##### 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 March 31, 2011
 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
    
    (I.R.S. Employerincorporation or organization)
    
    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
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ
  Class
    
    Shares outstanding as of May 3, 2011Common Stock, $.001 par value
    
    16,466,971 shares




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##### 



KEYNOTE SYSTEMS, INC.
 PagePART IFINANCIAL INFORMATION
    
    
    3Item 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
    
    
    34Item 4. Controls and Procedures
    
    
    34PART IIOTHER INFORMATION
    
    
    34Item 1. Legal Proceedings
    
    
    34Item 1A. Risk Factors
    
    
    36Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    44Item 3. Defaults Upon Senior Securities
    
    
    44Item 4. (Reserved)
    
    
    44Item 5. Other Information
    
    
    44Item 6. Exhibits
    
    
    45Signatures
    
    
    46EX-31.1EX-31.2EX-32.1EX-32.2
  2




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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 March 31, 2011 and September 30, 2010
    
    
    4Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2011 and 2010
    
    
    5Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2011 and 2010
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7
 3




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KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
 March 31,
    
    
    September 30,2011
    
    
    2010ASSETSCurrent assets:Cash and cash equivalents
    
    $
    31,690
    
    
    $
    23,241Short-term investments
    
    
    54,268
    
    
    
    43,111Total cash, cash equivalents and short-term investments
    
    
    85,958
    
    
    
    66,352Accounts receivable, less allowance for doubtful accounts
of $160 and $50, respectively, and less billing reserve
of $146 and $150, respectively
    
    
    11,241
    
    
    
    9,094Prepaids, deferred costs and other current assets
    
    
    5,039
    
    
    
    3,571Inventories
    
    
    1,964
    
    
    
    1,286Deferred tax assets
    
    
    3,889
    
    
    
    3,749Total current assets
    
    
    108,091
    
    
    
    84,052Deferred costs and other long-term assets
    
    
    830
    
    
    
    1,599Property, equipment and software, net
    
    
    33,695
    
    
    
    33,432Goodwill
    
    
    64,741
    
    
    
    63,166Identifiable intangible assets, net
    
    
    2,802
    
    
    
    3,914Long-term deferred tax assets
    
    
    373
    
    
    
    359Total assets
    
    $
    210,532
    
    
    $
    186,522LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,792
    
    
    $
    1,748Accrued expenses
    
    
    8,592
    
    
    
    7,945Deferred revenue
    
    
    17,785
    
    
    
    19,539Total current liabilities
    
    
    28,169
    
    
    
    29,232Deferred rent and other long-term liabilities
    
    
    3,780
    
    
    
    3,605Long-term deferred revenue
    
    
    3,466
    
    
    
    1,926Long-term deferred tax liability
    
    
    435
    
    
    
    395Total liabilities
    
    
    35,850
    
    
    
    35,158Commitments and contingencies (see Note 15)Stockholders equity:Common stock, $0.001 par value; 100,000,000 shares
authorized; 16,307,150 and 14,942,571 shares issued and
outstanding, respectively
    
    
    16
    
    
    
    15Additional paid-in capital
    
    
    300,895
    
    
    
    286,761Accumulated deficit
    
    
    (130,970
    )
    
    
    (137,928
    )Accumulated other comprehensive income
    
    
    4,741
    
    
    
    2,516Total stockholders equity
    
    
    174,682
    
    
    
    151,364Total liabilities and stockholders equity
    
    $
    210,532
    
    
    $
    186,522
  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
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2011
    
    
    2010
    
    
    2011
    
    
    2010Net revenue:
    
    $
    24,107
    
    
    $
    19,356
    
    
    $
    48,940
    
    
    $
    40,065Costs and expenses:Costs of revenue:Direct costs of revenue
    
    
    5,964
    
    
    
    5,204
    
    
    
    11,807
    
    
    
    10,607Development
    
    
    3,186
    
    
    
    2,971
    
    
    
    6,221
    
    
    
    6,116Operations
    
    
    1,967
    
    
    
    1,935
    
    
    
    3,878
    
    
    
    3,826Amortization of intangible assets  software
    
    
    419
    
    
    
    435
    
    
    
    838
    
    
    
    733Total costs of revenue
    
    
    11,536
    
    
    
    10,545
    
    
    
    22,744
    
    
    
    21,282Sales and marketing
    
    
    6,768
    
    
    
    6,376
    
    
    
    13,961
    
    
    
    12,704General and administrative
    
    
    2,559
    
    
    
    2,536
    
    
    
    5,407
    
    
    
    5,178Excess occupancy income
    
    
    (273
    )
    
    
    (311
    )
    
    
    (519
    )
    
    
    (619
    )Amortization of intangible assets  other
    
    
    153
    
    
    
    156
    
    
    
    304
    
    
    
    338Total costs and expenses
    
    
    20,743
    
    
    
    19,302
    
    
    
    41,897
    
    
    
    38,883Income from operations
    
    
    3,364
    
    
    
    54
    
    
    
    7,043
    
    
    
    1,182Interest income
    
    
    132
    
    
    
    117
    
    
    
    266
    
    
    
    203Other income (expense), net
    
    
    75
    
    
    
    43
    
    
    
    157
    
    
    
    50Income before provision for income taxes
    
    
    3,571
    
    
    
    214
    
    
    
    7,466
    
    
    
    1,435Provision for income taxes
    
    
    (240
    )
    
    
    (358
    )
    
    
    (508
    )
    
    
    (598
    )Net income (loss)
    
    $
    3,331
    
    
    $
    (144
    )
    
    $
    6,958
    
    
    $
    837Net income (loss) per share:Basic
    
    $
    0.21
    
    
    $
    (0.01
    )
    
    $
    0.45
    
    
    $
    0.06Diluted
    
    $
    0.19
    
    
    $
    (0.01
    )
    
    $
    0.42
    
    
    $
    0.06Shares used in computing basic and diluted net income (loss) per share:Basic
    
    
    15,814
    
    
    
    14,591
    
    
    
    15,406
    
    
    
    14,560Diluted
    
    
    17,160
    
    
    
    14,591
    
    
    
    16,498
    
    
    
    14,825Cash dividends declared per common share
    
    $
    0.06
    
    
    $
    0.05
    
    
    $
    0.12
    
    
    $
    0.10
  5




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KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 Six Months EndedMarch 31,2011
    
    
    2010Cash flows from operating activities:Net income
    
    $
    6,958
    
    
    $
    837Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    2,066
    
    
    
    2,317Stock-based compensation
    
    
    1,519
    
    
    
    1,790Amortization of identifiable intangible assets
    
    
    1,142
    
    
    
    1,071Amortization of prepaid tax asset
    
    
    351
    
    
    
    382Charges to bad debt and billing reserves
    
    
    215
    
    
    
    165Amortization of debt investment premium
    
    
    591
    
    
    
    262Deferred tax provision (benefit)
    
    
    40
    
    
    
    (262
    )Loss on disposal of equipment
    
    
    21
    
    
    
    8Changes in operating assets and liabilities:Accounts receivable
    
    
    (2,132
    )
    
    
    (2,158
    )Inventories
    
    
    (598
    )
    
    
    (379
    )Prepaids, deferred costs and other assets
    
    
    (954
    )
    
    
    (603
    )Accounts payable and accrued expenses
    
    
    549
    
    
    
    800Deferred revenue
    
    
    (751
    )
    
    
    (2,576
    )Net cash provided by operating activities
    
    
    9,017
    
    
    
    1,654Cash flows from investing activities:Purchases of short-term investments
    
    
    (24,503
    )
    
    
    (26,609
    )Maturities and sales of short-term investments
    
    
    12,955
    
    
    
    4,308Purchases of property, equipment and software
    
    
    (2,163
    )
    
    
    (1,428
    )Net cash used in investing activities
    
    
    (13,711
    )
    
    
    (23,729
    )Cash flows from financing activities:Proceeds from issuance of common stock and exercise of stock options
    
    
    14,486
    
    
    
    1,233Cash dividends declared and paid
    
    
    (1,868
    )
    
    
    (1,458
    )Repayment of capital lease obligation
    
    
    
    
    
    
    (9
    )Net cash provided by (used in) financing activities
    
    
    12,618
    
    
    
    (234
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    525
    
    
    
    (1,232
    )Net change in cash and cash equivalents
    
    
    8,449
    
    
    
    (23,541
    )Cash and cash equivalents at beginning of the period
    
    
    23,241
    
    
    
    51,383Cash and cash equivalents at end of the period
    
    $
    31,690
    
    
    $
    27,842Supplemental cash flow disclosure:Income taxes paid (net of refunds)
    
    $
    30
    
    
    $
    282Noncash operating and investing activities:Exercise of non-employee stock options
    
    $
    
    
    
    $
    81Acquisition of property, equipment and software on account
    
    $
    231
    
    
    $
    348
  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
    Recently Adopted Accounting Pronouncements
  (2) Net Income (Loss) Per Share
   Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2011
    
    
    2010
    
    
    2011
    
    
    2010Numerator:Net income (loss)
    
    $
    3,331
    
    
    $
    (144
    )
    
    $
    6,958
    
    
    $
    837Denominator:Weighted average shares outstanding
    
    
    15,814
    
    
    
    14,591
    
    
    
    15,406
    
    
    
    14,560Effect of dilutive stock options, RSUs and
employee stock purchase rights
    
    
    1,346
    
    
    
    
    
    
    
    1,092
    
    
    
    265Denominator for diluted net income (loss) per share
    
    
    17,160
    
    
    
    14,591
    
    
    
    16,498
    
    
    
    14,825Net income (loss) per share:Basic
    
    $
    0.21
    
    
    $
    (0.01
    )
    
    $
    0.45
    
    
    $
    0.06Diluted
    
    $
    0.19
    
    
    $
    (0.01
    )
    
    $
    0.42
    
    
    $
    0.06
 7




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(3) Revenue Recognition
  Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2011
    
    
    2010
    
    
    2011
    
    
    2010Internet:Web measurement subscriptions
    
    $
    7,373
    
    
    $
    6,593
    
    
    $
    14,648
    
    
    $
    12,763Other subscriptions
    
    
    2,784
    
    
    
    2,569
    
    
    
    6,232
    
    
    
    6,234Engagements
    
    
    2,600
    
    
    
    1,893
    
    
    
    4,785
    
    
    
    4,437Internet net revenue
    
    
    12,757
    
    
    
    11,055
    
    
    
    25,665
    
    
    
    23,434Mobile:Subscriptions
    
    
    3,234
    
    
    
    2,510
    
    
    
    6,429
    
    
    
    4,884Ratable licenses
    
    
    3,687
    
    
    
    5,791
    
    
    
    8,258
    
    
    
    11,747System licenses
    
    
    1,262
    
    
    
    
    
    
    
    3,254
    
    
    
    Maintenance and support
    
    
    3,167
    
    
    
    
    
    
    
    5,334
    
    
    
    Mobile net revenue
    
    
    11,350
    
    
    
    8,301
    
    
    
    23,275
    
    
    
    16,631Net revenue
    
    $
    24,107
    
    
    $
    19,356
    
    
    $
    48,940
    
    
    $
    40,065
     8




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
    
    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.Subscription based services are considered delivered
when the customer has been provided with access to the subscription services. Subscription
services are generally delivered on a consistent basis over the period of the subscription
with the customer having flexibility to define and change the measurement with respect to
the type, frequency, location and complexity of the measurement. Engagement services are
considered delivered when the services are performed or the contractual milestones are
completed. Monitoring systems, excluding maintenance, are considered delivered 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.
     Revenue Recognition for Arrangements with Multiple Deliverables
  For Arrangements Entered into Prior to October 1, 2010:
  9




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##### Table of Contents



For Arrangements Entered into Subsequent to September 30, 2010:
  
    
    Provide updated guidance on whether multiple deliverables exist, how the deliverables in
an arrangement should be separated, and how the consideration should be allocated;
    
    Require an entity to allocate revenue in an arrangement using best estimated selling
prices (BESP) of each deliverable if a vendor does not have VSOE or third-party evidence
(TPE) of selling price; and
    
    Eliminate the use of the residual method and require a vendor to allocate revenue using
the relative selling price method.
    Effects of Adoption:
   10




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Direct Costs of Revenue, Deferred Revenue and Deferred Direct Costs of Revenue
 Direct Costs of Revenue:
 Deferred Revenue:
 Deferred Direct Costs of Revenue:
 (4) Financial Instruments and Concentration of Risk
      11




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(5) Cash, Cash Equivalents, and Short-Term Investments
    Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Market ValueCash
    
    $
    19,069
    
    
    $
    
    
    
    $
    
    
    
    $
    19,069Money market funds
    
    
    12,621
    
    
    
    
    
    
    
    
    
    
    
    12,621Total cash and cash equivalents
    
    $
    31,690
    
    
    $
    
    
    
    $
    
    
    
    $
    31,690Corporate bonds
    
    $
    38,084
    
    
    $
    52
    
    
    $
    (47
    )
    
    $
    38,089United
States government agencies
    
    
    7,100
    
    
    
    4
    
    
    
    (8
    )
    
    
    7,096Fixed-term deposits
    
    
    7,087
    
    
    
    
    
    
    
    
    
    
    
    7,087Commercial paper
    
    
    1,997
    
    
    
    
    
    
    
    (1
    )
    
    
    1,996Total short-term investments
    
    $
    54,268
    
    
    $
    56
    
    
    $
    (56
    )
    
    $
    54,268
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Market ValueCash
    
    $
    17,732
    
    
    $
    
    
    
    $
    
    
    
    $
    17,732Money market funds
    
    
    5,509
    
    
    
    
    
    
    
    
    
    
    
    5,509Total cash and cash equivalents
    
    $
    23,241
    
    
    $
    
    
    
    $
    
    
    
    $
    23,241Corporate and municipal bonds
    
    $
    27,674
    
    
    $
    70
    
    
    $
    (15
    )
    
    $
    27,729Fixed-term deposits
    
    
    12,271
    
    
    
    
    
    
    
    
    
    
    
    12,271United
States government  agencies
    
    
    3,101
    
    
    
    10
    
    
    
    
    
    
    
    3,111Total short-term investments
    
    $
    43,046
    
    
    $
    80
    
    
    $
    (15
    )
    
    $
    43,111
  
    
    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.
 12




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EstimatedCost
    
    
    Fair ValueDue in less than one year
    
    $
    36,133
    
    
    $
    36,178Due in more than one year and less than two years
    
    
    18,135
    
    
    
    18,090Total
    
    $
    54,268
    
    
    $
    54,268
 (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 the use of model-based
techniques and managements estimates of assumptions that market participants would use in
pricing the asset or liability.
  Quoted Pricesin Active
    
    
    SignificantMarkets for
    
    
    Other
    
    
    SignificantIdentical
    
    
    Observable
    
    
    UnobservableInstruments
    
    
    Inputs
    
    
    Inputs(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    TotalCash and cash equivalents:Money market funds
    
    $
    12,621
    
    
    $
    
    
    
    $
    
    
    
    $
    12,621Short-term investments:Corporate bonds
    
    
    34,463
    
    
    
    3,626
    
    
    
    
    
    
    
    38,089United
States government agencies
    
    
    7,096
    
    
    
    
    
    
    
    
    
    
    
    7,096Fixed-term deposits
    
    
    
    
    
    
    7,087
    
    
    
    
    
    
    
    7,087Commercial paper
    
    
    
    
    
    
    1,996
    
    
    
    
    
    
    
    1,996Total assets measured at fair value
    
    $
    54,180
    
    
    $
    12,709
    
    
    $
    
    
    
    $
    66,889
  13




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(7) Consolidated Financial Statement Details
  Prepaids, Deferred Costs and Other Current Assets
 March 31, 2011
    
    
    September 30, 2010Prepaid expenses
    
    $
    2,358
    
    
    $
    1,591Security deposits, advances, and interest receivable
    
    
    806
    
    
    
    590Deferred costs of revenue
    
    
    537
    
    
    
    806Income tax receivable
    
    
    361
    
    
    
    425Prepaid tax asset
    
    
    456
    
    
    
    Other assets
    
    
    521
    
    
    
    159Total
    
    $
    5,039
    
    
    $
    3,571
 Property, equipment and software
 March 31, 2011
    
    
    September 30, 2010Land
    
    $
    14,150
    
    
    $
    14,150Computer equipment and software
    
    
    33,869
    
    
    
    31,874Building
    
    
    21,904
    
    
    
    21,614Furniture and fixtures
    
    
    2,192
    
    
    
    2,151Leasehold and building improvements
    
    
    1,203
    
    
    
    1,155Construction in progress
    
    
    267
    
    
    
    29273,585
    
    
    
    71,236Less accumulated depreciation and amortization
    
    
    (39,890
    )
    
    
    (37,804
    )Total
    
    $
    33,695
    
    
    $
    33,432
 Deferred Costs and Other Long-Term Assets
 March 31, 2011
    
    
    September 30, 2010Prepaid tax asset
    
    $
    
    
    
    $
    823Deferred costs of revenue
    
    
    235
    
    
    
    209Tenant rent receivable
    
    
    131
    
    
    
    163Deposits
    
    
    222
    
    
    
    221Prepaid expenses
    
    
    242
    
    
    
    183Total
    
    $
    830
    
    
    $
    1,599
 Accrued Expenses
 March 31, 2011
    
    
    September 30, 2010Accrued employee compensation
    
    $
    4,662
    
    
    $
    4,040Accrued audit and professional fees
    
    
    470
    
    
    
    334Income and other taxes
    
    
    885
    
    
    
    1,016Other accrued expenses
    
    
    2,575
    
    
    
    2,555Total
    
    $
    8,592
    
    
    $
    7,945
 (8) Inventories
  14




---



##### Table of Contents



(9) Goodwill and Identifiable Intangible Assets
    :
 Balance at September 30, 2010
    
    $
    63,166Translation adjustment
    
    
    1,575Balance at March 31, 2011
    
    $
    64,741
  Technology
    
    
    TechnologyBased-
    
    
    Based-
    
    
    CustomerSoftware
    
    
    Other
    
    
    Based
    
    
    Trademark
    
    
    Covenant
    
    
    Backlog
    
    
    TotalAs of March 31, 2011:Gross carrying value
    
    $
    8,017
    
    
    $
    11,845
    
    
    $
    8,125
    
    
    $
    1,395
    
    
    $
    39
    
    
    $
    117
    
    
    $
    29,538Accumulated amortization
    
    
    (5,935
    )
    
    
    (11,845
    )
    
    
    (7,756
    )
    
    
    (1,076
    )
    
    
    (31
    )
    
    
    (93
    )
    
    
    (26,736
    )Net carrying value
    
    $
    2,082
    
    
    $
    
    
    
    $
    369
    
    
    $
    319
    
    
    $
    8
    
    
    $
    24
    
    
    $
    2,802As of September 30, 2010:Gross carrying value
    
    $
    7,944
    
    
    $
    11,845
    
    
    $
    8,071
    
    
    $
    1,382
    
    
    $
    38
    
    
    $
    113
    
    
    $
    29,393Accumulated amortization
    
    
    (4,984
    )
    
    
    (11,845
    )
    
    
    (7,602
    )
    
    
    (939
    )
    
    
    (27
    )
    
    
    (82
    )
    
    
    (25,479
    )Net carrying value
    
    $
    2,960
    
    
    $
    
    
    
    $
    469
    
    
    $
    443
    
    
    $
    11
    
    
    $
    31
    
    
    $
    3,914
 15




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2011
    
    
    2010
    
    
    2011
    
    
    2010Amortization of intangible assets  software
    
    $
    419
    
    
    $
    435
    
    
    $
    838
    
    
    $
    733Amortization of intangible assets  other
    
    
    153
    
    
    
    156
    
    
    
    304
    
    
    
    338Total amortization of intangible assets
    
    $
    572
    
    
    $
    591
    
    
    $
    1,142
    
    
    $
    1,071
  Fiscal years:2011 (remaining six months)
    
    $
    1,1182012
    
    
    1,3992013
    
    
    285Total
    
    $
    2,802Weighted-average remaining useful life as of March 31, 2011 (years)
    
    
    1.9
 (10) Lease Abandonment Accrual
  Lease abandonment liability, September 30, 2010
    
    $
    468Lease payments to lessor
    
    
    (137
    )Sublease proceeds
    
    
    58Interest expense
    
    
    1Lease abandonment liability, March 31, 2011
    
    $
    390
 (11) Stockholders Equity and Stock-Based Compensation
 Dividends
  Record Date
    
    Payment Date
    
    Dividend Per Share
    
    
    Total Dividend PaidDecember 1, 2009
    
    December 15, 2009
    
    $
    0.05
    
    
    $
    727March 1, 2010
    
    March 15, 2010
    
    $
    0.05
    
    
    $
    731December 1, 2010
    
    December 15, 2010
    
    $
    0.06
    
    
    $
    898March 1, 2011
    
    March 15, 2011
    
    $
    0.06
    
    
    $
    970
 Stock-Based Compensation
 Summary of Plans
  16




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##### Table of Contents



Restricted Stock Units
    Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2011
    
    
    2010*
    
    
    2011
    
    
    2010*Volatility
    
    
    54.6
    %
    
    
    
    
    
    
    55.9
    %
    
    
    Risk free interest rate
    
    
    1.1
    %
    
    
    
    
    
    
    0.9
    %
    
    
    Expected life (in years)
    
    
    2.9
    
    
    
    
    
    
    
    2.9
    
    
    
    Dividend yield
    
    
    1.4
    %
    
    
    
    
    
    
    1.6
    %
    
    
    
 
 *
    
     No RSUs were granted during this period. 17




---



##### Table of Contents



WeightedAverageGrant Date FairShares
    
    
    ValueOutstanding at September 30, 2010
    
    
    489
    
    
    $
    9.07Granted
    
    
    141
    
    
    
    14.84Vested
    
    
    
    
    
    
    Cancelled
    
    
    (21
    )
    
    
    8.18Outstanding at March 31, 2011*
    
    
    609
    
    
    $
    10.56
 
 *
    
    -Included in the total outstanding RSU balance at March 31, 2011, are 20,000 Performance Stock
Units (PSUs) that were issued during the quarter ended March 31, 2011 and 20,000 PSUs that were
issued in fiscal 2009. Each PSU award reflects a target number of shares (Target Shares) that may
be issued to the award recipient before adjusting for performance conditions. The actual number
of shares the recipient receives is determined at the end of a performance period based on actual
results achieved versus pre-established targets and may range from 0% to 100% of the Target Shares
granted. The pre-established targets are based on net revenue and operating results over the
performance period.  Stock Options
   AverageWeighted
    
    
    Remaining
    
    
    AggregateAverage
    
    
    Contractual
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    Term (years)
    
    
    ValueOutstanding at September 30, 2010
    
    
    4,039
    
    
    $
    11.51
    
    
    
    4.9
    
    
    $
    2,647Granted
    
    
    
    
    
    
    Exercised
    
    
    (1,287
    )
    
    
    10.78Forfeited or canceled
    
    
    (15
    )
    
    
    12.03Expired
    
    
    (35
    )
    
    
    14.51Outstanding at March 31, 2011
    
    
    2,702
    
    
    $
    11.82
    
    
    
    4.8
    
    
    $
    18,196Vested and expected to vest at March 31, 2011
    
    
    2,688
    
    
    $
    11.81
    
    
    
    4.7
    
    
    $
    18,106Exercisable at March 31, 2011
    
    
    2,502
    
    
    $
    11.79
    
    
    
    4.6
    
    
    $
    16,911
   Employee Stock Purchase Plan
  Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2011
    
    
    2010
    
    
    2011
    
    
    2010Volatility
    
    
    56.4
    %
    
    
    64.8
    %
    
    
    57.9
    %
    
    
    63.0
    %Risk free interest rate
    
    
    0.5
    %
    
    
    0.5
    %
    
    
    0.5
    %
    
    
    0.6
    %Expected life (in years)
    
    
    1.3
    
    
    
    1.3
    
    
    
    1.3
    
    
    
    1.3Dividend yield
    
    
    0.9
    %
    
    
    0.1
    %
    
    
    0.7
    %
    
    
    
 18




---



##### Table of Contents



Stock-based Compensation Expense
  Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2011
    
    
    2010
    
    
    2011
    
    
    2010Direct costs of revenue
    
    $
    99
    
    
    $
    89
    
    
    $
    195
    
    
    $
    226Development
    
    
    171
    
    
    
    176
    
    
    
    348
    
    
    
    405Operations
    
    
    47
    
    
    
    92
    
    
    
    154
    
    
    
    226Sales and marketing
    
    
    284
    
    
    
    273
    
    
    
    575
    
    
    
    637General and administrative
    
    
    123
    
    
    
    157
    
    
    
    247
    
    
    
    296Total
    
    $
    724
    
    
    $
    787
    
    
    $
    1,519
    
    
    $
    1,790
 (12) Other Comprehensive Income (Loss) and Foreign Currency Translation
   Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2011
    
    
    2010
    
    
    2011
    
    
    2010Net income (loss)
    
    $
    3,331
    
    
    $
    (144
    )
    
    $
    6,958
    
    
    $
    837Net unrealized gain (loss) on available-for-sale investments
    
    
    (50
    )
    
    
    97
    
    
    
    (65
    )
    
    
    (33
    )Foreign currency translation gain (loss)
    
    
    3,506
    
    
    
    (3,505
    )
    
    
    2,290
    
    
    
    (4,906
    )Other comprehensive income (loss)
    
    $
    6,787
    
    
    $
    (3,552
    )
    
    $
    9,183
    
    
    $
    (4,102
    )
  (13) Excess Occupancy Income
  Fiscal years:2011 (remaining six months)
    
    $
    1,3182012
    
    
    2,1822013
    
    
    9212014
    
    
    6102015
    
    
    491Thereafter
    
    
    161Total future minimum rents receivable
    
    $
    5,683
 19




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##### Table of Contents



(14) Income Taxes
     Accounting for
Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109
   20




---



##### Table of Contents



(15) Commitments and Contingencies
 Leases
  OperatingLeasesFiscal year:2011 (remaining six months)
    
    $
    4462012
    
    
    5852013
    
    
    4662014
    
    
    3462015
    
    
    353Thereafter
    
    
    144Total minimum lease payments*
    
    $
    2,340
 
 *
    
    Future minimum lease payments exclude future sublease proceeds of approximately $0.9 million.  Commitments
   Legal Proceedings
   21




---



##### Table of Contents



Simmonds v. JPMorgan Chase & Co.,
et al.
  Warranties
  Indemnification
  22




---



##### Table of Contents



(16) Geographic and Segment Information
   Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2011
    
    
    2010
    
    
    2011
    
    
    2010United States
    
    $
    11,970
    
    
    $
    10,260
    
    
    $
    24,214
    
    
    $
    21,568Europe*
    
    
    8,042
    
    
    
    5,326
    
    
    
    16,383
    
    
    
    11,978Other*
    
    
    4,095
    
    
    
    3,770
    
    
    
    8,343
    
    
    
    6,519Total net revenue
    
    $
    24,107
    
    
    $
    19,356
    
    
    $
    48,940
    
    
    $
    40,065
 
 *
    
    No individual country represented more than 10% of net revenue.  March 31, 2011
    
    
    September 30, 2010United States
    
    $
    32,467
    
    
    $
    32,213Germany
    
    
    1,216
    
    
    
    1,212Other
    
    
    12
    
    
    
    7Total
    
    $
    33,695
    
    
    $
    33,432
 (17) 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 unaudited Condensed Consolidated Financial Statements and the Notes thereto
included in this report as well as the audited financial statements and notes thereto in our Annual
Report on Form 10-K for the year ended September 30, 2010, 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, 2010 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 Cloud products and services, as we
believe that revenue growth is the primary factor in creating stockholder value;
    
    Growing Web measurement revenue (such as Transaction Perspective and Application
Perspective which have increased over the past three quarters) in order to increase Internet
revenues;
    
    Growing our overall customer base to support the growth of our Internet and Mobile
revenue;
    
    Continuing to control our expenses in fiscal 2011 to maintain and improve profitability,
particularly because of the economic uncertainties that continue to exist; and
    
    Meeting challenges faced due to the current economic environment as this affects our
customers ability to purchase our products and services.
  www.keynote.com
 Critical Accounting Policies and Estimates
  
    
    Revenue recognition
    
    Allowance for doubtful accounts and billing allowance
    
    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
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2011
    
    
    2010
    
    
    2011
    
    
    2010Total net revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Costs and expenses:Costs of revenue:Direct costs of revenue
    
    
    24.7
    
    
    
    26.9
    
    
    
    24.1
    
    
    
    26.4Operations
    
    
    8.2
    
    
    
    10.0
    
    
    
    7.9
    
    
    
    9.5Development
    
    
    13.2
    
    
    
    15.3
    
    
    
    12.7
    
    
    
    15.3Amortization of intangible assets  software
    
    
    1.7
    
    
    
    2.2
    
    
    
    1.7
    
    
    
    1.8Sales and marketing
    
    
    28.1
    
    
    
    33.0
    
    
    
    28.6
    
    
    
    31.8General and administrative
    
    
    10.6
    
    
    
    13.1
    
    
    
    11.1
    
    
    
    12.9Excess occupancy income
    
    
    (1.1
    )
    
    
    (1.6
    )
    
    
    (1.1
    )
    
    
    (1.5
    )Amortization of intangible assets  other
    
    
    0.6
    
    
    
    0.8
    
    
    
    0.6
    
    
    
    0.8Total costs and expenses
    
    
    86.0
    
    
    
    99.7
    
    
    
    85.6
    
    
    
    97.0Income from operations
    
    
    14.0
    
    
    
    0.3
    
    
    
    14.4
    
    
    
    3.0Interest income and other, net
    
    
    0.8
    
    
    
    0.8
    
    
    
    0.9
    
    
    
    0.6Income before provision for income taxes
    
    
    14.8
    
    
    
    1.1
    
    
    
    15.3
    
    
    
    3.6Provision for income taxes
    
    
    (1.0
    )
    
    
    (1.8
    )
    
    
    (1.1
    )
    
    
    (1.5
    )Net income (loss)
    
    
    13.8
    %
    
    
    (0.7
    )%
    
    
    14.2
    %
    
    
    2.1
    %
 The dollar amounts in the tables in this and the following sections are in thousands unless
otherwise indicated.
 Net Revenue
 For the three months ended March 31,
    
    
    For the six months ended March 31,2011
    
    
    2010
    
    
    % Change
    
    
    2011
    
    
    2010
    
    
    % ChangeInternet:Web Measurement Subscriptions
    
    $
    7,373
    
    
    $
    6,593
    
    
    
    12
    %
    
    $
    14,648
    
    
    $
    12,763
    
    
    
    15
    %Other Subscriptions
    
    
    2,784
    
    
    
    2,569
    
    
    
    8
    %
    
    
    6,232
    
    
    
    6,234
    
    
    
    Engagements
    
    
    2,600
    
    
    
    1,893
    
    
    
    37
    %
    
    
    4,785
    
    
    
    4,437
    
    
    
    8
    %Total Internet net
revenue
    
    
    12,757
    
    
    
    11,055
    
    
    
    15
    %
    
    
    25,665
    
    
    
    23,434
    
    
    
    10
    %Mobile:Subscriptions
    
    
    3,234
    
    
    
    2,510
    
    
    
    29
    %
    
    
    6,429
    
    
    
    4,884
    
    
    
    32
    %Ratable Licenses
    
    
    3,687
    
    
    
    5,791
    
    
    
    (36
    )%
    
    
    8,258
    
    
    
    11,747
    
    
    
    (30
    )%System Licenses
    
    
    1,262
    
    
    
    
    
    
    
    
    
    
    
    3,254
    
    
    
    
    
    
    
    Maintenance and Support
    
    
    3,167
    
    
    
    
    
    
    
    
    
    
    
    5,334
    
    
    
    
    
    
    
    Total Mobile net revenue
    
    
    11,350
    
    
    
    8,301
    
    
    
    37
    %
    
    
    23,275
    
    
    
    16,631
    
    
    
    40
    %Total net revenue
    
    $
    24,107
    
    
    $
    19,356
    
    
    
    25
    %
    
    $
    48,940
    
    
    $
    40,065
    
    
    
    22
    %
  26




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##### Table of Contents



Internet Net Revenue.
  Mobile Net Revenue.
    27




---



##### Table of Contents



Direct Costs of Net Revenue
 For the three months ended March 31,
    
    
    For the six months ended March 31,2011
    
    
    2010
    
    
    %  Change
    
    
    2011
    
    
    2010
    
    
    %  ChangeDirect costs of net revenue
    
    $
    5,964
    
    
    $
    5,204
    
    
    
    15
    %
    
    $
    11,807
    
    
    $
    10,607
    
    
    
    11
    %
  Development
 For the three months ended March 31,
    
    
    For the six months ended March 31,2011
    
    
    2010
    
    
    %  Change
    
    
    2011
    
    
    2010
    
    
    %  ChangeDevelopment
    
    $
    3,186
    
    
    $
    2,971
    
    
    
    7
    %
    
    $
    6,221
    
    
    $
    6,116
    
    
    
    2
    %
  Operations
 For the three months ended March 31,
    
    
    For the six months ended March 31,2011
    
    
    2010
    
    
    %  Change
    
    
    2011
    
    
    2010
    
    
    %  ChangeOperations
    
    $
    1,967
    
    
    $
    1,935
    
    
    
    2
    %
    
    $
    3,878
    
    
    $
    3,826
    
    
    
    1
    %
  Sales and Marketing
 For the three months ended March 31,
    
    
    For the six months ended March 31,2011
    
    
    2010
    
    
    %  Change
    
    
    2011
    
    
    2010
    
    
    %  ChangeSales and marketing
    
    $
    6,768
    
    
    $
    6,376
    
    
    
    6
    %
    
    $
    13,961
    
    
    $
    12,704
    
    
    
    10
    %
  28




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##### Table of Contents



General and Administrative
 For the three months ended March 31,
    
    
    For the six months ended March 31,2011
    
    
    2010
    
    
    %  Change
    
    
    2011
    
    
    2010
    
    
    %  ChangeGeneral and administrative
    
    $
    2,559
    
    
    $
    2,536
    
    
    
    1
    %
    
    $
    5,407
    
    
    $
    5,178
    
    
    
    4
    %
  Excess Occupancy Income
 For the three months ended March 31,
    
    
    For the six months ended March 31,2011
    
    
    2010
    
    
    %  Change
    
    
    2011
    
    
    2010
    
    
    %  ChangeRental income
    
    $
    (644
    )
    
    $
    (672
    )
    
    
    (4
    )%
    
    $
    (1,254
    )
    
    $
    (1,362
    )
    
    
    (8
    )%Rental and other expenses
    
    
    371
    
    
    
    361
    
    
    
    3
    %
    
    
    735
    
    
    
    743
    
    
    
    (1
    )%Excess occupancy income
    
    $
    (273
    )
    
    $
    (311
    )
    
    
    (12
    )%
    
    $
    (519
    )
    
    $
    (619
    )
    
    
    (16
    )%
  Amortization of Identifiable Intangible Assets
 For the three months ended March 31,
    
    
    For the six months ended March 31,2011
    
    
    2010
    
    
    %  Change
    
    
    2011
    
    
    2010
    
    
    %  ChangeAmortization
of identifiable
intangible assets
 software
    
    $
    419
    
    
    $
    435
    
    
    
    (4
    )%
    
    $
    838
    
    
    $
    733
    
    
    
    14
    %Amortization of
identifiable
intangible assets
 other
    
    
    153
    
    
    
    156
    
    
    
    (2
    )%
    
    
    304
    
    
    
    338
    
    
    
    (10
    )%Total
amortization of
identifiable
intangible
assets
    
    $
    572
    
    
    $
    591
    
    
    
    (3
    )%
    
    $
    1,142
    
    
    $
    1,071
    
    
    
    7
    %
    29




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##### Table of Contents



Technology
    
    TechnologyBased-
    
    Based-
    
    CustomerSoftware
    
    Other
    
    Based
    
    Trademark
    
    Covenant
    
    Backlog
    
    Total$2,082
    
    $
    
    
    $ 369

    
    $
    319
    
    
    $
    8
    
    
    $
    24
    
    
    $
    2,802
  Interest Income and Other Income (Expense), Net
 For the three months ended March 31,
    
    
    For the six months ended March 31,2011
    
    
    2010
    
    
    %  Change
    
    
    2011
    
    
    2010
    
    
    %  ChangeInterest income
    
    $
    132
    
    
    $
    117
    
    
    
    13
    %
    
    $
    266
    
    
    $
    203
    
    
    
    31
    %Other income
(expense), net
    
    
    75
    
    
    
    43
    
    
    
    74
    %
    
    
    157
    
    
    
    50
    
    
    
    214
    %Total
    
    $
    207
    
    
    $
    160
    
    
    
    29
    %
    
    $
    423
    
    
    $
    253
    
    
    
    67
    %
  Provision for Income Taxes
 For the three months ended March 31,
    
    
    For the six months ended March 31,2011
    
    
    2010
    
    
    %  Change
    
    
    2011
    
    
    2010
    
    
    %  ChangeProvision for income taxes
    
    $
    240
    
    
    $
    358
    
    
    
    (33
    )%
    
    $
    508
    
    
    $
    598
    
    
    
    (15
    )%
   Stock-based Compensation Expense
  30




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2011
    
    
    2010
    
    
    2011
    
    
    2010Direct costs of net revenue
    
    $
    99
    
    
    $
    89
    
    
    $
    195
    
    
    $
    226Development
    
    
    171
    
    
    
    176
    
    
    
    348
    
    
    
    405Operations
    
    
    47
    
    
    
    92
    
    
    
    154
    
    
    
    226Sales and marketing
    
    
    284
    
    
    
    273
    
    
    
    575
    
    
    
    637General and administrative
    
    
    123
    
    
    
    157
    
    
    
    247
    
    
    
    296Total
    
    $
    724
    
    
    $
    787
    
    
    $
    1,519
    
    
    $
    1,790
 Non-GAAP Financial Measures and Other Operational Data
  Non-GAAP Net Income and Non-GAAP Net Income Per Share.
 Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2011
    
    
    2010
    
    
    2011
    
    
    2010GAAP net income (loss)
    
    $
    3,331
    
    
    $
    (144
    )
    
    $
    6,958
    
    
    $
    837Stock-based compensation
    
    
    724
    
    
    
    787
    
    
    
    1,519
    
    
    
    1,790Amortization of intangible assets  software
    
    
    419
    
    
    
    435
    
    
    
    838
    
    
    
    733Amortization of intangible assets  other
    
    
    153
    
    
    
    156
    
    
    
    304
    
    
    
    338Provision for income taxes
    
    
    240
    
    
    
    358
    
    
    
    508
    
    
    
    598Cash taxes from on-going operations
    
    
    136
    
    
    
    (118
    )
    
    
    (30
    )
    
    
    (282
    )Non-GAAP net income
    
    $
    5,003
    
    
    $
    1,474
    
    
    $
    10,097
    
    
    $
    4,014Weighted average diluted common shares outstanding:
    
    
    17,160
    
    
    
    14,880
    
    
    
    16,498
    
    
    
    14,825Non-GAAP net income per share
    
    $
    0.29
    
    
    $
    0.10
    
    
    $
    0.61
    
    
    $
    0.27
 Adjusted EBITDA.
 Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2011
    
    
    2010
    
    
    2011
    
    
    2010GAAP net income (loss)
    
    $
    3,331
    
    
    $
    (144
    )
    
    $
    6,958
    
    
    $
    837Stock-based compensation
    
    
    724
    
    
    
    787
    
    
    
    1,519
    
    
    
    1,790Amortization of intangible assets  software
    
    
    419
    
    
    
    435
    
    
    
    838
    
    
    
    733Amortization of intangible assets  other
    
    
    153
    
    
    
    156
    
    
    
    304
    
    
    
    338Depreciation
    
    
    1,060
    
    
    
    1,120
    
    
    
    2,066
    
    
    
    2,317Provision for income taxes
    
    
    240
    
    
    
    358
    
    
    
    508
    
    
    
    598Interest income and other income (expense), net
    
    
    (207
    )
    
    
    (160
    )
    
    
    (423
    )
    
    
    (253
    )Adjusted EBITDA
    
    $
    5,720
    
    
    $
    2,552
    
    
    $
    11,770
    
    
    $
    6,360
 31




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##### Table of Contents



Free Cash Flow.
 Six Months EndedMarch 31,2011
    
    
    2010Cash flow provided by operations
    
    $
    9,017
    
    
    $
    1,654Purchases of property, equipment and software
    
    
    (2,163
    )
    
    
    (1,428
    )Free cash flow
    
    $
    6,854
    
    
    $
    226
 Gross Deferred Revenue.
 March 31, 2011
    
    
    September 30, 2010Net deferred revenue
    
    $
    21,251
    
    
    $
    21,465Unpaid deferred revenue
    
    
    6,817
    
    
    
    5,775Gross deferred revenue
    
    $
    28,068
    
    
    $
    27,240
 Liquidity and Capital Resources
 March 31, 2011
    
    
    September 30, 2010Cash, cash equivalents and short-term investments
    
    $
    85,958
    
    
    $
    66,352Accounts receivable, net
    
    $
    11,241
    
    
    $
    9,094Working capital
    
    $
    79,922
    
    
    $
    54,820Days sales outstanding (DSO) for the three months ended (a)
    
    
    42
    
    
    
    41
 
 (a)
    
    DSO is calculated as: (ending net accounts receivable / net revenue for the three month
period) multiplied by number of days in the period.  Six Months EndedMarch 31,2011
    
    
    2010Cash provided by operating activities
    
    $
    9,017
    
    
    $
    1,654Cash used in investing activities
    
    $
    (13,711
    )
    
    $
    (23,729
    )Cash provided by (used in) financing activities
    
    $
    12,618
    
    
    $
    (234
    )
 Cash, cash equivalents and short-term investments
  Cash provided by operating activities
   32




---



##### Table of Contents



Cash used in investing activities
   Cash provided by (used in) financing activities
   Commitments
    33




---



##### Table of Contents



Off Balance Sheet Arrangements
  
 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
  
 PART II-OTHER INFORMATION
 
 Item 1. Legal Proceedings
  34




---



##### Table of Contents



Simmonds v. JPMorgan Chase & Co.,
et al.
  35




---



##### 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 in foreign exchange rates;
    
    The effect of global economic conditions on customers and partners, including the
level of discretionary IT spending;
    
    The rate of new and renewed subscriptions for our services, particularly large
customers;
    
    The amount and timing of any reductions or increases by our customers in their
usage of our products and services;
    
    Our ability to increase the number of Web sites we measure and the scope of
products and 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 products and services that are not as widely used or that may
experience decreased demand;
    
    The level of sales of our Mobile Cloud products and services and the timing of
customer acceptance during the period;
    
    The timing and amount of engagement services revenue, which is difficult to predict
because of its dependence on the number of engagements in any given period, the size of
these engagements, and our ability to continue our existing engagements and secure new
engagements from customers;
    
    Disruptions to our global monitoring network infrastructure;
    
    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;
    
    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.
  36




---



##### Table of Contents




    
    Currency exchange rate fluctuations, primarily the Euro;
    
    Seasonal fluctuations in purchasing patterns;
    
    Unexpected changes in regulatory requirements;
    
    Maintaining and servicing computer systems 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;
    
    Difficulties in establishing and enforcing our intellectual property rights in some
countries; and
    
    Political or economic instability, war or terrorism in the countries where we are
doing business.
 The success of our business depends on maintaining a large customer base, either by customers
renewing their subscriptions for our products and services and purchasing additional products and
services or by obtaining new customers.
   If our Mobile Cloud products and services decline, we may not be able to grow our revenue and our
results of operations will be harmed.
  37




---



##### Table of Contents



The inability of our products and 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 global monitoring network infrastructure could impair our ability to serve and
retain existing customers or attract new customers.
     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.
  38




---



##### Table of Contents



We have incurred in the past and may, in the future, incur losses, and we may not sustain
profitability.
  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.
  If we do not complement our direct sales force with relationships with other companies to help
market our products and services, we may not be able to grow our business.
    39




---



##### Table of Contents



If the market does not accept our engagement services, our results of operations could be harmed.
  We face competition that could make it difficult for us to acquire and retain customers.
       40




---



##### Table of Contents



If we do not continually improve our products and 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.
   The market price of our common stock can be volatile.
  Our cash, cash equivalents and short-term investments are managed through various banks around the
world and we may realize losses on these.
  If the protection of our proprietary technology is inadequate, our competitors may gain access to
our technology, and our market share could decline.
    Others might bring infringement claims which could harm our business.
  41




---



##### 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.
  If we were required to write down all or part of our goodwill, our net income and net worth could
be materially adversely affected.
  The success of our business depends on the continued use of 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,
tracking of personal data by Web site and infrastructure providers, and other information
communicated over 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 mobile devices;
and
    
    The need to operate with multiple and frequently incompatible products.
 Improvements to the infrastructure of Internet and mobile networks could reduce or eliminate demand
for our Internet and Mobile Cloud products and services.
  42




---



##### Table of Contents



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;
    
    Adverse effects on existing business relationships with resellers of our products
and 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;
 43




---



##### Table of Contents




    
    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 and changes to existing regulations may increase
our costs and risk of noncompliance as well as adversely affect our stock price, revenue, and
reported financial results.
   
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. (Reserved)
 
 Item 5. Other Information
  44




---



##### Table of Contents



Item 6. Exhibits
 EXHIBIT INDEX
 Exhibit
    
    
    
    Incorporated by Reference
    
    FiledNo.
    
    Exhibit
    
    Form
    
    File No.
    
    Filing Date
    
    Exhibit No.
    
    Herewith10.1
    
    1999 Equity
Incentive Plan, as
amended, dated
March 18, 2011*
    
    8-K
    
    000-27241
    
    March 7, 2011
    
    
    99.0110.2
    
    1999 Employee Stock
Purchase Plan, as
amended, dated
March 18, 2011*
    
    Schedule 14A
    
    000-27241
    
    January 28, 2011
    
    Appendix A31.1
    
    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
 
 *
    
    Management contract or compensatory plan.**
    
    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. 45




---



##### 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 H. SMITHCurtis H. SmithChief Financial Officer
(Principal Financial Officer) By:
    /s/ DAVID F. PETERSONDavid F. PetersonChief Accounting Officer
(Principal Accounting Officer) 46




---



##### Table of Contents



EXHIBIT INDEX
 Exhibit
    
    
    
    Incorporated by Reference
    
    FiledNo.
    
    Exhibit
    
    Form
    
    File No.
    
    Filing Date
    
    Exhibit No.
    
    Herewith10.1
    
    1999 Equity Incentive Plan, as amended, dated March 18, 2011*
    
    8-K
    
    000-27241
    
    March 7, 2011
    
    
    99.0110.2
    
    1999 Employee Stock Purchase Plan, as amended, dated March
18, 2011*
    
    Schedule 14A
    
    000-27241
    
    January 28, 2011
    
    Appendix A31.1
    
    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
 
 *
    
    Management contract or compensatory plan.**
    
    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. 47