(QSII) Quality Systems Beats Estimates

Quality Systems (QSII) recently reported second-quarter fiscal 2012 (ended September 30) earnings per share of 35 cents, sailing past the Zacks Consensus Estimate of 33 cents (adjusted for the 2:1 stock split). Net income rose sharply 52.6% year over year to $20.5 million in the reported quarter, bolstered by higher revenues.

Revenues

Revenues amounted to $107.6 million in the second quarter, up 32.1% year over year, exceeding the Zacks Consensus Estimate of $104 million.

Segment-wise Results

System sales amounted to $38 million, up 52.6% year over year. Revenues from the two subcomponents were $31.9 million (up 56.4% year over year) from Software, Hardware and Supplies and $6.1 million (up 35.5%) from Implementation and Training Services.

Maintenance, EDI, Revenue Cycle Management and other Services revenues were $69.7 million, a growth of 23.1% year over year. Segment sales were reported under four categories. Maintenance charges were $35.2 million, up 27.9%. Electronic data interchange services sales were $12 million, up 18.2%. Revenue Cycle Management sales of $11.1 million were roughly flat and the “Other” sub-segment amounted to $11.3 million, up 46.6%.

Margin

Gross margin came to 66.5% in the second quarter, higher than 63% achieved in the prior-year quarter. Operating margin stood at 29.3%, greater than 25.6% in the year-ago quarter.

Balance Sheet

Cash, cash equivalents and marketable securities were $125.8 million at the end of the second quarter, up 17.7% year over year.

Other

The company announced a quarterly cash dividend of 17.5 cents per share on its outstanding common stock, payable to shareholders of record as of December 20, 2011. The distribution date is expected to be January 5, 2012. The cash dividend per share has been adjusted to take into account the 2:1 stock split.

Our Take

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 acquisition. In recent times, the company has not only well managed its ambulatory clinical deals but, in addition, has nicely executed several enterprise contracts. Also, on the positive side, we derive comfort from the high proportion of recurring revenues and steady growth in its NextGen pipeline.

Quality Systems’ fully owned subsidiary NextGen Healthcare Information Systems recently revealed that it has inked an agreement with Dell (DELL) to sell sophisticated technology solutions for medical practices of different sizes, physician networks as well as community and rural inpatient settings.

However, competition is intense from well regarded players such as Athenahealth (ATHN), Allscripts Healthcare Solutions (MDRX), Cerner Corporation (CERN) and others. Price discounting is frequent, particularly on 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 shrinking for selling their products as physician groups are increasingly getting absorbed into hospitals.

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QUALITY SYS (QSII): Free Stock Analysis Report

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