On Nov 14, we have upgraded our recommendation on
Quality Systems Inc.
) to Neutral from Underperform. Despite the revenues and earnings
miss from in the second quarter of fiscal 2014, we are optimistic
about QSII given the continued strength in its NextGen division
as well as the expected benefit from its Mirth acquisition.
On Oct 25, Quality Systems reported more than 30% fall in
earnings to $12.3 million or 21 cents per share in the fiscal
2014-second quarter from $18.0 million or 30 cents in the same
quarter of fiscal 2013 (excluding acquisition costs, amortization
of acquired intangible assets, and proxy contest expense). With
this, QSII missed the Zacks Consensus Estimate by a couple of
Revenues decreased 4% year over year to $111.1 million in the
quarter, driven by significant decline in System sales revenues.
Revenues also missed the Zacks Consensus Estimate of $114
million. Total bookings (excluding Revenue Cycle Management or
RCM) rose 22.8% to $32.9 million from $26.8 million in the last
Following the release of second quarter results, the Zacks
Consensus Estimate for 2014 earnings fell 9.6% to 85 cents per
share. The Zacks Consensus Estimate for 2015 earnings also dipped
5.5% to $1.03 per share. Quality Systems now has a Zacks Rank #3
QSII has done well on growing demand from providers, who have to
meet the Meaningful Use criteria under the federal stimulus
program. Its revenue growth continues to be boosted by the
strength of the NextGen division.
In the second quarter, Quality Systems completed the development,
testing and preparation for the NextGen Ambulatory Electronic
Health Record (EHR) 5.8 as well as NextGen Practice Management
5.8. This will help the company's clients meet ICD-10 and
Meaningful Use Stage 2 requirements.
QSII also expects to benefit from its acquisition of Mirth
Corporation, which contributed about $0.6 million in revenues and
$3.6 million in bookings in the fiscal 2014-second quarter.
However, Quality Systems is not well positioned to capitalize on
opportunities in the growing EHR replacement market, which is
expected to grow significantly in late-2014.
Moreover, we are concerned about competitors' attempt to grab
Quality Systems' market share through lower prices or services
that are differentiated from those offered by the company.
Other Stocks to Look For
While there are no stocks to look for in the medical information
systems industry, we consider stocks from the medical products
industry that are performing well. They include
Hill-Rom Holdings, Inc.
INSYS Therapeutics, Inc.
). All of them carry a Zacks Rank #1 (Strong Buy).
HILL-ROM HLDGS (HRC): Free Stock Analysis
INSYS THERAP (INSY): Free Stock Analysis
NUVASIVE INC (NUVA): Free Stock Analysis
QUALITY SYS (QSII): Free Stock Analysis
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