Recently, we reiterated our Neutral recommendation on
Merge Healthcare Inc.
) with a target price of $2.75.
The company's third quarter 2012 adjusted earnings per share
(EPS) remained at breakeven level, in line with the Zacks
Consensus Estimate but lower than the year-ago $0.05. Revenue
edged up 0.5% to $60.4 million but missed the Zacks Consensus
Estimate of $64 million.
Merge witnessed 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. During the reported quarter,
subscription revenue was approximately 15% of total net sales.
The shift to a subscription-based model is clearly reflected in
the company's continued backlog generation in both healthcare and
DNA compared to the year-ago quarter. The company expects about
80% of its revenue to be generated from the subscription-based
model in the next couple of years.
Currently, with the greater adoption of electronic health
records (EHRs) in doctor's offices, hospitals and imaging
centers, Merge's iConnect platform is becoming significant, since
it is a vendor-neutral archive. According to Frost and Sullivan
and Merge's recent research report, the global market for imaging
software and services, healthcare IT interoperability solutions
and EHR solutions for radiology, cardiology, ophthalmology and
orthopedics is worth $7.5 billion annually.
In the third quarter of 2012, the company added more than 15
clients for its iConnect solutions. These include global contract
research organizations (CRO), and large IDMs (identity
managements) to community hospitals.
We also believe that Merge possesses strong growth potential
in the Radiology Information System/ Picture Archiving and
Communication System (RIS/PACS) market. There is immense
potential in the diagnostic imaging market, especially with the
government's emphasis on health IT (HIT) and an aging
However, in recent years, Medicare reimbursement for advanced
medical imaging has declined significantly. This remains a matter
of concern as it could negatively affect hospital and imaging
clinic revenues, thereby reducing demand for imaging-related
software and services offered by Merge.
Moreover, Merge's growth prospects are highly dependent on
capital investments by hospitals for advanced imaging solutions,
which in turn depend on the general economic conditions.
Furthermore, the presence of many big players like
) has made the healthcare solutions and services market highly
competitive. We have a Zacks #3 Rank on the stock, which
translates into a short-term 'Hold' rating.
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