Can Quality Systems (QSII) Surprise This Earnings Season?

Quality Systems Inc. (QSII) is scheduled to report second-quarter fiscal 2015 results before the opening bell on Oct 23. In the last reported quarter, Quality Systems’ earnings met estimates, although earnings almost halved on a year-over-year basis. Moreover, Quality Systems’ trailing four-quarter average miss is 30.78%.

Let’s see how things are shaping up for this announcement.

Factors to Consider

The Irvine, CA-based healthcare information systems provider continues to report declining earnings. Last quarter, earnings were hurt by a year-over-year decline in system sales and higher R&D expenses. Also, Quality Systems witnessed a decline in booking margins in recent quarters which raises concern.

The healthcare information systems and services market is very competitive. The industry is highly fragmented and includes numerous players. Quality Systems has to compete with larger players such as Allscripts Healthcare Solutions and Cerner Corp., among others. The intensity of competition may pressurize both pricing and margins. Stringent hospital budgets might pressurize pricing further.

Despite a multitude of impediments, we are still optimistic given the continued strength in the company’s NextGen division as well as the expected benefit from its Mirth acquisition. Meanwhile, areas such as Revenue Cycle Management, Population Health and interoperability are positively impacting sales and marketing, both in the form of net new deals as well as cross-selling into the company’s growing client base.

Earnings Whispers

Our proven model does not conclusively show that Quality Systems is likely to beat earnings this quarter as it does not have the right combination of two key ingredients. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or at least 3 for this to happen. That is not the case here as you will see below.

Zacks ESP: The Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is currently pegged at 0.00%, as both these estimates stand at 13 cents.

Zacks Rank: Quality Systems’ Zacks Rank #3 (Hold) when combined with an ESP of 0.00% makes surprise prediction difficult.

We caution against stocks with a Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks That Warrant a Look

Here are some companies you may want to consider as our model shows these have the right combination of elements to post an earnings beat:

Pacific Biosciences of California, Inc. (PACB) with an earnings ESP of 36.84% and a Zacks Rank #2 (Buy).

Heartware International Inc. (HTWR) with an earnings ESP of 21.21% and a Zacks Rank #3 (Hold).

Hologic Inc. (HOLX) with an earnings ESP of 5.41% and a Zacks Rank #3 (Hold).

Read the Full Research Report on HOLX
Read the Full Research Report on QSII
Read the Full Research Report on HTWR
Read the Full Research Report on PACB


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