Doctors continue to implement next-generation healthcare information-technology solutions to bolster efficiency and improve patient health. Key player Quality Systems' (NASDAQ:NXGN) fiscal third-quarter results show that while the company might be turning the corner back to growth, there's still plenty of work to do to win market share from industry leaders Epic Systems and Allscripts (NASDAQ:MDRX).
Turning a corner?
QSI's top-line results were solid, with the company reporting that sales grew 13% year over year to $123.4 million. The third quarter lifted sales through the first three fiscal quarters to $361.8 million, up from $329.5 million in the comparable period of fiscal 2013.
Sales growth was driven primarily by maintenance contracts for the company's healthcare IT solutions, rather than system sales. QSI's year-over-year revenue from maintenance grew by 8.25% in the quarter, while system sales grew by 4.37%.
The return to system sales growth, however, is encouraging given that sales had been falling. In the fiscal second quarter, system sales slid 9% versus the prior year, and year-to-date system sales of $62.28 million remain below last year's $65.01 million. That has caused concern among investors that the company's future recurring maintenance and service revenue could drop.
While one quarter does not equal a trend, building on the system sales improvement notched last quarter could signal the company's market share has at least stabilized.
Dropping to profit
QSI's restructuring to rein in cost and drop more money to the bottom line paid off in the fiscal third quarter.
The company reported that total operating expenses fell to 49.3% of sales from 52.5% of sales in the previous year; as a result, net income per diluted share improved to $0.16 from $0.11 a year ago.
The pickup in profitability is particularly encouraging given that QSI is spending increasingly more money on research and development to outmaneuver market share leaders Epic Systems and Allscripts. In the quarter, QSI plowed 14.96% of its sales back into R&D, versus 12.1% the year before.
Despite the spending on R&D, the company's balance sheet remains solid with $113.6 million in cash and cash equivalents and no debt. That suggests its dividend remains safe.
One of the bright spots in QSI's quarter was the sales growth recorded for its revenue cycle management products, which help doctors manage billing and payments.
Sales of those products climbed 8.25% to $20.4 million. Management believes QSI and its peers have only grabbed 20% to 25% of the $50 billion market for revenue cycle management products, so sales of those products should continue to offer tailwinds. Additionally, QSI also has a solid client base of 90,000 physicians to which it can cross-sell its revenue cycle management products. So far, QSI's revenue cycle management penetration into its existing ambulatory client base stands at just 5%.