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Quality Systems (QSII) Beats on Earnings & Revenues in Q3

Irvine, CA-based Quality Systems Inc.QSII reported third-quarter fiscal 2017 adjusted earnings of 21 cents per share, exceeding the Zacks Consensus Estimate of 18 cents.

Furthermore, earnings improved 40% on a year-over-year basis, courtesy of impressive revenue growth.

Coming to third-quarter revenues, Quality Systems posted revenues of $127.9 million, surpassing the Zacks Consensus Estimate of $125 million. Revenues also increased 9.3% on a year-over-year basis.

Quality Systems Inc. - Earnings Surprise | FindTheBest

Favorable Stock Performance

Over the last three months, the stock added almost 14.5%, comparing favorably with the Zacks classified Medical Info Systems sub-industry's decline of 4.04%.

Furthermore, a long-term expected earnings growth rate of 12.67% instills confidence in investors.

Segment Details

Total software, hardware and related revenues increased 42% to $39.5 million, primarily driven by a 92.6% surge in Software-related subscription services.

However, massive growth at this section was partially offset by lower software license and hardware sales, which grew a modest 5.2% in the quarter

Support and maintenance revenues increased 1% on a year-over-year basis to $39.9 million.

Quality Systems, Inc. Price and EPS Surprise

Quality Systems, Inc. Price and EPS Surprise | Quality Systems, Inc. Quote

Revenues from Professional services declined 11.5% to $6.5 million. Per management, lower revenues at the segment were primarily because of the unimpressive performance of the new software platform in the preceding quarters. Furthermore, strategic initiatives to enhance customer satisfaction at low cost resulted in the lower revenues.

Coming to Electronic data interchange (EDI) services, revenues increased 5.6% on a year-over-year basis to almost $21.6 million.

Meanwhile, the company's Revenue Cycle Management (RCM) business improved 0.7% to $21.7 million.

Bookings

Quality Systems registered bookings worth $32.5 million in the reported quarter, down by $3.2 million from the year-ago quarter.

Furthermore, bookings in the quarter were lower than the second quarter's $33.4 million.

Margin Details

As a percentage of revenues, total software and hardware-related expenses rose 140 basis points (bps).

Quality Systems' expenses on support and maintenance, revenue cycle management and professional services decreased 70 bps, 180 bps and 70 bps, respectively. However, due to a change in the mix of revenue and lower amortization of capitalized software development costs, gross margin witnessed a robust 350 bps expansion.

Coming to operating expenses, selling, general and administrative (SG&A) expenses, as a percentage of revenues, contracted a massive 430 bps.

However, research and development (R&D) costs scaled a substantial 300 bps. As a result, operating margin (excluding amortization of acquired intangible assets and impairment of assets) rose 330 bps to 10.5% in the quarter.

Guidance

For fiscal 2017, Quality Systems projects revenues in the band of $501 million to $507 million, compared to the previous $494 million to $510 million.

However, adjusted earnings are forecasted in the upper end of the previously estimated band of 75--81 cents per share.

Our Take

We are bullish on Quality Systems' streak of positive earnings surprises, which accounts for an average beat of 5.91% over the last four quarters.

On the flip side, although recurring revenue stream is a positive for Quality Systems, it mostly comes from the lower margin EDI and RCM services. We also believe that a shift in product mix might negatively impacting gross margin over the long haul.

Zacks Rank & Stocks to Consider

Quality Systems has a Zacks Rank #4 (Sell).

Better-ranked stocks in the broader medical sector include Addus Glaukos Corporation GKOS , Dextera Surgical Inc. DXTR and Hologic, Inc. HOLX . Notably, Addus Glaukos sports a Zacks Rank #1 (Strong Buy) while Dextera and Hologic have a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here .

Glaukos Corporation has a long-term expected earnings growth rate of approximately 25%. Notably, the stock represents an impressive one-year return of 161.3%.

Dextera Surgical has a long-term expected earnings growth rate of 25. Additionally, the company posted a promising one-month return of almost 57.1%.

Hologic has a long-term expected earnings growth rate of roughly 10.34%. Notably, the stock represents a solid one-year return of 21.47%.

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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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