NextGen Healthcare Information Systems, a full subsidiary of Quality Systems ( QSII - Analyst Report ) , and Dell ( DELL - Analyst Report ) recently revealed an agreement with Puerto Rico Hospital Supply, Inc. to jointly sell high end technology offerings to medical providers in the Caribbean and Florida.

The agreement includes the possibility to expand into South and Central American nations. According to NextGen, Puerto Rico Hospital Supply’s hold in the Latin American and Caribbean markets, in conjunction with Dell’s worldwide presence, will allow it to penetrate these markets.

As per their understanding, Puerto Rico Hospital Supply will bring to market several NextGen solutions as parts of Dell’s Electronic Health Record (EHR/EMR) offerings for outpatient and inpatient settings. Dell will use up-to-date cloud-based know-how to reduce complications with data management for Puerto Rico Hospital Supply.

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. On the positive side, we observe the high proportion of recurring revenues and steady growth in its NextGen pipeline.

Of late, however, growth of its pipeline metric has been on a falling trend along with progressively lower number of signed deals on a quarterly basis.

The company has made multiple acquisitions to bolster organic growth. Its acquisitions are expected to facilitate its entry in the small hospital segment. We are concerned about execution risk emanating from Quality Systems’ entry into the rural inpatient market.

Moreover, 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.

Our Underperform recommendation is supported by a short-term Zacks #5 Rank (Strong Sell).