Looking beyond the headlines, the numbers are still convincing. Gross and net margins improved, both sequentially and year over year, to 62.5% and 16.5%, respectively. The magnified increase in profits relative to the increase of sales was a result of Quality Systems maintaining its cost of sales, even as volumes increased. Year over year, the number of shares outstanding increased by 2.3%, which is not ideal, but acceptable in a tech company.
The balance sheet still looks great, with no debt and cash increasing by $15 million over the last year. Year-over-year accounts receivable are up by 16%, a perfectly acceptable value for a company that's growing sales by 25% annually. An increase in deferred service revenue to $17 million will help ensure reliable earnings in the future.
At a price in the mid-40s, Quality Systems has a trailing price-to-earnings ratio approaching 30. This seems high, but considering Quality Systems' growth rate, it's reasonable if the company is able to maintain its current growth for several years. There seems to be the potential for it to do exactly that.
First, the market isn't close to saturated, with only about 10% of physicians having electronic medical records. Second, EMRs are becoming important because they have the potential to both save lives and money. Their significance was highlighted yesterday when EMRs were raised as an issue in the presidential elections.
Third, technological barriers to adoption are disappearing. Conversations with doctors indicate that entering patient information using a laptop is still not the ideal solution. In addition to the time it takes to type everything in, the audible clicking of the keyboard and the way the laptop screen sticks up becomes a barrier between the physician and patient in communication.
One concern is the potential for larger companies like McKesson
Quality Systems is one of Tom Gardner's Motley Fool Stock Advisor recommendations. You can sign up, risk-free, to learn more about Quality Systems or Tom's other recommendations.
Fool contributor Richard Gibbons does not own any of the securities mentioned in this report.