Apr 11, 2018
Quality Systems Inc. (QSII – NASDAQ) $13.57
Note: This report contains substantially new information. Subsequent reports will have changes highlighted.
Reason for Report: 3Q18 Earnings Update With Estimate Revisions
Prev. Ed.: Nov 21, 3Q17 Earnings update with estimate revisions
Firms’ Recommendations: Positive: 13.3% (2 firms); Neutral: 53.3% (8); Negative: 33.3% (5); Prev. Ed.: 2; 9; 3.
Firms Target Price: $14.04 (↓ $14.61 from the last edition; 9 firms); Firms’ Avg. Expected Return: 9.3%.
* Note: Though dated Mar 07, 2018 share price and broker materials are as Mar 05, 2018.
* *Note: A Flash Update on 4Q17 earnings was done on Feb 19, 2018
Note: Although the company has five negative and two positive ratings from firms, no similar brokers’ reports were found.
Portfolio Manager Executive Summary
Quality Systems Inc. (QSII) is a developer and marketer of software systems for physician practice offices, other outpatient settings, dental practices and smaller hospitals. The company is a significant provider of electronic medical records and electronic health records (EMR/EHR) in ambulatory care settings with its NextGen product suite.
Of the 15 firms rating the stock, 8 firms (53.3%) assigned neutral ratings, 5 firms (33.3%) provided negative ratings and 2 firms (13.3%) conferred positive ratings. Target prices range from $12.00 to $17.00.
Neutral Outlook (9/14 firms): Firms believe, Quality Systems will continue to benefit from strong demand for its other NextGen solutions that include Hospitals, EHR and practice management. The acquisitions of Entrada and EagleDream are also likely to be strategic for Quality Systems, according to these firms. Firms are also positive about the new changes made by the company’s CEO, which are already believed to be in progress. On the contrary, firms anticipate falling earnings per share for the rest of FY18 and also pressured margins owing to negative mix shift.
Conclusion: Quality Systems is positive about the recent developments in its product line and current acquisitions. However, pressed margins continue to raise concern. Also, the M&A strategy might generate integration costs.
Jul 24, 2017
© Copyright 2017, Zacks Investment Research. All Rights Reserved. Overview
Quality Systems, Inc. (QSII) and its subsidiary NextGen Healthcare Information Systems, Inc. are engaged in the development and marketing of healthcare information systems that automate medical and dental practices, smaller hospitals, physician hospital organizations and management service organizations, ambulatory care centers, community health centers, and medical and dental schools. It offers proprietary electronic medical records software and practice management systems under the NextGen3 product name. The company was founded in 1974 and is headquartered in Irvine, CA.
Further information on the company can be found at its website: www.qsii.com.
Firms identified the following factors for evaluating the investment merits of QSII:
Key Positive Arguments Key Negative Arguments The Healthcare Information Technology Pipeline is improving and lead counts (HCIT) market is competitive and are increasing on the back of fragmented. QSII competes with better- meaningful improvements by CEO. capitalized companies, including GE, McKesson, and Cerner. The RCM services segment is considered to be a significant growth driver. Negative mix shift is likely to keep margins under pressure for several Entrada and EagleDream acquisitions quarters ahead. diversify the company’s product base. A downbeat guidance for earnings per Quality System’s strategic alternative share in 2018 is discouraging. is considered to be a potential upside for the company.
Quality Systems operates its business through four divisions: the QSI Dental, NextGen, Hospital Solutions and the RCM Services.
However, in 1Q16, QSII changed its reported revenue segments. Instead of reporting a system sales line, the company now reports software, hardware and related revenue together.
QSI Dental Division: The company’s QSI division markets and develops software for dental practices in the U.S. Practice management software at this division automates functions such as patient scheduling and registration, accounts receivable, billing, and management reporting. Its new SaaS software solution, the QSIDental Web is being sold to multi-location group practices in which the division has historically been a leading player. Moreover, QSIDental along with the NextGen Division provides software and services to Federally Qualified Health Centers (FQHC), considered to be safety net entities. Further, its Clinical Product Suite (CPS) integrates the dental practice management product with a clinical information system. The QSI Dental Division also sells EDI services to dental practices, including electronic submission of claims to insurance providers as well as automated patient statements.
Zacks Investment Research Page 2 www.zacks.com NextGen Division: This segment develops integrated clinical, financial and connectivity solutions for ambulatory and dental provider organizations. The major product categories include the NextGen Ambulatory product suite and NextGen Community Connectivity. NextGen is also moving forward with e-learning and computer-based training programs.
Hospital Solutions Division: This division provides integrated clinical, financial and connectivity solutions for rural, community and specialty hospitals. It is also engaged in the development of revenue cycle management and clinical information systems software products for the small and specialty hospital market. The companyQuality Systems acquired a number of companies in the recent past such as Poseidon, CQI Solutions, IntraNexus, Opus, and Sphere to operate under this division to serve the inpatient market.
RCM Services Division: The RCM Services Division provides technology solutions and consulting services by combining a Web-delivered SaaS model and the NextGen Practice Management software platform to healthcare providers requiring RCM services. In 2012, the company acquired Matrix Management Solutions to expand its reach among private and hospital-based physicians and groups by leveraging Matrix’s RCM expertise.
Note: Quality Systems’ fiscal year ends on March 31. Jul 24, 2017
Long-Term Growth
Firms believe that new CEO’s positive changes are already in progress. They further believe that the previously identified growth levers are on track with the EagleDream acquisition. Both Entrada and EagleDream are likely to serve as add-on products. Thus, in the long run the company is likely to up-sell their client base.
Firms further expect to see benefit of tax reform on earnings in the long-run.
According to the bullish firms, Quality Systems considers its RCM segment as an important long-term growth driver with decent pipeline and bookings signaling better organic growth ahead. Also, there lies a substantial cross-selling opportunity, with just around 10% penetration of 85,000 physician base.
Long-term contracts with Quality Systems’ Ambulatory enterprise clients indicate success of the company’s cross-selling efforts and is expected to induce future growth in this segment. The bullish firms believe that realigned incentives for the sales force should improve the mix of long- term contracts and market tailwinds should further drive renewed customer focus on RCM.
Jul 24, 20
17
Target Price/Valuation
Rating Distribution Positive 13.3%↓ Neutral 53.3% ↓
Zacks Investment Research Page 3 www.zacks.com Negative 33.3%↑ Avg. Target Price $14.04↓ Maximum Target $17.00 ↑ Minimum Target $12.00 Upside from current 9.3% No. of Analysts with Target 12 price
Recent Events
On Jan 25, 2018, Quality Systems announced 3Q18 financial results. Highlights are as follows:
Revenues increased 3% to $131.7 million. Adjusted EPS decreased 34.8% on a year-over-year basis to 15 cents.
On Mar 27, Quality systems announced that several of its solutions received Certified status, meeting federal and state regulations for information use and exchange by HITRUST.
On Mar 1, Quality Systems unveiled its new corporate logo and brand identity, following years of recent acquisitions that expanded the company’s offerings in the rapidly evolving data analytics and mobile solutions spaces.
On Feb 13, Quality Systems announced that the company’s direct messaging solution-Mirth Mail 2.10 has achieved 2015 Edition ONC-ACB EHR Certification via Drummond Group LLC, an Authorized Certification Body (ACB).
On Feb 6, Quality Systems received the 2018 Best in KLAS award most improved vendor for EHR – over 75 Providers.
Revenues
Revenues for 3Q18 totaled $131.7 million, which increased 3% y/y.
Revenues ($ 3Q17A FY17A 2Q18A 3Q18A 4Q18E FY18E 2019E 2020E in M) Digest High $127.9 $509.6 $132.6 $131.7 Digest Low $127.9 $509.6 $132.6 $131.7 Average $127.9 $509.6 $132.6 $131.7 Y/Y Growth 9.3% 3.5% 4.3% 3.0% Q/Q Growth 0.6% 1.3% -0.7%
Segment Details
Total Software, Hardware and Related: Revenues in this segment declined 4.3% y/y, amounting to $37.82 million. Subscription revenues of $24.7 million increased 10% y/y.
Zacks Investment Research Page 4 www.zacks.com Support and Maintenance: Revenues improved 1.1% y/y, to $40.36 million. However, the figure declined sequentially.
Professional Services: Revenues in this segment increased 29% y/y to $8.5 million.
Electronic Data Interchange: Revenues in this segment grew 6.2% y/y to $23.1 million.
Revenue Cycle Management (RCM): Revenues in this segment increased 9.3% y/y to $21.9 million. In 3Q18, nine new RCM deals were signed, of which two were entirely new clients to the company as a whole.
Quarter Highlights
EagleDream Acquisition: A Major Positive
Recently, Quality Systems acquired EagleDream, a software analytics solutions company. It was incorporated in the company’s operations in 3Q18. In 3Q18, the company closed 10 deals across a broad product spectrum of accounts, both by specialty and geography. It has also led to a swift uptake in interest from the company’s user base around EagleDream. Thus, Quality Systems witnesses deal flow and significant interest from the integration of EagleDream.
Bookings Strengthen
A sequential 17% increase in bookings majorly drove sales in 3Q18, which amounted to 30.5 million.
Interoperability Framework
The company’s framework is suitable for its software to exchange and make use of the information. Per management, the company had more than 100 clients integrated into the national care quality framework for interoperability, as of Dec 31. Further, more clients are being added each month post the upgrade. It ensures that patient data is transportable not just within the company database, but also across the industry.
Financial Condition
The company exited 3Q18 with 23.4 million in cash and equivalents and 39 million in outstanding against revolving credit agreement at the end of the quarter. Quality Systems continues to be well positioned in terms of financial flexibility with 189 million available in total liquidity.
Guidance: For FY18, the company reiterated revenue outlook at the range of $522-$530 million.
Outlook: Firms believe that the company will be experiencing trimmed revenue figures in FY19.
Margins
Zacks Investment Research Page 5 www.zacks.com Gross profit for 3Q18 totaled $70.1 billion and gross margin is at 53.2%. Gross margin declined 429 basis points (bps) y/y. The decline is mainly due to a general shift to lower margin subscription revenues.
RCM margins are too compressed as the company invested for future efficiencies and witnessed some headwinds this quarter from personnel expenses.
Operating expenses surged due to investment in sale and marketing as well as acquisitions, partially.
Margins 3Q17A FY17A 2Q18A 3Q18A 4Q18E FY18E 2019E 2020E
Gross 58.0% 56.7% 56.1% 54.0% Operating 42.2% 41.4% 39.8% Pre-Tax 16.2% 14.3% 15.4% 10.3% Net 11.2% 10.0% 10.7% 7.1% Outlook: Per firms, margins will remain under pressure in the quarters ahead.
Please refer to Zacks Digest spreadsheet on QSII for further details on margins.
Earnings per Share
Quality Systems (QSII) reported third-quarter 2018 (3Q18) adjusted earnings per share of 15 cents. However, adjusted earnings per share declined 34.8% on a year-over-year basis (y/y).
EPS 3Q17A FY17A 2Q18A 3Q18A 4Q18E FY18E 2019E 2020E Digest High $0.23 $0.83 $0.22 $0.15 Digest Low $0.23 $0.82 $0.22 $0.15 Digest Average $0.23 $0.82 $0.22 $0.15 Y/Y Growth 43.6% 14.1% -4.2% -36.0% Q/Q Growth 0.0% 30.3% -33.3%
Guidance: The company reiterated its adjusted earnings per share at the range of 64-68 cents.
Outlook: Per firms, the adjusted earnings per share is likely to fall in FY18 but will recover in FY19.
Please refer to the Zacks Digest spreadsheet on QSII for further details on EPS.
Analyst Sreyoshi Mukherjee Copy Editor Parijat Sen Content Editor Nabaparna BHattacharya Lead Analyst Nabaparna BHattacharya QCA Urmimala Biswas Zacks InvestmentReason for Research Update 3Q18 Earnings Page 6 www.zacks.com Update Zacks Investment Research Page 7 www.zacks.com