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Merge Posts Q4 Earnings, Revs Fall

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Merge Healthcare Incorporated  reported fourth-quarter 2013 adjusted net income per share of 3 cents, bouncing back from a loss of 4 cents incurred in the year-ago quarter. However, reported net loss of $0.3 million or break-even results in the fourth quarter of 2013 compared favorably with the year-ago net loss of $17.3 million or loss of 19 cents per share. Full year adjusted EPS was a penny, a huge improvement from the year-ago loss of 23 cents.

Quarter in Detail

Total revenue in the reported quarter declined 17.1% year over year to $53.6 million. On a pro forma basis, sales declined 17.2% year over year to $53.9 million, lagging the Zacks Consensus Estimate of $58 million. Of the total revenue, 64% was generated from subscription and other predictable sources. Subscription backlog grew 39% over the prior-year quarter, with improvements in both the Merge Healthcare and DNA segments.

Segments in Detail

Merge Healthcare primarily derives revenues from three segments – Software and others (33.4% of total sales in the quarter), Professional services (18.2%), and Maintenance and EDI (48.4%). While maintenance and EDI registered revenues of $26.1 million, down 10.1%, the Software and others segment experienced a decline of 29.5% to $17.8 million. Revenues in the Professional services segment dropped 6.7% year over year to $9.7 million in the quarter.

Operational Update

Total costs (excluding depreciation and amortization) fell 23.1% year over year to $32.3 million. Fourth-quarter adjusted gross margin expanded a massive 309 basis points (bps) from the year-ago quarter to 60.2%.

Sales and marketing expenses were down 33.5% year over year (to $7.6 million) while product research and development expenses declined 9.4% (to $7.4 million) on a year-over-year basis. General and administrative expenses slashed 50.8% from the year-ago quarter (to $9.1 million).

Consequently, adjusted operating profit stood at $8.1 million against operating loss of $1.2 million in the year-ago quarter. The adjustments excluded restructuring and acquisition-related costs, depreciation and amortization.

Financial Update

Merge Healthcare exited the quarter with cash (including restricted cash) of $19.7 million, compared with $35.8 million at the end of 2012. Cash generated from business operations was $21.3 million versus cash outflow of $0.880 million in the year-ago quarter.

2014 Outlook

The company provided a basic guidance for 2014. Merge expects net sales in 2014 to remain in the range of $212-$225 (essentially flat with 2013 sales) leading to adjusted net income per share in the range of 16 cents to 21 cents. The Zacks Consensus Estimate for revenues of $217 million remains within the guided range.

Our Take

Disappointing fourth-quarter results combined with declining sales at Merge Healthcare raise an alarm.  On a positive note, increase in subscription-based backlog was the highlight of the quarter. On the other hand, Merge Healthcare’s growth prospects are highly subject to capital investments by hospitals for advanced imaging solutions, which are in turn, dependent upon generic economic conditions.

Currently, the stock carries a Zacks Rank #5 (Strong Sell). Some of the better-ranked stocks in the medical information systems industry are Computer Programs & Systems Inc. (CPSI - Free Report) with a Zacks Rank #1 (Strong Buy), and Omnicell, Inc. (OMCL - Free Report) and athenahealth, Inc. (ATHN - Free Report) , both carrying a Zacks Rank #2 (Buy).

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