) reported net loss of 4 cents per share in the third quarter of
fiscal 2012, worse than the year-ago net loss of a penny per
share. After adjusting for certain one-time items, the company
reported breakeven earnings per share (EPS), in line with the
Zacks Consensus Estimate. The results, however, are considerably
lower than the year-ago adjusted earnings of 5 cents per
Although total revenue during the quarter edged up 0.5% year
over year to $60.4 million, it was down 3.9% sequentially. Total
revenue also missed the Zacks Consensus Estimate of $64 million.
The company noted that its latest subscription-based pricing
model, which was launched in the first quarter of 2012, generated
15.1% of total revenue in the reported quarter with a 62% year
over year increase in subscription backlog.
Merge primarily derives revenues from three segments -
software and others (35.1% of total sales in the quarter),
professional services (18.7%), and maintenance and EDI (46.2%).
Barring software and others, which recorded a year-over-year
increase of 5.5% to $21.2 million, the professional
services, and maintenance and EDI registered annualized decline
of 6.0% to $11.3 million and 0.5% to $27.9 million, respectively,
during the quarter.
Total cost during the reported quarter (excluding depreciation
and amortization) increased 5.6% year over year to $22.9 million.
Gross margin during the quarter was 62.01%, down 183 basis points
(bps) compared to the year-ago quarter.
Sales and marketing expenses during the quarter were up 5.6%
(to $10.8 million) with a 14.9% jump in product research and
development expenses (to $8.3 million). General and
administrative expenses were up 3.7% year over year ($7.8
million) during the quarter. The adjusted operating margin
declined to 17.5% from 22.3% in the year-ago quarter.
Merge exited the quarter with cash (including restricted cash)
of $42.2 million compared with $39.3 million at the end of fiscal
2011. Year-to-date, operating cash flow was $5.1 million as
against $5.9 million in the same period last year.
Although the company's subscription-based model is improving
gradually, a sluggish second-quarter performance disappoints us
yet again. During the quarter, the company acquired 15 new
iConnect(R) contracts with some big healthcare systems. Moreover,
it received contracts to store more than 3.65 million studies in
the Merge Honeycomb Archive via subscription-based models. We
still believe that Merge has the potential to expand in the huge
and growing market for diagnostic imaging, especially with
government's emphasis on HIT and an aging population.
However, Merge's growth prospect is highly dependent on
capital investments by hospitals for advanced imaging solutions,
which in turn are linked to the general economic conditions.
Also, the presence of big players like
General Electric Co.
) has made the diagnostic imaging market highly competitive.
Presently, Merge retains a short-term Zacks #3 (Hold) Rank. Over
the long term, we are Neutral on Merge.
GENL ELECTRIC (GE): Free Stock Analysis
MCKESSON CORP (MCK): Free Stock Analysis
MERGE HEALTHCAR (MRGE): Free Stock Analysis
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