QUALITY SYSTEMS, INC.

October 22, 2015

MARKET PERFORM

Reason for report:

EARNINGS

David Larsen, CFA (617) 918-4502 David.Larsen@

Chris Abbott (617) 918-4010 Chris.Abbott@

QUALITY SYSTEMS, INC.

Hospital Division Sale, Cost Reduction a Plus, but Volatility Likely, PT to $15

? Bottom Line: This afternoon QSII reported F2Q:16 results, and while total revenue of $125.4M (+4.0% y/y) was roughly in-line with our estimate (of $125.2M) and consensus (of $124.8M), adjusted EPS of $0.21 (+66.9% y/y) was well ahead of our estimate (of $0.15) and consensus (of $0.14). QSII also announced the sale of its hospital segment, and under the new leadership of Rusty Franz as CEO, we believe QSII is taking the right steps to focus on its core ambulatory business. We are encouraged that bookings returned to normal levels and there appears to be some stabilization across QSII's business segments, although the EPS beat was largely due to SG&A timing benefits. The launch of QSII's NG Now cloud based EHR platform was delayed until C2017 which is a negative, and we remain cautious in the near-term as QSII continues its CFO search and works to re-position the company for growth. Maintain MP, PT to $15 from $14.

? Sequential business improvements a positive. We are pleased to see a sequential rebound in system sales after F1Q:16 weakness, and growth in recurring subscription services (+28% y/y) and RCM (+19% y/y) were both bright spots in our view. While the lower SG&A in the quarter (29.8% of revenue) helped drive the EPS beat, management noted that some benefit was timing related and it is expected to return to a normalized rate (~32% of revenue).

Key Stats:

(NASDAQ :QSII)

Sector:

Healthcare IT & Distribution

S&P 600 Health Care Index:

1,533.87

Price :

$12.86

Price Target:

$15.00 from $14.00

Methodology:

~21.4x C16E Adj. EPS of $0.70

52 Week High: 52 Week Low: Shares Outstanding (mil): Market Capitalization (mil): Book Value/Share: Cash Per Share: Net Debt to Total Capital: Dividend (ann): Dividend Yield: Est LT EPS Growth:

$18.75 $12.00

60.9 $783.2

$4.66 $1.95

NA $0.70 5.4%

NM

? Bookings improvement a positive, but still down year-over-year. After disappointing F1Q:16 bookings, it is reassuring that bookings returned to ~$60M in the quarter (down from $66.5M y/y but up from $37.5M sequentially). Sequential bookings growth came from add-on and new customer arrangements for software license sales and RCM deals. QSII did not provide a pipeline figure this quarter due to a new sales process with a new "solution oriented" go to market strategy. While this reduces some visibility, we don't believe there were meaningful changes to the pipeline and we expect a pipeline figure to be provided in F3Q.

? Sale of hospital division removes a distraction & overhang, but maintain MP. The sale of QSII's hospital segment should help QSII refocus on its ambulatory customer base which we view as a positive. While there will be a ~$4-6M revenue headwind in F2H:16 due to the sale, overall it will be slightly accretive to F2016 EPS ($0.02-$0.04). Incremental commentary around F2H:16 expectations call for revenue growth in 2H:16 expected to be more "muted" than the ~4% growth in 1H:16, although there is still no annual guidance. Our new estimates reflect the commentary and hospital segment divestiture. While we believe management is plotting a better course, NG Now platform delay is a negatives and we expect earnings choppiness to continue.

Mar Yr

1Q

2Q

3Q

4Q

FY Rev

1Q

2016E - New $122.2A $125.4A $125.7 $130.1 $503.4 $0.16A

2016E - Old $122.2A $125.2 $129.5 $132.1 $509.0 $0.16A

2017E - New $127.1 $130.5 $132.9 $136.1 $526.5 $0.16

2017E - Old

--

--

--

--

$539.8

--

2018E

--

--

--

--

$558.2

--

2Q $0.21A $0.15 $0.18

---

3Q $0.16 $0.15 $0.18

---

4Q $0.18 $0.17 $0.18

---

FY EPS $0.71 $0.62 $0.70 $0.66 $0.75

P/E 18.1x NM 18.4x NM 17.1x

Source: Company Information and Leerink Partners LLC Research Revenues in millions. Non-GAAP EPS exclude acquired amortization, acquisition costs, stock comp, litigation costs, and other one-time costs.

Please refer to pages 5 - 8 for Important Disclosures, Price Charts and Analyst Certification.

QUALITY SYSTEMS, INC.

October 22, 2015

INVESTMENT THESIS

Quality Systems is a developer and marketer of software systems for physician practice offices, other outpatient settings, and dental practices. The company is a significant player in the rapidly growing market for electronic medical records (EMRs) for ambulatory care settings with its NextGen product suite. The company should benefit from the $30B+ in healthcare IT stimulus payments, growth in hosted solutions, and demand for interoperability solutions, but overall we are cautious that system sales are slowing and Stage 2 Meaningful Use demand is expected to be well below the level of sales spurred by Stage 1; while the Stimulus should benefit the market overall, QSII may struggle to retain share and the replacement market continues to be very competitive. QSII is facing some integration challenges given the fairly large number of acquisitions completed over the past five years. NextGen has traditionally been a premium product, and the company's brand is well trusted in the market, but the complex specialty templates can be difficult to build and maintain, which has led to some customer attrition in our view. We believe the large group practices in the U.S. have a high EMR penetration rate, and we believe EMR sales for QSII are beginning to slow. Given the lumpy nature of System Sales, a deceleration in growth tied to EMR sales, we rate the shares Market Perform.

VALUATION

Quality Systems Inc. shares currently trade at ~18.4x our C2016E Adjusted EPS of $0.70, a discount to the HCIT group average of ~28.9x and below the company's 5-year historical EPS average of ~22.3x. QSII trades at 1.3x our EV / C2016E sales, which is below the group average of 2.9x. We estimate that over the next 12 months the shares will trade at $15 (previously $14) which is ~21.4x our C2016E Non-GAAP EPS of $0.70. Our higher price target is based on our more favorable EPS outlook following the sale of QSII's hospital segment. The stock may benefit from some take-out speculation and potential improvements in lead generation, pipeline and bookings, although we expect QSII's new products to take time to gain traction and we expect higher R&D to remain an earnings headwind. We are cautious on the company's ability to sell to the mid-sized group market via large deals, and we believe some of QSII's existing large customer base may be at risk. We have a greater conviction that the pipeline is starting to stabilize and management is taking the right steps to restructure the company to increase operating leverage and drive more cross-selling efforts, although the launch of QSII's NG Now platform is now delayed until C2017. We expect a shift in revenue mix away from software sales to pressure margins and believe the company will need to reduce its cost structure to grow margins. Given the potential for decelerating growth, limited earnings guidance, and a set of acquisitions that makes running the business more difficult, we rate the stock Market Perform.

RISKS TO VALUATION

Several vendors have begun to undercut Quality Systems and other premium EMR vendors on price in an effort to buy market share. We believe QSII has resisted pricing pressures up to this point, but could be forced to either concede price or share in the face of intense competition. In addition, QSII revenue and earnings may fluctuate significantly from quarter to quarter, given delays in purchasing related to the ARRA and lack of clarity around certain definitions within the legislation. Pressure from shareholder and previous board member Hussein represents a distraction and some uncertainty around the future board composition. We believe the shares could be negatively impacted if Hussein attempts to rejoin the board or if he begins to dump shares. Finally, lumpiness in earnings and revenue may cause stock price volatility, in either direction.

2

QUALITY SYSTEMS, INC.

October 22, 2015

Quality Systems Inc.

Q2 FY-16 Earnings vs. Leerink Partners Estimates

($ in millions, except EPS)

Q2 FY-16

Est

Act

Revenue

Software, Hardware and related

$30.0

$32.1

Maint, RCM, EDI & Prof Svcs

95.2

93.2

Total Revenue

125.2 125.4

Q2 FY-15 Exp Dif.

$29.0 91.5 120.5

3.6% 4.0% 3.9%

Cost of goods sold

55.7

56.6

56.8

-1.8%

Gross Profit Gross margin

69.5 55.5%

68.8 54.9%

63.7

9.0%

52.9% 261 bps

SG&A % rev

40.2 32.1%

37.4 29.8%

38.7 32.1%

3.8% -3 bps

Software R&D

19.4 15.5%

18.9 15.1%

17.8 14.8%

9.0% 73 bps

EBIT EBIT Margin

9.9 7.9%

12.5 10.0%

7.3 6.0%

36.9% 191 bps

Net interest & other

0.0

(0.0)

0.0

Profit before tax

9.9

12.5

7.3

36.1%

Tax Tax rate

3.1 31.5%

4.2 33.4%

2.6

22.6%

34.9% -346 bps

Net operating earnings

6.8

8.3

4.7

43.3%

Shares out

61.1

61.2

60.8

GAAP EPS

$0.11 $0.14 $0.08 42.6%

Adjusted EPS

$0.15 $0.21 $0.13 14.2%

Source: Company reports and Leerink Partners LLC estimates

Adjusted Gross Profit E margin

$70.5 56.3%

$69.8 55.7%

$64.7

9.0%

53.7% 262 bps

Adjusted Operating Income E

$12.9 $18.7

margin

10.3% 14.9%

Source: Company reports and Leerink Partners LLC estimates

$11.8 9.8%

9.3% 51 bps

Act Dif. Comments

10.8% 1.9% 4.0%

Software & Hardware better than expected, offset slower growth in Maintenance, RCM, EDI and Professional Services Total revenue was In-line with our estimate

-0.3%

7.9% Less Gross margin expansion than we modeled, represents $0.01 ding 196 bps

-3.3% Better SG&A cost control more than offset the gross margin shortfall -227 bps Added back $0.03. Timing related, expected to return to 32% of revenue

6.0% 28 bps

Less R&D also added a penny

72.1% In-line revenue and better operating expense control drove operating 394 bps Income beat

71.0%

63.3% -156 bps Slightly higher tax rate immaterial

75.1%

73.9% 66.9%

GAAP EPS was ~$0.03 ahead of our estimate Adjusted EPS beat by $0.06, after adjusted for 1x items

7.9% 198 bps

57.8% One time items greater than expected, $2.3M from security litigation 508 bps

3

QUALITY SYSTEMS, INC.

October 22, 2015

Quality Systems Inc.

Income Statement Model ($ in millions)

Software, Hardware and related % change % of total

Maint, RCM, EDI & Prof Svcs % change % of total

F2014A

Mar-14

NA NA NA

NA NA NA

Total Revenue % change

$444.7 -3.4%

CoGS

Gross Profit % of Revs % change

Operating Expenses SG&A % of Revs Software R&D % of Revs

EBIT % of revs % growth

Interest Income/ (Exp) Other Income/(Exp)

Pretax Profit

Taxes Tax Rate

Net income % change

Extra Items (AT)

GAAP Net Income y/y change

220.2

224.5 50.5% -17.0%

155.1 34.9% 46.3 10.4%

23.1 5.2% -73.3%

0.2 (0.4)

23.0

7.3 31.8%

15.7 -73.5%

0.0

$15.7 -63.3%

GAAP EPS % change

Adjusted EPS % change

$0.26 -63.4%

$0.70 -38.2%

Basic shares Diluted shares

59.9 60.0

Source: Company reports and Leerink Partners LLC estimates

Non-GAAP EPS Adjustements:

Acquisiton costs

1.4

Amortization of acquired intangibles

8.3

Impairment of other assets

26.0

Proxy contest expense

1.7

Share-based comp

2.5

securities ligiation costs

0.0

other non-run-rate expenses

0.0

Incremental Taxes tax rate

13.6 32%

Non-GAAP Net Income

42.1

Adjusted Gross Profit: GAAP Gross Profit Adjustments Adjusted Gross Profit margin

Adjusted Operating Income GAAP Operating Expenses Adjustments to Operating Expenses Adjusted Operating Income margin

F2015A

Mar-15

NA NA NA

NA NA NA

$490.2 10.2%

223.2

267.1 54.5% 19.0%

158.2 32.3% 72.9 14.9%

36.0 7.3% 55.7%

(0.2) (0.1)

35.7

8.3 23.4%

27.3 74.3%

0.0 $27.3 74.3%

$0.45 70.5%

$0.62 -11.8%

60.3 60.8

2.9 7.1 0.0 0.0 3.5 4.0 0.3

7.4 NA

37.7

267.1 3.8

270.9 55.3%

231.1 14.0 53.7 11.0%

Q1-16A

Jun-15

28.4 -3.5% 23%

93.7 6.0% 77%

$122.2 3.6%

56.0

66.2 54.2% 7.3%

39.2 32.1% 18.0 14.7%

9.0 7.4% 16.5%

0.3 (0.1)

9.3

2.9 31.5%

6.4 23.2%

0.0 $6.4 23.2%

$0.10 22.6%

$0.16 22.2%

60.3 61.1

0.5 1.8 0.0 0.0 0.7 0.5 0.9

1.3 31%

9.6

66.2 1.0 67.2 55.0%

57.2 3.5 13.5 11.1%

Q2-16A

Sep-15

32.1 10.8% 26%

93.2 1.9% 74%

$125.4 4.0%

56.6

68.8 54.9% 7.9%

37.4 29.8% 18.9 15.1%

12.5 10.0% 72.1%

0.0 (0.1)

12.5

4.2 33.4%

8.3 75.1%

0.0 $8.3 75.1%

$0.14 73.9%

$0.21 66.9%

60.5 61.2

0.8 1.8 0.0 0.0 0.9 2.3 0.4

1.5 33%

13.0

68.8 1.0 69.8 55.7%

56.3 5.2 18.7 14.9%

Q3-16E

Dec-15

30.9 NA 25%

94.8 NA 75%

$125.7 1.8%

55.3

70.4 56.0% 1.9%

40.2 32.0% 18.9 15.0%

11.3 9.0% 37.8%

0.0 0.0

11.3

3.7 32.5%

7.6 14.4%

0.0 $7.6 14.4%

$0.12 13.7%

$0.16 2.3%

61.1 61.2

0.8 1.8 0.0 0.0 0.9 0.0 0.0

1.1 33%

10.0

70.4 1.0 71.4 56.8%

59.1 2.5 14.8 11.8%

Q4-16E

Mar-16

32.8 NA 25%

97.3 NA 75%

$130.1 1.4%

56.7

73.4 56.4% 1.2%

41.4 31.8% 19.5 15.0%

12.5 9.6% -1.9%

0.0 0.0

12.5

4.1 32.5%

8.4 -21.5%

0.0 $8.4 -21.5%

$0.14 -21.9%

$0.18 -11.7%

61.1 61.3

0.8 2.0 0.0 0.0 1.2 0.0 0.0

1.3 33%

11.1

73.4 1.0 74.4 57.2%

60.9 3.0 16.5 12.7%

F2016E

Mar-16

124.3 NA 25%

379.0 NA 75%

$503.4 2.7%

224.6

278.7 55.4% 4.4%

Q1-17E

Jun-16

30.7 7.8% 24%

96.4 2.8% 76%

$127.1 4.0%

56.2

70.9 55.8% 7.1%

Q2-17E

Sep-16

31.7 -1.4% 24%

98.8 5.9% 76%

$130.5 4.1%

56.8

73.7 56.5% 7.2%

Q3-17E

Dec-16

32.1 3.8% 24%

100.8 6.4% 76%

$132.9 5.8%

57.8

75.1 56.5% 6.7%

Q4-17E

Mar-17

33.3 1.6% 25%

102.7 5.6% 75%

$136.1 4.6%

59.2

76.9 56.5% 4.8%

F2017E

Mar-17

127.8 2.8% 24%

398.8 5.2% 76%

$526.5 4.6%

229.9

296.6 56.3% 6.4%

F2018E

Mar-18

133.1 4.2% 24%

425.1 6.6% 76%

$558.2 6.0%

242.8

315.4 56.5% 6.3%

158.2 31.4% 75.2 14.9%

45.3 9.0% 26.1%

0.3 (0.1)

45.6

14.8 32.5%

30.7 12.5%

0.0

$30.7 12.5%

$0.50 11.9%

$0.71 15.0%

60.7 61.2

40.7 32.0% 19.1 15.0%

11.2 8.8% 23.8%

0.0 0.0

11.2

3.6 32.5%

7.5 18.6%

0.0

$7.5 18.6%

$0.12 18.2%

$0.16 3.7%

61.1 61.3

41.7 32.0% 19.6 15.0%

12.4 9.5% -0.8%

0.0 0.0

12.4

4.0 32.5%

8.4 0.6%

0.0

$8.4 0.6%

$0.14 0.4%

$0.18 -17.1%

61.2 61.3

42.5 32.0% 19.9 15.0%

12.6 9.5% 11.6%

0.0 0.0

12.6

4.1 32.5%

8.5 11.6%

0.0

$8.5 11.6%

$0.14 11.4%

$0.18 9.3%

61.2 61.4

43.5 32.0% 20.4 15.0%

12.9 9.5% 3.5%

0.0 0.0

12.9

4.2 32.5%

8.7 3.5%

0.0

$8.7 3.5%

$0.14 3.2%

$0.18 0.0%

61.3 61.4

168.5 32.0% 79.0 15.0%

49.1 9.3% 8.4%

0.0 0.0

49.1

16.0 32.5%

33.2 7.9%

0.0

$33.2 7.9%

$0.54 7.6%

$0.70 -2.2%

61.2 61.4

177.5 31.8% 83.7 15.0%

54.1 9.7% 10.2%

0.0 0.0

54.1

17.6 32.5%

36.6 10.2%

0.0

$36.6 10.2%

$0.59 9.9%

$0.75 7.6%

61.4 61.5

2.8

0.8

0.8

0.8

0.8

3.1

3.1

7.4

1.8

1.8

1.8

1.8

7.2

7.2

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

3.7

1.0

1.0

1.0

1.0

4.0

4.0

2.8

0.0

0.0

0.0

0.0

0.0

0.0

1.4

0.0

0.0

0.0

0.0

0.0

0.0

5.2

1.2

1.2

1.2

1.2

4.6

4.6

NA

33%

33%

33%

33%

NA

NA

43.6

10.0

10.8

10.9

11.1

42.8

46.2

278.7 4.0

282.8 56.2%

233.4 14.1 63.4 12.6%

70.9 1.0 71.9 56.6%

59.7 2.6 14.8 11.6%

73.7 1.0 74.7 57.3%

61.3 2.6 16.0 12.2%

75.1 1.0 76.1 57.3%

62.5 2.6 16.2 12.2%

76.9 1.0 77.9 57.2%

64.0 2.6 16.5 12.1%

296.6 4.0

300.6 57.1%

247.5 10.3 63.4 12.0%

315.4 4.0

319.4 57.2%

261.3 10.3 68.4 12.3%

Source: Company reports and Leerink Partners LLC estimates

4

QUALITY SYSTEMS, INC.

October 22, 2015

Disclosures Appendix Analyst Certification

I, David Larsen, CFA, certify that the views expressed in this report accurately reflect my views and that no part of my compensation was, is, or will be directly related to the specific recommendation or views contained in this report.

Valuation

Quality Systems Inc. shares currently trade at ~18.4x our C2016E Adjusted EPS of $0.70, a discount to the HCIT group average of ~28.9x and below the company's 5-year historical EPS average of ~22.3x. QSII trades at 1.3x our EV / C2016E sales, which is below the group average of 2.9x. We estimate that over the next 12 months the shares will trade at $15 (previously $14) which is ~21.4x our C2016E Non-GAAP EPS of $0.70. Our higher price target is based on our more favorable EPS outlook following the sale of QSII's hospital segment. The stock may benefit from some take-out speculation and potential improvements in lead generation, pipeline and bookings, although we expect QSII's new products to take time to gain traction and we expect higher R&D to remain an earnings headwind. We are cautious on the company's ability to sell to the mid-sized group market via large deals, and we believe some of QSII's existing large customer base may be at risk. We have a greater conviction that the pipeline is starting to stabilize and management is taking the right steps to restructure the company to increase operating leverage and drive more crossselling efforts, although the launch of QSII's NG Now platform is now delayed until C2017. We expect a shift in revenue mix away from software sales to pressure margins and believe the company will need to reduce its cost structure to grow margins. Given the potential for decelerating growth, limited earnings guidance, and a set of acquisitions that makes running the business more difficult, we rate the stock Market Perform.

Risks to Valuation

Several vendors have begun to undercut Quality Systems and other premium EMR vendors on price in an effort to buy market share. We believe QSII has resisted pricing pressures up to this point, but could be forced to either concede price or share in the face of intense competition. In addition, QSII revenue and earnings may fluctuate significantly from quarter to quarter, given delays in purchasing related to the ARRA and lack of clarity around certain definitions within the legislation. Pressure from shareholder and previous board member Hussein represents a distraction and some uncertainty around the future board composition. We believe the shares could be negatively impacted if Hussein attempts to rejoin the board or if he begins to dump shares. Finally, lumpiness in earnings and revenue may cause stock price volatility, in either direction.

5

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