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Quality Systems (QSII - Analyst Report) reported fourth-quarter fiscal 2012 (ended March 31) adjusted (excluding one-time items other than stock-based compensation expense) earnings per share of 26 cents missing the Zacks Consensus Estimate of 27 cents. The company stated earnings per share of $1.30 for fiscal 2012 missing the Zacks Consensus Estimate of $1.31.   

Net income dropped 18.8% year over year to $150.7 million (25 cents per share) in the reported quarter partly due to higher expenditures. 

Revenues

Sales stood at $109 million in the fourth quarter, up 12.2% year over year, missing the Zacks Consensus Estimate of $111 million. Revenues were $429.8 million in fiscal 2012, up 21.6%, also missing the Zacks Consensus Estimate of $431 million.   

Segment-wise Results

System sales amounted to $34.8 million, down 5% year over year. Revenues from the two subcomponents were $26.6 million (down 16.2% year over year) from Software, Hardware and Supplies and $8.3 million (higher 67.2%) from Implementation and Training Services.

Maintenance, EDI, Revenue Cycle Management and other Services revenues amounted to $74.2 million, up 22.7% year over year. Segment sales were reported under four separate headings. Maintenance charges were $35.9 million, up 23.5%. Electronic data interchange services sales were $13.1 million, up 21.6%. Revenue Cycle Management sales of $11.4 million were down 1.9% and the “Other” sub-segment amounted to $13.8 million, up 52.9%.

Margin

Gross margin stood at 61.5% in the fourth quarter, lower than 65.8% achieved in the prior-year quarter. Operating margin came to 21.4%, also lower than 29.3% in the year-ago quarter.

Balance Sheet

Cash, cash equivalents and marketable securities were $134.3 million at the end of the fourth quarter, up 15.3% year over year.

Our Take

Quality Systems runs a pure-play business model, in an attractive industry, with a large number of catalysts, which provoke frequent speculation about mergers and acquisition. In recent times, the company has not only well managed its ambulatory clinical deals but, in addition, has nicely executed several enterprise contracts. Also, on the positive side, we derive comfort from the high proportion of recurring revenues and steady growth in its NextGen pipeline.

However, competition is intense from well regarded players such as Athenahealth (ATHN - Analyst Report), Allscripts Healthcare Solutions (MDRX - Analyst Report), Cerner Corporation (CERN - Analyst Report) and others. Price discounting is frequent, particularly on 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.

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