Quest Software Reports Third Quarter 2009 Results
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Achieves Third Quarter Revenues of $171 Million
Announces Pending Resolution of Class Action Litigation
ALISO VIEJO, Calif.--(BUSINESS WIRE)-- Quest Software, Inc. (Nasdaq: QSFT) today reported financial results for the quarter ended September 30, 2009. Total revenues were $170.8 million, a 8.9% decrease compared to the prior year's third quarter revenue of $187.6 million. Total revenues for the first nine months of 2009 were $500.7 million, a 6.2% decrease compared to $533.8 million for the same period in 2008. Operating margins decreased to (1.2)% and 7.6% for the three and nine months ended September 30, 2009, respectively, as compared to 14.8% and 7.8% for the three and nine months ended September 30, 2008, respectively, primarily due to the expense associated with the pending litigation settlement discussed below. On a non-GAAP basis operating margins were 24.3% and 21.4% for the three and nine months ended September 30, 2009, respectively.
Quest's cash and investments at September 30, 2009, totaled $362.0 million, an increase of $31.7 million over the comparable balance at June 30, 2009. Quest generated cash flow from operations of $43.7 million in the third quarter of 2009, an increase of $8.6 million over the comparable period in 2008.
Quest also announced that it has reached an agreement in principle with the class representative to settle the shareholder class action relating to alleged option backdating that was filed in October 2006 in the U.S. District Court for the Central District of California against Quest and certain of its current or former officers and directors for a payment of $29.4 million. The parties are negotiating in good faith a stipulation of settlement which will be subject to court approval once finalized.
"The key theme for the third quarter was operating discipline," said Doug Garn, president and CEO of Quest. "We delivered excellent margin improvement and operating cash flow this quarter. My primary focus is to ensure that Quest is continuing to execute well and that we are building a foundation for sustainable long-term growth."
GAAP Results
Quest Software's net income for the third quarter of 2009 was $2.9 million, or $0.03 per fully diluted share. This compares to net income of $17.3 million, or $0.16 per share on a fully diluted basis, for the third quarter of 2008. Operating margins decreased year-over-year from 14.8% to (1.2)% in the third quarter, resulting in an operating loss of $2.0 million which compares to income of $27.8 million for the corresponding period in 2008. Net income for the first nine months of 2009 was $33.3 million, or $0.35 per fully diluted share, versus net income of $38.9 million, or $0.36 per fully diluted share, for the comparable period in 2008.
Non-GAAP Results
On a non-GAAP basis, net income for the third quarter of 2009 was $31.2 million, or $0.34 per fully diluted share. This compares to non-GAAP net income of $26.8 million, or $0.25 per share on a fully diluted basis, for the third quarter of 2008. The non-GAAP operating margin was 24.3% in the third quarter of 2009, resulting in non-GAAP operating income of $41.6 million, compared to non-GAAP operating margin and operating income of 22.1% and $41.5 million, respectively, for the corresponding period in 2008. For the nine months ended September 30, 2009, non-GAAP net income was $80.8 million, or $0.86 per fully diluted share. This compares to non-GAAP net income of $66.7 million, or $0.63 per fully diluted share, for the nine months ended September 30, 2008. The non-GAAP operating margin was 21.4% in the first nine months of 2009, resulting in non-GAAP operating income of $107.4 million, compared to non-GAAP operating margin of 15.6% and non-GAAP operating income of $83.5 million in the comparable period of 2008.
Non-GAAP results exclude the after-tax effects of amortization of intangible assets acquired with business combinations, share-based compensation expenses, acquisition related costs, expenses and litigation loss provision associated with the pending settlement of the shareholder class action arising from Quest's stock option investigation. A reconciliation of GAAP to non-GAAP financial results is included with this press release.
Quest'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. Management believes excluding charges such as those described above from its GAAP results facilitates 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.
Third Quarter 2009 Conference Call Information
Quest Software will host a conference call today, Tuesday, November 3, 2009, at 2:00 p.m. Pacific Time, to discuss its results. A simultaneous webcast of the conference call will be available on Quest's website in the Investor Relations section at www.quest.com/investor_relations/. A webcast replay will be available on the same website through November 3, 2010. An audio replay of the conference call will also be available through November 10, 2009 by dialing (888) 203-1112 (from the U.S. or Canada) or 719-457-0820 (outside the U.S. and Canada), using confirmation code: 8652894.
About Quest Software, Inc.
Now more than ever, organizations need to work smart and improve efficiency. Quest Software creates and supports smart systems management products - helping our customers solve everyday IT challenges faster and easier. Visit www.quest.com for more information.
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, including statements relating to expectations of future revenue and operating margin performance and other operating prospects and statements relating to the settlement of the shareholder class action. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially from those anticipated as a result of various factors, including: risks associated with finalizing and obtaining court approval of a stipulation of settlement of the shareholder class action, the impact of adverse changes in general economic conditions on Quest's 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 Quest's 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 Quest's recent SEC filings, including the Annual Report on Form 10-K for the year ended December 31, 2008, 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. Quest undertakes no obligation to update forward-looking statements to reflect events or circumstances after the date thereof.
QUEST SOFTWARE, INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
Revenues:
Licenses $ 67,323 $ 86,700 $ 191,333 $ 241,128
Services 103,526 100,865 309,371 292,650
Total revenues 170,849 187,565 500,704 533,778
Cost of revenues:
Licenses 2,197 1,921 5,740 6,110
Services 14,607 15,167 42,867 46,571
Amortization of purchased 4,983 5,026 14,924 14,619
technology
Total cost of revenues 21,787 22,114 63,531 67,300
Gross profit 149,062 165,451 437,173 466,478
Operating expenses:
Sales and marketing 64,704 76,957 196,732 234,604
Research and development 34,721 37,169 107,928 114,687
General and administrative 18,971 21,120 55,170 66,811
Amortization of other purchased 3,258 2,418 9,925 7,730
intangible assets
In-process research and - - - 955
development
Litigation loss provision 29,400 - 29,400 -
Total operating expenses 151,054 137,664 399,155 424,787
Income (loss) from operations (1,992 ) 27,787 38,018 41,691
Other income (expense), net 2,703 (6,526 ) 3,338 4,385
Income before income tax 711 21,261 41,356 46,076
provision (benefit)
Income tax provision (benefit) (2,238 ) 3,944 8,019 7,204
Net income $ 2,949 $ 17,317 $ 33,337 $ 38,872
Net income per share:
Basic $ 0.03 $ 0.16 $ 0.36 $ 0.37
Diluted $ 0.03 $ 0.16 $ 0.35 $ 0.36
Weighted average shares:
Basic 88,968 105,434 92,540 104,334
Diluted 91,846 107,450 94,483 106,697
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 webcast 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, acquisition related costs, expenses, including indemnification advances and settlement amounts, associated with litigation arising from Quest's stock option investigation 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. Management believes excluding charges such as those described above from its GAAP results facilitates 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 intangible asset amortization that are
related to business combinations, provides investors and financial
analysts with a consistent basis for comparison across accounting
periods and, therefore, is useful to help investors and financial
analysts better understand the Company's operating results and
underlying operational trends.
-- Amortization costs are fixed at the time of an acquisition, 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 are excluded as such
charges are generally fixed at the time of grant and amortized over a
period of several years and cannot be changed nor influenced by
management after the grant.
-- Share-based compensation is not an expense that typically requires or
will require cash settlement by the Company.
-- Acquisition related costs include expenses incurred for outside legal
fees and costs and other professional fees.
-- Ongoing litigation arising from Quest's stock option investigation
includes expenses incurred for outside legal fees and costs, consulting
services and other professional fees, indemnification expenses for
current and former directors and officers, and settlement amounts.
Because these expenses are non-recurring and unique to the stock option
investigation, the Company believes they are not indicative of future
operating results and that investors benefit from an understanding of
Quest's 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.
QUEST SOFTWARE, INC.
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
TO MOST DIRECTLY COMPARABLE GAAP FINANCIAL MEASURES
(In thousands, except per share data)
(Unaudited)
Three Months Ended September Nine Months Ended September 30,
30,
2009 2008 2009 2008
GAAP total cost $ 21,787 $ 22,114 $ 63,531 $ 67,300
of revenues
Amortization of
purchased (4,983 ) (5,026 ) (14,924 ) (14,619 )
technology
Share-based
compensation (185 ) (151 ) (521 ) (688 )
expense
Non-GAAP total
cost of $ 16,619 $ 16,937 $ 48,086 $ 51,993
revenues
GAAP gross $ 149,062 $ 165,451 $ 437,173 $ 466,478
profit
Amortization of
purchased 4,983 5,026 14,924 14,619
technology
Share-based
compensation 185 151 521 688
expense
Non-GAAP gross $ 154,230 $ 170,628 $ 452,618 $ 481,785
profit
GAAP income
(loss) from $ (1,992 ) $ 27,787 $ 38,018 $ 41,691
operations
Amortization of
purchased 4,983 5,026 14,924 14,619
technology
Amortization of
other purchased 3,258 2,418 9,925 7,730
intangible
assets
Share-based
compensation 4,034 5,234 11,365 15,222
expense
Acquisition 16 - 120 -
related costs
Professional
fees related to
our ongoing
legal and
indemnification 1,893 1,033 3,611 3,235
expense
relating to our
previous
restatement
In-process
research and - - - 955
development
Litigation loss 29,400 - 29,400 -
provision
Non-GAAP income $ 41,592 $ 41,498 $ 107,363 $ 83,452
from operations
GAAP net income $ 2,949 $ 17,317 $ 33,337 $ 38,872
Amortization of
purchased 4,983 5,026 14,924 14,619
technology
Amortization of
other purchased 3,258 2,418 9,925 7,730
intangible
assets
Share-based
compensation 4,034 5,234 11,365 15,222
expense
Acquisition 16 - 120 -
related costs
Professional
fees related to
our ongoing
legal and
indemnification 1,893 1,033 3,611 3,235
expense
relating to our
previous
restatement
In-process
research and - - - 955
development
Litigation loss 29,400 - 29,400 -
provision
Tax effect of
these (15,349 ) (4,198 ) (21,860 ) (13,938 )
adjustments
Non-GAAP net $ 31,184 $ 26,830 $ 80,822 $ 66,695
income
GAAP net income $ 0.03 $ 0.16 $ 0.36 $ 0.37
per basic share
Amortization of
purchased 0.05 0.05 0.16 0.14
technology
Amortization of
other purchased 0.04 0.02 0.11 0.07
intangible
assets
Share-based
compensation 0.05 0.05 0.12 0.15
expense
Acquisition - - - -
related costs
Professional
fees related to
our ongoing
legal and
indemnification 0.02 0.01 0.04 0.03
expense
relating to our
previous
restatement
In-process
research and - - - 0.01
development
Litigation loss 0.33 - 0.32 -
provision
Tax effect of
these (0.17 ) (0.04 ) (0.24 ) (0.13 )
adjustments
Non-GAAP net
income per $ 0.35 $ 0.25 $ 0.87 $ 0.64
basic share
Shares used in
basic per share 88,968 105,434 92,540 104,334
amounts
GAAP net income
per fully $ 0.03 $ 0.16 $ 0.35 $ 0.36
diluted share
Amortization of
purchased 0.05 0.05 0.16 0.14
technology
Amortization of
other purchased 0.04 0.02 0.11 0.07
intangible
assets
Share-based
compensation 0.05 0.05 0.12 0.15
expense
Acquisition - - - -
related costs
Professional
fees related to
our ongoing
legal and
indemnification 0.02 0.01 0.04 0.03
expense
relating to our
previous
restatement
In-process
research and - - - 0.01
development
Litigation loss 0.32 - 0.31 -
provision
Tax effect of
these (0.17 ) (0.04 ) (0.23 ) (0.13 )
adjustments
Non-GAAP net
income per $ 0.34 $ 0.25 $ 0.86 $ 0.63
fully diluted
share
Shares used in
fully diluted 91,846 107,450 94,483 106,697
per share
amounts
QUEST SOFTWARE, INC.
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
TO MOST DIRECTLY COMPARABLE GAAP FINANCIAL MEASURES (Continued)
(In thousands, except per share data)
(Unaudited)
Three Months Ended September 30, 2009
Amortization
Sales and Research General and of Other Litigation Total
Marketing and Administrative Purchased Loss Operating
Development Intangible Provision Expenses
Assets
GAAP operating $ 64,704 $ 34,721 $ 18,971 $ 3,258 $ 29,400 $ 151,054
expenses
Amortization of
other purchased - - - (3,258) - (3,258)
intangible
assets
Share-based
compensation (1,047) (1,473) (1,329) - - (3,849)
expense
Acquisition - - (16) - - (16)
related costs
Professional
fees related to
our ongoing
legal and
indemnification - - (1,893) - - (1,893)
expense
relating to our
previous
restatement
Litigation loss - - - - (29,400) (29,400)
provision
Non-GAAP
operating $ 63,657 $ 33,248 $ 15,733 $ - $ - $ 112,638
expenses
Three Months Ended September 30, 2008
Amortization In-process
Sales and Research General and of Other Research Total
Marketing and Administrative Purchased and Operating
Development Intangible Development Expenses
Assets
GAAP operating $ 76,957 $ 37,169 $ 21,120 $ 2,418 $ - $ 137,664
expenses
Amortization of
other purchased - - - (2,418) - (2,418)
intangible
assets
Share-based
compensation (1,588) (1,283) (2,212) - - (5,083)
expense
Professional
fees related to
our ongoing
legal and
indemnification - - (1,033) - - (1,033)
expense
relating to our
previous
restatement
In-process
research and - - - - - -
development
Non-GAAP
operating $ 75,369 $ 35,886 $ 17,875 $ - $ - $ 129,130
expenses
Nine Months Ended September 30, 2009
Amortization
Sales and Research General and of Other Litigation Total
Marketing and Administrative Purchased Loss Operating
Development Intangible Provision Expenses
Assets
GAAP operating $ 196,732 $ 107,928 $ 55,170 $ 9,925 $ 29,400 $ 399,155
expenses
Amortization of
other purchased - - - (9,925) - (9,925)
intangible
assets
Share-based
compensation (3,768) (4,074) (3,002) - - (10,844)
expense
Acquisition - - (120) - (120)
related costs
Professional
fees related to
our ongoing
legal and
indemnification - - (3,611) - - (3,611)
expense
relating to our
previous
restatement
Litigation loss - - - - (29,400) (29,400)
provision
Non-GAAP
operating $ 192,964 $ 103,854 $ 48,437 $ - $ - $ 345,255
expenses
Nine Months Ended September 30, 2008
Amortization In-process
Sales and Research General and of Other Research Total
Marketing and Administrative Purchased and Operating
Development Intangible Development Expenses
Assets
GAAP operating $ 234,604 $ 114,687 $ 66,811 $ 7,730 $ 955 $ 424,787
expenses
Amortization of
other purchased - - - (7,730) - (7,730)
intangible
assets
Share-based
compensation (5,537) (4,505) (4,492) - - (14,534)
expense
Professional
fees related to
our ongoing
legal and
indemnification - - (3,235) - - (3,235)
expense
relating to our
previous
restatement
In-process
research and - - - - (955) (955)
development
Non-GAAP
operating $ 229,067 $ 110,182 $ 59,084 $ - $ - $ 398,333
expenses
QUEST SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
ASSETS
September 30, December 31,
2009 2008
Current assets:
Cash and cash equivalents $ 303,465 $ 215,895
Restricted cash 900 2,425
Short-term investments 58,549 632
Accounts receivable, net 124,545 153,892
Prepaid expenses and other current assets 19,116 17,362
Deferred income taxes 30,776 18,460
Total current assets 537,351 408,666
Property and equipment, net 71,587 77,394
Long-term investments - 41,410
Intangible assets, net 79,918 104,567
Goodwill 659,195 655,777
Deferred income taxes 23,313 28,026
Other assets 26,274 29,819
Total assets $ 1,397,638 $ 1,345,659
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,579 $ 3,798
Accrued compensation 40,325 45,079
Other accrued expenses 27,414 39,760
Litigation loss provision 29,400 -
Current portion of loans payable 34,213 -
Current portion of income taxes payable 6,090 167
Current portion of deferred revenue 258,189 272,626
Total current liabilities 400,210 361,430
Long-term liabilities:
Long-term portion of deferred revenue 76,790 66,086
Long-term portion of income taxes payable 38,697 40,846
Long-term portion of loans payable 33,428 -
Other long-term liabilities 7,228 3,545
Total long-term liabilities 156,143 110,477
Stockholders' equity 841,285 873,752
Total liabilities and stockholders' equity $ 1,397,638 $ 1,345,659
QUEST SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
Cash flows from operating
activities:
Net income $ 2,949 $ 17,317 $ 33,337 $ 38,872
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and 11,950 11,650 36,596 34,859
amortization
Compensation expense
associated with 4,035 5,139 11,366 14,306
share-based payments
Deferred income taxes (2,608 ) (2,539 ) 1,184 (421 )
Unrealized gains on
long-term investments, net (81 ) - (483 ) -
of loss from put options
Excess tax benefit related
to share-based (347 ) (190 ) (639 ) (3,328 )
compensation
Provision for bad debts 59 342 120 756
In-process research and - - - 955
development
Litigation loss provision 29,400 - 29,400 -
Other non-cash (121 ) - (61 ) -
adjustments, net
Changes in operating
assets and liabilities,
net of effects of
acquisitions:
Accounts receivable (11,936 ) (10,291 ) 32,128 37,663
Prepaid expenses and other (844 ) 1,207 (34 ) 1,178
current assets
Other assets 2,337 544 1,687 (348 )
Accounts payable 1,310 (2,640 ) (1,988 ) (1,557 )
Accrued compensation (652 ) (2,748 ) (7,691 ) (7,840 )
Other accrued expenses (652 ) 1,944 (10,110 ) (3,738 )
Income taxes payable (1,973 ) 6,831 (8,280 ) (7,657 )
Deferred revenue 10,436 8,539 (3,733 ) 10,671
Other liabilities 481 13 3,508 33
Net cash provided by 43,743 35,118 116,307 114,404
operating activities
Cash flows from investing
activities:
Purchases of property and (4,337 ) (2,651 ) (8,277 ) (8,181 )
equipment
Cash paid for
acquisitions, net of cash (96 ) (82,554 ) (96 ) (135,226 )
acquired
Change in restricted cash 26 (2,370 ) 1,690 46,554
Purchases of cost method - - (3,000 ) (3,160 )
investments
Purchases of investment (11,993 ) (4 ) (11,993 ) (52,003 )
securities
Sales and maturities of 749 258 1,289 39,322
investment securities
Net cash used in investing (15,651 ) (87,321 ) (20,387 ) (112,694 )
activities
Cash flows from financing
activities:
Proceeds from loans 67,897 - 67,897 -
payable
Repayment of loans payable (725 ) - (725 ) -
Repurchase of common stock (97,203 ) - (101,119 ) -
Repayment of capital lease (67 ) (98 ) (193 ) (205 )
obligations
Cash paid for line of - - (1,979 ) -
credit fees
Proceeds from the exercise 22,937 1,820 27,600 38,644
of stock options
Excess tax benefit related
to share-based 347 190 639 3,328
compensation
Proceeds received from
certain executive officers - 200 - 200
as part of our restatement
remedial actions
Net cash provided by (used (6,814 ) 2,112 (7,880 ) 41,967
in) financing activities
Effect of exchange rate
changes on cash and cash (853 ) 3,074 (470 ) 1,246
equivalents
Net increase (decrease) in 20,425 (47,017 ) 87,570 44,923
cash and cash equivalents
Cash and cash equivalents, 283,040 327,508 215,895 235,568
beginning of period
Cash and cash equivalents, $ 303,465 $ 280,491 $ 303,465 $ 280,491
end of period
Source: Quest Software, Inc.
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