MRGE

Merge Healthcare Incorporated. (MRGE)

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Merge Healthcare, Inc. (MRGE)

Q3 2012 Earnings Conference Call

November 01, 2012 08:30 a.m. ET

Executives

Jeff Surges – CEO

Justin Dearborn – President

Oreskovich – CFO

Analysts

Ryan Daniels

Deepak Chaulagai

Chad Bennett – Craig-Hallum Capital

Douglas Dieter

Presentation

Operator

Good morning and welcome to Merge’s Third 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 would first like to start and state that we will not be commenting on the previously announced strategic review underway with Allen & Company. This quarter we witnessed acceleration in our move to the cloud, increasing client adoption of our enterprise imaging solutions and so our clients received over $3.1 million in Stage 1 Meaningful Use incentive dollars by using Merge solutions.

As we did last quarter, I will provide an update on the Merge Healthcare side of our business and Justin Dearborn will provide an update on the Merge DNA operating group. Merge Healthcare represents roughly 85% of our business and in Q3 pro forma revenue was 53.4 million. Further, subscription revenue comprised 4.3% of total revenue for this operating group. Adjusted EBITDA for this group was 14.3 million or 26.8% of pro forma revenue.

On our Q1 earnings call, we announced the availability of a subscription-based pricing model to align more closely with our clients’ long-term operating plans. This quarter we saw continued adoption of subscription-based pricing models. I’m very pleased to report that clients contracted with us to move and store over 3.65 million annual studies to the Merge Honeycomb archive, our cloud-based archiving solution. These studies will come from groups of all sizes across a wide range of specialties, including North Texas Hospital, Wood County Hospital and (inaudible) Radiology Group plus earlier this week, as we announced, Resurgens Orthopaedics, the largest orthopedic practice in Georgia, has also selected Merge Honeycomb.

As previously stated and as evidenced by strong adoption in Q3, we expect to see clients continue to embrace our subscription and cloud-based solutions and we remain confident that our transition to the subscription model will increase predictability, position us for continued growth and ultimately prove to be more profitable. This quarter we also saw strong uptake in organizations embracing an enterprise imaging strategy with our iConnect enterprise clinical platform, we had over 15 clients select Merge iConnect solutions this quarter ranging from large IDMs to community hospitals, a brand new client for Merge, as I think in hospital who had selected the entire iConnect enterprise clinical platform and merged packs for their enterprise imaging strategies.

In a majority of our iConnect opportunities this quarter clients selected us because of the iConnect enterprise archive or VNA. We’ve seen progress of clients has moved from our iConnect Access and Share to the large anchor solution VNA.

And if you recall, last quarter we announced that Merge was named the number 1 global market leader in providing vendor neutral archive solutions by a leading independent research firm, without question the VNA space is very active right now. And based on our industry-leading products, we are aligning our sales, service and go-to-market teams to ensure that we, – we remain the leader in this space and continue to capture market share.

Just as our VNA strategic so to our partnerships with leading HIT organizations. As we’ve reported in quarters past, we continue to see progress with our partners. This quarter was no exception as we successfully partnered with Cerner and several client opportunities. One example is Rex Healthcare a member of the UNC Healthcare Network which will implement Merge Hemo to automate their cathlab in their Cerner electronic health record.

This quarter, we are pleased to announce that we were also awarded acceptance into the EMC select program and our entire iConnect enterprise clinical platform will be offered by EMC sales reps throughout the country, of which there are over 350 are the sales people, our progress in Q3 was not just in the acute marketplace but also in our ambulatory space. We continue to see clients selecting merge solutions to help them achieve meaningful use goals. Also in Q3, the final rules for Stage 2 meaningful use were announced and as we hoped and expected imaging was included.

The final rule states that 10% plus of all scans and test that resulted in image will need to be accessible through meaningful use certified EHR technology, a perfect fit for our iConnect Access product. We are excited by the opportunity that Stage 2 will represent as we move forward. Even more important, our clients have begun to recede meaningful use incentive dollars from the federal government.

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