Quality Systems Inc.
) reported fourth quarter fiscal 2013 (ended Mar 31) adjusted
(excluding one-time items) earnings per share of 21 cents. It
missed the Zacks Consensus Estimate of 28 cents. Adjusted
earnings exclude impairment burden of $17.4 million on goodwill
of Hospital Division.
Net loss in the fiscal fourth quarter was $4.1 million (or a
loss of 7 cents a share) compared with a net profit of $15.1
million (or earnings of 25 cents per share) in the year-ago
Adjusted earnings per share were 99 cents for fiscal 2013
missing the Zacks Consensus Estimate of $1.07.
Revenues increased 2% year over year to $111.3 million in the
fiscal fourth quarter. The company's revenues missed the Zacks
Consensus Estimate of $118 million. For fiscal 2013, revenues
rose 7% to $460.2 million falling short of the Zacks Consensus
Estimate of $467 million.
System sales amounted to $24.3 million, down about 30.3% year
over year. Revenues from the two subcomponents were $17.1 million
(down 35.6% year over year) from Software, Hardware and Supplies
and $7.2 million (down 13.4% on a year-over-year basis) from
Implementation and Training Services.
Revenues from Maintenance, Electronic Data Interchange
Services (EDI), Revenue Cycle Management and other Services
amounted to $87 million, up 17.3% year over year. Segment sales
are reported under four separate headings. Maintenance revenues
came in at $40 million, up 11.6% year over year. Electronic data
interchange services revenues were $15.7 million, up 19.7% year
over year. Revenue Cycle Management sales surged 34.3% year over
year to $15.3 million and revenues from other services amounted
to $16 million, up 16.1% year over year.
Gross margin declined to 56.6% in the fiscal fourth quarter
compared to 61.5% in the prior-year quarter. Operating margin
went into the red at (1.9)% from 21.4% in the year-ago quarter.
The decline in margin is due to reduction in the high-margin
System sales in the reported quarter.
The selling, general and administrative expenses climbed 12%
year over year to $38.3 million in the quarter while research and
development expenditure declined 7.6% year over year to $8.2
Quality Systems ended the fiscal fourth quarter with cash,
cash equivalents and marketable securities of $106 million, down
21.2% year over year.
Quality Systems runs a pure-play business model in an industry
with a large number of catalysts, which provoke frequent
speculation about mergers and acquisitions. On the positive side,
we observe the high proportion of recurring revenues. Of late,
however, the condition of the pipeline metric has not always been
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
) 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. While fresh projects have
shrunk in number, the replacement market is growing.
Quality Systems has traditionally focused on providing
solutions for physician practices. However, core ambulatory EHR
providers such as Quality Systems will see opportunities for
product sales shrink, as physician groups are increasingly
absorbed into hospitals.
Currently, the stock retains a Zacks Rank #3 (Hold). However,
we are more positive about other stocks such as
Merge Healthcare Incorporated
) which carries a Zacks Rank #2 (Buy) and is expected to do
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