8-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(D) OF THE

SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported) October 22, 2003

QUEST SOFTWARE, INC.

(Exact name of registrant as specified in its charter)

California	000-26937	33-0231678
(State or other jurisdiction of incorporation)	(Commission File Number)	(IRS Employer Identification No.)

8001 Irvine Center Drive, Irvine, California	92618
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (949) 754-8000

Not Applicable

(Former name or former address, if changed since last report.)

Item 7.    Financial Statements, Pro Forma Financial Information and Exhibits

(c) Exhibits

99.1 Press Release issued by Quest Software, Inc. on October 22, 2003

Item 12.    Results of Operations and Financial Condition

On October 22, 2003, Quest Software, Inc. issued a press release announcing operating results for the quarter ended September 30, 2003. This press release is attached hereto as Exhibit 99.1 and is incorporated by reference herein.

The information in this Form 8-K and the Exhibit attached hereto shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”) or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Exchange Act, unless Quest Software, Inc. specifically incorporates the foregoing information into those documents by reference.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	QUEST SOFTWARE, INC.
Date: October 22, 2003	By:	/s/    M. BRINKLEY MORSE
		M. Brinkley Morse, Vice President, Finance and Operations and Chief Financial Officer

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EXHIBIT INDEX

Exhibit No.	Description of Document
99.1	Press Release issued by Quest Software, Inc. on October 22, 2003

EX-99.1

EXHIBIT 99.1

NEWS

Editorial Contact: Erin Jones

949-754-8032

erin.jones@quest.com

Investor Contact: Scott Davidson

949-754-8659

scott.davidson@quest.com

QUEST SOFTWARE REPORTS RECORD RESULTS FOR THIRD QUARTER 2003

Revenue of $73.3 Million for the Quarter

Expansion of Operating Margin

IRVINE, Calif., October 22, 2003 – Quest Software, Inc. (Nasdaq: QSFT), a leading provider of application management solutions, today reported record financial results for the quarter ended September 30, 2003. The Company achieved record total revenue of $73.3 million in the September 2003 quarter, a year-over-year growth rate of 16.5% compared to last year’s third quarter revenue of $62.9 million. Total revenue for the first nine months of 2003 was $215.3 million.

GAAP Results

Quest’s net income for the third quarter was $4.4 million, or $0.05 per diluted share. Net income for the first nine months of 2003 was $10.0 million, or $0.11 per diluted share. GAAP operating margins increased sequentially from 1.3% to 8.1% in the third quarter, resulting in record GAAP operating income of $5.9 million. Quest generated net cash of $15.6 million in the September 2003 quarter.

Non-GAAP Results

On a pro forma basis, operating margins increased to 12.1% for the quarter, resulting in pro forma net income of $6.3 million, or $0.07 per share on a diluted basis. This compares to pro forma net income of $4.4 million, or $0.05 per share on a diluted basis, for the third quarter ended September 30, 2002. Pro forma operating margins doubled sequentially in the third quarter to 12%, resulting in record pro forma operating income of $8.9 million for the quarter and $19.3 million for the nine months ended September 30, 2003. For the nine months ended

Quest Reports Third Quarter 2003 Results – page 2 of 8

September 30, 2003, pro forma net income was $16.3 million, or $0.17 per diluted share.

A reconciliation of pro forma and as reported financial results is included with this press release.

Quest management utilizes non-GAAP financial measures in the presentation of the Company’s results to provide a consistent understanding of its historical operating performance and comparisons with peer companies. Management believes that pro forma reporting provides a more accurate representation of the Company’s on-going economic performance and therefore uses pro forma reporting internally to evaluate and manage the Company’s operations. Management believes that these measures provide useful information because they exclude certain items including amortization of intangibles, other compensation expenses, gains or losses on investment securities and facility closure charges that are not necessarily relevant to understanding the operating activities within the Company’s business.

“The third quarter was quite strong and we remain optimistic for several reasons. First, revenues are growing well. Second, we have been very focused on our expense run rate and have reduced our headcount by over 6% in the last two quarters. Furthermore, Q3’s margin improvement demonstrates the operating leverage in our business model,” said Vinny Smith, chairman and chief executive officer, Quest Software. “Third, the IT environment appears to be strengthening. And fourth, we are in a strong product cycle with the major new releases of our Application Performance Management and Database Management solutions.”

Financial Outlook

Quest management offers the following guidance for the quarter ending December 31, 2003:

• Revenue is expected to be in the range of $77 million to $79 million;

• GAAP diluted earnings per share is expected to be in the range of $0.07 to $0.08 per share;

• Pro forma diluted earnings per share is expected to be in the range of $0.08 to $0.09 per share. The pro forma guidance excludes approximately $1.3 million of amortization of purchased intangible assets, $746,000 of amortization of acquired intangible assets including customer lists, a non-compete agreement and trademarks, and $158,000 of other compensation charges related to stock options.

For the full year ending December 31, 2003, Quest management has raised its prior guidance:

• Annual revenue is expected to be in the range of $292 million to $294 million;

Quest Reports Third Quarter 2003 Results – page 3 of 8

• GAAP diluted earnings per share is expected to be in the range of $0.18 to $0.19 per share;

• Pro forma diluted earnings per share is expected to be in the range of $0.25 to $0.26. The pro-forma guidance excludes approximately $7.8 million of amortization of purchased intangible assets, $3.4 million of amortization of acquired intangible assets including customer lists, a non-compete agreement and trademarks, and $1.1 million of other compensation charges related to stock options.

Third Quarter 2003 Conference Call Information

Quest Software will host a conference call today, Wednesday, October 22, 2003 at 2:00 p.m. Pacific Time, to discuss its results. A simultaneous Web cast of the conference call will be available on Quest Software’s Web site in the Investors – IR Events section at www.quest.com. A Web cast replay will be available on the same Web site through October 22, 2004. An audio replay of the call will also be available through October 31, 2003 by dialing (888) 203-1112 (from the United States or Canada) or (719) 457-0820 (outside the United States and Canada), using confirmation code: 578779.

About Quest Software, Inc.

Quest Software, Inc., a leader in application management, provides software for Application Confidence to 18,000 customers worldwide, including 75 percent of the Fortune 500. Quest products for database management, application performance management and Microsoft infrastructure management help customers develop, deploy, manage and maintain enterprise applications without expensive downtime or business interruption. Headquartered in Irvine, Calif., Quest Software can be found in offices around the globe and at www.quest.com.

Quest and Quest Software are registered trademarks of Quest Software, Inc. All other trademarks and registered trademarks are property of their respective owners.

# # #

Forward Looking Statements

This release and the matters to be discussed on the conference call may include predictions, estimates and other information that might be considered forward-looking statements. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ from those anticipated as a result of various factors, including the impact of adverse changes in general economic conditions; further reductions or delays in information technology spending; variations in the size and timing of customer orders; competitive products and pricing; rapid technological change; risks associated with the development and market acceptance of new products; disruptions caused by acquisitions of companies and/or technologies; risks associated with international operations; and the need to attract and retain qualified personnel. For a discussion of these and other related risks, please refer to our recent SEC filings, including our Annual Report on Form 10-K/A for the year ended December 31, 2002, and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2003. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date thereof. We undertake no obligation to update forward-looking statements to reflect events or circumstances after the date thereof.

Quest Reports Second Quarter 2003 Results – page 4 of 8

QUEST SOFTWARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2003		2002			2003		2002
Revenues:
Licenses	$	41,423	$	39,851		$	125,310	$	116,493
Services		31,841		23,051			89,988		67,890
Total revenues		73,264		62,902			215,298		184,383
Cost of revenues:
Licenses		1,026		904			3,098		2,826
Services		5,267		4,321			15,805		13,285
Amortization of purchased intangible assets		1,899		1,288			6,391		3,978
Total cost of revenues		8,192		6,513			25,294		20,089
Gross profit		65,072		56,389			190,004		164,294
Operating expenses:
Sales and marketing		34,418		31,096			106,457		92,725
Research and development		16,415		14,685			50,589		44,944
General and administrative		7,438		6,201			21,285		18,418
Intangible asset amortization		889		479			2,643		1,343
Total operating expenses		59,160		52,461			180,974		157,430
Income from operations		5,912		3,928			9,030		6,864
Other income, net		1,308		1,221			7,156		6,732
Loss on sale of aircraft		—		(790	)		—		(790	)
Write-down of investments		—		—			—		(1,095	)
Income before income tax provision		7,220		4,359			16,186		11,711
Income tax provision		2,782		2,089			6,148		5,136
Net income	$	4,438	$	2,270		$	10,038	$	6,575
Net income per share:
Basic	$	0.05	$	0.03		$	0.11	$	0.07
Diluted	$	0.05	$	0.02		$	0.11	$	0.07
Weighted average shares:
Basic		92,550		90,256			91,737		89,886
Diluted		94,213		92,195			93,571		92,645

Quest Reports Second Quarter 2003 Results – page 5 of 8

QUEST SOFTWARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

	Three Months Ended September 30, 2003						Nine Months Ended September 30, 2003
	GAAP		Adjustments		Adjusted		GAAP		Adjustments		Adjusted
Revenues:
Licenses	$	41,423			$	41,423	$	125,310			$	125,310
Services		31,841				31,841		89,988				89,988
Total revenues		73,264				73,264		215,298				215,298
Cost of revenues:
Licenses		1,026	(1	)(1)		1,025		3,098	(2	)(3)		3,096
Services		5,267	(13	)(1)		5,254		15,805	(58	)(3)		15,747
Amortization of purchased intangible assets		1,899	(1,899	)		—		6,391	(6,391	)		—
Total cost of revenues		8,192				6,279		25,294				18,843
Gross profit		65,072				66,985		190,004				196,455
Operating expenses:
Sales and marketing		34,418	(82	)(1)		34,336		106,457	(663	)(3)		105,794
Research and development		16,415	(78	)(1)		16,337		50,589	(441	)(3)		50,148
General and administrative		7,438	(12	)(1)		7,426		21,285	(84	)(3)		21,201
Intangible asset amortization		889	(889	)		—		2,643	(2,643	)		—
Total operating expenses		59,160				58,099		180,974				177,143
Income from operations		5,912				8,886		9,030				19,312
Other income, net		1,308				1,308		7,156	(98	)(4)		7,058
Income before income tax provision		7,220				10,194		16,186				26,370
Income tax provision		2,782	1,092	(2)		3,874		6,148	3,873	(5)		10,021
Net income	$	4,438			$	6,320	$	10,038			$	16,349
Net income per share:
Basic	$	0.05			$	0.07	$	0.11			$	0.18
Diluted	$	0.05			$	0.07	$	0.11			$	0.17
Weighted average shares:
Basic		92,550				92,550		91,737				91,737
Diluted		94,213				94,213		93,571				93,571

For the Three Months Ended September 30, 2003

(1) Represents compensation and other costs related primarily to stock option grants with a below fair market value exercise price.

(2) Represents the tax effect of adjustments.

For the Nine Months Ended September 30, 2003

(3) Represents (1) $281,000 in severance and idle facility charges incurred from closing one of our Canadian offices, which are included in sales and marketing and research and development, and (2) compensation and other costs related primarily to stock option grants with a below fair market value exercise price.

(4) Represents gain on securities held for trading purposes.

(5) Represents the tax effect of adjustments.

Quest Reports Second Quarter 2003 Results – page 6 of 8

QUEST SOFTWARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

	Three Months Ended September 30, 2002							Nine Months Ended September 30, 2002
	GAAP			Adjustments		Adjusted		GAAP			Adjustments		Adjusted
Revenues:
Licenses	$	39,851				$	39,851	$	116,493				$	116,493
Services		23,051					23,051		67,890					67,890
Total revenues		62,902					62,902		184,383					184,383
Cost of revenues:
Licenses		904					904		2,826					2,826
Services		4,321		(31	)(1)		4,290		13,285		(90	)(1)		13,195
Amortization of purchased intangible assets		1,288		(1,288	)		—		3,978		(3,978	)		—
Total cost of revenues		6,513					5,194		20,089					16,021
Gross profit		56,389					57,708		164,294					168,362
Operating expenses:
Sales and marketing		31,096		(203	)(1)		30,893		92,725		(646	)(1)		92,079
Research and development		14,685		(177	)(1)		14,508		44,944		(471	)(1)		44,473
General and administrative		6,201		(51	)(1)		6,150		18,418		(123	)(1)		18,295
Intangible asset amortization		479		(479	)		—		1,343		(1,343	)		—
Total operating expenses		52,461					51,551		157,430					154,847
Income from operations		3,928					6,157		6,864					13,515
Other income, net		1,221					1,221		6,732					6,732
Loss on sale of aircraft		(790	)	790			—		(790	)	790			—
Write-down of investments		—					—		(1,095	)	1,095			—
Income before income tax provision		4,359					7,378		11,711					20,247
Income tax provision		2,089		862	(2)		2,951		5,136		2,963	(2)		8,099
Net income	$	2,270				$	4,427	$	6,575				$	12,148
Net income per share:
Basic	$	0.03				$	0.05	$	0.07				$	0.14
Diluted	$	0.02				$	0.05	$	0.07				$	0.13
Weighted average shares:
Basic		90,256					90,256		89,886					89,886
Diluted		92,195					92,195		92,645					92,645

(1) Represents compensation and other costs related primarily to stock option grants with a below fair market value exercise price.

(2) Represents the tax effect of adjustments.

Quest Reports Second Quarter 2003 Results – page 7 of 8

QUEST SOFTWARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

ASSETS

	September 30, 2003		December 31, 2002
Current assets:
Cash and cash equivalents	$	94,391	$	64,283
Short-term marketable securities available for sale		21,292		27,841
Accounts receivable, net		38,563		39,898
Prepaid expenses and other current assets		8,104		9,653
Deferred income taxes		7,349		9,491
Total current assets		169,699		151,166
Property and equipment, net		38,435		44,505
Long-term marketable securities		135,503		115,422
Goodwill, net		239,696		231,717
Amortizing intangible assets, net		26,822		31,116
Deferred income taxes		15,030		15,014
Other assets		1,878		2,341
Total assets	$	627,063	$	591,281
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	5,420	$	5,308
Accrued compensation		15,586		13,900
Other accrued expenses		26,025		23,678
Income taxes payable		4,214		1,262
Deferred revenue		68,010		63,210
Total current liabilities		119,255		107,358
Long-term liabilities and other		1,878		5,941
Shareholders’ equity		505,930		477,982
Total liabilities and shareholders’ equity	$	627,063	$	591,281

Quest Reports Second Quarter 2003 Results – page 8 of 8

QUEST SOFTWARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2003			2002			2003			2002
Cash flows from operating activities:
Net income	$	4,438		$	2,270		$	10,038		$	6,575
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		6,446			6,371			20,654			17,075
Compensation expense associated with stock option grants		138			112			796			921
Accrued interest receivable from shareholders		—			530			—			(99	)
Deferred income taxes		(384	)		(1,081	)		(459	)		(21	)
Provision for bad debts		(220	)		249			23			631
Write-down of investments		—			—			—			1,095
Loss on sale of aircraft		—			790			—			790
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable		(1,416	)		2,233			3,204			9,140
Prepaid expenses and other current assets		627			(751	)		2,653			(1,556	)
Other assets		(525	)		(766	)		(99	)		176
Accounts payable		854			1,070			(44	)		(690	)
Accrued compensation		618			(1,255	)		1,003			(641	)
Other accrued expenses		(216	)		(1,359	)		(3,379	)		(5,126	)
Income taxes payable		5,449			1,694			8,634			4,081
Deferred revenue		(739	)		935			4,200			3,974
Other liabilities		(112	)		(583	)		(277	)		(1,255	)
Net cash provided by operating activities		14,958			10,459			46,947			35,070
Cash flows from investing activities:
Purchases of property and equipment		(1,504	)		(884	)		(5,387	)		(3,330	)
Proceeds from sale of aircraft		—			1,932			—			1,932
Cash paid for acquisitions, net of cash acquired		—			—			(4,746	)		(4,063	)
Purchases of marketable securities		(50,131	)		476			(107,491	)		(43,873	)
Sales and maturities of marketable securities		27,384			7,681			93,460			29,868
Net cash (used in) provided by investing activities		(24,251	)		9,205			(24,164	)		(19,466	)
Cash flows from financing activities:
Repayment of notes payable		(1,336	)		(1,612	)		(1,336	)		(1,835	)
Proceeds from repayment of note receivable from shareholder		—			685			—			685
Repayment of capital lease obligations		(60	)		(68	)		(255	)		(193	)
Proceeds from the exercise of stock options		1,244			248			5,388			1,379
Proceeds from employee stock purchase plan		2,345			1,958			4,631			4,480
Net cash provided by financing activities		2,193			1,211			8,428			4,516
Effect of exchange rate changes on cash and cash equivalents		262			(297	)		(1,103	)		(709	)
Net (decrease) increase in cash and cash equivalents		(6,838	)		20,578			30,108			19,411
Cash and cash equivalents, beginning of period		101,229			29,112			64,283			30,279
Cash and cash equivalents, end of period	$	94,391		$	49,690		$	94,391		$	49,690