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Quality Systems, Inc. Reports Fiscal 2014 Fourth Quarter and Year-End Results; System Sales, Revenue, Bookings and Pipeline All Increase in Quarter

Quality Systems, Inc. (NASDAQ:QSII) announced today results for its fiscal 2014 fourth quarter and fiscal year ended March 31, 2014.

Revenues for the fiscal 2014 fourth quarter reached $115.2 million, up 4 percent when compared with $111.3 million for the fiscal 2013 fourth quarter. Net income for the 2014 fourth quarter was $5.2 million, up from a net loss of $4.1 million reported in the same period last year.

On a GAAP basis, fully diluted earnings per share was $0.09 in the fourth quarter of fiscal 2014 versus fully diluted loss per share of $0.07 for the 2013 fourth quarter. On a non-GAAP basis, fully diluted earnings per share for the fiscal 2014 fourth quarter was $0.12, a decline of 50 percent from $0.24 for the comparable quarter a year ago.

During the 2014 fourth quarter, the Company saw increases in systems sales, revenue, bookings and pipeline when compared with the fiscal 2014 third quarter.

Revenues reached $444.7 million for the fiscal year ended March 31, 2014, a decrease of 3 percent when compared with $460.2 million for the 2013 fiscal year ended March 31, 2013. The recurring revenue base reached $357.9 million for the fiscal year ended 2014. Net income for fiscal 2014 was $15.7 million, a decrease of 63 percent when compared with net income of $42.7 million for fiscal 2013.

On a GAAP basis, fully diluted earnings per share for the 2014 fiscal year was $0.26, down 64 percent from $0.72 reported in the 2013 fiscal year. On a non-GAAP basis, fully diluted earnings per share for the fiscal 2014 year was $0.70, a decline of 39 percent from $1.14 for the comparable period 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 ended the year with a strong liquidity position, including $113.8 million of cash and investments.

“We are encouraged by the progress we are seeing this quarter, resulting from our dedicated marketing and sales efforts, which are now positively impacting our system sales, revenue, bookings and pipeline growth. The improvement was also fueled by our new Mirth product line and our growth in revenue cycle management business. Both of these areas are expected to be two strong growth drivers for the Company in fiscal 2015,” explained president and chief executive officer Steven T. Plochocki.

“We ended the year in a very strong cash position, which affords us opportunity as we look ahead. We are confident that the programs and initiatives we have put in place over the past several quarters will further enhance the Company’s position as the next fiscal year unwinds,” Plochocki said.

In other news, Quality Systems reported that Jeffrey H. Margolis was named to its Board of Directors, effective May 28, 2014. He also was appointed to serve on the Board's Transaction Committee.

Margolis is a seasoned healthcare executive, having dedicated more than 25 years to the industry. Currently he is chairman and chief executive officer of Welltok, Inc., an early-stage healthcare consumer engagement and platform-as-a-service enterprise. He founded and served as chairman and chief executive officer at TriZetto Corporation for 13 years and 12 years, respectively, beginning in 1997. TriZetto, a recognized leader in the provision of healthcare IT solutions to payers and providers, became a publicly traded company in 1999 and significantly grew revenues and profitability for approximately nine years before becoming a private entity in 2008, a transaction led by Apax Partners. Margolis concluded his role with TriZetto in 2011 and is Chairman Emeritus. During 2012 and 2013, he served as a senior executive advisor to the Oliver Wyman Health Innovation Center, an organization that identifies and disseminates ideas and best practices that aim to transform healthcare. He is a published author, including his most recent book, The Healthcare Cure.

Margolis also serves on a number of for-profit and non-profit boards. For-profit boards include healthcare analytics company, Predilytics, Inc., and an Irvine-based population health management entity. Non-profit boards include the Crohn’s and Colitis Foundation of America and Hoag Hospital in Newport Beach, Calif. He also serves as an advisory board member of the University of California at Irvine’s Center for Healthcare Management & Policy as well as at UCI’s Center for Digital Transformation. Additionally, he is a member of the board of governors at Cedars-Sinai in Los Angeles.

Margolis earned a bachelor’s degree in business administration/management information systems with high honors from the University of Illinois in 1984 and holds CPA certificates (currently inactive) in Colorado and Illinois.

“As a healthcare industry veteran, Jeff brings extensive expertise to our board. His previous accomplishments and experience will bode well for the Company as we continue to play a key role in the evolving healthcare information technology marketplace. We welcome Jeff to our board and look forward to the contributions he will make in this capacity,” 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 June 13, 2014 with an anticipated distribution date of July 3, 2014. The $0.175 per share cash dividend is pursuant to the Company’s current practice 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.

The Company will hold its 2014 Annual Shareholders' Meeting on Monday, August 11, 2014 at 1:00 PM local time. The meeting will be held at the Irvine Marriott, 18000 Von Karman Avenue, Irvine, Calif., 92612. Holders of record as of June 16, 2014 are eligible to vote and attend. Proxy materials and the 2014 Annual Report will be made available to shareholders of record and will also be posted on the Company's website at www.qsii.com.

Quality Systems will host a conference call to discuss its fiscal 2014 fourth quarter and year-end results on Thursday, May 29, 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 #42101881. 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 #42101881. The replay will be available from approximately 1:00 PM ET on Thursday, May 29, 2014, through 11:59 PM ET on Thursday, June 5, 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, 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, impairment of goodwill and other assets, proxy contest expense, and share-based compensation from GAAP income before provision for income taxes.

 
QUALITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
 
      Three Months Ended March 31,       Fiscal Year Ended March 31,
2014       2013 2014       2013
 
Revenues:
Software and hardware $ 15,186 $ 17,109 $ 60,834 $ 88,572
Implementation and training services   6,518   7,161     25,948     35,008  
 
System sales 21,704 24,270 86,782 123,580
 
Maintenance 41,376 40,025 160,060 156,771
Electronic data interchange services 17,421 15,653 67,295 59,709
Revenue cycle management and related services 15,316 15,317 62,976 59,219
Other services   19,387   16,030     67,554     60,950  
 
Maintenance, EDI, RCM and other services   93,500   87,025     357,885     336,649  
 
Total revenues   115,204   111,295     444,667     460,229  
 
Cost of revenue:
Software and hardware 7,115 5,695 44,226 21,750
Implementation and training services   8,109   7,023     29,681     30,896  
 
Total cost of system sales 15,224 12,718 73,907 52,646
 
Maintenance 6,384 5,505 22,590 20,316
Electronic data interchange services 10,845 10,099 42,567 38,350
Revenue cycle management and related services 12,059 10,980 46,203 43,324
Other services   8,842   8,995     34,896     35,016  
 
Total cost of maintenance, EDI, RCM and other services   38,130   35,579     146,256     137,006  
 
Total cost of revenue   53,354   48,297     220,163     189,652  
 
Gross profit 61,850 62,998 224,504 270,577
 
Operating expenses:
Selling, general and administrative 38,677 38,308 149,214 148,353
Research and development costs 15,120 8,231 41,524 30,865
Amortization of acquired intangible assets 1,132 1,194 4,805 4,859
Impairment of goodwill and other assets   -   17,400     5,873     17,400  
 
Total operating expenses   54,929   65,133     201,416     201,477  
 
Income (loss) from operations 6,921 (2,135 ) 23,088 69,100
 
Interest income (expense), net 322 (93 ) 269 (107 )
Other income (expense), net   35   36     (356 )   (79 )
 
Income (loss) before income taxes 7,278 (2,192 ) 23,001 68,914
Provision for income taxes   2,077   1,898     7,321     26,190  
 
Net income (loss) $ 5,201 $ (4,090 ) $ 15,680 $ 42,724
 
Net income (loss) per share:
Basic $ 0.09 $ (0.07 ) $ 0.26 $ 0.72
Diluted $ 0.09 $ (0.07 ) $ 0.26 $ 0.72
 
Weighted-average shares outstanding:
Basic 60,208 59,541 59,918 59,392
Diluted 60,592 59,541 60,134 59,462
 
Dividends declared per common share $ 0.175 $ 0.175 $ 0.700 $ 0.700
 
 
QUALITY SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
 
      March 31,       March 31,
2014 2013
 
ASSETS
Current assets:
Cash and cash equivalents $ 103,145 $ 105,999
Restricted cash 4,351 5,488
Marketable securities 10,656 12,012
Accounts receivable, net 110,181 148,257
Inventories 834 710
Income taxes receivable 8,366 -
Deferred income taxes, net 11,690 12,140
Other current assets   11,135     12,720  
 
Total current assets 260,358 297,326
 
Equipment and improvements, net 22,801 21,887
Capitalized software costs, net 39,152 39,781
Intangibles, net 33,016 27,550
Goodwill 72,804 45,761
Other assets   16,927     10,750  
 
Total assets $ 445,058   $ 443,055  
 
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,888 $ 11,501
Deferred revenue 71,077 65,207
Accrued compensation and related benefits 15,953 11,915
Income taxes payable - 1,480
Dividends payable 10,686 10,418
Other current liabilities   18,282     26,508  
 
Total current liabilities 123,886 127,029
 
Deferred revenue, net of current 2,187 1,219
Deferred compensation 4,809 3,809
Other noncurrent liabilities   19,086     3,949  
 
Total liabilities 149,968 136,006
 
Commitments and contingencies
 
Shareholders' equity:
Common stock
$0.01 par value; authorized 100,000 shares; issued
and outstanding 60,206 and 59,543 shares at
March 31, 2014 and March 31, 2013, respectively 602 595
Additional paid-in capital 194,739 179,743
Accumulated other comprehensive loss (182 ) (11 )
Retained earnings   99,931     126,722  
 
Total shareholders' equity   295,090     307,049  
 

Total liabilities and shareholders' equity

$ 445,058   $ 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 March 31,       Fiscal Year Ended March 31,
2014       2013 2014       2013
 
Income (loss) before provision for income taxes - GAAP $ 7,278 $ (2,192 ) $ 23,001 $ 68,914
 
Plus items included in cost of revenue:
Amortization of acquired software technology 858 671 3,526 2,700
Impairment of other assets* - - 20,098 -
Share-based compensation   95   1     348   201
Total adjustments to cost of revenue 953 672 23,972 2,901
 
Plus items included in operating expenses:
Acquisition costs 846 448 1,448 2,030
Amortization of acquired intangible assets 1,132 1,194 4,805 4,859
Impairment of goodwill and other assets - 17,400 5,873 17,400
Proxy contest expense - - 1,721 1,250
Share-based compensation   563   360     2,142   2,126
Total adjustments to operating expenses 2,541 19,402 15,989 27,665
       
Total adjustments to GAAP income before provision for income taxes:   3,494   20,074     39,961   30,566
 
Income before provision for income taxes - Non-GAAP 10,772 17,882 62,962 99,480
Provision for income taxes   3,318   3,827     20,966   31,834
 
Net income - Non-GAAP $ 7,454 $ 14,055   $ 41,996 $ 67,646
 
Diluted net income per share - Non-GAAP $ 0.12 $ 0.24 $ 0.70 $ 1.14
 
Weighted-average shares outstanding (diluted): 60,592 59,550 60,134 59,462

* Relates to the impairment of acquired software technology and capitalized software costs in the Hospital Solutions Division

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