Quality Systems slumps a third on healthcare IT demand woes

(Reuters) - Quality Systems Inc (QSII.O) lost a third of its market value as the healthcare IT company pulled its full-year outlook after a weaker-than-expected start to the year on slowing sales of its high-margin software systems.

Shares of Quality Systems' dropped to a four year-low in early trade, before recouping some losses to trade down 33 percent at $15.76, making them the second-biggest percentage loser on the Nasdaq.

While some analysts said the company's results could be due to the distraction from an ongoing proxy fight, others suggested Quality Systems could be losing market share.

"We now have to strongly consider the idea that the company's addressable market opportunity is shrinking," said Sterne Agnee analyst Greg Bolan, slashing his price target on the stock to $18.50 from $43.

While healthcare IT firms face the threat of a dwindling customer base as hospitals consolidate physician practices into their existing vendors, Citi Research analyst George Hill said the Quality Systems' issues were specific to the company.

Hill said rivals Cerner Corp (CERN.O), which reports results later in the day, and Athenahealth Inc (ATHN.O) could benefit.

Cerner's shares were up just over one percent, while Athenahealth was down about one percent.

Most analysts questioned if Quality Systems, which makes electronic health records systems, would be able to sustain profits given its high dependence on software sales.

The Irvine, California-based company said sales of its software, hardware and supplies fell 11 percent in the first quarter and contributed just over a fifth to total revenue.

"We believe the company is struggling to move down market, as its core market of mid- and large-sized physician practices becomes saturated," said Oppenheimer analyst Bret Jones.

Quality Systems' weaker-than-expected profit also pulled shares of peer Allscripts Healthcare Solutions Inc (MDRX.O) down about 3 percent to $9.03.

SOFTWARE SLIPS

Quality Systems' bleak statement comes a day after its second-largest shareholder and board member, Ahmed Hussein, renewed his attack on the company in a letter issued late on Wednesday.

Hussein referred to the "obvious weaknesses in the company's position," urging shareholders to nominate his slate of seven directors at its annual meeting on August 16.

Early on Thursday, Quality Systems reported that its profit in the April-June quarter slumped 18 percent to $15.5 million, or 26 cents per share. Total sales rose 18 percent to $118.3 million.

Software sales fell 11 percent to $25.8 million, but included some amount that was to be recognized in the fourth quarter, said analyst Hill.

"Investors may fear (and be correct) that software sales were actually down more than 20 percent if this revenue was captured," Hill said.

Analysts, on average, had expected earnings of 35 cents per share on revenue of $120.6 million, according to Thomson Reuters I/B/E/S.

(Reporting by Balaji Sridharan and Zeba Siddiqui in Bangalore; Editing by Akshay Lodaya, Ted Kerr and Savio D'Souza)