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Merge Reports Second Quarter Sales Growth of 13% Signs new clients under subscription model and is named #1 VNA in the world

Merge Reports Second Quarter Sales Growth of 13%

Signs new clients under subscription model and is named #1 VNA in the world

Merge Healthcare Incorporated (NASDAQ: MRGE), a leading provider of clinical systems and innovations that seek to transform healthcare, today announced its financial and business results for the second quarter of 2012.

“Our second quarter results reflect solid revenue growth even as we move to a new business model,” said Jeff Surges, CEO of Merge Healthcare. “With our premier client base, industry-leading solutions and expansion into new markets, we are well-positioned for continued success in 2012.”

Financial Highlights:

  • Revenue was $62.9 million ($63.4 million on a pro forma basis) in the quarter, compared to $55.6 million ($57.0 million on a pro forma basis) in the second quarter of 2011 - an increase of 13%.
  • Adjusted EBITDA was $13.6 million, representing 21% of pro forma revenue in the quarter, compared to $17.1 million and 30% in the second quarter of 2011.
  • Subscription-based pricing arrangements in which software, hardware and professional services are recognized ratably over a number of years generated 15% of total revenue in the quarter.

Business Highlights:
  • Signed multiple subscription-based contracts including an extension of our strategic partnership with one of the largest imaging practices in the country; 
  • Extended our leadership in enterprise-wide imaging and was named the world’s #1 Vendor Neutral Archive (VNA) provider;
  • Added five iConnect® contracts with leading healthcare systems including Franciscan Alliance, Children’s Hospital & Research Center in Oakland, Our Lady of Lourdes and St. Vincent Hospital;
  • Executed 12 contracts for the Merge Meaningful Use (MU) platform within Radiology and Orthopedics settings, adding another 125 physicians to those who have already selected Merge;
  • Released eClinical OS, a Software as a Service (SaaS) application, offering an end-to-end solution for clients to design, deploy and manage clinical trials;
  • Continued the nationwide replacement of disconnected health station units currently in retail pharmacy and corporate settings with new, connected Merge Health Stations.

Quarter Results:
Results compared to the same quarter in the prior year on a GAAP basis are as follows (in millions, except per share data):
  Q2 2012 Q2 2011
Net sales $62.9 $55.6
Operating income 3.4 8.1
Net loss attributable to common shareholders (5.9) (3.3)
Net loss per diluted share ($0.06) ($0.04)
     
Cash balance at period end $33.7 $45.2
Cash from business operations* 10.2 6.6
*See table at the back of this earnings release.

Pro forma results and other, non-GAAP measures compared to the same quarter in the prior year are as follows (in millions, except percentages and per share data):
  Q2 2012 Q2 2011
Pro forma results    
Net sales $63.4 $57.0
Adjusted net income 1.7 5.0
Adjusted EBITDA 13.6 17.1
     
Adjusted net income per diluted share $0.02 $0.06
Adjusted EBITDA per diluted share $0.14 $0.20
     
Non-GAAP and other measures**    
Subscription, maintenance & EDI revenue as % of net sales 58.8% N/A
Subscription and non-recurring backlog at period end $62.4 N/A
Days sales outstanding 99 N/A
**Comparable information for periods prior to Q2 2012 is not available.

Reconciliation of GAAP net income to adjusted net income and adjusted EBITDA is included after the financial information, below.

Pro Forma Operating Group Results:
Results (in millions) for our operating groups, which we commenced reporting in the second quarter of 2012, are as follows:


Explanation of Non-GAAP Financial Measures
We report our financial results in accordance with generally accepted accounting principles or GAAP. This press release includes certain non-GAAP financial measures to supplement its GAAP information. Non-GAAP measures are not an alternative to GAAP and may be different from non-GAAP measures used by other companies. A quantitative reconciliation of GAAP net income available to common shareholders to adjusted net income and adjusted EBITDA is included after the financial information included in this press release.
Management believes that the presentation of non-GAAP results, when shown in conjunction with corresponding GAAP measures, provides useful information to it and investors regarding financial and business trends related to results of operations, because certain charges, costs and expenses reflect events that are not essential to recurring business operations. In addition, management believes these non-GAAP measures provide investors useful information regarding the underlying performance of the post-acquisition business operations when compared to the pre-acquisition results of Merge and any significant acquired company.  Purchase accounting adjustments made in accordance with GAAP can make it difficult to make meaningful comparisons of the underlying operations of the business without considering the non-GAAP adjustments that are provided and discussed herein. Further, management believes that these non-GAAP measures improve its and investors’ ability to compare Merge’s financial performance with other companies in the technology industry. Management also uses financial statements that exclude these charges, costs and expenses for its internal budgets.  While GAAP results are more complete, these supplemental metrics are offered since, with reconciliations to GAAP, they may provide greater insight into our financial results. Management does not intend the presentation of these non-GAAP financial measures to be considered in isolation or as a substitute for results prepared in accordance with GAAP.

Additional information regarding the non-GAAP financial measures presented is as follows:
  • Pro forma revenue consists of GAAP revenue as reported, adjusted to add back the acquisition related sales adjustments (for all significant acquisitions) recorded for GAAP purposes.
  • Subscription revenue and the related backlog is comprised of software, hardware and professional services (including installation, training, etc.) contracted with and payable by the customer over a number of years.  Generally, these contracts will include a minimum volume / dollar commitment.  As such, the revenue from these transactions is recognized ratably over an extended period of time.   These types of contracts will include monthly payments (including leases), long-term clinical trials, renewable annual software arrangements (with very high renew rate), to specify a few methods.
  • Non-recurring revenue and related backlog represents revenue that we anticipate recognizing in future periods from signed customer contracts as of the end of the period presented.  Non-recurring revenue is comprised of perpetual software license sales and includes licenses, hardware and professional services (including installation, training and consultative engineering services). 
  • Adjusted net income consists of GAAP net income available to common stockholders, adjusted to exclude (a) acquisition-related costs, (b) restructuring and other costs, (c) stock-based compensation expense, (d) acquisition-related amortization, and (e) acquisition-related cost of sales adjustments and adds back (f) the acquisition-related sales adjustments.
  • Adjusted EBITDA adjusts GAAP net income available to common stockholders for the items considered in adjusted net income as well as (a) remaining depreciation and amortization, (b) net interest expense, (c) non-cash preferred stock dividends and (d) income tax expense (benefit).
  • Cash from business operations reconciles the cash generated from such operations to the change in GAAP cash balance for the period by reflecting payments of liabilities associated with our acquisitions, payments of acquisition related fees, interest payments and other payments and receipts of cash not generated by the business operations. 
Management has excluded certain items from non-GAAP adjusted net income because it believes (i) the amount of certain expenses in any specific period may not directly correlate to the underlying performance of business operations and (ii) the adjustment facilitates comparisons of pre-acquisition results to post-acquisition results.  In addition, the following adjustments are described in more detail below:
  • Acquisition-related amortization expense is a non-cash expense arising from the acquisition of intangible assets in connection with significant acquisitions. Management excludes acquisition-related amortization expense from non-GAAP net income because it believes such expenses can vary significantly between periods as a result of new acquisitions and full amortization of previously acquired intangible assets.
  • Stock-based compensation expense is a non-cash expense arising from the grant of stock awards to employees and is excluded from non-GAAP net income because management believes such expenses can vary significantly between periods as a result of the timing of grants of new stock-based awards, including grants to new employees resulting from acquisitions.
  • Acquisition related sales and costs of sales adjustments reflect the fair value adjustment to deferred revenues acquired in connection with significant acquisitions. The fair value of deferred revenue represents an amount equivalent to the estimated cost plus an appropriate profit margin to perform services-related software and product support, which assumes a legal obligation to do so, based on the deferred revenue balances as of the date the acquisition of a significant company was completed. Management adds back this deferred revenue adjustment, net of related costs, for non-GAAP revenue and non-GAAP net income because it believes the inclusion of this amount directly correlates to the underlying performance of operations and facilitates comparisons of pre-acquisition to post-acquisition results.

Notice of Conference Call
Merge will host a conference call on Wednesday, August 1 at 8:30 am EDT to discuss its financial results for the second quarter 2012.  Jeff Surges, Justin Dearborn, and Steve Oreskovich will lead the call. Investors can listen to the conference call live via telephone by dialing 888.267.0102 (US and Canada) or (706) 643-0988 (International) and and referencing Conference ID Number 98263095. The call can be accessed over the Internet at Merge Healthcare Web Cast. A replay via the Internet or phone will be available after the call at http://www.merge.com/Company/Investors/Conference-Call-Info.aspx.

About Merge
Merge is a leading provider of clinical systems and innovations that seek to transform healthcare.  Merge’s enterprise and cloud-based solutions for image intensive specialties provide access to any image, anywhere, any time. Merge also provides health stations, clinical trials software and other health data and analytics solutions that engage consumers in their personal health. With solutions that are used by providers and consumers and include more than 20 years of innovation, Merge is helping to reduce costs and improve the quality of healthcare worldwide. For more information, visit merge.com.

Cautionary Notice Regarding Forward-Looking Statements
The matters discussed in this news release may include forward-looking statements, which could involve a number of risks and uncertainties. When used in this press release, the words “will,” “believes,” “intends,” “anticipates,” “expects” and similar expressions are intended to identify forward-looking statements. Actual results could differ materially from those expressed in, or implied by, such forward-looking statements. Except as expressly required by the federal securities laws, the Company undertakes no obligation to update such factors or to publicly announce the results of any of the forward-looking statements.

Contact:
Lesley Weisenbacher
Vice President, Marketing
312-540-6623
lesley.weisenbacher@merge.com

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