Quest Software Reports Record Revenue and Earnings for Fourth Quarter

Quest Software Reports Record Revenue and Earnings for Fourth Quarter and Fiscal Year 2004; Fourth Quarter Revenue Grows 33% Year-over-Year

    Business Editors/High-Tech Writers

    IRVINE, Calif.--(BUSINESS WIRE)--Feb. 2, 2005--

Company Posts $389 Million In Revenue for Fiscal 2004
    Quest Software, Inc. (Nasdaq:QSFT), a leading provider of application, database and Windows management solutions, today reported record financial results for the fourth quarter and fiscal year ended December 31, 2004. Total revenues increased 33% year-over-year to $118.1 million in the fourth quarter of 2004 compared to last year's fourth quarter revenue of $89.0 million. Total revenues increased 28% to $389.5 million in fiscal 2004 compared to total revenues of $304.3 million in fiscal 2003.

    GAAP Results

    Quest Software's GAAP net income for the fourth quarter was $13.3 million, or $0.13 per diluted share. GAAP operating margins were 11.2% in the fourth quarter, resulting in GAAP operating income of $13.3 million. Net income for the full year ended December 31, 2004 was $47.2 million or $0.48 per diluted share versus net income of $21.5 million or $0.23 per diluted share for the comparable period in 2003. Operating income for fiscal 2004 was $63.6 million, a 145% increase over the same period in 2003. GAAP results for the fourth quarter include charges of $11.0 million for a loss contingency reserve related to our Computer Associates intellectual property litigation. In the second quarter we had a charge for the same matter of $5.0 million bringing the total charges for the year to $16.0 million. Quest Software generated cash flow from operations of $38.0 million in the December 2004 quarter.

    Non-GAAP Results

    On a pro forma basis, net income for the fourth quarter 2004 was $22.8 million or $0.23 per diluted share. Pro forma operating margins were 24.1% for the fourth quarter resulting in pro-forma operating income of $28.4 million. Pro forma net income for fiscal 2004 was $52.9 million, a 67% increase over the prior year and resulting in $0.54 per diluted share. Pro forma operating income for fiscal 2004 was $72.6 million, an 89% increase over fiscal 2003.
    A reconciliation of pro forma and as reported financial results is included with this press release.
    "Our strong performance during Q4 and 2004 in total reflects solid execution by the members of our team across all aspects of our business," said Vinny Smith, chairman and chief executive officer, Quest Software. "Of particular note is the strength of our 2004 license growth which demonstrates the core value of our products and our customers' willingness to select Quest as a strategic partner to manage their key infrastructure needs. We believe that we are entering 2005 with positive momentum in our markets and we remain enthusiastic in our ability to capitalize on the investments that we made in our people, products and infrastructure during 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.

    2004 Milestones

    In addition to solid 2004 financial performance, Quest Software has also achieved the following milestones:

--	Successfully integrated the people and products of Aelita Software. As a result of this acquisition, Quest Software has broadened its footprint in the Microsoft infrastructure management marketplace and diversified its multi-platform revenue stream.
--	Won Microsoft's Global ISV Partner of the year Award for 2004.
--	Delivered new releases of major products across all solution areas including: Quest Central(R) for Oracle 5.0; Quest Central for SQL Server 5.0; SharePlex(R) 5.0; Stat ACM 5.0; PerformaSure(TM) 3.0; Quest MessageStats(TM) 5.0, InTrust(TM) 8.0, and new products Quest Group Policy Manager(TM) 1.0, and Quest Archive Manager(TM) for Exchange 1.0.
--	Integrated the acquired assets of LECCO Technology, Inc. enabling Quest to broaden its SQL tuning and optimization product line.
--	Effectively sold the Vista Plus Suite of products and its related assets to Open Text Corporation enabling the company to increase its focus on its core application, database and infrastructure management markets.
--	Obtained significant industry analyst endorsements, including No. 1 positioning in Application Management software, Windows Server Management software and Distributed Data Management Facilities software by three leading industry analyst firms.

    Financial Outlook

    These statements do not include the potential impact of expensing stock options under the Financial Accounting Standards Board's Statement 123R (FAS 123R), which will become effective for fiscal quarters after June 15, 2005(1).
    Quest Software management offers the following guidance for the first quarter ending March 31, 2005:

    -- Revenue is expected to be in the range of $95.0 million to
    $100.0 million;

    -- GAAP diluted earnings per share is expected to be in the range
    of $0.06 to $0.10 per share;

    -- Pro forma diluted earnings per share is expected to be in the
    range of $0.09 to $0.13 per share. The pro forma guidance
    excludes approximately $3.4 million of amortization of
    acquisition related intangible assets and $755,000 of other
    compensation charges related to stock options.

    For the full year ending December 31, 2005, Quest Software management offers the following guidance:

    -- Annual revenue is expected to be in the range of $435.0
    million to $450.0 million;

    -- GAAP diluted earnings per share is expected to be in the range
    of $0.47 to $0.52 per share;

    -- Pro forma diluted earnings per share is expected to be in the
    range of $0.57 to $0.62. The pro-forma guidance excludes
    approximately $13.1 million of amortization of acquisition
    related intangible assets and $2.4 million of other
    compensation charges related to stock options.

    Other Corporate Matters

    In the course of its 2004 audit Deloitte & Touche, our independent auditors, informed Quest and our Audit Committee of deficiencies in Quest's internal controls over financial reporting that arose in the course of the audit relating to staffing and procedures in our internal tax department. The Company has determined that the deficiencies will likely be classified as a "material weakness" under Section 404 of SOX and PCAOB Accounting Standard No. 2. Specifically, the company's controls failed to prevent or detect errors in certain tax calculations. The errors resulting from the deficiencies were corrected prior to completion of the audit. The reported year-end financial results that we are releasing today reflect these corrections.
    We have performed detailed analyses and reconciliations of the income tax accounts and, based thereon, believe that the 2004 income tax provision is appropriate. We are taking steps to remedy the deficiencies, primarily by engaging external tax advisors to assist in the preparation and review of our income tax calculations.
    Concerning our class action securities litigation, we are pleased to announce that, after the Court granted two consecutive motions to dismiss plaintiff's class action complaints, the lead plaintiff agreed to dismiss the case, with prejudice. The lead plaintiff filed a stipulation and proposed order dismissing the case with prejudice, which the Judge signed on January 18, 2005.

    Fourth Quarter 2004 Conference Call Information

    Quest Software will host a conference call today, Wednesday, February 2, 2005 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 February 2, 2006. An audio replay of the call will also be available through February 16, 2005 by dialing (888) 203-1112 (from the U.S. or Canada) or (719) 457-0820 (outside the U.S. and Canada), using confirmation code: 234311.

    About Quest Software, Inc.

    Quest Software, Inc. delivers innovative products that help organizations get more performance and productivity from their applications, databases and 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 Irvine, 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.
    (1) As a result of excluding stock option expense, diluted earnings per share presented in our Financial Outlook for fiscal year ending December 31, 2005, may constitute a non-GAAP financial measure. Quest is unable to provide a quantitative reconciliation of such forward-looking measures to GAAP because Quest is currently in the process of assessing the potential impact of FAS 123R and, therefore, the amount of stock option expense is unknown at this time.

    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 September 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 SOFTWARE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited)

Three Months Ended Twelve Months Ended December 31, December 31, 2004 2003 2004 2003

Revenues: Licenses $73,269 $54,250 $225,032 $179,560 Services 44,781 34,740 164,431 124,728 Total revenues 118,050 88,990 389,463 304,288 Cost of revenues: Licenses 1,123 1,214 3,958 4,312 Services 7,907 5,560 29,646 21,365 Amortization of purchased technology 2,126 1,284 8,107 7,675 Total cost of revenues 11,156 8,058 41,711 33,352 Gross profit 106,894 80,932 347,752 270,936 Operating expenses: Sales and marketing 50,510 38,003 170,702 144,460 Research and development 19,924 16,859 78,305 67,448 General and administrative 10,833 8,371 36,493 29,656 Amortization of other purchased intangible assets 1,351 747 5,212 3,390 In-process research and development - - 6,980 - Litigation loss provision 11,000 - 16,000 - Total operating expenses 93,618 63,980 313,692 244,954 Gain on sale of Vista Plus product suite - - 29,574 - Income from operations 13,276 16,952 63,634 25,982 Other income, net 6,093 481 8,976 7,637 Income before income tax provision 19,369 17,433 72,610 33,619 Income tax provision 6,106 5,955 25,390 12,103 Net income $13,263 $11,478 $47,220 $21,516

Net income per share: Basic $0.14 $0.12 $0.50 $0.23 Diluted $0.13 $0.12 $0.48 $0.23

Weighted average shares: Basic 95,557 93,096 94,622 92,081 Diluted 99,635 96,480 98,158 94,231

QUEST SOFTWARE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited)

Three Months Ended December 31, 2004

GAAP Adjustments Adjusted

Revenues: Licenses $73,269 $73,269 Services 44,781 44,781 Total revenues 118,050 118,050 Cost of revenues: Licenses 1,123 1,123 Services 7,907 (45)(1) 7,862 Amortization of purchased technology 2,126 (2,126) - Total cost of revenues 11,156 8,985 Gross profit 106,894 109,065

Operating expenses: Sales and marketing 50,510 (379)(1) 50,131 Research and development 19,924 (219)(1) 19,705 General and administrative 10,833 (19)(1) 10,814 Amortization of other purchased intangible assets 1,351 (1,351) - In-process research and development - - - Litigation loss provision 11,000 (11,000)(4) - Total operating expenses 93,618 80,650 Gain on sale of Vista Plus product suite - - - Income from operations 13,276 28,415 Other income, net 6,093 6,093 Income before income tax provision 19,369 34,508 Income tax provision 6,106 5,600 (2) 11,706 Net income $13,263 $22,802

Net income per share: Basic $0.14 $0.24 Diluted $0.13 $0.23

Weighted average shares: Basic 95,557 95,557 Diluted 99,635 99,635

Twelve Months Ended December 31, 2004

GAAP Adjustments Adjusted

Revenues: Licenses $225,032 $225,032 Services 164,431 164,431 Total revenues 389,463 389,463 Cost of revenues: Licenses 3,958 3,958 Services 29,646 (190)(1) 29,456 Amortization of purchased technology 8,107 (8,107) - Total cost of revenues 41,711 33,414 Gross profit 347,752 356,049 Operating expenses: Sales and marketing 170,702 (1,409)(1) 169,293 Research and development 78,305 (569)(1) 77,736 General and administrative 36,493 (40)(1) 36,453 Amortization of other purchased intangible assets 5,212 (5,212) - In-process research and development 6,980 (6,980)(3) - Litigation loss provision 16,000 (16,000)(4) - Total operating expenses 313,692 283,482 Gain on sale of Vista Plus product suite 29,574 (29,574) - Income from operations 63,634 72,567 Other income, net 8,976 8,976 Income before income tax provision 72,610 81,543 Income tax provision 25,390 3,248 (2) 28,638 Net income $47,220 $52,905

Net income per share: Basic $0.50 $0.56 Diluted $0.48 $0.54

Weighted average shares: Basic 94,622 94,622 Diluted 98,158 98,158

(1) Represents stock based compensation and payroll taxes attributed to stock option exercises. (2) Represents the tax effect of adjustments. (3) 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. (4) Represents a special charge for a loss contingency reserve related to our Computer Associates intellectual property litigation.

QUEST SOFTWARE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited)

Three Months Ended December 31, 2003

GAAP Adjustments Adjusted

Revenues: Licenses $54,250 $54,250 Services 34,740 34,740 Total revenues 88,990 88,990 Cost of revenues: Licenses 1,214 1,214 Services 5,560 (13)(1) 5,547 Amortization of purchased technology 1,284 (1,284) - Total cost of revenues 8,058 6,761 Gross profit 80,932 82,229 Operating expenses: Sales and marketing 38,003 (81)(1) 37,922 Research and development 16,859 (68)(1) 16,791 General and administrative 8,371 (16)(1) 8,355 Amortization of other purchased intangible assets 747 (747) - Total operating expenses 63,980 63,068 Income from operations 16,952 19,161 Other income, net 3,976 3,976 Loss on impairment of aircraft (3,495) 3,495 (2) - Income before income tax provision 17,433 23,137 Income tax provision 5,955 1,847 (3) 7,802 Net income $11,478 $15,335

Net income per share: Basic $0.12 $0.16 Diluted $0.12 $0.16

Weighted average shares: Basic 93,096 93,096 Diluted 96,480 96,480

Twelve Months Ended December 31, 2003

GAAP Adjustments Adjusted

Revenues: Licenses $179,560 $179,560 Services 124,728 124,728 Total revenues 304,288 304,288 Cost of revenues: Licenses 4,312 (2)(4) 4,310 Services 21,365 (71)(4) 21,294 Amortization of purchased technology 7,675 (7,675) - Total cost of revenues 33,352 25,604 Gross profit 270,936 278,684 Operating expenses: Sales and marketing 144,460 (744)(4) 143,716 Research and development 67,448 (509)(4) 66,939 General and administrative 29,656 (100)(4) 29,556 Amortization of other purchased intangible assets 3,390 (3,390) - Total operating expenses 244,954 240,211 Income from operations 25,982 38,473 Other income, net 11,132 (98)(5) 11,034 Loss on impairment of aircraft (3,495) 3,495 (2) - Income before income tax provision 33,619 49,507 Income tax provision 12,103 5,720 (3) 17,823 Net income $21,516 $31,684

Net income per share: Basic $0.23 $0.34 Diluted $0.23 $0.34

Weighted average shares: Basic 92,081 92,081 Diluted 94,231 94,231

(1) Represents stock based compensation and payroll taxes attributed to stock option exercises. (2) Represents a one-time impairment charge to the carrying value of our aircraft. (3) Represents the tax effect of adjustments. (4) 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) compensation and other costs related primarily to stock option grants with a below fair market value exercise price. (5) Represents gain on securities held for trading purposes.

QUEST SOFTWARE, INC. CONSOLIDATED BALANCE SHEETS (In thousands) (Unaudited)

ASSETS

December 31, December 31, 2004 2003

Current assets: Cash and cash equivalents $118,157 $67,470 Short-term marketable securities available for sale 15,892 26,736 Accounts receivable, net 98,800 58,535 Prepaid expenses and other current assets 12,528 6,846 Deferred income taxes 11,960 15,074 Total current assets 257,337 174,661 Property and equipment, net 52,761 31,950 Long-term marketable securities 163,527 184,160 Goodwill 323,903 239,840 Amortizing intangible assets, net 41,404 25,159 Deferred income taxes - 10,126 Other assets 3,304 1,915 Total assets $842,236 $667,811

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities: Accounts payable $4,135 $4,180 Obligation under repurchase agreement 12,632 - Accrued compensation 27,802 17,384 Other accrued expenses 46,292 27,939 Income taxes payable 12,030 9,082 Current portion of deferred revenue 106,356 73,957 Total current liabilities 209,247 132,542

Long-term liabilities: Long-term portion of deferred revenue 20,897 9,416 Deferred income taxes 3,411 - Other long-term liabilities 1,769 1,677 Total long-term liabilities 26,077 11,093

Shareholders' equity 606,912 524,176 Total liabilities and shareholders' equity $842,236 $667,811

QUEST SOFTWARE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)

Three Months Twelve Months Ended Ended December 31, December 31, 2004 2003 2004 2003

Cash flows from operating activities: Net income $13,263 $11,478 $47,220 $21,516 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 5,860 5,614 26,420 26,584 Compensation expense associated with stock option grants 512 94 1,778 890 Deferred income taxes 6,702 (2,780) 7,314 (3,234) Gain on sale of Vista Plus product suite - - (29,574) - Tax benefit related to stock option grants 1,112 3,163 3,909 8,864 Provision for bad debts 124 268 236 291 Loss on impairment of aircraft - 3,495 - 3,495 In-process research and development - - 6,980 - Litigation loss provision 11,000 - 16,000 - Changes in operating assets and liabilities, net of effects of acquisitions: Accounts receivable (28,220)(18,515) (34,290) (14,622) Prepaid expenses and other current assets (1,196) 1,399 (1,472) 4,074 Other assets 4,246 2 3,870 (92) Accounts payable (1,531) (1,348) (829) (1,329) Accrued compensation 5,706 1,304 7,747 2,276 Other accrued expenses 2,349 4,380 (3,285) 869 Income taxes payable (7,344) 4,925 2,619 7,841 Deferred revenue 25,617 15,364 41,371 19,557 Other liabilities (216) (53) 92 (329)

Net cash provided by operating activities 37,984 28,790 96,106 76,651 Cash flows from investing activities: Purchases of property and equipment (3,863) (960) (31,873) (6,664) Cash paid for acquisitions, net of cash acquired (369) (50) (96,733) (4,796) Proceeds from sale of Vista Plus product suite - - 22,515 - Purchases of marketable securities (9,994)(67,588) (10,001)(175,079) Sales and maturities of marketable securities 12,948 12,888 40,446 106,348

Net cash used in investing activities (1,278)(55,710) (75,646) (80,191) Cash flows from financing activities: Repayment of notes payable - (2,914) (769) (4,249) Proceeds from repurchase agreement - - 67,581 - Repayment of repurchase agreement (14,980) - (55,492) - Repayment of capital lease obligations (125) (96) (400) (315) Proceeds from the exercise of stock options 9,676 4,113 16,704 9,499 Proceeds from employee stock purchase plan - - 4,797 4,631

Net cash provided by (used in) financing activities (5,429) 1,103 32,421 9,566 Effect of exchange rate changes on cash and cash equivalents (2,504) (1,104) (2,194) (2,839)

Net increase (decrease) in cash and cash equivalents 28,773 (26,921) 50,687 3,187 Cash and cash equivalents, beginning of period 89,384 94,391 67,470 64,283

Cash and cash equivalents, end of period $118,157 $67,470 $118,157 $67,470

--30--ST/np*

CONTACT: Quest Software, Inc. Erin Jones (Media), 949-754-8032 erin.jones@quest.com or Scott Davidson (Investors), 949-754-8659 scott.davidson@quest.com

KEYWORD: CALIFORNIA INDUSTRY KEYWORD: HARDWARE SOFTWARE NETWORKING INTERNET E-COMMERCE EARNINGS CONFERENCE CALLS SOURCE: Quest Software, Inc.

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