Press Room: 2007

Keynote Announces Fiscal First Quarter 2007 Results

• Total Revenue of $15.8 Million Increased 4% Sequentially and 15% Compared to Fiscal First Quarter 2006
• Net Deferred Revenues of $14.7 Million Grew 38% Sequentially and 144% Compared to Fiscal First Quarter 2006
• Achieved GAAP Net Income of $264,000, or $0.01 per Share, and Non-GAAP Net Income of $551,000, or $0.03 per Share
• Delivered $5.1 Million in Cash from Operations and $4.0 Million in Free Cash Flow
• First Quarter Results Exceeded Company’s Previous Revenue, Earnings and Cash Flow Guidance

SAN MATEO, Calif., — January 30, 2007 — Keynote Systems (Nasdaq: KEYN), The Mobile and Internet Performance Authority™, today announced financial results for its fiscal first quarter ended December 31, 2006.

Umang Gupta, chairman and CEO of Keynote, said: “Solid execution, particularly by Keynote SIGOS, delivered strong first quarter results. Our Internet Test and Measurement and Customer Experience Test and Measurement (CEM) businesses together performed in line with company expectations, while our Mobile Test and Measurement business exceeded projections. Mobile Test and Measurement revenue grew to $3.2 million, or 33 percent sequentially, and net deferred revenue, the majority of which is related to Keynote SIGOS, grew to $14.7 million or 38 percent sequentially. We believe the increase in both reported revenue and deferred revenue provides a comprehensive indicator of our growth.”

Gupta continued, “Keynote is capitalizing on opportunities presented by the rapidly evolving mobile and Internet markets. The better than expected top-line results from Keynote SIGOS combined with operating cost controls drove improved margins earlier than expected. Providing that Keynote SIGOS continues to perform for the remainder of the fiscal year 2007 at the same level as last year, we expect to deliver non-GAAP net income throughout fiscal 2007.”

First Quarter 2007 Financial Summary

Revenue for the first quarter of fiscal year 2007 was $15.8 million, an increase of four percent compared to the preceding quarter and a 15 percent increase compared to the first quarter of fiscal year 2006. Net income for the first quarter of fiscal year 2007, which included a $1.0 million income tax benefit, $920,000 in stock-based compensation expenses, and a $759,000 charge for amortization of intangible assets required under generally accepted accounting principles (GAAP), was $264,000, or $0.01 per diluted share. This compared to net loss of $6.0 million, or $0.35 per share, for the preceding quarter, and net income of $587,000, or $0.03 per diluted share, for the first quarter a year ago.

The non-GAAP net income for the quarter was $551,000, or $0.03 per diluted share, compared to non-GAAP net loss of $797,000, or $0.05 per share, for the preceding quarter, and non-GAAP net income of $2.4 million, or $0.12 per diluted share, for the first quarter a year ago. The company defines non-GAAP net income or loss as net income or loss adjusted for provision for income taxes, less cash tax expense, stock-based compensation expense, amortization of purchased intangibles. Non-GAAP net income per share equals non-GAAP net income divided by the weighted diluted share count as of that period end. Non-GAAP net loss per share equals non-GAAP net loss divided by the weighted basic share count as of that period end.

Cash, Free Cash Flow and Deferred Revenue Summary

Keynote SIGOS’ revenue recognition policy under GAAP requires the amortization of most of Keynote SIGOS’ software license revenues over an approximate twenty-four month period. Although Keynote had a consolidated GAAP and non-GAAP net loss for each of the past two quarters, Keynote SIGOS’ strong revenue growth has resulted in earlier than expected consolidated non-GAAP income in the current quarter. In addition, until Keynote SIGOS’ revenues normalize with quarterly billings, management believes cash provided by operating activities, free cash flow and deferred revenue are also important metrics to measure and manage Keynote’s financial performance.

For the quarter, cash provided by operating activities was $5.1 million, compared to $1.2 million in the prior quarter and $3.7 million in the first quarter of 2006. Cash used for purchases of property, equipment and software totaled $1.1 million for the first quarter of 2007, compared to $874,000 in the prior quarter and $549,000 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 $4.0 million for the quarter, compared to $357,000 in the prior quarter and $3.2 million for the same period last year.

Keynote’s net deferred revenue was $14.7 million at December 31, 2006, up 38 percent compared to $10.6 million at September 30, 2006 and up 144 percent from $6.0 million at December 31, 2005. The increase resulted primarily from the amortization of Keynote SIGOS revenue over the life of customer contracts. Keynote’s gross deferred revenue, defined as the sum of net deferred revenue and unpaid deferred revenue of $8.9 million, increased to $23.6 million at December 31, 2006, up 83 percent compared to $12.9 million at September 30, 2006.

“Our deferred revenues and cash from operations are at an all time high with strong contribution from Keynote SIGOS,” said Gupta. “This, again, proves our continued success nurturing the synergies of the acquisition and solidifies our position as a major player in the fast growing mobile test and measurement industry.”

The company had $95.6 million in total cash, cash equivalents and short-term investments as of December 31, 2006, of which approximately $10.6 million is expected to be paid in the second fiscal quarter as a performance earn-out to SIGOS’ shareholders under the terms of the purchase agreement for the acquisition of SIGOS by Keynote.

Operational Metrics Summary

As of December 31, 2006, Keynote’s total worldwide customer base was approximately 2,650 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 December 31, 2006, Keynote measured over 10,000 Internet pages, as compared to 9,000 Internet pages in the same quarter a year ago.

Expectations for the Second Quarter of Fiscal Year 2007

The following company outlook for the second 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 fiscal 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 second fiscal quarter ending March 31, 2007:

• Total revenue is expected to be between $16.2 million and $16.7 million.
• Net earnings (loss) per share are expected to be between $(0.02) and $0.02.
• Non-GAAP earnings per share are expected to be between $0.05 and $0.08.
• Cash provided by operating activities is expected to be between $3.0 million and $3.5 million.
• Free cash flow is expected to be between $2.0 million and $2.5 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 $400,000. As noted, cash paid to SIGOS’ shareholders for acquisition related performance fees is expected to be approximately $10.6 million. Basic weighted average shares outstanding are expected to be approximately 17.1 million shares and diluted weighted average shares outstanding are expected to be approximately 17.7 million shares.

Conference Call

Keynote will host a conference call and simultaneous webcast at 2:00 pm (PST) today, January 30, 2007. To access the call please dial (706) 679-4457, approximately 10 minutes prior to the start of the conference call. The pass code is #5680745. 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 #5680745, 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, including key employees of SIGOS particularly after the payment of the earn out payment is made, 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 mobile and 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, 2006, 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 mobile and Internet 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 phone 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. © 2007 Keynote Systems, Inc.

Contacts:

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

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