) reported loss of 2 cents per share in the first quarter of fiscal
2012, slightly up from the year-ago loss of 4 cents per share.
However, adjusted EPS came in at 3 cents in the reported quarter,
in line with the prior-year adjusted EPS but ahead of the Zacks
Consensus Estimate of break-even.
Total revenue during the quarter stood at $61.0 million, up 16%
year over year but down 4.8% sequentially. Total revenue also
missed the Zacks Consensus Estimate by $6 million. While reporting
the quarter's result, Merge also announced changes in its
operations. From now on, the company has been fragmented in
two new operating groups, namely Merge Healthcare and Merge DNA
(Data & Analytics). The company also announced changes to the
roles and responsibilities of a number of senior executives,
including the re-assumption of the CFO role by Steve Oreskovich.
The company believes with the operational alteration it will be
able to better focus on its two primary end users, providers and
consumers. These operational changes were needed as the company
shifted from traditional perpetual software license arrangement to
subscription-based pricing in order to meet the purchasing
requirements of the company's clients in better way.
Merge primarily derives revenues from three segments - software and
others, professional services, and maintenance and EDI. The three
segments registered annualized growth of 22.0% to $22.7 million,
11.9% to $9.4 million and 12.4% to $28.9 million, respectively,
during the quarter. Recurring revenues in the quarter were nearly
57.5% of net sales versus 65% in the year-ago quarter.
Gross margin in the quarter was 59.02% versus 58.03% in the
year-ago quarter, up 99 basis points (bps) year over year. However,
gross margin in the reported quarter contracted 368 bps
sequentially. Adjusted operating margin (excluding the impact of
certain one-time expenses) contracted 170 bps on a year-over-year
basis and 320 bps sequentially to 14.5% during the quarter.
Merge exited the quarter with cash (including restricted cash) of
$39.8 million compared with $39.3 million at the end of fiscal
2011.Net cash provided by operating activities in the first quarter
was $2.1 million as against $6.9 million in the year-ago quarter.
With the shift from traditional perpetual software license
arrangement to subscription model in the first quarter of 2012 with
the introduction of Merge Honeycomb solution at the RSNA trade
show, Merge witnessed greater demand for its offerings. However,
with the subscription model, the company anticipates lower upfront
revenue, but expects to incur more over the contract term. Although
the company expects year-over-year revenue growth in fiscal 2012,
the subscription pricing changed its initial 2012 revenue
expectations. As a result, the company suspended its previous
On the back of a disappointing first quarter and uncertainty
related to operational changes, share price of Merge plummeted
36.2% to $2.52. We remain concerned about declining Medicare
reimbursement for advanced medical imagingthat has negatively
affected hospital and imaging clinic revenues, thereby reducing
demand for imaging-related software and services offered by Merge.
Moreover, Merge's growth prospect is highly dependent on capital
investments by hospitals for advanced imaging solutions, which are
in turn tied to the general economic condition.
The presence of big players like
General Electric Co
) has made the diagnostic imaging market highly competitive.
However, we still believe in the immense potential of Merge in the
huge and growing market for diagnostic imaging, especially with
government's emphasis on HIT and an ageing population.
Presently, Merge retains a short-term Zacks #3 Rank (Hold), which
also corresponds to our long-term Neutral recommendation on the
(NOTE: We are re-issuing this article to correct a mistake,
namely that we had erroneously mentioned Steve Oreskovich was
resigning from Merge Healthcare, which is untrue. We regret the
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MERGE HEALTHCAR (MRGE): Free Stock Analysis
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