We reiterate our Neutral rating on Quality Systems (QSII). First-quarter fiscal 2012 earnings of 65 cents a share beat the Zacks Consensus Estimate by three cents.
Quality Systems’ healthy results for the quarter may be attributed to the federal stimulus that has provided a boost to the industry in general. The company offers a well recognized electronic health record (“EHR”) product and is benefiting from the migration of ambulatory and inpatient practices to EHR under the federal Stimulus.
The company has made multiple acquisitions to bolster organic growth. Its acquisition of IntraNexus, in early 2011, is expected to facilitate its entry in the small hospital segment. Quality Systems recently provided limited guidance by expressing comfort with Consensus estimates for the current financial year. Such guidance improves visibility into the company’s performance.
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 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.
In the end, we believe that Quality Systems provides only a moderate upside to investor expectations. The company’s performance does not sustain its valuation momentum at present, which has boosted its earnings multiple. We believe that Quality Systems is one of the more expensive names in the healthcare IT universe.
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QUALITY SYS (QSII): Free Stock Analysis Report
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