Quality Systems Inc (QSII) reported impressive third-quarter 2015 financial numbers. The company saw its shares rise over 6% following the results. This led to solid trading also with far more shares changing hands than in a normal session.
However, the momentum soon subsided and the stock did not show much upward movement on Jan 23. Share price actually declined 0.06% on Jan 26 to close at $17.23. Volumes also declined significantly in the last two days.
We believe that the lack of momentum primarily reflected investors’ skepticism over the stock’s growth potential over the rest of fiscal 2015 and in fiscal 2016.
Quarter Details
EPS (including stock-based compensation) of 15 cents beat the Zacks Consensus Estimate by a couple of cents and surged 44.1% from the year-ago quarter. The robust performance was primarily driven by higher revenues, which increased 13.4% to $123.4 million and surpassed the Zacks Consensus Estimate of $121 million.
The year-over-year growth was attributable to higher revenues from Maintenance, Electronic Data Interchange Services (EDI), Revenue Cycle Management (RCM) and other services. During the quarter, Quality Systems’ pipeline grew to $162.3 million, improving for the ninth consecutive quarter.
System sales increased 4.4% to $20 million, driven by 15.8% growth in Software and hardware revenues, partially offset by 27.5% decrease in Implementation and training services revenues.
Revenues from Maintenance, EDI, RCM and other Services increased 15.3% year over year to $103.4 million. The year-over-year upside was driven by 8.3%, 14.5%, 26% and 22.3% growth in Maintenance, EDI, RCM and Other Services, respectively.
Subscription and Software-as-a-Service (SaaS) revenues surged 59% from the year-ago quarter to $8.4 million, primarily driven by significant synergies from the Mirth acquisition and continued growth in the Patient Portal customer base. Total bookings measured on full contract value were $67.2 million as compared with $65 million in the year-ago quarter.
Mirth sales increased quarter-over-quarter with some big wins including sizable deals from Arizona, Health Information Network of Arizona, San Diego HIE and a private payer HIE.
Adjusted gross profit (including stock-based compensation, excluding the hospital related impairment in the year-ago quarter) was $68.2 million as compared with $16.6 million in the year-earlier quarter. The year-over-year improvement can be primarily attributed to better revenue mix.
Operating expenses as percentage of revenues increased 110 basis points (bps) on a year-over-year basis to 47%. The increased expenses can be attributed to higher selling, general and administrative expenses owing to rising employee related expenses, bad debt expense and legal expenses.
Quality Systems reported operating income (including stock based compensation) of $10.2 million as compared with a loss of $33.3 million in the year-ago quarter.
As of Dec 31, 2014, cash and cash equivalents were 113.6 million.
Our Take
We believe that an expanding RCM pipeline, new product launches and strategic partnerships with the likes of Patterson (PDCO) will drive growth going forward. However, we think that higher operating expenses may mar profits. Also, a sluggish global economy and a strict regulatory environment remain headwinds for the company.
Zacks Rank
Currently, Quality Systems carries a Zacks Rank #2 (Buy).
Other favorably-ranked stocks in the broader medical sector include Inogen (INGN) and Synergetics USA (SURG). Both the stocks sport a Zacks Rank #1 (Strong Buy).
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