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.