Quality Systems, Inc. Reports Fiscal 2014 Third Quarter Results

IRVINE, Calif.--(BUSINESS WIRE)-- 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

Quality Systems, Inc.
Paul Holt, EVP and CFO
949-255-2600
[email protected]
or
Susan J. Lewis
303-804-0494
[email protected]

Source: Quality Systems, Inc.

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