) reported third quarter fiscal 2013 (ended December 31) adjusted
(excluding one-time items) earnings per share of 26 cents. It
missed the Zacks Consensus Estimate by 2 cents.
Net income in the fiscal third quarter was $15.6 million (or
26 cents a share), down 26% on a year-over-year basis, primarily
due to lower software license sales.
Revenues increased 2% year over year to $114.5 million in the
fiscal third quarter. The company's revenues missed the Zacks
Consensus Estimate of $119 million.
System sales amounted to $29.2 million, down about 29.9% year
over year. Revenues from the two subcomponents were $21.9 million
(down 37.6% year over year) from Software, Hardware and Supplies
and $7.3 million (up 10.8% 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 $85.3 million, up 20% year over year. Segment sales
are reported under four separate headings. Maintenance revenues
came in at $39.5 million, up 8.9% year over year. Electronic data
interchange services revenues were $15.2 million, up 25.7% year
over year. Revenue Cycle Management sales surged 34.7% year over
year to $15 million and revenues from other services amounted to
$15.6 million, up 34.5% year over year.
Gross margin declined to 59.3% in the fiscal third quarter
compared to 66% in the prior-year quarter. Operating margin
dropped to roughly 20.4% from 28.8% 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 7.4%
year over year to $35.5 million in the quarter while research and
development expenditure declined 5.9% year over year to $7.8
Quality Systems ended the fiscal third quarter with cash, cash
equivalents and marketable securities of $106.9 million, down
17.9% year over year.
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. On
the positive side, we observe the high proportion of recurring
revenues. Of late, however, growth of its pipeline metric has
seen a falling trend.
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
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 see opportunities for
product sales shrink, as physician groups are increasingly
absorbed into hospitals.
Quality Systems currently carries a Zacks Rank #4 (Sell).
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