Quality Systems Management Discusses Q1 2013 Results - Earnings Call Transcript

Quality Systems (QSII)

Q1 2013 Earnings Call

July 26, 2012 10:00 am ET

Executives

Steven T. Plochocki - Chief Executive Officer, President and Director

Paul A. Holt - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Scott Decker - President of NextGen Healthcare Information Systems Division

Donn E. Neufeld - Executive Vice President of Electronic Data Interchange (EDI) & Dental

Steve K. Puckett - Executive Vice President of Inpatient Solutions

Monte L. Sandler - Executive Vice President of Nextgen Practice Solutions

Analysts

Ryan Daniels - William Blair & Company L.L.C., Research Division

Charles Rhyee - Cowen and Company, LLC, Research Division

Jamie Stockton - Wells Fargo Securities, LLC, Research Division

Glen J. Santangelo - Crédit Suisse AG, Research Division

Zachary William Sopcak - Morgan Stanley, Research Division

George Hill - Citigroup Inc, Research Division

Richard C. Close - Avondale Partners, LLC, Research Division

David Larsen - Leerink Swann LLC, Research Division

Atif A Rahim - JP Morgan Chase & Co, Research Division

Stephen B. Shankman - UBS Investment Bank, Research Division

Bret D. Jones - Oppenheimer & Co. Inc., Research Division

Steven P. Halper - Lazard Capital Markets LLC, Research Division

Sean W. Wieland - Piper Jaffray Companies, Research Division

David H. Windley - Jefferies & Company, Inc., Research Division

Anthony V. Vendetti - Maxim Group LLC, Research Division

Presentation

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Quality Systems' Fiscal 2013 First Quarter Results Conference Call. [Operator Instructions] This conference is being recorded today, July 26, 2012, and I would now like to turn the conference over to Steven Plochocki, CEO. Please go ahead, sir.

Steven T. Plochocki

Thank you, Doug, and welcome, everyone, to the Quality Systems' 2013 Fiscal First Quarter Results Call. With me this morning are Paul Holt, our CFO; Scott Decker, the President of NextGen; Donn Neufeld, Executive Vice President of EDI and Dental; Steve Puckett, Executive Vice President of NextGen Hospital Solutions; and Monte Sandler, Executive Vice President of RCM Services.

Please note that the comments made on this call may include statements that are forward-looking within the meaning of securities laws including, without limitation, statements related to anticipated industry trends; the company's plans, products, perspective and strategies, preliminary and projected; and capital equity initiatives to the implementation of potential impacts of legal, regulatory or accounting principles. I'll provide some opening comments and then turn it over to the team.

First off, based on the advice of our counsel regarding the application of proxy regulations, the communications relating to the pending proxy contest for election of directors at our upcoming annual meeting, we will not be addressing any questions with respect to the proxy contest on this call. The company has filed its proxy statement with the SEC, as well as several other shareholder communications that address the proxy solicitation. And we refer you to those materials and to future supplemental materials that we will file for information relating to the proxy solicitation.

The company reported record revenues of $118.3 million for the fiscal 2013 first quarter, an increase of 18% compared with $100.4 million for fiscal 2012 first quarter. Net income for fiscal 2013 first quarter was $15.5 million, down 18% versus net income of $19 million for the same period a year ago.

Fully diluted earnings per share for the fiscal 2013 first quarter was $0.26, a 19% decrease from $0.32 for the fiscal 2012 first quarter. Although we delivered record revenue for our fiscal 2013 first quarter driven by strong performance in our recurring revenue streams, our overall results were impacted by lower-than-expected revenue from large, higher-margin software system sales. There are times when a limited number of these types of sales can influence performance in any given quarter.

However, we still remain extremely confident about our future performance and prospects. However, due to the evolving conditions affecting our industry and uncertainty in predicting future results, we are not affirming our previous guidance nor providing revised guidance at this time.

I'll now turn it over to Paul Holt.

Paul A. Holt

Thanks, Steve. As Steve mentioned, our consolidated June quarter revenue grew 18% versus the prior year. Note that our Matrix acquisition contributed approximately $2.7 million of revenue for the quarter.

Earnings per share declined by 19%, $0.26 versus a year ago, $0.32. Our profitability was negatively impacted by decline in software license revenue, saw higher SG&A and R&D expenses compared to our year-ago quarter. Also, I want to note that we recorded approximately $1.8 million in amortization of acquired intangibles this quarter versus approximately $0.9 million a year ago. This increase in net amortization expense is a result of the acquisitions that we've been making during the past year.

We report all of our numbers on a GAAP basis. However, I'm providing this disclosure for those of you who want to compare our results before these amortization charges. We are pleased with our growth in services revenue categories, including maintenance, revenue cycle and EDI, which in total grew 22% on a year-over-year basis to $80.4 million versus $66.1 million a year ago. Our recurring revenue as a percentage of our total revenue continues to grow, is to provide better visibility and stability towards future revenue growth.

We remain very positive about our opportunities to continue to grow these revenue streams by cross-selling into our expanding customer base as well as to new customers. Monte and Don will provide more details on our revenue cycle and EDI opportunities later on our call.

I'd also note that our recurring SaaS revenue has continued to build, reaching $743,000 this quarter versus $590,000 a year ago. Our total system sales revenue grew by 10% on a year-over-year basis to $37.9 million on the strength of increased implementation services revenue. Our increase in implementation services revenue came from both ambulatory and hospital divisions, start continued growth of our customer base deploying our software solutions.

Increased implementation services revenue was partially offset by $3.1 million or 11% decline in the software component of system sales. Consolidated gross profit margin this quarter came in at 59.1%, which is down from 65.2% a year ago. And our gross margin was down primarily due to comparatively lower amount of high-margin software revenue and a change in revenue mix, which are larger portion of lower margin implementation and other service revenue.

SG&A expense, excluding amortization, increased by approximately $7.3 million to $36.7 million in the first quarter compared to $29.4 million a year ago. This increase was driven primarily by SG&A expenses added with various acquisitions we made during the course of the year, as well as additional headcounts and other expenses. We intend to carefully review our planned expenditures moving forward.

R&D spend was up to $8.6 million, a 26% increase compared to the prior-year quarter. Our increased R&D spend reflects our continuing commitment to invest in our products as we move towards health care reform and accountable care organization.

Our effective tax rate for the quarter came in at 33.6% versus prior year at 34.2%. Our current period tax rate was driven lower by a comparatively lower effective state tax rate, as well as certain discreet items we include in our -- add in our provision this quarter.

Now I'm now going to move towards segment revenue and operating income performance. Note that these operating income results do not include any allocation of corporate expenses. NextGen ambulatory revenue was $36.2 million, up 16% over prior year. NextGen ambulatory operating income $28.8 million is down slightly, down 2% over the prior year; QSI dental revenue of $3.7 million is down 3% from the prior year; dental operating income, approximately $0.5 million; and hospital solutions revenue, $11.4 million is up 56% over the prior year; and hospital solutions operating income, $2.3 million, it's down 23% over the prior year.

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