Friday, July 30, 2010

Quest Software (Insert Monty Python Joke Here)

When I decided to push a sizable chunk of my cash into the market a few months ago, I basically walked right into a buzzsaw (thank you, Monsanto (NYSE: MON)!). One of the stocks I picked up then that *has* worked is Quest Software (Nasdaq: QSFT) and last night's earnings report has me feeling a bit happier than usual going into the weekend.

Revenue in the second quarter rose about 13% to $186M. That is not an eye-popping result, but it was almost 10% better than the average guess on the Street. Quest also produced about 350 basis points of operating margin improvement (non-GAAP), and a four-cent beat on EPS.

Digging a bit into the details, license revenue jumped 25% from last year, and I am glad to see this. License revenue growth has been a bit sluggish of late, and it is hard for me to see how the stock goes higher without a revival in this line-item.

Service revenue rose 6% year over year, while maintenance revenue rose 4%. I would like to see a better performance here, but I am not going to worry about it just yet.

The company's Windows business, its largest segment, was also its best grower. Although the database business did show the same magnitude of growth, at least it is growing again. The company's virtualization business did pretty well this period, but at about 10% of the total revenue base it does not really move the needle yet.

Along with earnings, the company announced the acquisition of Surgient - a company that specializes in the deployment and management of secure cloud infrastructure platforms. Given that this is basically "tools for cloud", it makes sense that Quest would be interested. As the IT world moves more and more towards the cloud approach, Quest is going to need to have tools available if it wants to maintain its growth prospects.

All in all, not much changes with this quarter, other than that I feel a little more comfortable with the "return to growth" scenario that motivated my initial purchase of the shares. The risks here are likewise still the same - that large vendors like Microsoft (Nasdaq: MSFT), IBM (NYSE: IBM), and Oracle (Nasdaq: ORCL) will squeeze Quest out of the market by incorporating more free tools into their products, and/or that others like BMC (NYSE: BMC) and CA (NYSE: CA) will basically just out-compete Quest.

Of course, counter-balancing that is the possibility of Quest getting a "if you can't beat them, buy them" bid.

I am still long Quest and I still think the shares are worth upwards of $26 a share. Please note, though, that my history in software stocks is gruesome - I bought Quest mostly as an experiment in a new way of approaching and analyzing the sector, so we will see how that works out.

Disclosure - I own shares of Monsanto and Quest Software

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