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Quality Systems Inc. (QSII - Analyst Report) reported more than 30% fall in earnings to $12.3 million or 21 cents per share in the second quarter of fiscal 2014 from $18.0 million or 30 cents in the same quarter of fiscal 2013 (excluding acquisition costs, amortization of acquired intangible assets, and proxy contest expense). With this, the QSII missed the Zacks Consensus Estimate by a couple of cents.

Revenues decreased 4% year over year to $111.1 million in the quarter, driven by significant decline in System sales revenues. Revenues also missed the Zacks Consensus Estimate of $114 million. Total bookings, (excluding Revenue Cycle Management, or RCM), rose 22.8% to $32.9 million from $26.8 million in the last year quarter.

Gross margin decreased 300 basis points (bps) to 57.1% from 60.1% in the year-ago quarter. The decline was attributable to a fall in higher-margin software versus prior year, as well as investments for supporting the requirements of IC-10 and Meaningful Use Stage (MU2).

QSII completed the acquisition of health information technology leader Mirth Corporation in the quarter. Mirth contributed about $0.6 million in revenues and $3.6 million in bookings. Its revenue streams include software license fees, maintenance fees, implementation and training fees, as well as hosting services.

Segment Details

Revenues from System sales dipped 27.5% to $23.4 million, driven by sharp decline in Software and hardware business revenues. Revenues from Software and hardware plunged 34.4% to $15.6 million while revenues from Implementation and training Services fell 8.5% to $7.8 million.

Revenues from Maintenance, Electronic Data Interchange Services (EDI), RCM, and other Services rose 4.6% to $87.7 million. Maintenance revenues rose 4.1% to $38.6 million. Electronic data interchange services revenues rose 10.1% to $16.5 million. Revenue Cycle Management and related services revenues increased 6.8% to $15.5 million but revenues from other services slid 1.7% to $15.4 million.

Balance Sheet

Quality Systems ended the quarter with cash and cash equivalents of $72.8 million, down from $106.0 million as of Mar 31, 2013.  Inventories stood at $996 thousand, up from $710 thousand as of Mar 31, 2013.

Our Take

Despite lower earnings and earnings miss, shares of QSII surprisingly reached a new 52-week high of $24.15 yesterday. The market seems to have overlooked the quarterly results due to strong optimism emanating from the company’s Mirth acquisition.

Mirth complements Quality Systems’ data analytics and interoperability offerings, which is in accordance with the requirements of the MU2. It could significantly boost QSII’s bookings growth going forward.

However, we still prefer to avoid the stock, which retains a Zacks Rank #4 (Sell). We are disappointed about earnings and revenues misses and concerned about headwinds in the QSII’s core Systems business. The company should also face strong competition from athenahealth Inc. (ATHN - Analyst Report), which has beaten the Zacks Consensus Estimate in the third quarter of the year.

Currently, we prefer Cerner Corp. (CERN - Analyst Report) and Greenway Medical Technologies, Inc. in the medical information systems industry. Both of them carry a Zacks Rank #2 (Buy).

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