Healthcare providers appetite for technology that allows for the electrification of patient health records, practice and processes, and data analytics led to 9% year-over-year sales growth for Quality Systems (NASDAQ:NXGN) in its fiscal second quarter ending September. That improvement outpaced the 8% year-over-year growth recorded in the company's fiscal first quarter.

QSI's sales, which are driven primarily by 90,000 physician clients, reached a record $120.5 million last quarter, slightly ahead of analyst expectations for $119.5 million. However, rising costs weighed down net income, resulting in non-GAAP EPS of just $0.13, which came in a penny shy of analysts' projections and marked a steep drop from the $0.22 the company earned in the same quarter a year ago.

Walking through sales
QSI has seen its revenue grow nicely since the implementation of provisions as part of healthcare reform that offer a carrot-and-stick approach for healthcare provides to begin implementing IT solutions. Thanks to the HITECH Act and Meaningful Use legislation, providers have scurried to implement or replace out-dated systems to track patient health and improve scheduling, billing, and receivables.

Source: Quality Systems

As a result, QSI's order backlog continues to grow, reaching a record $161.8 million last quarter; it's eighth consecutive quarter of improvement.

However, despite the tailwinds from growing industry adoption of healthcare IT, competitive pressure from market leaders Epic and Allscripts (NASDAQ:MDRX) continues to weigh down system, software, and training revenue.

Source: Quality Systems

Instead, QSI's sales growth last quarter came from maintenance contracts and that's potentially worrisome given that falling system revenue, which declined from $23.4 million to $21.3 million year-over-year, could lead to lower maintenance revenue in the future. One bright spot; however, came in the form of rising demand for QSI's revenue cycle management solutions which saw sales improve from $15.5 million a year ago to $17.4 million this past quarter.

Dropping to profit
QSI's competitors continue to pressure it on both product innovation and price. So QSI is in the midst of a restructuring that it hopes will eventually allow it to deliver more of its sales growth to the bottom line.

Cost saving is particularly important given that QSI is bumping up its R&D investment to keep pace with peers. R&D spending grew from $7.6 million last year to $16.9 million last quarter, contributing to operating expenses climbing from $47.4 million to $56.5 million in the past year. That led to operating income falling from $15.9 million a year ago to $7.3 million last quarter.

Source: Quality Systems and author's calculation

Although competitive pressure remains, QSI's balance sheet appears in good shape with no debt and cash on hand totaling $123.5 million. That suggests that its dividend payout, a key differentiator from its industry peers, is safe. Currently, QSI's dividend payout stands at an annualized $0.70 per share, giving it an attractive forward dividend yield of 5.1%.

Looking ahead
Many healthcare providers have yet to embrace the latest generation of healthcare IT solutions, which means that they face significant interoperability headaches between legacy systems and offerings from competitors like Epic and Allscripts. QSI has an opportunity to solidify its client base and win away business from smaller, legacy providers -- if it can execute. Given the company's ramp in R&D it would seem they feel confident they can; especially in the areas of revenue management, a market which QSI estimates is worth $50 billion and is significantly underpenetrated, and population analytics, which can help drive patient treatment plans.