Quality Systems (QSII) Q4 Earnings Disappoint, Stock Falls

Shares of Quality Systems Inc. QSII plunged almost 10% in after-hours trading following the company's disappointing fourth-quarter fiscal 2016 results. The company reported adjusted earnings of 19 cents per share, down 9.5% from the year-ago quarter.

Including share-based compensation expense, earnings were 18 cents which beat the Zacks Consensus Estimate by a couple of cents but declined 10% on a year-over-year basis.
 

Revenues were almost $128 million as compared with $128.4 million reported in the year-ago quarter. Revenues were in line with the Zacks Consensus Estimate. Total bookings in the quarter under review amounted to almost $44 million.

Total software, hardware and related revenues increased 8.8% to $37.5 million, primarily driven by a 42.7% surge in Software related subscription services. However, this massive growth was partially offset by lower software license and hardware sales, which declined 12.5% in the quarter

Support and maintenance revenues fell 8% on a year-over-year basis to $37.5 million. Revenues from Professional services declined 14.5% to $9.3 million.

However, revenues from Electronic data interchange (EDI) services increased 4.2% on a year-over-year basis to almost $21 million. Meanwhile, the company's Revenue cycle management (RCM) business continues to perform well, with revenues increasing 3.3% to $20.4 million.

The slight decline in revenues impacted gross margin, which contracted 50 basis points (bps) in the quarter.

Operating expenses (excluding amortization of acquired intangible assets and impairment of assets), as a percentage of revenues, declined 180 bps to 44.1%. Selling, general and administrative (SG&A) expenses, as a percentage of revenues, fell 70 bps, while research and development costs (R&D) decreased 120 bps.

As a result, operating margin (excluding amortization of acquired intangible assets and impairment of assets) expanded 130 bps to 9.6% in the quarter.

Fiscal 2016 Highlights

Revenues increased 0.5% to $492.5 million in fiscal 2016, primarily driven by robust performance from by yhe and EDI segments, which increased 11.8% and 7.8%, respectively.

However, gross margin contracted 30 bps due to the modest revenue growth. Nevertheless, operating margin (excluding amortization of acquired intangible assets and impairment of assets) expanded 100 bps due to lower operating expenses, which declined 130 bps in fiscal 2016.

Organizational Realignment

Quality Systems announced the results of its "Business Strategic Review" on Apr 27, per which it stopped further investments in the NextGen Now platform and recognized pre-tax impairment charge of $32 million in the fourth quarter of fiscal 2016.

Management at Quality Systems announced that the company will now focus on the recently acquired MediTouch platform, which offers the most efficient path to providing a high-quality, robust, cloud-based solution for ambulatory care.

Quality Systems also announced a restructuring plan that will realign its business units and organizational structure. Under this plan, the company will reduce headcount by approximately 150 employees, which is approximately 6% of its U.S.-based workforce.

The restructuring is expected to result in almost $4 million charges (over the first half of fiscal 2017), consisting mainly severance and other one-time termination benefits. However, excluding the restructuring charges, management expects $14 million to $16 million of personnel-related savings in fiscal 2017.

Guidance

Quality Systems maintained its fiscal 2017 guidance as announced earlier. Revenues are still projected in the range of $508--$522 million, adjusted earnings are expected in the band of 78--86 cents per share.

Zacks Rank & Key Picks

Currently, Quality Systems carries a Zacks Rank #2 (Buy).

Other favorably ranked stocks in the medical sector are SurModics SRDX, Edwards Lifesciences EW and Masimo Corporation MASI. All the three stocks sport a Zacks Rank #1 (Strong Buy).

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