Quality Systems Earnings Fall on Miss - Analyst Blog

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Similar to the last reported fiscal second quarter, Quality Systems Inc. ( QSII ) reported a fall in earnings and missed the Zacks Consensus Estimate for the third quarter of the fiscal 2014 as well. Consequently, QSII shares dipped 8.5% after the market closed last Friday.

QSII's earnings plunged more than 64.0% to $6,024 million or 10 cents per share in the reported quarter from $16,903 million or 28 cents in the third quarter of fiscal 2013, mainly due to lower revenues and considerably higher cost of sales (reflecting a 95.1% rise). With this, earnings per share significantly lagged the Zacks Consensus Estimate by 11 cents.

Revenues in the quarter ebbed roughly 5.0% to $108,854 million driven by a fall in Systems sales, partially mitigated by a 5% increase in services, maintenance, RCM, ADI, and other services revenues. Revenues were also lower than the Zacks Consensus Estimate of $114 million.

Recurring revenues accounted for about 82% of total revenues compared to 75% a year ago. Total bookings (including Revenue Cycle Management or RCM) rose 5.1% to $41.6 million from $39.6 million in the last year's quarter.

Adjusted gross profits plummeted 75.2% to $16,641 million from $67,242 million a year ago. Adjusted gross margin decreased to 15.3% from 58.7% in the year-ago quarter. The decline was attributable to fall in higher margin software from the prior year as well as a decline in implementation training profitability tied to a combination of the build out of resources in anticipation of expected demand for upgrade assistance along with the near-term slowdown in revenues.

Adjusted operating loss was $47,690 million in the third quarter of fiscal 2014 in sharp contrast with an operating profit of $21,143 million in the same quarter of fiscal 2013.

Effective tax rate for the quarter increased 150 basis points to 34.4% from 32.9% in the prior year quarter. The increase was attributable to increase of state blended rates and the non-deductibility of certain aspects of the company's impairment charge.

Segment Details

Revenues from System sales dipped 34.3% to $19,160 million, driven by a sharp decline in Software and hardware business revenues. Revenues from Software and hardware nosedived 35.5% to $14,114 million while revenues from Implementation and training Services fell 30.6% to $5,046 million.

Revenues from Maintenance, Electronic Data Interchange Services (EDI), RCM, and Other Services rose 5.1% to $89,694 million. Maintenance revenues remained almost flat at $39,763 million. Electronic data interchange services revenues rose 9.4% to $16.6 million. Revenue Cycle Management and related services revenues increased 7.7% to $16,178 million and revenues from other services went up 9.3% to $17,116 million.

Balance Sheet

Quality Systems ended the quarter with cash and cash equivalents of $82,101 million as of Dec 31, 2013, down from $105,999 million as of Mar 31, 2013. Inventories stood at $928 thousand, up from $710 thousand as of Mar 31, 2013. Cash flow from operations increased to $27.7 million in the reported quarter from $16.2 million in the year-ago quarter.

Our Take

Quality Systems currently retains a Zacks Rank #3 (Hold). We are disappointed about earnings and revenues misses and concerned about headwinds in the QSII's core Systems business.

Currently, we prefer Medidata Solutions, Inc. ( MDSO ) with a Zacks Rank #2 (Buy) from the medical information systems industry, and NuVasive, Inc. ( NUVA ) with a Zacks Rank #1 (Strong Buy) and Covidien plc ( COV ) with a Zacks Rank #2 (Buy) in the medical products industry.

COVIDIEN PLC (COV): Free Stock Analysis Report

MEDIDATA SOLUTN (MDSO): Free Stock Analysis Report

NUVASIVE INC (NUVA): Free Stock Analysis Report

QUALITY SYS (QSII): 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.

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

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