We reiterate our Neutral recommendation on Quality Systems (QSII) taking into account its well-recognized brand name as a provider of Electronic Health Record (EHR). At the same time, the ambulatory space, which is of concern to the company, is becoming more crowded, especially at the low-end of the market.
The company reported first-quarter fiscal 2011 earnings per share of 42 cents, which were lower than the Zacks Consensus Estimate by a nickel, but better than the year-ago figure of 36 cents. Revenues came in at a record $82.9 million, up 24% year over year.
The pros and cons of investing in the company are held in balance. On the one hand, we are pleased with Quality Systems’ wide range of products, particularly those of its NextGen business, contributing to a somewhat diversified and growing revenue-base.
In this context, the company’s acquisition of Healthcare Strategic Initiatives and Practice Management Partners expanded its presence in the revenue cycle management market, thus contributing to revenue growth. More recently, acquisition of Opus Healthcare Solutions marked the company’s entry into the rural and community marketplace.
We are also encouraged by Quality Systems’ attempt to grow its recurring revenue base. At the same time, we remain concerned about the minor contribution from the smaller QSI Dental division.
The market for EHR is poised to take-off on account of incentives to be derived by medical practitioners under the American Recovery and Reinvestment Act (ARRA). We note that the clarification provided by the U.S. Department of Health and Human Services regarding “meaningful use” criteria will finally encourage small physician practices to engage in constructive decision-making regarding implementation of EHR.
However, the industry is highly fragmented and includes numerous players operating in multiple segments. Quality Systems competes with larger-vendors such as, General Electric (GE), Allscripts Healthcare Solutions (MDRX), and Cerner Corporation (CERN), among others.
Among other issues, Quality Systems’ sales force needs to be further strengthened before the company can take full advantage of the opportunity with smaller practices.