UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
|
|
|
(Mark One)
|
|
|
þ
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the Fiscal
Year Ended September 30, 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. Employer
|
incorporation or
organization)
|
|
Identification No.)
|
777 Mariners Island Blvd,
|
|
94404
|
San Mateo, CA
|
|
(Zip Code)
|
(Address of principal executive
offices)
|
|
|
Registrants telephone number, including area code:
(650) 403-2400
Securities registered pursuant to Section 12(b) of the
Act:
|
|
|
Title of Each Class:
|
|
Name of Each Exchange on Which Registered:
|
|
Common Stock, $0.001 Par Value Per Share, and the
Associated Stock Purchase Rights
|
|
The NASDAQ Stock Market LLC
|
Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Exchange
Act. YES o NO þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Exchange
Act. YES o NO þ
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. YES þ NO o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). YES o NO o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of Registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
|
|
|
|
Large
accelerated
filer o
|
Accelerated
filer þ
|
Non-accelerated
filer o
|
Smaller
reporting
company o
|
(Do not check if a smaller reporting company)
Indicate by check mark whether the Registrant is a shell company
(as defined in Rule 12b-2 of the Exchange
Act). YES o NO þ
As of March 31, 2010, the aggregate market value of voting stock
held by non-affiliates of the Registrant was $142 million, based
on the closing price of a share of Registrants common
stock on March 31, 2010, as reported by the NASDAQ Global Market.
The number of shares of the Registrants common stock
outstanding as of December 6, 2010 was
14,975,109 shares.
DOCUMENTS
INCORPORATED BY REFERENCE:
Part III incorporates information by reference to portions
of the Registrants proxy statement for its 2011 annual
meeting of stockholders.
KEYNOTE
SYSTEMS, INC.
ANNUAL REPORT ON
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2010
TABLE OF CONTENTS
FORWARD-LOOKING
STATEMENTS
Except for historical information, this annual report
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 the section entitled Risk Factors
in Item 1A of Part I of this report, and elsewhere in
this report. You should also 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 in fiscal 2011. You are cautioned not to place
undue reliance on the forward-looking statements, which speak
only as of the date of this annual report on Form
10-K. 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.
No person is authorized to make any forward-looking statements
on behalf of Keynote Systems, Inc. other than its authorized
officers and then only through its external communications
processes. Accordingly, you should not rely on any
forward-looking statements regarding Keynote Systems, Inc. from
any other sources and we undertake no obligation to correct or
clarify any such forward-looking statements, except as required
by federal securities law.
The trademarks or registered trademarks of Keynote Systems, Inc.
in the United States and other countries include
Keynote®,
DataPulse®,
CustomerScope®,
Keynote CE
Rankings®,
Keynote Customer Experience
Rankings®,
Perspective®,
Keynote Red
Alert®,
Keynote Traffic
Perspective®,
Keynote
WebEffective®,
The Internet Performance
Authority®,
MyKeynote®,
SIGOS®,
SITE®,
keynotetm
The Mobile & Internet Performance
Authoritytm,
Keynote
FlexUsetm.
All other trademarks are the property of their respective owners.
3
PART I
Overview
Keynote Systems, Inc. (Keynote or we) is
a leading global provider of Internet and mobile cloud
monitoring solutions. We provide cloud-based testing, monitoring
and measurement products and services that enable our customer
to know precisely how their Web sites, content, and applications
perform on virtually any combination of actual browsers,
networks and mobile devices. Since our founding in 1995, we have
built and optimized a global monitoring network comprised of
over 3,000 measurement computers and mobile devices in over 275
locations and 180 metropolitan areas worldwide and execute more
than 450 million performance measurements every day. We
deliver our products and services primarily through a
cloud-based model on a subscription basis (formerly referred to
as Software-as-a-Service, or SaaS) to a world-class customer
base representing a broad cross-section of industries.
We offer a robust portfolio of Internet and mobile products and
services to optimize the end-user customer experience in two
broad categories: Internet Cloud (Internet Cloud)
and Mobile Cloud (Mobile Cloud). We combine our
Internet and Mobile Cloud products and services with our Real
User Experience Testing to offer our customers a unique value
proposition.
Internet
Cloud Products and Services
Our Internet Cloud products and services enable enterprises to
monitor key technical performance metrics from the end-user
perspective in order to benchmark and improve online application
responsiveness and operational support, proactively detect
problems that impact end-users, and accelerate the time to
respond to and repair
4
performance issues. Our Internet Cloud products and services
utilize our global monitoring network and include the following:
Transaction Perspective is our flagship service offering.
It provides full visibility into the performance and
availability of Web transactions from the end-user perspective.
It uses actual Internet Explorer and Firefox browsers to
generate real transactions from locations all over the world.
Key features include representation of Web transactions on
actual Internet Explorer and Firefox browsers, ability to
monitor performance of third party components such as ads or
video on Web sites and report on specific Web components by
server domain or other criteria, Web performance dashboards with
real-time smart alerts and comprehensive diagnostics, Flash and
Silverlight performance monitoring based on actual browsers and
last mile performance, and availability monitoring for access
types such as DSL, cable, 3G, and T1/T3.
Application Perspective is a cost-effective, cloud-based
Web application monitoring service that measures the response
time and availability of Web transactions via a simulated Web
browser from multiple geographic locations. The service provides
root cause monitoring and diagnostics for Web applications and
sophisticated trending, alarms and reporting to enable the rapid
assessment, diagnosis and repair of performance issues when they
occur. Key features include high-frequency operational
monitoring and advanced scripting capabilities for monitoring
Web services and Application Program Interfaces
(APIs).
Streaming Perspective measures, compares and assures the
performance of audio and video streams, diagnosing performance
problems before they impact the end-user. Key features include
support for all the latest media players (Flash, Quicktime, Real
Media, Silverlight and Windows Media), a Web-based dashboard for
all data, multi-purpose stream monitoring, cloud-based delivery
and pricing, and Keynote StreamQ technology.
Private Agents provide a turn-key, managed appliance that
can be placed anywhere inside our customers network or Web
cloud application environment. Private Agents provide visibility
into the performance of mission critical extranet and intranet
applications. Key features include
end-to-end
view, ability to isolate performance issues, scalability, full
integration with our dashboard (MyKeynote) and
self-service configuration.
Performance Scoreboard is a customizable dashboard for
monitoring Web performance. It helps customers define and manage
service level objectives (SLOs) in complex,
multi-location or multi-property businesses. Taking advantage of
Keynotes cloud monitoring infrastructure, Performance
Scoreboard enables customers to trend the performance of
critical transactions relative to industry benchmarks and key
competitors. Performance Scoreboard enables customers to track
SLOs, quickly identify application and network latency issues,
and analyze trends and infrastructure details using cloud-based
diagnostic tools.
Enterprise Adapters integrate Keynotes performance
measurement data into leading enterprise systems management
platforms, such as CA NSM, HP Operations Manager, IBM Tivoli
Software, Microsoft SCOM, BMC ProactiveNet Performance
Management Software, dynaTrace, OPNET APM Software, and Quest
Foglight. Enterprise Adapters also integrate with Nagios, the
leading open source monitoring platform. Enterprise Adapters
transform Keynote performance data and alerts into various
formats, including Extensible Markup Language (XML),
log file, and Simple Network Management Protocol
(SNMP).
Red Alert is a self-service, easy-to-use, real-time
monitoring service that tests devices connected to the Internet
primarily for availability. It can measure availability of any
Internet server or other Transmission Control Protocol
(TCP) enabled Internet device, including Web
servers, secure Web servers, domain name servers, mail servers,
File Transfer Protocol (FTP) servers and network
gateways. Red Alert provides around the clock alerts when
adverse conditions exceed specified thresholds.
LoadPro is a turnkey Web load testing service utilizing
our load testing expertise and proprietary technology. Keynote
consultants accurately and dynamically test customers
Web-based applications by driving traffic from multiple points
across the globe, thereby quantifying the opportunity cost of
performance problems and avoiding over- or under-provisioning of
their Web site hardware and software systems. LoadPro utilizes
Keynotes global monitoring network and can scale up to one
million concurrent users from multiple Internet backbones and
countries. Key benefits for our customers include a dedicated
cloud-based load testing platform managed by Keynote, no capital
expenditures or maintenance costs, and proprietary user behavior
profiling and abandonment models that accurately stress test Web
sites and applications.
5
Test Perspective is a cost-effective, cloud-based,
self-service load testing service. Customers can take advantage
of Keynotes global monitoring network of load-generating
computers to easily test their Web applications at varying
traffic levels. Key benefits include a simplified process,
accelerated set up, a unified dashboard and a team friendly user
interface.
Keynote Internet Testing Environment (KITE)
is a free desktop tool for real-time testing, diagnosing and
troubleshooting of Web performance issues. KITE can test a
single Web page or multi-page transaction instantly with
point-and-click
ease and enables easy collaboration between Web developers,
quality assurance and operations teams. KITE also provides
customers the ability to try our Internet Cloud services before
purchasing.
We complement and support our Internet Cloud products and
services with a suite of consulting services. Our consulting
services provide our customers with a deeper and qualitative
perspective on their Web site performance data and benchmarks
against other relevant Web sites and user experiences. Our
consulting services include:
|
|
|
|
|
Performance Insights deliver a blend of Keynotes
Web site monitoring software and custom consulting, tailored to
our customers specific needs. Using Keynotes
measurement technology, we measure our customers business
critical applications to provide in-depth analysis of their Web
site. Based on this data, our consultants prepare a monthly
management report with key performance indicators, as well as
monitoring trends and in-depth diagnosis of issues and events.
|
|
|
|
Web Site Performance Assessment monitors Web site
performance from the end-users perspective to measure in
real time an
e-business
at the application, transaction, and infrastructure level.
Keynotes consultants take this data, analyze it and
deliver detailed input on strategies our customers can deploy
immediately to improve Web performance.
|
|
|
|
Automated Reporting eliminates manual effort required to
customize, format and display performance data from our products
and services. Automated Reporting
e-mails
reports, including performance metrics, SLO compliance,
competitive intelligence, and industry benchmarking, at
requested intervals.
|
|
|
|
Custom Competitive Research provides Web site monitoring
services with a clear picture of how a Web site compares to
peers and provides actionable recommendations for
differentiation from the peer group.
|
Mobile
Cloud Products and Services
Keynote provides independent testing and monitoring of mobile
content, applications, and services on real devices across
multiple mobile operator networks around the world. Our Mobile
Cloud products and services also utilize our global monitoring
network to enable carriers, device manufacturers, content
portals and developers to test, measure and improve the
subscriber experience. Our Mobile Cloud products and services
include the following:
System Integrated Test Environment (SITE) System
is a comprehensive system of test probes and software to
test and measure the quality and reliability of mobile networks,
mobile applications and content delivery for mobile operators.
The SITE system supports network operators and manufacturers as
they implement new technologies and protocols, such as GSM,
GPRS, EDGE, UMTS, HSDPA and LTE, with no loss of quality. It has
a complete interface for protocol layer testing, prepares
detailed measurement activity logs for mobile quality tests, and
uses SIM multiplexing to ensure the maximum selection for
testing across mobile operators around the world. Key features
include user behavior modeling, comprehensive core network
testing, multiple protocol testing, detailed measurement
activity, modular structure and powerful scripting language.
GlobalRoamer is a cloud-based service offering designed
to certify and validate roaming agreements across multiple
mobile operators in major geographical regions across the world.
With our SIM multiplexing technology, customer SIMs are
virtually transmitted to remote test stations around
the world where real voice, SMS, and data calls are performed.
This enables our customers to rapidly test the availability and
performance of their roaming services without a single SIM card
ever having to be physically shipped to remote test locations.
This service offering is based upon a SITE network managed by us
and can test over 450 mobile networks in over 140 countries. Key
features include improved roaming revenue and service
performance, reduced MTTR costs, ad-hoc testing,
6
proactive monitoring, virtual testing, multiple service (SMS,
MMS, etc.) certification, global coverage and flexible reporting.
Mobile Device Perspective (MDP) utilizes our
global monitoring network to measure the response time, to
measure the availability, and to interactively test the behavior
of mobile data services and applications from actual mobile
phones located in multiple geographies and connected to
different mobile operators networks. MDP enables wireless
operators, mobilized enterprises and mobile content providers to
improve the quality of their mobile content, applications, and
services, including Web browsing, text messaging, picture
messaging, streaming video, and instant messaging, as well as
proprietary applications built for smart phones such as the
Apple iPhone, RIM Blackberry, HTC Android, Palm Pre and Nokia.
MDP provides high fidelity measurements that represent the
end-user experience while interacting with mobile content,
applications and services.
Mobile Web Perspective (MWP) is our
cloud-based solution for monitoring and troubleshooting quality
and performance issues for mobile Web sites. MWP uses our mobile
measurement technology, global monitoring network and extensive
device library to provide an accurate and real-time view into
the mobile user experience. MWP measures the mobile user
experience by using a simulated mobile browser to capture
network level details to help customers understand how Web site
content is downloaded and rendered on mobile devices. Along with
monitoring the performance of mobile content, MWP also
benchmarks mobile quality in multiple geographic locations and
against competitors. Key features include access to our library
of 1,800 emulated mobile devices and 11,000 device profiles,
self-service scripting, multiple network options, 50 global
measurement locations, performance dashboard, device graphs and
reporting.
Mobile Internet Testing Environment (MITE) is
a powerful and easy-to-use desktop tool for analyzing Web site
design using a simulated mobile device. MITEs cloud-based
service utilizes our library of over 1,800 emulated mobile
devices and 11,000 device profiles to provide an overall
verification grade, script success score, download duration,
error codes and score, number of resources, actions and content
errors, and total bytes sent and received. MITE is offered for
free and with more advanced testing capabilities for a fee as
MITE Pro. MITE also provides customers the ability to try our
Mobile Cloud services before purchasing.
We complement and support our Mobile Cloud products and services
with a suite of consulting and engineering services. These
services include:
|
|
|
|
|
Professional Services to improve operational and business
performance.
|
|
|
|
Mobile Competitive Monitoring and Analysis to provide a
comprehensive view of performance and end-user experience,
benchmarked against the competition.
|
|
|
|
Mobile Insights to provide comprehensive data from an
end-users perspective, along with detailed analysis and
recommendations based on Keynotes collective experience in
the mobile market.
|
Real User
Experience Testing
To evaluate how users actually interact with a Web site, Keynote
has a panel of over 145,000 online users from a cross-section of
demographics, languages, and connections options. The panel
participates in interactive Web site tests to assess the online
user experience. These online tests capture customer attitude
and behavior. Keynotes Real User Experience Testing
services complement and leverage our Internet and Mobile Cloud
products and services to provide additional insights into the
end-user Internet and mobile experience. Our suite of products
and services enables our customers to perform behavioral and
attitudinal analysis, real-world user testing, online surveys,
and competitive and market intelligence. Our Real User
Experience Testing services include:
WebEffective is our online real user experience testing
tool that combines the best of market research, usability labs
and Web analytics to provide an in-depth perspective on the
Internet and mobile user experience. WebEffective utilizes both
the Keynote in-house panel and customer specified panels for
conducting in-depth customer experience and usability studies on
individual sites or across an entire industry. WebEffective can
be used by customers on an assisted self-service basis or via
full service engagements delivered by Keynote consultants.
7
Customers can undertake tests by panelist selected from the
Keynote Research Panel of over 145,000 panelists, existing
customer lists, or real-time interception and polling of site
visitors.
Visitor Insights is our online feedback tool that lets
customers listen to their customers and convert that
conversation into business intelligence. Visitor Insights
combines customer satisfaction and Web analytics to provide
reliable business intelligence on Internet and mobile end-user
attitudes and behavior. Key benefits include actionable
reporting, quantitative and qualitative intelligence, support
for Web 2.0 and global reach.
Custom Research Products combine our technology and
expertise to deliver insights on Internet and mobile
end-users experiences. Custom Research Products include:
|
|
|
|
|
Mobile Web UX (User Experience) Testing efficiently
assesses the likely performance of a Web site as accessed by
iPhone users utilizing proven online research methodologies and
Keynotes WebEffective software platform.
|
|
|
|
Competitive Intelligence Research provides detailed
analysis on competitive Web sites, along with actionable
recommendations that could help differentiate a Web site from
its competition.
|
|
|
|
Brand and Value Proposition Research is a custom
engagement that explores the customers perception of brand
in the marketplace, isolating the online experience to uncover
how exposure to a Web site impacts brand image
before and after customers interact with a Web site.
|
|
|
|
Web Site Design Research provides actionable insights for
new Web site prototype and concept ideas, releasing new products
or pilot-testing new services before they are put into
development.
|
|
|
|
Web Site UX (User Experience) Assessment Research
provides a clear picture of how customers are actually
experiencing a Web site. The research provides insights into how
to eliminate obstacles that cause customers to leave a Web site,
provides actionable recommendations on how to acquire more
customers at a lower cost, and drive sales by creating a
user-friendly experience.
|
|
|
|
Customer Acquisition Research enables our customers to
follow panelists as they seek information and products on the
Web, without directing them to a specific Web site. By learning
how users navigate the Web and perform transactions, our
customers can determine if they are reaching users in the most
effective way.
|
|
|
|
Continuous Benchmarking Research establishes key metrics
to assess the effectiveness of a Web site over an extended
period of time. The research enables customers to determine Web
site improvements that need to be made and, after
implementation, the effect of the improvements.
|
Keynote
Global Monitoring Network
Our global monitoring network consists of three primary
components: 1) measurement and data collection
infrastructure, 2) operations and data centers, and
3) reporting and analysis tools.
Measurement
and Data Collection Infrastructure
Our measurements are conducted with Windows-based computers,
Linux-based computers
and/or
popular mobile devices that run our proprietary software to
replicate the experience of an Internet or mobile user accessing
content, applications, and services through a standard Web
browser, mobile browser, or mobile device. We designed our
software infrastructure to perform thousands of download
measurements concurrently without appreciably affecting the
integrity of any single measurement. The measurement computers
are co-located at the data center facilities of major
telecommunication and Internet access providers with connections
to Internet backbone providers and mobile network operators that
are selected to be statistically representative of users. At
some locations, we employ multiple Internet connections and
install equipment racks that can accommodate multiple
measurement computers. The hosting arrangements for our
measurement computers typically have terms ranging from three
months to more than one year.
These Web measurement computers access a Web site to download
Web pages and execute single-page and multi-page transactions,
while taking measurements of every component in the process.
These computers take
8
measurements continually throughout the day, at intervals as
often as three minutes, depending on the customers
requirements and subscription service level.
The mobile measurement computers access mobile content,
applications, and services and conduct typical mobile activities
such as voice, messaging,
e-mail and
Web browsing while taking measurements of every component in the
process. The mobile browsers and mobile devices take
measurements continually throughout the day, at intervals as
often as 15 minutes, depending on the customer requirements and
subscription service level.
As of September 30, 2010, we had deployed more than 3,000
measurement computers and mobile devices in over 275 locations
and 180 metropolitan areas worldwide. Included in this total are
over 250 mobile devices, including Apple iPhone, RIM Blackberry,
HTC Android, Palm Pre and Nokia. We continually upgrade and
balance our network capacity to meet the needs of our customers.
As of September 30, 2010, we had deployed SITE probes in
more than 180 cities in major geographical regions across
the world to test the quality of customer services when accessed
via various roaming arrangements between mobile operators.
Operations
and Data Centers
Our operations centers, located in San Mateo, California;
Plano, Texas; and Nuremberg, Germany, are designed to be
scalable to support large numbers of measurement computers and
to store, analyze and manage large amounts of data from these
computers. Our measurement computers receive instructions from,
and return collected data to, our operations centers. The data
is stored in large databases that incorporate a proprietary
transaction-processing system that we designed to store
measurement data efficiently and to deliver measurement data
quickly. We also employ proprietary, high-performance
application servers that manage the collection of measurement
data, the insertion of the data into our databases and the
dissemination of this data to our customers in a variety of
forms and delivery methods. Our GlobalRoamer infrastructure is
managed from Nuremberg, Germany, the headquarters of our Keynote
SIGOS subsidiary.
Reporting
and Analysis Tools
We offer the following tools for reporting and analysis:
|
|
|
|
|
SMS and Email Alerts. Our customers can be
notified by email, text message or pager when download times
exceed a particular value in specific cities or error counts
indicate that a Web site or application is unresponsive.
|
|
|
|
Daily Email Reports. Our customers can receive
a daily email that summarizes the performance and availability
of measured Web sites and applications, with comparisons to
industry averages over the same time period.
|
|
|
|
Web-Based Analysis. Using their Web browsers
and a password, our customers can access our online dashboard,
MyKeynote, to retrieve, view and analyze measurement data in
multiple formats.
|
|
|
|
Data APIs. Our customers can retrieve
measurement data through an API, or through bulk file transfers
using an industry-standard file-transfer protocol. This allows
our customers to incorporate our measurement data within their
own custom data-analysis applications.
|
9
Customers
As of September 30, 2010, we provided products and services
to more than 2,800 customers of all sizes in 81 countries,
representing a broad cross-section of industries including:
Automotive
Business-to-Business
(B2B)
Digital
Media/Internet
Financial
Services
Government
Healthcare
Hospitality/Travel
Retail
Technology
Telecommunications
Sales,
Marketing and Customer Support
Sales
We sell our Internet and Mobile Cloud products and services
globally through our field sales and telesales organizations.
Our Internet and Mobile field sales teams concentrate on selling
and servicing our largest customers and consist of direct sales
representatives and sales engineers located in 17 metropolitan
areas (12 across the United States and 5 in Europe). In addition
to our global field sales teams, we have telesales personnel
located in Plano, Texas and India. These telesales personnel
focus primarily on selling our subscription services and
providing telephone and email sales support and customer
service. We also market and sell some of our services through
our self-service Web site.
In addition, we domestically distribute our services through
Web-hosting and Internet service providers who manage
e-business
Web sites for other companies. These companies sell or bundle
our services to their customer base as a value-added service and
as a management tool for their customers Web sites. We
also sell to content distribution providers who use our services
as a pre-sales tool for their potential customers or in service
level agreements with their existing customers. We occasionally
market our services through other technology companies on a
lead referred basis. Internationally, we use both
direct and indirect sales approaches in the United Kingdom,
Nordic countries, France, and Germany and sell indirectly
through reseller partners throughout the rest of Europe, the
Middle East, Africa and Asia.
Marketing
We maintain an active marketing program designed to demonstrate
the breadth and depth of our Internet and Mobile Cloud
solutions. We promote our brand through multiple means including
the public availability on our Web site of top level details for
our
e-business
performance indices (both page download and transaction), and
through our regular reporting and commentary to the media
regarding Internet performance-related events.
Our marketing programs include advertising, Internet marketing,
trade events, public relations, and other events such as User
Conferences and Executive Summits. User Conferences and
Executive Summits provide an opportunity for us and our partners
to brief chief information officers, chief technology officers,
information technology executives and network administrators on
emerging solutions, new methodologies and best practices to
improve mobile and online business performance.
Customer
Support and Maintenance
We provide customer support by email and telephone. Basic
support for all our services is available during the business
day. For a fee, advanced support is available for our Internet
Cloud products through Keynote Diagnostic Services for customers
who want analytical or diagnostic support, or who require access
24 hours per day, 7 days per week to Keynote experts
to assist them with their questions. We also provide ongoing
technical and post-contract support and maintenance for our SITE
systems either from our German subsidiary or at a
customers designated location.
10
Development
The Internet and mobile markets are characterized by rapid
technological developments, frequent product and service updates
and evolving industry standards such as Internet telephony,
wireless devices, and Wi-Fi networks. The ongoing evolution of
the Internet and mobile markets requires us to continually
improve the functionality, features and reliability of our
Internet and Mobile Cloud products and services, particularly in
response to competing offerings. Therefore, we believe that our
future success will depend in large part on our ability to
maintain and enhance our current products and services and to
develop or acquire new services and technologies that achieve
market acceptance. The success of product and service
introductions depends on several factors, including properly
defining the scope and timely completion, introduction and
market acceptance. If new Internet, networking or
telecommunication technologies or standards are widely adopted
or if other technological changes occur, we may need to expend
significant resources to adapt our products and services.
Competition
The market for our products and services is rapidly evolving.
Our competitors vary in size and in the scope and breadth of
their products and services. We face competition from companies
that offer Internet and mobile software and services with
features similar to our products and services such as Compuware
(which acquired Gomez), Hewlett-Packard (which acquired Mercury
Interactive), Neustar (which acquired Webmetrics), and a variety
of other Internet and mobile companies that offer a combination
of testing, market research and data collection services.
Customers could choose to use these companies products and
services or these companies could enhance their products and
services to offer all of the features we offer. As we expand the
scope of our products and services, we expect to encounter many
additional market-specific competitors.
We also could face competition from other companies, which
currently do not offer products and services similar to ours,
but offer software or services related to Web analytics
services, such as Webtrends, Adobe Systems (which acquired
Omniture) and IBM (which acquired Coremetrics), and free
services that measure Web site availability. In addition,
companies that sell systems management software, such as BMC
Software, Compuware, CA NSM, HP Software, Quest Software,
Attachmate, Precise Software, and IBMs Tivoli Unit, may
decide to offer products and services similar to ours. While we
have relationships with some of these companies, they could
choose to develop products and services similar to ours or to
offer our competitors products and services. We face
competition for our mobile services from companies such as Ascom
(which acquired Argogroup), JDS Uniphase (which acquired
Casabyte), Datamat and Mobile Complete.
In the future, we intend to expand our product and service
offerings and continue to measure and manage the performance of
emerging technologies which could face competition from other
companies. Some of our existing and future competitors have or
may have longer operating histories, larger customer bases,
greater brand recognition in similar businesses, and
significantly greater financial, marketing, technical and other
resources. In addition, some of our competitors may be able to
devote greater resources to marketing and promotional campaigns,
to adopt more aggressive pricing policies, and to devote
substantially more resources to technology and systems
development.
There are many large and small firms that offer computer network
and Internet-related consulting services. Because this area is
very competitive and we have limited resources dedicated to
delivering professional services, we may not succeed in selling
these services.
Increased competition may result in price reductions, increased
costs of providing our products and services and loss of market
share, any of which could seriously harm our business. We may
not be able to compete successfully against our current and
future competitors.
11
Intellectual
Property
We are a technology company whose success depends on developing,
updating, acquiring and protecting our intellectual property
assets.
Intellectual
Property Assets
Our principal intellectual property assets consist of our
trademarks, our trade names, our logos, our characters, our
design, our trade dress, our service marks, our patents, our
patent applications and the proprietary software we developed or
acquired to provide our products and services. Trademarks are
important to our business because they represent our brand name
and we use them in our marketing and promotional activities as
well as in the delivery of our products and services. The
trademarks or registered trademarks of Keynote Systems, Inc. in
the United States and other countries include
Keynote®,
DataPulse®,
CustomerScope®,
Keynote CE
Rankings®,
Keynote Customer Experience
Rankings®,
Perspective®,
Keynote Red
Alert®,
Keynote Traffic
Perspective®,
Keynote
WebEffective®,
The Internet Performance
Authority®,
MyKeynote®,
SIGOS®,
SITE®,
keynotetm
The Mobile & Internet Performance
Authoritytm,
Keynote
FlexUsetm.
All other trademarks are the property of their respective owners.
We currently have five issued U.S. patents and three
U.S. patent applications related to our Internet services.
We also have one issued German patent and fifteen German patent
applications related to our Mobile services. It is possible that
no patents will be issued from our current pending patent
applications and that our issued patents or potential future
patents may be found invalid or unenforceable, or otherwise be
successfully challenged. It is also possible that any patent
issued to us may not provide us with any competitive advantages,
that we may not develop future proprietary products or
technologies that can be patented, and that the patents of
others may seriously limit our ability to do business. In this
regard, we have not performed any comprehensive analysis of
patents of others that may limit our ability to do business.
Our proprietary software is an integral part of our Internet and
Mobile Cloud products and services and consists of the software
we developed or acquired to collect, store, and deliver our
measurement data to customers. We also have developed software
that we use to provision customers orders and to bill our
customers.
Protection
of Our Intellectual Property
The intellectual property we use in our business is important to
us. Despite our efforts, we may be unable to prevent others from
infringing upon or misappropriating our intellectual property,
which could harm our business.
Legal standards relating to the validity, enforceability and
scope of protection of intellectual property rights in
Internet-related industries are uncertain and still evolving,
and the future viability or value of any of our intellectual
property rights is uncertain. Effective trademark, copyright and
trade secret protection may not be available in every country in
which our products and services are distributed or made
available. Furthermore, our competitors may independently
develop similar technology that substantially limits the value
of our intellectual property, or they may design around patents
issued to us.
The use of our products and services by many of our customers is
governed by a Web-based subscription agreement, while additional
terms and conditions may be added by means of a formal, written
contract with some of our larger customers. Each time customers
use our products and services, they click on a Web
page to agree to terms and conditions that are posted on our Web
site, and our relationship with these customers is then governed
by these terms and conditions and any written agreements that
may exist. There is a possibility that a court, arbiter or
regulatory body could deem this type of agreement to be invalid
or determine that the terms and conditions governing the
agreement do not fully protect our intellectual property rights.
If that were to occur, our business could be harmed.
12
Licensed
Technology
We license certain statistical, graphical and database
technologies from third parties. We cannot assure you that these
technology licenses will not infringe the proprietary rights of
others or will continue to be available to us on commercially
reasonable terms, if at all. The loss of this technology could
require us to obtain substitute technology of lower quality or
performance standards or at a greater cost. If we do not obtain
or develop substitute technology, we could be unable to offer
all of the features or functionality that we desire to include
in our products and services.
Foreign
and Domestic Operations and Geographic Data
The United States represents our largest geographic marketplace.
Approximately 55%, 55%, and 57% of our total net revenue came
from customers in the United States during the years ended
September 30, 2010, 2009, and 2008, respectively. Our
overall operating performance in foreign countries, mainly those
in Europe, can be adversely affected by foreign currency
exchange rate fluctuations, primarily the Euro and to a lesser
extent the British pound.
Our geographic financial information is contained in Note 9
Geographic and Segment Information in the notes to
consolidated financial statements included in Item 8 of
this report on
Form 10-K.
Employees
As of September 30, 2010, we had a total of
323 employees, of which 207 were based in the United
States, 103 were based in Germany and 13 were based in other
international locations. None of our employees are represented
by a collective bargaining agreement nor have we experienced any
work stoppage. In our German subsidiary, our employees are
represented by a workers council which consists of
employees who are elected onto the council by their colleagues.
We believe that our relationships with our domestic and
international employees are good. Our future success depends on
our ability to attract, motivate and retain our key personnel.
We may be unable to retain our key employees, including our
management team and experienced engineers, or to attract,
assimilate or retain other highly qualified employees. There is
substantial competition for highly skilled employees with
experience in the Internet and mobile industries.
About
Us
We were incorporated in 1995. Our headquarters is located at 777
Mariners Island Blvd., San Mateo, CA and our telephone
number at that location is
(650) 403-2400.
Our company Web site is www.keynote.com although
information on that Web site shall not be deemed incorporated in
this report. Through a link on the Investor Relations section of
our Web site, we make available, free of charge, our annual
reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports of
Form 8-K,
and all amendments to those reports filed with the Securities
and Exchange Commission.
13
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.
Our results of operations could vary significantly from quarter
to quarter. If revenue or other financial results fall below
ours or investor expectations, we may not be able to increase
our revenue or reduce our spending rapidly in response to the
shortfall. Other factors that could affect our quarterly
operating results include those described below and elsewhere in
this report:
|
|
|
|
|
Fluctuations of foreign exchange rates;
|
|
|
|
The effect of global economic conditions on customers and
partners;
|
|
|
|
The rate of new and renewed subscriptions for our services,
particularly large customers;
|
|
|
|
The amount and timing of any reductions or increases by our
customers in their usage of our products and services;
|
|
|
|
Our ability to increase the number of Web sites we measure and
the scope of products and services we offer our existing
customers in a particular quarter;
|
|
|
|
The timing and service period of orders received during a
quarter, especially from new customers;
|
|
|
|
Our ability to successfully introduce new products and services
to offset any reductions in revenue from products and services
that are not as widely used or that are experiencing decreased
demand such as some of our Internet Cloud services;
|
|
|
|
The level of sales of our Mobile Cloud products and services and
the timing of customer acceptance during the period;
|
|
|
|
The timing and amount of 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;
|
|
|
|
Seasonal factors, such as our LoadPro services which are
typically higher in our first fiscal quarter due to customers
preparing their Web sites for the holiday buying season;
|
|
|
|
Future accounting pronouncements and changes in accounting
policies;
|
|
|
|
Future macroeconomic conditions in our domestic and
international markets, as well as the general level of
discretionary IT spending;
|
|
|
|
The timing and amount, if any, of impairment charges related to
potential write down of acquired assets in acquisitions or
charges related to the amortization of intangible assets from
acquisitions; and
|
|
|
|
The cost associated with and the integration of future
acquisitions or divestures.
|
Due to these and other factors, we believe that
period-to-period
comparisons of our results of operations are not meaningful and
should not be relied upon as indicators of our future
performance. It is possible that in some future periods, our
results of operations may be below the expectations of
public-market analysts and investors. If this occurs, the price
of our common stock may decline.
Our
business, which includes our operating results and financial
condition, is susceptible to additional risks associated with
international operations.
Our financial condition and operating results could be
significantly affected by risks associated with international
activities, including economic and labor conditions, political
instability, tax laws (including
14
United States taxes on foreign subsidiaries and the negative tax
implications related to moving cash from international locations
to the United States), and changes in the value of the United
States dollar versus foreign currencies. Margins on sales of our
products and services in foreign countries could be materially
adversely affected by foreign currency exchange rate
fluctuations, particularly the Euro as a significant portion of
our revenues are denominated in Euros.
Our primary exposure to movements in foreign currency exchange
rates relate mainly to
non-United
States dollar denominated sales in Europe, as well as
non-United
States dollar denominated operating expenses incurred throughout
the world. As was the case in the most recent year, volatility
of foreign currencies relative to the United States dollar
adversely affected the United States dollar value of our foreign
currency-denominated sales and earnings.
International sales in dollars were approximately 45% of our
total net revenue for the years ended September 30, 2010
and 2009. We expect to continue to commit significant resources
to our international activities. Conducting international
operations subjects us to risks we do not face in the United
States. These include:
|
|
|
|
|
currency exchange rate fluctuations, primarily the Euro;
|
|
|
|
seasonal fluctuations in purchasing patterns;
|
|
|
|
unexpected changes in regulatory requirements;
|
|
|
|
maintaining and servicing computer systems in distant locations;
|
|
|
|
longer accounts receivable payment cycles and difficulties in
collecting accounts receivable;
|
|
|
|
difficulties in managing and staffing international operations;
|
|
|
|
potentially adverse tax consequences, including restrictions on
the repatriation of earnings;
|
|
|
|
the burdens of complying with a wide variety of foreign laws;
|
|
|
|
difficulties in establishing and enforcing our intellectual
property rights in some countries; and
|
|
|
|
political or economic instability, war or terrorism in the
countries where we are doing business.
|
The Internet and mobile devices may not be used as widely in
other countries and the adoption of
e-business
may evolve slowly or may not evolve at all. As a result, we may
not be successful in selling our products and services to
customers in markets outside the United States.
We
have incurred in the past and may, in the future, incur losses,
and we may not sustain profitability.
While we were profitable in fiscal 2010 and 2009, we incurred
net losses in fiscal 2008, fiscal 2007 and in other prior fiscal
years. As of September 30, 2010, we had an accumulated
deficit of $138 million. If we are not able to increase our
revenues, it may be difficult to sustain profitability. In
addition, we are required under generally accepted accounting
principles to review our goodwill and identifiable intangible
assets for impairment when events or circumstances indicate that
the carrying value may not be recoverable. As of
September 30, 2010, we had $3.9 million of net
identifiable intangible assets and $63.2 million of
goodwill. We may in the future incur impairment charges in
connection with a write down of goodwill and identifiable
intangible assets due to changes in market conditions. In
addition, we have deferred tax assets which may not be fully
realized, which may contribute to additional losses. We are also
required to record as compensation expense, in accordance with
the Financial Accounting Standards Boards
(FASBs) guidance on stock compensation, the
cost of stock-based compensation awards. As a result of these
and other conditions, we may not be able to sustain
profitability in the future.
15
The
success of our business depends on maintaining a large customer
base, either by customers renewing their subscriptions for our
products and services and purchasing additional products and
services or by obtaining new customers.
To maintain and grow our revenue, we must maintain or increase
the overall size of our customer base, either through
maintaining high customer renewal rates, obtaining new customers
for our products and services,
and/or
selling additional products and services to existing customers.
Our customers have no obligation to renew our products and
services after the contract term and, therefore, they could
cease using our products and services at any time. In addition,
customers that renew may contract for fewer product and services
or at lower prices. Further, our customers may reduce their use
of our products and services during the term of their
subscription or purchase lower levels of our products and
service. We cannot project the level of renewal rates or the
prices at which customers renew subscriptions. The size of our
customer base and prices may decline as a result of a number of
factors, including competition, consolidations in the Internet
or mobile industries or if a significant number of our customers
cease operations.
Additionally, sales of our products and services may decline as
companies evaluate their technology spending in response to the
global economic environment. We have experienced in the past,
and may experience in the future, reduced spending,
cancellations, and non-renewals by our customers. If we
experience reduced renewal rates or if customers renew for a
lesser amount of our products and services, or if customers, at
any time, reduce the amount of products or services they
purchase from us for any reason, our revenue could decline
unless we are able to obtain additional customers or sources of
revenue, sufficient to replace lost revenue.
If our
Mobile Cloud products and services decline, we may not be able
to grow our revenue and our results of operations will be
harmed.
Revenue from our Mobile Cloud products and services was
$32.6 million for the year ended September 30, 2010.
Future growth for these products and services could be adversely
affected by a number of factors, including, but not limited to,
the difficulty in predicting demand; currency rate fluctuations;
global economic conditions; and our ability to successfully
compete against current or new competitors in this market. Our
business and our operating results could be harmed if we are not
able to continue to grow revenue from our Mobile Cloud products
and services.
The
inability of our products and services to perform properly could
result in loss of or delay in revenue, injury to our reputation
or other harm to our business.
We offer complex products and services, which may not perform at
the level our customers expect. Despite our testing, upgrades to
our existing or future products and services may not perform as
expected due to unforeseen problems, which could result in loss
of or delay in revenue, loss of market share, failure to achieve
market acceptance, diversion of development resources, injury to
our reputation, increased insurance costs or increased service
costs. In addition, we have in the past, and may in the future,
acquire, rather than develop internally, some of our products
and services.
These problems could also result in tort or warranty claims.
Although we attempt to reduce the risk of losses resulting from
any claims through warranty disclaimers and liability-limitation
clauses in our customer agreements, these contractual provisions
may not be enforceable in every instance. Furthermore, although
we maintain errors and omissions insurance, this insurance
coverage may not be adequate in any particular case. If a court
refused to enforce the liability-limiting provisions of our
contracts for any reason, or if liabilities arose that were not
contractually limited or adequately covered by insurance, we
could be required to pay damages.
A
disruption to our global monitoring network infrastructure could
impair our ability to serve and retain existing customers or
attract new customers.
Our operations depend upon our ability to maintain and protect
our data centers, which store and distribute all data collected
from our global monitoring network. We currently serve our
customers from facilities located in San Mateo, California;
Plano, Texas; and Nuremburg, Germany. Our primary operations
center is located at our corporate headquarters in
San Mateo, California, which is susceptible to earthquakes
and possible power outages.
16
We have occasionally experienced outages in the past and, if we
experience outages at our operations centers in the future, we
might not be able to promptly receive data from our measurement
computers and we might not be able to deliver our products and
services to our customers on a timely basis.
Although we maintain insurance against fires, earthquakes and
general business interruptions, the amount of coverage may not
be adequate in any particular case. If our operations centers
are damaged, this could disrupt our products and services, which
could impair our ability to retain existing customers or attract
new customers.
Any outage for any period of time or loss of customer data could
cause us to lose customers. Our operations systems are also
vulnerable to damage from break-ins, computer viruses,
unauthorized access, vandalism, fire, floods, earthquakes, power
loss, telecommunications failures and similar events. Our
insurance may not be adequate in any particular case.
Individuals who attempt to breach our network security, such as
hackers, could, if successful, misappropriate proprietary
information or cause interruptions in our products and services.
We might be required to expend significant capital and resources
to protect against, or to alleviate, problems caused by hackers.
We may not have a timely remedy against a hacker who is able to
breach our network security. In addition to intentional security
breaches, the inadvertent transmission of computer viruses could
expose us to litigation or to a material risk of loss.
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 ten largest customers accounted for approximately 31% and
34% of our total net revenue for the years ended
September 30, 2010 and 2009, respectively. We cannot be
certain that customers that have accounted for significant
revenue in past periods, individually or as a group, will renew,
will not cancel or will not reduce their products and services
and, therefore, continue to generate revenue in any future
period. In addition, our customers that have monthly renewal
arrangements may terminate their contract at any time with
little or no penalty. If we lose a major customer or group of
customers, our revenue could decline.
Our
investment in sales and marketing may not yield increased
customers or revenue.
We have invested in our sales and marketing activities to help
grow our business, including hiring additional sales personnel.
Typically, additional sales personnel can take time before they
become productive, and our marketing programs may also take time
before they yield additional business, if any. We cannot assure
you that these efforts will be successful, or that these
investments will yield significantly increased revenue in the
near or long-term.
Our
business could be harmed by adverse economic conditions or
reduced spending on information technology.
Our operations and performance depend significantly on worldwide
economic conditions. Uncertainty about current global economic
conditions poses a risk as consumers and businesses have reduced
and may continue to reduce spending in response to tighter
credit, negative financial news
and/or
declines in income or asset values, which could have a material
negative effect on the demand for our products and services. A
decrease in consumer demand also could have a variety of
negative effects on our customers demand for our products
and services. Other factors that could influence demand include
labor and healthcare costs, access to credit, consumer
confidence, and other macroeconomic factors affecting spending
behavior. These and other economic factors could have a material
adverse effect on our financial results, and in certain cases,
may reduce our revenue, increase our costs, and lower our gross
margin percentage, or require us to recognize impairments of our
assets. In addition, real estate values across the United States
have been adversely affected by the global economic downturn and
tighter credit conditions, and we cannot assure you that the
value of our building will not be further affected by these
conditions.
17
We
must retain qualified personnel in a competitive marketplace, or
we may not be able to grow our business.
We may be unable to retain our key employees, namely our
management team and experienced engineers, or to attract,
assimilate or retain other highly qualified employees. There is
substantial competition for highly skilled employees. If we fail
to attract and retain key employees, our business could be
harmed.
If we
do not complement our direct sales force with relationships with
other companies to help market our products and services, we may
not be able to grow our business.
To increase sales worldwide, we must complement our direct sales
force with relationships with companies to help market and sell
our products and services to their customers. If we are unable
to maintain our existing marketing and distribution
relationships, or fail to enter into additional relationships,
we may have to devote substantially more resources to direct
sales and marketing efforts. We would also lose anticipated
revenue from customer referrals and other co-marketing benefits.
In the past, we have had to terminate relationships with some of
our international resellers, and we may be required to terminate
other reseller relationships in the future. As a result, we may
have to commit resources to supplement our direct sales effort
to find additional resellers in foreign countries.
Our success depends in part on the ability of these companies to
help market and sell our products and services. Our existing
relationships do not, and any future relationships may not,
afford us any exclusive marketing or distribution rights.
Therefore, these companies could reduce their commitment to us
at any time in the future. Many of these companies have multiple
relationships and they may not regard us as significant for
their business. In addition, these companies generally may
terminate their relationships with us, pursue other
relationships with our competitors, or develop or acquire
products or services that compete with our services. Even if we
succeed in entering into these relationships, they may not
result in additional customers or revenue.
If the
market does not accept our professional services, our results of
operations could be harmed.
Professional services revenue represented approximately 11% and
12% of total net revenue for the years ended September 30,
2010 and 2009, respectively. We will need to successfully market
these services in order to maintain or increase professional
services revenue. The market for these services is very
competitive. Each professional services engagement typically
spans over a one month to twelve month period and, therefore, it
is more difficult for us to predict the amount of professional
services revenue recognized in any particular quarter. Our
business and operating results could be harmed if we cannot
maintain or increase our professional services revenue.
We
face competition that could make it difficult for us to acquire
and retain customers.
The market for our products and services is rapidly evolving.
Our competitors vary in size and in the scope and breadth of
their products and services. We face competition from companies
that offer Internet and mobile software and services with
features similar to our products and services such as Compuware,
Hewlett-Packard, Neustar and a variety of other Internet and
mobile companies that offer a combination of testing, market
research and data collection services. Customers could choose to
use these companies products and services or these
companies could enhance their products and services to offer all
of the features we offer. As we expand the scope of our products
and services, we expect to encounter many additional
market-specific competitors.
In addition, there has been a trend toward industry
consolidation in our markets for several years. We expect this
trend to continue as companies attempt to strengthen or hold
their market positions in an evolving industry and as companies
are acquired or are unable to continue operations. In prior
years, Compuware acquired Gomez,
Hewlett-Packard
acquired Mercury Interactive, and Neustar acquired Webmetrics.
We believe that industry consolidation may result in stronger
competitors that are better able to compete for customers. This
could lead to more variability in operating results and could
have a material adverse effect on our business, operating
results, and financial condition. Furthermore, rapid
consolidation could also lead to fewer customers and partners,
with the effect that the loss of a major customer could harm our
revenue.
18
We could also face competition from other companies, which
currently do not offer products and services similar to ours,
but offer software or services related to Web analytics
services, such as Webtrends, Adobe Systems (which acquired
Omniture) and IBM (which acquired Coremetrics), and free
services that measure Web site availability. In addition,
companies that sell systems management software, such as BMC
Software, Compuware, CA NSM, HP Software, Quest Software,
Attachmate, Precise Software, and IBMs Tivoli Unit, may
decide to offer products and services similar to ours. While we
have relationships with some of these companies, they could
choose to develop products and services similar to ours or to
offer our competitors services. We face competition for
our mobile products and services from companies such as Ascome
(which acquired Argogroup), JDS Uniphase (which acquired
Casabyte), Datamat and Mobile Complete.
In the future, we intend to expand our product and service
offerings and continue to measure and manage the performance of
emerging technologies which could face competition from other
companies. Some of our existing and future competitors have or
may have longer operating histories, larger customer bases,
greater brand recognition in similar businesses, and
significantly greater financial, marketing, technical and other
resources. In addition, some of our competitors may be able to
devote greater resources to marketing and promotional campaigns,
to adopt more aggressive pricing policies, and to devote
substantially more resources to technology and systems
development.
There are many experienced firms that offer computer network and
Internet-related consulting services. These consulting services
providers include consulting companies, such as Accenture, as
well as consulting divisions of large technology companies, such
as IBM. Because this area is very competitive, and we have
limited resources dedicated to delivering professional services,
we may not succeed in selling these services.
Increased competition may result in price reductions, increased
costs of providing our products and services and loss of market
share, any of which could seriously harm our business. We may
not be able to compete successfully against our current and
future competitors.
If we
do not continually improve our products and services in response
to technological changes, including changes to the Internet and
mobile networks, we may encounter difficulties retaining
existing customers and attracting new customers.
The ongoing evolution of the Internet and mobile networks has
led to the development of new technologies and communications
protocols such as Internet telephony, wireless devices, Wi-Fi
networks, HSDPA and LTE, as well as increased use of various
applications, such as VoIP and video. These developing
technologies require us to continually improve the
functionality, features and reliability of our products and
services, particularly in response to offerings by our
competitors. If we do not succeed in developing and marketing
new products and services that respond to competitive and
technological developments and changing customer needs, we may
encounter difficulties retaining existing customers and
attracting new customers.
The success of new products and services depends on several
factors, including proper definition of the scope and timely
completion, introduction and market acceptance. If new Internet,
networking or telecommunication technologies or standards are
widely adopted or if other technological changes occur, we may
need to expend significant resources to adapt to these
developments or we could lose market share or some of our
products and services could become obsolete.
The
market price of our common stock can be volatile.
The stock market in recent years has experienced significant
price and volume fluctuations, and has recently experienced
substantial volatility that has affected the market prices of
technology companies. These fluctuations have often been
unrelated to or disproportionately impacted by the operating
performance of these companies. The market for our common stock
has been subject to similar fluctuations. Factors such as
fluctuations in our operating results, announcements of events
affecting other companies in the technology industry, currency
fluctuations and general market conditions may cause the market
price of our common stock to decline. In addition, because of
the relatively low trading volume and the fact that we only have
approximately 14.9 million shares outstanding at
September 30, 2010, our stock price could be more volatile
than companies with higher trading volumes and larger numbers of
shares available for trading in the public market.
19
If we
were required to write down all or part of our goodwill, our net
income and net worth could be materially adversely
affected.
We had $63.2 million of goodwill recorded on our
consolidated balance sheet as of September 30, 2010.
Goodwill represents the excess of cost over the fair market
value of net assets acquired in business combinations. If our
market capitalization drops significantly below the amount of
net equity recorded on our balance sheet, it could indicate a
decline in our value and would require us to further evaluate
whether our goodwill has been impaired. At
September 30th of each year, we perform an annual
review of our goodwill to determine if it has become impaired,
in which case we would write down the impaired portion of our
goodwill. We also evaluate goodwill for impairment whenever
events or changes in circumstances indicate that the carrying
amount may not be recoverable. If we were required to write down
all or a significant part of our goodwill, our operating results
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 we may realize losses
on these.
We maintain our cash, cash equivalents and short-term
investments with a number of financial institutions around the
world, and our results could vary materially from expectations
depending on gains or losses realized on the sale or exchange of
investments; impairment charges related to debt securities as
well as other investments; and interest rates. The volatility in
the financial markets and overall economic conditions increases
the risk that the actual amounts realized in the future on our
investments could differ significantly from the fair values
currently assigned to them.
If the
protection of our proprietary technology is inadequate, our
competitors may gain access to our technology, and our market
share could decline.
Our success is heavily dependent on our ability to create
proprietary technology and to protect and enforce our
intellectual property rights in that technology, as well as our
ability to defend against adverse claims of third parties with
respect to our technology and intellectual property. To protect
our proprietary technology, we rely primarily on a combination
of contractual provisions, confidentiality procedures, trade
secrets, copyright and trademark laws, and patents. Despite our
efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products and services or
obtain and use information that we regard as proprietary.
The laws of some foreign countries do not protect our
proprietary rights to as great an extent as do the laws of the
United States. Our means of protecting our proprietary rights
may not be adequate and unauthorized third parties, including
our competitors, may independently develop similar or superior
technology, duplicate or reverse engineer aspects of our
products and services, or design around our patented technology
or other intellectual property.
There can be no assurance or guarantee that any products,
services or technologies that we are presently developing, or
will develop in the future, will result in intellectual property
that is subject to legal protection under the laws of the United
States or a foreign jurisdiction and that produces a competitive
advantage for us.
Others
might bring infringement claims which could harm our
business.
In recent years, there has been significant litigation in the
United States involving patents and other intellectual property
rights. We could become subject to intellectual property
infringement claims as our products and services overlap with
competitive offerings. In addition, we are, or could be, subject
to other legal proceedings, claims, and litigation arising in
the ordinary course of our business. Any of these claims, even
if not meritorious, could be expensive and divert
managements attention from operating our company. If we
become liable to others for infringement of their intellectual
property rights, we could be required to pay a substantial
damage award, to develop non-infringing technology, obtain a
license to use the infringed intellectual property, or cease
selling the products and services that contain the infringing
intellectual property. We may be unable to develop
non-infringing technology or to obtain a license on commercially
reasonable terms, or at all.
20
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.
Our measurement computers and mobile devices that we use to
provide many of our products and services are located at
facilities that are not owned by our customers or us. Instead,
these devices are installed at locations near various worldwide
Internet access points. We do not own or operate the facilities,
and we have little control over how these devices are maintained
on a
day-to-day
basis. We do not have long-term contractual relationships with
the companies that operate the facilities where our measurement
computers are located. We may have to find new locations for
these computers if we are unable to maintain relationships with
these companies or if these companies cease their operations as
some have done due to bankruptcies or being acquired. In
addition, if our measurement computers and mobile devices cease
to function properly, we may not be able to repair or service
them on a timely basis, as we may not have immediate access to
our measurement computers and measurement devices. Should
performance problems arise, our ability to collect data in a
timely manner could be impaired if we are unable to quickly
maintain and repair our computers and devices.
The
success of our business depends on the continued use of Internet
and mobile networks by business and consumers for
e-business
and communications and, if usage of these networks declines, our
operating results and working capital would be
harmed.
Because our business is based on providing Internet and Mobile
Cloud products and services, Internet and mobile networks must
continue to be used as a means of electronic business and
communications. In addition, we believe that the use of Internet
and mobile networks for conducting business could be hindered
for a number of reasons, including, but not limited to:
|
|
|
|
|
security concerns, including the potential for fraud or theft of
stored data and information communicated over Internet and
mobile networks;
|
|
|
|
inconsistent quality of service, including outages of popular
Web sites and mobile networks;
|
|
|
|
delay in the development or adoption of new standards;
|
|
|
|
inability to integrate business applications with the
Internet; and
|
|
|
|
the need to operate with multiple and frequently incompatible
products.
|
Improvements
to the infrastructure of Internet and mobile networks could
reduce or eliminate demand for our Internet and Mobile Cloud
products and services.
The demand for our products and services could be reduced or
eliminated if future improvements to the infrastructure of
Internet or mobile networks lead companies to conclude that the
measurement and evaluation of their performance is no longer
important to their business. We believe that the vendors and
operators that supply and manage the underlying infrastructure
still look to improve the speed, availability, reliability and
consistency of Internet and mobile networks. If these vendors
and operators succeed in significantly improving the performance
of these networks, which would result in corresponding
improvements in the performance of companies Web sites,
mobile networks and services, demand for our products and
services would likely decline, which would harm our operating
results.
If we
need to raise additional capital and are unable to do so, our
business could be harmed.
We believe that our available cash, cash equivalents and
short-term investments will enable us to meet our capital and
operating requirements for at least the next 12 months.
However, if cash is required for unanticipated needs, we may
need additional capital during that period. If the market for
our products develops at a slower pace than anticipated, we
could be required to raise substantial additional capital. We
cannot be certain that additional capital will be available to
us on favorable terms, or at all. If we were unable to raise
additional capital when required, our business could be
seriously harmed.
21
We
have anti-takeover protections that may delay or prevent a
change in control that could benefit our
stockholders.
Our amended and restated certificate of incorporation and bylaws
contain provisions that could make it more difficult for a third
party to acquire us without the consent of our Board of
Directors. These provisions include:
|
|
|
|
|
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 have also adopted a stockholder rights plan that may
discourage, delay or prevent a change of control and make any
future unsolicited acquisition attempt more difficult. The
rights will become exercisable only upon the occurrence of
certain events specified in the rights plan, including the
acquisition of 20% of our outstanding common stock by a person
or group. In addition, it is the policy of our Board of
Directors that a committee consisting solely of independent
directors will review the rights plan at least once every three
years to consider whether maintaining the rights plan continues
to be in the best interests of Keynote and our stockholders. The
Board may amend the terms of the rights without the approval of
the holders of the rights.
We may
face difficulties assimilating, and may incur costs associated
with, any future acquisitions.
We have completed several acquisitions in the past and, as a
part of our business strategy, we may seek to acquire or invest
in additional businesses, products or technologies that we feel
could complement or expand our business, augment our market
coverage, enhance our technical capabilities, or may otherwise
offer growth opportunities. Future acquisitions could create
risks for us, including:
|
|
|
|
|
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 managements attention from other business
concerns;
|
|
|
|
entry in new businesses in which we have little direct
experience;
|
|
|
|
difficulties in marketing additional services to the acquired
companies customer base or to our customer base;
|
|
|
|
adverse effects on existing business relationships with
resellers of our products and services, our customers and other
business partners;
|
|
|
|
the need to integrate or enhance the systems of an acquired
business;
|
|
|
|
impairment charges related to potential write down of acquired
assets in acquisitions;
|
|
|
|
failure to realize any of the anticipated benefits of the
acquisition; and
|
|
|
|
use of substantial portions of our available cash, or dilution
in equity if stock is used, to consummate the acquisition
and/or
operate the acquired business.
|
Failure
to maintain effective internal controls and changes to existing
regulations may increase our costs and risk of noncompliance as
well as adversely affect our stock price, revenue, and reported
financial results.
As a public company, we incur significant legal, accounting and
other expenses. In addition, the Sarbanes-Oxley Act, the
recently-enacted Dodd-Frank Consumer Protection Act and rules
subsequently implemented by the SEC and The Nasdaq Stock Market,
have imposed and will impose a variety of requirements and
restrictions on public companies, including requiring changes in
corporate governance practices. Our management and other
22
personnel will need to devote a substantial amount of time to
these compliance initiatives. Moreover, these rules and
regulations will increase our legal and financial compliance
costs and will make some activities more time-consuming and
costly.
Moreover, generally accepted accounting principles, or GAAP, are
promulgated by, and are subject to the interpretation of the
FASB and the SEC. New accounting guidance or taxation rules and
varying interpretations of accounting guidance or taxation
practices have occurred and may occur in the future. Any future
changes in accounting guidance or taxation rules or practices
may have a significant effect on how we report our results and
may even affect our reporting of transactions completed before
the change is effective. In addition, a review of existing or
prior accounting practices may result in a change in previously
reported amounts. For example, the FASB has recently issued new
accounting guidance related to revenue recognition and the SEC
is considering adoption of international financial reporting
standards. This change to existing rules, future changes, if
any, or the questioning of current practices may adversely
affect our reported financial results, our ability to remain
listed on the Nasdaq Global Market, or the way we conduct our
business and subject us to regulatory inquiries or litigation.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
As of September 30, 2010, our facilities primarily
consisted of our headquarters building in San Mateo,
California, an 188,000 square foot building which we own.
We currently occupy approximately 42,000 square feet of
this facility, which is our principal sales, marketing, product
development, operations and administrative location and contains
our primary data center. In addition, we lease
25,100 square feet in Nuremberg, Germany for our Mobile
operations, including sales, operations and administration;
8,200 square feet in Plano, Texas for our inside sales,
support and operations; and 5,700 square feet in Seattle,
Washington for our Mobile operations. We also lease sales
offices, in Austin, Texas; Alexandria, Virginia; Paris, France;
Toronto, Canada; Reading, United Kingdom; Stockholm, Sweden; and
Hamburg, Germany.
From time to time, we consider alternatives related to our
long-term facilities needs. While we believe our existing
facilities are adequate to meet our immediate needs, it may
become necessary to lease, acquire or dispose of space to
accommodate any future business needs.
|
|
Item 3.
|
Legal
Proceedings
|
In August 2001, we and certain of our current and former
officers were named as defendants in two securities
class-action
lawsuits based on alleged errors and omissions concerning
underwriting terms in the prospectus for our initial public
offering. A Consolidated Amended Class Action Complaint for
Violation of the Federal Securities Laws (Consolidated
Complaint) was filed on or about April 19, 2002, and
alleged claims against us, certain of our officers, and
underwriters of our September 24, 1999 initial public
offering (underwriter defendants), under
Sections 11 and 15 of the Securities Act of 1933, as
amended, and under Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, as amended. The lawsuit alleged
that the defendants participated in a scheme to inflate the
price of our stock in its initial public offering and in the
aftermarket through a series of misstatements and omissions
associated with the offering. The lawsuit is one of several
hundred similar cases pending in the Southern District of New
York that have been consolidated by the court.
We were a party to a global settlement with the plaintiffs that
would have disposed of all claims against us with no admission
of wrongdoing by us or any of our present or former officers or
directors. The settlement agreement had been preliminarily
approved by the Court. However, while the settlement was
awaiting final approval by the District Court, in December 2006
the Court of Appeals reversed the District Courts
determination that six focus cases could be certified as class
actions. In April 2007, the Court of Appeals denied
plaintiffs petition for rehearing, but acknowledged that
the District Court might certify a more limited class. At a
June 26, 2007 status conference, the Court approved a
stipulation withdrawing the proposed settlement. On
August 14, 2007, plaintiffs filed amended complaints in the
focus cases, and a motion for class certification in the focus
cases on September 27, 2007. On November 13, 2007,
defendants in the focus cases filed a motion to dismiss the
amended complaints for
23
failure to state a claim, which the District Court denied in
March 2008. Plaintiffs, the issuer defendants (including us),
the underwriter defendants, and the insurance carriers for the
defendants, have engaged in mediation and settlement
negotiations. The parties reached a settlement agreement, which
was submitted to the District Court for preliminary approval on
April 2, 2009. As part of this settlement, our insurance
carrier has agreed to assume our entire payment obligation under
the terms of the settlement. On June 10, 2009, the District
Court granted preliminary approval of the proposed settlement.
After a September 10, 2009 hearing, the District Court gave
final approval to the settlement on October 5, 2009.
Several objectors have filed notices of appeal to the United
States Court of Appeals for the Second Circuit from the District
Courts October 5, 2009 order approving the
settlement. Although the District Court has granted final
approval of the settlement, there can be no guarantee that it
will not be reversed on appeal. We believe that we have
meritorious defenses to these claims. If the settlement is not
implemented and the litigation continues against us, we would
continue to defend against this action vigorously.
In addition, in October 2007, a lawsuit was filed in the United
States District Court for the Western District of Washington by
Vanessa Simmonds, captioned Simmonds v. JPMorgan
Chase & Co., et al.,
No. 07-1634,
alleging that the underwriters violated section 16(b) of
the Securities Exchange Act of 1934, 15 U.S.C.
section 78p(b), by engaging in short-swing trades, and
seeks disgorgement to us of profits from the underwriters in
amounts to be proven at trial. On February 28, 2008,
Ms. Simmonds filed an amended complaint. The suit names us
as a nominal defendant, contains no claims against us, and seeks
no relief from us. This lawsuit is one of more than fifty
similar actions filed in the same court. On July 25, 2008,
the underwriter defendants in the various actions filed a joint
motion to dismiss the complaints for failure to state a claim.
The parties entered into a stipulation, entered as an order by
the Court, that we are not required to answer or otherwise
respond to the amended complaint. Accordingly, we did not join
the motion to dismiss filed by certain issuers. On
March 12, 2009, the Court dismissed the complaint in this
lawsuit with prejudice. On April 10, 2009, the plaintiff
filed a notice of appeal of the District Courts order, and
thereafter the underwriter defendants filed a cross appeal
to a portion of the District Courts order that dismissed
thirty (30) of the cases without prejudice following the
moving issuers motion to dismiss. On May 27, 2009,
the Ninth Circuit issued an order stating that the cases were
not selected for inclusion in the mediation program, and on
June 22, 2009 issued an order granting the parties
joint motion filed on May 22, 2009 to consolidate the 54
appeals and 30 cross-appeals. Briefing on the appeal was
completed on November 17, 2009. The Court heard oral
argument on October 5, 2010 and the Courts decision
may be issued at any time. No amount has been accrued as of
September 30, 2010 since management believes that our
liability, if any, is not probable and cannot be reasonably
estimated.
We are subject to other legal proceedings, claims, and
litigation arising in the ordinary course of business. While the
outcome of these matters is currently not determinable,
management does not expect that the ultimate costs to resolve
these matters will have a material adverse effect on our
consolidated financial position, results of operations, or cash
flows.
|
|
Item 4.
|
(Removed
and Reserved)
|
24
|
|
Item 4A.
|
Executive
Officers
|
The following table presents information regarding our executive
officers and other key employees as of December 1, 2010:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Umang Gupta
|
|
|
61
|
|
|
Chairman of the Board and Chief Executive Officer
|
Curtis Smith
|
|
|
45
|
|
|
Chief Financial Officer
|
Anshu Agarwal
|
|
|
41
|
|
|
Vice President of Marketing
|
Donald Aoki
|
|
|
53
|
|
|
Senior Vice President of Keynote Professional Services
|
Vik Chaudhary
|
|
|
45
|
|
|
Vice President of Product Management and Corporate Development
|
Adil Kaya
|
|
|
43
|
|
|
Managing Director of Keynote SIGOS
|
Krishna Khadloya
|
|
|
51
|
|
|
Vice President of Engineering
|
Jeffrey Kraatz
|
|
|
56
|
|
|
Senior Vice President of Worldwide Sales and Services
|
Martin Löhlein
|
|
|
44
|
|
|
Managing Director of Keynote SIGOS
|
David Peterson
|
|
|
49
|
|
|
Chief Accounting Officer
|
Eric Stokesberry
|
|
|
42
|
|
|
Vice President of Operations
|
Umang Gupta has served as one of our directors since
September 1997 and as our Chief Executive Officer and Chairman
of the Board of Directors since December 1997. From 1996 to
1997, he was a private investor and an advisor to
high-technology companies. From 1984 to 1996, he was the
founder, Chairman of the Board and Chief Executive Officer of
Gupta Technologies, a client/server database and tools company.
Prior to that, he held various positions with Oracle Corporation
and IBM. Mr. Gupta holds a Bachelor of Science degree in
Chemical Engineering from the Indian Institute of Technology,
Kanpur, India, and an M.B.A. degree from Kent State University.
Curtis Smith has served as our Chief Financial Officer
since July 2010. From February 2006 until joining Keynote,
Mr. Smith held various positions at GCA Savvian Advisors,
most recently as a Partner and Managing Director. From 2003 to
October 2005, Mr. Smith served as Principal with Broadpoint
Gleacher Securities Group, Inc. Prior to that, he worked for
Credit Suisse First Bostons technology group where he
served as Vice President. Mr. Smith holds a Bachelors of
Administration degree from Brigham Young University and an
M.B.A. from University of Southern California.
Anshu Agarwal has served as our Vice President of
Marketing since May 2008. Mr. Agarwal served as our
Executive Director of Marketing from February 2007 to April 2008
and Senior Director of Marketing from April 2006 to January
2007. From January 2002 until joining Keynote, Mr. Agarwal
was at Allianz/Firemans fund, where he last held the
position of Senior Director of Marketing. Prior to that,
Mr. Agarwal served in various positions at a number of
technology companies, including Shutterfly.com, Sparks.com,
Foundry Networks, and Hewlett Packard Company. He holds a
Bachelors of Administration degree from Rutgers University and
an M.B.A. from NYU Stern School of Business.
Donald Aoki has served as our Senior Vice President of
Keynote Professional Services since July 2008. Mr. Aoki
joined Keynote in May 1997 and has served as our General Manager
of Customer Experience Management, Senior Vice President of
Engineering and Operations, and Vice President of Engineering.
Prior to joining Keynote, he served as a Business Unit General
Manager at Aspect Telecommunications, a supplier of customer
relational management solutions. Mr. Aoki holds a Bachelors
of Science degree in Computer Science from the University of
Southern California and a Masters of Science degree in
Electrical Engineering and Computer Science from the
Massachusetts Institute of Technology.
Vik Chaudhary has served as our Vice President of Product
Management and Corporate Development since June 2007.
Mr. Chaudhary joined Keynote in May 2002 and has served as
our Vice President of Marketing and Senior Director of Corporate
Development. From March 2000 until joining Keynote,
Mr. Chaudhary was the founder and Chief Executive Officer
of Bizmetric, an online business measurements company. Prior to
that, he was
25
Director of Product Management at Gupta Technologies and led
software engineering teams at Oracle Corporation.
Mr. Chaudhary holds a Bachelors of Science degree in
Computer Science and Engineering from the Massachusetts
Institute of Technology.
Adil Kaya has served as Managing Director of Keynote
SIGOS since April 2008. Prior to that, Mr. Kaya served as
Director of Sales and Professional Services at Keynote SIGOS.
From 1990 until its acquisition by Keynote in April 2006, he
served as Director of Sales and Professional Services at SIGOS
GmbH. Mr. Kaya holds a Masters degree in Electrical
Engineering from the University of Applied Sciences in Cologne,
Germany.
Krishna Khadloya has served as our Vice President of
Engineering since April 2006. Mr. Khadloya joined Keynote
in September 1999 and has served as our Director and Senior
Director of Engineering. Prior to that, he served as Director of
Research and Development at Mentor Graphics Corporation, an
electronic design automation software company. Mr. Khadloya
holds a Masters of Science degree in Computer Science from State
University of New York Albany and a Bachelors of Science degree
in Electrical and Electronics Engineering from Birla Institute
of Technology and Science at Pilani, India. He has attended the
Executive Program at Stanford Universitys Graduate School
of Business.
Jeffrey Kraatz has served as our Senior Vice President of
Worldwide Sales and Services since May 2007. Mr. Kraatz
joined Keynote in April 2006 as Vice President of Sales Americas
and Asia Pacific. From June 2004 until joining Keynote,
Mr. Kraatz was the Vice President of Worldwide Sales for
Caspian Networks, an advanced IP router company. From September
2002 to May 2004, he was the founder of Strategic Alliance
Worldgroup, an Asian focused international sales and marketing
consulting firm. From April 1999 to March 2002, he was CEO of
two
business-to-business
electronic-commerce companies, Netclerk and Fastxchange. Prior
to that, he was Vice President of Sales and Marketing at
Warpspeed Communications, held a number of senior management
positions with Octel Communications, and spent ten years working
at SPRINT. He holds a Bachelors of Administration degree in
Economics from University of California, Los Angeles.
Martin Löhlein has served as Managing Director of
Keynote SIGOS since April 2008. Prior to that,
Mr. Löhlein served as Director of Research and
Development at Keynote SIGOS. From 1991 until its acquisition by
Keynote in April 2006, he served as Director of Research and
Development at SIGOS GmbH. Mr. Löhlein holds a
Bachelors of Science degree in Telecommunications Engineering
from Georg-Simon-Ohm University of Applied Sciences in
Nuremberg, Germany.
David Peterson has served as Chief Accounting Officer
since July 2010. Mr. Peterson joined Keynote in July 2009
as Corporate Controller. He held various Vice President and
Senior Vice President positions at BenefitStreet, Inc., a
financial services company from June 2007 to January 2009, and
was Corporate Controller at QuickLogic Corporation from April
2003 to June 2007, a public fabless semiconductor company. Prior
to that, he held various positions at Spectrian Corporation,
Philips Semiconductors, Fujitsu Microelectronics,
PriceWaterhouse, and Ernst & Whinney.
Mr. Peterson received a Bachelors of Science degree in
Accounting from Oklahoma State University and was a Certified
Public Accountant in Oklahoma.
Eric Stokesberry has served as our Vice President of
Operations since November 2004. Mr. Stokesberry joined
Keynote in 1998 as a Senior Software Engineer. Since then, he
has served as Manager and Director of Test Engineering as well
as Senior Director of Operations. Prior to joining Keynote, he
worked at Network General, both as an engineer and as a product
manager. Mr. Stokesberry holds a Bachelors of Science
degree in Electrical Engineering from Stanford University.
26
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Price
Range of Common Stock
Our common stock has traded on the Nasdaq Global Market under
the symbol KEYN since our initial public offering on
September 24, 1999. The following table presents the high
and low sales price per share of our common stock for the
periods indicated, as reported on the Nasdaq Global Market:
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
Fiscal Year ended September 30, 2010:
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
11.92
|
|
|
$
|
8.89
|
|
Third Quarter
|
|
|
12.18
|
|
|
|
8.96
|
|
Second Quarter
|
|
|
11.93
|
|
|
|
9.47
|
|
First Quarter
|
|
|
11.88
|
|
|
|
9.18
|
|
Fiscal Year ended September 30, 2009:
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
11.32
|
|
|
$
|
7.25
|
|
Third Quarter
|
|
|
9.24
|
|
|
|
6.76
|
|
Second Quarter
|
|
|
9.47
|
|
|
|
6.61
|
|
First Quarter
|
|
|
13.52
|
|
|
|
6.34
|
|
On December 6, 2010, we had 14,975,109 shares of our
common stock outstanding held by 58 stockholders of record.
Because many brokers and other institutions hold our stock on
behalf of stockholders, we believe the total number of
beneficial holders is greater than that represented by these
record holders.
The market price of our common stock has fluctuated in the past
and is likely to fluctuate in the future. In addition, the
market prices of technology companies securities have been
volatile. Accordingly, the price of our common stock could be
volatile due to a variety of factors, including those described
under Risk Factors in Item 1A.
Dividend
Policy
Prior to November 2009, we had not declared or paid any cash
dividends on our common stock or other securities. In November
2009 and each subsequent quarter thereafter, we announced and
paid a dividend of $0.05 per share payable to stockholders of
record as of December 1, 2009, March 1, 2010,
June 1, 2010 and September 1, 2010, respectively. In
November 2010, we announced a dividend of $0.06 per share
payable to stockholders of record as of December 1, 2010.
In the future, we currently intend to pay a similar dividend on
a quarterly basis. However, our decision to continue to do so
will be affected by our future results of operations, financial
position, business, changes to applicable tax laws and
regulations, and the various other factors that may affect our
overall business, including those set forth in Risk
Factors. Accordingly, we cannot assure you that in the
future we will continue to pay a quarterly dividend of this
amount, or at all.
27
Equity
Plans
As of September 30, 2010, we maintained our 1999 Equity
Incentive Plan and 1999 Employee Stock Purchase Plan, both of
which were approved by our stockholders. The following table
contains information about equity awards under those plans as of
September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c)
|
|
|
|
(a)
|
|
|
|
|
|
Number of Shares
|
|
|
|
Number of Shares to
|
|
|
(b)
|
|
|
Remaining Available for
|
|
|
|
be Issued Upon
|
|
|
Weighted Average
|
|
|
Equity Compensation Plans
|
|
|
|
Exercise of
|
|
|
Exercise Price of
|
|
|
(Excluding Shares Reflected
|
|
Plan Category
|
|
Outstanding Options
|
|
|
Outstanding Options
|
|
|
in Column (a))
|
|
|
Equity compensation plans approved by stockholders
|
|
|
4,527,726
|
(1)
|
|
$
|
11.51
|
(2)
|
|
|
1,558,028
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,527,726
|
|
|
$
|
11.51
|
|
|
|
1,558,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
This number includes 4,039,133 stock options outstanding and
488,593 RSUs issued under the 1999 Equity Incentive Plan. |
|
(2) |
|
These weighted average exercise prices do not reflect the shares
that will be issued upon the vesting of outstanding awards under
RSUs. |
|
(3) |
|
There were 1,418,950 shares that remained available for
grant under the 1999 Equity Incentive Plan and
139,078 shares that remained available for grant under the
1999 Employee Stock Purchase Plan. All of the shares available
for grant under the 1999 Equity Incentive Plan may be issued as
restricted stock. |
Purchases
of Equity Securities
We did not repurchase any common stock during fiscal year 2010.
If we were to make additional repurchases of shares of our
common stock, we could face additional limits on our use of net
operating losses.
28
Stock
Price Performance Graph
The information contained in the Performance Graph shall not
be deemed to be soliciting material or
filed with the SEC or subject to the liabilities of
Section 18 of the Securities Exchange Act of 1934, as
amended (the Exchange Act), except to the extent
that we specifically incorporate it by reference into a document
filed under the Securities Act of 1933, as amended (the
Securities Act) or the Exchange Act.
The following graph and table compares the cumulative total
stockholder return on our common stock, the NASDAQ Composite
Index and iShares S&P North Amer Tech-Software. The graph
and table assume that $100 was invested in our common stock, the
NASDAQ Composite Index and iShares S&P North Amer
Tech-Software on September 30, 2005, and calculates the
annual return through September 30, 2010. The stock price
performance on the following graph and table is not necessarily
indicative of future stock price performance.
Cumulative
Total Return
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Keynote Systems, Inc.
|
|
$
|
100
|
|
|
$
|
81
|
|
|
$
|
106
|
|
|
$
|
102
|
|
|
$
|
73
|
|
|
$
|
90
|
|
NASDAQ Composite Index
|
|
$
|
100
|
|
|
$
|
105
|
|
|
$
|
126
|
|
|
$
|
97
|
|
|
$
|
99
|
|
|
$
|
110
|
|
iShares S&P North Amer Tech-Software
|
|
$
|
100
|
|
|
$
|
105
|
|
|
$
|
122
|
|
|
$
|
107
|
|
|
$
|
106
|
|
|
$
|
126
|
|
29
|
|
Item 6.
|
Selected
Consolidated Financial Data
|
The following selected consolidated financial data should be
read in conjunction with the consolidated financial statements
and related notes appearing in Item 8, and
Managements Discussion and Analysis of Financial
Condition and Results of Operations appearing in
Item 7 in this Annual Report on
Form 10-K.
The consolidated statement of operations data for the years
ended September 30, 2010, 2009, and 2008, and the
consolidated balance sheet data as of September 30, 2010
and 2009, are derived from and are qualified in their entirety
by our consolidated financial statements which are included in
Item 8 in this Annual Report on
Form 10-K.
The consolidated statement of operations data for the years
ended September 30, 2007 and 2006, and the consolidated
balance sheet data as of September 30, 2008, 2007, and
2006, are derived from our audited consolidated financial
statements which do not appear in this report. The historical
results presented below are not necessarily indicative of the
results to be expected for any future fiscal year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008(2)
|
|
|
2007(1)
|
|
|
2006
|
|
|
|
(In thousands, except per share data)
|
|
|
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue, net
|
|
$
|
79,851
|
|
|
$
|
80,107
|
|
|
$
|
76,908
|
|
|
$
|
67,754
|
|
|
$
|
55,508
|
|
Net income (loss)
|
|
$
|
1,686
|
|
|
$
|
3,257
|
|
|
$
|
(2,764
|
)
|
|
$
|
(4,691
|
)
|
|
$
|
(7,534
|
)
|
Basic net income (loss) per share
|
|
$
|
0.11
|
|
|
$
|
0.23
|
|
|
$
|
(0.18
|
)
|
|
$
|
(0.27
|
)
|
|
$
|
(0.41
|
)
|
Diluted net income (loss) per share
|
|
$
|
0.11
|
|
|
$
|
0.23
|
|
|
$
|
(0.18
|
)
|
|
$
|
(0.27
|
)
|
|
$
|
(0.41
|
)
|
Shares used in computing basic and diluted net income (loss) per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
14,708
|
|
|
|
14,323
|
|
|
|
15,522
|
|
|
|
17,533
|
|
|
|
18,278
|
|
Diluted
|
|
|
14,969
|
|
|
|
14,394
|
|
|
|
15,522
|
|
|
|
17,533
|
|
|
|
18,278
|
|
Cash dividends declared per common share
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008(2)
|
|
|
2007(1)
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments
|
|
$
|
66,352
|
|
|
$
|
57,968
|
|
|
$
|
49,331
|
|
|
$
|
107,935
|
|
|
$
|
90,751
|
|
Total assets
|
|
$
|
186,522
|
|
|
$
|
182,219
|
|
|
$
|
175,844
|
|
|
$
|
229,480
|
|
|
$
|
199,152
|
|
Long-term portion of capital lease obligation
|
|
|
|
|
|
|
|
|
|
$
|
17
|
|
|
$
|
31
|
|
|
$
|
50
|
|
Total stockholders equity
|
|
$
|
151,364
|
|
|
$
|
150,020
|
|
|
$
|
137,511
|
|
|
$
|
190,885
|
|
|
$
|
173,389
|
|
|
|
|
|
|
|
|
(1) |
|
The results of operations for fiscal 2007 included net tax
expense of $4.1 million that included deferred income tax
expense totaling approximately $5.5 million associated with
the increase in the valuation allowance against our net deferred
tax assets. |
|
(2) |
|
The results of operations for fiscal 2008 included net tax
expense of $1.0 million that included deferred income tax
expense totaling approximately $3.1 million associated with
the increase in the valuation allowance against our net deferred
tax assets. |
For information regarding comparability of this data as it may
relate to future periods, see the discussion in Item 7,
Managements Discussion and Analysis of Financial
Condition and Results of Operations.
30
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Except for historical information, this Report 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. Forward-looking
statements include, among others, those 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 such differences include, but are not limited to,
those discussed in Item 1A Risk Factors. 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
or Current Reports on
Form 8-K
that we file in the current fiscal year. You are cautioned not
to place undue reliance on the forward-looking statements, which
speak only as of the date of this Annual Report on Form
10-K. 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
Keynote is a leading global provider of Internet and mobile
cloud monitoring solutions. We provide cloud-based testing,
monitoring and measurement products and services that enable our
customers to know how their Web sites, content, and applications
perform on virtually any combination of actual browsers,
networks and mobile devices. Since our founding in 1995, we have
built and optimized a global monitoring network comprised of
over 3,000 measurement computers and mobile devices in over 275
locations and 180 metropolitan areas worldwide and execute more
than 450 million performance measurements every day. We
offer a robust portfolio of Internet and mobile products and
services to optimize the end-user customer experience in two
broad categories: Internet Cloud (Internet Cloud)
and Mobile Cloud (Mobile Cloud). We combine our
Internet and Mobile Cloud products and services with our Real
User Experience Testing to offer our customers a unique value
proposition.
We deliver our products and services primarily through a
cloud-based model on a subscriptions basis (formerly referred to
as Software-as-a-Service, or SaaS). Subscription fees range from
monthly to multi-year commitments and vary based on the type of
service selected, the number of measurements, transactions or
devices monitored, the number of measurement locations
and/or
appliances, the frequency of the measurements, the communication
protocols or services measured and any additional features
ordered. Our SITE systems, which include monitoring software and
hardware, usually are offered via a software license fee model
that is bundled with ongoing maintenance and support. Because we
do not have sufficient objective evidence of fair value for the
maintenance and support, the entire contract fee is amortized
over the length of the contract and is included in ratable
license revenue. Our Real User Experience Testing services, or
professional services, primarily are offered on an engagement,
per incident or per study basis. Engagements typically involve
fixed price contracts based on the complexity of the project,
the size of a panel, and the type of testing to be conducted.
Our net income decreased by $1.6 million, from net income
of $3.3 million for the year ended September 30, 2009
to net income of $1.7 million for the year ended
September 30, 2010. Total net revenue remained consistent,
decreasing by $0.3 million, or 0.3%, from
$80.1 million for the year ended September 30, 2009 to
$79.9 million for the year ended September 30, 2010.
The change in total net revenue is mainly attributable to a
decrease of $2.4 million in our ratable licenses revenue
and a decrease of $1.1 million in our professional services
revenue; partially offset by, an increase of $3.3 million
in subscription services revenue. Total costs and expenses
remained consistent, increasing $0.5 million, or 0.6%, from
$77.2 million for the year ended September 30, 2009 to
$77.6 million for the year ended September 30, 2010.
For the year ended September 30, 2010, our ten largest
customers accounted for approximately 31% of total net revenue.
We cannot be certain that customers that have accounted for
significant revenue in past periods, individually or in
aggregate, will renew our products and services and continue to
generate revenue in any future period. In addition, our
customers that have monthly renewal arrangements may terminate
their contract at any time, with little or no penalty. If we
lose a major customer or a group of significant customers, our
revenue could significantly decline.
31
We believe that important trends and challenges for our business
include:
|
|
|
|
|
continuing to drive growth in our Internet and Mobile Cloud
products and services, as we believe that revenue growth is the
primary factor in creating stockholder value;
|
|
|
|
growing Web measurement revenue (such as Transaction Perspective
and Application Perspective which have increased over the past
three quarters) in order to increase Internet revenues;
|
|
|
|
growing our overall customer base to support the growth of our
Internet and Mobile revenue;
|
|
|
|
continuing to control our expenses in fiscal 2011 to maintain
and improve profitability, particularly because of the economic
uncertainties that continue to exist; and
|
|
|
|
challenges faced due to the current economic environment as this
affects our customers ability to purchase our products and
services.
|
Refer to Results of Operations,
Non-GAAP Financial Measures and Other Operational
Data, Liquidity and Capital Resources, and
Commitments elsewhere in this section for a further
discussion of the risks, uncertainties and trends in our
business.
Critical
Accounting Policies and Estimates
Our consolidated financial statements and accompanying notes
included elsewhere in this Annual Report on
Form 10-K
are prepared in accordance with accounting principles generally
accepted in the United States of America. These accounting
principles require us to make estimates, judgments and
assumptions that have a significant effect on the reported
amounts of assets and liabilities as of the date of the
financial statements, as well as the reported amounts of revenue
and expenses during the periods presented. We believe that the
estimates, judgments and assumptions upon which we rely are
reasonable based upon information available to us at the time
that these estimates, judgments and assumptions are made. To the
extent there are material differences between these estimates,
judgments or assumptions and actual results, our financial
statements will be affected. We believe the following critical
accounting policies affect our more significant judgments and
estimates used in the preparation of our consolidated financial
statements:
|
|
|
|
|
Revenue recognition
|
|
|
|
Allowance for doubtful accounts and billing allowance
|
|
|
|
Goodwill, identifiable intangible assets, and long-lived assets
|
|
|
|
Stock-based compensation
|
|
|
|
Income taxes, deferred income tax assets and deferred income tax
liabilities
|
Revenue
Recognition
We generally recognize revenue when all of the following
criteria have been met:
|
|
|
|
|
Persuasive evidence of an arrangement exists,
|
|
|
|
Delivery of the product or service has occurred,
|
|
|
|
Fee is fixed or determinable, and
|
|
|
|
Collection is deemed reasonably assured.
|
One of the critical judgments that we make is the assessment
that collectibility is probable. Our recognition of
revenue is based on our assessment of the probability of
collecting the related accounts receivable on a
customer-by-customer
basis. If we determine that collection is not reasonably
assured, then revenue is deferred and recognized upon the
receipt of cash from that arrangement.
32
Our revenue consists of subscription services revenue, ratable
license revenue and professional services revenue.
Subscription
Services Revenue
We enter into multiple element arrangements where sufficient
objective evidence of fair value does not exist for the
allocation of revenue. As a result, the elements within our
subscription arrangements do not qualify for treatment as
separate units of accounting. Accordingly, we account for fees
received under subscription arrangements as a single unit of
accounting and recognize the entire arrangement fee as revenue
either ratably over the service period, generally twelve months,
or based upon actual monthly usage.
For customers that are billed the entire amount of their
subscription in advance, subscription services revenue is
deferred upon invoicing and is recognized ratably over the
service period, generally ranging from one to twelve months,
commencing on the day service is first provided. For customers
that are billed on a monthly basis, revenue is recognized
monthly based upon actual service usage for the month.
Regardless of when billing occurs, we recognize revenue as
services are provided and defer any revenue that is unearned.
WebEffective service is sold on a subscription basis or as part
of a professional services engagement. We recognize revenue from
the use of our WebEffective service that is sold on a
subscription basis ratably over the subscription period,
commencing on the first day service is provided, and such
revenue is recorded as subscription services revenue. We
recognize revenue from the use of our WebEffective service as
part of a professional services engagement at the time the
professional services revenue is recognized and such revenue is
recorded as professional services revenue.
Ratable
Licenses Revenue
Ratable licenses revenue consists of fees from the sale of
mobile automated test equipment, software, maintenance,
engineering and consulting services associated with SITE
systems. We frequently enter into multiple element arrangements
with mobile customers for the sale of our automated test
equipment, including hardware and software licenses, consulting
services to configure the hardware and software (implementation
or integration services), post contract support (maintenance)
services, training services and other minor consulting services.
This determination is based on the hardware component of our
multiple element arrangements being deemed to be a software
related element. In addition, customers do not purchase the
hardware without also purchasing the software. In other words,
the software and hardware is sold as a package with payments due
from customer upon delivery of this hardware and software
package.
None of the SITE implementation/integration services provided by
us is considered to be essential to the functionality of the
licensed products. This assessment is due to the
implementation/integration services being performed during a
relatively short period (generally within two to three months)
compared to the length of the arrangement which typically ranges
from twelve to thirty-six months. Additionally, the
implementation/integration services are general in nature and we
have a history of successfully gaining customer acceptance.
We cannot allocate the arrangement consideration to the multiple
elements based on vendor-specific objective evidence
(VSOE) of fair value since sufficient VSOE does not
exist for the undelivered elements of the arrangement, typically
maintenance. Therefore, we recognize the entire arrangement fee
into revenue ratably over the maintenance period, historically
ranging from twelve to thirty-six months, once the
implementation and integration services are completed, usually
within two to three months following the delivery of the
hardware and software. Where acceptance provisions exist in the
arrangement the ratable recognition of revenue begins when
evidence of customer acceptance of the software and hardware has
occurred as intended under the respective arrangements
contractual terms.
Professional
Services Revenue
Professional services revenue consists of fees generated from
our professional consulting services that are purchased as part
of a professional service or consulting project. Revenue from
these services is recognized as the services are performed,
typically over a period of one to twelve months. For
professional service projects that contain milestones, we
recognize revenue once the services or milestones have been
delivered, based on input measures. Payment occurs either
up-front or over time.
33
We also enter into multiple element arrangements that generally
consist of either: 1) the combination of subscription and
professional services or 2) multiple professional services.
The Company has been unable to establish objective evidence of
fair value of the undelivered elements for such arrangements.
Consequently, the entire arrangement fee is recognized ratably
over the applicable performance period.
Deferred
Revenue
Deferred revenue is comprised of all unearned revenue that has
been collected in advance, primarily unearned license and
subscription services revenue, and is recorded as deferred
revenue on the balance sheet until the revenue is earned.
Deferred revenue is reduced to the extent that there are any
accounts receivable balances associated with the deferred
revenue (unpaid deferred revenue) at the balance
sheet date and may change at any point in time based upon the
timing of when invoices are collected. Short-term deferred
revenue represents the unearned revenue that has been collected
in advance that will be earned within twelve months of the
balance sheet date. Correspondingly, long-term deferred revenue
represents the unearned revenue that will be earned more than
twelve months from the balance sheet date and primarily consists
of SITE revenue.
We generally do not grant refunds. All discounts granted reduce
revenue. Free trials are occasionally provided to prospective
customers who would like to try certain of our subscription
services before they commit to purchasing the services. The
services provided during the trial period are typically
stand-alone transactions and are not bundled with other
services. Revenue is not recognized for these free trial periods.
The table below provides the details of gross deferred revenue
(short-term and long-term aggregated), unpaid deferred revenue
and net deferred revenue (the amount presented on the
consolidated balance sheets) as of September 30, 2010 and
2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
International
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Net deferred revenue
|
|
$
|
4,631
|
|
|
$
|
16,834
|
|
|
$
|
21,465
|
|
Add back: unpaid deferred revenue
|
|
|
2,584
|
|
|
|
3,191
|
|
|
|
5,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross deferred revenue at September 30, 2010
|
|
$
|
7,215
|
|
|
$
|
20,025
|
|
|
$
|
27,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred revenue
|
|
$
|
5,880
|
|
|
$
|
12,948
|
|
|
$
|
18,828
|
|
Add back: unpaid deferred revenue
|
|
|
1,665
|
|
|
|
1,810
|
|
|
|
3,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross deferred revenue at September 30, 2009
|
|
$
|
7,545
|
|
|
$
|
14,758
|
|
|
$
|
22,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for Doubtful Accounts and Billing Allowance
Our allowance for doubtful accounts is determined based on
historical trends, experience and current market and industry
conditions. We regularly review the adequacy of our accounts
receivable allowance after considering the age of each
outstanding invoice, each customers expected ability to
pay and our collection history with each customer. We review
customers with invoices greater than 60 days past due to
determine whether a specific allowance is appropriate. In
addition, we maintain a reserve for all other invoices, which is
calculated by applying a percentage, based on historical
collection trends, to the outstanding accounts receivable
balance.
Billing allowance represents the reserve for potential billing
adjustments that are recorded as a reduction of revenue and
represents a percentage of revenue based on historical trends
and experience. The allowance for doubtful accounts and billing
allowance represent managements best estimate, but changes
in circumstances relating to accounts receivable and billing
adjustments, including unforeseen declines in market conditions,
collection rates, future recoveries and the number of billing
adjustments, may result in additions to or reductions in
allowances in the future.
Goodwill,
Identifiable Intangibles Assets, and Long-Lived
Assets
Goodwill is measured as the excess of the cost of acquisition
over the sum of the amounts assigned to identifiable assets
acquired less liabilities assumed.
34
We evaluate our goodwill for impairment on an annual basis, and
whenever events or changes in circumstances indicate that the
carrying value may not be fully recoverable from the results of
operations of our single reporting segment. In addition we
evaluate our identifiable intangible assets and other long-lived
assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Factors we consider important which could
trigger an impairment review include the following:
|
|
|
|
|
significant changes in the manner of our use of the acquired
assets or the strategy of our overall business;
|
|
|
|
significant negative industry or economic trends;
|
|
|
|
significant decline in our stock price for a sustained
period; and
|
|
|
|
our market capitalization relative to net book value.
|
Management continually applies its judgment when performing
these evaluations to determine the timing of the testing, the
undiscounted net cash flows used to assess recoverability of the
intangible assets and the fair value of the asset group. If
future events or circumstances indicate that our estimates or
the related assumptions change, an impairment assessment is
required
and/or an
asset group is determined to be impaired, our financial results
could be materially and adversely impacted.
Our annual goodwill review in each of fiscal 2010, 2009, and
2008 did not result in an impairment charge. The goodwill
recorded on the consolidated balance sheet as of
September 30, 2010 was $63.2 million as compared to
$66.1 million as of September 30, 2009. The change in
goodwill from September 30, 2009 to September 30, 2010
was a result of foreign exchange rate fluctuations, which affect
the goodwill amounts recorded in our foreign subsidiaries.
Stock-based
Compensation
We issue stock options and restricted stock units to our
employees and outside directors and provide our employees the
right to purchase common stock under our employee stock purchase
plan. Under the fair value recognition provisions of this
statement, stock-based compensation cost is measured at the
grant date based on the fair value of the award and is
recognized as expense over the service (vesting) period. The
value of an option is estimated using the Black-Scholes option
valuation model which requires the input of highly subjective
assumptions. A change in our assumptions could materially affect
the fair value estimate, and thus, the total calculated costs
associated with the grant of stock options and restricted stock
units or the issue of stock under the employee stock purchase
plan. Additionally, if actual forfeiture rates differ
significantly from our estimates, stock-based compensation
expense and our results of operations could be materially
impacted. See Note 6 to the notes to consolidated financial
statements for more detail.
Income
Taxes, Deferred Income Tax Assets and Deferred Income Tax
Liabilities
We are required to estimate our income taxes in each of the
jurisdictions in which we operate. This process involves
estimating our actual current tax liabilities, including the
impact, if any, of additional taxes resulting from tax
examinations together with assessing temporary differences
resulting from differing treatment of items, such as deferred
revenue, for tax and accounting purposes. These differences
result in deferred tax assets and liabilities. We must then
assess the likelihood that our deferred tax assets will be
recoverable from future taxable income and, to the extent we
believe that recovery is not likely, we must establish a
valuation allowance. To the extent we establish a valuation
allowance or increase the valuation allowance in a period, our
deferred tax expense increases. If a valuation allowance is
decreased, deferred tax expense may be reduced, goodwill may be
reduced, or paid in capital may be increased, depending on the
nature and source of the deferred tax assets. This analysis is
applied on a jurisdiction by jurisdiction basis and requires
significant judgment and consideration of all available positive
and negative evidence.
Significant management judgment is required in determining our
provision for income taxes, our deferred tax assets and
liabilities, and any valuation allowance recorded against our
net deferred tax assets. Tax exposures can involve complex
issues and may require an extended period to resolve. Tax
planning strategies may be implemented which would affect the
tax rate. Changes in the geographic mix or estimated level of
annual income before taxes can affect the overall effective tax
rate. We perform an analysis of our effective tax rate and we
assess the need for a valuation allowance against our deferred
tax assets quarterly.
35
The uncertainties which could affect the realization of our
deferred tax assets include various factors such as the amount
of deductions for tax purposes related to our stock options,
potential successful challenges to the deferred tax assets by
taxing authorities, and a mismatch of the period during which
the type of taxable income and the deferred tax assets are
realized or a mismatch in the tax jurisdiction in which taxable
income is generated and companies with the deferred tax assets.
As of October 1, 2007, we adopted the Financial Accounting
Standards Boards (FASBs) guidance on the
accounting for uncertain tax positions. This Guidance prescribes
a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. This
guidance also provides direction on derecognition,
classification, interest and penalties, accounting in interim
periods, disclosure, and transition. The evaluation of a tax
position is a two-step process. The first step is
recognition we determine whether it is
more-likely-than-not that a tax position will be
sustained upon examination, including resolution of any related
appeals or litigation processes, based on the technical merits
of the position. In evaluating whether a tax position has met
the more-likely-than-not recognition threshold, we
presume that the position will be examined by the appropriate
taxing authority that would have full knowledge of all relevant
information. The second step is measurement a tax
position that meets the more-likely-than-not
recognition threshold is measured to determine the amount of
benefit to recognize in the financial statements. The tax
position is measured at the largest amount of benefit that is
greater than 50 percent likely to be realized upon ultimate
settlement.
In December 2007, we entered into an agreement whereby we
purchased certain intangible assets from our German subsidiary.
This transaction was treated as an intercompany sale and, as
such, tax is not recognized on the sale until we no longer
benefit from the underlying asset. Therefore, during December
2007, we recorded a long-term prepaid tax asset of
$1.8 million which represents the tax that the German
subsidiary will pay of $3.0 million, offset by the
elimination of the remaining carrying amount of the deferred tax
liability related to these intangible assets that was
established at the time of the acquisition of the German
subsidiary. The deferred tax liability had a carrying amount of
$1.2 million at the time of the transfer. We are amortizing
the net prepaid tax asset of $1.8 million through tax
expense over the life of the underlying asset which has been
estimated to be 48 months. During the three months ended
September 30, 2009, we recorded an additional prepaid tax
asset of $1.1 million which represents the additional tax
that the German subsidiary will pay based upon an increase in
the purchase price calculated in fiscal 2009. We are amortizing
the additional net prepaid tax asset of $1.1 million
through tax expense over the remaining life of the underlying
asset. Amortization expense on the prepaid tax asset was
$0.8 million, $0.8 million and $0.4 million for
the years ended September 30, 2010, 2009 and 2008,
respectively. As of September 30, 2010, the prepaid tax
asset, net of accumulated amortization, was $0.8 million
and is included in deferred costs and other long-term assets on
the consolidated balance sheets.
36
Results
of Operations
Amounts in this Results of Operations section are in
thousands unless otherwise noted. The following table sets forth
selected items from our consolidated statements of operations as
a percentage of total net revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription services
|
|
|
61.2
|
%
|
|
|
56.9
|
%
|
|
|
58.9
|
%
|
Ratable licenses
|
|
|
27.8
|
|
|
|
30.8
|
|
|
|
28.4
|
|
Professional services
|
|
|
11.0
|
|
|
|
12.3
|
|
|
|
12.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue, net
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct costs of subscription services
|
|
|
10.9
|
|
|
|
10.8
|
|
|
|
10.8
|
|
Direct costs of ratable licenses
|
|
|
8.6
|
|
|
|
7.6
|
|
|
|
8.5
|
|
Direct costs of professional services
|
|
|
7.2
|
|
|
|
7.4
|
|
|
|
9.2
|
|
Development
|
|
|
15.0
|
|
|
|
15.3
|
|
|
|
16.4
|
|
Operations
|
|
|
9.6
|
|
|
|
10.3
|
|
|
|
11.2
|
|
Amortization of intangible assets software
|
|
|
2.0
|
|
|
|
1.4
|
|
|
|
1.3
|
|
Sales and marketing
|
|
|
31.9
|
|
|
|
29.8
|
|
|
|
33.4
|
|
General and administrative
|
|
|
13.1
|
|
|
|
12.9
|
|
|
|
13.2
|
|
Excess occupancy income
|
|
|
(1.9
|
)
|
|
|
(1.3
|
)
|
|
|
(1.5
|
)
|
Amortization of intangible assets other
|
|
|
0.8
|
|
|
|
1.3
|
|
|
|
2.8
|
|
Lease abandonment expense
|
|
|
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
97.2
|
|
|
|
96.3
|
|
|
|
105.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
2.8
|
|
|
|
3.7
|
|
|
|
(5.3
|
)
|
Interest income
|
|
|
0.5
|
|
|
|
1.1
|
|
|
|
3.9
|
|
Other income (expenses)
|
|
|
(0.1
|
)
|
|
|
0.6
|
|
|
|
(0.9
|
)
|
Provision for income taxes
|
|
|
(1.1
|
)
|
|
|
(1.3
|
)
|
|
|
(1.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
2.1
|
%
|
|
|
4.1
|
%
|
|
|
(3.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
% Change
|
|
2009
|
|
|
% Change
|
|
2008
|
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription services
|
|
$
|
48,860
|
|
|
|
7%
|
|
|
$
|
45,597
|
|
|
|
1%
|
|
|
$
|
45,314
|
|
Ratable licenses
|
|
|
22,203
|
|
|
|
(10)%
|
|
|
|
24,623
|
|
|
|
13%
|
|
|
|
21,820
|
|
Professional services
|
|
|
8,788
|
|
|
|
(11)%
|
|
|
|
9,887
|
|
|
|
1%
|
|
|
|
9,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
79,851
|
|
|
|
%
|
|
|
$
|
80,107
|
|
|
|
4%
|
|
|
$
|
76,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription
Services
Subscription services revenue consists of our Internet
measurements, monitoring, testing, diagnostic and performance
scoreboard services along with GlobalRoamer services.
Subscription services fees can vary based on the number of pages
measured, the number of devices monitored, the number of
measurement locations, the number of users, the number of hours,
the frequency of the measurements, the number of private agents,
the additional features ordered, and the type of services
purchased.
37
Net revenue from subscription services increased by
$3.3 million for the year ended September 30, 2010 as
compared to the year ended September 30, 2009. The increase
in subscription services revenue for the year ended
September 30, 2010 was mainly attributable to increased
revenues from our mobile subscription services of
$2.4 million and from our LoadPro subscription services of
$1.9 million, partially offset by decreases of
$0.5 million in our VoIP subscription services and of
$0.4 million in our WebEffective subscription services.
Net revenue from subscription services increased by
$0.3 million for the year ended September 30, 2009 as
compared to the year ended September 30, 2008. The increase
in subscription services revenue for the year ended
September 30, 2009 was mainly attributable to increased
revenues from our LoadPro and Application Perspective
subscription services totaling $2.2 million and from our
mobile services of $1.1 million, partially offset by a
decrease in our Web site Perspective subscription services of
$2.5 million and in our WebEffective subscription services
of $0.5 million.
Ratable
Licenses
Ratable licenses revenue is generated by our subsidiary located
in Germany and is denominated in Euros. As such, this revenue is
also affected by foreign exchange fluctuations. Net revenue from
these sales is recognized over the maintenance period for each
contract, which is typically twelve to thirty-six months.
Net revenue from ratable licenses decreased by $2.4 million
for the year ended September 30, 2010 as compared to the
year ended September 30, 2009. The decrease in ratable
licenses revenue was mainly attributable to fewer purchases of
SITE systems, partially offset by an increase in customers
renewing maintenance on existing systems.
Net revenue from ratable licenses increased by $2.8 million
for the year ended September 30, 2009 as compared to the
year ended September 30, 2008. The increase in ratable
licenses revenue was mainly attributable to revenue growth from
the sale of new SITE systems and existing customers renewing
maintenance agreements, offset by an unfavorable impact from
foreign exchange rates.
Professional
Services
Net revenue from professional services decreased by
$1.1 million for the year ended September 30, 2010 as
compared to the year ended September 30, 2009. The decrease
in professional services revenue for the year ended
September 30, 2010 was mainly attributable to our customers
using fewer professional services personnel as they purchased
more of our self-service load testing subscription services.
Net revenue from professional services increased by
$0.1 million for the year ended September 30, 2009 as
compared to the year ended September 30, 2008. The increase
in professional services revenue for the year ended
September 30, 2009 was mainly attributable to an increase
of $0.9 million from our load testing and enterprise
solutions engagements related to preparing Web sites for the
holiday shopping season and other events and new customers,
partially offset by a decrease of $0.8 million related to
our professional engagements.
38
In addition to analyzing revenue from subscription services,
ratable licenses and professional services, management also
internally analyzes revenue categorized as Internet Test and
Measurement (Internet) and Mobile Test and
Measurement (Mobile). The following table identifies
which services are categorized as Internet and Mobile services
and where they are recorded in our consolidated statements of
operations:
|
|
|
|
|
|
|
|
|
Subscription
|
|
Ratable
|
|
Professional
|
|
|
Services
|
|
Licenses
|
|
Services
|
|
Internet Test and Measurement:
|
|
|
|
|
|
|
Internet Subscriptions Web Measurement
|
|
|
|
|
|
|
Application Perspective
|
|
X
|
|
|
|
|
Streaming Perspective
|
|
X
|
|
|
|
|
Transaction Perspective
|
|
X
|
|
|
|
|
Internet Subscriptions Other
|
|
|
|
|
|
|
Enterprise Adapters
|
|
X
|
|
|
|
|
Keynote Internet Testing Environment (KITE)
|
|
X
|
|
|
|
|
Performance Scoreboard
|
|
X
|
|
|
|
|
Private Agents
|
|
X
|
|
|
|
|
Red Alert
|
|
X
|
|
|
|
|
Test Perspective
|
|
X
|
|
|
|
|
LoadPro
|
|
X
|
|
|
|
|
WebEffective
|
|
X
|
|
|
|
|
Internet Engagements
|
|
|
|
|
|
|
Professional Services
|
|
|
|
|
|
X
|
Automated Reporting
|
|
|
|
|
|
X
|
Custom Competitive Research
|
|
|
|
|
|
X
|
Customer Research Products
|
|
|
|
|
|
X
|
LoadPro
|
|
|
|
|
|
X
|
Mobile Competitive Monitoring Analysis
|
|
|
|
|
|
X
|
Mobile Insights
|
|
|
|
|
|
X
|
Performance Insights
|
|
|
|
|
|
X
|
Visitor Insights
|
|
|
|
|
|
X
|
WebEffective
|
|
|
|
|
|
X
|
Web Site Performance Assessment
|
|
|
|
|
|
X
|
Mobile Test and Measurement:
|
|
|
|
|
|
|
Mobile Subscription
|
|
|
|
|
|
|
Mobile Device Perspective (MDP)
|
|
X
|
|
|
|
|
Mobile Web Perspective (MWP)
|
|
X
|
|
|
|
|
GlobalRoamer
|
|
X
|
|
|
|
|
Mobile Internet Testing Environment (MITE)
|
|
X
|
|
|
|
|
Mobile Ratable Licenses
|
|
|
|
|
|
|
System Integrated Test Environment (SITE)
|
|
|
|
X
|
|
|
39
The following table summarizes Internet and Mobile net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
% Change
|
|
|
2009
|
|
|
% Change
|
|
|
2008
|
|
|
Internet Subscriptions Web Measurement
|
|
$
|
26,452
|
|
|
|
(1
|
)%
|
|
$
|
26,772
|
|
|
|
(4
|
)%
|
|
$
|
27,837
|
|
Internet Subscriptions Other
|
|
|
12,036
|
|
|
|
11
|
%
|
|
|
10,810
|
|
|
|
2
|
%
|
|
|
10,595
|
|
Internet Engagements
|
|
|
8,788
|
|
|
|
(11
|
)%
|
|
|
9,887
|
|
|
|
1
|
%
|
|
|
9,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Internet net revenue
|
|
|
47,276
|
|
|
|
|
%
|
|
|
47,469
|
|
|
|
(2
|
)%
|
|
|
48,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobile Subscription
|
|
|
10,372
|
|
|
|
29
|
%
|
|
|
8,015
|
|
|
|
16
|
%
|
|
|
6,882
|
|
Mobile Ratable Licenses
|
|
|
22,203
|
|
|
|
(10
|
)%
|
|
|
24,623
|
|
|
|
13
|
%
|
|
|
21,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Mobile net revenue
|
|
|
32,575
|
|
|
|
|
%
|
|
|
32,638
|
|
|
|
14
|
%
|
|
|
28,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
79,851
|
|
|
|
|
%
|
|
$
|
80,107
|
|
|
|
4
|
%
|
|
$
|
76,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows revenue as a percentage of total net
revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Internet net revenue
|
|
|
59
|
%
|
|
|
59
|
%
|
|
|
63
|
%
|
Mobile net revenue
|
|
|
41
|
|
|
|
41
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internet
Net Revenue
Internet net revenue decreased by $0.2 million for the year
ended September 30, 2010 compared to year ended
September 30, 2009. Internet net revenue represented 59% of
total net revenue for the year ended September 30, 2010 and
2009. The decrease in Internet net revenue in absolute dollars
for the year ended September 30, 2010 was mainly
attributable to a decrease in our professional service
engagements of $1.1 million, our VoIP subscription services
of $0.5 million, and our WebEffective subscription services
of $0.4 million, partially offset by an increase in our
LoadPro subscription services of $1.9 million.
Internet net revenue decreased by $0.7 million for the year
ended September 30, 2009 compared to year ended
September 30, 2008. Internet net revenue represented 59%
and 63% of total net revenue for the year ended
September 30, 2009 and 2008, respectively. The decrease in
Internet net revenue in absolute dollars for the year ended
September 30, 2009 was mainly attributable to a decrease in
our Web site Perspective subscription services of
$2.5 million, our professional service engagements of
$0.8 million, and our WebEffective subscription services of
$0.5 million, partially offset by an increase of Load Pro
and Application Perspective subscription services totaling
$2.2 million and our load testing and enterprise solutions
engagements of $0.9 million.
Mobile
Net Revenue
Mobile revenue decreased by $0.1 million for the year ended
September 30, 2010 compared to the year ended
September 30, 2009. Mobile net revenue represented 41% of
total net revenue for the year ended September 30, 2010 and
2009. The slight decline in absolute dollars was primarily due
to a $2.4 million decrease in Mobile Ratable Licenses
revenue as a result of fewer purchases of new SITE systems,
partially offset by an increase in customers renewing
maintenance on existing systems, and an increase of
$2.4 million in Mobile Subscription revenue as a result of
an increase in the number of GlobalRoamer customers.
Mobile revenue increased by $3.9 million for the year ended
September 30, 2009 compared to the year ended
September 30, 2008. Mobile net revenue represented 41% and
37% of total net revenue for the year ended September 30,
2009 and 2008, respectively. The increase in absolute dollars
for the year ended September 30, 2009 was mainly
attributable to revenue growth from the sale of new SITE systems
and existing customers renewing maintenance agreements, along
with an increase in the number of GlobalRoamer customers.
40
For the years ended September 30, 2010, 2009 and 2008, no
single customer accounted for more than 10% of total net
revenue. One customer accounted for 10% and 11% of net accounts
receivable at September 30, 2010 and 2009, respectively.
International sales were 45%, 45%, and 43% of our total net
revenue for the years ended September 30, 2010, 2009, and
2008, respectively.
Costs
and Expenses:
Direct
Costs of Subscription Services, Ratable Licenses and
Professional Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
% Change
|
|
|
2009
|
|
|
% Change
|
|
|
2008
|
|
|
Direct costs of subscription services
|
|
$
|
8,720
|
|
|
|
1
|
%
|
|
$
|
8,655
|
|
|
|
4
|
%
|
|
$
|
8,324
|
|
Direct costs of ratable licenses
|
|
$
|
6,870
|
|
|
|
13
|
%
|
|
$
|
6,079
|
|
|
|
(7
|
)%
|
|
$
|
6,558
|
|
Direct costs of professional services
|
|
$
|
5,737
|
|
|
|
(4
|
)%
|
|
$
|
5,958
|
|
|
|
(16
|
)%
|
|
$
|
7,113
|
|
Direct
Costs of Subscription Services
Direct costs of subscription services consist of connection fees
to telecommunication and Internet access providers for bandwidth
usage of our measurement computers, which are located around the
world. Also included is depreciation, maintenance and other
equipment charges for our measurement and data collection
infrastructure.
Direct costs of subscription services remained relatively
consistent with an increase of $0.1 million for the year
ended September 30, 2010 as compared to the year ended
September 30, 2009, and represented 18% and 19% of
subscription services revenue for the year ended
September 30, 2010 and 2009, respectively. The change in
absolute dollars was primarily attributable to an increase in
personnel related costs of $0.2 million; partially offset
by a decrease in connection fees and equipment costs of
$0.2 million.
Direct costs of subscription services increased by
$0.3 million for the year ended September 30, 2009 as
compared to the year ended September 30, 2008, and
represented 19% and 18% of subscription services revenue for the
year ended September 30, 2009 and 2008, respectively. The
increase in absolute dollars was primarily attributable to an
increase in bandwidth and connection fees related to our
Internet measurements.
Direct
Costs of Ratable Licenses
Direct costs of ratable licenses include cost of materials,
supplies, maintenance, support personnel related costs and
consulting costs related to the sale of our SITE systems. The
cost of equipment as part of each new customer contract is
expensed ratably over the same initial twelve to thirty-six
month period as the ratable licenses revenue to which it is
associated.
Direct costs of ratable licenses increased by $0.8 million
for the year ended September 30, 2010 as compared to the
year ended September 30, 2009, and represented 31% and 25%
of ratable licenses revenue for the year ended
September 30, 2010 and 2009, respectively. The increase in
absolute dollars was primarily attributable to an increase in
personnel costs of $0.3 million as a result of higher
headcount to support new SITE contracts and an increase in the
cost related to operating equipment of $0.4 million, which
is recognized ratably with revenue.
Direct costs of ratable licenses decreased by $0.5 million
for the year ended September 30, 2009 as compared to the
year ended September 30, 2008, and represented 25% and 30%
of ratable licenses revenue for the year ended
September 30, 2009 and 2008, respectively. The decrease in
absolute dollars was primarily attributable to higher revenue
during the year for maintenance renewals and software upgrades
that do not have any significant associated direct costs for
test equipment.
Direct
Costs of Professional Services
Direct costs of professional services consist of compensation
expenses, including stock-based compensation and other benefits,
for professional services personnel, external consulting
expenses to deliver our professional services, panel costs
associated with our professional engagements, all load-testing
bandwidth costs and related network infrastructure costs.
41
Direct costs of professional services decreased by
$0.2 million for the year ended September 30, 2010 as
compared to the year ended September 30, 2009, and
represented 65% and 60% of professional services revenue for the
year ended September 30, 2010 and 2009, respectively. The
decrease in absolute dollars was primarily due to lower
personnel related costs and our continued cost containment
efforts.
Direct costs of professional services decreased by
$1.2 million for the year ended September 30, 2009 as
compared to the year ended September 30, 2008, and
represented 60% and 73% of professional services revenue for the
year ended September 30, 2009 and 2008, respectively. The
decreases in absolute dollars was primarily due to lower
personnel related costs associated with our professional
services due to cost containment measures in line with the lower
revenue levels.
Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
% Change
|
|
|
2009
|
|
|
% Change
|
|
|
2008
|
|
|
Development
|
|
$
|
11,978
|
|
|
|
(2
|
)%
|
|
$
|
12,186
|
|
|
|
(3
|
)%
|
|
$
|
12,608
|
|
Development expenses consist primarily of compensation,
including stock-based compensation and other benefits, and other
costs incurred by our development personnel.
The decrease in development costs for the year ended
September 30, 2010 as compared to the year ended
September 30, 2009 was primarily due to lower personnel
related costs and continued cost containment.
The decrease in development costs for the year ended
September 30, 2009 as compared to the year ended
September 30, 2008 was primarily due to salary reductions
and lower consulting costs.
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
% Change
|
|
|
2009
|
|
|
% Change
|
|
|
2008
|
|
|
Operations
|
|
$
|
7,661
|
|
|
|
(7
|
)%
|
|
$
|
8,264
|
|
|
|
(4
|
)%
|
|
$
|
8,576
|
|
Operations expenses consist primarily of compensation, including
stock-based compensation and other benefits, for management and
technical support personnel, who manage and maintain our field
measurement and collection infrastructure and headquarters data
center and provide basic and extended customer support. Our
operations personnel also work closely with other departments to
ensure the reliability of our services.
Our operations expenses decreased by $0.6 million for the
year ended September 30, 2010 as compared to the year ended
September 30, 2009, primarily due to a $0.4 million
reduction in personnel related costs and other continued cost
containment efforts.
Our operations expenses decreased by $0.3 million for the
year ended September 30, 2009 as compared to the year ended
September 30, 2008, primarily due to salary reductions.
Sales
and Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
% Change
|
|
|
2009
|
|
|
% Change
|
|
|
2008
|
|
|
Sales and marketing
|
|
$
|
25,469
|
|
|
|
7
|
%
|
|
$
|
23,863
|
|
|
|
(7
|
)%
|
|
$
|
25,705
|
|
Sales and marketing expenses consist primarily of salaries,
benefits, commissions and bonuses earned by sales and marketing
personnel, stock-based compensation, lead-referral fees,
marketing programs and travel expenses.
Sales and marketing expenses increased by $1.6 million for
the year ended September 30, 2010 as compared to the year
ended September 30, 2009. The increase was primarily
attributable to an increase of $1.1 million on marketing
programs and tradeshow events and of $0.3 million in
consulting costs to grow Mobile revenues.
Sales and marketing expenses decreased by $1.8 million for
the year ended September 30, 2009 as compared to the year
ended September 30, 2008. The decrease was primarily
attributable to strong cost containment that resulted in lower
spending on marketing programs and tradeshow events.
42
General
and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
% Change
|
|
|
2009
|
|
|
% Change
|
|
|
2008
|
|
|
General and administrative
|
|
$
|
10,460
|
|
|
|
1
|
%
|
|
$
|
10,332
|
|
|
|
2
|
%
|
|
$
|
10,142
|
|
General and administrative expenses consist primarily of
compensation, including stock-based compensation and other
benefits; professional service fees, including accounting,
auditing, legal and bank fees; insurance; and other general
corporate expenses.
General and administrative expenses remained relatively
consistent with an increase of $0.1 million for the year
ended September 30, 2010 as compared to the year ended
September 30, 2009. The increase was primarily attributable
to additional personnel costs associated with additional
headcount, partially offset by continued cost containment
efforts.
General and administrative expenses increased by
$0.2 million for the year ended September 30, 2009 as
compared to the year ended September 30, 2008. The increase
was primarily attributable to additional personnel costs
associated with additional headcount and higher consulting and
professional services fees, partially offset by salary
reductions.
Excess
Occupancy Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
% Change
|
|
|
2009
|
|
|
% Change
|
|
|
2008
|
|
|
Rental income
|
|
$
|
(3,039
|
)
|
|
|
17
|
%
|
|
$
|
(2,605
|
)
|
|
|
1
|
%
|
|
$
|
(2,584
|
)
|
Rental and other expenses
|
|
|
1,552
|
|
|
|
(2
|
)%
|
|
|
1,585
|
|
|
|
15
|
%
|
|
|
1,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess occupancy income
|
|
$
|
(1,487
|
)
|
|
|
46
|
%
|
|
$
|
(1,020
|
)
|
|
|
(16
|
)%
|
|
$
|
(1,210
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess occupancy income consists of rental income from the
leasing of space not occupied by us in our headquarters
building, net of related fixed costs, which consists of property
taxes, insurance, building depreciation, leasing broker fees and
tenant improvement amortization. The costs associated with
excess occupancy income are based on the actual square footage
available for lease to third parties, which was approximately
75% for each of the years ended September 30, 2010 and 2009.
The increase in excess occupancy income for the year ended
September 30, 2010 as compared to the year ended
September 30, 2009 was primarily due to improved market
conditions and rent received on early termination of a lease.
The decrease in excess occupancy income for the year ended
September 30, 2009 as compared to the year ended
September 30, 2008 was primarily due to increased amounts
of net expenses related to depreciation, property taxes and
insurance.
Amortization
of Identifiable Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
% Change
|
|
|
2009
|
|
|
% Change
|
|
|
2008
|
|
|
Amortization of identifiable intangible assets
software
|
|
$
|
1,585
|
|
|
|
37
|
%
|
|
$
|
1,160
|
|
|
|
16
|
%
|
|
$
|
1,000
|
|
Amortization of identifiable intangible assets other
|
|
|
626
|
|
|
|
(40
|
)%
|
|
|
1,050
|
|
|
|
(51
|
)%
|
|
|
2,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortization of identifiable intangible assets
|
|
$
|
2,211
|
|
|
|
|
%
|
|
$
|
2,210
|
|
|
|
(30
|
)%
|
|
$
|
3,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets software mainly
relates to developed and purchased technology related to our
mobile products and is reflected in direct costs of revenue in
our consolidated statements of operations. Amortization of
intangible assets other relates to all other
intangibles, including customer lists, and is reflected in
operating expenses in our consolidated statement of operations.
See Note 5 to our consolidated financial statements for the
schedule of future amortization charges.
43
Amortization of identifiable intangible assets
software increased by $0.4 million for the year ended
September 30, 2010 as compared to the year ended
September 30, 2009 due to the amortization of an intangible
asset purchased from Fonjax in fiscal 2008, which was placed in
service in fiscal 2010. Amortization of identifiable intangible
assets other decreased by $0.4 million for year
ended September 30, 2010 as compared to the year ended
September 30, 2009 as a result of certain intangible assets
becoming fully amortized during fiscal 2010.
Amortization of identifiable intangible assets decreased by
$0.9 million for the year ended September 30, 2009 as
compared to the year ended September 30, 2008. The decrease
in total amortization is due to certain intangibles becoming
fully amortized in fiscal 2008, partially offset by an increase
in amortization associated with intangible assets purchased in
the Zandan acquisition that occurred in April 2008.
We annually review our identifiable intangible assets for
impairment, or whenever events or changes in circumstances
indicate that the carrying amount of these assets may not be
recoverable. The identifiable intangible assets will be fully
amortized by fiscal 2013. At September 30, 2010, the type
and net carrying amount of the identifiable intangible assets
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology
|
|
Technology
|
|
|
|
|
|
|
|
|
|
|
Based-
|
|
Based-
|
|
Customer
|
|
|
|
|
|
|
|
|
Software
|
|
Other
|
|
Based
|
|
Trademark
|
|
Covenant
|
|
Backlog
|
|
Total
|
|
$
|
2,960
|
|
|
$
|
|
|
|
$
|
469
|
|
|
$
|
443
|
|
|
$
|
11
|
|
|
$
|
31
|
|
|
$
|
3,914
|
|
Lease
abandonment expense
During the fourth quarter of fiscal 2009, we committed to an
exit plan to cease using our New York facility. Commencing
October 1, 2009, we have subleased the facility to a third
party through October 2015, the remainder of the lease term. The
lease abandonment expense of $0.6 million is included in
income from operations in fiscal 2009.
Interest
Income and Other Income (Expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
% Change
|
|
|
2009
|
|
|
% Change
|
|
|
2008
|
|
|
Interest income
|
|
$
|
459
|
|
|
|
(46
|
)%
|
|
$
|
853
|
|
|
|
(72
|
)%
|
|
$
|
3,025
|
|
Other income (expense), net
|
|
|
(108
|
)
|
|
|
(123
|
)%
|
|
|
478
|
|
|
|
168
|
%
|
|
|
(699
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income and other income (expense), net
|
|
$
|
351
|
|
|
|
(74
|
)%
|
|
$
|
1,331
|
|
|
|
(43
|
)%
|
|
$
|
2,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net primarily consists of foreign
currency transaction gains and losses and interest expense.
Interest income and other income (expense), net decreased
$1.0 million for the year ended September 30, 2010 as
compared to the year ended September 30, 2009. Interest
income decreased primarily due to lower interest rates on
invested cash balances. Other income (expense), net decreased
primarily due to less favorable foreign exchange rates in fiscal
2010 as compared to fiscal 2009.
Interest income and other income (expense), net decreased
$1.0 million for the year ended September 30, 2009 as
compared to the year ended September 30, 2008. Interest
income decreased primarily due to lower invested cash balances
and related interest rates. Other income (expense), net
increased primarily due to more favorable foreign exchange rates
in fiscal 2009 as compared to fiscal 2008.
Provision
for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
% Change
|
|
|
2009
|
|
|
% Change
|
|
|
2008
|
|
|
Provision for income taxes
|
|
$
|
897
|
|
|
|
(12
|
)%
|
|
$
|
1,019
|
|
|
|
(1
|
)%
|
|
$
|
1,034
|
|
The tax rate differed from the statutory rate in each of the
years primarily due to nondeductible stock-based compensation
charges, foreign tax differential, amortization of prepaid tax
asset and the change in our valuation allowance.
44
We had net operating loss carryforwards at September 30,
2010 for federal income tax purposes of $57.0 million,
available to reduce future income subject to income taxes. The
federal net operating loss carryforwards will expire, if not
utilized, in the tax years 2018 through 2027. In addition, we
had $26.6 million of net operating loss carryforwards at
September 30, 2010 available to reduce future taxable
income for state income tax purposes. The state net operating
loss carryforwards will expire, if not utilized, in the tax
years 2012 through 2017.
California has enacted legislation that suspends the utilization
of net operating loss carry forwards for tax year 2010 and 2011.
This legislation may increase our tax liability for the effected
tax years.
As of September 30, 2010, we had research credit
carryforwards of $2.3 million for federal and
$2.5 million for state income tax purposes individually
available to reduce future income taxes. The federal research
credit carryforwards begin to expire in the tax year 2018. The
California research credit can be carried forward indefinitely.
Deferred tax liabilities have not been recognized for
undistributed earnings of foreign subsidiaries because it is
managements intention to reinvest such undistributed
earnings indefinitely in those foreign subsidiaries.
Undistributed earnings of our foreign subsidiaries amounted to
approximately $5.2 million at September 30, 2010. If
we distribute these earnings, in the form of dividends or
otherwise, we would be subject to both U.S. income taxes
(net of applicable foreign tax credits) and withholding taxes
payable to the foreign jurisdiction.
Federal and state tax laws impose substantial restrictions on
the utilization of net operating loss and credit carryforwards
in the event of an ownership change for tax
purposes, as defined in Section 382 of the Internal Revenue
Code. We have determined that the net operating losses and
research and development credits acquired through the
acquisition of two of our subsidiaries are subject to
section 382 limitations, and the effects of the limitations
have been included in the loss and credit carryforwards. If an
additional ownership change occurs, the utilization of net
operating loss and credit carryforwards could be significantly
reduced. If we were to make additional repurchases of shares of
our common stock, we could face additional limits on our use of
net operating losses.
Stock-based
Compensation Expense
Stock-based compensation expense, which is included in total
costs and expenses by category, was $3.4 million,
$4.4 million and $4.6 million for the years ended
September 30, 2010, 2009 and 2008, respectively. The
decrease over the past two fiscal years is due to the full
vesting of outstanding options, cancellation of options on
termination of employees and the granting of fewer options over
this time period.
Stock-based compensation expense during the year ended
September 30, 2009 reflects an expense of $0.6 million
related to the cancellation in March 2009 of our Chief Executive
Officers option to purchase 400,000 shares of our
common stock at $14.99 per share, which was 67% vested at the
date of cancellation. Another option granted to our Chief
Executive Officer to purchase 300,000 shares of common
stock at an exercise price of $70.00 per share was also
cancelled in March 2009. No expense was recorded for this
cancellation given that the option was fully vested at the date
of the cancellation.
45
Stock-based compensation, in accordance with the FASBs
guidance on accounting for stock-based compensation related to
employee stock options, restricted stock units and employee
stock purchase rights was reflected in the consolidated
statements of operations as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Direct costs of ratable licenses
|
|
$
|
72
|
|
|
$
|
78
|
|
|
$
|
246
|
|
Direct costs of professional services
|
|
|
353
|
|
|
|
494
|
|
|
|
462
|
|
Development
|
|
|
778
|
|
|
|
969
|
|
|
|
993
|
|
Operations
|
|
|
440
|
|
|
|
554
|
|
|
|
644
|
|
Sales and marketing
|
|
|
1,244
|
|
|
|
1,580
|
|
|
|
1,532
|
|
General and administrative
|
|
|
478
|
|
|
|
717
|
|
|
|
680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,365
|
|
|
$
|
4,392
|
|
|
$
|
4,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP Financial
Measures and Other Operational Data
We also consider certain financial measures that are not
prepared in accordance with accounting principles generally
accepted in the United States (GAAP), including
Non-GAAP net income, Non-GAAP net income per share, Adjusted
EBITDA, free cash flow and gross deferred revenues, and other
operational data in managing and measuring the performance of
our business. The Non-GAAP measures are not based on any
standardized methodology prescribed by GAAP and are not
necessarily comparable to similar measures presented by other
companies. However, we believe that this non-GAAP information is
useful as an additional means for investors to evaluate our
operating performance, when reviewed in conjunction with our
GAAP financial statements. Therefore, these measures should not
be considered in isolation or as a substitute for measures
prepared in accordance with GAAP, and because these amounts are
not determined in accordance with GAAP, they should not be used
exclusively in evaluating our business and operations.
Non-GAAP Net
Income and Non-GAAP Net Income Per Share
Non-GAAP net income is calculated by adjusting GAAP net income
(loss) for the provision for income taxes less cash taxes from
on-going operations, stock-based compensation expense and
amortization of purchased intangibles. Non-GAAP net income per
share is calculated by dividing Non-GAAP net income by the
weighted average number of diluted shares outstanding for the
period. The following table details our calculation (and
reconciliation to GAAP) of non-GAAP net income and non-GAAP net
income per share (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
GAAP net income (loss)
|
|
$
|
1,686
|
|
|
$
|
3,257
|
|
|
$
|
(2,764
|
)
|
Stock-based compensation
|
|
|
3,365
|
|
|
|
4,392
|
|
|
|
4,557
|
|
Amortization of intangible assets software
|
|
|
1,585
|
|
|
|
1,160
|
|
|
|
1,000
|
|
Amortization of intangible assets other
|
|
|
626
|
|
|
|
1,050
|
|
|
|
2,148
|
|
Provision for income taxes
|
|
|
897
|
|
|
|
1,019
|
|
|
|
1,034
|
|
Cash taxes from on-going operations*
|
|
|
(544
|
)
|
|
|
(78
|
)
|
|
|
(1,670
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP net income
|
|
$
|
7,615
|
|
|
$
|
10,800
|
|
|
$
|
4,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted common shares outstanding:
|
|
|
14,969
|
|
|
|
14,394
|
|
|
|
16,098
|
|
Non-GAAP net income per share
|
|
$
|
0.51
|
|
|
$
|
0.75
|
|
|
$
|
0.27
|
|
|
|
|
* |
|
Cash taxes from on-going operations for the year ended
September 30, 2009 excludes a onetime cash payment of
$4.1 million related to an agreement to purchase certain
intangible assets from our German subsidiary. Cash taxes from
on-going operations for the year ended September 30, 2009
differs from the amounts previously publicly announced as a
result of reconciling these amounts to the cash flow statements. |
46
Adjusted
EBITDA
Adjusted EBITDA is defined as earnings before interest income,
taxes, stock-based compensation, depreciation, amortization and
other income (expense), net. The following table details our
calculation (and reconciliation to GAAP) of Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
GAAP net income (loss)
|
|
$
|
1,686
|
|
|
$
|
3,257
|
|
|
$
|
(2,764
|
)
|
Stock-based compensation
|
|
|
3,365
|
|
|
|
4,392
|
|
|
|
4,557
|
|
Amortization of intangible assets software
|
|
|
1,585
|
|
|
|
1,160
|
|
|
|
1,000
|
|
Amortization of intangible assets other
|
|
|
626
|
|
|
|
1,050
|
|
|
|
2,148
|
|
Depreciation
|
|
|
4,462
|
|
|
|
4,854
|
|
|
|
5,139
|
|
Provision for income taxes
|
|
|
897
|
|
|
|
1,019
|
|
|
|
1,034
|
|
Interest income and other income (expense), net
|
|
|
(351
|
)
|
|
|
(1,331
|
)
|
|
|
(2,326
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
12,270
|
|
|
$
|
14,401
|
|
|
$
|
8,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free
Cash Flow
Free cash flow is defined as cash flow from operations less cash
used for purchases of property, equipment, software and acquired
technology. The following table details our calculation (and
reconciliation to GAAP) of free cash flow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Cash flow provided by operations
|
|
$
|
12,731
|
|
|
$
|
8,799
|
|
|
$
|
5,280
|
|
Purchases of property, equipment and software
|
|
|
(3,229
|
)
|
|
|
(3,444
|
)
|
|
|
(8,422
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free cash flow
|
|
$
|
9,502
|
|
|
$
|
5,355
|
|
|
$
|
(3,142
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Deferred Revenue
Net deferred revenue is comprised of all unearned revenue that
has been collected in advance, primarily unearned license and
subscription services revenue, and is recorded as deferred
revenue on the balance sheet until the revenue is earned. Net
deferred revenue is reduced to the extent that there are any
accounts receivable balances associated with the deferred
revenue (unpaid deferred revenue) at the balance
sheet date and may change at any point in time based upon the
timing of when invoices are collected. Gross deferred revenue is
defined as the sum of net deferred revenue and unpaid deferred
revenue. The following table details our calculation of gross
deferred revenue at September 30 of each fiscal year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net deferred revenue
|
|
$
|
21,465
|
|
|
$
|
18,828
|
|
|
$
|
19,933
|
|
Unpaid deferred revenue
|
|
|
5,775
|
|
|
|
3,475
|
|
|
|
4,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross deferred revenue
|
|
$
|
27,240
|
|
|
$
|
22,303
|
|
|
$
|
24,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
Other
Operational Data
The following table provides certain other operational data that
management uses to manage and measure our performance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Worldwide customers (approximately)
|
|
|
2,800
|
|
|
|
2,800
|
|
|
|
2,800
|
|
Quarterly Internet Web measurement subscription net revenue (in
thousands)
|
|
$
|
7,105
|
|
|
$
|
6,370
|
|
|
$
|
7,348
|
|
Average monthly Internet pages measured
|
|
|
26,800
|
|
|
|
18,000
|
|
|
|
13,900
|
|
Average monthly revenue per Internet page*
|
|
$
|
88
|
|
|
$
|
118
|
|
|
$
|
176
|
|
|
|
|
* |
|
Average monthly revenue per Internet page is calculated as:
(quarterly Internet Web measurement subscription net
revenue/3 months)/ average monthly Internet pages measured.
Internet Web measurement subscription net revenue consists of
our Application Perspective, Transaction Perspective, and
Streaming Perspective subscription services. |
While the total number of customers has remained relatively
constant for each of the periods ended September 30, 2010,
2009, and 2008 due to our sales and marketing efforts to replace
lost customers with new customers, our total number of Internet
pages measured has increased due to the increased complexity of
our customers Web sites and their reliance on our
measurements to monitor their Web site performance. However, at
the same time, our average monthly revenue per Internet page has
decreased due to a decline in our average price per Internet
page measured as a result of the recent economic environment and
other competitive pressures. If we cannot increase or maintain
our revenue per Internet page measured, we will need to further
increase our customer base to grow our subscription revenue.
As a result of the introduction of our FlexUse system in fiscal
2009, customers now have the ability to increase or decrease the
number of pages they measure at any given time without
significantly changing their overall spend. The reason for this
is they now have the flexibility to change not only the number
of URL targets they measure, but also the frequency and location
of the measurements. For example, Internet pages measured and
revenue per Internet page over the last four quarters were
significantly impacted by a single customer project that began
about a year ago. The pricing for this customer project was
offered below our average pricing because this project was
expected to transition shortly to Keynote Private
Agents which usually carry an unlimited usage
pricing model. If we were to exclude this single customer
projects page count and revenues from our normally
published metrics, the number of pages measured in the first
fiscal quarter of 2010 would have been approximately 16,800 with
revenue per page of $121, compared to approximately 19,800 pages
in the fourth fiscal quarter of 2010 with revenue per page of
$118. With this adjustment, our Internet pages measured would
have grown by approximately 18%, while the revenue per Internet
page would have decreased by approximately 3%. Consequently, we
believe that Internet pages measured is no longer a reliable
metric of underlying demand, and revenue per Internet page is no
longer a useful metric for understanding unit pricing trends. As
a result, commencing in our 2011 fiscal year we will not be
publishing Internet pages measured and revenue per Internet
page, as we do not believe these will be key business metrics.
However, we will continue to separately provide Internet
Subscription revenue Web measurement and Internet
Subscription revenue Other as measures of our
Internet business.
48
Liquidity
and Capital Resources
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Cash, cash equivalents and short-term investments
|
|
$
|
66,352
|
|
|
$
|
57,968
|
|
Accounts receivable, net
|
|
$
|
9,094
|
|
|
$
|
6,403
|
|
Working capital
|
|
$
|
54,820
|
|
|
$
|
44,749
|
|
Days sales in accounts receivable (DSO)*
|
|
|
41
|
|
|
|
30
|
|
|
|
|
* |
|
DSO for the fourth fiscal quarter is calculated as: (ending net
accounts receivable / net sales for the three month period)
multiplied by number of days in the period |
The increase in DSO from September 30, 2009 to
September 30, 2010 was primarily due to granting foreign
and domestic customers longer payment terms during contract
negotiations. The collectability of accounts receivable has not
been affected.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Cash provided by operating activities
|
|
$
|
12,731
|
|
|
$
|
8,799
|
|
|
$
|
5,280
|
|
Cash provided by (used in) investing activities
|
|
$
|
(40,149
|
)
|
|
$
|
(2,731
|
)
|
|
$
|
48,142
|
|
Cash provided by (used in) financing activities
|
|
$
|
666
|
|
|
$
|
2,726
|
|
|
$
|
(53,646
|
)
|
Cash,
cash equivalents and short-term investments and working
capital
At September 30, 2010, we had $23.2 million in cash
and cash equivalents and $43.1 million in short-term
investments, for a total of $66.4 million. Cash and cash
equivalents consist of highly liquid investments held at major
banks, money market funds and fixed term deposits with original
maturities of three months or less. Short-term investments
consist of fixed-term deposits with original maturities longer
than three months and investment-grade corporate and government
debt securities with Moodys ratings of A2 or better. As of
September 30, 2010, $41.1 million of our cash, cash
equivalents and short-term investments was held in the United
States. The remainder of our cash, cash equivalents and
short-term investments were held in foreign subsidiaries. If
these foreign cash and cash equivalents and short-term
investments are distributed to the United States in the form of
dividends or otherwise, we may be subject to additional
U.S. income taxes (subject to an adjustment for foreign tax
credits) and foreign withholding taxes.
Cash
flows from operating activities
We expect that cash provided by operating activities may
fluctuate in future periods as a result of a number of factors,
including fluctuations in our operating results, accounts
receivable collections, and the timing and amount of tax and
other payments.
Our largest source of operating cash flow is cash collections
from our customers. Payments from subscription services
customers are generally collected either at the beginning of the
subscription period, ranging from one to twelve months, or
monthly during the life of the subscription period. Payments for
our ratable licenses are generally collected at delivery of the
SITE system. Payments from some of our professional services
customers are collected at the completion of the service period
or as milestones are completed. Our primary use of cash from
operating activities, are for personnel related expenditures,
measurement and data collection infrastructure costs, insurance,
regulatory compliance and other expenses associated with
operating our business.
For the year ended September 30, 2010, net cash provided by
operating activities was $12.7 million. Net cash provided
was mainly due to net income of $1.7 million, adjusted for
$10.6 million of non-cash adjustments to reconcile net
income to net cash provided by operating activities and a
$0.5 million net change in operating assets and
liabilities. The non-cash adjustments consist primarily of
depreciation, amortization, stock-based compensation expenses,
amortization of debt instruments, and deferred tax benefit. The
net change in operating assets and liabilities was primarily due
to an increase in deferred revenue of $2.9 million, an
increase in accounts payable and accrued expenses of
$0.5 million; partially offset by an increase in accounts
receivable of $3.1 million.
49
For the year ended September 30, 2009, net cash provided by
operating activities was $8.8 million. Net cash provided
was mainly due to net income of $3.3 million, adjusted for
$13.1 million of non-cash adjustments to reconcile net
income to net cash provided by operating activities and a
$7.6 million net change in operating assets and
liabilities. The non-cash adjustments consist primarily of
depreciation, amortization, stock-based compensation expenses
and bad debt and billing adjustment reserves. The net change in
operating assets and liabilities was primarily due to a decrease
in accounts payable and accrued expenses of $4.7 million, a
decrease in deferred revenue of $1.7 million, and an
increase in prepaid and other assets, including prepaid tax
assets, of $1.8 million; partially offset by a decrease in
account receivable of $0.6 million. The change in accounts
payable and accrued expenses during the year ended
September 30, 2009 was mainly attributed to a
$4.1 million cash payment to the German tax authority for
taxes associated with fiscal year 2008 operations and the
migration of intellectual property from Germany to the United
States.
Cash
flows from investing activities
The changes in cash flows from investing activities primarily
relates to acquisitions and the timing of purchases and
maturities of investments. We also use cash to purchase
property, equipment and software to support our growth and
infrastructure and to make tenant improvements associated with
space we lease in our headquarters building.
For the year ended September 30, 2010, net cash used by our
investing activities was $40.1 million. We paid
$56.1 million for the purchase of short-term investments,
and received $19.2 million from maturities and sales of
short-term investments. We also purchased $3.2 million of
property, equipment, and software.
For the year ended September 30, 2009, net cash used by our
investing activities was $2.7 million. We paid
$15.9 million for the purchase of short-term investments,
and received $16.8 million from maturities and sales of
short-term investments. We also purchased $3.4 million of
property, equipment, and software.
Cash
flows from financing activities
The changes in cash flows from financing activities primarily
relate to payments made for stock repurchases and proceeds
received from the issuance of common stock associated with our
employee stock option plan and employee stock purchase plan.
For the year ended September 30, 2010, net cash from
financing activities was $0.7 million. We received
$3.6 million from the issuance of common stock associated
with our employee stock option plan and employee stock purchase
plan, partially offset by common stock dividends of
$2.9 million.
For the year ended September 30, 2009, net cash from
financing activities was $2.7 million. We received
$3.0 million from the issuance of common stock associated
with our employee stock option plan and employee stock purchase
plan, partially offset by repayment of notes payable of
$0.2 million.
Commitments
and Contractual Obligations
As of September 30, 2010, our principal commitments
consisted of $2.7 million in real property and equipment
operating leases. These leases expire at various times through
October 2017. Additionally, we had $1.5 million of
contingent commitments, with a remaining term of between one to
twenty-three months, to bandwidth and co-location providers,
which commitments become due if we terminate any of these
agreements prior to their expiration. At present, we do not
intend to terminate any of these agreements prior to their
expiration. We expect to continue to invest in equipment and
other assets to support our growth.
50
The following table summarizes our minimum contractual
obligations and commercial commitments as of September 30,
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
2-3
|
|
|
4-5
|
|
|
More Than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
Contractual Obligations: Operating Leases
|
|
$
|
2,659
|
|
|
$
|
794
|
|
|
$
|
1,030
|
|
|
$
|
695
|
|
|
$
|
140
|
|
Contingent Commitments: Bandwidth and
Co-location
|
|
|
1,492
|
|
|
|
1,267
|
|
|
|
225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,151
|
|
|
$
|
2,061
|
|
|
$
|
1,255
|
|
|
$
|
695
|
|
|
$
|
140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The above amounts exclude liabilities under the FASBs
guidance on accounting for income taxes, as we are unable to
reasonably estimate the ultimate amount or timing of settlement.
As of September 30, 2010, we have outstanding guarantees
totaling $0.1 million to customers and vendors of one of our
foreign subsidiaries. These guarantees can only be executed upon
agreement by both the customer or vendor and us. At
September 30, 2010, these guarantees were secured by a
$1.4 million unsecured line of credit.
We generally do not indemnify customers for our measuring,
monitoring and testing services against legal claims that our
products and services infringe on third-party intellectual
property rights. Other agreements entered into by us may include
indemnification provisions that could subject us to costs
and/or
damages in the event of an infringement claim against us or an
indemnified third-party. However, we have never been a party to
an infringement claim and in the opinion of management, we do
not have a liability related to any infringement claims subject
to indemnification and as such, there is no material adverse
affect on our financial condition, liquidity or results of
operations.
We believe that our existing cash, cash equivalents and
short-term investments will be sufficient to meet our
anticipated cash needs for working capital and capital
expenditures for at least the next 12 months. Factors that
could affect our cash position include potential acquisitions,
additional stock repurchases, cash dividends, decreases in
customers or renewals, decreases in revenue or changes in the
value of our short-term investments. If, after some period of
time, our existing cash, short-term investments and cash
generated from operations is insufficient to satisfy our
liquidity requirements, we may seek to sell additional equity or
debt securities or to obtain a credit facility. If additional
funds are raised through the issuance of debt securities, these
securities could have rights, preferences and privileges senior
to holders of common stock, and the terms of this debt could
impose restrictions on our operations. The sale of additional
equity or convertible debt securities could result in dilution
to our stockholders, and we may not be able to obtain additional
financing on acceptable terms, if at all. If we are unable to
obtain this additional financing, our business may be harmed.
Off
Balance Sheet Arrangements
We did not enter into any transactions with unconsolidated
entities whereby we have financial guarantees, subordinated
retained interests, derivative instruments or other contingent
arrangements that expose us to material continuing risks,
contingent liabilities, or any other obligation under a variable
interest in a unconsolidated entity that provides financing,
liquidity, market risk or credit risk support to us.
Recent
Accounting Pronouncements
In September 2009, the FASB issued new guidance on certain
revenue arrangements that include hardware and software elements
and that include multiple deliverables. The guidance removed
from the scope of industry specific revenue guidance for
software and software related transactions, tangible products
containing software components and non-software components that
function together to deliver the products essential
functionality. Additionally, the new guidance provides updated
guidance on: (1) whether multiple deliverables exist, how
the deliverables in an arrangement should be separated, and the
consideration allocated; (2) requires an entity to allocate
revenue in an arrangement using estimated selling prices of
deliverables if a vendor does not have vendor-specific objective
evidence (VSOE) or third-party evidence of selling
price; and (3) eliminates the use of the residual method
and require an entity to allocate revenue using the relative
selling price method. The new guidance is effective for fiscal
years beginning on or after
51
June 15, 2010, with early adoption permitted. Adoption may
either be on a prospective basis or by retrospective
application. At this time, we believe that the guidance will
primarily affect the timing of recognizing revenue on our sales
of SITE systems. While we are still assessing the impact of this
guidance on our accounting and reporting systems and processes,
we have elected to adopt this guidance on a prospective basis
and, at this time, do not expect the new guidance to have a
material effect on our financial condition or operating results
in the first fiscal quarter of 2011.
During the first quarter of 2010, we adopted the FASBs new
guidance on fair value measurements and disclosures for all
financial assets and liabilities. The new guidance defines fair
value, provides a framework for measuring fair value, and
expands the disclosures required for fair value measurements.
Adoption of the new fair value guidance for all non-financial
assets and non-financial liabilities, except for items that are
recognized or disclosed at fair value in the financial
statements on a recurring basis, did not have a material effect
on our financial condition or operating results.
In December 2007, the FASB issued new guidance for business
combinations, which establishes principles and requirements for
how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities
assumed, and any noncontrolling interest in the acquiree in a
business combination. This new guidance also establishes
principles regarding how goodwill acquired in a business
combination or a gain from a bargain purchase should be
recognized and measured, as well as provides guidelines on the
disclosure requirements on the nature and financial impact of
the business combination. In April 2009, the FASB amended this
new guidance to require that assets acquired and liabilities
assumed in a business combination that arise from contingencies
be recognized at fair value, if the fair value can be determined
during the measurement period. We adopted the new guidance for
acquisitions completed after October 1, 2009, the beginning
of our fiscal year 2010. The impact of adoption will be largely
dependent on the size and nature of the business combinations
completed after the adoption of this guidance.
In December 2007, the FASB issued new guidance for accounting of
noncontrolling interests in consolidated financial statements,
which establishes accounting and reporting standards for
ownership interests in subsidiaries held by parties other than
the parent, the amount of consolidated net income attributable
to the parent and to the noncontrolling interest, changes in a
parents ownership interest and the valuation of retained
noncontrolling equity investments when a subsidiary is
deconsolidated. The guidance also establishes reporting
requirements that provide sufficient disclosures that clearly
identify and distinguish between the interests of the parent and
the interests of the noncontrolling owners. We adopted the new
guidance in the first quarter of 2010, which did not have an
effect on our financial condition or operating results.
In March 2008, the FASB issued new guidance for disclosures
about derivative instruments and hedging activities, which
enhances financial disclosure by requiring that objectives for
using derivative instruments be described in terms of underlying
risk and accounting designation in the form of tabular
presentation, requiring transparency with respect to the
entitys liquidity from using derivatives, and
cross-referencing an entitys derivative information within
its financial footnotes. We adopted the new guidance in the
first quarter of 2010, which did not have an effect on our
financial condition or operating results.
In April 2008, the FASB issued new guidance for determination of
the useful life of intangible assets, which amends the factors
that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized
intangible asset. The intent of the statement is to improve the
consistency between the useful life of a recognized intangible
asset and the period of expected cash flows used to measure the
fair value of the asset. We adopted the new guidance in the
first quarter of 2010, which did not have an effect on our
financial condition or operating results.
In May 2009, the FASB issued new guidance that establishes
general standards of accounting for and disclosure of events
that occur after the balance sheet date but before financial
statements are issued. In February 2010, the FASB issued an
amendment to this guidance that removed the requirement for an
SEC filer to disclose a date through which subsequent events
have been evaluated in both issued and revised financial
statements. The adoption of this guidance, as amended, did not
have a material impact on our consolidated financial statements.
52
|
|
Item 7A.
|
Quantitative
And Qualitative Disclosures About Market Risk
|
We are exposed to financial market risks, including changes in
interest rates and foreign currency exchange rates. To mitigate
these risks we may use derivative financial instruments in
accordance with our investment and foreign exchange policies. We
have not and currently do not use derivatives or other financial
instruments for trading or speculative purposes.
Interest
Rate Sensitivity
Our interest income is sensitive to changes in the general level
of interest rates, particularly because most of our short-term
investments are invested in debt instruments. If market interest
rates were to change immediately and uniformly by ten percent
(10%) from their current levels, the interest earned on those
cash, cash equivalents, and short-term investments could
increase or decrease by $0.1 million on an annualized basis.
Foreign
Currency Fluctuations
We operate internationally and are exposed to potentially
adverse movements in foreign currency rate changes. A majority
of our revenue and expenses are transacted in United States
dollars. However, we do enter into transactions in other
currencies, primarily the Euro and British Pound. As a result,
our United States dollar earnings and net cash flows from
international operations may be adversely affected by changes in
foreign currency exchange rates. Net foreign exchange
transaction gains (losses) included in Other income
(expense), net in the accompanying consolidated statements
of operations, primarily due to fluctuations in the Euro and the
British Pound, totaled $(0.1) million, $0.5 million
and $(0.6) million for the years ended September 30,
2010, 2009 and 2008, respectively. We currently do not hedge or
enter into currency exchange contracts against foreign currency
exposures.
53
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
Keynote
Systems, Inc. and Subsidiaries
Index to
Consolidated Financial Statements
54
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Keynote Systems, Inc.
San Mateo, California
We have audited the accompanying consolidated balance sheets of
Keynote Systems, Inc. and subsidiaries (the Company)
as of September 30, 2010 and 2009, and the related
consolidated statements of operations, stockholders equity
and comprehensive income (loss), and cash flows for each of the
three years in the period ended September 30, 2010. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Keynote Systems, Inc. and subsidiaries as of September 30,
2010 and 2009, and the results of their operations and their
cash flows for each of the three years in the period ended
September 30, 2010, in conformity with accounting
principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Companys internal control over financial reporting as of
September 30, 2010, based on the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated December 10, 2010 expressed
an unqualified opinion on the Companys internal control
over financial reporting.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
December 10, 2010
55
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands, except share amounts and par value)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
23,241
|
|
|
$
|
51,383
|
|
Short-term investments
|
|
|
43,111
|
|
|
|
6,585
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and short-term investments
|
|
|
66,352
|
|
|
|
57,968
|
|
Accounts receivable, less allowance for doubtful accounts of $50
and $112, respectively, and less billing reserve of $150 and
$150, respectively
|
|
|
9,094
|
|
|
|
6,403
|
|
Prepaids, deferred costs and other current assets
|
|
|
3,571
|
|
|
|
3,517
|
|
Inventories
|
|
|
1,286
|
|
|
|
1,222
|
|
Deferred tax assets
|
|
|
3,749
|
|
|
|
2,913
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
84,052
|
|
|
|
72,023
|
|
Deferred costs and other long-term assets
|
|
|
1,599
|
|
|
|
3,024
|
|
Property, equipment and software, net
|
|
|
33,432
|
|
|
|
34,778
|
|
Goodwill
|
|
|
63,166
|
|
|
|
66,078
|
|
Identifiable intangible assets, net
|
|
|
3,914
|
|
|
|
6,255
|
|
Long-term deferred tax assets
|
|
|
359
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
186,522
|
|
|
$
|
182,219
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,748
|
|
|
$
|
1,147
|
|
Accrued expenses
|
|
|
7,945
|
|
|
|
8,466
|
|
Deferred revenue
|
|
|
19,539
|
|
|
|
17,661
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
29,232
|
|
|
|
27,274
|
|
Deferred rent and other long-term liabilities
|
|
|
3,605
|
|
|
|
3,344
|
|
Long-term deferred revenue
|
|
|
1,926
|
|
|
|
1,167
|
|
Long-term deferred tax liability
|
|
|
395
|
|
|
|
414
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
35,158
|
|
|
|
32,199
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (see Note 8)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; 100,000,000 shares
authorized; 14,942,571 and 14,501,176 shares issued and
outstanding, respectively
|
|
|
15
|
|
|
|
14
|
|
Additional paid-in capital
|
|
|
286,761
|
|
|
|
282,653
|
|
Accumulated deficit
|
|
|
(137,928
|
)
|
|
|
(139,614
|
)
|
Accumulated other comprehensive income
|
|
|
2,516
|
|
|
|
6,967
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
151,364
|
|
|
|
150,020
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
186,522
|
|
|
$
|
182,219
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except per
|
|
|
|
share amounts)
|
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription services
|
|
$
|
48,860
|
|
|
$
|
45,597
|
|
|
$
|
45,314
|
|
Ratable licenses
|
|
|
22,203
|
|
|
|
24,623
|
|
|
|
21,820
|
|
Professional services
|
|
|
8,788
|
|
|
|
9,887
|
|
|
|
9,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
79,851
|
|
|
|
80,107
|
|
|
|
76,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct costs of subscription services
|
|
|
8,720
|
|
|
|
8,655
|
|
|
|
8,324
|
|
Direct costs of ratable licenses
|
|
|
6,870
|
|
|
|
6,079
|
|
|
|
6,558
|
|
Direct costs of professional services
|
|
|
5,737
|
|
|
|
5,958
|
|
|
|
7,113
|
|
Development
|
|
|
11,978
|
|
|
|
12,186
|
|
|
|
12,608
|
|
Operations
|
|
|
7,661
|
|
|
|
8,264
|
|
|
|
8,576
|
|
Amortization of intangible assets software
|
|
|
1,585
|
|
|
|
1,160
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs of revenue
|
|
|
42,551
|
|
|
|
42,302
|
|
|
|
44,179
|
|
Sales and marketing
|
|
|
25,469
|
|
|
|
23,863
|
|
|
|
25,705
|
|
General and administrative
|
|
|
10,460
|
|
|
|
10,332
|
|
|
|
10,142
|
|
Excess occupancy income
|
|
|
(1,487
|
)
|
|
|
(1,020
|
)
|
|
|
(1,210
|
)
|
Amortization of intangible assets other
|
|
|
626
|
|
|
|
1,050
|
|
|
|
2,148
|
|
Lease abandonment expense
|
|
|
|
|
|
|
635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses*
|
|
|
77,619
|
|
|
|
77,162
|
|
|
|
80,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
2,232
|
|
|
|
2,945
|
|
|
|
(4,056
|
)
|
Interest income
|
|
|
459
|
|
|
|
853
|
|
|
|
3,025
|
|
Other income (expense), net
|
|
|
(108
|
)
|
|
|
478
|
|
|
|
(699
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes
|
|
|
2,583
|
|
|
|
4,276
|
|
|
|
(1,730
|
)
|
Provision for income taxes
|
|
|
(897
|
)
|
|
|
(1,019
|
)
|
|
|
(1,034
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,686
|
|
|
$
|
3,257
|
|
|
$
|
(2,764
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.11
|
|
|
$
|
0.23
|
|
|
$
|
(0.18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.11
|
|
|
$
|
0.23
|
|
|
$
|
(0.18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net income (loss) per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
14,708
|
|
|
|
14,323
|
|
|
|
15,522
|
|
Diluted
|
|
|
14,969
|
|
|
|
14,394
|
|
|
|
15,522
|
|
Cash dividends declared per common share
|
|
$
|
0.20
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
* |
|
Stock-based compensation by category: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct cost of ratable licenses
|
|
$
|
72
|
|
|
$
|
78
|
|
|
$
|
246
|
|
Direct cost of professional services
|
|
|
353
|
|
|
|
494
|
|
|
|
462
|
|
Development
|
|
|
778
|
|
|
|
969
|
|
|
|
993
|
|
Operations
|
|
|
440
|
|
|
|
554
|
|
|
|
644
|
|
Sales and marketing
|
|
|
1,244
|
|
|
|
1,580
|
|
|
|
1,532
|
|
General and administrative
|
|
|
478
|
|
|
|
717
|
|
|
|
680
|
|
See accompanying notes to consolidated financial statements
57
Keynote
Systems, Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
Common Stock
|
|
|
Treasury Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
Comprehensive
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income
|
|
|
Equity
|
|
|
Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2007
|
|
|
18,436,648
|
|
|
$
|
18
|
|
|
|
(92,000
|
)
|
|
$
|
(1,151
|
)
|
|
$
|
325,525
|
|
|
$
|
(140,188
|
)
|
|
$
|
6,681
|
|
|
$
|
190,885
|
|
|
$
|
290
|
|
Cumulative effect of the adoption of uncertainty in income taxes
(See Note 1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81
|
|
|
|
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted balances, October 1, 2007
|
|
|
18,436,648
|
|
|
$
|
18
|
|
|
|
(92,000
|
)
|
|
$
|
(1,151
|
)
|
|
$
|
325,525
|
|
|
$
|
(140,107
|
)
|
|
$
|
6,681
|
|
|
$
|
190,966
|
|
|
$
|
290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
(5,000,000
|
)
|
|
|
(59,919
|
)
|
|
|
(151
|
)
|
|
|
|
|
|
|
|
|
|
|
(60,070
|
)
|
|
|
|
|
Issuance of common stock
|
|
|
750,533
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
6,450
|
|
|
|
|
|
|
|
|
|
|
|
6,451
|
|
|
|
|
|
Retirement of treasury stock
|
|
|
(5,092,000
|
)
|
|
|
(5
|
)
|
|
|
5,092,000
|
|
|
|
61,070
|
|
|
|
(61,065
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,557
|
|
|
|
|
|
|
|
|
|
|
|
4,557
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,764
|
)
|
|
|
|
|
|
|
(2,764
|
)
|
|
|
(2,764
|
)
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,642
|
)
|
|
|
(1,642
|
)
|
|
|
(1,642
|
)
|
Unrealized gain on available-for sale investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
13
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2008
|
|
|
14,095,181
|
|
|
$
|
14
|
|
|
|
|
|
|
$
|
|
|
|
$
|
275,316
|
|
|
$
|
(142,871
|
)
|
|
$
|
5,052
|
|
|
$
|
137,511
|
|
|
$
|
(4,393
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
405,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,978
|
|
|
|
|
|
|
|
|
|
|
|
2,978
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,359
|
|
|
|
|
|
|
|
|
|
|
|
4,359
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,257
|
|
|
|
|
|
|
|
3,257
|
|
|
|
3,257
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,915
|
|
|
|
1,915
|
|
|
|
1,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2009
|
|
|
14,501,176
|
|
|
$
|
14
|
|
|
|
|
|
|
$
|
|
|
|
$
|
282,653
|
|
|
$
|
(139,614
|
)
|
|
$
|
6,967
|
|
|
$
|
150,020
|
|
|
$
|
5,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
441,395
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
3,628
|
|
|
|
|
|
|
|
|
|
|
|
3,629
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,427
|
|
|
|
|
|
|
|
|
|
|
|
3,427
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,686
|
|
|
|
|
|
|
|
1,686
|
|
|
|
1,686
|
|
Unrealized gain on available for sale investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
|
|
|
|
65
|
|
|
|
65
|
|
Dividends paid on common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,947
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,947
|
)
|
|
|
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,516
|
)
|
|
|
(4,516
|
)
|
|
|
(4,516
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2010
|
|
|
14,942,571
|
|
|
$
|
15
|
|
|
|
|
|
|
$
|
|
|
|
$
|
286,761
|
|
|
$
|
(137,928
|
)
|
|
$
|
2,516
|
|
|
$
|
151,364
|
|
|
$
|
(2,765
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,686
|
|
|
$
|
3,257
|
|
|
$
|
(2,764
|
)
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4,462
|
|
|
|
4,854
|
|
|
|
5,139
|
|
Loss on disposal of assets
|
|
|
109
|
|
|
|
27
|
|
|
|
|
|
Stock-based compensation
|
|
|
3,365
|
|
|
|
4,392
|
|
|
|
4,557
|
|
Charges to bad debt and billing adjustment reserves
|
|
|
164
|
|
|
|
315
|
|
|
|
240
|
|
Impairment of short-term investments
|
|
|
|
|
|
|
|
|
|
|
98
|
|
(Accretion) amortization of debt investment (discount) premium
|
|
|
752
|
|
|
|
3
|
|
|
|
(464
|
)
|
Amortization of identifiable intangible assets
|
|
|
2,211
|
|
|
|
2,210
|
|
|
|
3,148
|
|
Excess tax benefits from stock-based compensation
|
|
|
|
|
|
|
(12
|
)
|
|
|
|
|
Amortization of prepaid tax asset
|
|
|
754
|
|
|
|
821
|
|
|
|
418
|
|
Collection of tax credit receivable within deferred tax assets
|
|
|
|
|
|
|
637
|
|
|
|
|
|
Deferred tax assets and liabilities, net
|
|
|
(1,263
|
)
|
|
|
(107
|
)
|
|
|
(26
|
)
|
Changes in assets and liabilities, net of acquired assets and
assumed liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(3,068
|
)
|
|
|
631
|
|
|
|
(1,622
|
)
|
Inventories
|
|
|
(171
|
)
|
|
|
(102
|
)
|
|
|
(23
|
)
|
Prepaids, deferred costs and other assets
|
|
|
257
|
|
|
|
(682
|
)
|
|
|
294
|
|
Accounts payable and accrued expenses
|
|
|
528
|
|
|
|
(4,653
|
)
|
|
|
96
|
|
Deferred revenue
|
|
|
2,945
|
|
|
|
(1,706
|
)
|
|
|
(2,067
|
)
|
Prepaid tax asset
|
|
|
|
|
|
|
(1,086
|
)
|
|
|
(1,744
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
12,731
|
|
|
|
8,799
|
|
|
|
5,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, equipment and software
|
|
|
(3,229
|
)
|
|
|
(3,444
|
)
|
|
|
(5,865
|
)
|
Acquired technology
|
|
|
|
|
|
|
|
|
|
|
(2,557
|
)
|
Purchases of businesses and assets, net
|
|
|
|
|
|
|
(170
|
)
|
|
|
(1,697
|
)
|
Purchases of short-term investments
|
|
|
(56,070
|
)
|
|
|
(15,918
|
)
|
|
|
(27,699
|
)
|
Maturities and sales of short-term investments
|
|
|
19,150
|
|
|
|
16,801
|
|
|
|
85,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(40,149
|
)
|
|
|
(2,731
|
)
|
|
|
48,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of lease obligation
|
|
|
(16
|
)
|
|
|
(15
|
)
|
|
|
(26
|
)
|
Payment of notes payable
|
|
|
|
|
|
|
(249
|
)
|
|
|
|
|
Excess tax benefits from stock-based compensation
|
|
|
|
|
|
|
12
|
|
|
|
|
|
Proceeds from issuance of common stock and exercise of stock
options
|
|
|
3,629
|
|
|
|
2,978
|
|
|
|
6,450
|
|
Common stock dividends
|
|
|
(2,947
|
)
|
|
|
|
|
|
|
|
|
Repurchase of outstanding common stock
|
|
|
|
|
|
|
|
|
|
|
(60,070
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
666
|
|
|
|
2,726
|
|
|
|
(53,646
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash
equivalents
|
|
|
(1,390
|
)
|
|
|
43
|
|
|
|
(105
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(28,142
|
)
|
|
|
8,837
|
|
|
|
(329
|
)
|
Cash and cash equivalents at beginning of the year
|
|
|
51,383
|
|
|
|
42,546
|
|
|
|
42,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of the year
|
|
$
|
23,241
|
|
|
$
|
51,383
|
|
|
$
|
42,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow disclosure:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid (net of refunds) during the year
|
|
$
|
544
|
|
|
$
|
4,164
|
|
|
$
|
1,670
|
|
Noncash operating and investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of property, equipment and software on account at
year end
|
|
$
|
105
|
|
|
$
|
31
|
|
|
$
|
113
|
|
Retirement of treasury stock
|
|
$
|
|
|
|
$
|
|
|
|
$
|
61,070
|
|
See accompanying notes to consolidated financial statements
59
(1) Summary
of Significant Accounting Policies
Keynote Systems, Inc. was incorporated on June 15, 1995 in
California and reincorporated in Delaware on March 31,
2000. Keynote Systems, Inc. and its subsidiaries (the
Company) develop and sell services, hardware and
software to measure, test, assure and improve the quality of
service of Internet and mobile communications.
Basis
of Presentation
The accompanying consolidated financial statements include the
accounts of the Company. Intercompany accounts and transactions
have been eliminated. The preparation of these consolidated
financial statements in conformity with United States generally
accepted accounting principles (GAAP) requires
management to make estimates and assumptions that affect the
amounts reported in these consolidated financial statements and
accompanying notes. Significant estimates made in preparing the
consolidated financial statements relate to revenue recognition,
the allowance for doubtful accounts and billing reserve,
allocation of purchase price for business combinations, useful
lives of property, equipment, software and identifiable
intangible assets, asset impairments, the fair values of options
granted under the Companys stock-based compensation plans
and valuation allowances for deferred tax assets. Actual results
could differ from those estimates, and such differences may be
material to the financial statements.
Revenue
Recognition
Revenue consists of subscription services revenue, ratable
licenses revenue and professional services revenue and is
recognized when all of the following criteria have been met:
|
|
|
|
|
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 Companys 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.
|
The Company does not generally grant refunds. All discounts
granted reduce revenue. Free trials are occasionally provided to
prospective customers who would like to try certain of the
Companys subscription services before they commit to
purchasing the services. The services provided during the trial
period are typically stand-alone transactions and are not
bundled with other services. Revenue is not recognized for these
free trial periods.
Subscription Services Revenue: Subscription
services revenue consists of fees from sales of subscriptions to
the Companys Internet Cloud services and Mobile Cloud
services.
The Company has entered into multiple element arrangements where
sufficient objective evidence of fair value does not exist for
the allocation of revenue. As a result, the elements within its
subscription arrangements do not qualify for treatment as
separate units of accounting. Accordingly, the Company accounts
for fees received under
60
Keynote
Systems, Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
subscription arrangements as a single unit of accounting and
recognizes the entire arrangement fee as revenue either ratably
over the service period, generally over twelve months, or based
upon actual monthly usage.
For customers that are billed the entire amount of their
subscription in advance, subscription services revenue is
deferred upon invoicing and is recognized ratably over the
service period, generally ranging from one to twelve months,
commencing on the day service is first provided. For customers
that are billed on a monthly basis, revenue is recognized
monthly based upon actual service usage for the month.
Regardless of when billing occurs, the Company recognizes
revenue as services are provided and defers any revenue that is
unearned.
WebEffective service can be sold on a subscription basis or as
part of a professional services engagement. The Company
recognizes revenue from the use of its WebEffective service that
is sold on a subscription basis ratably over the subscription
period, commencing on the day service is first provided, and
such revenue is recorded as subscription services revenue. The
Company recognizes revenue from the use of its WebEffective
service as part of a professional services engagement at the
time the professional services revenue is recognized and is
recorded as professional services revenue.
Ratable Licenses Revenue: Ratable licenses
revenue consists of fees from the sale of mobile automated test
equipment, maintenance, engineering and consulting services
associated with System Integrated Test Environment
(SITE) systems. The Company frequently enters into
multiple element arrangements with mobile customers for the sale
of its automated test equipment, including software licenses,
hardware, consulting services to configure the systems
(implementation or integration services), post contract support
(maintenance) services, training services and minor other
consulting services. This determination is based on the hardware
component of the Companys multiple element arrangements
being deemed to include a software related element. In addition,
customers do not purchase the hardware without also purchasing
the software. In other words, the software and hardware are sold
together as a package, with payments due from customers upon
delivery.
None of the SITE implementation/integration services provided by
the Company is considered to be essential to the functionality
of the licensed products. This assessment is due to the
implementation/integration services being performed during a
relatively short period (generally within two to three months)
compared to the length of the arrangement which typically ranges
from twelve to thirty-six months. Additionally, the
implementation/integration services are general in nature and
the Company has a history of successfully gaining customer
acceptance.
The Company cannot allocate the arrangement consideration to the
multiple elements based on vendor-specific objective evidence
(VSOE) of fair value because sufficient evidence of
VSOE does not exist for the undelivered elements of the
arrangement, typically maintenance. Therefore, the Company
recognizes the entire arrangement fee into revenue ratably over
the maintenance period, historically ranging from twelve to
thirty-six months, once the implementation and integration
services are completed, usually within two to three months
following the delivery of the hardware and software. Where
acceptance provisions exist, the ratable recognition of revenue
begins when evidence of customer acceptance of the software and
hardware has occurred as intended under the respective
arrangements contractual terms.
Professional Services Revenue: Professional
services revenue consists of fees generated from professional
consulting services that are purchased as part of a professional
service project. Revenue from these services is recognized as
the services are performed, typically over a period of one to
three months. For professional service projects that contain
milestones, the Company recognizes revenue once the services or
milestones have been delivered, based on input measures. Payment
occurs either up-front or over time.
The Company also enters into multiple element arrangements,
which generally consist of either: 1) the combination of
subscription and professional services, or 2) multiple
professional services. The Company has been unable to establish
objective evidence of fair value of the undelivered elements for
such arrangements. Consequently, the entire arrangement fee is
recognized ratably over the applicable performance period.
61
Keynote
Systems, Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
Deferred Revenue: Deferred revenue is
comprised of all unearned revenue that has been collected in
advance, primarily unearned subscription services and ratable
licenses revenue, and is recorded as deferred revenue on the
balance sheet until the revenue is earned. Any unpaid deferred
revenue reduces the balance of accounts receivable. Short-term
deferred revenue represents the unearned revenue that has been
collected in advance that will be earned within twelve months of
the balance sheet date. Correspondingly, long-term deferred
revenue represents the unearned revenue that will be earned
after twelve months from the balance sheet date and primarily
relates to ratable licenses revenue.
Deferred Costs: Deferred costs are mainly
comprised of hardware costs associated with SITE revenue
arrangements. Deferred costs are categorized as short-term for
any arrangement for which the original service contracts are one
year or less in length. Correspondingly, deferred costs
associated with arrangements for which the original service
contracts are greater than one year are classified as noncurrent
deferred costs in the consolidated balance sheets. These
deferred costs are amortized to cost of ratable licenses over
the life of the customer contract, generally one to three years.
Amortization of these deferred costs commences when revenue
recognition begins, which is typically the later of delivery or
acceptance.
Financial
Instruments
Cash and
Cash Equivalents and Short- Term Investments
All highly liquid investments held at major banks, commercial
paper, money market funds and other securities with original
maturities of three months or less are considered to be cash
equivalents.
The Company classifies all its investments as
available-for-sale
at the time of purchase since it is managements intent
that these investments are available for current operations, and
includes these investments on its balance sheets as short-term
investments. These investments consist of fixed-term deposits
with original maturities longer than three months and
investment-grade corporate and government debt securities with
Moodys ratings of A2 or better. Investments classified as
available-for-sale
are recorded at fair market value with the related unrealized
gains and losses included in accumulated other comprehensive
income (loss), a component of stockholders equity.
Realized gains and losses are recorded based on specific
identification.
Fair
Value Measurements
The Company adopted the Financial Accounting Standards
Boards (FASBs) new guidance on fair
value measurements and disclosures for all financial assets and
liabilities and non-financial assets and liabilities. The new
guidance defines fair value, provides a framework for measuring
fair value and expands the disclosures required for fair value
measurements. During the first quarter of 2010, the Company
adopted the new fair value guidance for all non-financial assets
and non-financial liabilities, except for items that are
recognized or disclosed at a fair value in the financial
statements on a recurring basis, which did not have effect the
Companys financial condition or operating results.
The Company applies fair value accounting for all financial
assets and liabilities and non-financial assets and liabilities
that are recognized or disclosed at fair value in the financial
statements on a recurring basis. The Company defines fair value
as the price that would be received from selling an asset or
paid to transfer a liability in an orderly transaction between
market participants at the measurement date. When determining
the fair value measurements for assets and liabilities which are
required to be recorded at fair value, the Company considers the
principal or most advantageous market in which the Company would
transact and the market-based risk measurements or assumptions
that market participants would use in pricing the asset or
liability, such as inherent risk, transfer restrictions and
credit risk. In accordance with the fair value accounting
requirements, companies may choose to measure eligible financial
instruments and certain other items at fair value. The Company
has not elected the fair value option for any eligible financial
instruments.
62
Keynote
Systems, Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
Inventories
Inventories primarily relate to direct costs associated with
SITE systems hardware and are stated at the lower of cost
(determined on a
first-in,
first-out basis) or market. If the cost of the inventories
exceeds their market value, provisions are made currently for
the difference between the cost and the market value. The
Company evaluates inventories for excess quantities and
obsolescence on a quarterly basis. This evaluation includes
analysis of historical and forecasted sales of our product.
Obsolescence is determined considering several factors,
including competitiveness of product offerings, market
conditions, and product life cycles. Any adjustment for market
value decreases, inventories on hand in excess of forecasted
demand or obsolete inventories are charged to cost of ratable
licenses in the period that management identifies the adjustment.
Property,
Equipment and Software
Property and equipment are recorded at cost less accumulated
depreciation and amortization. Depreciation is calculated using
the straight-line method over the estimated useful lives of the
respective assets, generally three to five years. Equipment
under capital leases is amortized over the shorter of the
estimated useful life of the equipment or the lease term.
Leasehold and building improvements are amortized over the
shorter of the estimated useful lives of the assets which ranges
from five to 30 years, or the lease term. The cost of the
Companys headquarters building is being depreciated over a
thirty-year life.
Accumulated
Other Comprehensive Income
The Company reports comprehensive income (loss) in accordance
with the FASBs guidance on reporting comprehensive
income, which establishes standards for reporting
comprehensive income and its components in the financial
statements. The components of comprehensive income consist of
net income (loss), unrealized gains and losses on
available-for-sale
investments and foreign currency translation. The unrealized
gains and losses on
available-for-sale
investments and foreign currency translation are excluded from
earnings and reported as a component of stockholders
equity. The foreign currency translation adjustment results from
those subsidiaries not using the U.S. dollar as their
functional currency since the majority of their economic
activities are primarily denominated in their applicable local
currency. The Company has subsidiaries located in Germany, the
United Kingdom, France and Canada. Accordingly, all assets and
liabilities related to these operations are translated at the
current exchange rates at the end of each period. The resulting
cumulative translation adjustments are recorded directly to the
accumulated other comprehensive income account in
stockholders equity. Revenues and expenses are translated
at average exchange rates in effect during the period. Gains
(losses) from foreign currency transactions are reflected in
other income (expense), net in the consolidated statements of
operations as incurred and were $(0.1) million,
$0.5 million and $(0.6) million for the years ended
September 30, 2010, 2009 and 2008, respectively.
The components of accumulated other comprehensive income
reflected in the consolidated statements of stockholders
equity at September 30, 2010 and 2009 consisted of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Unrealized gain on investments
|
|
$
|
65
|
|
|
$
|
|
|
Cumulative translation adjustments
|
|
|
2,451
|
|
|
|
6,967
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
$
|
2,516
|
|
|
$
|
6,967
|
|
|
|
|
|
|
|
|
|
|
The Company did not record deferred taxes on unrealized gains on
its investments, as the Company intends to hold these
investments to maturity. In addition, there is no tax effect on
the foreign currency translation because it is managements
intent to reinvest the undistributed earnings of its foreign
subsidiaries indefinitely.
63
Keynote
Systems, Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
Financial
Instruments and Concentration of Credit Risk
The carrying value of the Companys financial instruments,
including cash and cash equivalents, short-term investments,
accounts receivable, accounts payable and accrued expenses
approximates fair market value due to their short-term nature.
Financial instruments that subject the Company to concentrations
of credit risk consist primarily of cash and cash equivalents,
short-term investments and accounts receivable.
Credit risk is concentrated in North America, but exists in
Europe as well. The Company generally requires no collateral
from customers; however, throughout the collection process, it
conducts an ongoing evaluation of its customers ability to
pay. The Companys accounting for its allowance for
doubtful accounts is determined based on historical trends,
experience and current market and industry conditions.
Management regularly reviews the adequacy of the Companys
allowance for doubtful accounts by considering the age of each
outstanding invoice, each customers expected ability to
pay and the Companys collection history with each
customer. Management reviews customers with invoices greater
than 60 days past due to determine whether a specific
allowance is appropriate. In addition, the Company maintains a
reserve for all other invoices, which is calculated by applying
a percentage to the outstanding accounts receivable balance,
based on historical collection trends.
In addition to the allowance for doubtful accounts, the Company
maintains a billing reserve that represents the reserve for
potential billing adjustments that are recorded as a reduction
of revenue. The Companys billing reserve is calculated as
a percentage of revenue based on historical trends and
experience.
The allowance for doubtful accounts and billing reserve
represent managements best estimate as of the balance
sheet dates, but changes in circumstances relating to accounts
receivable and billing reserves, including unforeseen declines
in market conditions, actual collection rates and the number of
billing adjustments, may result in additional allowances or
recoveries in the future.
Activity in the allowance for doubtful accounts and billing
reserve was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Write-Offs/
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
Credit
|
|
|
Balance at
|
|
|
|
Beginning
|
|
|
Operations/
|
|
|
Memos
|
|
|
End of
|
|
Fiscal Years
|
|
of Period
|
|
|
Revenue
|
|
|
Issued
|
|
|
Period
|
|
|
2010
|
|
$
|
262
|
|
|
$
|
164
|
|
|
$
|
(226
|
)
|
|
$
|
200
|
|
2009
|
|
$
|
268
|
|
|
$
|
315
|
|
|
$
|
(321
|
)
|
|
$
|
262
|
|
2008
|
|
$
|
284
|
|
|
$
|
240
|
|
|
$
|
(256
|
)
|
|
$
|
268
|
|
One customer accounted for 10% and 11% of the Companys net
accounts receivable at September 30, 2010 and 2009,
respectively. For the years ended September 30, 2010, 2009
and 2008, no single customer accounted for more than 10% of
total net revenue.
Lease
Abandonment Accrual
The Company leases a facility in New York under an operating
lease that expires in October 2015. The Company ceased using the
facility in the fourth quarter of fiscal 2009 and, effective
October 1, 2009, subleased the facility to a third party
for the remainder of its lease term. In the fourth quarter of
fiscal 2009, the Company recorded lease abandonment expense of
$0.6 million related to its discontinuance of this
facility. The changes in the lease abandonment liability for the
year ended September 30, 2010 was as follows (in thousands):
|
|
|
|
|
Lease abandonment liability, September 30, 2009
|
|
$
|
696
|
|
Lease payments to lessor
|
|
|
(266
|
)
|
Sublease proceeds
|
|
|
101
|
|
Payment of lease termination costs
|
|
|
(63
|
)
|
|
|
|
|
|
Lease abandonment liability, September 30, 2010
|
|
$
|
468
|
|
|
|
|
|
|
64
Keynote
Systems, Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
Excess
Occupancy Income
Excess occupancy income consists of rental income from the
leasing of space not occupied by the Company in its headquarters
building, net of related fixed costs (which consist of property
taxes, insurance, building depreciation, leasing broker fees and
tenant improvement amortization). The costs are based upon
actual square footage available to lease to third parties which
was approximately 75% for each of the years ended
September 30, 2010, 2009, and 2008, respectively. Rental
income was $3.0 million, $2.6 million, and
$2.6 million for the years ended September 30, 2010,
2009 and 2008, respectively. As of September 30, 2010, the
Company had leased space to 11 tenants, of which 10 are under
noncancellable operating leases, which expire on various dates
through 2014. At September 30, 2010, future minimum rents
receivable under the leases were as follows (in thousands):
|
|
|
|
|
Fiscal Years
|
|
Total
|
|
|
2011
|
|
$
|
2,424
|
|
2012
|
|
|
1,751
|
|
2013
|
|
|
383
|
|
2014
|
|
|
95
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
Total future minimum rents receivable
|
|
$
|
4,653
|
|
|
|
|
|
|
Goodwill
and Long-Lived Assets
Goodwill is measured as the excess of the cost of an acquisition
over the sum of the amounts assigned to identifiable assets
acquired less liabilities assumed. Goodwill and other
identifiable intangible assets are accounted for in accordance
the FASBs guidance on goodwill and other intangible
assets. Goodwill and indefinite lived intangible assets are not
amortized but instead are reviewed annually for impairment or
more frequently if impairment indicators arise. Separable
intangible assets that are not deemed to have an indefinite life
are generally amortized on a straight-line basis over their
useful lives, generally thirty-six to seventy-eight months.
The Company tests for impairment annually, in the fourth quarter
of each fiscal year, and whenever events or changes in
circumstances indicate that the carrying amount of goodwill or
indefinite lived intangible assets may not be recoverable. These
tests are performed at the reporting unit level using a
two-step, fair-value based approach. The Company has determined
that it has only one reporting unit. The first step determines
the fair value of the reporting unit using the market
capitalization value and compares it to the reporting
units carrying value. The Company determines its market
capitalization value based on the number of shares outstanding,
its average stock price and other relevant market factors, such
as merger and acquisition multiples and control premiums. If the
fair value of the reporting unit is less than its carrying
amount, a second step is performed to measure the amount of
impairment loss, if any. The second step allocates the fair
value of the reporting unit to the Companys tangible and
intangible assets and liabilities. This derives an implied fair
value for the reporting units goodwill. If the carrying
amount of the reporting units goodwill exceeds the implied
fair value of that goodwill, an impairment loss is recognized
equal to that excess.
Based on the results of the first step of the Companys
impairment test performed at September 30, 2010, the fair
value of its reporting unit exceeded its carrying value by more
than 20% and the Company passed Step 1 of the goodwill
impairment test. Accordingly, the Company determined that its
goodwill had not been impaired. The Company continuously
monitors for events and circumstances that could negatively
impact the key assumptions in determining fair value, including
long-term revenue growth projections, discount rates, recent
market valuations from transactions by comparable companies,
volatility in the Companys market capitalization and
general industry, market and macro-economic conditions. It is
possible that changes in such circumstances, or in the variables
65
Keynote
Systems, Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
associated with the judgments, assumptions and estimates used in
assessing the fair value of the reporting unit, would require
the Company to record a non-cash impairment charge.
The Company assesses the impairment of long-lived assets in
accordance with the FASBs guidance on accounting for
impairment or disposal of long-lived assets whenever events or
changes in circumstances indicate the carrying value of an asset
may not be recoverable. The Company assesses the fair value of
the assets based on the undiscounted future cash flow that the
assets are expected to generate and recognizes an impairment
loss when estimated undiscounted future cash flow expected to
result from the use of the asset plus net proceeds expected from
disposition of the asset, if any, are less than the carrying
value of the asset. When the Company identifies an impairment,
it reduces the carrying amount of the asset to its estimated
fair value based on a discounted cash flow approach or, when
available and appropriate, to comparable market values.
Stock-Based
Compensation
The Company applies the FASBs guidance for stock-based
compensation transactions in which the Company receives employee
services in exchange for equity instruments of the Company.
Further information regarding stock-based compensation is more
fully described in Note 6. For stock options and employee
stock purchase plan awards, the fair value of stock-based
compensation is estimated on the date of grant using the
Black-Scholes option pricing model. For restricted stock units,
the fair value of stock-based compensation is estimated on the
date of grant using the fair market value of the Companys
common stock and the dividend rate. Guidance prohibits
recognition of an excess tax benefit related to stock-based
compensation until that benefit has been realized through a
reduction of the taxes payable.
Determining Fair Value: The Company estimates
the fair value of each option award granted using the
Black-Scholes option pricing model. Stock options vest on a
graded schedule; however, the Company determines the fair value
of each award as a single award and recognizes the expense on a
straight-line basis over the requisite service period of the
award, which is generally the vesting period. The exercise price
of the options granted is equal to the fair market value of the
Companys common stock on the date of grant. Stock options
generally expire ten years from the date of grant.
Expected Volatility: The Companys
expected volatility represents the amount by which the stock
price is expected to fluctuate throughout the period that the
stock option is outstanding. The Company estimates expected
volatility based on historical volatility.
Risk-free Interest Rate: The risk-free rate
for the expected term of the option is based on the average
yield to maturity of treasury bills and bonds as reported by the
Federal Reserve Bank of St. Louis in effect on the date of
the option grant.
Expected Term: The Companys expected
term of options granted is derived from a risk-adjusted single-
exercise factor lattice model.
Estimated Forfeitures: Stock-based
compensation is recognized based on awards that are ultimately
expected to vest. Therefore, a forfeiture rate is applied at the
time of grant and revised, if necessary, in subsequent periods
when actual forfeitures differ from those estimates.
The Company elected to adopt the alternative transition method
for calculating the tax effects of stock-based compensation. The
alternative transition method includes simplified methods to
establish the beginning balance of additional
paid-in-capital
(APIC pool) related to the tax effects of employee
stock-based compensation and to determine the subsequent impact
on the APIC pool and consolidated statements of cash flows of
the tax effects of employee stock-based compensation awards that
are outstanding. The increase to the APIC pool is limited to the
tax benefits related to an employee award that is fully vested
and outstanding.
66
Keynote
Systems, Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
Income
Taxes
In accordance with the FASBs guidance on income taxes,
the provisions for income taxes are accounted for under the
asset and liability method. Deferred tax assets and liabilities
are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis
and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes
the enactment date. A valuation allowance is established when
necessary to reduce deferred tax assets to the amounts that the
Company expects to realize. These calculations are performed on
a separate tax jurisdiction basis.
On October 1, 2007, the Company adopted the FASBs
guidance on accounting for uncertainty in income taxes, which
creates a new framework for how companies should recognize,
measure, present, and disclose uncertain tax positions in their
financial statements. Under the guidance, the Company may
recognize the tax benefit from an uncertain tax position only if
it is more likely than not the tax position will be sustained on
examination by the taxing authorities, based on the technical
merits of the position. The tax benefits recognized in the
financial statements from such positions are then measured based
on the largest benefit that has a greater than 50% likelihood of
being realized upon settlement. The guidance also provides
direction on the reversal of previously recognized tax
positions, balance sheet classifications, accounting for
interest and penalties associated with tax positions, and income
tax disclosures. See Note 7 for additional information,
including the effects of adoption on the Companys
consolidated financial statements.
Development
Development costs are expensed as incurred until technological
feasibility, defined as a working prototype, has been
established in accordance with the FASBs guidance on
accounting for the costs of computer software to be sold, leased
or otherwise marketed. To date, the Companys products and
service offerings have been available for general release
shortly before the establishment of technological feasibility
and, accordingly, no development costs have been capitalized in
fiscal years ended September 30, 2010, 2009 and 2008.
Development costs incurred to develop internal use software
follows the guidance set forth in the FASBs guidance on
accounting for the cost of computer software developed or
obtained for internal use, which requires companies to
capitalize qualifying computer software costs that are incurred
during the application development stage and amortize them over
the softwares estimated useful life. There were no
capitalized development costs for the years ended
September 30, 2010 and 2009. Development costs capitalized
for the year ended September 30, 2008 were
$2.6 million, and relate to a purchase of intangible assets
from FonJax on August 28, 2008. These purchased intangible
assets are presented as identifiable intangible assets, net on
the consolidated balance sheets.
Net
Income (Loss) Per Share
Basic net income (loss) per share is computed using the weighted
average number of outstanding shares of common stock. Diluted
net income (loss) per share is computed using the weighted
average number of shares of common stock outstanding and, when
dilutive, potential shares from options and restricted stock
units to purchase common stock using the treasury stock method.
67
Keynote
Systems, Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
The following table sets forth the computation of basic and
diluted net income (loss) per share (in thousands, except per
share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,686
|
|
|
$
|
3,257
|
|
|
$
|
(2,764
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
14,708
|
|
|
|
14,323
|
|
|
|
15,522
|
|
Effect of dilutive securities
|
|
|
261
|
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares diluted
|
|
|
14,969
|
|
|
|
14,394
|
|
|
|
15,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
0.11
|
|
|
$
|
0.23
|
|
|
$
|
(0.18
|
)
|
Diluted net income (loss) per share
|
|
$
|
0.11
|
|
|
$
|
0.23
|
|
|
$
|
(0.18
|
)
|
Potentially dilutive securities representing 4.0 million,
4.9 million and 5.6 million shares of common stock for
the years ended September 30, 2010, 2009 and 2008,
respectively, were excluded from the computation of diluted net
income (loss) per share because their effect would have been
antidilutive.
Advertising
Costs
All advertising costs are expensed as incurred. Advertising
expenses included in sales and marketing in the consolidated
statements of operations were $2.4 million,
$1.3 million and $1.1 million for the years ended
September 30, 2010, 2009, and 2008, respectively.
Recent
Accounting Pronouncements
In September 2009, the FASB issued new guidance on certain
revenue arrangements that include hardware and software elements
and that include multiple deliverables. The guidance removed
from the scope of industry specific revenue guidance for
software and software related transactions, tangible products
containing software components and non-software components that
function together to deliver the products essential
functionality. Additionally, the new guidance provides updated
guidance on: (1) whether multiple deliverables exist, how
the deliverables in an arrangement should be separated, and the
consideration allocated; and (2) require an entity to
allocate revenue in an arrangement using estimated selling
prices of deliverables if a vendor does not have vendor-specific
objective evidence (VSOE) or third-party evidence of
selling price; and (3) eliminates the use of the residual
method and require an entity to allocate revenue using the
relative selling price method. The new guidance is effective for
fiscal years beginning on or after June 15, 2010, with
early adoption permitted. Adoption may either be on a
prospective basis or by retrospective application. At this time,
the Company believes that the guidance will primarily affect the
timing of recognizing revenue on sales of SITE systems. While
the Company is still assessing the impact of this guidance on
its accounting and reporting systems and processes, the Company
has elected to adopt this guidance on a prospective basis and,
at this time, does not expect the new guidance to have a
material effect on its financial condition or operating results
in the first fiscal quarter of 2011.
During the first quarter of 2010, the Company adopted the
FASBs new guidance on fair value measurements and
disclosures for all financial assets and liabilities. The new
guidance defines fair value, provides a framework for measuring
fair value, and expands the disclosures required for fair value
measurements. Adoption of the new fair value guidance for all
non-financial assets and non-financial liabilities, except for
items that are recognized or disclosed at fair value in the
financial statements on a recurring basis, did not have a
material effect on the Companys financial condition or
operating results.
68
Keynote
Systems, Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
In December 2007, the FASB issued new guidance for business
combinations, which establishes principles and requirements for
how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities
assumed, and any noncontrolling interest in the acquiree in a
business combination. This new guidance also establishes
principles regarding how goodwill acquired in a business
combination or a gain from a bargain purchase should be
recognized and measured, as well as provides guidelines on the
disclosure requirements on the nature and financial impact of
the business combination. In April 2009, the FASB amended this
new guidance to require that assets acquired and liabilities
assumed in a business combination that arise from contingencies
be recognized at fair value, if the fair value can be determined
during the measurement period. The Company adopted the new
guidance for acquisitions completed after October 1, 2009,
the beginning of its fiscal year 2010. The impact of adoption
will be largely dependent on the size and nature of the business
combinations completed after the adoption of this guidance.
In December 2007, the FASB issued new guidance for accounting of
noncontrolling interests in consolidated financial statements,
which establishes accounting and reporting standards for
ownership interests in subsidiaries held by parties other than
the parent, the amount of consolidated net income attributable
to the parent and to the noncontrolling interest, changes in a
parents ownership interest and the valuation of retained
noncontrolling equity investments when a subsidiary is
deconsolidated. The guidance also establishes reporting
requirements that provide sufficient disclosures that clearly
identify and distinguish between the interests of the parent and
the interests of the noncontrolling owners. The Company adopted
the new guidance in the first quarter of 2010, which did not
have an effect on its financial condition or operating results.
In March 2008, the FASB issued new guidance for disclosures
about derivative instruments and hedging activities, which
enhances financial disclosure by requiring that objectives for
using derivative instruments be described in terms of underlying
risk and accounting designation in the form of tabular
presentation, requiring transparency with respect to the
entitys liquidity from using derivatives, and
cross-referencing an entitys derivative information within
its financial footnotes. The Company adopted the new guidance in
the first quarter of 2010, which did not have an effect on its
financial condition or operating results.
In April 2008, the FASB issued new guidance for determination of
the useful life of intangible assets, which amends the factors
that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized
intangible asset. The intent of the statement is to improve the
consistency between the useful life of a recognized intangible
asset and the period of expected cash flows used to measure the
fair value of the asset. The Company adopted the new guidance in
the first quarter of 2010, which did not have an effect on its
financial condition or operating results.
In May 2009, the FASB issued new guidance that establishes
general standards of accounting for and disclosure of events
that occur after the balance sheet date but before financial
statements are issued. In February 2010, the FASB issued an
amendment to this guidance that removed the requirement for an
SEC filer to disclose a date through which subsequent events
have been evaluated in both issued and revised financial
statements. The adoption of this guidance, as amended, did not
have a material impact on the Companys consolidated
financial statements.
|
|
(2)
|
Cash,
Cash Equivalents and Short-Term Investments
|
The Company considers all highly liquid investments held at
major banks, commercial paper, money market funds and other
securities with original maturities of three months or less to
be cash equivalents in accordance with the FASBs guidance
on statement of cash flows.
69
Keynote
Systems, Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
The following table summarizes the Companys cash and cash
equivalents and short-term investments as of September 30,
2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Market Value
|
|
|
Cash
|
|
$
|
17,732
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
17,732
|
|
Money market funds
|
|
|
5,509
|
|
|
|
|
|
|
|
|
|
|
|
5,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
$
|
23,241
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
23,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-term deposits
|
|
$
|
12,271
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
12,271
|
|
Treasuries and agencies
|
|
|
3,101
|
|
|
|
10
|
|
|
|
|
|
|
|
3,111
|
|
Corporate and municipal bonds
|
|
|
27,674
|
|
|
|
70
|
|
|
|
(15
|
)
|
|
|
27,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
$
|
43,046
|
|
|
$
|
80
|
|
|
$
|
(15
|
)
|
|
$
|
43,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the Companys cash and cash
equivalents and short-term investments as of September 30,
2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Market Value
|
|
|
Cash
|
|
$
|
20,492
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
20,492
|
|
Money market funds
|
|
|
30,891
|
|
|
|
|
|
|
|
|
|
|
|
30,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
$
|
51,383
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
51,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-term deposits
|
|
$
|
6,585
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
6,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
$
|
6,585
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
6,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company utilizes the FASBs guidance to determine the
fair value of financial instruments and to determine if the
gross unrealized loss on investments represents a temporary
impairment. The Company evaluates whether an impairment of a
debt security is other than temporary each reporting period
using the following guidance:
|
|
|
|
|
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 securitys amortized cost basis, the entity must
assess whether it expects to recover the entire amortized cost
basis of the security.
|
Market values were determined for each individual security in
the investment portfolio. Investments are reviewed periodically
to identify possible impairment and if impairment does exist,
the charge would be recorded in the consolidated statement of
operations. The Company reviewed factors such as the length of
time and extent to which fair value has been below cost, the
financial condition of the investee, and the Companys
ability and intent to hold the investment for a period of time
which may be sufficient for anticipated recovery in market
value. There was no impairment charge for the years ended
September 30, 2010 and 2009.
70
Keynote
Systems, Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
The following table shows the gross unrealized losses and fair
value of the Companys investments aggregated by investment
category and length of time that individual securities have been
in a continuous unrealized loss position (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months
|
|
|
12 Months or Greater
|
|
|
Total
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
Security Description
|
|
Fair Value
|
|
|
Loss
|
|
|
Fair Value
|
|
|
Loss
|
|
|
Fair Value
|
|
|
Loss
|
|
|
As of September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed term deposits
|
|
$
|
12,271
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
12,271
|
|
|
$
|
|
|
Treasuries and agencies
|
|
|
3,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,111
|
|
|
|
|
|
Corporate and municipal bonds
|
|
|
27,729
|
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
27,729
|
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
43,111
|
|
|
$
|
(15
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
43,111
|
|
|
$
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed term deposits
|
|
$
|
6,585
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
6,585
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,585
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
6,585
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual maturities of
available-for-sale
securities at September 30, 2010 were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Due in less than one year
|
|
$
|
30,063
|
|
|
$
|
30,090
|
|
Due in more than one year and less than two years
|
|
|
12,983
|
|
|
|
13,021
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
43,046
|
|
|
$
|
43,111
|
|
|
|
|
|
|
|
|
|
|
|
|
(3)
|
Fair
Value Measurements
|
The Company defines fair value as the price that would be
received from selling an asset or paid to transfer a liability
in an orderly transaction between market participants at the
measurement date. When determining the fair value measurements
for assets and liabilities which are required to be recorded at
fair value, the Company considers the principal or most
advantageous market in which the Company would transact and the
market-based risk measurements or 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.
The Company applies the following fair value hierarchy, which
prioritizes the inputs used to measure fair value into three
levels and bases the categorization within the hierarchy upon
the lowest level of input that is available and significant to
the fair value measurement:
|
|
|
|
|
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 managements 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.
|
71
Keynote
Systems, Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
The following table presents the Companys assets measured
at fair value on a recurring basis as of September 30, 2010
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Instruments
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
5,509
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
5,509
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-term deposits
|
|
|
|
|
|
|
12,271
|
|
|
|
|
|
|
|
12,271
|
|
Corporate and municipal bonds
|
|
|
27,729
|
|
|
|
|
|
|
|
|
|
|
|
27,729
|
|
Treasuries and agencies
|
|
|
3,111
|
|
|
|
|
|
|
|
|
|
|
|
3,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value
|
|
$
|
36,349
|
|
|
$
|
12,271
|
|
|
$
|
|
|
|
$
|
48,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-term deposits are valued at cost, which approximates fair
value as of September 30, 2010.
|
|
(4)
|
Consolidated
Financial Statement Details
|
The following tables present the Companys consolidated
financial statement details (in thousands):
Prepaids,
Deferred Costs and Other Current Assets
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Prepaid expenses
|
|
$
|
1,591
|
|
|
$
|
1,554
|
|
Deferred costs of revenue
|
|
|
806
|
|
|
|
580
|
|
Income tax receivable
|
|
|
425
|
|
|
|
971
|
|
Security deposits, advances, and interest receivable
|
|
|
590
|
|
|
|
43
|
|
Other assets
|
|
|
159
|
|
|
|
369
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,571
|
|
|
$
|
3,517
|
|
|
|
|
|
|
|
|
|
|
Property,
equipment and software
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Land
|
|
$
|
14,150
|
|
|
$
|
14,150
|
|
Computer equipment and software
|
|
|
31,874
|
|
|
|
29,551
|
|
Building
|
|
|
21,614
|
|
|
|
21,875
|
|
Furniture and fixtures
|
|
|
2,151
|
|
|
|
2,169
|
|
Leasehold and building improvements
|
|
|
1,155
|
|
|
|
1,179
|
|
Construction in progress
|
|
|
292
|
|
|
|
383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71,236
|
|
|
|
69,307
|
|
Less accumulated depreciation and amortization
|
|
|
(37,804
|
)
|
|
|
(34,529
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
33,432
|
|
|
$
|
34,778
|
|
|
|
|
|
|
|
|
|
|
72
Keynote
Systems, Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
Deferred
Costs and Other Long-Term Assets
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Prepaid tax asset
|
|
$
|
823
|
|
|
$
|
1,710
|
|
Deferred costs of revenue
|
|
|
209
|
|
|
|
421
|
|
Tenant rent receivable
|
|
|
163
|
|
|
|
280
|
|
Deposits
|
|
|
221
|
|
|
|
264
|
|
Prepaid expenses
|
|
|
183
|
|
|
|
349
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,599
|
|
|
$
|
3,024
|
|
|
|
|
|
|
|
|
|
|
Accrued
Expenses*
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Accrued employee compensation
|
|
$
|
4,040
|
|
|
$
|
4,417
|
|
Accrued audit and professional fees
|
|
|
334
|
|
|
|
429
|
|
Income and other taxes
|
|
|
1,016
|
|
|
|
844
|
|
Other accrued expenses
|
|
|
2,555
|
|
|
|
2,776
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,945
|
|
|
$
|
8,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
The current portion of capital lease obligation has been
included in other accrued expenses to conform to the current
year presentation. Additionally, certain amounts in other
accrued expenses at September 30, 2009 have been
reclassified to the other components of accrued expenses to
correct their classification. |
Deferred
Rent and Other Long-term Liabilities
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Income and other taxes
|
|
$
|
3,029
|
|
|
$
|
2,643
|
|
Deferred rent
|
|
|
392
|
|
|
|
506
|
|
Other long-term liabilities
|
|
|
184
|
|
|
|
195
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,605
|
|
|
$
|
3,344
|
|
|
|
|
|
|
|
|
|
|
|
|
(5)
|
Goodwill
and Identifiable Intangible Assets
|
The following table represents the changes in goodwill for the
two years ended September 30, 2010 (in thousands):
|
|
|
|
|
Balance at September 30, 2008
|
|
$
|
64,396
|
|
Additional goodwill for the acquisition of Zandan S.A.
|
|
|
90
|
|
Translation adjustments
|
|
|
1,592
|
|
|
|
|
|
|
Balance at September 30, 2009
|
|
$
|
66,078
|
|
Translation adjustments
|
|
|
(2,912
|
)
|
|
|
|
|
|
Balance at September 30, 2010
|
|
$
|
63,166
|
|
|
|
|
|
|
73
Keynote
Systems, Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
Identifiable intangible assets amounted to $3.9 million
(net of accumulated amortization of $25.5 million) and
$6.3 million (net of accumulated amortization of
$23.5 million) at September 30, 2010 and 2009,
respectively. The components of identifiable intangible assets
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology
|
|
|
Technology
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based-
|
|
|
Based-
|
|
|
Customer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
|
Other
|
|
|
Based
|
|
|
Trademark
|
|
|
Covenant
|
|
|
Backlog
|
|
|
Total
|
|
|
As of September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross carrying value
|
|
$
|
7,944
|
|
|
$
|
11,845
|
|
|
$
|
8,071
|
|
|
$
|
1,382
|
|
|
$
|
38
|
|
|
$
|
113
|
|
|
$
|
29,393
|
|
Accumulated amortization
|
|
|
(4,984
|
)
|
|
|
(11,845
|
)
|
|
|
(7,602
|
)
|
|
|
(939
|
)
|
|
|
(27
|
)
|
|
|
(82
|
)
|
|
|
(25,479
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net carrying value
|
|
$
|
2,960
|
|
|
$
|
|
|
|
$
|
469
|
|
|
$
|
443
|
|
|
$
|
11
|
|
|
$
|
31
|
|
|
$
|
3,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross carrying value
|
|
$
|
8,125
|
|
|
$
|
11,845
|
|
|
$
|
8,190
|
|
|
$
|
1,407
|
|
|
$
|
40
|
|
|
$
|
121
|
|
|
$
|
29,728
|
|
Accumulated amortization
|
|
|
(3,422
|
)
|
|
|
(11,834
|
)
|
|
|
(7,391
|
)
|
|
|
(733
|
)
|
|
|
(23
|
)
|
|
|
(70
|
)
|
|
|
(23,473
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net carrying value
|
|
$
|
4,703
|
|
|
$
|
11
|
|
|
$
|
799
|
|
|
$
|
674
|
|
|
$
|
17
|
|
|
$
|
51
|
|
|
$
|
6,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for identifiable intangible assets for the
years ended September 30, 2010, 2009 and 2008 was
$2.2 million, $2.2 million and $3.1 million,
respectively. Amortization of developed technology related to
software was $1.6 million, $1.2 million, and
$1.0 million for the years ended September 30, 2010,
2009, and 2008, respectively. These amounts were recorded to
costs of revenue. Amortization of other identifiable intangible
assets was $0.6 million, $1.0 million and
$2.1 million for the years ended September 30, 2010,
2009 and 2008, respectively. There were no in-process research
and development expenses capitalized for the years ended
September 30, 2010, 2009 and 2008.
The estimated future amortization expense for existing
identifiable intangible assets as of September 30, 2010 was
as follows (in thousands):
|
|
|
|
|
Fiscal Years
|
|
Total
|
|
|
2011
|
|
$
|
2,251
|
|
2012
|
|
|
1,378
|
|
2013
|
|
|
285
|
|
|
|
|
|
|
Total
|
|
$
|
3,914
|
|
|
|
|
|
|
Weighted average remaining useful lives as of September 30,
2010 (years)
|
|
|
2.3
|
|
1999
Equity Incentive Plan
As of September 30, 2010, the Company was authorized to
issue up to approximately 8.3 million shares of common
stock under its 1999 Equity Incentive Plan (Incentive
Plan) to employees, directors and consultants, including
nonqualified and incentive stock options, restricted stock units
(RSUs), and stock bonuses. Options expire ten years
after the date of grant. Vesting periods are determined by the
Board of Directors and generally, in the case of stock options,
provide for shares to vest over a period of four years with 25%
of the shares vesting one year from the date of grant and the
remainder vesting monthly over the next three years. RSUs
generally vest in full three years from the date of grant. As of
September 30, 2010, options to purchase approximately
4.0 million shares and approximately 489,000 RSUs were
outstanding under the Incentive Plan. Approximately
1.4 million shares were available for future issuance under
the Incentive Plan as of September 30, 2010.
74
Keynote
Systems, Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
Under the Incentive Plan, the exercise price for incentive stock
options is at least 100% of the stocks fair market value
on the date of the grant for employees owning less than 10% of
the voting power of all classes of stock, and at least 110% of
the fair market value on the date of grant for employees owning
more than 10% of the voting power of all classes of stock. For
nonqualified stock options, the exercise price must be at least
110% of the fair market value on the date of grant for employees
owning more than 10% of the voting power of all classes of stock
and no less than 85% for employees owning less than 10% of the
voting power of all classes of stock.
1999
Employee Stock Purchase Plan
In September 1999, the Company adopted the 1999 Employee Stock
Purchase Plan (Purchase Plan). As of
September 30, 2010, the Company had reserved a total of
approximately 1.4 million shares of common stock for
issuance under the Purchase Plan. Under the Purchase Plan,
eligible employees may defer an amount not to exceed 10% of the
employees compensation, as defined in the Purchase Plan,
to purchase common stock of the Company. The purchase price per
share is 85% of the lesser of the fair market value of the
common stock on the first day of the applicable offering period
or the last day of each purchase period. The Purchase Plan is
intended to qualify as an employee stock purchase
plan under Section 423 of the Internal Revenue Code.
As of September 30, 2010, approximately 1.3 million
shares had been issued under the Purchase Plan, and
approximately 140,000 shares remain for future issuance.
Stock-Based
Compensation
Stock
Options
A Summary of stock option activity under the Companys
Incentive Plan was as follows (in thousands expect per share and
term amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Term (Years)
|
|
|
Value
|
|
|
Outstanding at September 30, 2008
|
|
|
5,948
|
|
|
$
|
14.67
|
|
|
|
6.5
|
|
|
|
|
|
Granted
|
|
|
67
|
|
|
|
10.16
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(241
|
)
|
|
|
7.16
|
|
|
|
|
|
|
|
|
|
Forfeited or canceled
|
|
|
(916
|
)
|
|
|
32.29
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(56
|
)
|
|
|
12.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2009
|
|
|
4,802
|
|
|
$
|
11.65
|
|
|
|
5.8
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(280
|
)
|
|
|
8.91
|
|
|
|
|
|
|
|
|
|
Forfeited or canceled
|
|
|
(67
|
)
|
|
|
12.52
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(416
|
)
|
|
|
14.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2010
|
|
|
4,039
|
|
|
$
|
11.51
|
|
|
|
4.9
|
|
|
$
|
2,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest
|
|
|
4,008
|
|
|
$
|
11.51
|
|
|
|
4.9
|
|
|
$
|
2,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2010
|
|
|
3,644
|
|
|
$
|
11.44
|
|
|
|
4.6
|
|
|
$
|
2,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic values in the table above are based on
the difference between the Companys closing stock price on
the last trading day of fiscal 2010 and the exercise price,
multiplied by the number of in the money options
outstanding, vested and expected to vest and exercisable,
respectively.
75
Keynote
Systems, Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
The following table presents the composition of options
outstanding and exercisable as of September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Remaining
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
Contractual
|
|
|
Average
|
|
|
Number of
|
|
|
Average
|
|
|
|
Shares
|
|
|
Life
|
|
|
Exercise
|
|
|
Shares
|
|
|
Exercise
|
|
Range of Exercise Prices
|
|
Outstanding
|
|
|
(In Years)
|
|
|
Price
|
|
|
Exercisable
|
|
|
Price
|
|
|
$ 7.25-$ 9.30
|
|
|
415,235
|
|
|
|
1.64
|
|
|
$
|
8.21
|
|
|
|
398,216
|
|
|
$
|
8.22
|
|
$ 9.35-$10.62
|
|
|
404,148
|
|
|
|
5.88
|
|
|
|
10.27
|
|
|
|
385,325
|
|
|
|
10.28
|
|
$10.66-$10.97
|
|
|
460,163
|
|
|
|
4.28
|
|
|
|
10.84
|
|
|
|
405,149
|
|
|
|
10.86
|
|
$11.00-$11.00
|
|
|
452,502
|
|
|
|
5.43
|
|
|
|
11.00
|
|
|
|
452,502
|
|
|
|
11.00
|
|
$11.01-$11.61
|
|
|
55,803
|
|
|
|
6.32
|
|
|
|
11.46
|
|
|
|
30,104
|
|
|
|
11.33
|
|
$11.68-$11.68
|
|
|
522,000
|
|
|
|
5.34
|
|
|
|
11.68
|
|
|
|
522,000
|
|
|
|
11.68
|
|
$11.75-$11.98
|
|
|
442,911
|
|
|
|
5.12
|
|
|
|
11.97
|
|
|
|
374,557
|
|
|
|
11.97
|
|
$12.00-$12.74
|
|
|
406,631
|
|
|
|
5.76
|
|
|
|
12.48
|
|
|
|
311,859
|
|
|
|
12.46
|
|
$12.76-$13.25
|
|
|
405,381
|
|
|
|
4.08
|
|
|
|
12.98
|
|
|
|
403,474
|
|
|
|
12.98
|
|
$13.28-$24.25
|
|
|
474,362
|
|
|
|
5.99
|
|
|
|
13.91
|
|
|
|
360,678
|
|
|
|
13.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,039,136
|
|
|
|
4.88
|
|
|
$
|
11.51
|
|
|
|
3,643,864
|
|
|
$
|
11.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the year ended September 30, 2009, the Company
recorded stock-based compensation expense of $0.6 million
related to the cancellation in March 2009 of the Companys
Chief Executive Officers option to purchase
400,000 shares of its common stock at $14.99 per share,
which was approximately 67% vested at the date of cancellation.
Another option granted to the Companys Chief Executive
Officer to purchase 300,000 shares of common stock at an
exercise price of $70.00 per share was also cancelled in March
2009. No additional expense was recorded for this cancellation
given that the options were fully vested at the date of the
cancellation.
During the years ended September 30, 2010, 2009 and 2008,
the Company recorded stock-based compensation expense of
$3.4 million, $4.4 million and $4.6 million,
respectively. There was no income tax benefit associated with
the stock-based compensation expense because the deferred tax
asset resulting from stock-based compensation was offset by a
valuation allowance against the deferred tax assets.
The Company did not grant any stock options during the year
ended September 30, 2010. The weighted average grant-date
fair value of options granted during the years ended
September 30, 2009 and 2008 was $3.57, and $4.31 per share,
respectively. The aggregate intrinsic value of options exercised
during the years ended September 30, 2010, 2009 and 2008
was $0.6 million, $0.4 million, and $2.5 million,
respectively. Upon the exercise of options, the Company issues
new common stock from its authorized shares.
Weighted average assumptions for options granted under the
Incentive Plan for the years ended September 30, 2010,
2009, and 2008, respectively, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Volatility
|
|
|
|
|
|
|
39.1
|
%
|
|
|
33.4
|
%
|
Risk-free interest rates
|
|
|
|
|
|
|
2.04
|
%
|
|
|
3.29
|
%
|
Expected life (in years)
|
|
|
|
|
|
|
4.5
|
|
|
|
4.4
|
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010, there was $0.9 million of
total unrecognized compensation cost (net of estimated
forfeitures) related to nonvested stock options that is expected
to be recognized over a weighted average period of
1.2 years.
76
Keynote
Systems, Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
Purchase
Plan
Weighted average assumptions for rights issued under the
Purchase Plan for the years ended September 30, 2010, 2009,
and 2008, respectively, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Volatility
|
|
|
62.9
|
%
|
|
|
55.4
|
%
|
|
|
37.8
|
%
|
Risk-free interest rates
|
|
|
0.51
|
%
|
|
|
1.04
|
%
|
|
|
2.81
|
%
|
Expected life (in years)
|
|
|
1.25
|
|
|
|
1.25
|
|
|
|
1.25
|
|
Dividend yield
|
|
|
0.20
|
%
|
|
|
|
|
|
|
|
|
Restricted
Stock Units (RSU)
Historically, the Company used equity awards in the form of
stock options as one of the means for recruiting and retaining
highly skilled talent. In fiscal 2009, the Company began issuing
RSUs rather than stock options for eligible employees as the
primary type of long-term equity-based award. A summary of the
Companys RSU activity and related information for the
years ended September 30, 2010 and 2009 were as follows (in
thousands except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Balance at September 30, 2008
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
487
|
|
|
|
8.90
|
|
Vested
|
|
|
(16
|
)
|
|
|
9.43
|
|
Cancelled
|
|
|
(1
|
)
|
|
|
7.59
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2009
|
|
|
470
|
|
|
$
|
8.88
|
|
Granted
|
|
|
60
|
|
|
|
9.05
|
|
Vested
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(41
|
)
|
|
|
7.59
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2010
|
|
|
489
|
|
|
$
|
9.07
|
|
|
|
|
|
|
|
|
|
|
Upon vesting, the RSUs are generally net share-settled to cover
the required withholding tax and the remaining amount is
converted into an equivalent number of shares of common stock.
As of September 30, 2010, there was $2.3 million of
total unrecognized compensation cost (net of estimated
forfeitures) related to nonvested restricted stock units that is
expected to be recognized over a weighted average period of
1.8 years.
Stock
Repurchase Plan
During fiscal 2008, as part of its overall stock repurchase
program, the Company entered into several agreements with two
brokers to establish Trading Plans intended to qualify under
Rule 10b5-1
of the Securities Exchange Act of 1934 (the Exchange
Act). The Trading Plans instructed the broker to
repurchase for the Company, in accordance with
Rule 10b-18
of the Exchange Act, a cumulative total of
5.0 million shares of the Companys common stock.
In accordance with the repurchase program and Trading Plans, the
Company repurchased 5.0 million shares for
$60.1 million, and retired approximately 5.1 million
shares of treasury stock during fiscal 2008. The Company has
purchased the maximum allowable number of shares under the
Trading Plans.
77
Keynote
Systems, Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
Stockholder
Rights Plan
On October 28, 2002, the Company announced that its Board
of Directors adopted a stockholder rights plan. The plan was
amended on December 15, 2003. The plan is designed to
protect the long-term value of the Company for its stockholders
during any future unsolicited acquisition attempt. The rights
become exercisable only upon the occurrence of certain events
specified in the plan, including the acquisition of 20% of the
Companys outstanding common stock by a person or group.
The Companys Board of Directors adopted a policy under
which a committee consisting solely of independent directors of
the Board will review the Rights Agreement at least once every
three years to consider whether maintaining the Rights Agreement
continues to be in the best interests of Keynote and its
stockholders. The Board may amend the terms of the rights
without the approval of the holders of the rights.
Dividends
Prior to November 2009, the Company had not declared or paid any
cash dividends on its common stock or other securities. During
the year ended September 30, 2010, the Company declared and
paid the following cash dividends:
|
|
|
|
|
|
|
|
|
|
|
Record Date
|
|
Payment Date
|
|
Dividend Per Share
|
|
Total Dividend Paid
|
|
December 1, 2009
|
|
December 15, 2009
|
|
|
$0.05
|
|
|
|
$727,000
|
|
March 1, 2010
|
|
March 15, 2010
|
|
|
$0.05
|
|
|
|
$731,000
|
|
June 1, 2010
|
|
June 15, 2010
|
|
|
$0.05
|
|
|
|
$743,000
|
|
September 1, 2010
|
|
September 15, 2010
|
|
|
$0.05
|
|
|
|
$746,000
|
|
Income (loss) before income taxes is attributed to the following
geographic locations for the years ended September 30,
2010, 2009, and 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
United States
|
|
$
|
1,736
|
|
|
$
|
3,473
|
|
|
$
|
(2,656
|
)
|
Foreign
|
|
|
847
|
|
|
|
803
|
|
|
|
926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
2,583
|
|
|
$
|
4,276
|
|
|
$
|
(1,730
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78
Keynote
Systems, Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
Provision for income taxes for the years ended
September 30, 2010, 2009, 2008 consisted of the following
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
41
|
|
|
$
|
43
|
|
|
$
|
|
|
Foreign
|
|
|
2,131
|
|
|
|
1,130
|
|
|
|
947
|
|
State
|
|
|
52
|
|
|
|
115
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current tax expense
|
|
|
2,224
|
|
|
|
1,288
|
|
|
|
940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
69
|
|
|
|
69
|
|
|
|
67
|
|
Foreign
|
|
|
(1,410
|
)
|
|
|
(345
|
)
|
|
|
18
|
|
State
|
|
|
14
|
|
|
|
7
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax expense
|
|
|
(1,327
|
)
|
|
|
(269
|
)
|
|
|
94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes
|
|
$
|
897
|
|
|
$
|
1,019
|
|
|
$
|
1,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes for the years ended
September 30, 2010, 2009, and 2008 differed from the
amounts computed by applying the statutory federal income tax
rate of 35% to pretax income (loss) as a result of the following
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Federal tax expense (benefit) at statutory rate
|
|
$
|
904
|
|
|
$
|
1,497
|
|
|
$
|
(605
|
)
|
State tax expense, net of federal tax effect
|
|
|
26
|
|
|
|
628
|
|
|
|
1,590
|
|
Non-deductible expenses and other
|
|
|
282
|
|
|
|
653
|
|
|
|
1,058
|
|
Change in valuation allowance for federal and state deferred tax
assets
|
|
|
(788
|
)
|
|
|
(2,229
|
)
|
|
|
(1,650
|
)
|
Foreign tax differential
|
|
|
473
|
|
|
|
470
|
|
|
|
641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expense
|
|
$
|
897
|
|
|
$
|
1,019
|
|
|
$
|
1,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79
Keynote
Systems, Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
The tax effects of temporary differences that give rise to
significant portions of the Companys deferred taxes (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Accruals, reserves and other
|
|
$
|
8,040
|
|
|
$
|
6,503
|
|
Capitalized research and development
|
|
|
855
|
|
|
|
1,393
|
|
Intangibles related to acquisition
|
|
|
5,593
|
|
|
|
5,936
|
|
Property and equipment
|
|
|
23,470
|
|
|
|
22,947
|
|
Net operating loss carryforwards
|
|
|
25,432
|
|
|
|
26,190
|
|
Tax credit carryforwards
|
|
|
1,412
|
|
|
|
1,349
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
64,802
|
|
|
|
64,318
|
|
Valuation allowance
|
|
|
(60,594
|
)
|
|
|
(61,082
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
4,208
|
|
|
|
3,236
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
(495
|
)
|
|
|
(676
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred taxes
|
|
$
|
3,713
|
|
|
$
|
2,560
|
|
|
|
|
|
|
|
|
|
|
Reported as:
|
|
|
|
|
|
|
|
|
Current deferred tax assets
|
|
$
|
3,749
|
|
|
$
|
2,913
|
|
Non-current deferred tax assets
|
|
|
359
|
|
|
|
61
|
|
Non-current deferred tax liabilities
|
|
|
(395
|
)
|
|
|
(414
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred taxes
|
|
$
|
3,713
|
|
|
$
|
2,560
|
|
|
|
|
|
|
|
|
|
|
Management has established a valuation allowance for the portion
of deferred tax assets for which it is not more-likely-than-not
to be realized. The net change in the total valuation allowance
for the years ended September 30, 2010 and 2009 was an
increase (decrease) of $(0.5) million and
$0.1 million, respectively.
The Companys accounting for deferred taxes under the
FASBs guidance on accounting for income taxes involves the
evaluation of a number of factors concerning the realizability
of the Companys deferred tax assets. Assessing the
realizability of deferred tax assets is dependent upon several
factors, including the likelihood and amount, if any, of future
taxable income in relevant jurisdictions during the periods in
which those temporary differences become deductible. The
Companys management forecasts taxable income by
considering all available positive and negative evidence
including its history of operating income or losses and its
financial plans and estimates which are used to manage the
business. These assumptions require significant judgment about
future taxable income. The amount of deferred tax assets
considered realizable is subject to adjustment in future periods
if estimates of future taxable income are reduced.
At present, the Companys management believes that it is
more likely than not that $4.2 million of net deferred tax
assets, primarily related to foreign locations, will be realized
in the foreseeable future and a valuation allowance has been
established against the remaining deferred tax assets.
Any subsequent increases in the valuation allowance will be
recognized as an increase in deferred tax expense. Any decreases
in the valuation allowance will be recorded as credits to
paid-in-capital
or income tax benefit, depending on the associated deferred tax
assets.
80
Keynote
Systems, Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
Deferred tax liabilities have not been recognized for
undistributed earnings of foreign subsidiaries because it is
managements intention to indefinitely reinvest such
undistributed earnings. Undistributed earnings of the
Companys foreign subsidiaries amounted to
$5.2 million at September 30, 2010. If the Company
distributes those earnings, in the form of dividends or
otherwise, the Company would be subject to both U.S. income
taxes (net of applicable foreign tax credits) and withholding
taxes payable to the foreign jurisdictions.
The Company had net operating loss carryforwards as of
September 30, 2010 for federal income tax purposes of
$57.0 million, available to reduce future income subject to
income taxes. The federal net operating loss carryforwards will
expire, if not utilized, in the tax years 2018 through 2027. In
addition, the Company had $26.6 million of net operating
loss carryforwards as of September 30, 2010 available to
reduce future taxable income, for state income tax purposes. The
state net operating loss carryforwards will expire, if not
utilized, in the tax years 2012 through 2017. As of
September 30, 2010, federal and state net operating loss
carryforwards of $9.5 million and $4.4 million,
respectively, resulted from exercises of employee stock options
and were not recorded on the Companys consolidated balance
sheet. When realized, the benefit of the tax deduction related
to these options will be accounted for as a credit to
stockholders equity rather than as a reduction of the
income tax provision.
As of September 30, 2010, the Company had research credit
carryforwards of $2.3 million for federal and
$2.5 million for state income tax purposes individually
available to reduce future income taxes. The federal research
credit carryforwards begin to expire in the tax year 2018. The
California research credit may be carried forward indefinitely.
Federal and state tax laws impose substantial restrictions on
the utilization of net operating loss and credit carryforwards
in the event of an ownership change for tax
purposes, as defined in Section 382 of the Internal Revenue
Code. The Company has determined that the net operating losses
and research and development credits acquired through the
acquisition of two of its subsidiaries are subject to
section 382 limitations, and the effects of the limitations
have been included in the loss and credit carryforwards. If an
additional ownership change occurs, the utilization of net
operating loss and credit carryforwards could be significantly
reduced. If the Company were to make additional repurchases of
shares of its common stock, it could face additional limits on
its use of net operating losses.
In December 2007, the Company entered into an agreement whereby
it purchased certain intangible assets from its German
subsidiary. This transaction was treated as an intercompany sale
and, as such, tax is not recognized on the sale until the
Company no longer benefits from the underlying asset. Therefore,
in December 2007, the Company recorded a long-term prepaid tax
asset of $1.8 million which represents the tax that the
German subsidiary will pay of $3.0 million, offset by the
elimination of the remaining carrying amount of the deferred tax
liability related to these intangible assets that was
established at the time of the acquisition of the German
subsidiary. The deferred tax liability had a carrying amount of
$1.2 million at the time of the transfer. The net prepaid
tax asset of $1.8 million is being amortized through tax
expense over the life of the underlying asset which has been
estimated to be 48 months. During the three months ended
September 30, 2009, the Company recorded an additional
prepaid tax asset of $1.1 million which represents the
additional tax that the German subsidiary will pay based upon an
increase in the calculated price. The additional net prepaid tax
asset of $1.1 million is being amortized through tax
expense over the remaining life of the underlying asset.
Amortization expense on the prepaid tax asset was
$0.8 million, $0.8 million and $0.4 million for
the years ended September 30, 2010, 2009 and 2008,
respectively. As of September 30, 2010, the prepaid tax
asset, net of accumulated amortization, was $0.8 million
and is included in deferred costs and other long-term assets on
the consolidated balance sheet.
On October 1, 2007, the Company adopted the FASBs
guidance for accounting for uncertainty in income taxes and
recognized a cumulative effect adjustment of $0.1 million,
decreasing its income tax liability for unrecognized tax
benefits, and decreasing the September 30, 2007 accumulated
deficit balance.
81
Keynote
Systems, Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
The aggregate changes in the balance of gross unrecognized tax
benefits during the years ended September 30, 2010, 2009,
and 2008 were as follows (in thousands):
|
|
|
|
|
Beginning balance as of October 1, 2007 (upon
adoption)
|
|
$
|
5,049
|
|
Increases related to prior year tax positions
|
|
|
76
|
|
Decreases related to prior year tax positions
|
|
|
|
|
Increases related to current year tax positions
|
|
|
1,287
|
|
Decreases related to lapse of statute of limitations
|
|
|
(6
|
)
|
|
|
|
|
|
Ending balance at September 30, 2008
|
|
$
|
6,406
|
|
Increases related to prior year tax positions
|
|
|
472
|
|
Decreases related to prior year tax positions
|
|
|
(300
|
)
|
Increases related to current year tax positions
|
|
|
482
|
|
Decreases related to lapse of statute of limitations
|
|
|
(28
|
)
|
|
|
|
|
|
Ending balance at September 30, 2009
|
|
$
|
7,032
|
|
Increases related to prior year tax positions
|
|
|
51
|
|
Decreases related to prior year tax positions
|
|
|
(112
|
)
|
Increases related to current year tax positions
|
|
|
77
|
|
Decreases related to settlement with taxing authorities
|
|
|
(25
|
)
|
|
|
|
|
|
Ending balance at September 30, 2010
|
|
$
|
7,023
|
|
|
|
|
|
|
If the ending balance of approximately $7.0 million of
unrecognized tax benefits at September 30, 2010 were
recognized, $2.8 million would affect the effective income
tax rate. In accordance with the Companys accounting
policy, it recognizes accrued interest and penalties related to
unrecognized tax benefits in the provision for income taxes. The
Company had accrued interest and penalties of $0.2 million
at September 30, 2010, and $0.1 million at
September 30, 2009.
It is possible that the amount of liability for unrecognized tax
benefits may change within the next 12 months. However, an
estimate of the range of possible changes cannot be made at this
time. In addition, over the next twelve months, the
Companys existing tax positions will continue to generate
an increase in liabilities for unrecognized tax benefits.
Although the Company files U.S. federal, various state, and
foreign tax returns, the Companys only major tax
jurisdictions are the United States, California, Canada, France,
Germany, the Netherlands, and the United Kingdom. Tax years 1997
through 2009 remain subject to examination by the appropriate
governmental agencies due to tax loss carryovers from those
years.
82
Keynote
Systems, Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
|
|
(8)
|
Commitments
and Contingencies
|
Leases
The Company leases certain of its facilities and equipment under
noncancelable leases, which expire on various dates through
October 2017. As of September 30, 2010, future minimum
payments under these operating leases were as follows (in
thousands):
|
|
|
|
|
|
|
Operating
|
|
Fiscal Year
|
|
Leases
|
|
|
2011
|
|
$
|
794
|
|
2012
|
|
|
566
|
|
2013
|
|
|
464
|
|
2014
|
|
|
344
|
|
2015
|
|
|
351
|
|
Thereafter
|
|
|
140
|
|
|
|
|
|
|
Total minimum lease payments*
|
|
$
|
2,659
|
|
|
|
|
|
|
|
|
|
* |
|
Future minimum lease payments exclude sublease proceeds of
$1.0 million. |
Rent expense was $1.0 million, $1.9 million and
$1.1 million for the years ended September 30, 2010,
2009 and 2008, respectively.
Commitments
As of September 30, 2010, the Company had $1.5 million
of contingent commitments, with a remaining term of between one
to twenty-three months, to bandwidth and co-location providers,
which commitments become due if the Company terminates any of
these agreements prior to their expiration. At present, the
Company does not intend to terminate any of these agreements
prior to their expiration.
Legal
Proceedings
In August 2001, and the Company and its former officers were
named as defendants in two securities
class-action
lawsuits based on alleged errors and omissions concerning
underwriting terms in the prospectus for the Companys
initial public offering. A Consolidated Amended
Class Action Complaint for Violation of the Federal
Securities Laws (Consolidated Complaint) was filed
on or about April 19, 2002, and alleged claims against the
Company, certain of its officers, and underwriters of its
September 24, 1999 initial public offering
(underwriter defendants), under Sections 11 and
15 of the Securities Act of 1933, as amended, and under
Sections 10(b) and 20(a) of the Securities Exchange Act of
1934, as amended. The lawsuit alleged that the defendants
participated in a scheme to inflate the price of the
Companys stock in its initial public offering and in the
aftermarket through a series of misstatements and omissions
associated with the offering. The lawsuit is one of several
hundred similar cases pending in the Southern District of New
York that have been consolidated by the court.
The Company is a party to a global settlement with the
plaintiffs that would have disposed of all claims against the
Company with no admission of wrongdoing by the Company or any of
its present or former officers or directors. The settlement
agreement had been preliminarily approved by the Court. However,
while the settlement was awaiting final approval by the District
Court, in December 2006 the Court of Appeals reversed the
District Courts determination that six focus cases could
be certified as class actions. In April 2007, the Court of
Appeals denied plaintiffs petition for rehearing, but
acknowledged that the District Court might certify a more
limited class. At a June 26, 2007 status conference, the
Court approved a stipulation withdrawing the proposed
settlement. On August 14, 2007, plaintiffs filed amended
complaints in the focus cases, and a motion for class
certification in the focus cases on September 27, 2007. On
November 13, 2007, defendants in the focus cases filed a
motion to dismiss
83
Keynote
Systems, Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
the amended complaints for failure to state a claim, which the
District Court denied on March 2008. Plaintiffs, the issuer
defendants (including the Company), the underwriter defendants,
and the insurance carriers for the defendants, have engaged in
mediation and settlement negotiations. The parties reached a
settlement agreement, which was submitted to the District Court
for preliminary approval on April 2, 2009. As part of this
settlement, the Companys insurance carrier has agreed to
assume the Companys entire payment obligation under the
terms of the settlement. On June 10, 2009, the District
Court granted preliminary approval of the proposed settlement.
After a September 10, 2009 hearing, the District Court gave
final approval to the settlement on October 5, 2009.
Several objectors have filed notices of appeal to the United
States Court of Appeals for the Second Circuit from the District
Courts October 5, 2009 order approving the
settlement. Although the District Court has granted final
approval of the settlement, there can be no guarantee that it
will not be reversed on appeal. The Company believes that it has
meritorious defenses to these claims. If the settlement is not
implemented and the litigation continues against the Company,
the Company would continue to defend against this action
vigorously.
In addition, in October 2007, a lawsuit was filed in the United
States District Court for the Western District of Washington by
Vanessa Simmonds, captioned Simmonds v. JPMorgan
Chase & Co., et al.,
No. 07-1634,
alleging that the underwriters violated section 16(b) of
the Securities Exchange Act of 1934, 15 U.S.C.
section 78p(b), by engaging in short-swing trades, and
seeks disgorgement to the Company of profits from the
underwriters in amounts to be proven at trial. On
February 28, 2008, Ms. Simmonds filed an amended
complaint. The suit names the Company as a nominal defendant,
contains no claims against the Company, and seeks no relief from
the Company. This lawsuit is one of more than fifty similar
actions filed in the same court. On July 25, 2008, the
underwriter defendants in the various actions filed a joint
motion to dismiss the complaints for failure to state a claim.
The parties entered into a stipulation, entered as an order by
the Court, that the Company is not required to answer or
otherwise respond to the amended complaint. Accordingly, the
Company did not join the motion to dismiss filed by certain
issuers. On March 12, 2009, the Court dismissed the
complaint in this lawsuit with prejudice. On April 10,
2009, the plaintiff filed a notice of appeal of the District
Courts order, and thereafter the underwriter
defendants filed a cross appeal to a portion of the
District Courts order that dismissed thirty (30) of
the cases without prejudice following the moving issuers
motion to dismiss. On May 27, 2009, the Ninth Circuit
issued an order stating that the cases were not selected for
inclusion in the mediation program, and on June 22, 2009
issued an order granting the parties joint motion filed on
May 22, 2009 to consolidate the 54 appeals and 30
cross-appeals. Briefing on the appeal was completed on
November 17, 2009. The Court heard oral argument on
October 5, 2010 and the Courts decision may be issued
at any time. No amount has been accrued as of September 30,
2010 since the Company believes that the liability, if any, is
not probable and cannot be reasonably estimated.
The Company is subject to other legal proceedings, claims, and
litigation arising in the ordinary course of business. While the
outcome of these matters is currently not determinable,
management does not expect that the ultimate costs to resolve
these matters will have a material adverse effect on its
consolidated financial position, results of operations, or cash
flows.
Warranties
The Companys products are generally warranted to perform
for a period of one year. In the event there is a failure of
such products, the Company generally is obliged to correct or
replace the product to conform to the warranty provision. No
amount has been accrued for warranty obligations as of
September 30, 2010 or 2009, as costs to replace or correct
product are generally reimbursable under the manufacturers
warranty.
84
Keynote
Systems, Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
Indemnification
The Company does not generally indemnify its customers against
legal claims that its services infringe third-party intellectual
property rights. Other agreements entered into by the Company
may include indemnification provisions that could subject the
Company to costs
and/or
damages in the event of an infringement claim against the
Company or an indemnified third-party. However, the Company has
never been a party to an infringement claim and its management
is not aware of any liability related to any infringement claims
subject to indemnification. As such, no amount is accrued for
infringement claims as of September 30, 2010 and 2009.
Guarantees
As of September 30, 2010, the Company, through one of its
foreign subsidiaries, has outstanding guarantees totaling
$0.1 million to customers and vendors as a form of
security. The guarantees can only be executed upon agreement by
both the customer or vendor and the Company. The guarantees are
secured by an unsecured line of credit of $1.4 million as
of September 30, 2010.
85
Keynote
Systems, Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
|
|
(9)
|
Geographic
and Segment Information
|
The Company operates in a single reportable segment encompassing
the development and sale of services, hardware and software to
measure, test, assure and improve the service quality of
Internet and mobile communications. While the Company operates
under one operating segment, management also internally analyzes
revenue categorized as Internet Test and Measurement
(Internet) and Mobile Test and Measurement
(Mobile). The following table identifies which
services are categorized as Internet and Mobile services and
where they are recorded in the consolidated statements of
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscription
|
|
Ratable
|
|
Professional
|
|
|
Services
|
|
Licenses
|
|
Services
|
|
Internet Test and Measurement:
|
|
|
|
|
|
|
|
|
|
|
|
|
Internet Subscriptions Web Measurement
|
|
|
|
|
|
|
|
|
|
|
|
|
Application Perspective
|
|
|
X
|
|
|
|
|
|
|
|
|
|
Streaming Perspective
|
|
|
X
|
|
|
|
|
|
|
|
|
|
Transaction Perspective
|
|
|
X
|
|
|
|
|
|
|
|
|
|
Internet Subscriptions Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Enterprise Adapters
|
|
|
X
|
|
|
|
|
|
|
|
|
|
Keynote Internet Testing Environment (KITE)
|
|
|
X
|
|
|
|
|
|
|
|
|
|
Performance Scoreboard
|
|
|
X
|
|
|
|
|
|
|
|
|
|
Private Agents
|
|
|
X
|
|
|
|
|
|
|
|
|
|
Red Alert
|
|
|
X
|
|
|
|
|
|
|
|
|
|
Test Perspective
|
|
|
X
|
|
|
|
|
|
|
|
|
|
LoadPro
|
|
|
X
|
|
|
|
|
|
|
|
|
|
WebEffective
|
|
|
X
|
|
|
|
|
|
|
|
|
|
Internet Engagements
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional Services
|
|
|
|
|
|
|
|
|
|
|
X
|
|
Automated Reporting
|
|
|
|
|
|
|
|
|
|
|
X
|
|
Custom Competitive Research
|
|
|
|
|
|
|
|
|
|
|
X
|
|
Customer Research Products
|
|
|
|
|
|
|
|
|
|
|
X
|
|
LoadPro
|
|
|
|
|
|
|
|
|
|
|
X
|
|
Mobile Competitive Monitoring Analysis
|
|
|
|
|
|
|
|
|
|
|
X
|
|
Mobile Insights
|
|
|
|
|
|
|
|
|
|
|
X
|
|
Performance Insights
|
|
|
|
|
|
|
|
|
|
|
X
|
|
Visitor Insights
|
|
|
|
|
|
|
|
|
|
|
X
|
|
WebEffective
|
|
|
|
|
|
|
|
|
|
|
X
|
|
Web Site Performance Assessment
|
|
|
|
|
|
|
|
|
|
|
X
|
|
Mobile Test and Measurement:
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobile Subscription
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobile Device Perspective (MDP)
|
|
|
X
|
|
|
|
|
|
|
|
|
|
Mobile Web Perspective (MWP)
|
|
|
X
|
|
|
|
|
|
|
|
|
|
GlobalRoamer
|
|
|
X
|
|
|
|
|
|
|
|
|
|
Mobile Internet Testing Environment (MITE)
|
|
|
X
|
|
|
|
|
|
|
|
|
|
Mobile Ratable Licenses
|
|
|
|
|
|
|
|
|
|
|
|
|
System Integrated Test Environment (SITE)
|
|
|
|
|
|
|
X
|
|
|
|
|
|
86
Keynote
Systems, Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
The following table summarizes Internet and Mobile net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Internet Subscriptions Web Measurement
|
|
$
|
26,452
|
|
|
$
|
26,772
|
|
|
$
|
27,837
|
|
Internet Subscriptions Other
|
|
|
12,036
|
|
|
|
10,810
|
|
|
|
10,595
|
|
Internet Engagements
|
|
|
8,788
|
|
|
|
9,887
|
|
|
|
9,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Internet net revenue
|
|
|
47,276
|
|
|
|
47,469
|
|
|
|
48,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobile Subscription
|
|
|
10,372
|
|
|
|
8,015
|
|
|
|
6,882
|
|
Mobile Ratable Licenses
|
|
|
22,203
|
|
|
|
24,623
|
|
|
|
21,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Mobile net revenue
|
|
|
32,575
|
|
|
|
32,638
|
|
|
|
28,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
79,851
|
|
|
$
|
80,107
|
|
|
$
|
76,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Information regarding the geographic areas from which the
Companys net revenues were generated, based on the
location of the Companys customers, was as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
United States
|
|
$
|
44,189
|
|
|
$
|
44,433
|
|
|
$
|
43,896
|
|
Europe*
|
|
|
23,031
|
|
|
|
25,115
|
|
|
|
28,774
|
|
Other*
|
|
|
12,631
|
|
|
|
10,559
|
|
|
|
4,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
79,851
|
|
|
$
|
80,107
|
|
|
$
|
76,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
No individual country represents more than 10% of revenue. |
Information regarding the geographic areas which the Company has
long lived assets (includes all tangible assets) was as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
United States
|
|
$
|
32,213
|
|
|
$
|
33,685
|
|
Germany
|
|
|
1,212
|
|
|
|
1,084
|
|
Other
|
|
|
7
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
33,432
|
|
|
$
|
34,778
|
|
|
|
|
|
|
|
|
|
|
87
Keynote
Systems, Inc. and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
|
|
(10)
|
Supplementary
Data (Unaudited)
|
The following tables set forth quarterly supplementary data for
each of the fiscal years in the two-year period ended
September 30, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
Quarter Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
|
(In thousands, except per share data)
|
|
|
Net revenue
|
|
$
|
20,709
|
|
|
$
|
19,356
|
|
|
$
|
19,273
|
|
|
$
|
20,513
|
|
|
$
|
79,851
|
|
Gross profit
|
|
$
|
9,972
|
|
|
$
|
8,811
|
|
|
$
|
8,694
|
|
|
$
|
9,823
|
|
|
$
|
37,300
|
|
Net income (loss)
|
|
$
|
981
|
|
|
$
|
(144
|
)
|
|
$
|
(315
|
)
|
|
$
|
1,164
|
|
|
$
|
1,686
|
|
Basic net income (loss) per share
|
|
$
|
0.07
|
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
0.08
|
|
|
$
|
0.11
|
|
Diluted net income (loss) per share
|
|
$
|
0.07
|
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
0.08
|
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
Quarter Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
|
(In thousands, except per share data)
|
|
|
Net revenue
|
|
$
|
20,637
|
|
|
$
|
19,564
|
|
|
$
|
20,169
|
|
|
$
|
19,737
|
|
|
$
|
80,107
|
|
Gross profit
|
|
$
|
9,682
|
|
|
$
|
8,384
|
|
|
$
|
10,258
|
|
|
$
|
9,481
|
|
|
$
|
37,805
|
|
Net income (loss)
|
|
$
|
886
|
|
|
$
|
(258
|
)
|
|
$
|
2,092
|
|
|
$
|
537
|
|
|
$
|
3,257
|
|
Basic net income (loss) per share
|
|
$
|
0.06
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.15
|
|
|
$
|
0.04
|
|
|
$
|
0.23
|
|
Diluted net income (loss) per share
|
|
$
|
0.06
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.15
|
|
|
$
|
0.04
|
|
|
$
|
0.23
|
|
Basic and diluted net income (loss) per share are computed
independently for each quarter presented. Therefore, the sum of
quarterly basic and diluted per share information may not equal
annual basic and diluted net income (loss) per share.
In November 2010, the Company announced a dividend of $0.06 per
share payable to stockholders of record as of December 1,
2010.
88
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Keynote Systems, Inc.
San Mateo, California
We have audited Keynote Systems, Inc. and subsidiaries
(the Companys) internal control over financial
reporting as of September 30, 2010, based on criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Companys
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting,
included in the accompanying Managements Report on
Internal Control over Financial Reporting. Our responsibility is
to express an opinion on the Companys internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
that risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as
of September 30, 2010, based on the criteria established in
Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements as of and for the year ended
September 30, 2010, of the Company and our report dated
December 10, 2010 expressed an unqualified opinion on those
financial statements.
/s/ DELOITTE &
TOUCHE LLP
San Jose, California
December 10, 2010
89
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
Not applicable
|
|
Item 9A.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
Our management, with the participation of our chief executive
officer (CEO) and our chief financial officer
(CFO), evaluated the effectiveness of our disclosure
controls and procedures as defined in
Rules 13a-15(e)
and
15d-15(e) of
the Exchange Act as of September 30, 2010. Based upon the
evaluation, our management, including our CEO and our CFO,
concluded that the design and operation of our disclosure
controls and procedures were effective to ensure that
information required to be disclosed by us in reports that we
file or submit under the Exchange Act (i) is recorded,
processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms
and (ii) is accumulated and communicated to our management,
including our CEO and CFO, as appropriate to allow timely
decisions regarding required disclosure.
Changes
in Internal Control over Financial Reporting
As required by
Rule 13a-15(d)
of the Exchange Act, our management, including our CEO and CFO,
conducted an evaluation of our internal control over
financial reporting as defined in Exchange Act
Rule 13a-15(f)
to determine whether any changes in our internal control over
financial reporting occurring during the fourth quarter of
fiscal 2010 that materially affected, or are reasonably likely
to materially affect, our internal control over financial
reporting. Based on that evaluation, there have been no such
changes during the fourth quarter of fiscal 2010.
Managements
Annual Report on Internal Control over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as defined
in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act. Our internal control over financial
reporting is designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles.
Under the supervision and with the participation of our
management, including our principal executive officer and
principal financial officers, we conducted an evaluation of the
effectiveness of our internal control over financial reporting
based on the framework set forth in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Our management has concluded that, as of
September 30, 2010, our internal control over financial
reporting was effective based on these criteria.
The effectiveness of our internal control over financial
reporting as of September 30, 2010 has been audited by
Deloitte & Touche LLP, an independent registered
public accounting firm, as stated in its report which appears
above.
|
|
Item 9B.
|
Other
Information
|
None
90
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
Information relating to our executive officers is presented
under Item 4A in this report. The other information
required by this item relating to our directors will be
presented in our definitive proxy statement (definitive
proxy statement) in connection with our 2011 Annual
Meeting of Stockholders to be filed within 120 days of our
fiscal year-end. That information is incorporated into this
report by reference. We have adopted a code of ethics that
applies to our principal executive officer and all members of
our finance department, including the principal accounting
officer. This code of ethics is posted on our Web site. The
Internet address for our Web site is www.keynote.com and
the code of ethics may be found on the page entitled
Corporate Governance.
|
|
Item 11.
|
Executive
Compensation
|
Information required by this item will be presented in our
definitive proxy statement. That information is incorporated
into this report by reference.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
Information required by this item will be presented in our
definitive proxy statement. That information is incorporated
into this report by reference.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
Information required by this item will be presented in our
definitive proxy statement. That information is incorporated
into this report by reference.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
Information required by this item will be presented in our
definitive proxy statement. That information is incorporated
into this report by reference.
PART IV
|
|
Item 15.
|
Exhibits,
Financial Statement Schedules
|
(a) Documents to be filed as part of this
report:
(1) Financial Statements (see index to Item 8).
(2) Financial Statement Schedules.
Schedule II Valuation and Qualifying Accounts
was omitted as the required disclosures are included in
Note 1 to the consolidated financial statements.
All other schedules are omitted since the required information
is inapplicable or the information is presented in the
consolidated financial statements or notes thereto.
91
(3) Exhibits
The following table lists the exhibits filed as part of this
report. In some cases, these exhibits are incorporated into this
report by reference to exhibits to our other filings with the
Securities and Exchange Commission. Where an exhibit is
incorporated by reference, we have noted the type of form filed
with the Securities and Exchange Commission, the file number of
that form, the date of the filing and the number of the exhibit
referenced in that filing.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
|
|
Exhibit
|
|
|
|
|
|
|
|
Filing
|
|
Exhibit
|
|
Filed
|
No.
|
|
Exhibit
|
|
Form
|
|
File No.
|
|
Date
|
|
No.
|
|
Here-With
|
|
|
3
|
.01
|
|
Amended and Restated Certificate of Incorporation.
|
|
S-1
|
|
333-94651
|
|
01-14-00
|
|
|
3.04
|
|
|
|
|
3
|
.02
|
|
Bylaws, as amended.
|
|
8-K
|
|
000-27241
|
|
12-10-09
|
|
|
3.01
|
|
|
|
|
3
|
.03
|
|
Certificate of Designations specifying the terms of the
Series A Junior Participating Preferred Stock of
registrant, as filed with the Secretary of State of the State of
Delaware on October 28, 2002
|
|
8-A
|
|
000-27241
|
|
10-29-02
|
|
|
3.02
|
|
|
|
|
4
|
.01
|
|
Form of Specimen Stock Certificate for Keynote common stock.
|
|
S-1
|
|
333-82781
|
|
09-22-99
|
|
|
4.01
|
|
|
|
|
10
|
.01
|
|
Form of Indemnity Agreement between Keynote and each of its
directors and executive officers.
|
|
S-1
|
|
333-94651
|
|
01-14-00
|
|
|
10.01A
|
|
|
|
|
10
|
.02
|
|
[Intentionally omitted]
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
.03
|
|
Forms of stock option agreement and stock option exercise
agreement under 1999 Equity Incentive Plan.
|
|
S-1
|
|
333-82781
|
|
08-23-99
|
|
|
10.04
|
|
|
|
|
10
|
.03.1
|
|
1999 Equity Incentive Plan, as amended.
|
|
Schedule 14A
|
|
000-27241
|
|
01-22-09
|
|
|
Annex A
|
|
|
|
|
10
|
.04
|
|
Forms of enrollment form, subscription agreement, notice of
withdrawal and notice of suspension under 1999 Employee Stock
Purchase Plan.
|
|
S-1
|
|
333-82781
|
|
08-23-99
|
|
|
10.05
|
|
|
|
|
10
|
.04.1
|
|
1999 Employee Stock Purchase Plan, as amended.
|
|
Schedule 14A
|
|
000-27241
|
|
01-22-09
|
|
|
Annex B
|
|
|
|
|
10
|
.05
|
|
401(k) Plan.
|
|
S-1
|
|
333-82781
|
|
07-13-99
|
|
|
10.06
|
|
|
|
|
10
|
.06*
|
|
Employment Agreement dated as of December 9, 1997 between
Keynote and Umang Gupta.
|
|
S-1
|
|
333-82781
|
|
07-13-99
|
|
|
10.08
|
|
|
|
|
10
|
.07*
|
|
Amendment Agreement dated as of November 12, 2001 between
Keynote and Umang Gupta.
|
|
10-Q
|
|
000-27241
|
|
02-14-02
|
|
|
10.01
|
|
|
|
|
10
|
.09
|
|
[Intentionally omitted]
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
.10*
|
|
Promotion Letter Agreement dated as of April 4, 2006
between Keynote Systems, Inc. and Jeffrey Kraatz
|
|
10-Q
|
|
000-27241
|
|
08-09-06
|
|
|
10.5
|
|
|
|
|
10
|
.11*
|
|
Addendum to Stock Option Agreement dated as of April 1,
2006 between Keynote Systems, Inc. and Jeffrey Kraatz
|
|
10-Q
|
|
000-27241
|
|
08-09-06
|
|
|
10.06
|
|
|
|
92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
|
|
Exhibit
|
|
|
|
|
|
|
|
Filing
|
|
Exhibit
|
|
Filed
|
No.
|
|
Exhibit
|
|
Form
|
|
File No.
|
|
Date
|
|
No.
|
|
Here-With
|
|
|
10
|
.12*
|
|
Promotion Letter Agreement dated as of April 12, 2006
between Keynote Systems, Inc. and Eric Stokesberry
|
|
10-Q
|
|
000-27241
|
|
08-09-06
|
|
|
10.7
|
|
|
|
|
10
|
.13*
|
|
Addendum to Stock Option Agreement dated as of April 4,
2006 between Keynote Systems, Inc. and Eric Stokesberry
|
|
10-Q
|
|
000-27241
|
|
08-09-06
|
|
|
10.8
|
|
|
|
|
10
|
.16*
|
|
Share Purchase and Transfer Agreement to acquire SIGOS
Systemintegration GmbH (SIGOS) and the Shareholders
of SIGOS dated April 3, 2006 among Keynote Systems+
|
|
10-Q
|
|
000-27241
|
|
08-09-06
|
|
|
10.12
|
|
|
|
|
10
|
.18*
|
|
Employment Agreement between Keynote Systems, Inc. and Curtis
Smith
|
|
10-Q
|
|
000-27241
|
|
08-06-10
|
|
|
10.1
|
|
|
|
|
21
|
.01
|
|
Subsidiaries of Keynote Systems, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
23
|
.01
|
|
Consent of Deloitte & Touche LLP, Independent
Registered Public Accounting Firm
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
31
|
.1
|
|
Certification of Periodic Report by Chief Executive Officer
under Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
31
|
.2
|
|
Certification of Periodic Report by Chief Financial Officer
under Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
32
|
.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**
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
32
|
.2
|
|
Certification of Chief Financial Officer Pursuant to
18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002**
|
|
|
|
|
|
|
|
|
|
|
|
X
|
|
|
|
* |
|
Management contract or compensatory plan. |
|
** |
|
As contemplated by SEC Release
No. 33-8212,
these exhibits are furnished with this Annual Report on
Form 10-K
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. |
|
+ |
|
Confidential treatment has been requested with regards to
certain portions of this document. Such portions were filed
separately with the Commission. |
93
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of San Mateo, State
of California, on this 10th day of December 2010.
KEYNOTE SYSTEMS, INC.
Umang Gupta
Chairman of the Board and
Chief Executive Officer
KNOW ALL PERSONS BY THESE PRESENTS that each individual whose
signature appears below constitutes and appoints Umang Gupta,
Curtis H. Smith and David F. Peterson, and each of them, his or
her true lawful attorneys-in-fact and agents, with full power of
substitution, for him or her and in his or her name, place and
stead, in any and all capacities, to sign any and all amendments
to this Annual Report on
Form 10-K
and to file the same, with all exhibits thereto and all
documents in connection therewith, with the Securities and
Exchange Commission, granted unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to
be done in and about the premises, as fully to all intents and
purposes as he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or his, her or their substitute or
substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act,
this report has been signed by the following persons on behalf
of the Registrant in the capacities and on the date indicated.
|
|
|
|
|
|
|
Name
|
|
Title
|
|
Date
|
|
|
|
|
|
|
Principal Executive Officer:
|
|
|
|
|
|
|
|
|
|
/s/ UMANG
GUPTA
Umang
Gupta
|
|
Chairman of the Board, Chief Executive Officer and Director
|
|
December 10, 2010
|
|
|
|
|
|
Principal Financial Officer:
|
|
|
|
|
|
|
|
|
|
/s/ CURTIS
H. SMITH
Curtis
H. Smith
|
|
Chief Financial Officer
|
|
December 10, 2010
|
|
|
|
|
|
Principal Accounting Officer:
|
|
|
|
|
|
|
|
|
|
/s/ DAVID
F. PETERSON
David
F. Peterson
|
|
Chief Accounting Officer
|
|
December 10, 2010
|
|
|
|
|
|
Additional Directors:
|
|
|
|
|
|
|
|
|
|
/s/ JENNIFER
M. JOHNSON
Jennifer
M. Johnson
|
|
Director
|
|
December 10, 2010
|
|
|
|
|
|
/s/ CHARLES
BOESENBERG
Charles
Boesenberg
|
|
Director
|
|
December 10, 2010
|
|
|
|
|
|
/s/ MOHAN
GYANI
Mohan
Gyani
|
|
Director
|
|
December 10, 2010
|
|
|
|
|
|
/s/ RAYMOND
L. OCAMPO JR.
Raymond
L. Ocampo Jr.
|
|
Director
|
|
December 10, 2010
|
|
|
|
|
|
/s/ DR. DEBORAH
RIEMAN
Dr. Deborah
Rieman
|
|
Director
|
|
December 10, 2010
|
94