MRGE

Merge Healthcare Incorporated. (MRGE)

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Merge Healthcare Incorporated (MRGE)

Q1 2014 Earnings Call

April 30, 2014 8:30 am ET

Executives

Justin C. Dearborn - Chief Executive Officer, President, Corporate Secretary, Director, Member of Executive Committee and Chief Executive Officer of Merge DNA

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

Analysts

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

Evan A. Stover - Robert W. Baird & Co. Incorporated, Research Division

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

Presentation

Operator

Good morning, and welcome to Merge's First Quarter 2014 Earnings Call. Today's teleconference is being hosted by Merge's Chief Executive Officer, Justin Dearborn; and Merge's Chief Financial Officer, Steve Oreskovich. My name is Colin, and I'll be moderating today session. [Operator Instructions]

Before we get started, please consider that the comments today may contain forward-looking statements under the Private Securities Litigation Reform Act of 1995, which statements are not historical fact. Actual results may differ. Various critical factors that could affect future results are set forth in Merge'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 presented in the company's earnings release 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 would now like to turn the call over to Merge's CEO, Justin Dearborn. Mr. Dearborn, please go ahead.

Justin C. Dearborn

Thank you, operator, and thank you to everyone for joining us this morning. Even though the industry continued to be top line challenged, we made progress in many areas of our business operations. We achieved an improved adjusted EBITDA margin of 20%, when compared to the last 3 quarters. We increased our cash flow to $13.5 million compared to $9.2 million in Q1 of 2013. We repaid $8.6 million of debt principal, achieving an incompliance leverage ratio under our credit facility. We reported net income profitability for the first time in more than 3 years. And we completed the refinancing of our credit facility with a new 6-year term loan of $235 million and effective variable interest rate of 7%.

The new facility has no financial covenants for the first year and the covenants, thereafter, provides significant additional operating flexibility, if needed. We continue to experience the same industry trends that drove our results in 2013, as we started 2014. Merge felt the impact to provider indecision, as they focused on big 2014 mandates such as ICD-10, and Meaningful Use Stage 2.

On April 1, President Obama signed legislation that delayed ICD-10 by at least 1 year. Vendors, hospitals and physician practices have been focused on October 1, 2014 for the deadline. This extension impacted both Merge's ambulatory and acute business. In the acute or hospital markets, customers seemed largely ready for ICD-10. The delay may provide hospitals a short window of opportunity to upgrade their legacy systems for imaging, but will also result in another period early in 2015 during which hospitals will again be forced to focus on compliance.

Meaningful Use Stage 2 compliance work is already underway and as unlikely to slow down because of the extension of MU2 announced in December of 2013. This may give Merge an opportunity to sell Interoperability Solutions, including the recently updated iConnect Access and iConnect Network to help prepare hospital customers for the mandate.

In the nonhospital, or ambulatory market, the ICD-10 extension provides release for outpatient customers, who had began to reserve funds to prepare for reimbursement delays tied to the mandate. The delay may allow them to focus on business fundamentals, including strengthening the referring physician networks and complying with Meaningful Use 2. Despite the ICD-10 delay, we believe, our customers will continue to upgrade to our latest risks and financial solutions releases because important improvements and functionality, including mandatory HCFA claims forms. MU2 is important to ambulatory customers as 80% of their physician clients have registered to participate and expect our customers provide certified technologies that help them demonstrate in a test for MU.

In Q1, Merge completed 2014 MU2 certifications for all of our applicable solutions, which helps our customers attest and receive reimbursements. MU2 had a lesser affect on Merge than EHR vendors, but it does create opportunities with respect to our ambulatory radiology and orthopedic customers, as well as opportunities for our hospital customers to purchase Interoperability Solutions.

To help our customers simplify their interoperability infrastructure, we released iConnect Access 5.0. In version 5.0, we have combined universal viewing and image sharing into a single integrated solution. Referring physicians now have access to both patients' priors and new shared images from browser-based devices. This update gives physician a simple workflow, letting them learn and use only 1 product for all their image viewing and image sharing needs within the EHR.

In addition, Merge saw continued momentum for our subscription base service offerings. We signed 19 new customers to iConnect Network in Q1, including Southern Illinois Healthcare, our first hospital customer for this solution. Additionally, we signed a reseller agreement, enabling a competitor to license the iConnect Network to their installed base. We also released the second version of the solution, which now integrates directly with athenahealth. Athena customers using this solution can receive and view exam results, diagnostic quality images and other critical patient information within their athenaClinicals EHR workflow.

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