    $
    0.15
    
    
    $
    0.04
    
    
    $
    0.19
 18




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##### Table of Contents



(12) Stockholders Equity
 Dividends
  Record Date
    
    Payment Date
    
    Dividend Per Share
    
    Total Dividend PaidDecember 1, 2009
    
    December 15, 2009
    
    $
    0.05
    
    
    $
    727,000March 1, 2010
    
    March 15, 2010
    
    $
    0.05
    
    
    $
    731,000June 1, 2010
    
    June 15, 2010
    
    $
    0.05
    
    
    $
    743,000
 (13) Income Taxes
     Accounting for Uncertainty in Income Taxes  an interpretation of FASB
Statement No. 109
 19




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##### Table of Contents



(14) Commitments and Contingencies
 Leases
  Operating
    
    
    CapitalLeases
    
    
    LeasesFiscal year:2010 (remaining three months)
    
    $
    242
    
    
    $
    22011
    
    
    761
    
    
    
    2012
    
    
    548
    
    
    
    2013
    
    
    450
    
    
    
    2014
    
    
    338
    
    
    
    Thereafter
    
    
    473
    
    
    
    Total minimum lease payments (a)
    
    $
    2,812
    
    
    
    2Less amounts representing interest
    
    
    
    
    
    
    Present value of minimum lease payments
    
    
    
    
    
    
    2Less current portion of capital lease obligation
    
    
    
    
    
    
    (2
    )Long-term portion of capital lease obligation
    
    
    
    
    
    $
    
 
 (a)
    
    Future minimum lease payments exclude sublease proceeds of approximately $1.1 million.  Commitments
 ,
  Legal Proceedings
  20




---



##### Table of Contents



Simmonds v. JPMorgan Chase & Co.,
et al.
  Warranties
  Indemnification
  21




---



##### Table of Contents



(15) Geographic and Segment Information
   Subscription
    
    Ratable
    
    ProfessionalServices
    
    Licenses
    
    ServicesInternet Test and Measurement:Internet Subscriptions  Web MeasurementApplication Perspective
    
    XStreaming Perspective
    
    XTransaction Perspective
    
    XWeb Site Perspective
    
    XInternet Subscriptions  OtherDiagnostic Services
    
    XEnterprise Adapters
    
    XNetMechanic
    
    XPerformance Scoreboard
    
    XRed Alert
    
    XTest Perspective
    
    XFinancial Industry Scorecards
    
    XLoadPro
    
    XVoice Perspective
    
    XWebEffective
    
    XInternet EngagementsProfessional Services
    
    
    
    
    
    XFinancial Industry Scorecards
    
    
    
    
    
    XLoadPro
    
    
    
    
    
    XVoice Perspective
    
    
    
    
    
    XWebEffective
    
    
    
    
    
    XMobile Test and Measurement:Mobile SubscriptionMobile Device Perspective
    
    XMobile Application Perspective
    
    XSIGOS Global Roamer
    
    XMobile Ratable LicencesSIGOS SITE
    
    
    
    X
  Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Internet Subscriptions  Web Measurement
    
    $
    6,584
    
    
    $
    6,621
    
    
    $
    19,347
    
    
    $
    20,402Internet Subscriptions  Other
    
    
    2,648
    
    
    
    2,782
    
    
    
    8,882
    
    
    
    7,998Internet Engagements
    
    
    2,164
    
    
    
    2,324
    
    
    
    6,601
    
    
    
    7,753Total Internet net revenue
    
    
    11,396
    
    
    
    11,727
    
    
    
    34,830
    
    
    
    36,153Mobile Subscription
    
    
    2,718
    
    
    
    2,052
    
    
    
    7,602
    
    
    
    5,869Mobile Ratable Licenses
    
    
    5,159
    
    
    
    6,390
    
    
    
    16,906
    
    
    
    18,348Total Mobile net revenue
    
    
    7,877
    
    
    
    8,442
    
    
    
    24,508
    
    
    
    24,217Total net revenue
    
    $
    19,273
    
    
    $
    20,169
    
    
    $
    59,338
    
    
    $
    60,370
 22




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009United States
    
    $
    10,818
    
    
    $
    10,969
    
    
    $
    32,386
    
    
    $
    33,949Europe*
    
    
    5,401
    
    
    
    6,623
    
    
    
    17,995
    
    
    
    18,962Other**
    
    
    3,054
    
    
    
    2,577
    
    
    
    8,957
    
    
    
    7,459Total net revenue
    
    $
    19,273
    
    
    $
    20,169
    
    
    $
    59,338
    
    
    $
    60,370
 
 *
    
    No individual country represents more than 10% of total net revenue for the three and nine months
ended June 30, 2010 and for the nine months ended June 30, 2009. One individual country
represents 10% of total net revenue for the three months ended June 30, 2009.**
    
    No individual country represents more than 10% of total net revenue.  June 30,
    
    
    September 30,2010
    
    
    2009United States
    
    $
    32,734
    
    
    $
    33,685Europe
    
    
    1,116
    
    
    
    1,093Total
    
    $
    33,850
    
    
    $
    34,778
 (16) Subsequent Events
  23




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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
     24




---



##### 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 which remained stable after increasing in the second fiscal
quarter) without corresponding reductions in unit price (which has showed signs of
stabilizing in recent quarters) in order to increase Internet revenues and margins, as
growth in these services will be important to growing our Internet revenue;
 25




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##### Table of Contents




    
    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 affects
our customers ability to purchase our services.
  www.keynote.com
 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
  Results of Operations
  26




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net revenue:Subscription services
    
    
    62.0
    %
    
    
    56.8
    %
    
    
    60.4
    %
    
    
    56.8
    %Ratable licenses
    
    
    26.8
    
    
    
    31.7
    
    
    
    28.5
    
    
    
    30.4Professional services
    
    
    11.2
    
    
    
    11.5
    
    
    
    11.1
    
    
    
    12.8Total net revenue
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Costs and expenses:Costs of revenue:Direct costs of subscription services
    
    
    10.9
    
    
    
    10.4
    
    
    
    10.9
    
    
    
    11.1Direct costs of ratable licenses
    
    
    8.7
    
    
    
    7.1
    
    
    
    8.6
    
    
    
    7.5Direct costs of professional services
    
    
    7.6
    
    
    
    6.4
    
    
    
    7.2
    
    
    
    7.4Operations
    
    
    10.0
    
    
    
    9.6
    
    
    
    9.7
    
    
    
    10.6Development
    
    
    15.4
    
    
    
    14.2
    
    
    
    15.3
    
    
    
    15.1Amortization of intangible assets  software
    
    
    2.2
    
    
    
    1.4
    
    
    
    2.0
    
    
    
    1.4Sales and marketing
    
    
    32.7
    
    
    
    28.1
    
    
    
    32.0
    
    
    
    30.1General and administrative
    
    
    13.8
    
    
    
    11.6
    
    
    
    13.2
    
    
    
    12.8Excess occupancy income
    
    
    (1.7
    )
    
    
    (1.3
    )
    
    
    (1.6
    )
    
    
    (1.2
    )Amortization of intangible assets  other
    
    
    0.8
    
    
    
    1.3
    
    
    
    0.8
    
    
    
    1.3Total costs and expenses
    
    
    100.4
    
    
    
    88.8
    
    
    
    98.1
    
    
    
    96.1Income (loss) from operations
    
    
    (0.4
    )
    
    
    11.2
    
    
    
    1.9
    
    
    
    3.9Interest income and other, net
    
    
    (0.2
    )
    
    
    0.5
    
    
    
    0.3
    
    
    
    1.9Income (loss) before provision for income taxes
    
    
    (0.6
    )
    
    
    11.7
    
    
    
    2.2
    
    
    
    5.8Provision for income taxes
    
    
    (1.0
    )
    
    
    (1.3
    )
    
    
    (1.3
    )
    
    
    (1.3
    )Net income (loss)
    
    
    (1.6
    )%
    
    
    10.4
    %
    
    
    0.9
    %
    
    
    4.5
    %
 Net Revenue
 For the three months ended June 30,
    
    
    For the nine months ended June 30,2010
    
    
    2009
    
    
    % Change
    
    
    2010
    
    
    2009
    
    
    % Change(In thousands)
    
    
    
    
    
    
    (In thousands)Subscription services
    
    $
    11,950
    
    
    $
    11,455
    
    
    
    4
    %
    
    $
    35,831
    
    
    $
    34,269
    
    
    
    5
    %Ratable licenses
    
    
    5,159
    
    
    
    6,390
    
    
    
    (19
    )%
    
    
    16,906
    
    
    
    18,348
    
    
    
    (8
    )%Professional services
    
    
    2,164
    
    
    
    2,324
    
    
    
    (7
    )%
    
    
    6,601
    
    
    
    7,753
    
    
    
    (15
    )%Total net revenue
    
    $
    19,273
    
    
    $
    20,169
    
    
    
    (4
    )%
    
    $
    59,338
    
    
    $
    60,370
    
    
    
    (2
    )%
 Subscription Services
  Ratable Licenses.
 Professional Services
 27




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##### Table of Contents



Subscription
    
    
    Ratable
    
    
    ProfessionalServices
    
    
    Licenses
    
    
    ServicesInternet Test and Measurement:Internet Subscriptions  Web MeasurementApplication Perspective
    
    
    XStreaming Perspective
    
    
    XTransaction Perspective
    
    
    XWeb Site Perspective
    
    
    XInternet Subscriptions  OtherDiagnostic Services
    
    
    XEnterprise Adapters
    
    
    XNetMechanic
    
    
    XPerformance Scoreboard
    
    
    XRed Alert
    
    
    XTest Perspective
    
    
    XFinancial Industry Scorecards
    
    
    XLoadPro
    
    
    XVoice Perspective
    
    
    XWebEffective
    
    
    XInternet EngagementsProfessional Services
    
    
    
    
    
    
    
    
    
    
    XFinancial Industry Scorecards
    
    
    
    
    
    
    
    
    
    
    XLoadPro
    
    
    
    
    
    
    
    
    
    
    XVoice Perspective
    
    
    
    
    
    
    
    
    
    
    XWebEffective
    
    
    
    
    
    
    
    
    
    
    XMobile Test and Measurement:Mobile SubscriptionMobile Device Perspective
    
    
    XMobile Application Perspective
    
    
    XSIGOS Global Roamer
    
    
    XMobile Ratable LicencesSIGOS SITE
    
    
    
    
    
    
    X
  For the three months ended June 30,
    
    
    For the nine months ended June 30,2010
    
    
    2009
    
    
    % Change
    
    
    2010
    
    
    2009
    
    
    % Change(In thousands)
    
    
    
    
    
    
    (In thousands)Internet Web
Measurement
Subscriptions
    
    $
    6,584
    
    
    $
    6,621
    
    
    
    (1
    )%
    
    $
    19,347
    
    
    $
    20,402
    
    
    
    (5
    )%Internet Subscriptions
Other
    
    
    2,648
    
    
    
    2,782
    
    
    
    (5
    )%
    
    
    8,882
    
    
    
    7,998
    
    
    
    11
    %Internet Engagements
    
    
    2,164
    
    
    
    2,324
    
    
    
    (7
    )%
    
    
    6,601
    
    
    
    7,753
    
    
    
    (15
    )%Total Internet net
revenue
    
    
    11,396
    
    
    
    11,727
    
    
    
    (3
    )%
    
    
    34,830
    
    
    
    36,153
    
    
    
    (4
    )%Mobile Subscription
    
    
    2,718
    
    
    
    2,052
    
    
    
    32
    %
    
    
    7,602
    
    
    
    5,869
    
    
    
    30
    %Mobile Ratable Licenses
    
    
    5,159
    
    
    
    6,390
    
    
    
    (19
    )%
    
    
    16,906
    
    
    
    18,348
    
    
    
    (8
    )%Total Mobile net
revenue
    
    
    7,877
    
    
    
    8,442
    
    
    
    (7
    )%
    
    
    24,508
    
    
    
    24,217
    
    
    
    1
    %Total net revenue
    
    $
    19,273
    
    
    $
    20,169
    
    
    
    (4
    )%
    
    $
    59,338
    
    
    $
    60,370
    
    
    
    (2
    )%
 28




---



##### 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 June 30,
    
    
    For the nine months ended June 30,2010
    
    
    2009
    
    
    % Change
    
    
    2010
    
    
    2009
    
    
    % Change(In thousands)
    
    
    
    
    
    
    (In thousands)Direct costs of subscription services
    
    $
    2,109
    
    
    $
    2,098
    
    
    
    1
    %
    
    $
    6,446
    
    
    $
    6,673
    
    
    
    (3
    )%Direct costs of ratable licenses
    
    $
    1,677
    
    
    $
    1,424
    
    
    
    18
    %
    
    $
    5,129
    
    
    $
    4,551
    
    
    
    13
    %Direct costs of professional services
    
    $
    1,457
    
    
    $
    1,293
    
    
    
    13
    %
    
    $
    4,275
    
    
    $
    4,466
    
    
    
    (4
    )%
 Direct Costs of Subscription Service
  29




---



##### Table of Contents



Direct Costs of Ratable Licenses.
 Direct Costs of Professional Services.
  Development
 For the three months ended June 30,
    
    
    For the nine months ended June 30,2010
    
    
    2009
    
    
    % Change
    
    
    2010
    
    
    2009
    
    
    % Change(In thousands)
    
    
    
    
    
    
    (In thousands)Development
    
    $
    2,968
    
    
    $
    2,863
    
    
    
    4
    %
    
    $
    9,084
    
    
    $
    9,137
    
    
    
    (1
    )%
   Operations
 For the three months ended June 30,
    
    
    For the nine months ended June 30,2010
    
    
    2009
    
    
    % Change
    
    
    2010
    
    
    2009
    
    
    % Change(In thousands)
    
    
    
    
    
    
    (In thousands)Operations
    
    $
    1,935
    
    
    $
    1,943
    
    
    
    
    %
    
    $
    5,761
    
    
    $
    6,353
    
    
    
    (9
    )%
   30




---



##### Table of Contents



Sales and Marketing
 For the three months ended June 30,
    
    
    For the nine months ended June 30,2010
    
    
    2009
    
    
    % Change
    
    
    2010
    
    
    2009
    
    
    % Change(In thousands)
    
    
    
    
    
    
    (In thousands)Sales and marketing
    
    $
    6,296
    
    
    $
    5,665
    
    
    
    11
    %
    
    $
    19,000
    
    
    $
    18,162
    
    
    
    5
    %
  General and Administrative
 For the three months ended June 30,
    
    
    For the nine months ended June 30,2010
    
    
    2009
    
    
    % Change
    
    
    2010
    
    
    2009
    
    
    % Change(In thousands)
    
    
    
    
    
    
    (In thousands)General and administrative
    
    $
    2,652
    
    
    $
    2,346
    
    
    
    13
    %
    
    $
    7,830
    
    
    $
    7,717
    
    
    
    1
    %
  Excess Occupancy Income
 For the three months ended June 30,
    
    
    For the nine months ended June 30,2010
    
    
    2009
    
    
    % Change
    
    
    2010
    
    
    2009
    
    
    % Change(In thousands)
    
    
    
    
    
    
    (In thousands)Rental income
    
    $
    (695
    )
    
    $
    (652
    )
    
    
    7
    %
    
    $
    (2,058
    )
    
    $
    (1,926
    )
    
    
    7
    %Rental and other expenses
    
    
    372
    
    
    
    394
    
    
    
    (6
    )%
    
    
    1,116
    
    
    
    1,197
    
    
    
    (7
    )%Excess occupancy
income
    
    $
    (323
    )
    
    $
    (258
    )
    
    
    25
    %
    
    $
    (942
    )
    
    $
    (729
    )
    
    
    29
    %
  Amortization of Identifiable Intangible Assets
 For the three months ended June 30,
    
    
    For the nine months ended June 30,2010
    
    
    2009
    
    
    % Change
    
    
    2010
    
    
    2009
    
    
    % Change(In thousands)
    
    
    
    
    
    
    (In thousands)Amortization
of identifiable
intangible assets
 software
    
    $
    433
    
    
    $
    290
    
    
    
    49
    %
    
    $
    1,166
    
    
    $
    866
    
    
    
    35
    %Amortization of
identifiable
intangible assets
 other
    
    
    146
    
    
    
    259
    
    
    
    (44
    )%
    
    
    484
    
    
    
    791
    
    
    
    (39
    )%Total
amortization of
identifiable
intangible
assets
    
    $
    579
    
    
    $
    549
    
    
    
    5
    %
    
    $
    1,650
    
    
    $
    1,657
    
    
    
    
    %
 31




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##### Table of Contents



Technology
    
    TechnologyBased-
    
    Based-
    
    
    CustomerSoftware
    
    Other
    
    
    Based
    
    
    Trademark
    
    
    Covenant
    
    
    Backlog
    
    
    Total$
    3,343
    
    $
    
    
    
    $
    476
    
    
    $
    494
    
    
    $
    11
    
    
    $
    32
    
    
    $
    4,356
 Interest Income and Other Income (Expense), Net
 For the three months ended June 30,
    
    
    For the nine months ended June 30,2010
    
    
    2009
    
    
    % Change
    
    
    2010
    
    
    2009
    
    
    % Change(In thousands)
    
    
    
    
    
    
    (In thousands)Interest income
    
    $
    96
    
    
    $
    157
    
    
    
    (39
    )%
    
    $
    299
    
    
    $
    744
    
    
    
    (60
    )%Other income (expense), net
    
    
    (143
    )
    
    
    (53
    )
    
    
    (170
    )%
    
    
    (93
    )
    
    
    403
    
    
    
    (123
    )%Interest income and
other income (expense),
net
    
    $
    (47
    )
    
    $
    104
    
    
    
    (145
    )%
    
    $
    206
    
    
    $
    1,147
    
    
    
    (82
    )%
   Provision for Income Taxes
 For the three months ended June 30,
    
    
    For the nine months ended June 30,2010
    
    
    2009
    
    
    % Change
    
    
    2010
    
    
    2009
    
    
    % Change(In thousands)
    
    
    
    
    
    
    (In thousands)Provision for income taxes
    
    $
    191
    
    
    $
    258
    
    
    
    (26
    )%
    
    $
    789
    
    
    $
    810
    
    
    
    (3
    )%
  32




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##### Table of Contents



Stock based Compensation Expense
    Compensation  Stock Compensation,
 Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Direct costs of ratable licenses
    
    $
    12
    
    
    $
    27
    
    
    $
    61
    
    
    $
    51Direct costs of professional services
    
    
    81
    
    
    
    65
    
    
    
    258
    
    
    
    391Development
    
    
    199
    
    
    
    171
    
    
    
    604
    
    
    
    745Operations
    
    
    102
    
    
    
    91
    
    
    
    328
    
    
    
    424Sales and marketing
    
    
    299
    
    
    
    285
    
    
    
    936
    
    
    
    1,216General and administrative
    
    
    64
    
    
    
    123
    
    
    
    360
    
    
    
    573Total
    
    $
    757
    
    
    $
    762
    
    
    $
    2,547
    
    
    $
    3,400
 Non-GAAP Financial Measures and Other Operational Data
  Non-GAAP Net Income and Non-GAAP Net Income Per Share.
 Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009GAAP net income (loss)
    
    $
    (315
    )
    
    $
    2,092
    
    
    $
    522
    
    
    $
    2,720Stock based compensation
    
    
    757
    
    
    
    762
    
    
    
    2,547
    
    
    
    3,400Amortization of intangible assets  software
    
    
    433
    
    
    
    290
    
    
    
    1,166
    
    
    
    866Amortization of intangible assets  other
    
    
    146
    
    
    
    259
    
    
    
    484
    
    
    
    791Provision for income taxes
    
    
    191
    
    
    
    258
    
    
    
    789
    
    
    
    810Cash taxes from on-going operations*
    
    
    (50
    )
    
    
    265
    
    
    
    (339
    )
    
    
    (190
    )Non-GAAP net income
    
    $
    1,162
    
    
    $
    3,926
    
    
    $
    5,169
    
    
    $
    8,397Weighted average diluted common shares outstanding:
    
    
    15,062
    
    
    
    14,403
    
    
    
    14,905
    
    
    
    14,321Non-GAAP net income per share
    
    $
    0.08
    
    
    $
    0.27
    
    
    $
    0.35
    
    
    $
    0.59
 
 *
    
    Cash taxes from on-going operations for the nine months ended June 30, 2009 excludes a
onetime cash payment of $4.1 million related to an agreement to purchase certain intangible
assets from our German subsidiary. Cash taxes from on-going operations differs from the
amounts previously publicly announced as a result of reconciling these amounts to the cash
flow statements. 33




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##### Table of Contents



Adjusted EBITDA.
 Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009GAAP net income (loss)
    
    $
    (315
    )
    
    $
    2,092
    
    
    $
    522
    
    
    $
    2,720Stock based compensation
    
    
    757
    
    
    
    762
    
    
    
    2,547
    
    
    
    3,400Amortization of intangible assets  software
    
    
    433
    
    
    
    290
    
    
    
    1,166
    
    
    
    866Amortization of intangible assets  other
    
    
    146
    
    
    
    259
    
    
    
    484
    
    
    
    791Depreciation
    
    
    1,064
    
    
    
    1,363
    
    
    
    3,381
    
    
    
    3,864Provision for income taxes
    
    
    191
    
    
    
    258
    
    
    
    789
    
    
    
    810Interest income and other income (expense), net
    
    
    47
    
    
    
    (104
    )
    
    
    (206
    )
    
    
    (1,147
    )Adjusted EBITDA
    
    $
    2,323
    
    
    $
    4,920
    
    
    $
    8,683
    
    
    $
    11,304
 Free Cash Flow.
 Nine Months EndedJune 30,2010
    
    
    2009Cash flow provided by operations
    
    $
    7,926
    
    
    $
    7,420Purchases of property, equipment and software
    
    
    (2,389
    )
    
    
    (2,596
    )Free cash flow
    
    $
    5,537
    
    
    $
    4,824
 Gross Deferred Revenue.
 June 30, 2010
    
    
    September 30, 2009
    
    
    June 30, 2009Net deferred revenue
    
    $
    18,460
    
    
    $
    18,828
    
    
    $
    21,419Unpaid deferred revenue
    
    
    6,760
    
    
    
    3,475
    
    
    
    4,219Gross deferred revenue
    
    $
    25,220
    
    
    $
    22,303
    
    
    $
    25,638
 Other Operational Data.
 June 30, 2010
    
    
    June 30, 2009Worldwide customers (approximately)
    
    
    2,800
    
    
    
    2,800Quarterly internet web measurement subscription net revenue (in thousands)
    
    $
    6,584
    
    
    $
    6,621Average monthly internet pages measured
    
    
    22,900
    
    
    
    17,500Average monthly revenue per internet page*
    
    $
    96
    
    
    $
    126
 
 *
    
    Average monthly revenue per internet page is calculated as: (quarterly internet web
measurement subscription net revenue/3 months)/ average monthly internet pages measured.
Internet web measurement subscription net revenue consists of our Application Perspective,
Transaction Perspective, Streaming Perspective and Web Site Perspective subscription services.  34




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##### Table of Contents



Liquidity and Capital Resources
 June 30,
    
    
    September 30,2010
    
    
    2009(In thousands)Cash, cash equivalents and short-term investments
    
    $
    60,363
    
    
    $
    57,968Accounts receivable, net
    
    $
    8,347
    
    
    $
    6,403Working capital
    
    $
    49,738
    
    
    $
    44,749Days sales outstanding (DSO) for the three months ended (a)
    
    
    39
    
    
    
    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  Nine Months EndedJune 30,2010
    
    
    2009(In thousands)Cash provided by operating activities
    
    $
    7,926
    
    
    $
    7,420Cash used in investing activities
    
    $
    (34,118
    )
    
    $
    (6,320
    )Cash provided by financing activities
    
    $
    778
    
    
    $
    2,022
 Cash, cash equivalents and short-term investments
  Cash provided by operating activities
   35




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##### Table of Contents



Cash used in investing activities
  Cash provided by financing activities
  Commitments
    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
 36




---



##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Interest Rate Sensitivity.
 Foreign Currency Fluctuations.
 
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control Over Financial Reporting
  37




---



##### Table of Contents



PART IIOTHER INFORMATION
 
 Item 1. Legal Proceedings
   Simmonds v. JPMorgan Chase & Co.,
et al.
  38




---



##### Table of Contents



Item 1A. Risk Factors
 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.
  
    
    Fluctuations of foreign exchange rates;
    
    The effect of global economic conditions on customers and partners;
    
    The rate of new and renewed subscriptions for our services, particularly large
customers;
    
    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 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 the 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;
    
    Seasonal factors, such as our LoadPro services, which are typically higher in our
first fiscal quarter due to customers preparing their web sites for the holiday buying
season;
    
    Future accounting pronouncements and changes in accounting policies;
    
    Future macroeconomic conditions in our domestic and international markets, as well
as the level of discretionary IT spending generally;
    
    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; and
    
    The cost associated with and the integration of future acquisitions or divestures.
  Our business, which includes our operating results and financial condition, is susceptible to
additional risks associated with international operations.
  39




---



##### Table of Contents




    
    currency exchange rate fluctuations, primarily the Euro;
    
    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.
  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.
  40




---



##### 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.
  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 business could be harmed by adverse economic conditions or reduced spending on information
technology.
  We must retain qualified personnel in a competitive marketplace, or we may not be able to grow our
business.
  41




---



##### Table of Contents



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.
    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.
     42




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##### Table of Contents



If the market does not accept our professional services, our results of operations could be harmed.
  We face competition that could make it difficult for us to acquire and retain customers.
       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.
   43




---



##### Table of Contents



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.
  Our cash, cash equivalents and short-term investments are managed through various banks around the
world.
  Industry consolidation may lead to stronger competition and may harm our operating results.
  If the protection of our proprietary technology is inadequate, our competitors may gain access to
our technology, and our market share could decline.
   44




---



##### Table of Contents



Others might bring infringement claims which could harm our business.
  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.
  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.
 45




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##### Table of Contents



Improvements to the infrastructure of the Internet and mobile networks could reduce or eliminate
demand for our Internet and Mobile services.
  If we need to raise additional capital and are unable to do so, our business could be harmed.
  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.
  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;
    
    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;
 46




---



##### Table of Contents




    
    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.
 Failure to maintain effective internal controls may cause us to delay filing our periodic reports
with the SEC and adversely affect our stock price.
  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.
  Our business is subject to changing regulations regarding corporate governance and public
disclosure that will increase both our costs and the risk of noncompliance.
  
 47




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##### Table of Contents



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. (Reserved)
 
 Item 5. Other Information
  
 Item 6. Exhibits
 EXHIBIT INDEX
 Exhibit
    
    
    
    Incorporated by Reference
    
    FiledNo.
    

Exhibit
    
Form

    File No.
    
    Filing Date
    
    Exhibit No.
    
    Herewith10.1
    
    Employment
Agreement dated as
of May 21, 2010
between Keynote and
Curtis Smith
    


    
    
    
    
    
    
    X31.1
    
    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




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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/ CURTIS SMITHCurtis SmithChief Financial Officer
(Principal Financial Officer)By:
    /s/ DAVID F. PETERSONDavid F. PetersonChief Accounting Officer
(Principal Accounting Officer) 49




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##### Table of Contents



EXHIBIT INDEX
 Exhibit
    
    
    
    Incorporated by Reference
    
    FiledNo.
    
    Exhibit
    
Form

    File No.
    
    Filing Date
    
    Exhibit No.
    
    Herewith10.1
    
    Employment
Agreement dated as
of May 21, 2010
between Keynote and
Curtis Smith
    


    
    
    
    
    
    
    X31.1
    
    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. 50