Tweet
It’s time to turn the calendar page again. That also means it will be time for $$$MR. MARKET$$$ to go take his annual physical. Getting a physical is a good thing. My doctor always says, “My my $$$MR. MARKET$$$ what big arms you have!” Then he says, “My My $$$MR. MARKET$$$ what high cholesterol you have! Has someone been bringing you the finest meats and cheeses?”
It’s not a perfect world, and certainly the waiting time in the doctor’s office is considerably less than perfect. I mean, how many times can I read Children’s Highlights? We all must remember the lessons of Goofus and Gallant:
Funny thing is, everything Goofus does seems to make more sense to me than what Gallant does.
Anyway, the wait in the doctor’s office is so excruciatingly long because most doctors are still back in the stone age when it comes to record keeping. You got it..when it’s time to go home, they fly off of their Brontosaurus and say Yabba Dabba Doo. Meanwhile all the crinkled manila folders fall off the top of the filing cabinets and your prescious medical records get coffee stained. Then the janitor comes in and eats the donuts left in the box. But he doesn’t like the coconut one so he sprinkles the frosting all over your EKG.
There is a solution to this madness. It is called Quality Systems, Inc. (QSII).
Today I bought QSII at 78.25. I will sell it in 4 to 6 weeks at 90.08. Here’s why I like QSII:
Quality Systems Inc., comprised of the QSI Division and a wholly owned subsidiary, NextGen Healthcare Information Systems, Inc. develops and markets healthcare information systems that automate certain aspects of medical and dental practices, networks of practices such as physician hospital organizations (PHO's) and management service organizations (MSO's), ambulatory care centers, community health centers, and medical and dental schools.
The Company, a California corporation formed in 1974, was founded with an early focus on providing information systems to dental group practices. In the mid-1980's, they capitalized on the increasing focus on medical cost containment and further expanded their information processing systems to serve the medical market. In the mid 1990's they made two acquisitions that accelerated our penetration of the medical market. These two acquisitions formed the basis for what is today the NextGen Division. Today, they serve the medical and dental markets through their two divisions.
The two Divisions operate largely as stand-alone operations with each Division maintaining its own distinct product lines, product platforms, development, implementation and support teams, sales staffing, and branding. The two Divisions share the resources of the "corporate office" which includes a variety of accounting and other administrative functions. Additionally, there are a small number of clients who are simultaneously utilizing software from each of our two Divisions.
The QSI Division, co-located with our Corporate Headquarters in Irvine, California, currently focuses on developing, marketing and supporting software suites sold to dental and certain niche medical practices. In addition, the Division supports a number of medical clients that utilize the Division's UNIX(1) based medical practice management software product.
The NextGen Division, with headquarters in Horsham, Pennsylvania, and a second significant location in Atlanta, Georgia, focuses principally on developing and marketing products and services for medical practices.
Both Divisions develop and market practice management software which is designed to automate and streamline a number of the administrative functions required for operating a medical or dental practice.
Quality Systems future looks promising due to strength in its core product Nextgen, strong balance sheet (about $4.25 per share in cash and no long term debt), anticipated strong near term prospects driven by handful of larger contracts.
Quality Systems is one of the fastest-growing and highest regarded software companies addressing the market for electronic medical records (EMR). That’s right, now more donut smeared manila folders. QSII has won many industry awards to support their position in this frontier market.
Over the past several years the demand fpr QSII’s products has accelerated as healthcare information technology spending has increased, especially for products that enable medical professionals to cut costs and improve efficiency. Think of it this way. If you wanted to open an Excel file or Word document, you’d just go to your computer and click “File Open”. In the medical profession, documents are still mostly on paper and accessing these documents involves getting up off your ass and climbing a shelf. How would you like doing that every time you wanted to open a spreadsheet on your PC. Starting to get the picture now?
The EMR market is in its very early stages, with only about 20% penetration in the markets that they know about. Most of the 600,000 physicians in the U.S. will convert to electronic records-keeping and management in the next few years. That’s a lot of sales calls for QSII. Each system they sell goes for hundreds of thousands of dollars. The best thing is that each incremental sale is almost all profit! The hardest part for QSII is to get the word out, let doctors know it exists. Adoption of these systems has been a stumbling block because physicans are resistant to change. Plus many doctors are cheap. They have to save their quatloops to buy new cars, and jewelry for their wives and country club memberships. However, EMR is going to soon become a necessity rather than a luxury.
Patrick Cline, President of NextGen, expects sales to double and NextGen is feverishly trying to build its sales force. The fact that they are looking to add to headcount indicates that sales growth will be a self fulfilling prophesy.
President Bush's proposal to more than double spending for computerized health record testing, to $125 million has certainly been a key catalyst. Since 2002, QSII has generated 26% average organic growth while EBITDA margins have expanded by 800 basis points. More recently, revenues have been growing at a 39% clip, year over year. Also, Health care providers are rushing to store patients' records electronically to become compliant with the Health Insurance Portability and Accountability Act, or HIPAA.
"Hippa, by all accounts, is going to be a tremendous burden to medical practices because it deals with the exchange of clinical and administrative info," Cline said. "It's designed to simplify transactions and protect patients' privacy and the security of information. It's going to be difficult to comply with these laws without an electronic system."
What about competition? Sure there’s competition, but NextGen is the best. NextGen offers some of the most flexible products because they can work with more than 25 kinds of practice management software. One of the differentiating features of Quality Systems' NextGen products is that they interface with so many different systems. They're not requiring an office to replace everything they have. NextGen software can also be set up to fit medical practice's workflow. A Quality salesperson can model an electronic form after a paper one. The salesperson can make the patient admission form look exactly like the paper form. So when they go to show the system to sell it to the practice or train the users, the comfort factor is high.
This revenue growth for QSII is well above the healthcare IT market growth rate and the growth of its direct competitors. Translation they are kicking major ass. The great news is that recurring revenue is 45% of sales, meaning that we can expect this sales growth to continue, at least in the near future.
Now don’t get me wrong, QSII’s fantastic story ain’t no secret. Look at this chart:
The stock is up 172% in the last 12 months. That’s fine with me. QSII’s PE is 53. Is that expensive? Hell yea it is. But that’s what I said about HOLX’s PE also. Sometimes you just have to jump on the biggest baddest bull and ride it for another 6 seconds. That’s what I’m doing here with QSII. I have a month before earnings come out and all indications are that the next earnings release will be very positive. At this kind of PE, all I can say is I hope I’m right. This could be a quick win or a punishing fall!
So my bet is that earnings will continue to be strong. The great thing about QSII is that they never give any forward guidance. This means that the ANAL-ysts are completely in the dark about where this company is going. As a result, QSII does not feel compelled to manipulate numbers to meet targets that they have set for Wall Street. All they need to do is make sure the salesman are getting out to the physicians and taking them on deep sea fishing trips and college bowl games.
Some of the most famous doctors in Florida love to go to cocktail parties. They also love their new computer systems with DSL capability. It’s excellent for accessing digital images and whatnot.
How does all of this compute to earnings? In November, Quality Systems, Inc. announced the results of operations for its fiscal 2006 second quarter ended September 30, 2005. The Company posted net revenues of $29.5 million in the second quarter, an increase of 39% from the $21.2 million generated during the same quarter last year. The Company reported net income of $5.8 million, an increase of 56% over net income of $3.7 million earned in the comparable quarter of the prior year. Fully diluted earnings per share was $0.43 in the quarter, an increase of 54% over the fully diluted $0.28 per share earnings recorded in the same quarter last year.
The revenue and net income results achieved in the quarter were records for the Company. Results in the second quarter were driven by record revenue and profit in the Company's NextGen Healthcare Information Systems division. For the quarter, the Company's NextGen Healthcare Information Systems division posted record revenue of $25.5 million, up 48% over the same quarter prior year and record operating income of $9.9 million, up 62% over the same quarter of the prior year.
So far so good. But where is this ship sailing? ANAL-ysts, with no guidance from the company, are projecting March 06 earnings to be $0.47/share on $34 MM in revenue. For the fiscal year 2006, they are projecting $1.70 per share on $122 MM in revenue. Historically, QSII has surprised to the upside by about 12% .
$$$MR. MARKET$$$ thinks that the ANAL-ysts are pretty close on the revenue target but they haven’t quite factored in the economies of scale that go on the margin side. As a result, $$$MR. MARKET$$$ predicts that 2006 revenues will come in at $134 MM with EPS of $1.88. If QSII can carry its market premium PE of 53, we’ll see that translate to a share price of $97.76, which is greater than my sales target.
Here’s the secret. How do I know revenues will climb in the short term? Remember, they are selling software and software services. They aren’t a factory or a restaurant chain, so it is easy to add or reduce staff to meet demand for their product. If they see demand in the marketplace, they’ll add headcount. QSII full time employee headcount is up to 455 (as of last quarter), up from 417 in the prior quarter, and 358 in the prior year. The annualized revenue per full time employee is $260,000 which is near their historical peak. Their annual employee growth of employees is 27%. If their revenue per employee is increasing, not decreasing, any addition to staff between this quarter and next quarter (and they are adding to staff) will generate an even higher percentage of sales growth. The kicker is that each additional sales dollar is bringing in more earnings per dollar because margins are increasing. Make sense?
My guess is that owning QSII is going to be a roller coaster ride. Every time someone over there farts, we’ll see some share price movement. At these high PE levels, it’s not for the faint of heart. However, my portfolio has quite a few low P/E stocks in it, and I’d figure I’d spice it up a little, at least this one time, going into the new year. Earnings will probably come out in early February. If I’m on target, I’ll be out of this stock before earnings come out. (If I’m reading the chart correctly, it looks like it is forming a cup, so the price run-up will be sooner rather than later.) If I have to hold it through earnings, I’ll need to drink heavily in anticipation of them smashing their numbers. The market seemed to react reasonably well to their prior earnings releases, so holding through news shouldn’t be to painful.
Oh well, if it gets painful, I can go see the doctor.
I am HUGE! Bring me your finest eats and cheeses!
$$$MR. MARKET$$$
PS For all you $$$MR. MARKET$$$ trivia buffs, you might note that QSII was purchased before and was #15 in my streak of 77 consecutive profitable trades. For Auld Lang Zyne my dear.
It’s not a perfect world, and certainly the waiting time in the doctor’s office is considerably less than perfect. I mean, how many times can I read Children’s Highlights? We all must remember the lessons of Goofus and Gallant:
Funny thing is, everything Goofus does seems to make more sense to me than what Gallant does.
Anyway, the wait in the doctor’s office is so excruciatingly long because most doctors are still back in the stone age when it comes to record keeping. You got it..when it’s time to go home, they fly off of their Brontosaurus and say Yabba Dabba Doo. Meanwhile all the crinkled manila folders fall off the top of the filing cabinets and your prescious medical records get coffee stained. Then the janitor comes in and eats the donuts left in the box. But he doesn’t like the coconut one so he sprinkles the frosting all over your EKG.
There is a solution to this madness. It is called Quality Systems, Inc. (QSII).
Today I bought QSII at 78.25. I will sell it in 4 to 6 weeks at 90.08. Here’s why I like QSII:
Quality Systems Inc., comprised of the QSI Division and a wholly owned subsidiary, NextGen Healthcare Information Systems, Inc. develops and markets healthcare information systems that automate certain aspects of medical and dental practices, networks of practices such as physician hospital organizations (PHO's) and management service organizations (MSO's), ambulatory care centers, community health centers, and medical and dental schools.
The Company, a California corporation formed in 1974, was founded with an early focus on providing information systems to dental group practices. In the mid-1980's, they capitalized on the increasing focus on medical cost containment and further expanded their information processing systems to serve the medical market. In the mid 1990's they made two acquisitions that accelerated our penetration of the medical market. These two acquisitions formed the basis for what is today the NextGen Division. Today, they serve the medical and dental markets through their two divisions.
The two Divisions operate largely as stand-alone operations with each Division maintaining its own distinct product lines, product platforms, development, implementation and support teams, sales staffing, and branding. The two Divisions share the resources of the "corporate office" which includes a variety of accounting and other administrative functions. Additionally, there are a small number of clients who are simultaneously utilizing software from each of our two Divisions.
The QSI Division, co-located with our Corporate Headquarters in Irvine, California, currently focuses on developing, marketing and supporting software suites sold to dental and certain niche medical practices. In addition, the Division supports a number of medical clients that utilize the Division's UNIX(1) based medical practice management software product.
The NextGen Division, with headquarters in Horsham, Pennsylvania, and a second significant location in Atlanta, Georgia, focuses principally on developing and marketing products and services for medical practices.
Both Divisions develop and market practice management software which is designed to automate and streamline a number of the administrative functions required for operating a medical or dental practice.
Quality Systems future looks promising due to strength in its core product Nextgen, strong balance sheet (about $4.25 per share in cash and no long term debt), anticipated strong near term prospects driven by handful of larger contracts.
Quality Systems is one of the fastest-growing and highest regarded software companies addressing the market for electronic medical records (EMR). That’s right, now more donut smeared manila folders. QSII has won many industry awards to support their position in this frontier market.
Over the past several years the demand fpr QSII’s products has accelerated as healthcare information technology spending has increased, especially for products that enable medical professionals to cut costs and improve efficiency. Think of it this way. If you wanted to open an Excel file or Word document, you’d just go to your computer and click “File Open”. In the medical profession, documents are still mostly on paper and accessing these documents involves getting up off your ass and climbing a shelf. How would you like doing that every time you wanted to open a spreadsheet on your PC. Starting to get the picture now?
The EMR market is in its very early stages, with only about 20% penetration in the markets that they know about. Most of the 600,000 physicians in the U.S. will convert to electronic records-keeping and management in the next few years. That’s a lot of sales calls for QSII. Each system they sell goes for hundreds of thousands of dollars. The best thing is that each incremental sale is almost all profit! The hardest part for QSII is to get the word out, let doctors know it exists. Adoption of these systems has been a stumbling block because physicans are resistant to change. Plus many doctors are cheap. They have to save their quatloops to buy new cars, and jewelry for their wives and country club memberships. However, EMR is going to soon become a necessity rather than a luxury.
Patrick Cline, President of NextGen, expects sales to double and NextGen is feverishly trying to build its sales force. The fact that they are looking to add to headcount indicates that sales growth will be a self fulfilling prophesy.
President Bush's proposal to more than double spending for computerized health record testing, to $125 million has certainly been a key catalyst. Since 2002, QSII has generated 26% average organic growth while EBITDA margins have expanded by 800 basis points. More recently, revenues have been growing at a 39% clip, year over year. Also, Health care providers are rushing to store patients' records electronically to become compliant with the Health Insurance Portability and Accountability Act, or HIPAA.
"Hippa, by all accounts, is going to be a tremendous burden to medical practices because it deals with the exchange of clinical and administrative info," Cline said. "It's designed to simplify transactions and protect patients' privacy and the security of information. It's going to be difficult to comply with these laws without an electronic system."
What about competition? Sure there’s competition, but NextGen is the best. NextGen offers some of the most flexible products because they can work with more than 25 kinds of practice management software. One of the differentiating features of Quality Systems' NextGen products is that they interface with so many different systems. They're not requiring an office to replace everything they have. NextGen software can also be set up to fit medical practice's workflow. A Quality salesperson can model an electronic form after a paper one. The salesperson can make the patient admission form look exactly like the paper form. So when they go to show the system to sell it to the practice or train the users, the comfort factor is high.
This revenue growth for QSII is well above the healthcare IT market growth rate and the growth of its direct competitors. Translation they are kicking major ass. The great news is that recurring revenue is 45% of sales, meaning that we can expect this sales growth to continue, at least in the near future.
Now don’t get me wrong, QSII’s fantastic story ain’t no secret. Look at this chart:
The stock is up 172% in the last 12 months. That’s fine with me. QSII’s PE is 53. Is that expensive? Hell yea it is. But that’s what I said about HOLX’s PE also. Sometimes you just have to jump on the biggest baddest bull and ride it for another 6 seconds. That’s what I’m doing here with QSII. I have a month before earnings come out and all indications are that the next earnings release will be very positive. At this kind of PE, all I can say is I hope I’m right. This could be a quick win or a punishing fall!
So my bet is that earnings will continue to be strong. The great thing about QSII is that they never give any forward guidance. This means that the ANAL-ysts are completely in the dark about where this company is going. As a result, QSII does not feel compelled to manipulate numbers to meet targets that they have set for Wall Street. All they need to do is make sure the salesman are getting out to the physicians and taking them on deep sea fishing trips and college bowl games.
Some of the most famous doctors in Florida love to go to cocktail parties. They also love their new computer systems with DSL capability. It’s excellent for accessing digital images and whatnot.
How does all of this compute to earnings? In November, Quality Systems, Inc. announced the results of operations for its fiscal 2006 second quarter ended September 30, 2005. The Company posted net revenues of $29.5 million in the second quarter, an increase of 39% from the $21.2 million generated during the same quarter last year. The Company reported net income of $5.8 million, an increase of 56% over net income of $3.7 million earned in the comparable quarter of the prior year. Fully diluted earnings per share was $0.43 in the quarter, an increase of 54% over the fully diluted $0.28 per share earnings recorded in the same quarter last year.
The revenue and net income results achieved in the quarter were records for the Company. Results in the second quarter were driven by record revenue and profit in the Company's NextGen Healthcare Information Systems division. For the quarter, the Company's NextGen Healthcare Information Systems division posted record revenue of $25.5 million, up 48% over the same quarter prior year and record operating income of $9.9 million, up 62% over the same quarter of the prior year.
So far so good. But where is this ship sailing? ANAL-ysts, with no guidance from the company, are projecting March 06 earnings to be $0.47/share on $34 MM in revenue. For the fiscal year 2006, they are projecting $1.70 per share on $122 MM in revenue. Historically, QSII has surprised to the upside by about 12% .
$$$MR. MARKET$$$ thinks that the ANAL-ysts are pretty close on the revenue target but they haven’t quite factored in the economies of scale that go on the margin side. As a result, $$$MR. MARKET$$$ predicts that 2006 revenues will come in at $134 MM with EPS of $1.88. If QSII can carry its market premium PE of 53, we’ll see that translate to a share price of $97.76, which is greater than my sales target.
Here’s the secret. How do I know revenues will climb in the short term? Remember, they are selling software and software services. They aren’t a factory or a restaurant chain, so it is easy to add or reduce staff to meet demand for their product. If they see demand in the marketplace, they’ll add headcount. QSII full time employee headcount is up to 455 (as of last quarter), up from 417 in the prior quarter, and 358 in the prior year. The annualized revenue per full time employee is $260,000 which is near their historical peak. Their annual employee growth of employees is 27%. If their revenue per employee is increasing, not decreasing, any addition to staff between this quarter and next quarter (and they are adding to staff) will generate an even higher percentage of sales growth. The kicker is that each additional sales dollar is bringing in more earnings per dollar because margins are increasing. Make sense?
My guess is that owning QSII is going to be a roller coaster ride. Every time someone over there farts, we’ll see some share price movement. At these high PE levels, it’s not for the faint of heart. However, my portfolio has quite a few low P/E stocks in it, and I’d figure I’d spice it up a little, at least this one time, going into the new year. Earnings will probably come out in early February. If I’m on target, I’ll be out of this stock before earnings come out. (If I’m reading the chart correctly, it looks like it is forming a cup, so the price run-up will be sooner rather than later.) If I have to hold it through earnings, I’ll need to drink heavily in anticipation of them smashing their numbers. The market seemed to react reasonably well to their prior earnings releases, so holding through news shouldn’t be to painful.
Oh well, if it gets painful, I can go see the doctor.
I am HUGE! Bring me your finest eats and cheeses!
$$$MR. MARKET$$$
PS For all you $$$MR. MARKET$$$ trivia buffs, you might note that QSII was purchased before and was #15 in my streak of 77 consecutive profitable trades. For Auld Lang Zyne my dear.
Sorry to be the bearer of negative stuff, but just calling it as I see it. Good luck folks and hope I'm wrong.
Comment