Quality Systems Shares Fall on Lower Q1 Earnings - Analyst Blog

By Zacks Equity Research,

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Shares of Quality Systems Inc. ( QSII ) fell approximately 1.5% following the release of its first-quarter fiscal 2015 (ended Jun 30) results. Adjusted earnings per share came in at 12 cents, reflecting a decline of 50% from the year-ago earnings of 24 cents. However, adjusted earnings were in line with the Zacks Consensus Estimate.

On a reported basis, net earnings per share significantly declined by 63.6% to 8 cents from 22 cents in the first quarter of fiscal 2014. Net earnings fell 46.8% to $5.2 million from the prior-year earnings of $12.9 million.

Quality Systems, Inc - Earnings Surprise | FindTheBest

Revenues at the end of the quarter stood at $117.9 million, representing an increase of 7.6% from the year-ago revenues of $109.5 million and also inched past the Zacks Consensus Estimate of $115 million. The upside was primarily driven by the company's recurring service revenue streams.

Segment-wise Results

System sales amounted to $21.0 million in the quarter, representing a decline of about 6.8% year over year. Within System sales, revenues from Software and hardware decreased 7.7% to $14.7 million. Meanwhile, revenues from Implementation and training services declined 4.7% to $6.3 million from the year-ago period.

Revenues from Maintenance, Electronic Data Interchange Services (EDI), Revenue Cycle Management (RCM) and other Services totaled $96.9 million, up 11.4% year over year.

Maintenance revenues came in at $40.8 million, reflecting an increase of 5.7%. Electronic data interchange services revenues climbed 9.7% to $18.3 million. Revenue Cycle Management edged up 4.2% to $16.7 million whereas revenues from other services spiked 34.5% to $21.1 million.


Adjusted gross profit improved 0.7% to $62.6 million in the quarter. However, adjusted gross margin contracted 360 basis points (bps) to 53.1% from 56.7% in the year-ago period primarily due to reduction in the higher-margin software sales.

Adjusted operating earnings decreased 48.8% to $11.0 million while adjusted operating margin contracted 1030 bps to 9.3% from 19.6% in the prior-year quarter.

Selling, general and administrative (SG&A) expenses increased 4.7% year over year to $36.7 million in the quarter. The increase was primarily driven by the inclusion of Mirth related SG&A expenses, salary benefits and marketing expenses, partially offset by a reduction in bad debt expenses. Research and development (R&D) expenditure shot up 189.2% to $16.2 million mainly on account of reduction in the amount of development costs being capitalized and the timing of projects.

Financial Position

Quality Systems had cash and cash equivalents of $107.7 million as of Jun 30, 2014, down 4.5% from $103.1 million as of Mar 31, 2014. Deferred revenues decreased 0.5% to $70.7 million at the end of the quarter from $71.1 million as of Mar 31, 2014.

Our Take

During the first quarter of fiscal 2015, Quality Systems began realizing benefits of various initiatives employed over the last year, including restructuring of its functional organization, cross-selling products and services and the release of new solutions to cater to the changing healthcare market.

Areas such as Revenue Cycle Management, Population Health and interoperability positively impacted sales and marketing, both in the form of net new deals as well as cross-selling into the company's growing client base.

However, earnings were hurt by a year-over-year decline in system sales and higher R&D expenses. Also, Quality Systems witnessed a decline in booking margins in recent quarters which raises concern.

Currently, Quality Systems carries a Zacks Rank #4 (Sell). Better-ranked stocks in the broader medical instruments sector include RTI Surgical Inc. ( RTIX ), Accuray Incorporated ( ARAY ) and Heartware International Inc. ( HTWR ). While RTI Surgical sports a Zacks Rank #1 (Strong Buy), both Accuray and Heartware International carry a Zacks Rank #2 (Buy).

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ACCURAY INC (ARAY): Free Stock Analysis Report

QUALITY SYS (QSII): Free Stock Analysis Report

HEARTWARE INTL (HTWR): Free Stock Analysis Report

RTI SURGICAL (RTIX): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Earnings , Stocks
Referenced Stocks: EDI , ARAY , QSII , HTWR , RTIX

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