8-K

UNITED STATES

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) April 27, 2004

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 and Exhibits

(c) Exhibits

99.1 Press Release issued by Quest Software, Inc. on April 27, 2004

Item 12.    Results of Operations and Financial Condition

On April 27, 2004, Quest Software, Inc. issued a press release announcing operating results for the quarter ended March 31, 2004. 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: April 27, 2004	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 April 27, 2004

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 RESULTS FOR FIRST QUARTER 2004

Revenue Grows 16% Year over Year to $82.5 Million for the Quarter

IRVINE, Calif., April 27, 2004 – Quest Software, Inc. (Nasdaq: QSFT), a leading provider of application management solutions, today reported financial results for the quarter ended March 31, 2004. Total revenues increased 16% year over year to $82.5 million compared to last year’s first quarter revenue of $71.2 million. First quarter 2004 includes approximately $3.0 million in revenue and $1.5 million in expenses from Aelita Software, an acquisition which closed on March 17, 2004.

GAAP Results

Quest Software’s net income for the first quarter was $386 thousand, or $0.00 per diluted share. GAAP operating margins increased sequentially from 3.1% to 4.4% in the first quarter, resulting in GAAP operating income of $3.6 million. GAAP net income reflects a $6.7 million write-off in the quarter of in-process research and development acquired in the Aelita transaction.

Non-GAAP Results

On a pro forma basis, operating margins increased to 15.6% for the quarter, resulting in pro forma net income of $8.6 million, or $0.09 per share on a diluted basis. This compares to pro forma net income of $4.8 million, or $0.05 per share on a diluted basis, for the first quarter ended March 31, 2003. Quest Software generated cash flow from operations of $22.8 million in the March 2004 quarter.

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

“Our results exemplify solid execution across the company and the continued penetration of our products into the marketplace,” said Vinny Smith, chairman and chief executive officer, Quest Software. “With the integration of our Aelita Software acquisition proceeding according to plan, we are well positioned to further build upon our offering of Windows management solutions and our visibility in the market. This, coupled with our well-respected application performance management and database management solutions offers IT professionals a comprehensive set of high quality products to enable them to tackle everyday issues fast, manage more complex systems with fewer resources and streamline their operations.”

Quest Software 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.

Financial Outlook

Quest Software management offers the following guidance for the quarter ending June 30, 2004:

• Revenue is expected to be in the range of $87.0 million to $89.0 million;

• GAAP diluted earnings per share is expected to be in the range of $0.04 to $0.06 per share;

• Pro forma diluted earnings per share is expected to be in the range of $0.07 to $0.09 per share. The pro forma guidance excludes approximately $3.7 million of amortization of acquisition related intangible assets and $700,000 of other compensation charges related to stock options.

For the full year ending December 31, 2004, Quest Software management provides the following guidance:

• Annual revenue is expected to be in the range of $360 million to $370 million;

• GAAP diluted earnings per share is expected to be in the range of $0.23 to $0.26 per share;

• Pro forma diluted earnings per share is expected to be in the range of $0.37 to $0.40. The pro-forma guidance excludes approximately $12.9 million of amortization of acquisition related intangible assets, $6.7 million of in-process research and development and $2.4 million of other compensation charges related to stock options.

First Quarter 2004 Conference Call Information

Quest Software will host a conference call today, Tuesday, April 27, 2004 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 April 27, 2005. An audio replay of the call will also be available through May 11, 2004 by dialing (888) 203-1112 (from the U.S. or Canada) or (719) 457-0820 (outside the U.S. and Canada), using confirmation code: 329040.

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 further adverse changes in general economic conditions on our customers; 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; fluctuating currency exchange rates and other risks associated with international operations; and the need to attract and retain qualified employees. For a discussion of these and other related risks, please refer to our recent SEC filings, including our Annual Report on Form 10-K for the year ended December 31, 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 SOFTWARE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

	Three Months Ended March 31,
	2004		2003
Revenues:
Licenses	$	47,028	$	42,722
Services		35,499		28,477
Total revenues		82,527		71,199
Cost of revenues:
Licenses		1,097		933
Services		6,403		5,195
Amortization of purchased intangible assets		1,431		2,130
Total cost of revenues		8,931		8,258
Gross profit		73,596		62,941
Operating expenses:
Sales and marketing		36,124		36,129
Research and development		18,158		17,185
General and administrative		8,260		6,551
In-process research and development		6,700		—
Intangible asset amortization		730		867
Total operating expenses		69,972		60,732
Income from operations		3,624		2,209
Other income, net		667		1,860
Income before income tax provision		4,291		4,069
Income tax provision		3,905		1,535
Net income	$	386	$	2,534
Net income per share:
Basic	$	0.00	$	0.03
Diluted	$	0.00	$	0.03
Weighted average shares:
Basic		93,802		90,974
Diluted		97,970		92,922

QUEST SOFTWARE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

	Three Months Ended March 31, 2004
	GAAP		Adjustments		Adjusted
Revenues:
Licenses	$	47,028			$	47,028
Services		35,499				35,499
Total revenues		82,527				82,527
Cost of revenues:
Licenses		1,097				1,097
Services		6,403	(30	)(1)		6,373
Amortization of purchased intangible assets		1,431	(1,431	)		—
Total cost of revenues		8,931				7,470
Gross profit		73,596				75,057
Operating expenses:
Sales and marketing		36,124	(213	)(1)		35,911
Research and development		18,158	(102	)(1)		18,056
General and administrative		8,260	(6	)(1)		8,254
In-process research and development		6,700	(6,700	)(2)		—
Intangible asset amortization		730	(730	)		—
Total operating expenses		69,972				62,221
Income from operations		3,624				12,836
Other income, net		667				667
Income before income tax provision		4,291				13,503
Income tax provision		3,905	956	(3)		4,861
Net income	$	386			$	8,642
Net income per share:
Basic	$	0.00			$	0.09
Diluted	$	0.00			$	0.09
Weighted average shares:
Basic		93,802				93,802
Diluted		97,970				97,970

(1) Represents stock based compensation and payroll taxes attributed to stock option exercises.

(2) Represents a one-time charge to write off in-process research and development assumed with our acquisition of Aelita Software in March 2004.

(3) Represents the tax effect of adjustments.

QUEST SOFTWARE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

	Three Months Ended March 31, 2003
	GAAP		Adjustments		Adjusted
Revenues:
Licenses	$	42,722			$	42,722
Services		28,477				28,477
Total revenues		71,199				71,199
Cost of revenues:
Licenses		933				933
Services		5,195	(28	)(1)		5,167
Amortization of purchased intangible assets		2,130	(2,130	)		—
Total cost of revenues		8,258				6,100
Gross profit		62,941				65,099
Operating expenses:
Sales and marketing		36,129	(343	)(1)		35,786
Research and development		17,185	(233	)(1)		16,952
General and administrative		6,551	(53	)(1)		6,498
In-process research and development		—				—
Intangible asset amortization		867	(867	)		—
Total operating expenses		60,732				59,236
Income from operations		2,209				5,863
Other income, net		1,860	79	(2)		1,939
Income before income tax provision		4,069				7,802
Income tax provision		1,535	1,430	(3)		2,965
Net income	$	2,534			$	4,837
Net income per share:
Basic	$	0.03			$	0.05
Diluted	$	0.03			$	0.05
Weighted average shares:
Basic		90,974				90,974
Diluted		92,922				92,922

(1) 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) stock based compensation and payroll taxes attributed to stock option exercises.

(2) Represents loss on securities held for trading purposes.

(3) Represents the tax effect of adjustments.

QUEST SOFTWARE, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

ASSETS
	March 31, 2004		December 31, 2003
Current assets:
Cash and cash equivalents	$	65,956	$	67,470
Short-term marketable securities available for sale		18,107		26,736
Accounts receivable, net		50,987		58,535
Prepaid expenses and other current assets		11,267		6,846
Deferred income taxes		3,954		15,074
Total current assets		150,271		174,661
Property and equipment, net		47,331		31,950
Long-term marketable securities		180,688		184,160
Goodwill, net		325,232		239,840
Amortizing intangible assets, net		50,796		25,159
Deferred income taxes		12,626		10,126
Other assets		2,097		1,915
Total assets	$	769,041	$	667,811
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	5,216	$	4,180
Repurchase agreement		67,500		—
Accrued compensation		17,648		17,384
Other accrued expenses		26,532		27,939
Income taxes payable		10,484		9,082
Short-term portion of deferred revenue		84,514		73,957
Total current liabilities		211,894		132,542
Long-term liabilities:
Long-term portion of deferred revenue		11,513		9,416
Other long-term liabilities		2,092		1,677
Total long-term liabilities		13,605		11,093
Shareholders’ equity		543,542		524,176
Total liabilities and shareholders’ equity	$	769,041	$	667,811

QUEST SOFTWARE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Three Months Ended March 31,
	2004			2003
Cash flows from operating activities:
Net income	$	386		$	2,534
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		5,402			6,919
Compensation expense associated with stock option grants		170			495
Deferred income taxes		3			110
Provision for bad debts		(23	)		138
In-process research and development		6,700			—
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable		9,807			11,232
Prepaid expenses and other current assets		(2,331	)		991
Other assets		(3	)		948
Accounts payable		493			89
Accrued compensation		(1,116	)		(1,101	)
Other accrued expenses		(4,796	)		(5,274	)
Income taxes payable		2,802			1,789
Deferred revenue		4,843			3,210
Other liabilities		415			(145	)
Net cash provided by operating activities		22,752			21,935
Cash flows from investing activities:
Purchases of property and equipment		(16,586	)		(2,883	)
Cash paid for acquisitions, net of cash acquired		(94,283	)		—
Purchases of marketable securities		—			(42,375	)
Sales and maturities of marketable securities		13,005			22,475
Net cash used in investing activities		(97,864	)		(22,783	)
Cash flows from financing activities:
Proceeds from repurchase agreement		67,500			—
Repayment of capital lease obligations		(92	)		(91	)
Proceeds from the exercise of stock options		4,288			195
Proceeds from employee stock purchase plan		2,723			2,286
Net cash provided by financing activities		74,419			2,390
Effect of exchange rate changes on cash and cash equivalents		(821	)		(418	)
Net (decrease) increase in cash and cash equivalents		(1,514	)		1,124
Cash and cash equivalents, beginning of period		67,470			64,283
Cash and cash equivalents, end of period	$	65,956		$	65,407