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Quality Systems Soars as Earnings Double

By Dan Caplinger – May 21, 2015 at 2:52PM

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The healthcare information-technology company has cashed in on a huge trend.

Image: Quality Systems.

The healthcare industry has transformed itself in the past several years, as reform efforts have resulted in massive changes throughout the universe of providers. One key trend driving change has been in information technology as it pertains to the industry, and a variety of businesses, including Quality Systems (NXGN -1.10%), have worked to help medical professionals and other healthcare providers get up to speed on electronic medical records and other crucial technology initiatives. Coming into Thursday morning's fiscal fourth-quarter financial report, shareholders had high hopes for the company, but Quality Systems did even better than most of them had anticipated. Let's look at how Quality Systems fared for the quarter and its full fiscal year and what is ahead for the company.

Quality Systems produces quality results
Quality Systems grew impressively during its most recent quarter. Sales climbed 11% to $128.4 million during the three-month period, and the company finished its fiscal year with roughly 10% overall revenue growth. Net income doubled to $10.7 million, and even after making some modifications to its generally accepted accounting principles numbers, earnings of $0.21 per share were more than a nickel higher than investors had anticipated from the healthcare IT specialist.

Growth was consistent across the company's various offerings. System sales climbed higher by almost 5%, as software and hardware revenue rose at a slightly faster pace than what Quality Systems gets from implementation and training services. The revenue cycle management business achieved the fastest growth, with sales rising 29% over the past year, and strength in electronic data interchange services and maintenance-related revenue also boosted overall top-line figures.

Just about the only concerning element of the Quality Systems report came from full-year earnings numbers, where adjusted earnings dropped more than 10% to $0.62 per share. Yet the company noted that those figures were largely due to a huge increase in research and development spending, with R&D costs rising by two-thirds and supporting Quality Systems' longer-term growth going forward.

Image: Quality Systems.

CEO Steven Plochocki expressed enthusiasm about the results. In the earnings press release, he attributed much of the company's revenue growth to "the impact of our broad-based market offerings, which now span nearly 30 products and services directly aimed at the evolving value-based Accountable Care Organization model." With the need for doctors and other healthcare professionals to manage both their patient rolls and their interactions with insurance companies and other payers, Quality Systems believes it is well positioned to evolve along with the industry more broadly.

What's next for Quality Systems?
Plochocki also has high hopes for certain parts of the company's business as fiscal 2016 begins. In particular, the CEO highlighted the continuing important role of the revenue cycle management business, particularly given the changes in how programs such as Medicare intend to pay medical professionals in the years to come. Ensuring that physician organizations provide high-quality healthcare while also maintaining themselves as functional and successful businesses increasingly requires technology products such as those offered by Quality Systems, and the growth potential there is still high.

Quality Systems should also benefit from changing regulatory conditions. The industry has been switching to a new diagnostic coding set in order to match up with the new 10th revision of the International Classification of Diseases. What is known as ICD-10 is substantially different from the older ICD-9 standards, and the American Medical Association and other key groups have asked for more time before ICD-10 implementation takes effect. Nevertheless, the new coding system will be enacted eventually, and Quality Systems can seize that as an opportunity not just to help with revenue cycle management but also to cross-sell its other offerings.

Investors were extremely pleased with Quality Systems' results, with shares jumping almost 10% in the first couple hours of pre-market trading following the announcement. With so much potential for growth, it's really up to Quality Systems to figure out how to position itself to take maximum advantage of its opportunities and grab as big a piece of the growing healthcare IT pie as it can.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Quality Systems. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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