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) July 28, 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 July 28, 2004

Item 12. Results of Operations and Financial Condition

On July 28, 2004, Quest Software, Inc. issued a press release announcing operating results for the quarter ended June 30, 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.

2

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: July 28, 2004
	By:	/s/ M. Brinkley Morse
		M. Brinkley Morse,
		Vice President, Finance and Operations
		and Chief Financial Officer

3

EXHIBIT INDEX

Exhibit No.	Description of Document
99.1	Press Release issued by Quest Software, Inc. on July 28, 2004

4

EX-99.1

EXHIBIT 99.1

NEWS     For Immediate Release

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 SECOND QUARTER 2004

Revenue Grows 30% to $92.1 Million for the Quarter

IRVINE, Calif., July 28, 2004 – Quest Software, Inc. (Nasdaq: QSFT), a leading provider of application, database and Windows management solutions, today reported financial results for the quarter ended June 30, 2004. Total revenues increased 30% year over year to $92.1 million compared to last year’s second quarter revenue of $70.8 million. Total revenues for the first six months of 2004 were $174.7 million compared to $142.0 million for the same period in 2003.

GAAP Results

Quest Software’s net income for the second quarter was $2.6 million, or $0.03 per diluted share. GAAP operating margins were 5.0% in the second quarter, resulting in GAAP operating income of $4.6 million. GAAP results for the second quarter include a special charge of $5.0 million for a loss contingency reserve related to our Computer Associates intellectual property litigation. Net income for the first six months of 2004 was $3.0 million or $0.03 per diluted share versus net income of $5.6 million or $0.06 per diluted share for the comparable period in 2003. Quest Software generated cash flow from operations of $12.3 million in the June 2004 quarter, and our DSOs were 58 days.

Non-GAAP Results

On a pro forma basis, operating margins were 15.6% for the quarter, resulting in pro forma net income of $8.9 million, or $0.09 per share on a diluted basis. This compares to pro forma net income of $5.2 million, or $0.06 per share on a diluted basis, for the second quarter ended June 30, 2003. For the six months ended June 30, 2004 pro forma net income was $17.5 million or $0.18 per diluted share. This compares to pro forma net income of $10.0 million or $0.11 per diluted share for the six months ended June 2003.

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

“Our second quarter results reflect our growing competitive strength as we continue to build upon our leadership position in the areas of application, database and Windows management solutions,” said

Quest Reports Second Quarter 2004 Results – page 2 of 8

Vinny Smith, chairman and chief executive officer, Quest Software. “We executed well across all fronts this quarter including the successful integration of the Aelita team into the Quest organization. On the product side, one particular highlight was strong growth within both our organic Windows management solutions and the expanded set of products acquired through the Aelita acquisition. I would also emphasize our steady improvement in operating margins and operating income, with pro forma operating income increasing 215% year over year and pro forma operating margins increasing from 6.4% last year to 15.6% in Q2 2004.”

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 acquisition-related intangible assets, other compensation expenses associated with stock options, litigation-related loss contingency reserves and impacts of other events, which might otherwise obscure the results of operations of our core business when compared to our historical performance or competitors or 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 September 30, 2004:

• Revenue is expected to be in the range of $90 million to $92 million;

• GAAP diluted earnings per share is expected to be in the range of $0.05 to $0.06 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 $3.8 million of amortization of acquisition related intangible assets and $680,000 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 $0.19 to $0.22 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 $13.3 million of amortization of acquisition related intangible assets, $7.0 million of in-process research and development, the $5.0 million special CA litigation charge and $2.3 million of other compensation charges related to stock options.

Quest Reports Second Quarter 2004 Results – page 3 of 8

Second Quarter 2004 Conference Call Information

Quest Software will host a conference call today, Wednesday, July 28, 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 July 28, 2005. An audio replay of the call will also be available through August 11, 2004 by dialing 888-203-1112 (from the U.S and Canada) or 719-457-0820 (outside the U.S. and Canada), using confirmation code: 255193.

About Quest Software, Inc.

Quest Software, Inc. provides software to simplify IT management to 18,000 customers worldwide, including 75 percent of the Fortune 500. Quest products for application, database and Windows management help customers develop, deploy, manage and maintain the IT enterprise 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; the outcome of pending or future litigation (including pending litigation involving our Quest Central for DB2 products and resulting disruption to our business); 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 and form 10Q for the period ended March 31, 2004. 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 2004 Results – page 4 of 8

QUEST SOFTWARE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

	Three Months Ended June 30,					Six Months Ended June 30,
	2004			2003		2004		2003
Revenues:
Licenses	$	51,195		$	41,164	$	98,223	$	83,886
Services		40,952			29,671		76,451		58,148
Total revenues		92,147			70,835		174,674		142,034
Cost of revenues:
Licenses		974			1,138		2,071		2,071
Services		7,363			5,343		13,766		10,538
Amortization of purchased intangible assets		2,280			2,363		3,711		4,492
Total cost of revenues		10,617			8,844		19,548		17,101
Gross profit		81,530			61,991		155,126		124,933
Operating expenses:
Sales and marketing		41,193			35,911		77,317		72,039
Research and development		20,356			16,991		38,513		34,175
General and administrative		8,524			7,293		16,785		13,847
In-process research and development		280			—		6,980		—
Intangible asset amortization		1,563			887		2,293		1,754
Litigation loss contingency		5,000			—		5,000		—
Total operating expenses		76,916			61,082		146,888		121,815
Income from operations		4,614			909		8,238		3,118
Other income (expense), net		(506	)		3,988		161		5,848
Income before income tax provision		4,108			4,897		8,399		8,966
Income tax provision		1,479			1,831		5,384		3,366
Net income	$	2,629		$	3,066	$	3,015	$	5,600
Net income per share:
Basic	$	0.03		$	0.03	$	0.03	$	0.06
Diluted	$	0.03		$	0.03	$	0.03	$	0.06
Weighted average shares:
Basic		94,374			91,672		94,087		91,325
Diluted		97,761			93,644		97,774		93,259

Quest Reports Second Quarter 2004 Results – page 5 of 8

QUEST SOFTWARE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

	Three Months Ended June 30, 2004								Six Months Ended June 30, 2004
	GAAP			Adjustments		Adjusted			GAAP		Adjustments		Adjusted
Revenues:
Licenses	$	51,195				$	51,195		$	98,223			$	98,223
Services		40,952					40,952			76,451				76,451
Total revenues		92,147					92,147			174,674				174,674
Cost of revenues:
Licenses		974					974			2,071				2,071
Services		7,363		(59	)(1)		7,304			13,766	(89	)(1)		13,677
Amortization of purchased intangible assets		2,280		(2,280	)		—			3,711	(3,711	)		—
Total cost of revenues		10,617					8,278			19,548				15,748
Gross profit		81,530					83,869			155,126				158,926
Operating expenses:
Sales and marketing		41,193		(461	)(1)		40,732			77,317	(674	)(1)		76,643
Research and development		20,356		(107	)(1)		20,249			38,513	(209	)(1)		38,304
General and administrative		8,524		(8	)(1)		8,516			16,785	(14	)(1)		16,771
In-process research and development		280		(280	)(2)		—			6,980	(6,980	)(4)		—
Intangible asset amortization		1,563		(1,563	)		—			2,293	(2,293	)		—
Litigation loss contingency		5,000		(5,000	)(5)		—			5,000	(5,000	)(5)		—
Total operating expenses		76,916					69,497			146,888				131,718
Income from operations		4,614					14,372			8,238				27,208
Other income (expense), net		(506	)				(506	)		161				161
Income before income tax provision		4,108					13,866			8,399				27,369
Income tax provision		1,479		3,513	(3)		4,992			5,384	4,469	(3)		9,853
Net income	$	2,629				$	8,874		$	3,015			$	17,516
Net income per share:
Basic	$	0.03				$	0.09		$	0.03			$	0.19
Diluted	$	0.03				$	0.09		$	0.03			$	0.18
Weighted average shares:
Basic		94,374					94,374			94,087				94,087
Diluted		97,761					97,810			97,774				97,774

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

(2) Represents a charge to write off in-process research and development assumed with our acquisition of Lecco Technology in April 2004.

(3) Represents the tax effect of adjustments.

(4) Represents charges to write off in-process research and development assumed with our acquisition of Aelita Software in March 2004 and Lecco Technology in April 2004.

(5) Represents a special charge for a loss contingency reserve related to our Computer Associates intellectual property litigation.

Quest Reports Second Quarter 2004 Results – page 6 of 8

QUEST SOFTWARE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

	Three Months Ended June 30, 2003						Six Months Ended June 30, 2003
	GAAP		Adjustments		Adjusted		GAAP		Adjustments		Adjusted
Revenues:
Licenses	$	41,164			$	41,164	$	83,886			$	83,886
Services		29,671				29,671		58,148				58,148
Total revenues		70,835				70,835		142,034				142,034
Cost of revenues:
Licenses		1,138	(1	)(2)		1,137		2,071	(1	)(1)		2,070
Services		5,343	(18	)(2)		5,325		10,538	(46	)(1)		10,492
Amortization of purchased intangible assets		2,363	(2,363	)		—		4,492	(4,492	)		—
Total cost of revenues		8,844				6,462		17,101				12,562
Gross profit		61,991				64,373		124,933				129,472
Operating expenses:
Sales and marketing		35,911	(238	)(2)		35,673		72,039	(581	)(1)		71,458
Research and development		16,991	(131	)(2)		16,860		34,175	(364	)(1)		33,811
General and administrative		7,293	(18	)(2)		7,275		13,847	(71	)(1)		13,776
Intangible asset amortization		887	(887	)		—		1,754	(1,754	)		—
Total operating expenses		61,082				59,808		121,815				119,045
Income from operations		909				4,565		3,118				10,427
Other income, net		3,988	(177	)(3)		3,811		5,848	(98	)(3)		5,750
Income before income tax provision		4,897				8,376		8,966				16,177
Income tax provision		1,831	1,352	(4)		3,183		3,366	2,781	(4)		6,147
Net income	$	3,066			$	5,193	$	5,600			$	10,030
Net income per share:
Basic	$	0.03			$	0.06	$	0.06			$	0.11
Diluted	$	0.03			$	0.06	$	0.06			$	0.11
Weighted average shares:
Basic		91,672				91,672		91,325				91,325
Diluted		93,644				93,644		93,259				93,259

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

(3) Represents a gain on securities held for trading purposes.

(4) Represents the tax effect of adjustments.

Quest Reports Second Quarter 2004 Results – page 7 of 8

QUEST SOFTWARE, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

ASSETS

	June 30, 2004		December 31, 2003
Current assets:
Cash and cash equivalents	$	75,729	$	67,470
Short-term marketable securities available for sale		25,505		26,736
Accounts receivable, net		59,207		58,535
Prepaid expenses and other current assets		9,419		6,846
Deferred income taxes		3,167		15,074
Total current assets		173,027		174,661
Property and equipment, net		51,200		31,950
Long-term marketable securities		166,311		184,160
Goodwill, net		326,612		239,840
Amortizing intangible assets, net		48,718		25,159
Deferred income taxes		12,626		10,126
Other assets		2,552		1,915
Total assets	$	781,046	$	667,811
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	7,393	$	4,180
Repurchase agreement		67,804		—
Accrued compensation		19,423		17,384
Other accrued expenses		31,751		27,939
Income taxes payable		6,978		9,082
Short-term portion of deferred revenue		86,794		73,957
Total current liabilities		220,143		132,542
Long-term liabilities:
Long-term portion of deferred revenue		12,354		9,416
Other long-term liabilities		2,007		1,677
Total long-term liabilities		14,361		11,093
Shareholders’ equity		546,542		524,176
Total liabilities and shareholders’ equity	$	781,046	$	667,811

Quest Reports Second Quarter 2004 Results – page 8 of 8

QUEST SOFTWARE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2004			2003			2004			2003
Cash flows from operating activities:
Net income	$	2,629		$	3,066		$	3,015		$	5,600
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		7,237			7,289			12,639			14,208
Compensation expense associated with stock option grants		539			163			709			658
Deferred income taxes		8			(185	)		11			(75	)
Provision for bad debts		91			105			68			243
In-process research and development		280			—			6,980			—
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable		(8,723	)		(6,612	)		1,084			4,620
Prepaid expenses and other current assets		1,959			1,035			(372	)		2,026
Other assets		(419	)		(522	)		(422	)		426
Accounts payable		2,114			(987	)		2,607			(898	)
Accrued compensation		1,505			1,486			389			385
Other accrued expenses		5,182			2,111			386			(3,163	)
Income taxes payable		(2,704	)		1,396			98			3,185
Deferred revenue		2,713			1,729			7,556			4,939
Other liabilities		(84	)		(20	)		331			(165	)
Net cash provided by operating activities		12,327			10,054			35,079			31,989
Cash flows from investing activities:
Purchases of property and equipment		(7,548	)		(1,000	)		(24,134	)		(3,883	)
Cash paid for acquisitions, net of cash acquired		(1,655	)		(4,746	)		(95,938	)		(4,746	)
Purchases of marketable securities		—			(14,985	)		—			(57,360	)
Sales and maturities of marketable securities		4,326			43,601			17,331			66,076
Net cash (used in) provided by investing activities		(4,877	)		22,870			(102,741	)		87
Cash flows from financing activities:
Proceeds from repurchase agreement		81			—			67,581			—
Repayment of capital lease obligations		(136	)		(104	)		(228	)		(195	)
Proceeds from the exercise of stock options		1,627			3,949			5,915			4,144
Proceeds from employee stock purchase plan		—			—			2,723			2,286
Net cash provided by financing activities		1,572			3,845			75,991			6,235
Effect of exchange rate changes on cash and cash equivalents		751			(947	)		(70	)		(1,365	)
Net increase in cash and cash equivalents		9,773			35,822			8,259			36,946
Cash and cash equivalents, beginning of period		65,956			65,407			67,470			64,283
Cash and cash equivalents, end of period	$	75,729		$	101,229		$	75,729		$	101,229