Aliso Viejo-based Quest Software Inc. is seeing sales grow at a healthy clip after a turbulent year marked by a stock options probe, discouraged investors and persistent threats to delist its shares from Nasdaq.
Quest, which makes software that monitors the performance of other business software programs, last week gave Wall Street a look at its sales after a year of partial or no numbers at all.
“The street is happy to see numbers being released and that we have something to work off of,” said Richard Sherman, an analyst at MKM Partners LLC in Greenwich, Conn.
Quest hasn’t reported full results since early 2006 amid its probe into misdated stock options.
Last week, the company offered sales figures for the past six quarters as part of an update on its options probe. The company also released details on its cash, but no profit or other figures.
For the second quarter, Quest said it had sales of $143 million, up 11% from a year earlier.
The figure was higher than what Wall Street had expected,Quest’s shares jumped about 7% on the news. The company had a recent market value of about $1.7 billion.
Analysts had expected about $128 million in sales for the quarter.
“The numbers were better than what I had expected,” Sherman said.
The analyst said he wasn’t looking for double-digit growth because “the management team was heavily engaged in getting the options investigation concluded.”
Quest declined to comment for this story.
Sales growth was driven in part by Quest’s programs for Microsoft Corp.’s business software, Sherman said.
Quest’s infrastructure management group focuses on software that layers on top of Microsoft’s programs, including a bit of administrative software known as Active Directory.
Quest also makes and services database management software that works with software from Oracle Corp. and Sun Microsystems Inc.
A big part of Quest’s revenue comes from licensing and renewal fees for its software.
Options concerns still linger for some company watchers.
Quest has received several delisting threats from Nasdaq for its delays in reporting and updating financial filings. Such threats are routine, though Quest has been getting them on an almost monthly basis.
“The company did receive another Nasdaq extension, so this is not a complete clean bill of health, but the better than expected financial update is the key takeaway,” said Aaron Schwartz, analyst at J.P. Morgan Securities Inc. in New York, in a note to clients.
The fallout from misdated stock options proved as expected. No wrongdoing was found in the company’s internal investigation.
Quest tallied an official pretax bill of $143 million and said it plans to take the charges to prior earnings to fix misdated options granted from 1999 through spring 2006.
The company uncovered some other accounting errors but said they’ll have little material effect.
With the adjustments, the company expects to see lower revenue by about 1% for 2000, 2001 and 2005 and slightly higher sales for 2002, 2003 and 2004.
Changes to profit are expected to be slight,equal to 0.1% to 0.5% of revenue for each period, Quest said.
Quest’s options bill is the second highest in Orange County, albeit a distant one, after Irvine chipmaker Broadcom Corp., which earlier this year took charges of about $2.2 billion, the most of any U.S. company so far.
Analysts considered the Quest options probe water under the bridge a long time ago. They were more relieved to see that the damage was negligible and Quest still is growing.
“Everyone is relieved that the options investigation is ready to be concluded,” Sherman said.
A bright spot for Quest, according to analysts, is its significant cash flow.
The company had $423 million in cash as of June 30, up 46% from a year earlier.
Quest’s cash “was well ahead of Street models,” Schwartz of J.P. Morgan said.
“The strong cash balance suggests that the company’s margin structure has held up,” he said.
Sitting on lots of cash means Quest could fuel its growth by buying another company.
It also makes Quest an attractive acquisition target, analysts said.
Rumors about the company being bought by larger software makers have been circulating for years. They’re renewed now that the options investigation seems to be wrapping up.
“There are expectations that Quest, in light of its cash flow, would be a decent candidate for a buyout,” Sherman said. “I think that’s what’s moved the stock more than anything else.”
Potential buyers could be Hewlett-Packard Co., EMC Corp. or Symantec Corp., a maker of virus protection software.
“A longer shot would be Microsoft, which would come in to take Quest’s Microsoft applications and make them their own,” Sherman said.
