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Keynote Systems, Inc. (KEYN)

F1Q09 (Qtr End 12/31/2008) Earnings Call

January 27, 2009 5:00 pm ET

Executives

Kirsten Chapman - IR

Umang Gupta - Chairman and CEO

Drew Hamer - VP, CFO

Analysts

Douglas Whitman - Whitman Capital

Digvijay Chowdhary - Craig-Hallum Capital

Brian Kinstlinger - Sidoti & Company

Derrick Wood - Pacific Growth Equities

Justin Cable - Global Hunter Securities

Presentation

Operator

Good afternoon, everyone, and welcome to Keynote's conference call for the first quarter fiscal year 2009. Today's call is being recorded. At this time, I would like to turn the call over to Kirsten Chapman for opening remarks and instructions.

Kirsten Chapman

Thank you, Christie. Good afternoon everyone, and welcome to Keynote's conference call for the first quarter fiscal 2009 ending December 31, 2008. I am here today with Umang Gupta, Chairman and Chief Executive Officer, and Drew Hamer, Chief Financial Officer.

Umang and Drew will review our accomplishments for the quarter and then will be available to answer questions. Hopefully by now, you have you seen our press release distributed over the major wire services. For your convenience, the press release has also been posted on our website at www.keynote.com .

The replay of this call will be made available by telephone by dialing 1800-642-1687. The passcode is 80489465 or by webcast at the Investor Relations section of our website at www.keynote.com .

I would like to remind you that statements made during this call that are not purely historical, are forward-looking statements 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 may differ materially from those projected in the forward-looking statements.

Important factors that could cause actual results to differ materially from those in the forward-looking are discussed in today's press release and in the company's Annual Report for fiscal 2008.

We have provided detailed guidance in our earnings release today as we have in prior quarters. This guidance assumes no additional acquisitions, no material change in foreign exchange currency rates, or other significant or extraordinary transactions other than those described in our earnings release. We will not comment on guidance during the quarter but may provide an update to this guidance in the event of material changes during the quarter.

Before the company reviews the financials, I will review definitions for some metrics which are not in accordance with Generally Accepted Accounting Principles, commonly known as GAAP.

The company defines non-GAAP net income as net income adjusted for provisioned for income tax, stock-based compensation expense, and amortization of purchased intangibles less cash taxes from ongoing operations. Non-GAAP net income per share equals non-GAAP net income divided by the weighted average number of diluted shares outstanding for the period.

Deferred revenue represents the deferred revenue balance as recorded on the consolidated balance sheet and gross deferred revenue represents net deferred revenue plus the unpaid deferred revenue that has an associated accounts receivable balance as of the balance sheet date.

EBITDA is defined as earnings before interest, taxes, depreciation and amortization and provides a useful measure of operations. EBITDA margin is EBITDA as a percent of total revenue.

During the call, Umang Gupta, Chairman and CEO will review the first quarter accomplishments, and Drew Hamer, CFO will detail the financial results. Then Umang will summarize and open the call for questions.

Now, it is my pleasure to introduce to you Umang Gupta. Please go ahead, sir.

Umang Gupta

Thank you, Kirsten. Welcome, everyone, and thank you for joining us today. I am pleased to report, we started 2009 with a strong first quarter. Our revenue was $20.6 million exceeding our guidance and rising 16.5% from the first quarter of 2008.

Most noteworthy is that our revenue was supported by strong performance in the mobile business as usual, but also as well as in the Internet business. While the December quarter is usually our strongest with revenue from increased load testing and customer experience engagements related to holiday shopping and a push for year end bookings by Keynote SIGOS. This year, we expected the quarter to be negatively impacted by the drop in the euro to US dollar exchange rate as well as the general deterioration of the economic environment.

Even with these factors, we achieved higher than expected revenues due to the following reasons: First, our Keynote SIGOS project completions occurred as expected with no significant impact as yet due to the economy. In fact, due to a stronger than expected December, our bookings when measured in euros reached an all-time high in calendar 2008. Second, we had the best time high in calendar 2008.

Second, we had the best quarter in our history for load testing engagements, while customer experience revenues also stayed consistent with the past couple of quarters. We believe this was due to the fact that despite the economic slowdown, there is still an important need for online retailers to ensure that they test their sites for maximum capacity and usability in time for the holiday season.

Third, we have grown beyond the lingering revenue impact on our Internet subscription services of the legacy single-page single-device monitoring services, and so we did not have to make up for any significant declines in this product category.

In addition, efforts to improve sales productivity at lower costs continued to produce results. Our EBITDA margin was 17%, equal to the fourth quarter of 2008 marking the highest two quarters in a row to-date. While we remain cautious about 2009 due to the economic situation, we are hopeful that our efforts will continue to yield improved bottom line results.

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