We are downgrading our recommendation on
) to Underperform. The company reported earnings per share of 26
cents in the first-quarter of fiscal 2013, missing the Zacks
Consensus Estimate of 36 cents. Net income dropped 18.4% year over
year to $15.5 million, primarily due to an increase in incurred
Revenues were up 17.8% year over year to $118.3 million in the
reported quarter. In spite of registering record revenues, the
company missed the Zacks Consensus Estimate of $121 million.
Quality Systems runs a pure-play business model in an attractive
industry with a large number of catalysts, which provoke frequent
speculation about mergers and acquisitions. Of late however, growth
of its pipeline metric has seen a falling trend along with
progressively fewer signed deals on a quarterly basis.
The company has made multiple acquisitions to bolster organic
growth. Its acquisitions are expected to facilitate its entry in
the small hospital segment. We are concerned about execution risk
emanating from Quality Systems' entry into the rural inpatient
Moreover, competition is intense from well regarded players such
Allscripts Healthcare Solutions
) and others. Price discounting is frequent, particularly at the
lower end and Software as a Service (SaaS) based model appears to
have exacerbated pricing pressure.
Quality Systems has traditionally focused on providing solutions
for physician practices. However, core ambulatory EHR providers
such as Quality Systems will find that opportunities for product
sales will shrink, as physician groups are increasingly absorbed
Our Underperform recommendation on the stock carries a Zacks #5
Rank, which translates into a short-term Strong Sell rating.
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