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) May 4, 2006

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.)

5 Polaris Way, Aliso Viejo, California	92656
(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 May 4, 2006, Quest Software, Inc. (“Quest”) issued a press release announcing operating results for the quarter ended March 31, 2006. 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 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 May 4, 2006.

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: May 4, 2006	By:	/s/ Michael J. Lambert
		Michael J. Lambert
		Senior Vice President, Chief Financial Officer

EXHIBIT INDEX

Exhibit Number	Exhibit Title or Description
99.1	Press release issued by Quest Software, Inc. on May 4, 2006.

EX-99.1

Exhibit 99.1

NEWS For Immediate Release

Editorial Contact: Joe Horine

614-726-4775

joe.horine@quest.com

Investor Contact: Scott Davidson

949-754-8659

scott.davidson@quest.com

QUEST SOFTWARE REPORTS RECORD REVENUES FOR FIRST QUARTER 2006

Revenue Grows 23% Year-over-Year to $127.5 Million for the Quarter

ALISO VIEJO, Calif., May 4, 2006 – Quest Software, Inc. (Nasdaq: QSFT) today reported financial results for the first quarter ended March 31, 2006. Total revenues increased 23.4% year-over-year to $127.5 million compared to last year’s first quarter revenue of $103.3 million.

GAAP Results

Quest Software’s GAAP net income for the first quarter was $6.6 million, or $0.06 per diluted share. GAAP operating margins decreased year-over-year from 14.4% to 6.4% in the first quarter, resulting in GAAP operating income of $8.1 million.

Non-GAAP Results

On a pro forma basis, operating margins were 17.0% for the quarter, resulting in pro forma net income of $15.9 million, or $0.15 per share on a diluted basis. This compares to pro forma net income of $12.4 million, or $0.12 per share on a diluted basis for the first quarter ended March 31, 2005. Quest Software generated cash flow from operations of $39.6 million in the March 2006 quarter.

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

“We are pleased with our strong performance in Q1 that demonstrates the business momentum we continue to realize in the market by providing key solutions to our customers’ IT management needs,” said Vinny Smith, chairman and chief executive officer, Quest Software. “We combined effective execution in current markets with expanded investment to broaden our product line and enter complementary new markets such as e-mail archiving with the acquisition of AfterMail, all as part of

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Quest Reports First Quarter 2006 Results – page 2 of 8

our continued focus on helping customers increase productivity and get better performance from their applications, databases and infrastructure.”

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 meaningful 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, such as amortization of acquisition-related intangible assets, stock-based compensation expense 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 may not necessarily be relevant to understanding the operating activities within the Company’s business.

Financial Outlook

Quest Software management offers the following guidance for the second quarter ending June 30, 2006:

• Revenue is expected to be in the range of $127.0 million to $131.0 million;

• GAAP diluted earnings per share is expected to be in the range of $0.06 to $0.08 per share;

• Pro forma diluted earnings per share is expected to be in the range of $0.13 to $0.15 per share. The pro-forma guidance excludes approximately $0.03 per share of amortization of acquisition-related intangible assets and $0.04 per share related to the effects of stock-based compensation expense.

For the full year ending December 31, 2006, Quest Software management offers the following guidance:

• Annual revenue is expected to be in the range of $535 million to $550 million;

• GAAP diluted earnings per share is expected to be in the range of $0.35 to $0.42 per share.

• Pro forma diluted earnings per share is expected to be in the range of $0.67 to $0.73. The pro-forma guidance excludes approximately $0.13 per share of amortization of acquisition-related intangible assets and $0.18 to $0.19 per share related to the effects of stock-based compensation expense.

First Quarter 2006 Conference Call Information

Quest Software will host a conference call today, Thursday, May 4, 2006 at 2:00 p.m. Pacific Time, to discuss its results. A simultaneous Web cast of the conference call will be available on Quest

Quest Reports First Quarter 2006 Results – page 3 of 8

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 May 4, 2007. An audio replay of the call will also be available through May 18, 2006 by dialing (888) 203-1112 (from the U.S. or Canada) or (719) 457-0820 (outside the U.S. and Canada), using confirmation code: 2334376.

About Quest Software, Inc.

Quest Software, Inc. delivers innovative products that help organizations get more performance and productivity from their applications, databases and Windows infrastructure. Through a deep expertise in IT operations and a continued focus on what works best, Quest helps more than 18,000 customers worldwide meet higher expectations for enterprise IT. Quest Software, headquartered in Aliso Viejo, Calif., can be found in offices around the globe and at www.quest.com.

Quest and Quest Software are registered trademarks of Quest Software, Inc. The Quest Software logo and all other Quest Software product or service names and slogans are registered trademarks or 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 on our relationships with customers, strategic partners and vendors; reductions or delays in information technology spending; variations in demand or the size and timing of customer orders; competitive conditions in our various product areas; rapid technological change; risks associated with the development and market acceptance of new products and product strategies; disruptions caused by acquisitions of companies and/or technologies; fluctuating currency exchange rates and risks associated with international operations; the need to attract and retain qualified employees; and other risks inherent in software businesses. 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, 2005, which are available on the SEC’s website at www.sec.gov. 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.

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Quest Reports First Quarter 2006 Results - page 4 of 8

QUEST SOFTWARE, INC.

CONDENSED CONSOLIDATED INCOME STATEMENTS

(In thousands, except per share data)

(Unaudited)

	Three Months Ended March 31,
	2006		2005
Revenues:
Licenses	$	63,680	$	54,718
Services		63,839		48,630
Total revenues		127,519		103,348
Cost of revenues:
Licenses		1,262		968
Services		11,458		8,675
Amortization of purchased technology		3,451		2,255
Total cost of revenues		16,171		11,898
Gross profit		111,348		91,450
Operating expenses:
Sales and marketing		58,949		43,393
Research and development		27,406		21,120
General and administrative		14,440		9,702
Amortization of other purchased intangible assets		2,133		1,276
In-process research and development		300		1,050
Total operating expenses		103,228		76,541
Income from operations		8,120		14,909
Other income (expense), net		2,284		(1,510	)
Income before income tax provision		10,404		13,399
Income tax provision		3,765		4,360
Net income	$	6,639	$	9,039
Net income per share:
Basic	$	0.07	$	0.09
Diluted	$	0.06	$	0.09
Weighted average shares:
Basic		100,424		96,195
Diluted		103,755		99,585

Quest Reports First Quarter 2006 Results - page 5 of 8

QUEST SOFTWARE, INC.

CONDENSED CONSOLIDATED INCOME STATEMENTS

(In thousands, except per share data)

(Unaudited)

	Three Months Ended March 31, 2006
	GAAP		Adjustments		Adjusted
Revenues:
Licenses	$	63,680			$	63,680
Services		63,839				63,839
Total revenues		127,519				127,519
Cost of revenues:
Licenses		1,262	(2	) (1)		1,260
Services		11,458	(337	) (1)		11,121
Amortization of purchased technology		3,451	(3,451	)		—
Total cost of revenues		16,171				12,381
Gross profit		111,348				115,138
Operating expenses:
Sales and marketing		58,949	(3,149	) (1)		55,800
Research and development		27,406	(2,505	) (1)		24,901
General and administrative		14,440	(1,625	) (1)		12,815
Amortization of other purchased intangible assets		2,133	(2,133	)		—
In-process research and development		300	(300	) (2)		—
Total operating expenses		103,228				93,516
Income from operations		8,120				21,622
Other income, net		2,284				2,284
Income before income tax provision		10,404				23,906
Income tax provision		3,765	4,222	(3)		7,987
Net income	$	6,639			$	15,919
Net income per share:
Basic	$	0.07			$	0.16
Diluted	$	0.06			$	0.15
Weighted average shares:
Basic		100,424				100,424
Diluted		103,755				103,755

(1) Represents stock based compensation. Also, includes payroll taxes attributed to stock option exercises. The portion of these adjustments attributable to the implementation of Statement of Financial Accounting Standards No. 123(R) is as follows:

Cost of License	$	(2	)
Cost of Services		(311	)
Sales and marketing		(2,732	)
Research and development		(1,994	)
General and administrative		(1,587	)
Total	$	(6,626	)

(2) Represents a one-time charge to write off in-process research and development assumed with our acquisition of AfterMail Limited in January 2006.

(3) Represents the tax effect of adjustments.

Quest Reports First Quarter 2006 Results - page 6 of 8

QUEST SOFTWARE, INC.

CONDENSED CONSOLIDATED INCOME STATEMENTS

(In thousands, except per share data)

(Unaudited)

	Three Months Ended March 31, 2005
	GAAP			Adjustments		Adjusted
Revenues:
Licenses	$	54,718				$	54,718
Services		48,630					48,630
Total revenues		103,348					103,348
Cost of revenues:
Licenses		968					968
Services		8,675		(38	) (1)		8,637
Amortization of purchased technology		2,255		(2,255	)		—
Total cost of revenues		11,898					9,605
Gross profit		91,450					93,743
Operating expenses:
Sales and marketing		43,393		(285	) (1)		43,108
Research and development		21,120		(398	) (1)		20,722
General and administrative		9,702		(11	) (1)		9,691
Amortization of other purchased intangible assets		1,276		(1,276	)		—
In-process research and development		1,050		(1,050	) (2)		—
Total operating expenses		76,541					73,521
Income from operations		14,909					20,222
Other expense, net		(1,510	)				(1,510	)
Income before income tax provision		13,399					18,712
Income tax provision		4,360		1,948	(3)		6,308
Net income	$	9,039				$	12,404
Net income per share:
Basic	$	0.09				$	0.13
Diluted	$	0.09				$	0.12
Weighted average shares:
Basic		96,195					96,195
Diluted		99,585					99,585

(1) Represents stock based compensation. Also, includes 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 Wingra Technologies, Inc. in January 2005.

(3) Represents the tax effect of adjustments.

QUEST SOFTWARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

	March 31, 2006		December 31, 2005
ASSETS
Current assets:
Cash and cash equivalents	$	152,003	$	121,025
Short-term marketable securities		79,467		74,398
Accounts receivable, net		77,539		116,052
Prepaid expenses and other current assets		14,180		15,202
Deferred income taxes		11,891		11,905
Total current assets		335,080		338,582
Property and equipment, net		85,769		82,845
Long-term marketable securities		41,347		47,538
Amortizing intangible assets, net		66,031		68,975
Goodwill		442,890		430,239
Other assets		6,315		4,828
Total assets	$	977,432	$	973,007
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	4,468	$	3,756
Accrued compensation		26,923		32,696
Other accrued expenses		27,855		34,351
Income taxes payable		8,907		19,554
Current portion of deferred revenue		136,714		140,267
Total current liabilities		204,867		230,624
Long-term liabilities:
Long-term portion of deferred revenue		36,540		34,980
Deferred income taxes		11,399		10,576
Other long-term liabilities		1,421		1,460
Total long-term liabilities		49,360		47,016
Shareholders’ equity		723,205		695,367
Total liabilities and shareholders’ equity	$	977,432	$	973,007

Quest Reports First Quarter 2006 Results - page 8 of 8

QUEST SOFTWARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Three Months Ended March 31,
	2006			2005
Cash flows from operating activities:
Net income	$	6,639		$	9,039
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		9,394			6,148
Compensation expense associated with stock option grants		7,287			683
Deferred income taxes		(16	)		(41	)
Excess tax benefit related to stock-based compensation		(2,349	)		259
Provision for bad debts		(146	)		(80	)
In-process research and development		300			1,050
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable		40,007			43,513
Prepaid expenses and other current assets		1,107			461
Other assets		204			141
Accounts payable		352			548
Accrued compensation		(5,997	)		(6,614	)
Other accrued expenses		(6,711	)		(8,035	)
Litigation settlement payment		—			(16,000	)
Income taxes payable		(8,204	)		(2,351	)
Deferred revenue		(2,228	)		(1,010	)
Other liabilities		(32	)		(108	)
Net cash provided by operating activities		39,607			27,603
Cash flows from investing activities:
Purchases of property and equipment		(6,254	)		(3,039	)
Cash paid for acquisitions, net of cash acquired		(15,259	)		(12,754	)
Purchases of equity investments		(1,636	)		—
Sales and maturities of marketable securities		935			2,064
Net cash used in investing activities		(22,214	)		(13,729	)
Cash flows from financing activities:
Repayment of repurchase agreement		—			(12,725	)
Repayment of capital lease obligations		(64	)		(85	)
Proceeds from the exercise of stock options		12,008			1,472
Excess tax benefit related to stock-based compensation		2,349			—
Net cash provided by (used in) financing activities		14,293			(11,338	)
Effect of exchange rate changes on cash and cash equivalents		(708	)		851
Net increase in cash and cash equivalents		30,978			3,387
Cash and cash equivalents, beginning of period		121,025			118,157
Cash and cash equivalents, end of period	$	152,003		$	121,544