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Quality Systems, Inc. Reports Fiscal 2019 First Quarter Results

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

Quality Systems, Inc. (QSII), known to its clients as NextGen Healthcare, announced today its fiscal 2019 first quarter ended June 30, 2018 operating results.

"We are pleased with continuing progress executing our plan, as illustrated by our team’s delivery of another solid performance in the first quarter of fiscal 2019 with revenue and EPS in-line with our expectations. Most importantly, we saw continued momentum in quarterly bookings with first quarter bookings up 23% year over year, which marks our second consecutive quarter of growth. Based on these results, we remain confident in the current year guidance and committed to our multi-year growth targets,” commented Rusty Frantz, president and chief executive officer of NextGen Healthcare.

Fiscal 2019 First Quarter Highlights

As a result of the adoption of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers: Topic 606 (“ASC 606”), the GAAP comparisons below compare fiscal 2019 first quarter results under ASC 606 to the fiscal 2018 first quarter results under ASC 605. A reconciliation of fiscal 2019 first quarter results from ASC 606 to ASC 605 can be found in the tables at the end of the press release.

On a GAAP basis, revenue for the fiscal 2019 first quarter of $133.2 million compared to $130.9 million a year-ago. On a pro forma basis under ASC 605, revenue for the fiscal 2019 first quarter was also $133.2 million.

On a GAAP basis, net income for the fiscal 2019 first quarter was $2.6 million, compared with net income of $3.9 million in the fiscal 2018 first quarter. On a pro forma basis under ASC 605, net income for the fiscal 2019 first quarter was $1.7 million.

On a GAAP basis, fully diluted net income per share was $0.04 in the fiscal 2019 first quarter compared with earnings per share of $0.06 for the same period a year ago. On a non-GAAP basis, fully diluted earnings per share for the fiscal 2019 first quarter was $0.19 versus $0.17 reported in the first quarter a year ago. On a pro forma non-GAAP basis under ASC 605, fully diluted earnings per share for the fiscal 2019 first quarter was $0.18.

Fiscal 2019 Financial Outlook

The company is reiterating its outlook for fiscal 2019 and expects:

  • Revenue of between $532 million and $548 million
  • Non-GAAP EPS of between $0.70 and $0.78

Conference Call Information

NextGen Healthcare will host a conference call to discuss its fiscal 2019 first quarter results on Tuesday, July 31, 2018 at 5:00 PM ET (2:00 PM PT). Shareholders and interested participants may listen to a live broadcast of the conference call by dialing 866-750-8947 or 720-405-1352 for international callers, and referencing participant code 2995586 approximately 15 minutes prior to the call. A live webcast of the conference call will be available on the investor relations section of the company’s web site and an audio file of the call will also be archived for 90 days at investor.qsii.com. After the conference call, a replay will be available until August 14, 2018 and can be accessed by dialing 800-585-8367 or 404-537-3406 for international callers, and referencing participant code 2995586.

2018 Analyst Day Meeting

The Company will host an Analyst Day Meeting on Friday, September 7, 2018 at 9:00 AM ET in New York, NY. To RSVP or for further information, please contact Jordan Kohnstam at Jordan.Kohnstam@westwicke.com or 443-450-4189.

About Quality Systems, Inc.

Quality Systems, Inc., known to its clients as NextGen Healthcare, provides a range of software, services, and analytics solutions to medical and dental group practices. The company's portfolio delivers foundational capabilities to empower physician success, enrich the patient care experience, and enable the transition to value-based healthcare. 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 and subsequently filed Quarterly Reports on Form 10-Q, 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; uncertainties related to the future impact of U.S. tax reform; the impact of governmental and regulatory agency investigations; 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; disruptions caused by acquisitions of companies, products, or technologies; 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. These forward-looking statements speak only as of the date hereof. 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 diluted earnings per share provides useful supplemental information to investors and management regarding the Company's financial condition and results. The presentation of non-GAAP financial information is not intended to be considered in isolation or as a substitute for, or superior to, financial information prepared and presented in accordance with GAAP. The Company calculates non-GAAP diluted earnings per share by excluding net acquisition costs, amortization of acquired intangible assets, amortization of deferred debt issuance costs, restructuring costs, net securities litigation defense costs and settlement, share-based compensation, and other non-run-rate expenses from GAAP income before provision for income taxes. The Company utilizes a normalized non-GAAP tax rate to provide better consistency across the interim reporting periods within a given fiscal year by eliminating the effects of non-recurring and period-specific items, which can vary in size and frequency, and which are not necessarily reflective of the Company’s longer-term operations.

The normalized non-GAAP tax rate applied to fiscal year 2019 was 22.0%, compared to 30.5% for fiscal year 2018, which was updated as a result of the enactment of the new tax reform legislation on December 22, 2017. The determination of this rate is based on the consideration of both historic and projected financial results. The Company may adjust its non-GAAP tax rate as additional information becomes available and in conjunction with any other significant events occur that may materially affect this rate, such as merger and acquisition activity, changes in business outlook, or other changes in expectations regarding tax regulations.

The Company’s future period guidance in this release includes adjustments for items not indicative of the Company’s core operations. Such adjustments are generally expected to be of a nature similar to those adjustments applied to the Company’s historic GAAP financial results in the determination of the Company’s non-GAAP diluted earnings per share. Such adjustments, however, may be affected by changes in ongoing assumptions and judgments as to the items that are excluded in the calculation of non-GAAP adjusted net income and adjusted diluted earnings per share, as described in this release. The exact amount and probable significance of these adjustments, including net acquisition costs, net securities litigation defense costs, and other non-run-rate expenses, are not currently determinable without unreasonable efforts, but may be significant. These items cannot be reliably quantified or forecasted due to the combination of their historic and expected variability. It is therefore not practicable to reconcile this non-GAAP guidance to the most comparable GAAP measures.

 

TABLE #1

 
QUALITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)

 
Three Months Ended June 30,
2018   2017
Revenues:
Recurring $ 120,007 $ 119,178
Software, hardware, and other non-recurring   13,193   11,744
Total revenues 133,200 130,922
Cost of revenue:
Recurring 48,153 48,458
Software, hardware, and other non-recurring 7,154 6,040
Amortization of capitalized software costs and acquired intangible assets   6,544   4,671
Total cost of revenue   61,851   59,169
Gross profit 71,349 71,753
Operating expenses:
Selling, general and administrative 44,636 42,977
Research and development costs, net 22,128 19,989
Amortization of acquired intangible assets   1,168   2,047
Total operating expenses   67,932   65,013
Income from operations 3,417 6,740
Interest income 29 9
Interest expense (730 ) (677 )
Other income (expense), net   374   (22 )
Income before provision for income taxes 3,090 6,050
Provision for income taxes   442   2,154
Net income $ 2,648 $ 3,896
Net income per share:
Basic $ 0.04 $ 0.06
Diluted $ 0.04 $ 0.06
Weighted-average shares outstanding:
Basic 64,019 62,636
Diluted 64,054 62,643
   

TABLE #2

QUALITY SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

(Unaudited)

 
June 30, 2018 March 31, 2018
ASSETS
Current assets:
Cash and cash equivalents $ 26,544 $ 28,845
Restricted cash and cash equivalents 7,520 2,373
Accounts receivable, net 86,064 84,962
Contract assets 10,448
Inventory 161 180
Income taxes receivable 7,677 8,122
Prepaid expenses and other current assets   17,397   17,180
Total current assets 155,811 141,662
Equipment and improvements, net 26,567 26,795
Capitalized software costs, net 28,846 26,318
Deferred income taxes, net 6,249 9,219
Contract assets, net of current 2,768
Intangibles, net 68,636 74,091
Goodwill 218,875 218,875
Other assets   27,383   18,795
Total assets $ 535,135 $ 515,755
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,133 $ 4,213
Contract liabilities 52,196 54,079
Accrued compensation and related benefits 17,567 27,910
Income taxes payable 111 73
Other current liabilities   62,067   48,317
Total current liabilities 135,074 134,592
Contract liabilities, net of current 1,173
Deferred compensation 5,937 6,086
Line of credit 44,000 37,000
Other noncurrent liabilities   13,232   13,494
Total liabilities 198,243 192,345
Commitments and contingencies
Shareholders' equity:
Common stock
$0.01 par value; authorized 100,000 shares; issued and outstanding 64,220 and 63,995 shares at June 30, 2018 and March 31, 2018, respectively 642 640
Additional paid-in capital 247,374 244,462
Accumulated other comprehensive loss (899 ) (400 )
Retained earnings (1)   89,775   78,708
Total shareholders' equity   336,892   323,410
Total liabilities and shareholders' equity $ 535,135 $ 515,755

_____________

(1)   Includes cumulative effect adjustment related to the adoption of ASC 606.
 

TABLE #3

QUALITY SYSTEMS, INC.
NON-GAAP FINANCIAL MEASURES

(In thousands, except per share data)

 

RECONCILIATION OF NON-GAAP DILUTED EARNINGS PER SHARE

 
Three Months Ended June 30,
2018   2017
Income before provision for income taxes - GAAP $ 3,090 $ 6,050
Non-GAAP adjustments:
Acquisition costs, net 1,634 549
Amortization of acquired intangible assets 5,456 5,448
Amortization of deferred debt issuance costs 177 269
Securities litigation defense costs, net of insurance 279 446
Share-based compensation 3,116 2,041
Other non-run-rate expenses*   1,948   263
Total adjustments to GAAP income before provision for income taxes:   12,610   9,016
Income before provision for income taxes - Non-GAAP 15,700 15,066
Provision for income taxes   3,454   4,595
Net income - Non-GAAP $ 12,246 $ 10,471
Diluted net income per share - Non-GAAP $ 0.19 $ 0.17
Weighted-average shares outstanding (diluted): 64,054 62,643
 
 

RECONCILIATION OF NON-GAAP DILUTED EARNINGS PER SHARE UNDER ASC 605

 
Income before provision for income taxes - Non-GAAP 15,700
Adjustments due to adoption of ASC 606   (1,191 )
Income before provision for income taxes - Non-GAAP under ASC 605 14,509
Provision for income taxes   3,192
Net income - Non-GAAP under ASC 605 $ 11,317
Diluted net income per share - Non-GAAP under ASC 605 $ 0.18
Weighted-average shares outstanding (diluted): 64,054
 
* Other non-run-rate expenses for the three months ended June 30, 2018 consist primarily of severance and other employee-related costs not related to core operations. Other non-run-rate expenses for the three months ended June 30, 2017 consist primarily of professional services costs not related to core operations.
 

We adopted Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers: Topic 606 (“ASC 606”) and all related amendments as of April 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption. Results for reporting periods beginning after April 1, 2018 are presented under ASC 606, while prior period comparative information has not been adjusted and continue to be reported under the accounting standards in effect for those prior periods. We have also implemented changes to our processes, policies, and internal controls over financial reporting to address the impacts of the new revenue recognition standard on our consolidated financial statements and related disclosures.

The adjustments to reflect the cumulative effect of the changes to the balances of our previously reported consolidated balance sheet as of March 31, 2018 for the adoption of ASC 606 are summarized as follows:

TABLE #4 – ASC 606 CUMULATIVE EFFECT ADJUSTMENT

       
As Reported ASC 606 Transition Adjusted
March 31, 2018 Adjustments April 1, 2018
ASSETS
Accounts receivable, net $ 84,962 $ 2,380 $ 87,342
Contract assets 13,446 13,446
Prepaid expenses and other current assets 17,180 (223 ) 16,957
Deferred income taxes, net 9,219 (2,884 ) 6,335
Contract assets, net of current 2,731 2,731
Other assets 18,795 6,679 25,474
 
LIABILITIES
Contract liabilities 54,079 4,174 58,253
Accrued compensation and related benefits 27,910 745 28,655
Other current liabilities 48,317 9,964 58,281
Contract liabilities, net of current 1,173 (1,173 )
 
SHAREHOLDERS' EQUITY
Retained earnings 78,708 8,419 87,127
 

The impact of the adoption of ASC 606 on our consolidated balance sheet and consolidated statements of net income and comprehensive income as of and for the three months ended June 30, 2018, assuming that the previous revenue recognition guidance in ASC 605 had been in effect, is summarized as follows:

TABLE #5 – ASC 606 IMPACT OF ADOPTION – BALANCE SHEET

 
June 30, 2018
As reported under     Adjustments due to   As disclosed under
ASC 606 adoption of ASC 606 ASC 605
ASSETS
Accounts receivable, net $ 86,064 $ 6,685 $ 92,749
Contract assets 10,448 (10,448 )
Income taxes receivable 7,677 246 7,923
Prepaid expenses and other current assets 17,397 344 17,741
Deferred income taxes, net 6,249 2,884 9,133
Contract assets, net of current 2,768 (2,768 )
Other assets 27,383 (7,703 ) 19,680
 
LIABILITIES
Contract liabilities 52,196 6,241 58,437
Accrued compensation and related benefits 17,567 (158 ) 17,409
Other current liabilities 62,067 (8,658 ) 53,409
Contract liabilities, net of current 1,179 1,179
 
SHAREHOLDERS' EQUITY
Retained earnings 89,775 (9,364 ) 80,411
 

TABLE #6 – ASC 606 IMPACT OF ADOPTION – INCOME STATEMENT

 
Three Months Ended June 30, 2018
As reported under   Adjustments due to   As disclosed under
ASC 606 adoption of ASC 606 ASC 605
Revenues:
Subscription services $ 28,328 $ (1,575 ) $ 26,753
Support and maintenance 41,248 (698 ) 40,550
Managed services 26,270 3,033 29,303
Electronic data interchange and data services   24,161   (73 )   24,088
Total recurring revenues 120,007 687 120,694
Software license and hardware 7,443 (567 ) 6,876
Other non-recurring services   5,750   (74 )   5,676
Total software, hardware, and other non-recurring revenues   13,193   (641 )   12,552
Total revenue 133,200 46 133,246
Total cost of revenue   61,851   40   61,891
Gross profit 71,349 6 71,355
Operating expenses:
Selling, general and administrative 44,636 1,197 45,833
Research and development costs, net 22,128 22,128
Amortization of acquired intangibles   1,168     1,168
Total operating expenses 67,932 1,197 69,129
Income from operations 3,417 (1,191 ) 2,226
Interest and other income, net   (327 )     (327 )
Income before provision for income taxes 3,090 (1,191 ) 1,899
Provision for income taxes   442   (246 )   196
Net income $ 2,648 $ (945 ) $ 1,703
 

The following table presents our revenues disaggregated by our major revenue categories and by occurrence on a pro forma basis under ASC 605:

TABLE #7 – PRO FORMA REVENUES UNDER ASC 605

 
Three Months Ended,
June 30,     September 30,     December 31,     March 31,     June 30,
2017 2017 2017 2018 2018
Recurring revenues:
Subscription services $ 25,575 $ 26,788 $ 26,596 $ 27,366 $ 26,753
Support and maintenance 41,116 41,693 40,362 40,634 40,550
Managed services 29,175 27,962 28,903 27,271 29,303
Electronic data interchange and data services   23,312   22,998   23,136   23,327   24,088
Total recurring revenues 119,178 119,441 118,997 118,598 120,694
 
Software, hardware, and other non-recurring revenues:
Software license and hardware 7,420 8,853 7,759 9,985 6,876
Other non-recurring services   4,324   4,313   4,959   7,192   5,676
Total software, hardware and other non-recurring revenues 11,744 13,166 12,718 17,177 12,552
                   
Total revenues $ 130,922 $ 132,607 $ 131,715 $ 135,775 $ 133,246
 

Effective April 1, 2018, in addition to the adoption of ASC 606, we changed the presentation of revenue on our consolidated statements of comprehensive income. The following table presents a mapping of our revenues as previously reported and on a pro forma basis under ASC 605:

TABLE #8 – IMPACT OF INCOME STATEMENT RECLASSIFICATION

 
Three Months Ended,
June 30,   September 30,   December 31,   March 31,   June 30,
2017 2017 2017 2018 2018
Revenues:
Software license and hardware - As previously reported $ 12,800 $ 14,267 $ 13,131 $ 15,378 $ 12,388
Annual licenses - reclassified to 'Subscription services'   (5,380 )   (5,414 )   (5,372 )   (5,393 )   (5,512 )
Software license and hardware 7,420 8,853 7,759 9,985 6,876
 
Software related subscription services - As previously reported 23,906 24,988 24,690 25,963 25,622
Annual licenses - reclassified from 'Software license and hardware' 5,380 5,414 5,372 5,393 5,512
Managed cloud services - reclassified to 'Managed services'   (3,711 )   (3,614 )   (3,466 )   (3,990 )   (4,381 )
Subscription services 25,575 26,788 26,596 27,366 26,753
 
Revenue cycle management and related services - As previously reported 21,403 21,002 21,922 19,669 21,323
Managed cloud services - reclassified from 'Software related subscription services' 3,711 3,614 3,466 3,990 4,381
Transcription and other recurring services - reclassified from 'Professional services'   4,061   3,346   3,515   3,612   3,599
Managed services 29,175 27,962 28,903 27,271 29,303
 
Professional services - As previously reported 8,385 7,659 8,474 10,804 9,275
Transcription and other recurring services - reclassified to 'Professional services'   (4,061 )   (3,346 )   (3,515 )   (3,612 )   (3,599 )
Other non-recurring services 4,324 4,313 4,959 7,192 5,676

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