On Dec 18, we issued an updated research report on Quality Systems Inc. (QSII). We remain optimistic owing to continued strength in the company’s NextGen division as well as the expected benefit from its Mirth acquisition. However, stiff competition, pricing pressure, and product mix shift toward lower margin recurring revenue stream may hurt profitability going forward.
We believe that Quality Systems will continue to benefit from strong demand for its other NextGen solutions that include Hospitals, EHR and practice management. NextGen’s Inpatient Clinicals, Lab and Patient Portal EHR solutions have also been gaining considerable traction.
Quality System’s NextGen RCM platform continues to win contracts from healthcare providers. The company is also increasing headcount to boost RCM adoption. Recently, NextGen RCM earned the top ranking in a newly released KLAS 2014 Ambulatory RCM Services report. Based on the popularity of the RCM solution, the company plans to expand into dental and hospital markets, which will further drive top-line growth in our view.
We believe that the HITECH Act, which has authorized the EHR Incentive program, presents significant opportunities for Electronic Health Record vendors like Quality Systems. Moreover, the recent acquisitions have been accretive and instrumental in expanding the company’s product pipeline.
Although recurring revenue stream is a positive for Quality Systems, it mostly comes from the lower margin EDI and RCM services. We think that higher operating expenses may hinder profitability, going forward. Also, a sluggish global economy and a strict regulatory environment remain as headwinds for the company.
Incidentally, acquisitions are always accompanied by integration risks. We are also concerned that frequent acquisitions may likely hurt the company’s organic growth. Moreover, Quality Systems faces stiff competition from the likes of McKesson Corporation (MCK), Allscripts Healthcare Solutions, Inc. (MDRX) and athenahealth, Inc. (ATHN), which adds to the worries.
Currently, Quality Systems carries a Zacks Rank #3 (Hold).
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