Quality Systems 3Q Tops Consensus

Shares of Quality Systems Inc. surged Wednesday, as the medical records and billing software maker reported better-than-expected results for its fiscal third quarter.

Shares rose $4.64, or 15.4 percent, to $34.74 in afternoon trading, having earlier risen to $36.30. Over the past 52 weeks, the stock has ranged between $26.08 and $45.35.

Late Tuesday, the Irvine, Calif.-based company said quarterly net income rose 29 percent to $11.2 million, or 40 cents per share, from $8.7 million, or 32 cents per share, a year ago. Quality Systems said earnings benefited by 3 cents per share from life insurance proceeds and associated compensation expense related to the passing of Greg Flynn, the company's general manager.

Revenue climbed 25 percent to $48.1 million from $38.5 million in the 2007 period.

The results beat consensus estimates of analysts polled by Thomson Financial, who expected earnings excluding items of 36 cents per share on revenue of $46.8 million.

Leerink Swann & Co. analyst Bret Jones said better-than-expected system sales accounted for the revenue upside. He thinks the strong quarter should pacify investor concerns about a slowdown in the ambulatory segment, spending on which he thinks will reaccelerate in 2008. He maintained an "Outperform" rating on the stock.

Thomas Weisel Partners LLC's Steven Halper also reiterated an "Overweight" rating on shares, noting the company had a strong quarter despite having fewer sales reps. While the reduction from 67 to 58 reps has concerned investors, Halper said management indicated the cuts were largely intentional and considered a necessary move to boost efficiency within the department.

"We are not that concerned about the reduction; the company still wants to grow the sales department, albeit from a smaller base," Halper said in a note to clients.

Deutsche Bank-North America analyst Ross Muken said Quality Systems had a "record" quarter in its NextGen Healthcare Information Systems division, which makes electronic medical record and practice management systems for medical practices.

However, he backed a "Hold" rating on the stock, noting that gross margins were down slightly due to higher hardware and third-party software sales and lamenting that company again offered no forward-looking guidance to improve visibility. Muken lowered his price target to $34.