MRGE

Merge Healthcare Incorporated. (MRGE)

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Merge Healthcare Incorporated (MRGE)

Q1 2013 Earnings Call

May 1, 2013, 8:30 a.m. ET

Executives

Jeff Surges - Chief Executive Officer

Justin Dearborn – President

Steve Oreskovich - Chief Financial Officer

Analysts

Ryan Daniels - William Blair & Company

Chad Bennett - Craig-Hallum Capital

Deepak Chaulagai – Dougherty

Unidentified Analyst (Eric)

Unidentified Analyst (Gene)

Presentation

Operator

Good morning and welcome to Merge's first quarter 2013 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

Thank you Operator and thanks to everyone for joining us this morning for an update on our solid Q1 performance.

As we typically structure this call, I will provide an update on the overall organization as well as the Merge Healthcare operating group. And Justin Dearborn will provide an update on the Merge DNA side of our business.

Let me start with the fact that last week, we completed our debt refinancing, which entailed replacing our existing 11.75% notes with a new senior secured credit facility consisting of a six year term loan of $255 million and a five year revolving credit facility of up to $20 million at an initial rate of 6%. This will have a very positive and immediate impact on our business as we expect to save over $14 million on an annual basis.

Early feedback from clients and partners has been overwhelmingly positive as they have expressed renewed confidence in Merge's long term health financially and our viability.

Equally important is the fact that we expect this transaction to add almost $0.04 of GAAP EPS on a quarterly basis, a good move by the team.

Additionally in the first quarter, total Merge revenue increased to $64 million on a pro forma basis. Adjusted EBITDA was $12.5 million representing 19.5% of pro forma revenue. And subscription based pricing arrangements generated 15% of total revenue in the quarter as the subscription backlog grew 16% in both of our operating groups.

For the Merge Healthcare portion of our business, revenue was $53.6 million. Adjusted EBITDA for that group was $14.6 million or 27.2% of pro forma revenue.

While our overall Q1 EBITDA results did not meet our internal expectations, there are a few things worth noting. First, it's only our first quarter, so we remain confident that with the final three quarters of the year, we will achieve our full year goals. Second, in light of the quarter's results, we have implemented a multi-faceted plan to improve our COGs or cost of goods sold. We expect to see these results from this activity in Q2. Last, we expect that we will see more net new clients, which I'll speak to in a moment, but we'll see an increase in software revenue, which will have a positive impact.

That said, we believe our record sales combined with general trends we saw in Q1 have us off to a good and solid start. These results were fueled by three things, net new sale of iConnect, expansion of strategic client relationships, and adoption of our subscription based Honeycomb solutions. I'd like to briefly address each one of these.

First for the quarter, 11 more clients embraced an enterprise imaging strategy with our iConnect enterprise clinical platform. Even more exciting, many of these clients were net new and we welcome them to the Merge family. And they don’t currently have any Merge products within their health system. This signals that the message of an enterprise imaging strategy is resonating with the industry at large and not just with clients who already use a Merge solution.

On our last call, I eluded to the fact that we had line of sight to several net new enterprise imaging and iConnect deals that were very substantial in size. We’ve made great progress on these net new deals and still see them occurring throughout the year as well as the market continues to open up for these type of solutions.

Second, in addition to adding net new clients in Q1, we had great success in the expansion of current client relationships. Two examples are Ascension Health and the Centers for Diagnostic Imagings, CDI. Both of these organizations are growing dramatically and decided to expand their relationship with Merge in Q1. Ascension provides care at more than 1,500 locations in 23 states. And has renewed their contract with Merge as well as expanded the services and solutions that it will be purchasing from Merge. The Ascension agreement not only secured Merge's existing relationships for another five years, but provides us with confidence in our ability to expand our relationship across additional product lines.

Due to the structure of this agreement, this opportunity is not currently contemplated in our non-recurring or subscription backlogs. But we are very excited about the opportunity to work with Ascension and support their growth initiatives for years to come, Enterprise Imaging.

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