MRGE

Merge Healthcare Incorporated. (MRGE)

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Merge Healthcare Incorporated (MRGE)

Q4 2012 Earnings Conference Call

February 19, 2013; 08:30 a.m. ET

Executives

Jeff Surges - Chief Executive Officer

Justin Dearborn - President

Steve Oreskovich - Chief Financial Officer

Analysts

Deepak Chaulagai - Dougherty

Chad Bennett - Craig-Hallum Capital

Ryan Daniels - William Blair & Company

Anthony Esposito - Imperial Capital LLC

Presentation

Operator

Good morning and welcome to Merge’s, fourth quarter 2012 earnings call. Today's call is being hosted by Jeff Surges, Chief Executive Officer; Justin Dearborn, President; and Steve Oreskovich, Merge’s Chief Financial Officer.

Before we get started, please consider that the comments today may contain forward-looking statements under the Private Securities Litigation Reform Act of 1995 and not historical facts. Actual results may differ. Various critical factors that could affect future results are set forth in the company’s recent SEC filings and press releases. The company undertakes no obligation to update or revise any forward-looking statements.

In addition, there may be references to non-GAAP financial measures. These measures are supplemental to the GAAP financial measures and should not be viewed as an alternative to them. For greater information regarding these metrics, please see the related discussion in the company’s earnings release.

With that, I will turn the call over to Jeff Surges.

Jeff Surges

Well, thank you operator and thanks to all of you for joining us this morning. I'm pleased to have the opportunity to share our 2012, Q4 record results, as well as an update on the company's market outlook and our strategies for 2013.

Before I begin this discussion, I want to first address the announcement we made in September of 2012. As you'll recall, at that time we stated that our Board of Directors, in response to certain inquiries made to Merge last year, had retained Allen & Company LLC, a New York based investment banking firm, to assist Merge in exploring and evaluating a broad range of strategic alternatives.

Following discussions with other companies in our sector, as well as with various private equity firms, we received several non-binding indications of interest. Our board has unanimously determined that the valuation ranges set forth in these indications of interest, did not appropriately value the company.

During this lengthy process, management remains very focused on the execution of our operational plan as evidenced by our strong Q4. Going forward we will continue this momentum and build Merge organically.

In Q4 we saw one of the strongest selling quarters in Merge’s history. As we've done in the past, I will provide an update on the Merge Healthcare side of the business and Justin Dearborn will provide an update on the Merge DNA operating group.

But before we turn to Q4, I think it's very important to look back even further. Two years ago Merge was $190 million company. Last year we ended our fiscal year $235 million in revenue, up from that $190 million, and this year we are finishing the year $251 million.

Our healthcare bookings are up 40% year-over-year, while eClinical bookings are up 79%. Additionally we grew our subscription backlog by 82%, while still maintaining our non-recurring backlog. To me, it's very clear that we've made substantial progress.

For the fourth quarter specifically, revenue increased to a healthy $65.1 million on a pro forma basis. Adjusted EBITDA was $13.9 million, representing 21% of pro forma revenue. Subscription based pricing arrangements generated 13.5% of total revenue in the quarter, as subscription backlog grew 12.8%.

For the Merge Healthcare portion of the business, revenue was $57.4 million, with subscription revenue comprising 3.1% of total revenue for this operating group. Adjusted EBITDA for the group was $15.1 million or 26.3% of pro forma revenue.

Our strong quarter was driven by sales of iConnect, adoption of our subscription based solutions and growth in several specialty areas. Let me briefly speak to each of these. This quarter, 12 more clients embraced the enterprise imaging strategy with our iConnect enterprise clinical platform, ranging from large IDM’s to community hospitals.

I'm pleased to report we saw a positive trend this quarter, with customers including Northeast Georgia Health System, who do not use Merge tax platforms selecting our vendor neutral archive. Competitors in this space have tried to claim that a company like Merge cannot be vendor neutral, because we offer our PACS; however, the selection of Merge by clients like Northeast Georgia, proves that our iConnect enterprise archive is a compelling choice, regardless of the clients legacy PACS.

As we have mentioned in the past, our VNA, which you may recall as the global market leader of VNA, is integrated to over 45 non-Merge clinical systems. Northeast Georgia joint clients including Health Ventures of Central Iowa, St. John's Providence Health System, Edward Hospital and Altru Health System, who also selected Merge’s iConnect solutions to enable their enterprise imaging strategies.

Remember, it was only two years ago that we started broadly selling and promoting the iConnect platform. At that time we predicted health systems were not going to be reimbursed for duplicate images. Payment models are changing and it's clear like no time in the past, that interoperability and particularly imaging interoperability is imperative to our health system’s success.

The second part of our strong quarter was fueled by growth in our subscription backlog. It was up $20 million or 82% in 2012. As of today clients have contracted with us to move more than $4 million annual studies in the Merge Honeycomb archive, our cloud-based archiving solution now live and yearning.

Read the rest of this transcript for free on seekingalpha.com