We reiterate our Neutral recommendation for Quality Systems (QSII), a provider of Electronic Health Record (“EHR”) for physician practices and inpatient settings, based on its fourth-quarter fiscal 2011 (ended March 31) financial results. Earnings for the quarter topped the Zacks Consensus Estimate while revenues climbed to a record $97.1 million, up 23.7% year over year, also beating the Zacks.Consensus Estimate.
The buoyant results may be attributed to the federal Stimulus, which has provided a fillip to the industry in general. 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 at 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. On the positive side, we derive comfort from the high proportion of recurring revenues and steady growth in its (NextGen) pipeline.
Quality Systems’ tuck-in acquisition of IntraNexus, in early 2011, is expected to strengthen its foot-print in the small hospital segment, a somewhat nascent segment for the company. However, given the intensity of competition, and seamless inpatient-outpatient offerings of some competing firms, we believe that Quality Systems’ success on the inpatient side may be limited to a relatively small number of hospitals.
For the first time, Quality Systems provided limited guidance, in May 2011, by expressing comfort with Consensus estimates for the current financial year. In essence, the company agreed with Consensus estimates for revenues and EPS.
In the end, we conclude that, despite good execution, Quality Systems provides only a moderate upside to investor expectations from current levels. It is noteworthy that the company has a track record of regular dividend payment. Further, its growing cash balance and absence of debt make it an attractive candidate in the mergers and acquisition space. Our Neutral recommendation on the stock is supported by a short-term Zacks #3 Rank (Hold).
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