KEYN Keynote Systems, Inc. (MM)

Keynote (NASDAQ: KEYN), the global leader in mobile and web cloud testing & monitoring, reported financial results for its third quarter of fiscal 2013 ended June 30, 2013.

Umang Gupta, Chairman and CEO of Keynote, said: “During the third quarter, our business performed as expected. As announced on June 24th, we have signed a definitive agreement to be acquired by Thoma Bravo. The board and I are pleased the agreement provides stockholders with immediate and substantial cash value, as well as an attractive premium to our share price. We expect to complete this transaction within 60 days.”

Quarter Ended June 30, 2013 Compared to Quarter Ended June 30, 2012

Revenue was $31.2 million for the third quarter of fiscal 2013, compared to $30.3 million in the third quarter of fiscal 2012. Total Internet revenue was $16.2 million, up from $14.6 million a year ago. Total mobile revenue was $15.0 million, compared to $15.7 million a year ago.

Total costs and expenses for the quarter were $31.1 million, compared to $30.3 million in the same quarter a year ago. Also included in operating expenses in this quarter were expenses associated with the announced acquisition by Thoma Bravo of approximately $1.2 million. Net income for the third quarter of fiscal 2013 was $167,000, or $0.01 per diluted share, compared to net income of $27,000, or breakeven per diluted share, for the same period last fiscal year. Non-GAAP net income for the third quarter of fiscal 2013 was $2.8 million, or $0.15 per diluted share, compared to $3.3 million, or $0.18 per diluted share, for the same period last fiscal year. The company defines non-GAAP net income as GAAP net income adjusted for the provision (benefit) for income taxes, cash taxes from on-going operations, stock-based compensation expense, amortization of purchased intangibles, and any unusual items. In the third quarter of fiscal 2013, the expenses associated with the announced acquisition by Thoma Bravo were considered an unusual item. Non-GAAP net income per diluted share equals non-GAAP net income divided by the diluted weighted average shares outstanding for the period.

Adjusted EBITDA for the third quarter of fiscal 2013 was $4.2 million, or 14% of revenue, compared to $4.6 million, or 15% of revenue, for the same period last fiscal year. The company defines Adjusted EBITDA as earnings before interest income, taxes, depreciation, amortization of purchased intangibles, stock-based compensation, other income (expense), net, and any unusual items. In the third quarter of fiscal 2013, the expenses associated with the announced acquisition by Thoma Bravo were considered an unusual item.

Cash provided by operating activities was $5.6 million for the third quarter of fiscal 2013, compared to $5.0 million for the same period last fiscal year. Keynote defines free cash flow as cash flow from operations less cash used to purchase property, equipment and software. The company generated free cash flow of $3.9 million for the third quarter of fiscal 2013, compared to generating $3.6 million in the third quarter of fiscal 2012.

Nine Months Ended June 30, 2013 Compared to Nine Months Ended June 30, 2012

Revenue was $94.4 million for the nine months ended June 30, 2013, compared to $93.9 million for the same period last fiscal year. Net income for the nine months ended June 30, 2013 was $2.4 million, or $0.13 per diluted share, compared to net income of $4.5 million, or $0.24 per diluted share, for the same period last fiscal year. Non-GAAP net income for the nine months ended June 30, 2013 was $10.5 million, or $0.57 per diluted share, compared to $13.5 million, or $0.73 per diluted share, for the same period last fiscal year. Adjusted EBITDA for the nine months ended June 30, 2013 was $15.4 million, or 16% of revenue, compared to $17.5 million, or 19% of revenue, for the same period last fiscal year. For the nine months ended June 30, 2013, the $1.2 million of expenses associated with the announced acquisition by Thoma Bravo were considered an unusual item for both non-GAAP net income and adjusted EBITDA calculations.

Cash provided by operating activities was $15.3 million for the nine months ended June 30, 2013, compared to $11.2 million for the same period last fiscal year.

Balance Sheet

At June 30, 2013, Keynote had $61.3 million in cash, cash equivalents, and short-term investments, compared to $49.9 million at September 30, 2012. Net deferred revenue was $16.8 million at June 30, 2013, compared to $16.7 million at September 30, 2012. The total shares outstanding at June 30, 2013 were 18.5 million, compared to 17.9 million at September 30, 2012.

Quarterly Dividend

Per the terms of the definitive agreement to be acquired by Thoma Bravo, Keynote will not pay a quarterly dividend for the quarter ended June 30, 2013.

Merger Agreement with Thoma Bravo, LLC

On June 24, 2013, Keynote entered a definitive agreement to be acquired by an affiliate of leading private equity investment firm Thoma Bravo, LLC in an all-cash transaction valued at approximately $395 million. Under the terms of the agreement, pending stockholder approval, Keynote stockholders will receive $20.00 in cash for each share of Keynote common stock.

Because of the pending acquisition, Keynote will not provide guidance for the fourth quarter of fiscal 2013 or conduct a conference call to discuss its third quarter of fiscal 2013 results.

Forward-Looking Statements

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

Forward-looking statements in this release include, but are not limited to, the closing of the acquisition by Thoma Bravo. It is important to note that actual outcomes and Keynote’s actual results could differ materially from those in such forward-looking statements. Factors that could cause actual results to differ materially include risks and uncertainties such as risks related to the stockholder approval of and closing of the acquisition by Thoma Bravo. Readers should also refer to the risks outlined in Keynote’s reports filed with the Securities and Exchange Commission, including its Annual Report on Form 10-K for its fiscal year ended September 30, 2012, and its quarterly reports on Form 10-Q and any current reports on Form 8-K filed during the fiscal year.

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

Non-GAAP Measures

This press release includes information on Non-GAAP net income, Non-GAAP net income per share, Adjusted EBITDA, Adjusted EBITDA Margin and free cash flow. These measures are not based on any standardized methodology prescribed by United States generally accepted accounting principles (“GAAP”) and are not necessarily comparable to similar measures presented by other companies. Non-GAAP net income is calculated by adjusting GAAP net income (loss) for the provision (benefit) for income taxes, cash taxes from on-going operations, stock-based compensation expense, amortization of purchased intangibles, and any unusual items. In the first quarter of fiscal 2012, the change in fair value of acquisition-related contingent consideration and the expenses associated with the acquisition of DeviceAnywhere were considered unusual items. In the third quarter of fiscal 2013, the expenses associated with the announced acquisition by Thoma Bravo were considered an unusual item. 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. Free cash flow is defined as cash flow from operations less cash used to purchase property, equipment and software. Adjusted EBITDA is defined as earnings before interest income, taxes, depreciation, amortization of purchased intangibles, stock-based compensation, other income (expense), net, and any unusual items. In the first quarter of fiscal 2012, the change in fair value of acquisition-related contingent consideration and the expenses associated with the acquisition of DeviceAnywhere were considered unusual items. In the third quarter of fiscal 2013, the expenses associated with the announced acquisition by Thoma Bravo were considered an unusual item. Adjusted EBITDA Margin is defined as Adjusted EBITDA as a percentage of net revenue. 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 the company’s business and operations. Accordingly, the company believes that this non-GAAP information is only useful as an additional means for investors to evaluate the company’s operating performance, when reviewed in conjunction with the company’s GAAP financial statements. Management also uses this information as an additional means for measuring the performance of the company. The company compensates for these limitations by realizing that these amounts are not determined in accordance with GAAP and, therefore, should not be used exclusively in evaluating its business and operations.

About Keynote

Keynote® (NASDAQ:KEYN) is the global leader in Internet and mobile cloud testing & monitoring. The company maintains the world’s largest on-demand performance monitoring and testing infrastructure for Web and mobile sites comprised of over 7,000 measurement computers and mobile devices in over 275 locations around the world that enable companies to continuously improve the online and mobile experience. Keynote currently collects over 700 million mobile and Web performance measurements daily and in 2012 was recognized by Forbes as “One of the Best 100 Companies in America” with under one billion in revenue. Known as ‘The Mobile and Internet Performance Authority™,’ Keynote offers three market-leading product platforms:

Keynote Perspective® provides on-demand performance monitoring for enterprise Web and mobile sites including online portals, e-commerce sites and B2B sites. Over 2,000 customers rely on Keynote Perspective services to know precisely how their websites, content, and applications perform on actual browsers, networks, and mobile devices.

Keynote DeviceAnywhere® is the industry's leading cloud-based software platform for automated QA testing and monitoring of mobile applications and websites on real smartphones and tablets. DeviceAnywhere is used by over 1,000 mobile enterprises and developers to assure the highest quality experience of their connected mobile users.

Keynote SIGOS® offers active end-to-end Quality of Service (QoS) testing and monitoring solutions for mobile, fixed and VoIP communications. It’s SITE and Global Roamer products are used by over 200 network operators, content providers, carriers and regulators in over 100 countries worldwide.

Keynote's 4,000 customers represent top Internet and mobile companies and include AT&T, Disney, eBay, E*TRADE, Expedia, Google, Microsoft, Sony Mobile Communications, T-Mobile and Vodafone. Keynote Systems, Inc. is headquartered in San Mateo, California and can be reached at http://www.keynote.com/ or by phone in the U.S. at 1-800-KEYNOTE (1-800-539-6683).

The trademarks or registered trademarks of Keynote Systems, Inc. in the United States and other countries include Keynote®, DataPulse®, Keynote Customer Experience Rankings®, Perspective®, Keynote Red Alert®, Keynote WebEffective®, The Internet Performance Authority®, MyKeynote®, SIGOS®, SITE®, keynote® The Mobile & Internet Performance Authority™, Keynote FlexUse®, Keynote DeviceAnywhere®, Keynote DeviceAnywhere Test Center®, Keynote DemoAnywhere® and Keynote MonitorAnywhere® All related trademarks, trade names, logos, characters, design and trade dress are trademarks or registered trademarks of Keynote Systems, Inc. in the United States and other countries and may not be used without written permission. All other trademarks are the property of their respective owners.

  Keynote Systems, Inc. and Subsidiaries   UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

    Three Months Ended     Nine Months Ended June 30,   March 31,   June 30, June 30,   June 30,   2013     2013     2012   2013     2012 Net revenue: $ 31,201 $ 29,330 $ 30,276 $ 94,443 $ 93,947 Costs and expenses: Costs of revenue: Direct costs of revenue 9,013 8,644 8,826 26,748 26,111 Development 4,765 4,990 4,754 14,593 13,821 Operations 3,030 2,995 2,587 8,774 7,750 Amortization of intangible assets- software   312     383     525   1,220     1,515 Total costs of revenue 17,120 17,012 16,692 51,335 49,197 Sales and marketing 9,895 9,473 9,506 28,389 27,518 General and administrative 3,355 3,178 3,525 10,184 11,106 Transaction related expenses 1,185 — — 1,185 328 Change in fair value of acquisition-related contingent consideration — — — — (2,000) Excess occupancy income, net (574) (556) (407) (1,646) (1,145) Amortization of intangible assets - other   168     168     968   634     2,747 Total costs and expenses   31,149     29,275     30,284   90,081     87,751 Income (loss) from operations 52 55 (8) 4,362 6,196 Interest income and other, net   43     63     122   (33)     170 Income before benefit (provision) for income taxes 95 118 114 4,329 6,366 Benefit (provision) for income taxes   72     204     (87)   (1,896)     (1,884) Net income $ 167   $ 322   $ 27 $ 2,433   $ 4,482   Net income per share: Basic $ 0.01 $ 0.02 $ 0.00 $ 0.13 $ 0.26 Diluted $ 0.01 $ 0.02 $ 0.00 $ 0.13 $ 0.24 Weighted average common shares outstanding: Basic 18,285 18,174 17,502 18,139 17,390 Diluted 18,597 18,677 18,335 18,560 18,485     Keynote Systems, Inc. and Subsidiaries   UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

   

June 30,2013

 

September 30,2012

  Assets Current assets: Cash, cash equivalents and short-term investments $ 61,334 $ 49,939 Accounts receivable, net 17,857 17,395 Other current assets 2,912 2,776 Inventories 2,002 1,980 Deferred tax assets   5,530     6,076 Total current assets 89,635 78,166 Property and equipment, net 35,608 35,165 Goodwill 110,672 110,253 Identifiable intangible assets, net 7,206 9,060 Deferred tax assets 32,335 33,392 Other long-term assets   914     929 Total assets $ 276,370   $ 266,965     Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 2,895 $ 2,393 Accrued expenses 13,062 11,301 Deferred revenue   15,104     15,626 Total current liabilities 31,061 29,320 Other long term liabilities 3,868 3,824 Long-term deferred revenue   1,699     1,093 Total liabilities   36,628     34,237   Stockholders’ equity: Common stock 19 18 Additional paid-in capital 320,165 316,125 Accumulated deficit (79,925) (82,358) Accumulated other comprehensive income (loss)   (517)     (1,057) Total stockholders’ equity   239,742     232,728 Total liabilities and stockholders’ equity $ 276,370   $ 266,965     Keynote Systems, Inc. and Subsidiaries   GAAP TO NON-GAAP RECONCILIATION

(in thousands, except per share data)

(unaudited)

    Three Months Ended     Nine Months Ended June 30,   March 31,   June 30, June 30,   June 30,   2013     2013     2012   2013     2012

Non-GAAP Net Income

GAAP net income $ 167 $ 322 $ 27 $ 2,433 $ 4,482 Benefit (provision) for income taxes (72) (204) 87 1,896 1,884 Stock-based compensation * 971 1,202 1,709 3,512 4,581 Amortization of intangible assets - software 312 383 525 1,220 1,515 Amortization of intangible assets - other 168 168 968 634 2,747 Transaction related expenses 1,185 — — 1,185 328 Change in fair value of acquisition-related contingent consideration   —     —     —   —     (2,000) Non-GAAP income before income tax 2,731 1,871 3,316 10,880 13,537 Cash taxes from on-going operations   42     (120)     (61)   (335)     (81) Non-GAAP net income $ 2,773   $ 1,751   $ 3,255 $ 10,545   $ 13,456 Weighted average diluted common shares outstanding 18,597 18,677 18,335 18,560 18,485 Non-GAAP income per share $ 0.15 $ 0.09 $ 0.18 $ 0.57 $ 0.73

Adjusted EBITDA

GAAP net income $ 167 $ 322 $ 27 $ 2,433 $ 4,482 Benefit (provision) for income taxes (72) (204) 87 1,896 1,884 Interest income and other, net (43) (63) (122) 33 (170) Stock-based compensation * 971 1,202 1,709 3,512 4,581 Amortization of intangible assets - software 312 383 525 1,220 1,515 Amortization of intangible assets - other 168 168 968 634 2,747 Depreciation 1,537 1,495 1,414 4,510 4,118 Transaction related expenses 1,185 — — 1,185 328 Change in fair value of acquisition-related contingent consideration   —     —     —   —     (2,000) Adjusted EBITDA $ 4,225   $ 3,303   $ 4,608 $ 15,423   $ 17,485 Adjusted EBITDA Margin   14%     11%     15%   16%     19% * Stock-based compensation by category Direct costs of revenue $ 157 $ 165 $ 204 $ 398 $ 573 Development 32 291 387 595 1,067 Operations 132 154 151 414 454 Sales and marketing 408 346 588 1,211 1,538 General and administrative   242     246     379   894     949 $ 971   $ 1,202   $ 1,709 $ 3,512   $ 4,581     Keynote Systems, Inc. and Subsidiaries   REVENUE DETAIL

(in thousands)

(unaudited)

    Three Months Ended   Year Ended December 31   March 31   June 30   September 30 September 30

FY 2013

Internet: Web measurement subscriptions $ 9,518 $ 9,489 $ 9,592 $ — $ 28,599 Other subscriptions 4,120 2,907 2,819 — 9,846 Engagements   2,763   2,637   3,789   —   9,189 Internet net revenue 16,401 15,033 16,200 — 47,634 Mobile: Subscriptions 5,646 6,145 6,090 — 17,881 Ratable licenses 397 224 182 — 803 System licenses 5,319 3,243 3,826 — 12,388 Maintenance and support   6,149   4,685   4,903   —   15,737 Mobile net revenue   17,511   14,297   15,001   —   46,809 Net revenue $ 33,912 $ 29,330 $ 31,201 $ — $ 94,443   Mobile net revenue by customer type Enterprise $ 5,249 $ 5,416 $ 4,454 $ — $ 15,119 Telecommunications   12,262   8,881   10,547   —   31,690 Mobile net revenue $ 17,511 $ 14,297 $ 15,001 $ — $ 46,809

FY 2012

Internet: Web measurement subscriptions $ 8,119 $ 8,267 $ 8,803 $ 9,036 $ 34,225 Other subscriptions 4,295 3,269 3,032 3,970 14,566 Engagements   3,090   2,821   2,779   3,085   11,775 Internet net revenue 15,504 14,357 14,614 16,091 60,566 Mobile: Subscriptions 5,593 6,206 6,529 6,241 24,569 Ratable licenses 1,583 980 499 445 3,507 System licenses 5,755 4,023 4,382 2,883 17,043 Maintenance and support   4,644   5,026   4,252   4,732   18,654 Mobile net revenue   17,575   16,235   15,662   14,301   63,773 Net revenue $ 33,079 $ 30,592 $ 30,276 $ 30,392 $ 124,339   Mobile net revenue by customer type Enterprise $ 5,943 $ 5,884 $ 6,600 $ 5,256 $ 23,683 Telecommunications   11,632   10,351   9,062   9,045   40,090 Mobile net revenue $ 17,575 $ 16,235 $ 15,662 $ 14,301 $ 63,773

FY 2011

Internet: Web measurement subscriptions $ 7,275 $ 7,373 $ 7,865 $ 7,981 $ 30,494 Other subscriptions 3,448 2,784 2,846 3,316 12,394 Engagements   2,185   2,600   2,735   2,919   10,439 Internet net revenue 12,908 12,757 13,446 14,216 53,327 Mobile: Subscriptions 3,195 3,234 4,149 4,180 14,758 Ratable licenses 4,571 3,687 3,426 2,594 14,278 System licenses 1,992 1,262 3,112 3,858 10,224 Maintenance and support   2,167   3,167   2,453   2,656   10,443 Mobile net revenue   11,925   11,350   13,140   13,288   49,703 Net revenue $ 24,833 $ 24,107 $ 26,586 $ 27,504 $ 103,030   Mobile net revenue by customer type Enterprise $ 1,109 $ 1,249 $ 2,035 $ 1,635 $ 6,028 Telecommunications   10,816   10,101   11,105   11,653   43,675 Mobile net revenue $ 11,925 $ 11,350 $ 13,140 $ 13,288 $ 49,703     Keynote Systems, Inc. and Subsidiaries   CASH FLOW FROM OPERATING ACTIVITIES AND FREE CASH FLOW

(in thousands)

(unaudited)

  Three Months Ended   Year Ended December 31   March 31   June 30   September 30 September 30

FY 2013

Total Revenue $ 33,912 $ 29,330 $ 31,201 $ — $ 94,443 Cash Flow from Operations $ 3,823 $ 5,852 $ 5,580 $ — $ 15,255 % of Revenue 11% 20% 18% —% 16% Purchase of PP&E $ 1,453 $ 1,270 $ 1,641 $ — $ 4,364 Free Cash Flow $ 2,370 $ 4,582 $ 3,939 $ — $ 10,891 % of Revenue 7% 16% 13% —% 12%

FY 2012

Total Revenue $ 33,079 $ 30,592 $ 30,276 $ 30,392 $ 124,339 Cash Flow from Operations $ 1,510 $ 4,606 $ 5,046 $ 5,442 $ 16,604 % of Revenue 5% 15% 17% 18% 13% Purchase of PP&E $ 1,608 $ 1,639 $ 1,410 $ 1,068 $ 5,725 Free Cash Flow $ (98) $ 2,967 $ 3,636 $ 4,374 $ 10,879 % of Revenue (—%) 10% 12% 14% 9%

FY 2011

Total Revenue $ 24,833 $ 24,107 $ 26,586 $ 27,504 $ 103,030 Cash Flow from Operations $ 2,324 $ 6,693 $ 4,560 $ 5,686 $ 19,263 % of Revenue 9% 28% 17% 21% 19% Purchase of PP&E $ 470 $ 1,693 $ 795 $ 1,379 $ 4,337 Free Cash Flow $ 1,854 $ 5,000 $ 3,765 $ 4,307 $ 14,926 % of Revenue 7% 21% 14% 16% 14%