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Mercury Interactive Reports Second Quarter Results

July 26, 2004

• Revenue $159.0 million; Increase of 35% versus Q2 2003
• Net Increase in Deferred Revenue of $26.2 million
• Earnings Per Share: $0.12 GAAP; $0.22 Non-GAAP
• Cash Flows from Operations: $41.1 million

Mountain View, CA – July 21, 2004 – Mercury Interactive Corporation (NASDAQ: MERQ), the global leader in business technology optimization (BTO), today reported results for the second quarter ended June 30, 2004.

Revenue for the second quarter of 2004 was $159.0 million, an increase of 35 percent compared to $118.1 million reported in the second quarter of 2003.

Deferred revenue for the second quarter of 2004 increased by $26.2 million from the first quarter of 2004 to $327.3 million. Cash generated from operations for the second quarter of 2004 was $41.1 million compared to $38.2 million in the second quarter of 2003.
GAAP Results

Net income for the second quarter of 2004 was $11.6 million, or $0.12 per diluted share, compared to $16.9 million, or $0.19 per diluted share, for the same period a year ago. GAAP results for the second quarter include stock-based compensation and amortization of intangible assets of $3.9 million, integration and other related charges of $1.1 million, net gain on investments of $0.4 million and a non-cash asset impairment charge of $9.2 million related to Mercury’s move to its new headquarters.

NON-GAAP RESULTS
Net income for the second quarter of 2004 was $22.0 million, or $0.22 per diluted share, compared to $19.8 million, or $0.22 per diluted share, for the same period a year ago. Non-GAAP results, as presented in the attached reconciliation table, exclude the following recurring items: stock-based compensation, amortization of intangible assets, integration and other related charges, net gain on investments and non-cash asset impairment charges related to facilities.
“This was our fourth consecutive quarter of year over year new order growth exceeding 30 percent,” said Amnon Landan, chairman and CEO at Mercury. “This is a testament to customers increasing investment in Mercury’s BTO offerings and our continued execution.”

Q2 2004 Highlights
• Solid performance across all businesses and all geographies
• 15 transactions greater than $1.0 million
• Signed definitive agreement to acquire Appilog and extend Mercury’s leadership in Application Management and BTO

Financial Outlook
The following financial outlook is provided based on information as of July 21, 2004. Management provides the following guidance for the quarter ending September 30, 2004:
• Revenue is expected to be in the range of $160 million to $170 million
• Net increase in deferred revenue is expected to be in the range of $20 million to $30 million
• Non-GAAP operating margin is expected to be in the range of 15 percent to 17 percent
• GAAP diluted earnings per share is expected to be in the range of $0.16 to $0.21
• Non-GAAP diluted earnings per share is expected to be in the range of $0.22 to $0.27
• Cash flows from operations is expected to be in the range of $40 million to $50 million

Management provides the following guidance for the fiscal year ending December 31, 2004:
• New order growth is expected to be in the range of 25 percent to 30 percent
• Revenue is expected to be in the range of $665 million to $685 million
• Non-GAAP operating margin is expected to be in the range of 17 percent to 20 percent
• GAAP diluted earnings per share is expected to be in the range of $0.76 to $0.85
• Non-GAAP diluted earnings per share is expected to be in the range of $1.04 to $1.12
• Cash flows from operations is expected to be in the range of $220 million to $240 million

The company also announced that its board of directors has approved a program to repurchase up to $400 million of the company’s common stock over the next two years. The specific timing and amount of repurchases will vary based on market conditions, securities law limitations, and other factors.

For more info, contact Mercury Interactive, www.mercury.com.