UMANG GUPTA - KEYNOTE SYSTEMS - (KEYN)
CEO Interview - published 08/07/00

DOCUMENT # KAN604

Umang Gupta is Chairman and Chief Executive Officer of Keynote Systems, Inc. Mr. Gupta is a well-known technology visionary and entrepreneur in Silicon Valley. He is the Founder of Centura Software Corporation, (NASDAQ: CNTR), formerly known as Gupta Corporation, the software company he started in 1984 and grew into one of the world’s largest independent client server tools and database companies by 1994. Mr. Gupta was a seminal influence on the growth of the client server marketplace by bringing the power of mainframe-based (SQL) databases and development tools to the PC world. Mr. Gupta has also been an active investor and advisor to a number of Silicon Valley start-up companies. In addition to Keynote Systems, he is Chairman of NetClerk, an Internet start-up specializing in online services for the contracting industry. Prior to founding Gupta Corporation, Mr. Gupta was Vice President and General Manager of the Microcomputer Products Division of Oracle Corporation from 1981 to 1984. He began his career in 1973 with IBM, where he held several sales and management positions. Mr. Gupta holds a BS in Chemical Engineering from the Indian Institute of Technology in Kanpur, India and an MBA from Kent State University in Ohio, USA.

Sector: Internet Services

TWST: Could you provide an overview of Keynote Systems, including your markets, your position within the market and your customer base?

Mr. Gupta: Keynote is in the business of providing Web site performance measurement services to companies who do e-commerce on the Web. Companies such as Microsoft, Dell, Cisco, Amazon.com, Schwab, E*TRADE and Fidelity are all major customers of Keynote. The value proposition we offer them and why they choose our services is because we’re the only company today who can measure how fast your Web site downloads pages, how fast or slow it takes to buy a book on your site, do a travel reservation on your site, execute a credit card processing transaction on your site, and also measure how reliable your site is as viewed from 50 different metropolitan areas of the world and from statistically selected locations across the Internet backbone. Why is that important? On the Internet, performance — the speed and reliability of your Web sites and your transactions — varies hugely. You literally could be accessing the Amazon site from San Francisco one morning, and it might take you seven seconds to do something. The same page, the same site, the same time might take you 70 seconds from San Antonio. The only way you really know if you’re doing a good job or a bad job for your customers, if you happen to be Amazon or Cisco or Dell, is to literally either wait for your customers to complain from San Antonio or proactively choose Keynote to be constantly sampling your Web site, possibly your competitor’s Web sites, and possibly giving you statistics on your entire industry. You can get real-time data about your Web site and your competitors in the industry which will then help you, A: decide if you’re doing a good job or a bad job for your customers, and since you can’t manage what you don’t measure, this is the first step toward a high-performance Web site. B: once you know that you either have a good or bad performing Web site, take proactive action to improve upon the site performance either by fixes that we recommend to you through our consulting organization or that your own network engineers can deduce from the data that we provide you.

TWST: Is there any other company that is quite like your own?

Mr. Gupta: There is no direct competitor to our company. I know it may sound a little naive or self-serving, but I assure you we are being neither. We had a direct competitor about a year ago. This was a little company called Service Metrics that had a similar value proposition as us, but was about 10% of our size and customer reach, and the number of measurement computers from which they measured these sites. That company was bought by Exodus, which is one of the large Web hosting companies in the country. Service Metrics and its services are now largely used as a captive measurement service and diagnostic service for only Exodus customers. So if you are not an Exodus customer, we are the only company who offers such a service. Even with the Exodus customer base, many companies prefer to choose us because we keep Exodus honest, since we are an independent third-party company. You can use our data reliably to assure yourself whether your Web hosting suppliers are doing a good job for you. That’s one of the benefits customers find using our service because we are kind of like the J. D. Power of the Internet, an independent third party providing both useful diagnostic information to improve the quality of your Web site, and also very statistically reliable comparative information to give you a rating of how your vendors are doing for you.

TWST: Did you indicate that you are in at least 50 major metropolitan cities around the world?

Mr. Gupta: Yes. Everything we do on the Internet is from here. We literally have no sales offices around the United States outside our headquarters here in San Mateo, California. Everything is done on the phone with a very strong, well-honed, high-performance telesales group, and overseas, we work through re-sellers. But what we have are 50 different cities in which we have co-located our measurement computers at statistically selected Internet backbone providers and ISP locations around the world. We manage and control nearly 550 measurement computers centrally from our computers in San Mateo. These measurement computers download URLs and execute transactions on Web sites in an automated fashion for our customers 24 hours a day, seven days a week. These detailed performance measurements are aggregated in a huge server farm here in San Mateo and made instantly available in real-time to our customers through a standard Web browser. Also available through the Keynote service is a detailed means to diagnose and improve the performance of your Web site should our service detect Internet performance problems.

TWST: What’s your outlook for the next few years?

Mr. Gupta: Our belief is that in a trillion-dollar economy there is surely room for a big company whose full-time job is to improve the quality of the e-economy, to effectively be the J. D. Power of the Internet. We are probably the best-situated company to be able to do that. We have about a 90% market-share today in our core market of Internet performance measurement. We continue to grow rapidly. In our most recent quarter we were profitable. We had about $9.7 million in revenue, which is close to a $40 million per year annualized run-rate. And we had a 35% growth-rate from the previous quarter, and a 406% growth rate over the corresponding quarter the year before. Analysts are estimating that we will be around an $85 million company next calendar year. Clearly, we’re growing rapidly. The market is absolutely huge. Currently, we measure about 12,500 pages per month — pages translate to URLs. Customers pay on a per URL, per month basis. We believe the number of URLs we measure in the next few years could easily grow to a hundred thousand or more. I don’t want to be specific as to when, but certainly over the next few years. We think the market is huge, and we are clearly the leader in the business. We have a good potential to be a pretty large-sized company simply around our current core-measurement services of page download times and outsourced Web application performance measurement. However, we’re not standing still. We continue to add new services that help our customers measure other aspects of the health and quality of their Web sites, such as streaming media measurements. We just recently announced two new services — one to help measure, assure, compare and improve the quality of streaming media from Web sites, and another service to load test your Web site before you launch it. In the future, we expect to offer measurement services for wireless and Internet telephony. Over time, we expect to add new services that are not necessarily as technical as our current services, but are probably more qualitatively-oriented. I’m speaking of things that would tell you, for example, how fast or how slow you did an execution of a trade, if you were a brokerage firm; or how fast or slow it took for Amazon to ship its books to you versus Barnes & Noble. These are all examples of business metrics that we expect to be able to measure and that overall will help improve the quality of your e-business.

TWST: What kinds of responses have you been getting from some of your customers?

Mr. Gupta: A few metrics might help you understand the high level of customer acceptance we’ve experienced. In the most recent quarter ending June 2000, we announced that we had 1,350 customers, which is a significant step-up from just two years ago at this time when we had probably no more than just about 150 customers. So we have grown almost 10 times in size over a two-year period in terms of both our customers and our revenue. While I would not project the identical growth rates in the next two years, I do believe that we have plenty of room to grow at very nice rates in the coming years. That can only occur if your customers like what you do. And not only are we attracting new customers, but a lot of our current customers are buying new services from us for measuring new URLs or pages off their Web sites or their competitors’ Web sites. We also do customer satisfaction surveys every six months. Most of our customers give us high marks — in these surveys 90% or more of our customers regularly give us either a rating of satisfied or extremely satisfied with our service and our overall offering.

TWST: Do you make up a list of questions for these customer satisfaction surveys?

Mr. Gupta: Yes. We work with a third-party company to do that. In the last survey I think we had about a 95% satisfaction rate.

TWST: Do you think that you’ll be involved in any acquisitions and mergers or partnering in the next few years?

Mr. Gupta: We expect to be. We recently announced an acquisition of a company called Velogic. We already offer services for measuring the performance of your Web site once it’s in production. With technology acquired from Velogic we have now started to offer a new service called KeyReadiness that allows you to load test your Web site before it goes into production and regularly, on an ongoing basis, to assure your Web site can sustain acceptable performance during hit storms. With KeyReadiness we are now competing in the very lucrative pre and post-deployment load-testing space against a software company called Mercury. We have started to offer services in that area that I think will be quite useful to our customers. We are looking at a number of other possible places to which we could offer additional products or services. And, in many cases, we will consider acquisition as a way to do the job.

TWST: Do you see your services for streaming media to be a large growth area for your company?

Mr. Gupta: Yes. In fact, as the world moves from narrow-band to broadband, and from Web sites that are largely text and graphics, to Web sites that consist of moving pictures and sound, and essentially, as the whole next generation convergence of entertainment, education and information occurs, we think that the opportunities are endless for us to provide a new generation of measurement and improvement services for streaming media on the Internet. We think that there is certainly a lot of revenue to be made there that could potentially overshadow the growth potential that we’re experiencing in our current business.

TWST: What are some of the risks to your business going forward?

Mr. Gupta: The major risk for any business like ours are either market risks, or company-specific risks. We believe the market is huge. As I’ve mentioned before, in a trillion-dollar e-economy, surely room exists for maybe a billion or even multi-billion dollar company whose full-time job is to be the arbiter of quality and the improver of quality of the e-economy. Clearly, enough companies are willing to pay today for those kinds of services, so we’re comfortable with the size of the market. However, if you want to ask me about risk, I think investors need to look at us and ask, “Are we that company?” In other words, that’s capable of becoming such a billion-dollar company. There, the risks would always be assessed by looking at the execution risks we face, the quality of management, and our track record so far. I think we feel pretty good about our track record. We’ve had an excellent track record. We’ve grown this business now over the last three years at a compounded growth rate in excess of 10% a month, month-over-month. We have done an excellent job of not only getting high market share, but also having high customer satisfaction. We also continue to be the leader in our space in terms of new products and services. If we can continue to do that, we think we will have a great business. There are always risks, but we think those risks are manageable.

TWST: I guess it would take your competitors quite a while to catch up.

Mr. Gupta: Yes. Today, the barriers to entry that we have erected come down to brand and scale, brand and scale, brand and scale. Brand, because we are not just offering you a means to measure yourself and your competitors. But we’re offering our customers a seal of approval, a certain credibility behind the data that we stand by, which then helps customers feel comfortable that we represent a valid industry bench-mark for measuring performance. For instance, Web hosting companies and other service providers such as Digital Island embed Keynote measurement data into Service Level Agreements (SLAs) in which performance is guaranteed at a particular service level verified by Keynote. Internally, within companies, employees receive bonuses that are based on their Web site’s performance as reported by Keynote. That can only occur through a high level of credibility that you build up over time. I don’t think someone can buy that credibility just through superior advertising. At the end of the day, it’s credibility you build over the years by continuing to do a good job for your customers, and showing that you do offer a statistically reliable and valid service. We’ve done that and we intend to continue to enhance our credibility and the Keynote brand. I think the other aspect of the brand that is unique is our independence. We are the independent authority on Web site performance because we’re not aligned with any particular hardware or software provider. We don’t try to sell you hardware. We don’t make any money on solutions that we recommend. We really are perceived as a very independent, impartial company, much the same way you would view the J. D. Power brand, for example. I think that’s hugely important for us. Whereas many of our competitors such as Exodus, for example, or Mercury, all have an axe to grind. Exodus wants to sell you their Web hosting services, and Mercury wants to sell you their load testing software. So they already have an axe to grind because they want to sell you something else. Because of our independence and focus on what we do, this brand is very hard to duplicate by someone else, unless they were starting from scratch. But to start from scratch, you not only have to build the brand, but you also have to build a huge amount of operational scale in this business. In 50 cities, we have 120 separate backbone locations to which we connect to. We have more than 550 computers located in these 50 cities. On average, for us to start up a new location — given our current size and scale — can be a one to six month process. So if somebody were to start and try to build that system today from scratch, they would have a multi-year effort to really perfect it with the kind of high-level reliability, availability and accuracy that we have built into the system. To summarize, Keynote has created significant barriers to entry in terms of our unique brand and also the time and effort required to build a worldwide measurement infrastructure that is accurate and dependable.

TWST: How do you incent your employees?

Mr. Gupta: Our company is a meritocracy. We’re a fairly driven group of people. But on the other hand, we have a culture that focuses on a few key results, and not on a lot of different metrics. As far as we’re concerned, the number one goal is the growth of the company. We are measured by Wall Street based on growth, and so we measure our own sales force based on growth. And when I mean growth, I don’t mean absolute growth, as much as percentage growth. Our entire sales force is measured on revenue percentage growth, month over month over month over month. Our sales people get compensated on a certain percentage growth every month, regardless of what the base was when they started. So you could start with $100,000 per month territory and be paid on, let’s take an example, $10,000 per month growth rate that month. Or, you could start with $1 million per month territory and you’d be paid on $100,000 growth on that territory. That’s crucial because growth is what drives Internet businesses like ours. We’ve clearly recognized that and so we reward our sales people with that same kind of growth focus. In addition to revenue growth, there is a huge amount of emphasis across the company and particularly within our sales group on customer service. We do not distinguish between new customer acquisition and existing customer growth. When a Keynote sales person is dealing with a company, they don’t discriminate between trying to get a new customer versus keeping an existing customer happy because customers can leave us any day. If they order a subscription today and we don’t do a good job for them, they’re going to leave us tomorrow. And if they were to leave us, then we would end up having some pretty high attrition rates and immediate loss of revenues. We’re very proud of the fact that our customer retention and renewal rate is 99% every month. That results from our high focus on keeping customers happy. If we didn’t keep our customers happy, we would lose them; if we lose them, we lose revenue and of course, we have to make up for that revenue elsewhere. Since we’re totally focused on growth, it’s so much easier to keep your customers than to lose them and then find new customers. So growth and customer satisfaction are the key metrics by which we measure ourselves.

TWST: As CEO, where do you spend most of your time within the company?

Mr. Gupta: In the early days, I was very much involved with the product development, and business-model development activities. Today, I think our services are in pretty good shape. We still continue to come out with great services, so I really don’t spend as much time there as before. Our business model is very well proven, especially since our recent profitability last quarter. But we continue to tweak it for more efficiency. My current focus has been helping Wall Street understand our services and our company better. I also spend a lot of time with our larger customers. Even though we have 1,350 customers, about the top 20% of our customers represent as much as 50% of our business, so clearly I spend time there. I also spend a fair amount of time looking at other technologies, partnerships and new business development opportunities. If there’s one thing I’m very cognizant of on the Internet, it is that you can’t just have one business plan and one business model and stay focused on just that because things change too much. I try to constantly use my peripheral vision to detect changes in the industry, changes in customer needs, and changes in market situations and market participants that might affect us so that we can make appropriate changes when necessary.

TWST: In order to have an effective business model, do you have to always be one step ahead of everyone else?

Mr. Gupta: Absolutely. And it’s not just one step ahead of the competition; but you also have to be anticipating what your customers might need based on how the market shifts.

TWST: What are the primary factors affecting your operating margins right now?

Mr. Gupta: I think the primary factors affecting our operating margin is clearly top-line growth — the higher our revenue grows, a large part of it can fall to the bottom line. However, we’re not a fixed-cost business because one of our largest costs, which is a variable one, is our cost of goods, which is basically the price of bandwidth. The more URLs and Web sites we measure, the more bandwidth we need all across the country; all across the world to be able to measure them. Typically, this bandwidth comes in certain chunks, so at a given time, when we first started, we were simply buying co-location facilities in a city and paying a few hundred dollars per month for shared T1 lines to do these measurements. Nowadays, when we start up a facility we’ll buy a few DS3s — very large pipes connected directly to individual backbones. We pay thousands of dollars a month for these services. If we over-provision our systems, then we don’t get the high growth, that could affect margins. If, on the other hand, we under-provision, then we may not be able to meet customer needs. We have to find the right balance between provisioning our systems to be able to meet customer capacity needs, but at the same time, not doing it too much in advance. So net, I think as long as our cost of goods are reasonable, which so far at least they’ve been, and our growth rates are high, which so far they’ve been, the rest of our business is fairly straightforward to manage in terms of sales, marketing, engineering and support.

TWST: Do you think you’ve maintained that much-needed balance between undercapacity and overcapacity?

Mr. Gupta: So far, I’d like to think so. We have never found ourselves caught short of capacity. But on the other hand, when we have bought capacity, we’ve always found ourselves being able to fill it up fairly quickly.

TWST: Do you have any thoughts or comments about your current stock price?

Mr. Gupta: I try to make it a point to never comment on our stock price on a day-to-day basis. We did announce revenues and profitability ahead of schedule, but the stock price went down. My sense is that it is probably profit-taking maybe gone a little bit too much to one side. So we’d certainly like to see a higher stock price. I feel it’s more a matter of educating the market, of showing them how we achieved profitability, and how, overall, our metrics continue to show good prospects.

TWST: Do you spend at least some of your time talking to analysts on Wall Street?

Mr. Gupta: Yes.

TWST: What two or three reasons would you give potential long-term investors for investing in Keynote Systems?

Mr. Gupta: Keynote is one of the very few players in the Internet business which has all the earmarks of being a long-term survivor and thriver. We operate in a potentially very large market. We believe that the overall market for Internet performance measurement services of our type could very well be in the $2-$4 billion dollar range. At a $40 million dollar-per-year run-rate currently and approximately a 90%-market-share for what we do, we think we have a long way to go before we exhaust the potential of this company. Having become profitable, we think we have proven our business model unlike most of the players on the Internet, where business models are still to be proven. When you start to look for a company that is an infrastructure play, not dependent upon eyeballs or other esoteric measures of value; when you look for a company that has a high market share and a unique value proposition with little or no competition, and then you look for a company that is very well managed, with a fairly high amount of cash, $350 million dollars of cash in the bank, little or no cash burn rate, Keynote looks very good.

TWST: Thank you.

UMANG GUPTA
 Chairman & CEO
 Keynote Systems, Inc.
 2855 Campus Drive
 San Mateo, CA 94403
 (650) 522-1000
 (650) 522-1099 - FAX
 www.keynote.com

Each Executive who is the featured subject of a TWST Interview is offered the opportunity to include an Investors Brief or other highlight material to be provided and sponsored by and for the company. This Interview with Umang Gupta, Chairman & CEO of Keynote Systems, Inc., is accompanied by an Investors Brief containing corporate information.

To ask a question of this or any other publicly traded company, visit QAWire.com


Copyright 2000 The Wall Street Transcript Corporation
All Rights Reserved

The Wall Street Transcript (TWST) interviews are published verbatim, and TWST does not in any way endorse or guarantee the accuracy of any information or opinions expressed herein and all opinions are subject to change without notice. Nothing herein constitutes a solicitation to buy or sell any securities. TWST interviews with CEOs may include include "forward-looking statements", which are based on factors that involve risks and uncertainties. Actual results may differ materially from those expressed or implied. TWST shall have no liability whatsoever for any trading losses arising out of use of this information. Copyright 2000 Wall Street Transcript Corporation. All Rights Reserved.