Quality Systems QSII reported third-quarter 2018 adjusted earnings per share of 15 cents, in line with the Zacks Consensus Estimate. However, adjusted earnings per share declined 34.8% on a year-over-year basis.
Revenues for third-quarter fiscal 2018 totaled $131.7 million, which marginally beat the Zacks Consensus Estimate of $131 million. Additionally, revenues increased 3% on a year-over-year basis.
Segment Details
Total Software, Hardware and Related: Revenues in this segment declined 4.3% on a year-over-year basis, amounting to $37.82 million. Subscription revenues of $24.7 million increased 10% year over year.
Support and Maintenance: Revenues improved 1.1% on a year-over-year basis, to $40.36 million. However, the figure declined sequentially.
Professional Services: Revenues in this segment increased 29% on a year-over-year basis to $8.5 million.
Electronic Data Interchange: Revenues in this segment grew 6.2% year over year to $23.1 million.
Revenue Cycle Management (RCM): Revenues in this segment increased 9.3% year over year to $21.9 million. In the reported quarter, nine new RCM deals were signed, of which two were entirely new clients to the company as a whole.
Quality Systems, Inc. Price, Consensus and EPS Surprise
Quality Systems, Inc. Price, Consensus and EPS Surprise | Quality Systems, Inc. Quote
Quarter Highlights
EagleDream Acquisition: A Major Positive
Recently, Quality Systems acquired EagleDream, a software analytics solutions company. It was incorporated in the company’s operations in the third quarter of fiscal 2018. During the quarter, the company closed 10 deals across a broad product spectrum of accounts, both by specialty and geography. It has also led to a swift uptake in interest from the company’s user base around EagleDream. Thus, Quality Systems witnesses deal flow and significant interest from the integration of EagleDream.
Bookings Strengthen
A sequential 17% increase in bookings majorly drove sales in the reported quarter, which amounted to 30.5 million.
Interoperability Framework
The company’s framework is suitable for its software to exchange and make use of the information. Per management, the company had more than 100 clients integrated into the national care quality framework for interoperability, as of Dec 31. Further, more clients are being added each month post the upgrade. It ensures that patient data is transportable not just within the company database, but also across the industry.
Margin Details
Gross profit for the third quarter totaled $70.1 billion and gross margin is at 53.2%. Gross margin declined 429 basis points on a year-over-year basis. The decline is mainly due to a general shift to lower margin subscription revenues.
RCM margins are too compressed as the company invested for future efficiencies and witnessed some headwinds this quarter from personnel expenses.
Operating expenses surged due to investment in sale and marketing as well as acquisitions, partially.
Financial Condition
The company exited the third quarter with 23.4 million in cash and equivalents and 39 million in outstanding against revolving credit agreement at the end of the quarter. Quality Systems continues to be well positioned in terms of financial flexibility with 189 million available in total liquidity.
FY18 View
For fiscal 2018, the company reiterated revenue outlook at the range of $522-$530 million. The company reiterated its adjusted earnings per share at the range of 64-68 cents.
Our Take
Quality Systems exited the third quarter of fiscal 2018 with a lukewarm performance in earnings, while revenues beat the Zacks Consensus Estimate.
Solid revenue growth and segmental support buoys optimism. Revenues benefited from EagleDream software platform, which has been enjoying favorable market response since its integration in the reported quarter.
On the flip side, declining revenues in the Software and Hardware Related segment are a concern. Operating expenses are also high due to acquisition-driven costs. Continued acquisition poses integration risks for the acquiring company.
Price Performance
In the past year, Quality Systems has underperformed with respect to the industry.
Zacks Ranks & Key Picks
Quality Systems carries a Zacks Rank #3 (Hold).
A few better-ranked medical stocks in the broader medical space are Becton, Dickinson and Company BDX, BIOVERATIV BIVV and Exelixis EXEL. While Becton, Dickinson carries a Zacks Rank #2 (Buy), BIOVERATIV and Exelixis sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Becton, Dickinson has an expected long-term growth rate of 12.8%. The stock has returned 22.3%, outperforming the industry, in the last six months.
BIOVERATIV has an impressive projected growth rate of 36.5% for the next year. In the last month, the stock has gained 91.1% compared with the industry’s rally.
Exelixis has a notable long-term expected growth rate of 46%. In the last three months, the stock has gained 16.1%, surpassing the industry’s gain.
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