What happened

Shares of Healthcare Services Group (NASDAQ:HCSG) are down 10% as of 1:07 p.m. EDT after the hospital outsourcing company released disappointing second-quarter results.

So what

Revenue came in at $503.7 million, up 7% from the prior-year period. Most of the gain came from dining services it provides to hospitals; housekeeping services only increased marginally. The year-over-year growth was a slowdown from the first quarter, when revenue increased 24% year over year, but that was to be expected since Healthcare Services Group expanded its business in the second quarter of last year.

Unfortunately, costs at Healthcare Services grew even faster than revenue, so operating profit was up just 1.4%. On the earnings line, the company brought in $0.35 per share, an increase of 17%, but that was entirely due to paying less tax, which isn't exactly a growth strategy that investors can expect year after year.

The board of directors upped the quarterly dividend to $0.19375 per share, up a fraction of a penny compared to the $0.19250-per-share dividend in the first quarter.

Nurse giving a patient a tray of food

Image source: Getty Images.

Now what

Whether this is a buying opportunity is dependent on whether Healthcare Services Group can increase its margins, especially its gross margin, which came in at 13.1% in the first quarter. The company has a goal to increase gross margin to 14%, which would help juice operating profit and earnings.

In order to grow its revenue, Healthcare Services Group also needs to convince more hospitals to outsource their dining and housekeeping services. There's plenty of opportunity given the vast majority of hospitals run the services in-house, but it'll take time to convince them that outsourcing is more practical.