QSII

Analyst: Victor Sula, Ph.D. Initial Report May 19th, 2009

PESI daily

5/18/09

60 55 50 45 40 35 volume

© BigCharts.com

1 0.5 Mar

Apr

Millions

1.5

0

May

MARKET DATA

Share Statistics (04/29/09) Symbol Current price Low/ High 52 weeks Average Volume Market Cap Dil. Shares Outstanding

9mo 2008

9mo 2009

% Chg

FY 2007

FY % 2008 Chg

157.1

186.5 18.7%

QSII

Revenue $Mn.

135.3

179.7

32.8%

$51.88

Gross margin

66.4%

64.6%

-1.8%

67.5% 66.7% 0.8%

$25.70 - 53.15 Operating margin 31.3%

30.0%

-1.3%

47.8% 47.9% 0.1%

668,060

21.3%

19.3%

-2.0%

21.1% 21.4% 0.3%

1.04

1.23

18.3%

Net margin

$1,472 Mn. 28.3 Mn.

EPS, $

1.21

1.44

19.0%

Recommendation Quality Systems (QSII) is one of the top healthcare software vendors in the U.S., with annual revenue poised to exceed $240 million in 2009. QSII is well positioned for future growth based on the leadership position it holds today within the industry and increasing adoption of its offering. In addition, the Company is well positioned to benefit from President Obama’s $50 billion plan that provides rebates for doctors installing electronic medical records systems. Accordingly, we rate Quality Systems a “Buy.”

Highlights In 2008, the Company made a couple of important acquisitions to provide revenue cycle management services. The acquired companies - Healthcare Strategic Initiatives (HSI) and Practice Management Partners Inc. (PMP) added $34 million in annualized revenue. The figure is expected to rise as it sells new products to existing customers. HIS and PMP operate under the umbrella NextGen Practice Solutions. QSII intends to cross sell both software Quality Systems Inc. (Nasdaq: QSII)

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Analyst: Victor Sula, Ph.D. Initial Report May 19th, 2009

Quality Systems Inc. develops and markets healthcare information systems that automate medical and dental practices, networks of practices such as physician hospital organizations, ambulatory care centers, community health centers, and medical and dental schools.

The Company also provides revenue cycle management services, as well as hardware and software installation, maintenance and support services, system training, and electronic data interchange services.

QSII is comprised of the QSI Division and a wholly owned subsidiary, NextGen Healthcare Information Systems Inc. (NextGen Division). 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. Most of the Company’s proprietary electronic medical records software and practice management systems are offered under the NextGen3 product name.

QSII began operations in 1973 and incorporated in 1974. The Company is included in the S&P 600 SmallCap and S&P 1500 Super Comp Index.

and RCM services to the acquired customer base of HIS and PMP and NextGen. At December 31, 2008, the Company ended nine months of fiscal 2009 with record net revenue of $34.8 million or $1.23 per share on a fully diluted basis, rising 18.3% as compared to earlier year level.

The increase in net income was mainly a result of a 33% increase in consolidated revenue. Overall, QSII has achieved positive EPS growth routinely over the past two years. Analysts polled by Thomson Reuters expect the Company to earn $1.72 per share in the fiscal 2009 and $2.04 in fiscal 2010.

During past five years, the stock price increased approximately 400%. In a decade, this number surges to 4300% - one of the highest growth amongst all industries. Moreover, QSII has been paying annual dividend since 2005 and quarterly dividends since 2007. The stock rose to a major high at 45.97 in 2006 but got turned away in a long correction. The stock recently jumped to $53.69 record, driven by the earnings growth and the $20 billion stimulus package for healthcare IT companies. Currently, the Company’s stock is trading near the $50 mark.

In early April 2009, the Company announced it would offer both the NextGen Electronic Health Record (EHR) product and the NextGen Enterprise Practice Management (EPM) on a subscription basis. The products will be available as a bundle for $799 per practice per month, or practices can choose either individual offering for $599 per month. Meanwhile, about 75% of QSII’s new customers purchase practice management software in combination with electronic medical records systems, which have higher margins. The standard monthly subscription fee also includes state-of-the-art hosting and maintenance services, as well as access to the NextMD® patient portal and utilization of 3M CPT4/ICD9 coding content.

There are currently about 6,000 practice sites using Quality Systems and NextGen products. The Company has more than 1,400 billing sites. At December 31, 2008, the Company’s backlog stood at a record $86 million. That’s up $10 million from the earlier year.

The Company has been given multiple awards. The latest of them include: • Forbes ranked QSII one of the 200 Best Small Companies for the eighth consecutive year – No. 4 in 2008, moving up from its fifth place position in 2007 and from 158th position in 2001; • Fortune ranked the Company No. 41 in 2007 list of 100 Fastest Growing Small Public Companies;

Quality Systems Inc. (Nasdaq: QSII)

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Analyst: Victor Sula, Ph.D. Initial Report May 19th, 2009

STOCK PERFORMANCE (%) Price Change

GROWTH (%)

3 Mo.

1 Yr.

3 Yr. (Ann)

33.4

63.1

75.3

Last Qtr.

12 Mo.

3 Yr CAGR

Revenues EPS

36.2 15.0

18.6 19.0

28.0 33.5

RETURN ON EQUITY (%)

QSII

Ind Avg

S&P 500

TTM 5 Yr. Avg.

34.7 33.5

2.87 14.6

20.6 20.4

P/E comparison, ttm

• Business Week named QSII to 100 Hot Growth Companies list – No. 19 in 2007; and • Business 2.0’s 100 Fastest Growing Technology Companies named QSII No. 78 in 2007.

Financial Analysis Revenue for the nine months ended December 31, 2008, increased 32.8% to $179.7 million from $135.3 million for the nine months ended December 31, 2007. Overall, the NextGen Division accounts for approximately 94% of QSII’s revenue. The Company’s annual revenue has been growing about 26% on average the last couple of years. For the FY 2009 and 2010, revenue is expected to rich $246 million and $293 million, respectively.

For the nine months ended December 31, 2008, QSII’s gross margins slipped 600 basis points to 53.5% due to a shift in revenue mix with increased hardware, maintenance and revenue cycle management revenue. Some of that decline had to do with lowermargin products that the Company inherited from its recent acquisitions of HSI and PMP.

As of December 31, 2008, QSII has a solid balance sheet with $55.4 million cash and cash equivalents. Its cash decreased by $10 million-$12 million as compared to previous quarters, but the Company paid approximately $18 million including the repayment of acquired debt from the PMP acquisition. Also QSII paid a dividend of approximately $8.5 million or $0.30 per share in October 2008. The Company has no debt.

Industry analysis The market for healthcare products and services has exhibited attractive growth recently, driven by increasing demand for healthcare worldwide. The growth in the medical device and diagnostics sector has averaged between 8% and 9% over the past four years, and is projected at 7.2% per year over the next four years, with the global market exceeding $330 billion in 2008.

Source:Reuters.com

Quality Systems Inc. (Nasdaq: QSII)

In his inaugural speech, President Obama pledged to harness technology to raise health care quality and lower its costs, bringing health care into the 21st century. That includes investing $50 billion over the next five years in information technology to make health care more efficient. Medical records have gotten a lot of attention as the president has made it clear that this is a priority for his administration. The $819 billion stimulus package passed in January 2009 by the House includes $20 billion for health care IT. However, analysts don’t expect the stimulus package to have 3

Analyst: Victor Sula, Ph.D. Initial Report May 19th, 2009

an impact on healthcare companies until 2010 at the earliest, and how it will actually distributed to vendors is still unclear.

9mo 2008 31-Dec-07

9mo 2009 31-Dec-08

INCOME STATEMENT Net Sales ($mil) Gross profit ($mil) EBITDA ($mil) EBIT ($mil) Net Income ($mil)

135.3 89.8 42.3 45.3 28.8

179.7 116.1 53.9 54.9 34.7

BALANCE SHEET Cash & Equiv. ($mil) Total Assets ($mil) Total Debt ($mil) Equity ($mil)

30.0 160.3 0 114.7

55.4 171.5 0 150.7

66.4% 31.3% 0.82 18.0% 25.1%

64.6% 30.0% 0.87 20.2% 23.0%

2.6 -

2.1 -

27.74 1.04 4.12 n/a 347,146

28.28 1.23 5.3 70.3 356,961

PROFITABILITY Gross Margin Operating Margin Sales Turnover Return on Assets Return on Equity DEBT Current Ratio Debt/Capital Interest Expense ($mil) Interest Coverage SHARE DATA Dil. Shar. Outst.(mil) EPS Book value / share Institutional Own % Avg Daily Volume

Source: SEC filings; analyst estimates.

The personal computer has been available for more than 20 years, but only a small portion of doctors have switched from file folders to electronic patient records. There is plenty of room to grow the electronic medical records business, which would likely be the biggest beneficiary of the federal spending package. The Economic Reinvestment and Recovery Act earmarks $2 billion-$3 billion for construction of HIT infrastructure and about $17 billion in Medicare/Medicaid incentives payable to physicians and hospitals that can demonstrate meaningful use of certified HIT, particularly electronic health records (EHR). The companies providing doctors with hardware and software such as Quality Systems Inc., Allscripts-Misys Healthcare Solutions Inc., Cerner Inc., and athenahealth Inc. will benefit most from the stimulus package.

However, hospitals are delaying expansion plans, putting new equipment/software purchases on hold, blaming an ongoing financial crisis. A survey of 639 hospitals released in January 2009, indicates that as a result of the economic crunch, 45% of hospitals have postponed upcoming improvement projects and 13% have halted expansions already underway. Nevertheless, even without a dime of stimulus spending, the industry should grow at an attractive rate.

Analyst opinion QSII is focused on growing organically with a strong emphasis on reinvestment in new product and service development initiatives.

QSII acquisition strategy of complimentary business lines also contribute to growth.

QSII’s sales grew 39%, earnings per share rose 49% and return on equity increased 17%, on average during the past five years.

Meanwhile, the Company itself has lots of cash flow and never had debt. QSII has paid a substantial dividend for years, and continually produced new products that save health providers money. Analysts expect the Company to earn $2.04 per share in the year ending March 2010, which essentially equates to a forward P/E ratio of 20-25. That might seem a bit snooty, especially in this economic environment, but with five-year growth projections still being more than 18% per annum, there is sufficient certitude to believe in the Company’s success.

President Obama’s $50 billion plan is a significant boost for healthcare IT industry. The Company is well positioned to benefit

Quality Systems Inc. (Nasdaq: QSII)

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Analyst: Victor Sula, Ph.D. Initial Report May 19th, 2009

Consensus Estimates QSII

FY 2009 31-Mar-09

FY 2010 31-Mar-10

EPS, $ Revenue, $Mil

1.72 246.5

2.04 293.3

from the stimulus package which provides rebates for doctors installing electronic medical records systems. Even accounting for a decrease in IT expenditures due to the recession, Obama’s plan is enough to drive revenue to new heights for the sector.

Approximately 200,000 physicians could take advantage of the incentives, equaling to $4 billion in spending.

consensus estimates are provided by Thomson Financial

QSII’s stock has steadily risen over the past years. Priced at 30 times 2009 earnings, the stock seems expensive to the rest of the software industry, but the Company’s strengths give good reason for the higher price level at this time.

Rev. consensus estimates, $Mil.

Comparative analyses

Ticker Symbol

Revenue, $ Mn

2009

2010

%Chg

MDRX CERN ATHN HMSY HLTH ECLP

668.3 1,764 190.0 220.2 432.9 527.1

672.8 1,916 249.0 259.4 487.2 567.6

1% 9% 31% 18% 13% 8%

Median

480.0

527.4

11%

QSII

246.5

293.3

19%

Company Name 04.24.2009 Allscripts Misys Healthcare Solutions Inc. Cerner Corp. athenahealth Inc. HMS Holdings Corp.

HLTH Corp.

Eclipsys Corp.

Median Quality Systems Inc.

Ticker Symbol

Price per Share, $

P/E Mrkt. Cap. $ Mn 2009 2010

MDRX

11.03

1,573

22.06

18.38

CERN ATHN HMSY HLTH ECLP

46.89 28.74 29.88 11.31 11.63

1,068 960.5 765.5 1,165 653.0

20.48 61.15 29.01 226.20 25.28 27.15

17.63 38.32 22.47 80.79 21.54 22.00

QSII

51.88

1,472

30.16

25.43

Source: Thomson Reuters.

Source: Thomson Reuters.

EPS. consensus estimates, $ Ticker Symbol

EPS, $

2009

2010

%Chg

MDRX CERN ATHN HMSY HLTH ECLP

0.50 2.29 0.47 1.03 0.05 0.46

0.6 2.66 0.75 1.33 0.14 0.54

20% 16% 60% 29% 180% 17%

Median

0.49

0.68

25%

QSII

1.72

2.04

19%

Source: Thomson Reuters.

Quality Systems Inc. (Nasdaq: QSII)

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Analyst: Victor Sula, Ph.D. Initial Report May 19th, 2009

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I, Victor Sula, Ph.D, the author of this report, certify that the material and views presented herein represent my personal opinion regarding the content and securities included in this report. In no way has my opinion been influenced by outside parties, nor has my compensation been either directly or indirectly tied to the performance of any security listed. I certify that I do not currently own, nor will own and shares or securities in any of the companies featured in this report.

Victor Sula, Ph.D. - Senior Analyst Victor Sula, Ph.D. has held the position of Senior Analyst with several independent investment research firms since 2004. Prior to 2004, Mr. Sula held Senior Financial Consultant positions within the World Bank sponsored Agency for Restructuring and Enterprise Assistance and TACIS sponsored Center for Productivity and Competitiveness of Moldova, where he was involved in corporate reorganization and liquidation. He is also employed as Associate Professor at the Academy of Economic Studies of Moldova. Mr. Sula earned his Ph.D. degree in 2001 and bachelor’s degree in Finance in 1997 from the Academy of Economic Studies of Moldova. Mr. Sula is currently a level III candidate in the CFA program.

Quality Systems Inc. (Nasdaq: QSII)

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