MRGE

Merge Healthcare Incorporated. (MRGE)

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Merge Healthcare Incorporated (MRGE)

Q3 2013 Earnings Call

October 30, 2013 8:30 am ET

Executives

Justin C. Dearborn - Chief Executive Officer, Director, Chief Executive Officer of Merge Dna and President of Merge Healthcare

Steven M. Oreskovich - Chief Financial Officer, Chief Accounting Officer and Treasurer

Analysts

Ryan Daniels - William Blair & Company L.L.C., Research Division

Eugene M. Mannheimer - B. Riley Caris, Research Division

Chad M. Bennett - Craig-Hallum Capital Group LLC, Research Division

Presentation

Operator

Thank you for joining today's Merge Healthcare 2013 Quarter 3 Earnings Call. My name is Carla and I will be moderating today's call. The call will last approximately 1 hour including a question-and-answer period at the end. [Operator Instructions] I would now like to turn it over to Merge Healthcare.

Unknown Executive

Good morning, and welcome to Merge's third quarter 2013 earnings call. Today's call is being hosted by Justin Dearborn, Chief Executive Officer; 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 Merge's CEO, Justin Dearborn.

Justin C. Dearborn

Thank you. And thank you to everyone for joining us this morning.

Q3 was a challenging quarter for Merge. The new management team stepped up and kept the organization focused on the future growth of the company while increasing cash flow and returning a portion of our debt ahead of schedule. And Merge's status as a market leader in the imaging and the interoperability field was confirmed, as we received several third-party accolades for our innovative solutions.

I'd like to address the industry trends and challenges we are seeing, which are driving market uncertainty. As I mentioned during the last earnings call, Q2 was a challenging quarter not only for Merge but for many other vendors in the health care information technology industry. Market drivers have not changed significantly in the past 90 days.

In Q3, we witnessed spending delays in both ambulatory and acute or hospital settings. And while Q3 is generally a soft quarter in health technology spending, we attribute additional hesitation in spending to several external pressures. In the hospital or the acute market, budgets have been negatively impacted by the federal budget sequester that was applied on April 1, which cut $11 billion in Medicare reimbursements for fiscal year 2013. Additional potential budget reduction efforts stalled forward progress on decision-making amongst our largest clients and prospects. Regulatory mandates, including the conversion from ICD-9 to ICD-10 and Meaningful Use Stage 2 has focused technology investments in core hospital information systems and revenue cycle management and not in other important but not mandated projects.

In the nonhospital or ambulatory market, the industry is experiencing a movement towards consolidation, with many physician and radiology practices being acquired by larger systems. This move towards consolidation can result in purchasing delays and, at a minimum, complicate decision-making. Despite the spending pause, we have continued to develop innovative technologies to help meet the inevitable market demand.

In the ambulatory radiology market, the majority of our clients will need to upgrade their current products to stay in compliance with either ICD-9 or Meaningful Use. To help our customers embrace these changes, we are working diligently to update our financial systems and radiology information systems for ICD-10 coding and certifying virtually all of our existing imaging, interoperability and workflow products for Meaningful Use Stage 2 over the next few months.

Merge is the industry leader for radiology Meaningful Use. We launched the first comprehensive certified RIS to support Stage 1 requirements. And recently, the U.S. Department of Health and Human Services data showed that Merge RIS solution is the most widely used Certified Electronic Health Record Technology by radiologists.

Despite market conditions, we do see encouraging trends and areas of sales opportunity in 3 core areas of our business. First, in interoperability. As more health care organizations adopt the cloud as a viable, cost-effective solution to help manage images across the enterprise, we've seen our backlog for Merge Honeycomb Archive, a cloud-based archiving solution with a subscription pricing model, gain momentum. We've also realized 2 large net new customer wins in both the hospital and ambulatory sectors and have a significant sales opportunity to advance the market with the new iConnect Network.

Recently, Frost & Sullivan, a worldwide leader in market research, recognized Merge's experience in this area. In August, Merge officially announced that we received the 2013 Product Leadership Award for clinical imaging and interoperability. This Best in Interoperability Award acknowledges our industry leadership with the entire iConnect Enterprise Clinical Platform, which includes iConnect Access and iConnect Enterprise Archive and Merge's VNA solution.

According to recent industry reports, the entire global VNA market is now estimated to be valued at $165 million and is expected to reach $335 million by 2018. For the second year in a row, IHS has named Merge as the world leader in VNA solutions. More studies are being archived by Merge clients than any other solution provider. In total, Merge clients have accumulated over 237 million exams, which equates to over 15 billion images.

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