Quality Systems Inc., an Irvine-based healthcare software company that’s been an investor favorite in recent years, may have seen a cooling off lately with disappointing earnings. But analysts aren’t too shaken.
“To sum it up, we are disappointed in Quality’s quarterly performance but we remain confident in our view that the physician (healthcare software) market remains an attractive growth segment and that Quality remains well positioned to benefit from the growth of this market,” said Todd Weller and Scott Robinson of Stifel Nicolaus & Co., a St. Louis-based investment bank.
Quality makes software that doctors and dentists use to manage their practices. It’s seen tremendous growth as its software has replaced paper medical records.
Quality posted a profit of $7.9 million for the three months ended June 30, up 16% from a year earlier, but still short of analysts’ expectations. Wall Street was looking for a profit of $9 million.
Sales were up 17% to $42 million. Analysts expected revenue of $45.1 million.
The culprit: weak sales in its dominant NextGen division.
“We had a number of seven-figure deals forecasted for the quarter that we were not able to wrap up,” said Patrick Cline, NextGen’s division president, on a recent company earnings call. “As far as I know, none of these deals have been lost and at least a couple of these should fall into the current quarter.”
In terms of the deals, Weller and Robinson said that the ones that didn’t close “(appear) to represent more of a timing issue as opposed to material negative change in the physician market or Quality’s growth outlook.”
The company has two units that offer software: NextGen, which targets doctors and is based in suburban Philadelphia, and QSI Dental, a smaller subsidiary based in Irvine.
“The company’s growth is being driven by an overall push toward more IT spending by healthcare providers as a result of improving technology as well as a push from various government entities,” said Alexander Draper, an Atlanta-based healthcare information technology analyst with Raymond James & Associates Inc. of St. Petersburg, Fla.
Earlier this decade, Quality was among one of the fastest movers among Orange County’s public companies. The company was OC’s best-performing stock of 2005, recording a 161% gain.
So far this year, the company’s shares are down nearly 3%, giving it a market value of about $900 million at a recent check.
“Since the end of 2005, the stock has essentially traded sideways, albeit with a healthy amount of volatility,” Draper said.
Back when Quality reported its results, Draper wrote that he expected the stock to sell off.
“If the stock gets down as low as $35, we would view that as an attractive entry point” with profit expectations for the 12 months ending March 2008 of $38.1 million to $39.4 million, Draper said.
A main concern has been that analysts’ estimates have been too high, Draper said.
“The (recent) quarter may serve to temper expectations sufficiently such that the company can meet or beat them for the remainder of the year,” Draper said.
Meanwhile, Weller and Robinson said all signs remain positive for Quality. NextGen’s sales growth shows the demand “for physician IT remaining healthy.” In addition, they noted that Quality’s sales force grew to 63 from 58 in the previous quarter, along with investing in implementation and training.
As for guidance, don’t expect any soon,Quality doesn’t provide it.
“The company runs its business for long-term growth, not to meet near-term expectations,” Draper said. “Consequently, management is not trying to meet street targets, which can lead to quarterly volatility in results.”
Analysts expect the company to post a profit of $38.6 million with sales of $190.2 million for the 12 months through March 2008.
Separately, Quality said its NextGen ChartMail product would be interoperable with Microsoft Corp.’s highly touted HealthVault consumer medical records project.
ChartMail allows providers to send personal health records directly to their patients in a secure, authenticated manner, Quality said in a release.
Microsoft unveiled details about HealthVault at the beginning of this month. It is going to offer free personal online health data storage, as well as Internet searches for health topics. Microsoft has said it hopes that patients would allow their doctors, clinics and hospitals to submit information like prescriptions, blood pressure readings and cholesterol levels, to be made available online.
