Recently, we reiterated our Neutral recommendation on
Merge Healthcare Inc.
). Shares of the company surged 9.95% yesterday to close at $3.54
with the announcement of the company's plan to evaluate strategic
alternatives including the sale of the company or its merger with
another. In this regard the company appointed a New York based
investment bank Allen & Co. LLC to explore options.
In the second quarter, Merge reported a loss of 6 cents per
share, greater than the year-ago loss of 4 cents per share.
Adjusted earnings per share (EPS) came in at 2 cents in the
reported quarter, considerably down from the year-ago adjusted EPS
of 6 cents. Nevertheless, the adjusted EPS for the quarter was
ahead of the Zacks Consensus Estimate of break-even. Total revenue
during the quarter stood at $62.9 million, up 16% year over year
and above the Zacks Consensus Estimate of $60 million.
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. The company made this operational alteration to
better focus on its two primary served markets: providers and
Though this model has generated lower upfront revenues, thereby
impacting performance in the near term, it has higher longer-term
potential and lends visibility to the revenue stream. 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. The company expects about 80% of its
revenue to be generated from the subscription based model in a
couple of years.
Currently, with the greater adoption of EHRs in doctor's
offices, hospitals and imaging centers, Merge's iConnect platform
is becoming significant since it is a vendor-neutral archive. In
the second quarter of 2012, the company signed several new
contracts, including major healthcare systems such as Franciscan
Alliance with a network of 14 hospitals in Indiana, Children's
Hospital and Research Center in Oakland, California which is a
level one trauma center and
Our Lady of Lourdes
Hospital, which was formed by Ascension Health.
Additionally, St. Vincent's Hospital, a member of the Hospital
Sisters Health System and the largest hospital in Wisconsin has
developed a new partnership with Merge to implement the company's
complete cardiology solutions suite.
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 population.
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 #4 Rank on the stock, which translates
into a short-term Sell rating.
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