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) October 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

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

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.02 Results of Operations and Financial Condition.

On October 27, 2004, Quest Software, Inc. issued a press release announcing operating results for the quarter ended September 30, 2004. This press release is attached hereto as Exhibit 99.1 and is incorporated herein by reference.

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.

Item 9.01 Financial Statements and Exhibits.

(c) Exhibits.

99.1 Press release issued by Quest Software, Inc. on October 27, 2004.

SIGNATURES

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 27, 2004
	By:	/s/    M. BRINKLEY MORSE
		M. Brinkley Morse
		Vice President, Finance and Operations and Chief Financial Officer

EXHIBIT INDEX

Exhibit Number	Exhibit Title or Description
99.1	Press release issued by Quest Software, Inc. on October 27, 2004.

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 RECORD RESULTS FOR THIRD QUARTER 2004

Revenue Grows 32% to $96.7 Million for the Quarter

IRVINE, Calif., October 27, 2004 – Quest Software, Inc. (Nasdaq: QSFT), a leading provider of application, database and Windows management solutions, today reported financial results for the quarter ended September 30, 2004. Total revenues increased 32% year over year to $96.7 million compared to last year’s third quarter revenue of $73.3 million. Total revenues for the first nine months of 2004 were $271.4 million compared to $215.3 million for the same period in 2003.

GAAP Results

Quest Software’s net income for the third quarter was $30.9 million, or $0.32 per diluted share. GAAP operating margins were 43.5% in the third quarter, resulting in GAAP operating income of $42.1 million. Net income for the first nine months of 2004 was $34.0 million or $0.35 per diluted share versus net income of $10.0 million or $0.11 per diluted share for the comparable period in 2003. In the quarter, Quest sold its Vista Plus output management product line to Open Text Corporation resulting in a $29.6 million pretax gain. Quest Software generated cash flow from operations of $22.6 million in the September 2004 quarter.

Non-GAAP Results

On a pro forma basis, operating margins were 17.5% for the quarter, resulting in pro forma net income of $12.6 million, or $0.13 per share on a diluted basis. This compares to pro forma net income of $6.3 million, or $0.07 per share on a diluted basis, for the third quarter ended September 30, 2003. For the nine months ended September 30, 2004 pro forma net income was $30.1 million or $0.31 per diluted share. This compares to pro forma net income of $16.4 million or $0.18 per diluted share for the nine months ended September 30, 2003.

Quest Reports Third Quarter 2004 Results – page 2 of 9

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

“Our strong third quarter financial results demonstrate a consistent and disciplined approach to managing our operations, enabling us to realize the leverage in our model as we continued to deliver incremental operating profit,” said Vinny Smith, chairman and chief executive officer, Quest Software. “Today, Information Technology professionals are faced with mastering the growing complexity of their multi-vendor environments. Our solutions are unique because they help to simplify and automate the management of these complex, yet business-critical applications, as well as the databases, systems and Windows infrastructure that support them. This means that no matter how complex the environment is, with Quest products our customers remain in control. With a continued focus on empowering customers with the expertise to do more, we have a compelling opportunity to grow our business going forward.”

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 December 31, 2004:

• Revenue is expected to be in the range of $104.0 million to $106.0 million;

• GAAP diluted earnings per share is expected to be in the range of $0.11 to $0.13 per share;

• Pro forma diluted earnings per share is expected to be in the range of $0.14 to $0.16 per share. The pro forma guidance excludes approximately $3.5 million of amortization of acquisition related intangible assets and $590,000 of other compensation charges related to stock options.

Quest Reports Third Quarter 2004 Results – page 3 of 9

For the full year ending December 31, 2004, Quest Software management has raised its prior guidance:

• Annual revenue is expected to be in the range of $375.5 million to $377.5 million;

• GAAP diluted earnings per share is expected to be in the range of $0.46 to $0.48 per share;

• Pro forma diluted earnings per share is expected to be in the range of $0.45 to $0.47

• 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, a $29.6 million gain on sale of our Vista Plus product suite and $2.1 million of other compensation charges related to stock options.

Third Quarter 2004 Conference Call Information

Quest Software will host a conference call today, Wednesday, October 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 October 27, 2005. An audio replay of the call will also be available through November 12, 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: 885606.

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

Quest Reports Third Quarter 2004 Results – page 4 of 9

and form 10-Q for the period ended June 30, 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 Third Quarter 2004 Results – page 5 of 9

QUEST SOFTWARE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2004		2003		2004		2003
Revenues:
Licenses	$	53,539	$	41,423	$	151,762	$	125,309
Services		43,200		31,841		119,651		89,989
Total revenues		96,739		73,264		271,413		215,298
Cost of revenues:
Licenses		764		1,026		2,835		3,097
Services		7,973		5,267		21,739		15,805
Amortization of purchased intangible assets		2,269		1,899		5,980		6,392
Total cost of revenues		11,006		8,192		30,554		25,294
Gross profit		85,733		65,072		240,859		190,004
Operating expenses:
Sales and marketing		42,876		34,418		120,193		106,458
Research and development		19,868		16,415		58,381		50,591
General and administrative		8,876		7,438		25,661		21,282
Intangible asset amortization		1,568		889		3,861		2,643
In-process research and development		—		—		6,980		—
Litigation loss contingency		—		—		5,000		—
Total operating expenses		73,188		59,160		220,076		180,974
Gain on sale of Vista Plus product suite		29,574		—		29,574		—
Income from operations		42,119		5,912		50,357		9,030
Other income, net		2,723		1,308		2,884		7,156
Income before income tax provision		44,842		7,220		53,241		16,186
Income tax provision		13,901		2,782		19,285		6,148
Net income	$	30,941	$	4,438	$	33,956	$	10,038
Net income per share:
Basic	$	0.33	$	0.05	$	0.36	$	0.11
Diluted	$	0.32	$	0.05	$	0.35	$	0.11
Weighted average shares:
Basic		94,737		92,550		94,306		91,737
Diluted		96,608		94,213		97,691		93,571

Quest Reports Third Quarter 2004 Results – page 6 of 9

QUEST SOFTWARE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

	Three Months Ended September 30, 2004						Nine Months Ended September 30, 2004
	GAAP		Adjustments		Adjusted		GAAP		Adjustments		Adjusted
Revenues:
Licenses	$	53,539			$	53,539	$	151,762			$	151,762
Services		43,200				43,200		119,651				119,651
Total revenues		96,739				96,739		271,413				271,413
Cost of revenues:
Licenses		764				764		2,835				2,835
Services		7,973	(56	)(1)		7,917		21,739	(145	)(1)		21,594
Amortization of purchased intangible assets		2,269	(2,269	)		—		5,980	(5,980	)		—
Total cost of revenues		11,006				8,681		30,554				24,429
Gross profit		85,733				88,058		240,859				246,984
Operating expenses:
Sales and marketing		42,876	(356	)(1)		42,520		120,193	(1,030	)(1)		119,163
Research and development		19,868	(141	)(1)		19,727		58,381	(350	)(1)		58,031
General and administrative		8,876	(7	)(1)		8,869		25,661	(21	)(1)		25,640
Intangible asset amortization		1,568	(1,568	)		—		3,861	(3,861	)		—
In-process research and development		—	—			—		6,980	(6,980	)(4)		—
Litigation loss contingency		—	—			—		5,000	(5,000	)(5)		—
Total operating expenses		73,188				71,116		220,076				202,834
Gain on sale of Vista Plus product suite		29,574	(29,574	)(2)		—		29,574	(29,574	)(2)		—
Income from operations		42,119				16,942		50,357				44,150
Other income, net		2,723				2,723		2,884				2,884
Income before income tax provision		44,842				19,665		53,241				47,034
Income tax provision		13,901	(6,822	)(3)		7,079		19,285	(2,353	)(3)		16,932
Net income	$	30,941			$	12,586	$	33,956			$	30,102
Net income per share:
Basic	$	0.33			$	0.13	$	0.36			$	0.32
Diluted	$	0.32			$	0.13	$	0.35			$	0.31
Weighted average shares:
Basic		94,737				94,737		94,306				94,306
Diluted		96,608				96,608		97,691				97,691

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

⁽²⁾ Represents a gain on the sale of our Vista Plus product suite.

⁽³⁾ Represents the tax effect of adjustments.

⁽⁴⁾ Represents one-time 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 Third Quarter 2004 Results – page 7 of 9

QUEST SOFTWARE, INC.

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	$	125,309			$	125,309
Services		31,841				31,841		89,989				89,989
Total revenues		73,264				73,264		215,298				215,298
Cost of revenues:
Licenses		1,026	(1	)(2)		1,025		3,097	(2	)(1)		3,095
Services		5,267	(12	)(2)		5,255		15,805	(58	)(1)		15,747
Amortization of purchased intangible assets		1,899	(1,899	)		—		6,392	(6,392	)		—
Total cost of revenues		8,192				6,280		25,294				18,842
Gross profit		65,072				66,984		190,004				196,456
Operating expenses:
Sales and marketing		34,418	(82	)(2)		34,336		106,458	(663	)(1)		105,795
Research and development		16,415	(77	)(2)		16,338		50,591	(441	)(1)		50,150
General and administrative		7,438	(12	)(2)		7,426		21,282	(83	)(1)		21,199
Intangible asset amortization		889	(889	)		—		2,643	(2,643	)		—
Total operating expenses		59,160				58,100		180,974				177,144
Income from operations		5,912				8,884		9,030				19,312
Other income, net		1,308				1,308		7,156				7,156
Income before income tax provision		7,220				10,192		16,186				26,468
Income tax provision		2,782	1,091	(3)		3,873		6,148	3,910	(3)		10,058
Net income	$	4,438			$	6,319	$	10,038			$	16,410
Net income per share:
Basic	$	0.05			$	0.07	$	0.11			$	0.18
Diluted	$	0.05			$	0.07	$	0.11			$	0.18
Weighted average shares:
Basic		92,550				92,550		91,737				91,737
Diluted		94,213				94,213		93,571				93,571

⁽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 the tax effect of adjustments.

Quest Reports Third Quarter 2004 Results – page 8 of 9

QUEST SOFTWARE, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

	September 30, 2004		December 31, 2003
ASSETS
Current assets:
Cash and cash equivalents	$	89,384	$	67,470
Short-term marketable securities available for sale		56,163		26,736
Accounts receivable, net		66,610		58,535
Prepaid expenses and other current assets		11,097		6,846
Deferred income taxes		3,994		15,074
Total current assets		227,248		174,661
Property and equipment, net		51,003		31,950
Long-term marketable securities		126,544		184,160
Goodwill		326,324		239,840
Amortizing intangible assets, net		44,881		25,159
Deferred income taxes		11,219		10,126
Other assets		2,511		1,915
Total assets	$	789,730	$	667,811
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	5,533	$	4,180
Obligation under repurchase agreement		27,492		—
Accrued compensation		21,325		17,384
Other accrued expenses		30,445		27,939
Income taxes payable		18,929		9,082
Current portion of deferred revenue		87,630		73,957
Total current liabilities		191,354		132,542
Long-term liabilities:
Long-term portion of deferred revenue		13,696		9,416
Other long-term liabilities		1,984		1,677
Total long-term liabilities		15,680		11,093
Shareholders’ equity		582,696		524,176
Total liabilities and shareholders’ equity	$	789,730	$	667,811

Quest Reports Third Quarter 2004 Results – page 9 of 9

QUEST SOFTWARE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
Cash flows from operating activities:
Net income	$	30,941		$	4,438		$	33,956		$	10,038
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		7,921			6,446			20,560			20,654
Compensation expense associated with stock option grants		557			138			1,266			796
Deferred income taxes		601			(384	)		612			(459	)
Gain on sale of Vista Plus product suite		(29,574	)		—			(29,574	)		—
Provision for bad debts		44			(220	)		112			23
In-process research and development		—			—			6,980			—
Litigation loss provision		—			—			5,000			—
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable		(7,154	)		(1,416	)		(6,070	)		3,204
Prepaid expenses and other current assets		96			627			(276	)		2,653
Other assets		46			(525	)		(376	)		(99	)
Accounts payable		(1,905	)		854			702			(44	)
Accrued compensation		1,652			618			2,041			1,003
Other accrued expenses		(1,446	)		(216	)		(5,633	)		(3,379	)
Income taxes payable		12,662			5,449			12,760			8,634
Deferred revenue		8,198			(739	)		15,754			4,200
Other liabilities		(23	)		(112	)		307			(277	)
Net cash provided by operating activities		22,616			14,958			58,121			46,947
Cash flows from investing activities:
Purchases of property and equipment		(3,876	)		(1,504	)		(28,010	)		(5,387	)
Cash paid for acquisitions, net of cash acquired		—			—			(96,364	)		(4,746	)
Proceeds from sale of Vista Plus product suite		22,515			—			22,515			—
Purchases of marketable securities		(7	)		(50,131	)		(7	)		(107,491	)
Sales and maturities of marketable securities		10,167			27,384			27,498			93,460
Net cash (used in) provided by investing activities		28,799			(24,251	)		(74,368	)		(24,164	)
Cash flows from financing activities:
Repayment of notes payable		(769	)		(1,336	)		(769	)		(1,336	)
Proceeds from repurchase agreement		—			—			67,581			—
Repayment of repurchase agreement		(40,512	)		—			(40,512	)		—
Repayment of capital lease obligations		(47	)		(60	)		(275	)		(255	)
Proceeds from the exercise of stock options		1,113			1,244			7,028			5,388
Proceeds from employee stock purchase plan		2,074			2,345			4,797			4,631
Net cash provided by (used in) financing activities		(38,141	)		2,193			37,850			8,428
Effect of exchange rate changes on cash and cash equivalents		381			262			311			(1,103	)
Net increase (decrease) in cash and cash equivalents		13,655			(6,838	)		21,914			30,108
Cash and cash equivalents, beginning of period		75,729			101,229			67,470			64,283
Cash and cash equivalents, end of period	$	89,384		$	94,391		$	89,384		$	94,391