A long-simmering feud between Quality Systems Inc.’s management and a dissident director has flared anew in the aftermath of the company’s disappointing quarterly financial results.
Investor Ahmed Hussein, who owns about 17% of the Irvine-based medical software company, is backing a slate of new directors for Quality’s board after the company lost about a third of its market value in late July. Hussein, who lives in Egypt, contends a different board is needed to ensure strong performance at the company.
The director said his investment in Quality has fallen to a market value below $150 million, compared to more than $400 million in February.
“My entire motivation in this proxy contest has been to further [Quality’s] success both for my own investment and the rest of the shareholders,” Hussein said. “The company’s recent communications attempt to divert your attention from the miserable financial performance of the company by making irresponsible attacks on my motives and integrity.”
Quality, which makes software that doctors and dentists use to manage their practices, last week sent a letter to its shareholders detailing a plan to create additional share value. It came with a recommendation from Haverford, Pa.-based proxy research firm Egan-Jones Ratings Co. to vote for the company’s slate of nominees to its board.
Quality claimed Hussein violated the company’s insider trading policy by pledging shares in margin accounts.
Meantime, Chief Executive Steven Plochocki said Hussein and his slate of nominees have offered no credible plan for creating value for Quality shareholders.
“His business plan is similar to ours,” Plochocki said in an interview last week.
In an interview last week, Hussein denied that he sold shares and caused the big plunge in Quality shares. The value of his own investment plunged by $330 million during the period, he noted.
“I wasn’t highly leveraged, and the brokers got nervous and sold without my orders or anything like that,” he said.
Hussein again questioned Quality management’s ability to improve operations at the company.
“The management is saying they have a plan for action,” he said. “Well, what kind of plan? I didn’t see it (and) I’m a board member.”
Quality is set to hold its annual shareholders meeting on Aug. 16.
This year’s proxy fight is the fourth in eight years between Hussein and Quality. The businessman also launched fights in 2005, 2006 and 2008, with mixed results.
The most recent battle ignited after Quality reported financial results that missed analysts’ projections for the three months ended June 30. Plochocki said the company wouldn’t reaffirm its previous guidance for the 12 months ending in March 2013 because of “evolving conditions affecting our industry and uncertainty in predicting future results.”
Quality reported a profit of $15.5 million in the June quarter. That was 18% less than a year earlier and below consensus analyst estimates of $20.8 million.
Revenue came in at $118.3 million, or 18% higher than the three-month period ending in June 2011. Wall Street expected Quality’s revenue to come in at $120.6 million for the period.
Quality has been a comet among Orange County companies’ stocks for more than a decade. Its share price had risen more than 1,000% since the start of 2000 before recent events.
• Headquarters: Irvine
• Business: medical software
• Founded: 1974
• Ticker symbol: QSII (Nasdaq)
• Fiscal 2012 revenue: $429.8 million
• Recent earnings: $15.5 million for June quarter
• Market value: about $975 million
• Notable: shed two thirds of market value after company reined in Wall Street guidance
Stimulus Boost
Events fueling Quality’s rise included the Obama administration’s economic stimulus package passed in 2009 and federal healthcare reform passed in 2010. That reform gave doctors financial incentives to adopt electronic medical records.
Quality Chairman Sheldon Razin (see related story in special report, beginning page 31) once described the stimulus package as “pouring gasoline on a fire.”
The company’s overall results “were impacted by lower-than-expected revenue from large, higher-margin software system sales,” Plochocki said.
Quality is “going through a period of deceleration,” after the government delayed deadlines for healthcare providers to reach certain levels of proficiency in using electronic medical records, he said.
There’s also been some consolidation in the market that Quality Systems serves.
Quality relies on a large number of independent doctors to buy its software and services, and those doctors are increasingly choosing to join physician groups.
Doctors’ groups, in turn, are being bought by hospitals in an effort to streamline costs, according to an article on the Motley Fool investor website.
Analyst Eric Coldwell of Milwaukee investment bank Robert W. Baird & Co. said in a research note that it was “hard to ignore company-specific” issues that are affecting Quality.
Coldwell said those included “clear signs of organizational distress including an ongoing proxy battle for control of the board and mounting competitive pressures as evidenced by recent HMA contract loss.”
Service Contract
He was referring to Naples, Fla.-based Health Management Associates’ decision to sign a back-office information technology service contract with Quality competitor Athenahealth Inc. of Watertown, Mass., this month.
“We did not hear enough mea culpa—they are intent on continuing their M&A strategy to drive growth, off-shoring to lower expenses and relying on international expansion … i.e., more of the same,” wrote Sean Wieland of Piper Jaffray & Co. in Minneapolis.
Wieland said he believed Quality’s market is saturated, forcing the company “to come downstream where there is a lot more competition and high price sensitivity.”
Plochocki has spent a lot of time talking with institutional investors and other shareholders since Quality came out with its earnings report.
“I had calls scheduled all week,” he said.
