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Quality Systems (QSII) Beats on Earnings & Revenues in Q2

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Quality Systems Inc. QSII reported second-quarter fiscal 2018 adjusted earnings of 22 cents per share, beating the Zacks Consensus Estimate by 6 cents. However, adjusted earnings deteriorated 4.3% on a year-over-year basis.

Revenues totaled $132.6 million, outpacing the Zacks Consensus Estimate of $131 million. Revenues also increased 4.7% on a year-over-year basis.

Quality Systems carries a Zacks Rank #4 (Sell).

Segment Details

Total software, hardware and related revenues increased 1.5% to $39.3 million, primarily driven by a 16.3% rise in software-related subscription services. However, growth at this segment was partially offset by lower software license and hardware sales, which declined almost 17% in the quarter. The company expects software license and hardware revenues to remain under pressure for the remainder of the fiscal.

Support and maintenance revenues in the quarter totaled $41.7 million, up 7% on a year-over-year basis. Revenues at this segment were driven annual price increases.

Professional services revenues increased 9.9% to almost $7.7 million. The year-over-year increase was led by transfusion services. However, the rise was offset by a decline in sales of software products.

Coming to electronic data interchange (EDI) services, revenues increased 6.4% on a year-over-year basis to almost $23 million.

Meanwhile, the company’s revenue cycle management (RCM) business revenues inched up 0.3% to $21 million in the quarter under review.

Quality System’s recurring revenues were driven by contributions from subscription, support and maintenance, RCM and EDI. In the second quarter, recurring revenues reached a record level of 83% of total revenues.


Quality Systems, Inc. Price, Consensus and EPS Surprise



Quarter Highlights

EagleDream & Entrada Hold Promise: In August, Quality Systems completed the acquisition of EagleDream Health Inc. for roughly $26 million in cash. EagleDream Health is a cloud-based analytics company that optimizes understanding across clinical, financial and administrative data to enhance practice performance.

Following the acquisition, NextGen Healthcare, a wholly-owned subsidiary of Quality Systems, gained facilities to provide enriching care experience and accelerate patient engagement for ambulatory clinics and health systems. Management further expects to achieve per capita cost efficiency as well as enhanced work-life balance for clinicians and staff in the quarter to come (read more: Quality Systems Completes EagleDream Health Buyout).

Entrada’s pipeline has been offering new deals to Quality Systems for quite some time now. Earlier this year, NextGen Healthcare had acquired Entrada for $34 million. Per the second-quarter fiscal 2018 results, Subscription revenues were significantly up on strength in Entrada. We believe the acquisition will prove accretive over the long haul.

Bookings Decline: Quality Systems registered bookings worth $26 million, down 24% on a year-over-year basis. Per management, subscription bookings continued to be a steady contributor to second-quarter bookings. However, headwinds in the perpetual license bookings marred bookings growth in the quarter.

Margin Details

Quality Systems’ gross margin remained flat on a year-over-year basis at 56% of net revenues in the reported quarter.

Coming to operating expenses, the company recorded selling general & administrative (SG&A) expenses of $41 million, down from $42.8 million a year ago. As a percentage of revenues, SG&A expenses in the second quarter were 69%, up 260 basis points (bps) on a year-over-year basis.

Meanwhile, research and development (R&D) costs totaled $19.5 million, expanding 40 bps year over year. R&D expenses rose in the second quarter on the back of incremental personnel costs, offset by increased software capitalization.


For fiscal 2018, the company projects revenues in the band of $522-$530 million, up from the previously issued range of $512-$530 million.

Adjusted earnings per share are projected in the range of 64 cents to 68 cents, compared with the previous 62 cents to 70 cents.

Our Take

Quality Systems posted a stellar second quarter of fiscal 2018, beating the Zacks Consensus Estimate on both the counts. We are particularly upbeat about the company’s solid performance with regard to total software, hardware and related revenues. Quality Systems’ solid recurring revenue base is a key catalyst for the quarters to come. Furthermore, the company’s new Entrada and Eagle Dream solutions are likely to drive growth. On the flipside, ongoing sluggishness in the RCM customer base, intensifying competition and a strict regulatory environment are likely to mar the top line. Furthermore, management slashed the high end of the fiscal 2018 earnings guidance, signaling at looming concerns. The company expects software license and hardware revenues to remain under pressure for the remainder of the fiscal.

Companies With Solid Earnings Results

Intuitive Surgical Inc. (ISRG - Free Report) posted adjusted earnings of $2.77 per share in the third quarter of 2017, beating the Zacks Consensus Estimate of $1.97 on stellar revenue growth. The stock has a Zacks Rank #2 (Buy).

PetMed Express, Inc.’s PETS adjusted earnings per share of 43 cents for the second quarter of fiscal 2018 were up 79.2% from the year-ago quarter. Also, earnings surpassed the Zacks Consensus Estimate by 43.3%. The stock has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Cerner Corporation CERN promises a long-term expected earnings growth of 13.8%. In the just-reported third quarter, Cerner registered revenues of $1.29 billion, up 7.7% on a year-over-year basis. The stock carries a Zacks Rank #2.

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