Quality Systems Down on Q4 Earnings Miss - Analyst Blog

Shares of Quality Systems Inc. QSII tumbled nearly 9.2% in the two trading sessions following the release of its fourth-quarter fiscal 2014 (ended Mar 31) results. Adjusted earnings per share came in at 11 cents, reflecting a decline of 52.2% from the year-ago period and below the Zacks Consensus Estimate of 16 cents.

Excluding the impact of stock-based compensation expense, the company's fourth quarter fiscal 2014 earnings declined 50% from the year-ago period to 12 cents per share.

Revenues at the end of the quarter increased 3.5% from the year-ago period to $115.2 million. Revenues also inched past the Zacks Consensus Estimate of $112 million.

Full Year Results

For fiscal 2014, Quality Systems reported adjusted earnings per share of 66 cents, down 40.0% from $1.10 in fiscal 2013.

Excluding the impact of stock-based compensation expense, the company's fiscal 2014 earnings declined 38.6% to $1.14 per share.

Revenues for the year recorded a drop of 3.4% to $444.7 million from $460.2 million in fiscal 2013.

Segment-wise Results

System sales amounted to $21.7 million in the quarter, representing a decline of about 10.6%. Within System sales, revenues from Software and hardware decreased 11.2% to $15.2 million. Meanwhile, revenues from Implementation and training services declined 9.0% to $6.5 million from the year-ago period.

Revenues from Maintenance, Electronic Data Interchange Services (EDI), Revenue Cycle Management (RCM) and other Services totaled $93.5 million, up 7.4% year over year. Segment sales are reported under four separate headings. Maintenance revenues came in at $41.4 million, reflecting an increase of 3.4%. Electronic data interchange services revenues climbed 11.3% to $17.4 million. Revenue Cycle Management remained flat at $15.3 million whereas revenues from other services spiked 20.9% to $19.4 million.

Margins

Adjusted gross profit fell 1.5% to $62.7 million in fourth-quarter 2014, primarily due to reduction in the higher-margin software sales. Consequently, adjusted gross margin contracted 280 basis points (bps) to 54.4% from 57.2% in the year-ago period.

Adjusted operating earnings decreased 44.5% to $9.8 million while adjusted operating margin contracted 730 bps to 8.5% from 15.8% in the prior-year quarter.

Selling, general and administrative expenses increased 1.0% year over year to $38.7 million in the quarter. The increase was primarily driven by salary benefits and marketing expenses, partially offset by a reduction in bad debt expenses. Research and development (R&D) expenditure climbed 83.7% to $15.1 million mainly on account of reduction in the amount of development costs being capitalized and the timing of projects.

Financial Position

Quality Systems had cash and cash equivalents of $103.1 million as of Mar 31, 2014, down from $106.0 million as of Mar 31, 2013. Deferred revenues increased to $71.1 million at the end of fiscal 2014 from $65.2 million as of Mar 31, 2013.

Our Take

During the fourth quarter of fiscal 2014, Quality Systems witnessed a sequential rise in systems sales, revenue and bookings. However, earnings were hurt by a year-over-year decline in system sales and higher R&D expenses and missed our estimates for the quarter.

Vendors in the Healthcare Information Technology (HIT) space faced a number of external challenges during the year such as lack of demand, delay in the adoption of ICD-10 and a soft hospital spending environment.

Going forward, Quality Systems is extremely optimistic with regard to its Mirth acquisition which is expected to provide strategic opportunities in its Population Health Management and cloud-based applications. The synergies between Mirth Corporation and Quality Systems are very impressive which restores our confidence in the stock.  

Currently, Quality Systems retains a Zacks Rank #3 (Hold). Some better-ranked medical product stocks worth considering are Cardica Inc. CRDC, Eagle Pharmaceuticals Inc. EGRX and NeuroMetrix Inc. NURO. All these stocks carry a Zacks Rank #2 (Buy).