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Analyst Blog

On Jun 10, we have updated our research report on Quality Systems Inc. (QSII - Analyst Report). Quality Systems continues to report a fall in earnings and revenues but we are still optimistic about the company given the continued strength in its NextGen subsidiary as well as the expected benefit from its Mirth acquisition.

In the recently completed fiscal 2014, Quality Systems’ earnings plunged 40.0% to 66 cents per share while revenues fell 3.4% to $444.7 million. In the fiscal fourth quarter, adjusted earnings per share of 11 cents also missed the Zacks Consensus Estimate by 5 cents but revenues of $115.2 million rose 3.5% and beat the Zacks Consensus Estimate by roughly $3 million.

Adjusted gross profit fell 1.5% to $62.7 million in the fourth quarter of fiscal 2014, primarily due to reduction in the higher-margin software sales. Consequently, adjusted gross margin contracted 280 basis points (bps) to 54.4% from 57.2% in the year-ago period. Adjusted operating earnings decreased 44.5% to $9.8 million while adjusted operating margin contracted 730 bps to 8.5% from 15.8% in the prior-year quarter.

Despite sluggish growth, revenues of the company continue to be largely boosted by the strength of the NextGen subsidiary. The NextGen Ambulatory EHR 5.8 and NextGen Practice Management 5.8 will help the company’s clients meet ICD-10 and Meaningful Use Stage 2 requirements.

Quality Systems is also benefiting from its acquisition of Mirth Corporation. Mirth’s revenue streams include software license fees, maintenance fees, implementation and training fees, as well as hosting services. The acquisition would help the company develop advanced technologies and products, which could attract new clients looking for advanced connectivity solutions.

Currently, Quality Systems retains a Zacks Rank #4 (Sell). Some better-ranked stocks in the broader healthcare sector include Cardica Inc. (CRDC - Snapshot Report), Eagle Pharmaceuticals Inc. (EGRX - Snapshot Report), and NeuroMetrix Inc. (NURO). All of them carry a Zacks Rank #2 (Buy).

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