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MRGE???s 4Q Loss Widens Y/Y, Revs Miss

Zacks Equity Research

Imaging and interoperability solutions provider Merge Healthcare Incorporated (MRGE) reported net loss of 19 cents per share in the fourth quarter of 2012, worse than the year-ago net loss of a penny per share. Considering stock-based compensation and interest expense as regular expense for the company, adjusted loss per share in fourth quarter was 9 cents, a huge disappointment when compared to the year-ago adjusted earnings of 7 cents.

Merge Healthcare recorded annual adjusted earnings per share of 2 cents in 2012, in line with the corresponding Zacks Consensus Estimate. However, the annual result was a downfall from the 2011 adjusted earnings per share of 30 cents.

Although total revenue edged up 0.9% year over year to $64.7 million, quarterly revenues missed the Zacks Consensus Estimate of $65 million. Annual revenues rose 7.1% to $248.9 million in 2012, trailing the corresponding Zacks Consensus Estimate of $250 million. The company noted that its latest subscription-based pricing model, which was launched in the first quarter of 2012, generated 13.5% of total revenue in the fourth quarter with 13% and 82% rise in subscription backlog in the quarter and full year, respectively.

Quarter in Detail

Merge Healthcare primarily derives revenues from three segments – software and others (39% of total sales in the quarter), professional services (16%), and maintenance and EDI (45%). Barring professional services, which recorded a year-over-year decline of 5.5% to $10.4 million, the software and other business, and maintenance and EDI registered annualized improvement of 2.4% to $25.2 million and 1.8% to $29 million, respectively, in the quarter.

Total cost (excluding depreciation and amortization) surged 27.8% year over year to $27.6 million. Fourth-quarter gross margin declined a whopping 896 basis points (bps) from the year-ago quarter to 57.3%.

Sales and marketing expenses in the quarter were down 5% (to $11.4 million) while product research and development expenses jumped 22.7% (to $8.1 million) on a year-over-year basis. General and administrative expenses shot up 81.4% year over year ($18.5 million).

As a result, operating expenses surged 31.9% year over year to $38 million. With a massive decline in gross margin and a significant increase in operating expenditure, the company incurred an operating loss of $0.9 million in the quarter compared with operating income of $13.7 million in the year-ago quarter.

Merge Healthcare exited 2012 with cash (including restricted cash) of $35.9 million, down 8.7% from 2011.


Merge Healthcare reaffirmed its outlook for 2013. The company continues to expect revenues in the band of $265 million and $275 million. The current Zacks Consensus Estimate of $265 million tallies with the lower end of the guidance. Adjusted EBITDA is envisaged in the range of 22% to 24%. Subscription backlog is expected to grow by more than $25 million through 2013.

Our Take

Merge Healthcare posted another weak quarter to end a challenging 2012. However, the company’s subscription-based model is gaining traction. Moreover, the company’s recent contract wins and bookings growth cannot be overlooked. It is commendable that Merge Healthcare inked several contracts amid a tough reimbursement environment for advanced medical imaging. We are encouraged by the bookings growth despite the general slowdown in hospital spending and low demand for imaging equipment and related technology.

Going forward, Merge Healthcare is better positioned for execution in 2013. The stock carries a Zacks Rank #2 (Buy). Besides Merge Healthcare, medical stocks such as NuVasive (NUVA) Given Imaging (GIVN) and Medical Action (MDCI), each carrying a Zacks Rank #1 (Strong Buy) are expected to do well in the near term.

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