##### 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, 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
    
    (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
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ
  Class
    
    
    Shares outstanding as of May 3, 2010Common Stock, $.001 par value
    
    
    14,861,102 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 Risks
    
    
    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
    
    
    47Item 3. Defaults Upon Senior Securities
    
    
    47Item 4. (Reserved)
    
    
    47Item 5. Other Information
    
    
    47Item 6. Exhibits
    
    
    48Signatures
    
    
    49EX-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 March 31, 2010 and September 30, 2009
    
    
    4Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2010 and 2009
    
    
    5Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2010 and 2009
    
    
    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 30,2010
    
    
    2009ASSETSCurrent assets:Cash and cash equivalents
    
    $
    27,842
    
    
    $
    51,383Short-term investments
    
    
    28,339
    
    
    
    6,585Total cash, cash equivalents and short-term investments
    
    
    56,181
    
    
    
    57,968Accounts receivable, less allowance for doubtful accounts
of $121 and $112, respectively, and less billing reserve
of $278 and $150, respectively
    
    
    8,119
    
    
    
    6,403Prepaids, deferred costs and other current assets
    
    
    4,136
    
    
    
    3,517Inventories
    
    
    1,493
    
    
    
    1,222Deferred tax assets
    
    
    2,884
    
    
    
    2,913Total current assets
    
    
    72,813
    
    
    
    72,023Deferred costs and other long term assets
    
    
    2,283
    
    
    
    3,024Property, equipment and software, net
    
    
    34,109
    
    
    
    34,778Goodwill
    
    
    62,794
    
    
    
    66,078Identifiable intangible assets, net
    
    
    5,058
    
    
    
    6,255Long-term deferred tax assets
    
    
    168
    
    
    
    61Total assets
    
    $
    177,225
    
    
    $
    182,219LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,096
    
    
    $
    1,147Accrued expenses
    
    
    8,290
    
    
    
    8,466Deferred revenue
    
    
    14,426
    
    
    
    17,661Total current liabilities
    
    
    24,812
    
    
    
    27,274Deferred rent and other long-term liabilities
    
    
    3,353
    
    
    
    3,344Long-term deferred revenue
    
    
    1,068
    
    
    
    1,167Long-term deferred tax liability
    
    
    446
    
    
    
    414Total liabilities
    
    
    29,679
    
    
    
    32,199Commitments and contingencies (see Note 14)Stockholders equity:Common stock
    
    
    15
    
    
    
    14Additional paid-in capital
    
    
    284,280
    
    
    
    282,653Accumulated deficit
    
    
    (138,777
    )
    
    
    (139,614
    )Accumulated other comprehensive income
    
    
    2,028
    
    
    
    6,967Total stockholders equity
    
    
    147,546
    
    
    
    150,020Total liabilities and stockholders equity
    
    $
    177,225
    
    
    $
    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
    
    
    Six Months EndedMarch 31,

    
    
    March 31,2010
    
    
    2009
    
    
    2010
    
    
    2009Net revenue:Subscription services
    
    $
    11,672
    
    
    $
    11,341
    
    
    $
    23,881
    
    
    $
    22,814Ratable licenses
    
    
    5,791
    
    
    
    5,915
    
    
    
    11,747
    
    
    
    11,958Professional services
    
    
    1,893
    
    
    
    2,308
    
    
    
    4,437
    
    
    
    5,429Total net revenue
    
    
    19,356
    
    
    
    19,564
    
    
    
    40,065
    
    
    
    40,201Costs and
expenses:Costs of
revenue:Direct costs of subscription services
    
    
    2,129
    
    
    
    2,319
    
    
    
    4,337
    
    
    
    4,575Direct costs of ratable licenses
    
    
    1,724
    
    
    
    1,639
    
    
    
    3,452
    
    
    
    3,127Direct costs of professional services
    
    
    1,351
    
    
    
    1,495
    
    
    
    2,818
    
    
    
    3,173Development
    
    
    2,971
    
    
    
    3,191
    
    
    
    6,116
    
    
    
    6,274Operations
    
    
    1,935
    
    
    
    2,248
    
    
    
    3,826
    
    
    
    4,410Amortization of intangible assets  software
    
    
    435
    
    
    
    288
    
    
    
    733
    
    
    
    576Total costs of revenue
    
    
    10,545
    
    
    
    11,180
    
    
    
    21,282
    
    
    
    22,135Sales and marketing
    
    
    6,376
    
    
    
    6,317
    
    
    
    12,704
    
    
    
    12,497General and administrative
    
    
    2,536
    
    
    
    2,551
    
    
    
    5,178
    
    
    
    5,371Excess occupancy income
    
    
    (311
    )
    
    
    (251
    )
    
    
    (619
    )
    
    
    (471
    )Amortization of intangible assets  other
    
    
    156
    
    
    
    263
    
    
    
    338
    
    
    
    532Total costs and expenses
    
    
    19,302
    
    
    
    20,060
    
    
    
    38,883
    
    
    
    40,064Income (loss) from operations
    
    
    54
    
    
    
    (496
    )
    
    
    1,182
    
    
    
    137Interest income
    
    
    117
    
    
    
    254
    
    
    
    203
    
    
    
    587Other income, net
    
    
    43
    
    
    
    116
    
    
    
    50
    
    
    
    456Income (loss) before provision for income taxes
    
    
    214
    
    
    
    (126
    )
    
    
    1,435
    
    
    
    1,180Provision for income taxes
    
    
    (358
    )
    
    
    (132
    )
    
    
    (598
    )
    
    
    (552
    )Net income (loss)
    
    $
    (144
    )
    
    $
    (258
    )
    
    $
    837
    
    
    $
    628Net income (loss) per share:Basic
    
    $
    (0.01
    )
    
    $
    (0.02
    )
    
    $
    0.06
    
    
    $
    0.04Diluted
    
    $
    (0.01
    )
    
    $
    (0.02
    )
    
    $
    0.06
    
    
    $
    0.04Shares used in computing basic and diluted net
income (loss) per share:Basic
    
    
    14,591
    
    
    
    14,259
    
    
    
    14,560
    
    
    
    14,222Diluted
    
    
    14,591
    
    
    
    14,259
    
    
    
    14,825
    
    
    
    14,330Cash dividends declared per common share
    
    $
    0.05
    
    
    $
    
    
    
    $
    0.10
    
    
    $
    
  5




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KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 Six Months EndedMarch 31,2010
    
    
    2009Cash flows from operating activities:Net income
    
    $
    837
    
    
    $
    628Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    2,317
    
    
    
    2,501Stock-based compensation
    
    
    1,790
    
    
    
    2,637Amortization of identifiable intangible assets
    
    
    1,071
    
    
    
    1,107Amortization of prepaid tax asset
    
    
    382
    
    
    
    207Charges to bad debt and billing reserves
    
    
    165
    
    
    
    196Amortization of debt investment premium
    
    
    262
    
    
    
    3Deferred tax provision (benefit)
    
    
    (262
    )
    
    
    20Collection of tax credit receivable within deferred tax assets
    
    
    
    
    
    
    181Loss on disposal of equipment
    
    
    8
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (2,158
    )
    
    
    948Inventories
    
    
    (379
    )
    
    
    (114
    )Prepaids, deferred costs and other assets
    
    
    (603
    )
    
    
    (530
    )Accounts payable and accrued expenses
    
    
    800
    
    
    
    (6,706
    )Deferred revenue
    
    
    (2,576
    )
    
    
    2,191Net cash provided by operating activities
    
    
    1,654
    
    
    
    3,269Cash flows from investing activities:Purchases of short-term investments
    
    
    (26,609
    )
    
    
    (11,853
    )Maturities and sales of short-term investments
    
    
    4,308
    
    
    
    8,298Purchases of property, equipment and software
    
    
    (1,428
    )
    
    
    (1,397
    )Payment of acquisition costs for Zandan S.A.
    
    
    
    
    
    
    (170
    )Net cash used in investing activities
    
    
    (23,729
    )
    
    
    (5,122
    )Cash flows from financing activities:Repayment of capital lease obligation
    
    
    (9
    )
    
    
    (8
    )Proceeds from issuance of common stock and exercise of stock options
    
    
    1,233
    
    
    
    1,426Cash dividends declared and paid
    
    
    (1,458
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    (234
    )
    
    
    1,418Effect of exchange rate changes on cash and cash equivalents
    
    
    (1,232
    )
    
    
    (1,301
    )Net change in cash and cash equivalents
    
    
    (23,541
    )
    
    
    (1,736
    )Cash and cash equivalents at beginning of the period
    
    
    51,383
    
    
    
    42,546Cash and cash equivalents at end of the period
    
    $
    27,842
    
    
    $
    40,810Supplemental cash flow disclosure:Income taxes paid (net of refunds)
    
    $
    282
    
    
    $
    4,541Noncash operating and investing activities:Exercise of non-employee stock options
    
    $
    81
    
    
    $
    Acquisition of property, equipment and software on account
    
    $
    348
    
    
    $
    420
  6




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KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 (1) Summary of Significant Accounting Policies
 Basis of Presentation
    Correction of Classification of Short-Term Investments
  Recently Adopted Accounting Pronouncements
 Subsequent Events (Topic 855)Amendments to certain
Recognition and Disclosure Requirements
  7




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KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 (Continued)
  Fair Value Measurements and Disclosures Fair Value Measurements ,
 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
  8




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KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Continued)
  (b) Restricted Stock Units
    (c) Stock Options
  Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2010
    
    
    2009
    
    
    2010
    
    
    2009Volatility
    
    
    
    
    
    
    43.9
    %
    
    
    
    
    
    
    40.9
    %Risk free interest rate
    
    
    
    
    
    
    2.0
    %
    
    
    
    
    
    
    2.3
    %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
    
    
    (62
    )
    
    
    10.52Forfeited or canceled
    
    
    (49
    )
    
    
    12.40Expired
    
    
    (33
    )
    
    
    14.37Outstanding at March 31, 2010
    
    
    4,658
    
    
    $
    11.64
    
    
    
    5.1
    
    
    $
    2,894Vested and expected to vest at March 31, 2010
    
    
    4,583
    
    
    $
    11.64
    
    
    
    5.0
    
    
    $
    2,871Exercisable at March 31, 2010
    
    
    4,023
    
    
    $
    11.58
    
    
    
    4.7
    
    
    $
    2,659
  9




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KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Continued)
  (d) Employee Stock Purchase Plan
  Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2010
    
    
    2009
    
    
    2010
    
    
    2009Volatility
    
    
    64.8
    %
    
    
    58.4
    %
    
    
    63.0
    %
    
    
    50.9
    %Risk free interest rate
    
    
    0.5
    %
    
    
    0.6
    %
    
    
    0.6
    %
    
    
    1.4
    %Expected life (in years)
    
    
    1.25
    
    
    
    1.25
    
    
    
    1.25
    
    
    
    1.25Dividend yield
    
    
    0.1
    %
    
    
    
    
    
    
    
    
    
    
    
 (e) Stock based Compensation Expense
  Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2010
    
    
    2009
    
    
    2010
    
    
    2009Direct costs of ratable licenses
    
    $
    23
    
    
    $
    27
    
    
    $
    49
    
    
    $
    24Direct costs of professional services
    
    
    66
    
    
    
    214
    
    
    
    177
    
    
    
    326Development
    
    
    176
    
    
    
    344
    
    
    
    405
    
    
    
    574Operations
    
    
    92
    
    
    
    210
    
    
    
    226
    
    
    
    333Sales and marketing
    
    
    273
    
    
    
    566
    
    
    
    637
    
    
    
    930General and administrative
    
    
    157
    
    
    
    235
    
    
    
    296
    
    
    
    450Total
    
    $
    787
    
    
    $
    1,596
    
    
    $
    1,790
    
    
    $
    2,637
  Excess Occupancy Income
  10




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KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Continued)
 TotalFiscal years:2010 (remaining six months)
    
    $
    1,1852011
    
    
    2,3532012
    
    
    1,6732013
    
    
    3042014
    
    
    89Thereafter
    
    
    Total future minimum rents receivable
    
    $
    5,604
 (2) Revenue Recognition
  
    
    Persuasive evidence of an arrangement exists.The Company considers a customer signed
quote, contract, or purchase order to be evidence of an arrangement.
    
    Delivery of the product or service.For subscription services, delivery is considered to
occur when the customer has been provided with access to the subscription services. The
Companys subscription services are generally delivered on a consistent basis over the
period of the subscription. For professional services, delivery is considered to occur when
the services or milestones are completed. For ratable licenses, delivery occurs when all
elements of the arrangement have either been delivered or accepted, if acceptance language
exists.
    
    Fee is fixed or determinable.The Company considers the fee to be fixed or determinable
if the fee is not subject to refund or adjustment and payment terms are standard.
    
    Collection is deemed reasonably assured.Collection is deemed reasonably assured if it is
expected that the customer will be able to pay amounts under the arrangement as payments
become due. If it is determined that collection is not reasonably assured, then revenue is
deferred and recognized upon cash collection.
  Subscription Services Revenue:
 Revenue Recognition Revenue Arrangements with
Multiple Deliverables
    11




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




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KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Continued)
 (3) Other Comprehensive Income (Loss) and Foreign Currency Translation
 Reporting Comprehensive Income),
  Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2010
    
    
    2009
    
    
    2010
    
    
    2009Net income (loss)
    
    $
    (144
    )
    
    $
    (258
    )
    
    $
    837
    
    
    $
    628Net unrealized gain (loss) on available-for-sale investments
    
    
    97
    
    
    
    12
    
    
    
    (33
    )
    
    
    12Foreign currency translation loss
    
    
    (3,505
    )
    
    
    (3,020
    )
    
    
    (4,906
    )
    
    
    (3,983
    )Other comprehensive loss
    
    $
    (3,552
    )
    
    $
    (3,266
    )
    
    $
    (4,102
    )
    
    $
    (3,343
    )
  (4) Financial Instruments and Concentration of Risk
      13




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KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Continued)
 (5) Cash, Cash Equivalents, and Short-Term Investments
 Statement of Cash Flows
   Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Market ValueCash
    
    $
    23,594
    
    
    $
    
    
    
    $
    
    
    
    $
    23,594Money market funds
    
    
    4,248
    
    
    
    
    
    
    
    
    
    
    
    4,248Total cash and cash equivalents
    
    $
    27,842
    
    
    $
    
    
    
    $
    
    
    
    $
    27,842Fixed-term deposits
    
    $
    2,026
    
    
    $
    
    
    
    $
    
    
    
    $
    2,026Treasuries and agencies
    
    
    6,100
    
    
    
    
    
    
    
    (15
    )
    
    
    6,085Municipal and corporate bonds
    
    
    20,246
    
    
    
    18
    
    
    
    (36
    )
    
    
    20,228Total short-term investments
    
    $
    28,372
    
    
    $
    18
    
    
    $
    (51
    )
    
    $
    28,339
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Market ValueCash
    
    $
    20,492
    
    
    $
    
    
    
    $
    
    
    
    $
    20,492Money market funds
    
    
    30,891
    
    
    
    
    
    
    
    
    
    
    
    30,891Total cash and cash equivalents
    
    $
    51,383
    
    
    $
    
    
    
    $
    
    
    
    $
    51,383Fixed-term deposits
    
    $
    6,585
    
    
    $
    
    
    
    $
    
    
    
    $
    6,585Total short-term investments
    
    $
    6,585
    
    
    $
    
    
    
    $
    
    
    
    $
    6,585
 InvestmentsDebt and Equity Securities, Recognition and Measurement, Impairment
 
    
    If management intends to sell an impaired debt security, the impairment is considered
other than temporary. If the entity does not intend to sell the impaired debt security, it
must still assess whether it is more likely than not that it will be required to sell the
security.
 
    
    If management determines that it is more likely than not that it will be required to sell
the security before recovery of the amortized cost basis of the security, the impairment is
considered other than temporary.
 
    
    If management determines that it does not intend to sell an impaired debt security and,
that it is not more likely than not that it will be required to sell such a security before
recovery of the securitys amortized cost basis, the entity must assess whether it expects
to recover the entire amortized cost basis of the security.
 14




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##### Table of Contents



KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Continued)
   EstimatedCost
    
    
    Fair ValueDue in less than one year
    
    $
    7,964
    
    
    $
    7,959Due in more than one year and less than two years
    
    
    20,408
    
    
    
    20,380Total
    
    $
    28,372
    
    
    $
    28,339
 (6) Fair Value Measurements
   
    
    Level 1 inputs are based on quoted prices in active markets for identical assets or
liabilities.
 
    
    Level 2 inputs are based on quoted prices for similar instruments in active markets,
quoted prices for identical or similar instruments in markets that are not active, and
model-based valuation techniques for which all significant assumptions are observable in the
market or can be corroborated by observable market data for substantially the full term of
the assets or liabilities.
 
    
    Level 3 inputs are generally unobservable and typically reflect managements estimates of
assumptions that market participants would use in pricing the asset or liability. The fair
values are therefore determined using model-based techniques that include option pricing
models, discounted cash flow models, and similar techniques.
  Quoted Pricesin Active
    
    
    SignificantMarkets for
    
    
    Other
    
    
    SignificantIdentical
    
    
    Observable
    
    
    UnobservableInstruments
    
    
    Inputs
    
    
    Inputs(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    TotalCash and cash equivalents:Money market funds
    
    $
    4,248
    
    
    $
    
    
    
    $
    
    
    
    $
    4,248Short term investments:Fixed- term deposits
    
    
    
    
    
    
    2,026
    
    
    
    
    
    
    
    2,026Municipal and corporate bonds
    
    
    20,228
    
    
    
    
    
    
    
    
    
    
    
    20,228Treasuries and agencies
    
    
    6,085
    
    
    
    
    
    
    
    
    
    
    
    6,085Total assets measured at fair value
    
    $
    30,561
    
    
    $
    2,026
    
    
    $
    
    
    
    $
    32,587
  15




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##### Table of Contents



KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Continued)
 (7) Consolidated Financial Statement Details
 Prepaids, Deferred Costs and Other Current Assets
 March 31, 2010
    
    
    September 30, 2009Prepaid expenses
    
    $
    1,797
    
    
    $
    1,554Deferred costs of revenue
    
    
    827
    
    
    
    580Income tax receivable
    
    
    834
    
    
    
    971Security deposits, advances, and interest receivable
    
    
    474
    
    
    
    43Other assets
    
    
    204
    
    
    
    369Total
    
    $
    4,136
    
    
    $
    3,517
 Property, equipment and software
 March 31, 2010
    
    
    September 30, 2009Land
    
    $
    14,150
    
    
    $
    14,150Computer equipment and software
    
    
    30,824
    
    
    
    29,551Building
    
    
    21,908
    
    
    
    21,875Furniture and fixtures
    
    
    2,142
    
    
    
    2,169Leasehold and building improvements
    
    
    1,146
    
    
    
    1,179Construction in progress
    
    
    483
    
    
    
    38370,653
    
    
    
    69,307Less accumulated depreciation and amortization
    
    
    (36,544
    )
    
    
    (34,529
    )Total
    
    $
    34,109
    
    
    $
    34,778
 Deferred Costs and Other Long-Term Assets
 March 31, 2010
    
    
    September 30, 2009Prepaid tax asset
    
    $
    1,208
    
    
    $
    1,710Deferred costs of revenue
    
    
    347
    
    
    
    421Tenant rent receivable
    
    
    217
    
    
    
    280Deposits
    
    
    260
    
    
    
    264Prepaid expenses
    
    
    251
    
    
    
    349Total
    
    $
    2,283
    
    
    $
    3,024
 Accrued Expenses
 March 31, 2010
    
    
    September 30, 2009Accrued employee compensation
    
    $
    2,962
    
    
    $
    3,096Accrued audit and professional fees
    
    
    513
    
    
    
    388Income and other taxes
    
    
    581
    
    
    
    479Other accrued expenses
    
    
    4,234
    
    
    
    4,503Total
    
    $
    8,290
    
    
    $
    8,466
 (8) Inventories
  16




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##### Table of Contents



KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Continued)
 (9) Goodwill and Identifiable Intangible Assets
   Goodwill and Other Intangible
Assets
 :
 Balance at September 30, 2009
    
    $
    66,078Translation adjustments
    
    
    (3,284
    )Balance at March 31, 2010
    
    $
    62,794
  Technology
    
    
    TechnologyBased-
    
    
    Based-
    
    
    CustomerSoftware
    
    
    Other
    
    
    Based
    
    
    Trademark
    
    
    Covenant
    
    
    Backlog
    
    
    TotalAs of March 31, 2010:Gross carrying value
    
    $
    7,935
    
    
    $
    11,845
    
    
    $
    8,061
    
    
    $
    1,379
    
    
    $
    37
    
    
    $
    112
    
    
    $
    29,369Accumulated amortization
    
    
    (4,076
    )
    
    
    (11,845
    )
    
    
    (7,482
    )
    
    
    (811
    )
    
    
    (24
    )
    
    
    (73
    )
    
    
    (24,311
    )Net carrying value
    
    $
    3,859
    
    
    $
    
    
    
    $
    579
    
    
    $
    568
    
    
    $
    13
    
    
    $
    39
    
    
    $
    5,058As of September 30, 2009:Gross carrying value
    
    $
    8,125
    
    
    $
    11,845
    
    
    $
    8,190
    
    
    $
    1,407
    
    
    $
    40
    
    
    $
    121
    
    
    $
    29,728Accumulated amortization
    
    
    (3,422
    )
    
    
    (11,834
    )
    
    
    (7,391
    )
    
    
    (733
    )
    
    
    (23
    )
    
    
    (70
    )
    
    
    (23,473
    )Net carrying value
    
    $
    4,703
    
    
    $
    11
    
    
    $
    799
    
    
    $
    674
    
    
    $
    17
    
    
    $
    51
    
    
    $
    6,255
  17




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##### Table of Contents



KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Continued)
 Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2010
    
    
    2009
    
    
    2010
    
    
    2009Amortization of intangible assets  software
    
    $
    435
    
    
    $
    288
    
    
    $
    733
    
    
    $
    576Amortization of intangible assets  other
    
    
    156
    
    
    
    263
    
    
    
    338
    
    
    
    532Total amortization of intangible assets
    
    $
    591
    
    
    $
    551
    
    
    $
    1,071
    
    
    $
    1,108
  TotalFiscal years:2010 (remaining six months)
    
    $
    1,1642011
    
    
    2,2402012
    
    
    1,3702013
    
    
    284Total
    
    $
    5,058Weighted-average remaining useful life as of March 31, 2010 (years)
    
    
    2.7
 (10) Lease Abandonment Accrual
  Lease abandonment liability, September 30, 2009
    
    $
    696Lease payments to lessor
    
    
    (133
    )Sublease proceeds
    
    
    14Payment of lease termination costs
    
    
    (63
    )Lease abandonment liability, March 31, 2010
    
    $
    514
 (11) Net Income (Loss) Per Share
   Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2010
    
    
    2009
    
    
    2010
    
    
    2009Numerator:Net income (loss)
    
    $
    (144
    )
    
    $
    (258
    )
    
    $
    837
    
    
    $
    628Denominator:Weighted average shares outstanding
    
    
    14,591
    
    
    
    14,259
    
    
    
    14,560
    
    
    
    14,222Effect of dilutive stock options, RSUs and employee stock purchase rights
    
    
    
    
    
    
    
    
    
    
    265
    
    
    
    108Denominator for diluted net income (loss) per share
    
    
    14,591
    
    
    
    14,259
    
    
    
    14,825
    
    
    
    14,330Basic and diluted net income (loss) per share
    
    $
    (0.01
    )
    
    $
    (0.02
    )
    
    $
    0.06
    
    
    $
    0.04
 18




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##### Table of Contents



KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Continued)
  (12) Stockholders Equity
 Dividends
  (13) Income Taxes
     Accounting for Uncertainty in Income Taxes  an interpretation of FASB
Statement No. 109
  19




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##### Table of Contents



KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Continued)
  (14) Commitments and Contingencies
 Leases
  Operating
    
    
    CapitalLeases
    
    
    LeasesFiscal year:2010 (remaining six months)
    
    $
    471
    
    
    $
    72011
    
    
    722
    
    
    
    2012
    
    
    524
    
    
    
    2013
    
    
    418
    
    
    
    2014
    
    
    343
    
    
    
    Thereafter
    
    
    492
    
    
    
    Total minimum lease payments (a)
    
    $
    2,970
    
    
    
    7Less amounts representing interest
    
    
    
    
    
    
    Present value of minimum lease payments
    
    
    
    
    
    
    7Less current portion of capital lease obligation
    
    
    
    
    
    
    (7
    )Long-term portion of capital lease obligation
    
    
    
    
    
    $
    
 
 (a)
    
    Future minimum lease payments exclude sublease proceeds of approximately $1.2 million.  Commitments
 ,
  Legal Proceedings
  20




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##### Table of Contents



KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Continued)
  Simmonds v. JPMorgan Chase & Co.,
et al.
  Warranties
  Indemnification
  21




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##### Table of Contents



KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Continued)
 (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
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2010
    
    
    2009
    
    
    2010
    
    
    2009Internet Subscriptions  Web Measurement
    
    $
    6,593
    
    
    $
    6,572
    
    
    $
    12,763
    
    
    $
    13,781Internet Subscriptions  Other
    
    
    2,569
    
    
    
    2,761
    
    
    
    6,234
    
    
    
    5,216Internet Engagements
    
    
    1,893
    
    
    
    2,308
    
    
    
    4,437
    
    
    
    5,429Total Internet net revenue
    
    
    11,055
    
    
    
    11,641
    
    
    
    23,434
    
    
    
    24,426Mobile Subscription
    
    
    2,510
    
    
    
    2,008
    
    
    
    4,884
    
    
    
    3,817Mobile Ratable Licenses
    
    
    5,791
    
    
    
    5,915
    
    
    
    11,747
    
    
    
    11,958Total Mobile net revenue
    
    
    8,301
    
    
    
    7,923
    
    
    
    16,631
    
    
    
    15,775Total net revenue
    
    $
    19,356
    
    
    $
    19,564
    
    
    $
    40,065
    
    
    $
    40,201
 22




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KEYNOTE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Continued)
   Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2010
    
    
    2009
    
    
    2010
    
    
    2009United States
    
    $
    10,260
    
    
    $
    10,932
    
    
    $
    21,568
    
    
    $
    22,980Europe*
    
    
    5,326
    
    
    
    5,814
    
    
    
    11,978
    
    
    
    12,339Other*
    
    
    3,770
    
    
    
    2,818
    
    
    
    6,519
    
    
    
    4,882Total net revenue
    
    $
    19,356
    
    
    $
    19,564
    
    
    $
    40,065
    
    
    $
    40,201
 
 *
    
    No individual country represents more than 10% of total revenue.  March 31,
    
    
    September 30,2010
    
    
    2009United States
    
    $
    32,947
    
    
    $
    33,685Europe
    
    
    1,162
    
    
    
    1,093Total
    
    $
    34,109
    
    
    $
    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




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##### Table of Contents




    
    continuing to drive growth in our Internet and Mobile revenue, as we believe that these
areas represent the greatest growth opportunities for our business in light of the decline
in revenues from our legacy single page measurement services;
    
    growing multiple page/broadband related revenue, such as Transaction Perspective and
Application Perspective which increased for the first time in six quarters, without
corresponding reductions in unit price, which showed signs of stabilizing in the recent
quarter, in order to increase Internet revenues and margins, as growth in these services
will be important to growing our Internet revenue;
    
    maintaining and growing the overall size of our customer base to support the growth of
our Internet and Mobile revenue;
 25




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##### Table of Contents




    
    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 through reduced budgets.
  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
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2010
    
    
    2009
    
    
    2010
    
    
    2009Net revenue:Subscription services
    
    
    60.3
    %
    
    
    58.0
    %
    
    
    59.6
    %
    
    
    56.8
    %Ratable licenses
    
    
    29.9
    
    
    
    30.2
    
    
    
    29.3
    
    
    
    29.7Professional services
    
    
    9.8
    
    
    
    11.8
    
    
    
    11.1
    
    
    
    13.5Total net revenue
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Costs and expenses:Costs of revenue:Direct costs of subscription services
    
    
    11.0
    
    
    
    11.9
    
    
    
    10.8
    
    
    
    11.4Direct costs of ratable licenses
    
    
    8.9
    
    
    
    8.4
    
    
    
    8.6
    
    
    
    7.8Direct costs of professional services
    
    
    7.0
    
    
    
    7.6
    
    
    
    7.0
    
    
    
    7.9Operations
    
    
    10.0
    
    
    
    11.5
    
    
    
    9.5
    
    
    
    11.0Development
    
    
    15.3
    
    
    
    16.3
    
    
    
    15.3
    
    
    
    15.6Amortization of intangible assets  software
    
    
    2.2
    
    
    
    1.5
    
    
    
    1.8
    
    
    
    1.4Sales and marketing
    
    
    33.0
    
    
    
    32.3
    
    
    
    31.8
    
    
    
    31.1General and administrative
    
    
    13.1
    
    
    
    13.0
    
    
    
    12.9
    
    
    
    13.4Excess occupancy income
    
    
    (1.6
    )
    
    
    (1.3
    )
    
    
    (1.5
    )
    
    
    (1.2
    )Amortization of intangible assets  other
    
    
    0.8
    
    
    
    1.3
    
    
    
    0.8
    
    
    
    1.3Total costs and expenses
    
    
    99.7
    
    
    
    102.5
    
    
    
    97.0
    
    
    
    99.7Income (loss) from operations
    
    
    0.3
    
    
    
    (2.5
    )
    
    
    3.0
    
    
    
    0.3Interest income and other, net
    
    
    0.8
    
    
    
    1.9
    
    
    
    0.6
    
    
    
    2.6Income (loss) before provision for income taxes
    
    
    1.1
    
    
    
    (0.6
    )
    
    
    3.6
    
    
    
    2.9Provision for income taxes
    
    
    (1.8
    )
    
    
    (0.7
    )
    
    
    (1.5
    )
    
    
    (1.3
    )Net income (loss)
    
    
    (0.7
    )%
    
    
    (1.3
    )%
    
    
    2.1
    %
    
    
    1.6
    %
 Net Revenue
 For the three months ended March 31,
    
    
    For the six months ended March 31,2010
    
    
    2009
    
    
    % Change
    
    
    2010
    
    
    2009
    
    
    % Change(In thousands)
    
    
    
    
    
    
    (In thousands)Subscription services
    
    $
    11,672
    
    
    $
    11,341
    
    
    
    3
    %
    
    $
    23,881
    
    
    $
    22,814
    
    
    
    5
    %Ratable licenses
    
    
    5,791
    
    
    
    5,915
    
    
    
    (2
    )%
    
    
    11,747
    
    
    
    11,958
    
    
    
    (2
    )%Professional services
    
    
    1,893
    
    
    
    2,308
    
    
    
    (18
    )%
    
    
    4,437
    
    
    
    5,429
    
    
    
    (18
    )%Total net revenue
    
    $
    19,356
    
    
    $
    19,564
    
    
    
    (1
    )%
    
    $
    40,065
    
    
    $
    40,201
    
    
    
    0
    %
 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 March 31,
    
    
    For the six months ended March 31,2010
    
    
    2009
    
    
    % Change
    
    
    2010
    
    
    2009
    
    
    % Change(In thousands)
    
    
    
    
    
    
    (In thousands)Internet Web
Measurement Subscriptions
    
    $
    6,593
    
    
    $
    6,572
    
    
    
    0
    %
    
    $
    12,763
    
    
    $
    13,781
    
    
    
    (7
    )%Internet Subscriptions Other
    
    
    2,569
    
    
    
    2,761
    
    
    
    (7
    )%
    
    
    6,234
    
    
    
    5,216
    
    
    
    20
    %Internet Engagements
    
    
    1,893
    
    
    
    2,308
    
    
    
    (18
    )%
    
    
    4,437
    
    
    
    5,429
    
    
    
    (18
    )%Total Internet net revenue
    
    
    11,055
    
    
    
    11,641
    
    
    
    (5
    )%
    
    
    23,434
    
    
    
    24,426
    
    
    
    (4
    )%Mobile Subscription
    
    
    2,510
    
    
    
    2,008
    
    
    
    25
    %
    
    
    4,884
    
    
    
    3,817
    
    
    
    28
    %Mobile Ratable Licenses
    
    
    5,791
    
    
    
    5,915
    
    
    
    (2
    )%
    
    
    11,747
    
    
    
    11,958
    
    
    
    (2
    )%Total Mobile net revenue
    
    
    8,301
    
    
    
    7,923
    
    
    
    5
    %
    
    
    16,631
    
    
    
    15,775
    
    
    
    5
    %Total net revenue
    
    $
    19,356
    
    
    $
    19,564
    
    
    
    (1
    )%
    
    $
    40,065
    
    
    $
    40,201
    
    
    
    0
    %
 28




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##### Table of Contents



Internet Revenue.
  Mobile Revenue.
  Costs and Expenses
 Direct Costs of Subscription Services, Ratable Licenses and Professional Services
 For the three months ended March 31,
    
    For the six months ended March 31,2010
    
    2009
    
    % Change
    
    2010
    
    2009
    
    % Change(In thousands)
    
    
    
    
    
    (In thousands)Direct costs of subscription services
    
    $
    2,129
    
    
    $
    2,319
    
    
    
    (8
    )%
    
    $
    4,337
    
    
    $
    4,575
    
    
    
    (5
    )%Direct costs of ratable licenses
    
    $
    1,724
    
    
    $
    1,639
    
    
    
    5
    %
    
    $
    3,452
    
    
    $
    3,127
    
    
    
    10
    %Direct costs of professional services
    
    $
    1,351
    
    
    $
    1,495
    
    
    
    (10
    )%
    
    $
    2,818
    
    
    $
    3,173
    
    
    
    (11
    )%
 Direct Costs of Subscription Service
 Direct Costs of Ratable Licenses.
 29




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##### Table of Contents



Direct Costs of Professional Services.
 Development
 For the three months ended March 31,
    
    For the six months ended March 31,2010
    
    2009
    
    % Change
    
    2010
    
    2009
    
    % Change(In thousands)
    
    
    
    
    
    (In thousands)Development
    
    $
    2,971
    
    
    $
    3,191
    
    
    
    (7
    )%
    
    $
    6,116
    
    
    $
    6,274
    
    
    
    (3
    )%
   Operations
 For the three months ended March 31,
    
    For the six months ended March 31,2010
    
    2009
    
    % Change
    
    2010
    
    2009
    
    % Change(In thousands)
    
    
    
    
    
    (In thousands)Operations
    
    $
    1,935
    
    
    $
    2,248
    
    
    
    (14
    )%
    
    $
    3,826
    
    
    $
    4,410
    
    
    
    (13
    )%
  Sales and Marketing
 For the three months ended March 31,
    
    For the six months ended March 31,2010
    
    2009
    
    % Change
    
    2010
    
    2009
    
    % Change(In thousands)
    
    
    
    
    
    (In thousands)Sales and marketing
    
    $
    6,376
    
    
    $
    6,317
    
    
    
    1
    %
    
    $
    12,704
    
    
    $
    12,497
    
    
    
    2
    %
 30




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##### Table of Contents



General and Administrative
 For the three months ended March 31,
    
    For the six months ended March 31,2010
    
    2009
    
    % Change
    
    2010
    
    2009
    
    % Change(In thousands)
    
    
    
    
    
    (In thousands)General and administrative
    
    $
    2,536
    
    
    $
    2,551
    
    
    
    (1
    )%
    
    $
    5,178
    
    
    $
    5,371
    
    
    
    (4
    )%
  Excess Occupancy Income
 For the three months ended March 31,
    
    
    For the six months ended March 31,2010
    
    
    2009
    
    
    % Change
    
    
    2010
    
    
    2009
    
    
    % Change(In thousands)
    
    
    
    
    
    
    (In thousands)Rental income
    
    $
    (672
    )
    
    $
    (647
    )
    
    
    4
    %
    
    $
    (1,362
    )
    
    $
    (1,274
    )
    
    
    7
    %Rental and other expenses
    
    
    361
    
    
    
    396
    
    
    
    (9
    )%
    
    
    743
    
    
    
    803
    
    
    
    (7
    )%Excess occupancy income
    
    $
    (311
    )
    
    $
    (251
    )
    
    
    24
    %
    
    $
    (619
    )
    
    $
    (471
    )
    
    
    31
    %
  Amortization of Identifiable Intangible Assets
 For the three months ended March 31,
    
    
    For the six months ended March 31,2010
    
    
    2009
    
    
    % Change
    
    
    2010
    
    
    2009
    
    
    % Change(In thousands)
    
    
    
    
    
    
    (In thousands)Amortization of identifiable intangible assets  software
    
    $
    435
    
    
    $
    288
    
    
    
    51
    %
    
    $
    733
    
    
    $
    576
    
    
    
    27
    %Amortization of identifiable intangible assets  other
    
    
    156
    
    
    
    263
    
    
    
    (41
    )%
    
    
    338
    
    
    
    532
    
    
    
    (36
    )%Total amortization of identifiable intangible assets
    
    $
    591
    
    
    $
    551
    
    
    
    7
    %
    
    $
    1,071
    
    
    $
    1,108
    
    
    
    (3
    )%
  31




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##### Table of Contents



Technology
    
    TechnologyBased 
    
    Based 
    
    CustomerSoftware
    
    Other
    
    Based
    
    Trademark
    
    Covenant
    
    Backlog
    
    Total$3,859
    
    $
    
    $
    579
    
    
    $
    568
    
    
    $
    13
    
    
    $
    39
    
    
    $
    5,058
 Interest Income and Other Income, net
 For the three months ended March 31,
    
    
    For the six months ended March 31,2010
    
    
    2009
    
    
    % Change
    
    
    2010
    
    
    2009
    
    
    % Change(In thousands)
    
    
    
    
    
    
    (In thousands)Interest income
    
    $
    117
    
    
    $
    254
    
    
    
    (54
    )%
    
    $
    203
    
    
    $
    587
    
    
    
    (65
    )%Other income, net
    
    
    43
    
    
    
    116
    
    
    
    (63
    )%
    
    
    50
    
    
    
    456
    
    
    
    (89
    )%Interest income and other income, net
    
    $
    160
    
    
    $
    370
    
    
    
    (57
    )%
    
    $
    253
    
    
    $
    1,043
    
    
    
    (76
    )%
   Provision for Income Taxes
 For the three months ended March 31,
    
    For the six months ended March 31,2010
    
    2009
    
    % Change
    
    2010
    
    2009
    
    % Change(In thousands)
    
    
    
    
    
    (In thousands)Provision for
income taxes
    
    $
    358
    
    
    $
    132
    
    
    
    171
    %
    
    $
    598
    
    
    $
    552
    
    
    
    8
    %
  Stock based Compensation Expense
   32




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2010
    
    
    2009
    
    
    2010
    
    
    2009Direct costs of ratable licenses
    
    $
    23
    
    
    $
    27
    
    
    $
    49
    
    
    $
    24Direct costs of professional services
    
    
    66
    
    
    
    214
    
    
    
    177
    
    
    
    326Development
    
    
    176
    
    
    
    344
    
    
    
    405
    
    
    
    574Operations
    
    
    92
    
    
    
    210
    
    
    
    226
    
    
    
    333Sales and marketing
    
    
    273
    
    
    
    566
    
    
    
    637
    
    
    
    930General and administrative
    
    
    157
    
    
    
    235
    
    
    
    296
    
    
    
    450Total
    
    $
    787
    
    
    $
    1,596
    
    
    $
    1,790
    
    
    $
    2,637
 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 31,2010
    
    
    2009
    
    
    2010
    
    
    2009GAAP net income (loss)
    
    $
    (144
    )
    
    $
    (258
    )
    
    $
    837
    
    
    $
    628Stock based compensation
    
    
    787
    
    
    
    1,596
    
    
    
    1,790
    
    
    
    2,637Amortization of intangible assets  software
    
    
    435
    
    
    
    288
    
    
    
    733
    
    
    
    576Amortization of intangible assets  other
    
    
    156
    
    
    
    263
    
    
    
    338
    
    
    
    532Provision for income taxes
    
    
    358
    
    
    
    132
    
    
    
    598
    
    
    
    552Cash taxes from on-going operations*
    
    
    (118
    )
    
    
    (305
    )
    
    
    (282
    )
    
    
    (455
    )Non-GAAP net income
    
    $
    1,474
    
    
    $
    1,716
    
    
    $
    4,014
    
    
    $
    4,470Weighted average diluted common shares outstanding:
    
    
    14,880
    
    
    
    14,332
    
    
    
    14,825
    
    
    
    14,330Non-GAAP net income per share
    
    $
    0.10
    
    
    $
    0.12
    
    
    $
    0.27
    
    
    $
    0.31
 
 *
    
    Cash taxes from on-going operations for the three and six months ended March 31, 2009
excludes a onetime cash payment of $4.1 million related to an agreement to purchase certain
intangible assets from our German subsidiary. 33




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Adjusted EBITDA.
 Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2010
    
    
    2009
    
    
    2010
    
    
    2009GAAP net income (loss)
    
    $
    (144
    )
    
    $
    (258
    )
    
    $
    837
    
    
    $
    628Stock based compensation
    
    
    787
    
    
    
    1,596
    
    
    
    1,790
    
    
    
    2,637Amortization of intangible assets  software
    
    
    435
    
    
    
    288
    
    
    
    733
    
    
    
    576Amortization of intangible assets  other
    
    
    156
    
    
    
    263
    
    
    
    338
    
    
    
    532Depreciation
    
    
    1,120
    
    
    
    1,173
    
    
    
    2,317
    
    
    
    2,501Provision for income taxes
    
    
    358
    
    
    
    132
    
    
    
    598
    
    
    
    552Interest income and other income, net
    
    
    (160
    )
    
    
    (370
    )
    
    
    (253
    )
    
    
    (1,043
    )Adjusted EBITDA
    
    $
    2,552
    
    
    $
    2,824
    
    
    $
    6,360
    
    
    $
    6,383
 Free Cash Flow.
 Six Months EndedMarch 31,2010
    
    
    2009Cash flow provided by operations
    
    $
    1,654
    
    
    $
    3,269Purchases of property, equipment and software
    
    
    (1,428
    )
    
    
    (1,397
    )Free cash flow
    
    $
    226
    
    
    $
    1,872
 Gross Deferred Revenue.
 March 31, 2010
    
    
    September 30, 2009
    
    
    March 31, 2009Net deferred revenue
    
    $
    15,494
    
    
    $
    18,828
    
    
    $
    21,331Unpaid deferred revenue
    
    
    7,009
    
    
    
    3,475
    
    
    
    5,514Gross deferred revenue
    
    $
    22,503
    
    
    $
    22,303
    
    
    $
    26,845
 Other Operational Data.
 March 31, 2010
    
    March 31, 2009Worldwide customers
    
    
    2,800
    
    
    
    2,800Quarterly internet web measurement subscription net
revenue (in thousands)
    
    $
    6,593
    
    
    $
    6,572Average monthly internet pages measured
    
    
    20,800
    
    
    
    16,400Average monthly revenue per internet page*
    
    $
    106
    
    
    $
    134
 
 *
    
    Average monthly revenue per internet page is calculated as:
(quarterly internet web measurement subscription net
revenue/3







    mos)/
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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Liquidity and Capital Resources
 March 31,
    
    September 30,2010
    
    2009(In thousands)Cash, cash equivalents and short-term investments
    
    $
    56,181
    
    
    $
    57,968Accounts receivable, net
    
    $
    8,119
    
    
    $
    6,403Working capital
    
    $
    48,001
    
    
    $
    44,749Days sales outstanding (DSO) for the three months
ended (a)
    
    
    38
    
    
    
    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  Six Months EndedMarch 31,2010
    
    2009(In thousands)Cash provided by operating activities
    
    $
    1,654
    
    
    $
    3,269Cash used in investing activities
    
    $
    (23,729
    )
    
    $
    (5,122
    )Cash (used in) provided by financing activities
    
    $
    (234
    )
    
    $
    1,418
 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 used in 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




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##### Table of Contents



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




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




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##### 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 rate of new and renewed subscriptions for our services, particularly large customers;
    
    The effect of the global economic downturn on customers and partners;
    
    The amount and timing of any reductions by our customers in their usage of our services;
    
    Our ability to increase the number of web sites we measure and the scope of services we
offer 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;
    
    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.
    
    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.
    
    The cost associated with and the integration of future acquisitions or divestures;
    
    Future accounting pronouncements and changes in accounting policies; and
    
    Future macroeconomic conditions in our domestic and international markets, as well as the
level of discretionary IT spending generally.
  Our business, which includes our operating results and financial condition, is susceptible to
additional risks associated with international operations.
  39




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##### 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




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##### Table of Contents



Our business could be harmed by adverse economic conditions or reduced spending on information
technology.
  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.
  If the market does not accept our professional services, our results of operations could be harmed.
  41




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##### Table of Contents



We must retain qualified personnel in a competitive marketplace, or we may not be able to grow our
business.
  If 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



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




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##### 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 and recent capital and credit market conditions have been extremely volatile.
   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




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##### 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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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;
    
    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;
 46




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
    
    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.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4.
(Reserved)
 
 Item 5. Other Information
  47




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##### Table of Contents



Item 6. Exhibits
 EXHIBIT INDEX
 Incorporated by ReferenceFiledExhibit
    
    Form
    
    File No.
    
    Filing Date
    
    Exhibit No.
    
    Herewith31.1
    
    Certification of
Periodic Report by
Chief Executive
Officer under
Section 302 of the
Sarbanes-Oxley Act
of 2002
    
    
    
    
    
    
    
    
    
    X31.2
    
    Certification of
Periodic Report by
Chief Financial
Officer under
Section 302 of the
Sarbanes-Oxley Act
of 2002
    
    
    
    
    
    
    
    
    
    X32.1
    
    Certification of
Chief Executive
Officer Pursuant to
18 U.S.C.
Section 1350 as
Adopted Pursuant to
Section 906 of the
Sarbanes-Oxley Act
of 2002 *
    
    
    
    
    
    
    
    
    
    X32.2
    
    Certification of
Chief Financial
Officer Pursuant to
18 U.S.C.
Section 1350 as
Adopted Pursuant to
Section 906 of the
Sarbanes-Oxley Act
of 2002 *
    
    
    
    
    
    
    
    
    
    X
 
 *
    
    As contemplated by SEC Release No. 33-8212, these exhibits are furnished with this Quarterly
Report on Form 10-Q and are not deemed filed with the Securities and Exchange Commission and
are not incorporated by reference in any filing of Keynote Systems, Inc. under the Securities
Act of 1933 or the Securities Act of 1934, whether made before or after the date hereof and
irrespective of any general incorporation language in such filings. 48




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##### Table of Contents



SIGNATURES
  KEYNOTE SYSTEMS, INC.By:
    /s/ UMANG GUPTAUmang GuptaChairman of the Board and Chief Executive Officer
(Principal Executive Officer)By:
    /s/ ANDREW HAMERAndrew HamerVice President and Chief Financial Officer
(Principal Financial and Accounting Officer) 49




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##### Table of Contents



EXHIBIT INDEX
 Incorporated by ReferenceFiledExhibit
    
    Form
    
    File No.
    
    Filing Date
    
    Exhibit No.
    
    Herewith31.1
    
    Certification of
Periodic Report by
Chief Executive
Officer under
Section 302 of the
Sarbanes-Oxley Act
of 2002
    
    
    
    
    
    
    
    
    
    X31.2
    
    Certification of
Periodic Report by
Chief Financial
Officer under
Section 302 of the
Sarbanes-Oxley Act
of 2002
    
    
    
    
    
    
    
    
    
    X32.1
    
    Certification of
Chief Executive
Officer Pursuant to
18 U.S.C.
Section 1350 as
Adopted Pursuant to
Section 906 of the
Sarbanes-Oxley Act
of 2002 *
    
    
    
    
    
    
    
    
    
    X32.2
    
    Certification of
Chief Financial
Officer Pursuant to
18 U.S.C.
Section 1350 as
Adopted Pursuant to
Section 906 of the
Sarbanes-Oxley Act
of 2002 *
    
    
    
    
    
    
    
    
    
    X
 
 *
    
    As contemplated by SEC Release No. 33-8212, these exhibits are furnished with this Quarterly
Report on Form 10-Q and are not deemed filed with the Securities and Exchange Commission and
are not incorporated by reference in any filing of Keynote Systems, Inc. under the Securities
Act of 1933 or the Securities Act of 1934, whether made before or after the date hereof and
irrespective of any general incorporation language in such filings. 50