Similar to the last reported fiscal second quarter, Quality Systems Inc. (QSII) reported a fall in earnings and missed the Zacks Consensus Estimate for the third quarter of the fiscal 2014 as well. Consequently, QSII shares dipped 8.5% after the market closed last Friday.
QSII’s earnings plunged more than 64.0% to $6,024 million or 10 cents per share in the reported quarter from $16,903 million or 28 cents in the third quarter of fiscal 2013, mainly due to lower revenues and considerably higher cost of sales (reflecting a 95.1% rise). With this, earnings per share significantly lagged the Zacks Consensus Estimate by 11 cents.
Revenues in the quarter ebbed roughly 5.0% to $108,854 million driven by a fall in Systems sales, partially mitigated by a 5% increase in services, maintenance, RCM, ADI, and other services revenues. Revenues were also lower than the Zacks Consensus Estimate of $114 million.
Recurring revenues accounted for about 82% of total revenues compared to 75% a year ago. Total bookings (including Revenue Cycle Management or RCM) rose 5.1% to $41.6 million from $39.6 million in the last year’s quarter.
Adjusted gross profits plummeted 75.2% to $16,641 million from $67,242 million a year ago. Adjusted gross margin decreased to 15.3% from 58.7% in the year-ago quarter. The decline was attributable to fall in higher margin software from the prior year as well as a decline in implementation training profitability tied to a combination of the build out of resources in anticipation of expected demand for upgrade assistance along with the near-term slowdown in revenues.
Adjusted operating loss was $47,690 million in the third quarter of fiscal 2014 in sharp contrast with an operating profit of $21,143 million in the same quarter of fiscal 2013.
Effective tax rate for the quarter increased 150 basis points to 34.4% from 32.9% in the prior year quarter. The increase was attributable to increase of state blended rates and the non-deductibility of certain aspects of the company’s impairment charge.
Segment Details
Revenues from System sales dipped 34.3% to $19,160 million, driven by a sharp decline in Software and hardware business revenues. Revenues from Software and hardware nosedived 35.5% to $14,114 million while revenues from Implementation and training Services fell 30.6% to $5,046 million.
Revenues from Maintenance, Electronic Data Interchange Services (EDI), RCM, and Other Services rose 5.1% to $89,694 million. Maintenance revenues remained almost flat at $39,763 million. Electronic data interchange services revenues rose 9.4% to $16.6 million. Revenue Cycle Management and related services revenues increased 7.7% to $16,178 million and revenues from other services went up 9.3% to $17,116 million.
Balance Sheet
Quality Systems ended the quarter with cash and cash equivalents of $82,101 million as of Dec 31, 2013, down from $105,999 million as of Mar 31, 2013. Inventories stood at $928 thousand, up from $710 thousand as of Mar 31, 2013. Cash flow from operations increased to $27.7 million in the reported quarter from $16.2 million in the year-ago quarter.
Our Take
Quality Systems currently retains a Zacks Rank #3 (Hold). We are disappointed about earnings and revenues misses and concerned about headwinds in the QSII’s core Systems business.
Currently, we prefer Medidata Solutions, Inc. (MDSO) with a Zacks Rank #2 (Buy) from the medical information systems industry, and NuVasive, Inc. (NUVA) with a Zacks Rank #1 (Strong Buy) and Covidien plc (COV) with a Zacks Rank #2 (Buy) in the medical products industry.
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