We maintain our recommendation on
) at Neutral. Quality Systems reported second quarter fiscal 2013
(ended September 30) adjusted earnings per share of 26 cents. It
missed the Zacks Consensus Estimate by 2 cents and fell short of
the year-ago earnings of 35 cents per share.
Net income in the second quarter was $15.7 million, down 23%
on a year-over-year basis, primarily due to declining software
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.
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, its pipeline metric has been on a
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.
We have a long-term Neutral recommendation on the stock which
carries a short-term Zacks #3 Rank (Hold).
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