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Quality Systems, Inc. Reports Fiscal 2014 Third Quarter Results

Quality Systems, Inc. (NASDAQ:QSII) announced today results for its fiscal 2014 third quarter ended December 31, 2013.

The Company reported revenues of $108.9 million for the third quarter ended December 31, 2013, a decrease of five percent versus $114.5 million reported in the third quarter of fiscal 2013. Net loss for the fiscal 2014 third quarter, partially impacted by the previously announced impairment charge in the Hospital Solutions Division, was $12.6 million versus net income of $15.6 million for the fiscal 2013 third quarter. On a GAAP basis, fully diluted loss per share for the fiscal 2014 third quarter was $0.21 versus earnings per share of $0.26 reported in the comparable quarter a year ago. On a non-GAAP basis, fully diluted earnings per share for the fiscal 2014 third quarter was $0.11, a decline of 62 percent from $0.29 for the comparable quarter a year ago (non-GAAP fully diluted earnings per share is reconciled to its corresponding GAAP measure at the end of this release).

The Company’s results reflect the previously announced impairment of certain long-lived assets in its Hospital Solutions Division, which resulted in a non-cash charge of $26.0 million in the quarter. Of this amount, $20.1 million is classified as a component of cost of revenue and the remaining $5.9 million is reflected as a component of total operating expenses. This impairment stems from operating results of the Hospital Solutions Division, which has performed below internal expectations. The Company remains committed to the hospital market and continues to make investments across its Hospital Solutions Division, including in areas such as implementation and training, infrastructure and support, customer service and software development.

During the quarter, bookings continued to improve. The Company also noted it continues to realize growth from its RCM Services Division and its new Mirth Corporation acquisition.

“As we continue to position the Company for growth and improved performance, it is important to recognize that NextGen Healthcare became one of the first electronic health record vendors in the nation to achieve ONC-HIT 2014 Edition Certification as a complete EHR, for both ambulatory and inpatient settings. This certification included meeting criteria for both the transition to ICD-10 and achieving Meaningful Use Stage 2. This is a key milestone as we help prepare our clients for these critical changes and position the Company for future success in the EHR and replacement markets as well as the small hospital arena,” said President and Chief Executive Officer Steven T. Plochocki.

“While we are disappointed in the performance of late in our Hospital Services Division, we believe in its long-term prospects and to this end, are investing accordingly. With the impairment now behind us, we are encouraged by cross-selling opportunities, particularly as the demand for revenue cycle services increases in light of the fast-approaching ICD-10 deadline. Additionally, we are gaining traction since our acquisition of Mirth, and its connectivity solutions are paving the way as our healthcare system shifts from fee-for-service to value-based, such as the evolving accountable care organization model. Our breadth and depth make it possible for our clients to succeed in this rapidly changing space,” Plochocki concluded.

Quality Systems also announced that its Board of Directors declared a quarterly cash dividend of Seventeen and One-Half Cents ($0.175) per share on the Company’s outstanding shares of Common Stock, payable to shareholders of record as of March 14, 2014 with an anticipated distribution date of April 4, 2014. The $0.175 per share cash dividend is pursuant to the Company’s current policy to pay a regular quarterly dividend on the Company’s outstanding shares of Common Stock, subject to Board review and approval, and establishment of record and distribution dates by the Board prior to the declaration and payment of each such quarterly dividend.

Quality Systems will host a conference call to discuss its fiscal 2014 third quarter results on Thursday, January 23, 2014 at 10:00 AM ET (7:00 AM PT). All participants should dial 1-866-900-9499 at least ten minutes prior to the start of the call and reference conference ID #34711885. International callers should dial 1-937-502-2136. To hear a live Web simulcast or to listen to the archived webcast following completion of the call, please visit the Company’s website at www.qsii.com, click on the "Investors” tab, then select "Conference Calls," to access the link to the call. To listen to a telephone replay of the conference call, please dial 800-585-8367 or 404-537-3406 and enter conference ID #34711885. The replay will be available from approximately 1:00 PM ET on Thursday, January 23, 2014, through 11:59 PM ET on Thursday, January 30, 2014.

A transcript of the conference call will be made available on the Company’s website at www.qsii.com.

About Quality Systems, Inc.

Irvine, Calif.-based Quality Systems, Inc. and its NextGen Healthcare subsidiary develop and market computer-based practice management, electronic health records and revenue cycle management applications as well as connectivity products and services for medical and dental group practices and small hospitals. Visit www.qsii.com and www.nextgen.com for additional information.

SAFE HARBOR PROVISIONS FOR FORWARD-LOOKING STATEMENTS

This news release may contain forward-looking statements within the meaning of the federal securities laws, including but not limited to, statements regarding future events, developments in the healthcare sector and regulatory framework, the Company's future performance, as well as management's expectations, beliefs, intentions, plans, estimates or projections relating to the future (including, without limitation, statements concerning revenue, net income, and earnings per share). Risks and uncertainties exist that may cause the results to differ materially from those set forth in these forward-looking statements. Factors that could cause the anticipated results to differ from those described in the forward-looking statements and additional risks and uncertainties are set forth in Part I, Item A of our most recent Annual Report on Form 10-K for the fiscal year ended March 31, 2013, including but not limited to: the volume and timing of systems sales and installations; length of sales cycles and the installation process; the possibility that products will not achieve or sustain market acceptance; seasonal patterns of sales and customer buying behavior; impact of incentive payments under The American Recovery and Reinvestment Act on sales and the ability of the Company to meet continued certification requirements; the development by competitors of new or superior technologies; the timing, cost and success or failure of new product and service introductions, development and product upgrade releases; undetected errors or bugs in software; product liability; changing economic, political or regulatory influences in the health-care industry; changes in product-pricing policies; availability of third-party products and components; competitive pressures including product offerings, pricing and promotional activities; the Company's ability or inability to attract and retain qualified personnel; possible regulation of the Company's software by the U.S. Food and Drug Administration; changes of accounting estimates and assumptions used to prepare the prior periods' financial statements; and general economic conditions. A significant portion of the Company's quarterly sales of software product licenses and computer hardware is concluded in the last month of a fiscal quarter, generally with a concentration of such revenues earned in the final ten business days of that month. Due to these and other factors, the Company's revenues and operating results are very difficult to forecast. A major portion of the Company's costs and expenses, such as personnel and facilities, are of a fixed nature and, accordingly, a shortfall or decline in quarterly and/or annual revenues typically results in lower profitability or losses. As a result, comparison of the Company's period-to-period financial performance is not necessarily meaningful and should not be relied upon as an indicator of future performance. The Company undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

USE OF NON-GAAP FINANCIAL MEASURES

This news release contains certain non-GAAP (Generally Accepted Accounting Principles) financial measures which are provided only as supplemental information. Investors should consider these non-GAAP financial measures only in conjunction with the comparable GAAP financial measures. These non-GAAP measures are not in accordance with or a substitute for, U.S. GAAP. Pursuant to the requirements of Regulation G, the Company has provided a reconciliation of non-GAAP financial measures to the most directly comparable financial measure in the accompanying financial tables. Other companies may calculate non-GAAP measures differently than Quality Systems, which limits comparability between companies.

The Company believes that its presentation of non-GAAP measures, such as non-GAAP diluted earnings per share and Days Sales Outstanding (“DSO”), provide useful supplemental information to investors and management regarding the Company's financial condition and results. The Company calculates non-GAAP diluted earnings per share by excluding acquisition costs, amortization of acquired intangible assets, proxy contest expense, and share-based compensation from GAAP income before provision for income taxes. The Company calculates DSO by annualizing (multiplying by four) net revenue for the quarter and then dividing by 365 days to yield an average daily sales amount. The balance of accounts receivable, net of any reserves for bad debts and sales returns, is then divided by that average daily sales amount resulting in the DSO.

 

QUALITY SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)

                       
 
 
Three Months Ended December 31, Nine Months Ended December 31,
  2013     2012     2013     2012  
 
Revenues:
Software and hardware $ 14,114 $ 21,899 $ 45,648 $ 71,463
Implementation and training services   5,046     7,266     19,430     27,847  
 
System sales 19,160 29,165 65,078 99,310
 
Maintenance 39,763 39,463 118,684 116,746
Electronic data interchange services 16,637 15,209 49,874 44,056
Revenue cycle management and related services 16,178 15,015 47,660 43,902
Other services   17,116     15,658     48,168     44,920  
 
Maintenance, EDI, RCM and other services   89,694     85,345     264,386     249,624  
 
Total revenues   108,854     114,510     329,464     348,934  
 
Cost of revenue:
Software and hardware* 27,398 4,660 37,111 16,055
Implementation and training services   7,466     7,221     21,572     23,873  
 
Total cost of system sales 34,864 11,881 58,683 39,928
 
Maintenance 5,642 5,259 16,206 14,811
Electronic data interchange services 10,276 9,852 31,722 28,251
Revenue cycle management and related services 11,736 10,918 34,144 32,344
Other services   8,537     8,686     26,054     26,021  
 
Total cost of maintenance, EDI, RCM and other services   36,191     34,715     108,126     101,427  
 
Total cost of revenue   71,055     46,596     166,809     141,355  
 
Gross profit 37,799 67,914 162,655 207,579
 
Operating expenses:
Selling, general and administrative 36,864 35,532 110,538 110,045
Research and development costs 13,175 7,786 26,404 22,634
Amortization of acquired intangible assets 1,219 1,212 3,673 3,665
Impairment of goodwill and other assets   5,873     -     5,873     -  
 
Total operating expenses   57,131     44,530     146,488     136,344  
 
Income from operations (19,332 ) 23,384 16,167 71,235
 
Interest income, net 121 13 (53 ) (14 )
Other income (expense), net   18     (122 )   (391 )   (115 )
 
Income (loss) before income taxes (19,193 ) 23,275 15,723 71,106
Provision for (benefit of) income taxes   (6,606 )   7,649     5,244     24,292  
 
Net income (loss) $ (12,587 ) $ 15,626 $ 10,479 $ 46,814
 
Net income per share:
Basic $ (0.21 ) $ 0.26 $ 0.18 $ 0.79
Diluted $ (0.21 ) $ 0.26 $ 0.17 $ 0.79
 
Weighted-average shares outstanding:
Basic 60,173 59,400 59,823 59,343
Diluted 60,173 59,405 59,984 59,411
 
Dividends declared per common share $ 0.175 $ 0.175 $ 0.525 $ 0.525
 

*

Results for the three and nine months ended December 31, 2013 include $20.1 million in charges related to the impairment of

acquired software technology and capitalized software costs in the Hospital Solutions Division

 

QUALITY SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS)

(UNAUDITED)

                 
December 31, March 31,
  2013     2013  
 
ASSETS
Current assets:
Cash and cash equivalents $ 82,101 $ 105,999
Restricted cash 4,079 5,488
Marketable securities 11,888 12,012
Accounts receivable, net 126,298 148,257
Inventories 928 710
Income taxes receivable 15,270 -
Deferred income taxes, net 12,181 12,140
Other current assets   12,048     12,720  
 
Total current assets 264,793 297,326
 
Equipment and improvements, net 24,266 21,887
Capitalized software costs, net 40,267 39,781
Intangibles, net 35,006 27,550
Goodwill 72,107 45,761
Other assets   11,338     10,750  
 
Total assets $ 447,777   $ 443,055  
 
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,797 $ 11,501
Deferred revenue 72,726 65,207
Accrued compensation and related benefits 13,692 11,915
Income taxes payable - 1,480
Dividends payable 10,687 10,418
Other current liabilities   27,747     26,508  
 
Total current liabilities 129,649 127,029
 
Deferred revenue, net of current 2,087 1,219
Deferred compensation 4,557 3,809
Other noncurrent liabilities   11,740     3,949  
 
Total liabilities 148,033 136,006
 
Commitments and contingencies
 
Shareholders' equity:
Common stock
$0.01 par value; authorized 100,000 shares; issued
and outstanding 60,210 and 59,543 shares at
December 31, 2013 and March 31, 2013, respectively 602 595
Additional paid-in capital 193,960 179,743
Accumulated other comprehensive loss (235 ) (11 )
Retained earnings   105,417     126,722  
 
Total shareholders' equity   299,744     307,049  
 
Total liabilities and shareholders' equity $ 447,777   $ 443,055  

 

 

 

QUALITY SYSTEMS, INC.

NON-GAAP FINANCIAL MEASURES

                     
 

RECONCILIATION OF NON-GAAP DILUTED NET INCOME PER SHARE

(IN THOUSANDS, EXCEPT PER SHARE DATA)

Three Months Ended December 31,

Nine Months Ended December 31,
  2013     2012   2013   2012
 
Income (loss) before provision for income taxes - GAAP $ (19,193 ) $ 23,275 $ 15,723 $ 71,106
 
Plus items included in cost of revenue:
Amortization of acquired software technology 1,060 672 2,668 2,029
Impairment of other assets* 20,098 - 20,098 -
Share-based compensation   90     52   253   201
Total adjustments to cost of revenue 21,248 724 23,019 2,230
 
Plus items included in operating expenses:
Acquisition costs 108 357 602 1,582
Amortization of acquired intangible assets 1,219 1,212 3,673 3,665
Impairment of goodwill and other assets 5,873 - 5,873 -
Proxy contest expense - - 1,721 1,250
Share-based compensation   617     531   1,579   1,765
Total adjustments to operating expenses 7,817 2,100 13,448 8,262
       
Total adjustments to GAAP income before provision for income taxes:   29,065     2,824   36,467   10,492
 
Income before provision for income taxes - Non-GAAP 9,872 26,099 52,190 81,598
Provision for income taxes   3,141     8,613   17,518   27,976
 
Net income - Non-GAAP $ 6,731   $ 17,486 $ 34,672 $ 53,622
 
Diluted net income per share - Non-GAAP $ 0.11 $ 0.29 $ 0.58 $ 0.90
 
* Relates to the impairment of acquired software technology and capitalized software costs in the Hospital Solutions Division
 
 

RECONCILIATION OF DAYS SALES OUTSTANDING CALCULATION

(IN THOUSANDS, EXCEPT NUMBER OF DAYS)
December 31,
  2013  
 
Quarterly Revenue $ 108,854
Times four (4) x   4  
 
Equals Annualized Revenue 435,416
Divided by 365 days ÷   365  
 
Equals Average Daily Revenue = $ 1,193  
 
Net Accounts Receivable $ 126,298
Divided by Average Daily Revenue ÷   1,193  
 
Equals Days Sales Outstanding =   106  

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