) reported second quarter fiscal 2013 (ended September 30)
adjusted (excluding one-time items) earnings per share of 26
cents. It missed the Zacks Consensus Estimate by a couple of
cents and fell short of the year ago earnings of 35 cents per
Net income in the second quarter was $15.7 million, down 23% on a
year-over-year basis, primarily due to declining software license
Revenues increased 8% year over year to $116.1 million in the
second quarter. The company's revenues missed the Zacks Consensus
Estimate of $118 million.
System sales amounted to $32.3 million, down roughly 15% year
over year. Revenues from the two subcomponents were $23.7 million
(down 25.5% year over year) from Software, Hardware and Supplies
and $8.5 million (up 40% 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
$83.9 million, up 20.4% year over year. Segment sales are
reported under four separate headings. Maintenance revenues came
in at $38.7 million, up 9.9% year over year. Electronic data
interchange services revenues were $15 million, up 25.4% year
over year. Revenue Cycle Management sales surged 30% year over
year to $14.5 million and revenues from other services amounted
to $15.6 million, up 38% year over year.
Gross margin declined to 60.1% in the second quarter compared to
66.5% in the prior-year quarter. Operating margin dropped to
roughly 21% from 29.3% in the year-ago quarter. The decline in
margin is due to reduction in the high-margin System sales in the
The selling, general and administrative expenses climbed 17.6%
year over year to $37.8 million in the quarter while research and
development expenditure declined 14.8% year over year to $6.3
Quality Systems ended the second quarter with cash, cash
equivalents of $117 million, down 6.9% 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
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 see opportunities for product sales
shrink, as physician groups are increasingly absorbed into
We have a long-term 'Neutral' recommendation on the stock which
carries a short-term Zacks #3 Rank (Hold).
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