) recounted a significant addition to its client list with the
recent transition of its pricing arrangements to a
subscription-based model from the traditional perpetual software
license arrangement. Following this announcement, the
company's share price shot up 7.29% to close at $3.09.
Merge primarily generates revenue from the sale of software
(including upgrades), hardware, professional services and
maintenance and Electronic Data Interchange (EDI) services. By
tradition, majority of the company's revenues were used to be
generated through perpetual license agreements under which the
software, hardware and professional services were considered to be
sources of non-recurring revenue and related backlog.
The company also generated revenue through subscription-based
pricing arrangements in which software, hardware and professional
services were payable by customers over a period.
However, of late, the company perceived a change in customers'
buying habits with an increased demand for subscription-based
arrangements for huge multi-location groups as well as single
doctor practices. Additionally, the interest covered a wide range
of the company's solutions which include Merge RIS, Merge PACS and
Merge Eye Care PACS.
As a result, in order to align more closely with its clients'
long-term operating plans, Merge, in the first quarter of 2012,
announced a shift in its operations to subscription-based plans.
According to this plan, revenue from the transactions will be
recognized over an extended period of time. Subscription
arrangements contain contracts including leases with monthly
payments and long-term clinical trials or renewable annual software
contracts with a very high renewal rate.
During the second quarter of 2012, subscription revenue was
approximately 15% of total net sales with a subscription revenue
backlog of $34.1 million as of June 30, 2012. With the increasing
willingness of its clients to adopt this model, the company is
optimistic about this arrangement to become more prevalent in the
second half of 2012 and beyond.
We are encouraged by the fact that Merge revised its stand to
focus on the purchasing requirements of its clients in the face of
changing purchase patterns. It is also commendable that despite the
general slowdown in hospital spending, low demand for imaging
equipment and related technology due to global credit crisis and
macroeconomic factors, the company reported balanced segmental
revenue growth during the second quarter of 2012.
With the subscription model, the company expects to generate
lower revenues in initial phase but the situation is expected to
improve over the contract term.
However, the presence of big players like
General Electric Co.
) has made the diagnostic imaging market highly competitive.
Currently, Merge retains a short-term Zacks #3 (Hold) Rank. Over
the long term, we are Neutral on the stock.
GENL ELECTRIC (GE): Free Stock Analysis Report
MCKESSON CORP (MCK): Free Stock Analysis Report
MERGE HEALTHCAR (MRGE): Free Stock Analysis
To read this article on Zacks.com click here.