Quest Software Reports Second Quarter 2008 Results

Achieves Record Second Quarter Revenues of $173.4 Million
ALISO VIEJO, Calif.--(Business Wire)--
Quest Software, Inc. (Nasdaq: QSFT) today reported financial
results for the quarter ended June 30, 2008. Total revenues increased
21.9% to $173.4 million compared to the prior year's second quarter
revenue of $142.3 million. Total revenues for the first six months of
2008 increased 18.5% to $346.2 million compared to $292.1 million for
the same period in 2007.

The Company's cash and investments at June 30, 2008, totaled
$419.7 million, an increase of $36.2 million over the comparable
balance at March 31, 2008. Quest generated cash flow from operations
of $24.0 million in the second quarter of 2008.

"We are pleased with our financial performance through what has
been a tough macroeconomic environment in the first half of 2008,"
said Vinny Smith, Quest CEO. "We are continuing to drive our business
to support our customers' requirements across the breadth of their IT
infrastructure with innovative products and services."

GAAP Results

Quest Software's net income for the second quarter of 2008 was
$8.3 million, or $0.08 per fully diluted share. This compares to net
income of $7.9 million, or $0.08 per share on a fully diluted basis,
for the second quarter of 2007. Operating margins decreased
year-over-year from 5.5% to 2.5% in the second quarter, resulting in
operating income of $4.4 million which compares to $7.9 million for
the corresponding period in 2007. Net income for the first six months
of 2008 was $21.6 million, or $0.20 per fully diluted share, versus
net income of $22.8 million, or $0.22 per fully diluted share, for the
comparable period in 2007.

Non-GAAP Results

On a non-GAAP basis, net income for the second quarter of 2008 was
$17.7 million, or $0.17 per fully diluted share. This compares to
non-GAAP net income of $17.4 million, or $0.17 per share on a fully
diluted basis, for the second quarter of 2007. The non-GAAP operating
margin was 10.8% in the second quarter of 2008, resulting in non-GAAP
operating income of $18.7 million, compared to non-GAAP operating
margin and operating income of 13.8% and $19.6 million, respectively,
for the corresponding period in 2007. For the six months ended June
30, 2008 non-GAAP net income was $39.9 million, or $0.38 per fully
diluted share. This compares to non-GAAP net income of $43.6 million,
or $0.41 per fully diluted share, for the six months ended June 30,
2007. The non-GAAP operating margin was 12.1% in the first six months
of 2008, resulting in non-GAAP operating income of $42.0 million,
compared to non-GAAP operating margin of 18.2% and non-GAAP operating
income of $53.1 million in the comparable period of 2007.

Non-GAAP results exclude the after-tax effects of amortization of
intangible assets acquired with business combinations, share-based
compensation expenses, expenses associated with our stock option
investigation and write off of in-process research and development. A
reconciliation of GAAP to non-GAAP financial results is included with
this press release.

Quest Software's management prepares and uses 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 non-GAAP
reporting provides a more meaningful representation of the Company's
on-going economic performance and therefore uses non-GAAP reporting
internally to evaluate and manage the Company's operations. By
excluding charges such as those described above from its GAAP-based
results, we believe these non-GAAP financial measures are more likely
to facilitate investors' understanding of the Company's ongoing
business operating results. These non-GAAP financial measures also
facilitate comparisons to the operating results of the Company's
competitors and provide investors with greater transparency with
respect to the supplemental information used by management in its
operational and financial decision making.

Financial Outlook

Quest Software management offers the following updated guidance
for the twelve months ending December 31, 2008:

-- Annual revenue is expected to be in the range of $705 million
to $720 million;

-- GAAP operating margin is expected to be in the range of 11.0%
to 12.0%. Our GAAP guidance is based on information available
as of the date of this release;

-- Non-GAAP operating margin is expected to be in the range of
17.5% to 18.5%. The non-GAAP guidance excludes approximately
$28.5 million in amortization of acquisition-related
intangible assets, $1.0 million charge for in-process research
and development acquired in May 2008, $13.0 million related to
share-based compensation expense recognized in the six months
ended June 30, 2008, and $2.2 million in expenses associated
with the stock option investigation.

Second Quarter 2008 Conference Call Information

Quest Software will host a conference call today, Tuesday, August
5, 2008, 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 August 5, 2009. An audio replay of the conference call
will also be available through August 12, 2008, by dialing (888)
203-1112 (from the U.S. or Canada) or (719) 457-0820 (outside the U.S.
and Canada), using confirmation code: 1815438.

About Quest Software, Inc.

Quest Software, Inc., a leading enterprise systems management
vendor, delivers innovative products that help organizations get more
performance and productivity from their applications, databases,
Windows infrastructure and virtual environments. Through a deep
expertise in IT operations and a continued focus on what works best,
Quest helps more than 90,000 customers worldwide meet higher
expectations for enterprise IT. Quest provides customers with client
management as well as server and desktop virtualization solutions
through its subsidiaries, ScriptLogic and Vizioncore. Quest Software
can be found in offices around the globe and at www.quest.com.

Quest, Quest Software and the Quest logo are trademarks or
registered trademarks of Quest Software in the United States and
certain other countries. 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, including statements
relating to expectations of future revenue and operating margin
performance and other operating prospects. 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;
uncertainties relating to ongoing litigation and government
investigations arising from our stock option investigation; 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, 2007, 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.

-0-
*T
QUEST SOFTWARE, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share data)
(Unaudited)

Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
2008 2007 2008 2007
--------- -------- -------- --------

Revenues:
Licenses $ 75,286 $ 65,803 $154,428 $140,072
Services 98,147 76,514 191,785 152,014
--------- -------- -------- --------
Total revenues 173,433 142,317 346,213 292,086
Cost of revenues:
Licenses 1,775 659 4,189 2,662
Services 16,333 13,536 31,404 26,517
Amortization of purchased
technology 4,669 3,220 9,593 6,277
--------- -------- -------- --------
Total cost of revenues 22,777 17,415 45,186 35,456
--------- -------- -------- --------
Gross profit 150,656 124,902 301,027 256,630
Operating expenses:
Sales and marketing 81,275 65,822 157,647 129,058
Research and development 39,297 29,849 77,518 58,114
General and administrative 22,220 19,779 45,691 36,344
Amortization of other
purchased intangible assets 2,511 1,587 5,312 3,129
In-process research and
development 955 - 955 -
--------- -------- -------- --------
Total operating expenses 146,258 117,037 287,123 226,645
--------- -------- -------- --------
Income from operations 4,398 7,865 13,904 29,985
Other income, net 3,026 6,140 10,911 11,192
--------- -------- -------- --------
Income before income tax
(benefit) provision 7,424 14,005 24,815 41,177
Income tax (benefit) provision (842) 6,070 3,261 18,336
--------- -------- -------- --------
Net income $ 8,266 $ 7,935 $ 21,554 $ 22,841
========= ======== ======== ========

Net income per share:
Basic $ 0.08 $ 0.08 $ 0.21 $ 0.22
========= ======== ======== ========
Diluted $ 0.08 $ 0.08 $ 0.20 $ 0.22
========= ======== ======== ========

Weighted average shares:
Basic 104,247 101,819 103,774 101,819
Diluted 106,643 105,462 106,277 105,150
*T

Reconciliation of Non-GAAP Financial Measures to Comparable U.S.
GAAP Measures (Unaudited)

The Company has provided a reconciliation of each non-GAAP
financial measure used in this earnings release and related conference
call and Web cast to the most directly comparable GAAP financial
measure. These measures differ from GAAP in that they exclude
amortization of intangible assets acquired with business combinations,
share-based compensation expenses, expenses, including indemnification
advances, associated with ongoing legal matters arising from our stock
option investigation, write off of in-process research and development
and the estimated tax effect related to each of these items. The
Company's basis for these adjustments is described below.

Quest Software's management prepares and uses 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 non-GAAP
reporting provides a more meaningful representation of the Company's
on-going economic performance and therefore uses non-GAAP reporting
internally to evaluate and manage the Company's operations. The
Company's management believes that by excluding charges such as those
described above from its GAAP-based results, these non-GAAP financial
measures are more likely to facilitate investors' understanding of the
Company's ongoing business operating results. These non-GAAP financial
measures also facilitate comparisons to the operating results of the
Company's competitors and provide investors with greater transparency
with respect to the supplemental information used by management in its
operational and financial decision making.

Management excludes the expenses described above when evaluating
the Company's operating performance and believes that the resulting
non-GAAP measures are useful to investors and financial analysts in
assessing the Company's operating performance due to the following
factors:

-- The Company does not acquire businesses on a predictable
cycle. The Company, therefore, believes that the presentation
of non-GAAP measures that adjust for the impact of
amortization and charges for acquired in-process research and
development that are related to business combinations, provide
investors and financial analysts with a consistent basis for
comparison across accounting periods and, therefore, are
useful to investors and financial analysts in helping them to
better understand the Company's operating results and
underlying operational trends.

-- Amortization costs are fixed at the time of an acquisition,
are then amortized over a period of several years after the
acquisition and generally cannot be changed or influenced by
management after the acquisition.

-- Although share-based compensation is an important aspect of
the compensation of the Company's employees and executives,
share-based compensation expense and its related tax impact
because such charges are generally fixed at the time of grant,
are then amortized over a period of several years after the
grant of the share-based instrument and generally cannot be
changed or influenced by management after the grant.

-- Share-based compensation is not an expense that typically
requires or will require cash settlement by the Company.

-- Ongoing expenses associated with our stock option
investigation include expenses incurred for outside legal fees
and costs, consulting services and other professional fees,
and indemnification expenses for current and former directors
and officers. Because these expenses are non-recurring and
unique to the stock option investigation, we believe they are
not indicative of future operating results and that investors
benefit from an understanding of our operating results without
giving effect to them.

-- The estimated income tax effects on the above items adjust the
provision for income taxes to reflect the effect of the
non-GAAP adjustments on non-GAAP operating income.

These non-GAAP financial measures are not prepared in accordance
with accounting principles generally accepted in the United States
("GAAP") and may differ from the non-GAAP information used by other
companies. There are significant limitations associated with the use
of non-GAAP financial measures. The additional non-GAAP financial
information presented here should be considered in conjunction with,
and not as a substitute for or superior to, the financial information
presented in accordance with GAAP (such as net income and earnings per
share) and should not be considered measures of the Company's
liquidity. Furthermore, the Company in the future may exclude
amortization related to new business combinations from financial
measures that it releases, and the Company expects to continue to
incur share-based compensation expenses.

-0-
*T
QUEST SOFTWARE, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share data)
(Unaudited)

Three Months Ended
June 30, 2008
------------------------------
GAAP Adjustments Non-GAAP
--------- ----------- --------

Revenues:
Licenses $ 75,286 $ 75,286
Services 98,147 98,147
--------- --------
Total revenues 173,433 173,433
Cost of revenues:
Licenses 1,775 (1) (1) 1,774
Services 16,333 (276) (1) 16,057
Amortization of purchased
technology 4,669 (4,669) -
--------- --------
Total cost of revenues 22,777 17,831
--------- --------
Gross profit 150,656 155,602
Operating expenses:
Sales and marketing 81,275 (2,222) (1) 79,053
Research and development 39,297 (1,586) (1) 37,711
General and administrative 22,220 (2,083) (2) 20,137
Amortization of other purchased
intangible assets 2,511 (2,511) -
In-process research and development 955 (955) (3) -
--------- --------
Total operating expenses 146,258 136,901
--------- --------
Income from operations 4,398 18,701
Other income, net 3,026 3,026
--------- --------
Income before income tax (benefit)
provision 7,424 21,727
Income tax (benefit) provision (842) 4,905 (4) 4,063
--------- --------
Net income $ 8,266 $ 17,664
========= ========

Net income per share:
Basic $ 0.08 $ 0.17
========= ========
Diluted $ 0.08 $ 0.17
========= ========

Weighted average shares:
Basic 104,247 104,247
Diluted 106,643 106,643

Six Months Ended
June 30, 2008
-----------------------------
GAAP Adjustments Non-GAAP
-------- ----------- --------

Revenues:
Licenses $154,428 $154,428
Services 191,785 191,785
-------- --------
Total revenues 346,213 346,213
Cost of revenues:
Licenses 4,189 (2) (1) 4,187
Services 31,404 (535) (1) 30,869
Amortization of purchased technology 9,593 (9,593) -
-------- --------
Total cost of revenues 45,186 35,056
-------- --------
Gross profit 301,027 311,157
Operating expenses:
Sales and marketing 157,647 (3,949) (1) 153,698
Research and development 77,518 (3,222) (1) 74,296
General and administrative 45,691 (4,482) (2) 41,209
Amortization of other purchased
intangible assets 5,312 (5,312) -
In-process research and development 955 (955) (3) -
-------- --------
Total operating expenses 287,123 269,203
-------- --------
Income from operations 13,904 41,954
Other income, net 10,911 10,911
-------- --------
Income before income tax (benefit)
provision 24,815 52,865
Income tax (benefit) provision 3,261 9,739 (4) 13,000
-------- --------
Net income $ 21,554 $ 39,865
======== ========

Net income per share:
Basic $ 0.21 $ 0.38
======== ========
Diluted $ 0.20 $ 0.38
======== ========

Weighted average shares:
Basic 103,774 103,774
Diluted 106,277 106,277

(1) Represents share-based compensation expense.
(2) Represents $0.6 million and $2.2 million in expenses related to
our stock option investigation for the three and six months ended
June 30, 2008, respectively, and $1.5 million and $2.3 million in
share-based compensation expense for the three and six months
ended June 30, 2008, respectively.
(3) Represents a one-time charge to write off in-process research and
development acquired in May 2008.
(4) Represents the tax effect of adjustments.
*T

-0-
*T
QUEST SOFTWARE, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share data)
(Unaudited)

Three Months Ended
June 30, 2007
-----------------------------
GAAP Adjustments Non-GAAP
-------- ----------- --------

Revenues:
Licenses $ 65,803 $ 65,803
Services 76,514 76,514
-------- --------
Total revenues 142,317 142,317
Cost of revenues:
Licenses 659 (1) (1) 658
Services 13,536 (243) (1) 13,293
Amortization of purchased technology 3,220 (3,220) -
-------- --------
Total cost of revenues 17,415 13,951
-------- --------
Gross profit 124,902 128,366
Operating expenses:
Sales and marketing 65,822 (1,813) (1) 64,009
Research and development 29,849 (1,667) (1) 28,182
General and administrative 19,779 (3,189) (2) 16,590
Amortization of other purchased
intangible assets 1,587 (1,587) -
-------- --------
Total operating expenses 117,037 108,781
-------- --------
Income from operations 7,865 19,585
Other income, net 6,140 6,140
-------- --------
Income before income tax provision 14,005 25,725
Income tax provision 6,070 2,213 (3) 8,283
-------- --------
Net income $ 7,935 $ 17,442
======== ========

Net income per share:
Basic $ 0.08 $ 0.17
======== ========
Diluted $ 0.08 $ 0.17
======== ========

Weighted average shares:
Basic 101,819 101,819
Diluted 105,462 105,462

Six Months Ended
June 30, 2007
-----------------------------
GAAP Adjustments Non-GAAP
-------- ----------- --------

Revenues:
Licenses $140,072 $140,072
Services 152,014 152,014
-------- --------
Total revenues 292,086 292,086
Cost of revenues:
Licenses 2,662 (3) (1) 2,659
Services 26,517 (507) (1) 26,010
Amortization of purchased technology 6,277 (6,277) -
-------- --------
Total cost of revenues 35,456 28,669
-------- --------
Gross profit 256,630 263,417
Operating expenses:
Sales and marketing 129,058 (3,903) (1) 125,155
Research and development 58,114 (3,578) (1) 54,536
General and administrative 36,344 (5,705) (2) 30,639
Amortization of other purchased
intangible assets 3,129 (3,129) -
-------- --------
Total operating expenses 226,645 210,330
-------- --------
Income from operations 29,985 53,087
Other income, net 11,192 11,192
-------- --------
Income before income tax provision 41,177 64,279
Income tax provision 18,336 2,361 (3) 20,697
-------- --------
Net income $ 22,841 $ 43,582
======== ========

Net income per share:
Basic $ 0.22 $ 0.43
======== ========
Diluted $ 0.22 $ 0.41
======== ========

Weighted average shares:
Basic 101,819 101,819
Diluted 105,150 105,150

(1) Represents share-based compensation expense.
(2) Represents $2.3 million and $3.9 million in expenses related to
our stock option investigation for the three and six months ended
June 30, 2007, respectively, and $0.9 million and $1.8 million in
share-based compensation expense for the three and six months
ended June 30, 2007, respectively.
(3) Represents the tax effect of adjustments.
*T

-0-
*T
QUEST SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)

ASSETS

June 30, December 31,
2008 2007
---------- ------------

Current assets:
Cash and cash equivalents $ 327,508 $ 235,568
Restricted cash for an acquisition - 48,924
Short-term marketable securities 212 10,287
Accounts receivable, net 110,957 152,438
Prepaid expenses and other current assets 26,491 19,022
Deferred income taxes 10,775 11,014
---------- ------------
Total current assets 475,943 477,253
Property and equipment, net 77,502 75,848
Long-term marketable securities 91,935 70,936
Intangible assets, net 80,129 76,641
Goodwill 606,341 563,766
Deferred income taxes 29,636 36,661
Other assets 22,654 18,025
---------- ------------
Total assets $1,384,140 $ 1,319,130
========== ============

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Accounts payable $ 6,148 $ 4,590
Accrued compensation 44,913 46,437
Other accrued expenses 41,872 43,313
Current portion of income taxes payable - 1,962
Current portion of deferred revenue 232,784 211,840
---------- ------------
Total current liabilities 325,717 308,142

Long-term liabilities:
Long-term portion of deferred revenue 61,988 73,820
Long-term portion of income taxes payable 31,592 37,130
Other long-term liabilities 2,964 2,712
---------- ------------
Total long-term liabilities 96,544 113,662

Shareholders' equity 961,879 897,326
---------- ------------
Total liabilities and shareholders'
equity $1,384,140 $ 1,319,130
========== ============
*T

-0-
*T
QUEST SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
2008 2007 2008 2007
--------- --------- --------- ---------

Cash flows from operating
activities:
Net income 8,266 $ 7,935 $ 21,554 $ 22,841
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and
amortization 11,206 8,483 23,209 16,788
Compensation expense
associated with stock
option grants 5,289 4,595 9,167 9,710
Deferred income taxes 1,546 169 2,118 (4,519)
Excess tax benefit
related to share-
based compensation (1,808) - (3,138) -
Provision for bad
debts 280 177 414 42
In-process research
and development 955 - 955 -
Changes in operating
assets and
liabilities, net of
effects of
acquisitions:
Accounts
receivable (1,166) (14,294) 47,955 31,641
Prepaid
expenses and
other current
assets 3,674 1,214 (29) 1,951
Other assets 12 (11) (892) 352
Accounts
payable (78) (1,798) 1,083 (884)
Accrued
compensation 1,378 4,706 (5,092) (815)
Other accrued
expenses 500 1,902 (5,682) (4,378)
Income taxes
payable (5,895) (9,486) (14,488) (7,574)
Deferred
revenue (125) 3,316 2,132 (746)
Other
liabilities (77) (21) 20 (92)
--------- --------- --------- ---------

Net cash
provided by
operating
activities 23,957 6,887 79,286 64,317
Cash flows from investing
activities:
Purchases of property and
equipment (2,368) (5,510) (5,530) (7,633)
Cash paid for acquisitions,
net of cash acquired (4,520) (22,688) (52,672) (23,815)
Cash restricted for an
acquisition - - 48,924 -
Purchases of cost-method
investments - (2) (3,160) (2)
Purchases of marketable
securities - - (51,999) (20,167)
Sales and maturities of
marketable securities 4,194 26,818 39,064 33,398
--------- --------- --------- ---------

Net cash
used in
investing
activities (2,694) (1,382) (25,373) (18,219)
Cash flows from financing
activities:
Repayment of capital lease
obligations (51) (23) (107) (92)
Proceeds from the exercise
of stock options 18,178 - 36,824 -
Excess tax benefit related
to share-based
compensation 1,808 - 3,138 -
Other - 99 - 99
--------- --------- --------- ---------

Net cash
provided by
financing
activities 19,935 76 39,855 7
Effect of exchange rate
changes on cash and cash
equivalents (224) 527 (1,828) 631
--------- --------- --------- ---------

Net increase in cash and cash
equivalents 40,974 6,108 91,940 46,736
Cash and cash equivalents,
beginning of period 286,534 326,792 235,568 286,164

--------- --------- --------- ---------
Cash and cash equivalents, end
of period $327,508 $332,900 $327,508 $332,900
========= ========= ========= =========
*T

Quest Software, Inc.
Editorial Contact:
Daphne Kent, 614-726-4787
daphne.kent@quest.com
or
Investor Contacts:
Thomas Patterson, 949-754-8336
thomas.patterson@quest.com
or
Stephen Wideman, 949-754-8142
stephen.wideman@quest.com

Copyright Business Wire 2008