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Tickers in this Article: QSFT, CA, MSFT, FISV, ORCL
When looking through the earnings results from August 10-14, there was one upside surprise that caught my attention: Quest Software (Nasdaq:QSFT), a provider of products that help large organizations manage their software applications more efficiently. Not being a technology guru, all I can assume is that this involves keeping IT departments happy. On this front, Quest must be doing something right because its Q2 earnings per share beat analyst expectations by 45%. I may not be a techie but I do know when I see an interesting situation in front of me, and Quest's search for greater profits is certainly a candidate worth exploring further. IN PICTURES: Digging Out Of Debt In 8 Steps

Loads of Experience
Founded in 1987 and going public in 1999, Quest has grown revenues for nine straight years since its IPO and now has over 100,000 customers worldwide. It has increased annual sales at a 30% clip in that time and earnings per share at a 40% rate. How has the stock done in the past nine years? Not great. Initially priced at $14 back in August 1999, QSFT hit above $80 in 2001 and has traded between $10 and $20 ever since. Before I give the green light to this stock, I need to ascertain why it's trading in such a tight range. The answer should give me a better idea whether it's a diamond in the rough or stuck in the mud for a reason.

Where's The Problem
Quest's 2008 10-K shows that it had an earnings hiccup in 2005, when EPS dropped 21 cents from 53 cents in 2004 to 32 cents in 2005. However, the primary reason for this decline, as far as I can tell, is that the company paid a normal rate of tax in 2005, paying $27.26 million compared to $7.9 million in 2004. Its operating income in 2005 was $60.8 million, a 19.4% increase from $50.9 million a year earlier. In fact, Quest has had four straight years of operating income increases so I'd have to conclude this blip was due to its transformation from money-losing operation to that of a strong and profitable company.

Latest Results
As mentioned above, Quest's second-quarter earnings beat analyst expectations by 45%, earning 29 cents a share opposed to analyst estimates of 20 cents. Revenues dropped 5% to $164.3 million from $173.4 million in last year's same quarter. The main reason for beating EPS expectations is a 17% drop in Quest's operating expenses during the quarter. The company sits with no debt and $331.2 million in cash, which it will no doubt use for further acquisitions. Since 2004, the company has made 19 acquisitions totaling $455.4 million, although it made none in 2008. At current prices, Quest's trading at 4.3 times cash per share, and that's low. Take a look below to see just where Quest stacks up to other software companies. (For more on analyst expectations, be sure to read Analyst Forecasts Spell Disaster For Some Stocks.)

Top 5 Holdings - Invesco PowerShares Software Portfolio (NYSE:PSJ)

Cash Per Share
Microsoft (Nasdaq:MSFT)
Fiserv (Nasdaq:FISV)
Oracle (Nasdaq:ORCL)
Quest Software (Nasdaq:QSFT)
Data as of Aug 18, 2009 - Yahoo Finance
Bottom Line
Warren Buffett often talks about recurring revenue. Quest splits its revenues between perpetual software licenses and service fees for supporting those licenses. In 2006, the company's service revenues passed its licenses revenue for the first time and it likely won't look back. In Quest's latest quarterly report, service revenues accounted for 62% of its total, compared to 55% for all of 2008. As I said earlier, I'm not a techie but I do know that this is one consistent revenue generator worth considering.

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