Press Room: 2006

Keynote Announces Fiscal Fourth Quarter 2006 Results

• Total Revenue Increased 9.5% Sequentially to $15.2 Million and Deferred Revenues Grew 9.4% Sequentially to $10.6 Million
• Recorded GAAP Net Loss of $6.0 Million, or $0.35 per Share Including $3.9 Million Charge for Deferred Tax Asset Adjustment
• Non-GAAP Net Loss Reduced to $0.8 Million from $1.1 Million in Third Quarter 2006
• Delivered $1.3 Million in Cash from Operations and $0.4 Million in Free Cash Flow
• Fourth Quarter Results Exceeded Company’s Previous Guidance for Revenue and Non-GAAP Net Loss

SAN MATEO, Calif., — October 31, 2006 — Keynote Systems (Nasdaq: KEYN), The Mobile and Internet Performance Authority™, today announced financial results for its fourth quarter and fiscal year ended September 30, 2006.

Umang Gupta, chairman and CEO of Keynote, said: “We are extremely pleased with our fourth quarter results, as recent changes we made in our sales and marketing organizations drove growth across all of our business segments. Our Internet Test and Measurement business, previously known as Service Level Management (SLM), increased sequentially to the highest level in the past five years. Our Customer Experience Test and Measurement (CEM) business grew again after two quarters of declines. Additionally, the Mobile Test and Measurement business experienced very strong growth, generated primarily by Keynote SIGOS.”

Gupta continued, “Our goal during the last couple of years has been to position Keynote to take advantage of the new opportunities presented us by the rapidly evolving Internet and mobile markets. Last year, we made great progress on that goal with significant technology enhancements across our flagship products in Internet performance and customer experience. Additionally, we made tremendous strides in our mobile quality business, especially with the acquisition of SIGOS. We also began a process of expanding our sales force and upgrading our ability to sell and support more complex solutions. We are now seeing early signs from our customers that our investments should pay off well in the coming years.”

Fourth Quarter of Fiscal 2006 Financial Summary

Revenue for the fourth quarter of fiscal year 2006 was $15.2 million, an increase of 9.5 percent compared to the preceding quarter and a 12.7 percent increase compared to the fourth quarter of fiscal year 2005. Net loss for the fourth quarter of fiscal year 2006, which included a $3.9 million charge for the adjustment of the income tax benefit associated with the partial recognition of net deferred tax assets, $1.1 million in stock-based compensation expenses and a $771,000 charge for amortization of intangible assets required under generally accepted accounting principles (GAAP), was $6.0 million, or $0.35 per share. This compared to net loss of $2.0 million, or $0.11 per share, for the preceding quarter, and net income of $4.3 million, or $0.21 per diluted share, for the fourth quarter a year ago.

The non-GAAP net loss for the quarter was $797,000, or $0.05 per share, compared to non-GAAP net loss of $1.1 million, or $0.06 per share, for the third quarter. The company defines non-GAAP net loss as net loss adjusted for provision for income taxes, less cash tax expense, stock-based compensation expense, amortization of purchased intangibles and for in-process research and development associated with acquisitions. Non-GAAP net loss per diluted share equals non-GAAP net loss divided by the weighted share count as of that period end.

Fiscal 2006 Financial Summary

Revenue for fiscal year 2006 was $55.5 million, a 3.4 percent increase compared to revenue of $53.7 million for fiscal year 2005. Net loss for fiscal year 2006 was $7.5 million, or $0.41 per share, which included a $3.9 million charge for the adjustment of the income tax benefit associated with the partial recognition of net deferred tax assets, $3.7 million in stock-based compensation expenses, a $2.4 million charge for intangibles amortization, and a $840,000 charge for in-process research and development associated with the SIGOS acquisition. This compares to net income of $7.4 million, or $0.35 per diluted share, for fiscal year 2005, which included an income tax benefit of $3.1 million associated with the partial recognition of net deferred tax assets and a $2.4 million charge for intangibles amortization. The non-GAAP net income for the fiscal year 2006 was $2.0 million, or $0.10 per diluted share.

Cash, Free Cash Flow and Deferred Revenue Summary

Keynote SIGOS’ revenue recognition policy under U.S. GAAP requires the amortization of most of Keynote SIGOS’ software license revenues over an approximate twenty-four month period. Therefore, Keynote had a consolidated GAAP and non-GAAP net loss for each of the past two quarters and Keynote’s consolidated GAAP and non-GAAP losses are likely to remain negative until quarterly GAAP revenues normalize with quarterly billings. Consequently, management believes cash provided by operating activities, free cash flow and deferred revenue are important metrics to measure and manage Keynote’s financial performance.

For the quarter, cash provided by operating activities was $1.3 million, compared to $3.6 million in the fourth quarter of 2005. Cash used for purchases of property, equipment and software totaled $874,000 for the fourth quarter of 2006, compared to $1.2 million for the same period last year. Keynote generated free cash flow, defined as cash flow from operations less cash used for purchases of property, equipment, and software, of $415,000 for the quarter, compared to $2.4 million for the same period last year.

For the fiscal year 2006, cash provided by operating activities was $10.7 million, compared to $11.0 million in the fiscal year 2005. Cash used for purchases of property, equipment and software totaled $3.1 million for fiscal year 2006, compared to $3.6 million last year. Keynote generated free cash flow, defined as cash flow from operations less cash used for purchases of property, equipment, and software, of $7.6 million for the year, compared to $7.3 million for the fiscal year 2005.

“Keynote has generated cash flow from operations of over $40 million and free cash flow of nearly $30 million in the aggregate over the last four years,” said Gupta. “These funds have supported our active acquisition strategy and helped create the Keynote we have today.”

Keynote’s long and short term deferred revenue was $10.6 million at September 30, 2006, up 9.4 percent compared to $9.7 million at June 30, 2006 and up 71 percent from $6.2 million at September 30, 2005. The increase results primarily from the Keynote SIGOS revenue amortization over the life of customer contracts.

“Because of U.S. GAAP revenue recognition, we are only able to recognize as revenue a portion of the sales attributable to the Keynote SIGOS contracts – with the remaining portion accounted for as deferred revenue and recognized over time. Therefore, we believe the increase in deferred revenue and reported revenue provides a more comprehensive picture of the growth of our business,” said Gupta.

The company had $90.8 million in total cash, cash equivalents and short-term investments as of September 30, 2006. During the quarter, the company repurchased approximately 624,000 shares for approximately $6.6 million and also completed the stock buyback program, which was instituted in June of 2006. The total shares outstanding net of treasury shares as of the end of September 30, 2006 was 17.1 million as compared to 18.8 million as of September 30, 2005.

Operational Metrics Summary

As of September 30, 2006, Keynote’s total worldwide customer base was approximately 2,600 companies, up from approximately 2,300 customers in the same quarter a year ago. Keynote currently provides its services to 70 percent of the comScore Media Metrix’s top 50 Web sites and approximately half of the Fortune 100 companies. As of September 30, 2006, Keynote measured 10,004 Internet pages, as compared to 8,307 Internet pages in the same quarter a year ago.

Expectations for the First Quarter of Fiscal Year 2007

The following company outlook for the first quarter of fiscal 2007 also includes expectations for Keynote SIGOS. The company consolidated Keynote SIGOS’ financial reporting under U.S. GAAP rules starting April 3, 2006. U.S. GAAP requires Keynote SIGOS’ system license revenue to be ratably recognized over the initial duration of each customer contract, which averages approximately twenty-four months.

As a result of the aforementioned accounting, Keynote will be able to recognize as revenues only a fraction of Keynote SIGOS sales during the fiscal 2006 and 2007. Accordingly, the acquisition will be dilutive to Keynote’s U.S. GAAP net income, although cash flow from operations is expected to be positive.

The statements in this section of this press release are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Keynote currently expects the following for the first fiscal quarter ending December 31, 2006:

• Total revenue is expected to be between $15.0 million and $15.5 million.
• Net loss per share is expected to be between $0.06 and $0.09.
• Non-GAAP loss per share is expected to be between $0.01 and $0.04.
• Cash provided by operating activities is expected to be between $2.0 million and $2.5 million.
• Free cash flow is expected to be between $1.0 million and $1.5 million.

The above guidance was based on the following assumptions. Total stock-based compensation expense and amortization of intangible assets is expected to be approximately $1.8 million. Interest income, net is expected to be approximately $1.0 million, assuming no material changes in interest rates. Cash paid for income taxes is expected to be approximately $550,000. Basic weighted average shares outstanding are expected to be approximately 17.1 million shares.

Conference Call

Keynote will host a conference call and simultaneous webcast at 2:00 pm (PST) today, October 31, 2006. To access the call please dial (706) 679-4457, approximately 10 minutes prior to the start of the conference call. The pass code is #8354422. The webcast of the call will be available at the investor section of our web site at www.keynote.com. The replay will be available after the call by telephone by dialing (800) 642-1687 and the pass code #8354422, or by webcast at the investor section of our web site at www.keynote.com.

Forward-Looking Statements

This press release contains forward-looking statements that are not purely historical regarding the Company or management’s intentions, hopes, beliefs, expectations and strategies for the future. Because such statements deal with future events, they are subject to various risks and uncertainties, and actual results could differ materially from the Company’s current expectations.

Forward-looking statements in this release include, but are not limited to, forecasts concerning Keynote’s expected revenue, earnings per share, cash flow from operations, income tax rate and other future financial results. It is important to note that actual outcomes and Keynote’s actual results could differ materially from those in such forward-looking statements. Factors that could cause actual results to differ materially include risks and uncertainties such as Keynote’s ability to successfully market and sell its current services to new or existing customers, Keynote’s ability to develop and introduce new services in a timely manner and customer acceptance of new services, the extent to which demand for Keynote’s various services fluctuates and the extent to which revenue from other service lines, can continue to increase, the extent to which existing customers renew their subscriptions and purchase additional services, particularly enterprise customers, Keynote’s ability to retain customers of SIGOS, Keynote’s ability to operate SIGOS and manage related costs successfully, Keynote’s ability to retain key employees, pricing pressure with respect to Keynote’s services, Keynote’s ability to increase sales of its CEM services, and the risk that its prior organizational changes will not result in improved results, unforeseen expenses, competition in Keynote’s markets, integration of acquired companies or technologies and costs associated with any future acquisitions, Keynote’s ability to manage expanded international operations, Keynote’s ability to keep pace with changes in the Internet infrastructure as well as other technological changes, and the success of Keynote’s international operations. Readers should also refer to the risks outlined in Keynote’s reports filed with the Securities and Exchange Commission, including its Annual Report on Form 10-K for its fiscal year ended September 30, 2 005, and its quarterly reports on Form 10-Q and any current reports on Form 8-K filed during the fiscal year.

All forward-looking statements and reasons why results might differ included in this release are made as of the date of this press release, based on information available to Keynote as of the date of this press release, and Keynote assumes no obligation to update any such forward-looking statement or reasons why results might differ.

About Keynote

Keynote Systems (Nasdaq “KEYN”) is the global leader in test & measurement solutions that improve mobile communications and online business performance. As an independent and trusted third-party, Keynote provides IT and marketing executives with an unbiased view into their Internet services from around the world. For over a decade, we have been providing measurement data and testing capabilities that allow companies to understand and improve their customer’s online and mobile experience. Keynote has four test and measurement businesses: Web performance, mobile quality, streaming & VoIP, and customer experience/UX. In addition, our industry analysis group called Keynote Competitive Research publishes proprietary studies measuring customer experience and service levels across a wide range of industries.

Known as The Mobile and Internet Performance Authority™, Keynote has a market-leading infrastructure of 2,400 measurement computers and mobile devices in over 240 geographic locations around the world. Keynote also maintains one of the most representative panels of online users consisting of 160,000 consumers. Our on-demand, hassle-free infrastructure allows businesses to access services they need, when they need them to pinpoint and fix mobile quality and Internet problems before they impact customers.

We help over 2,600 corporate customers become “the best of the best” by helping them improve online business performance and mobile communications quality. Our customers represent top Internet and mobile companies including American Express, BP, Caterpillar, Dell, Disney, eBay, ESPN Mobile, E*TRADE, Expedia, FedEx, Microsoft, SonyEricsson, Sprint, T-Mobile, Verizon and Vodafone.

Keynote Systems, Inc. is headquartered in San Mateo, California and can be reached at www.keynote.com or by travel in the U.S. at (650) 403-2400.

Keynote, The Internet Performance Authority and Perspective are registered trademarks and The Mobile and Internet Performance Authority is a trademark of Keynote Systems, Inc. Other trademarks are the property of their respective owners. © 2006 Keynote Systems, Inc.

Contacts:

Public Relations:
Dan Berkowitz, Keynote Systems, Inc.(650) 403-3305, dberkowitz@keynote.com

Investor Relations:
JKirsten Chapman/Moriah Shilton, Keynote Systems, Inc.((415) 433-3777, mshilton@lhai.com