Merge Reports Second Quarter Financial Results merge, merge healthcare, q2 results Merge announces the resignation of Jeffery Surges and the appointment of Justin Dearborn as CEO

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Lesley Weisenbacher
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312-540-6623
lesley.weisenbacher@merge.com

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Merge Reports Second Quarter Financial Results

Merge announces the resignation of Jeffery Surges and the appointment of Justin Dearborn as CEO

Chicago, IL (Aug. 9, 2013) 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 2013. Merge also announced that its board of directors has accepted the resignation of Jeffery A. Surges as Chief Executive Officer and Director of the Company and appointed Justin C. Dearborn, as the Company’s new CEO. Additionally, Merge announced that Nancy Koenig has been promoted to Chief Operating Officer of the Company from EVP, Operations and also has been elected to the Company’s Board of Directors to fill the vacancy created by Mr. Surges’ resignation.

“Speaking on behalf of all of Merge’s Directors, I want to apologize for the company’s very disappointing second quarter results,” said Michael W. Ferro, Jr., Merge’s Chairman of the Board and largest shareholder.  “We all strongly believe in the company, its products and its employees.  Our new leaders, Justin Dearborn and Nancy Koenig, resurrected Merge five years ago, and they are the right team to get the company back on track.  I, personally, plan to continue to invest in Merge, whether in response to opportunities in the market or otherwise.”

Mr. Dearborn said, “Merge’s value proposition continues to be very strong in three distinct market areas: imaging and interoperability, cardiology, and clinical trials. Our spending, on bringing innovative solutions to market, has outpaced our end user markets’ readiness for a variety of macro-economic reasons currently clouding hospital spend decision making. We saw a continued reluctance amongst large health systems to move forward with enterprise purchases. Unfortunately, this pause has overshadowed the fourth quarter in a row of very strong bookings and revenue growth from our clinical trials group.” Mr. Dearborn joined Merge in 2008 and has served as CEO, Chief Financial Officer and most recently as President and CEO of Merge’s DNA reporting segment.

We anticipate recording a pre-tax restructuring charge of approximately $1.0 million to $2.0 million in the third quarter of 2013 primarily for severance and other costs related to certain sales and marketing cost reduction initiatives taken in the quarter.
 
Financial Highlights:

  • Sales decreased to $57.2 million ($57.6 million on a pro forma basis) in the second quarter of 2013, from $62.9 million ($63.4 million on a pro forma basis) in the second quarter of 2012;
  • Adjusted EBITDA for the second quarter of 2013 was $8.5 million, representing 15% of pro forma revenue for the quarter, compared to $13.6 million and 21% in the second quarter of 2012 (see table at end of this press release for reconciliation);
  • Revenue generated from subscription-based pricing arrangements increased to 17% of total sales in the second quarter of 2013 and subscription backlog grew 82% since the second quarter of 2012;
  • Debt refinancing reduced Merge’s effective cash interest rate by almost 50% (approximately $14.3 million on an annual basis) and extended the maturity of its indebtedness to six years, while also adding a five-year, $20 million revolving credit facility; the refinancing resulted in $23.8 million of one-time expenses, including $20.3 million of cash expenditures incurred in the second quarter of 2013; and
  • Cash from business operations increased to $10.6 million in the second quarter of 2013 from $10.2 million in the second quarter of 2012.

Business Highlights:
  • Added 12 iConnect® contracts with large and small hospitals and imaging centers, including UC San Diego Medical Center, Children’s Memorial Hospital, Pioneers Memorial and Radiology Limited, among others;
  • Executed 17 contracts for Merge Cardiology products with clients including, Central Washington Hospital, Clinton Memorial Hospital, Borgess Health and St. Vincent Hospital, among others;
  • Saw 10 new clients from both large and smaller organizations across all specialties including radiology and orthopedics groups adopt Merge Honeycomb including, Premier Diagnostic, Vista Imaging, North Carolina Orthopedics, Parker University and Pioneers Memorial, among others;
  • Backlog for the quarter in the clinical trials segment, which is 100% subscription revenue based, grew from $35.5M at the end of the first quarter of 2013 to $45.7M at the end of the second quarter of 2013.

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 2013 Q2 2012
Net sales $57.2 $62.9
Operating income 1.3 3.4
Net loss (28.1) (5.9)
Net loss per diluted share ($0.30) ($0.06)
     
Cash balance at period end $16.8 $33.7
Cash from business operations* 10.6 10.2
*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 2013
Pro forma results    
Net sales $57.6 $63.4
Adjusted net income 0.9 1.7
Adjusted EBITDA 8.5 13.6
     
     
Adjusted net income per diluted share $0.01 $0.02
Adjusted EBITDA per diluted share $0.09 $0.14
     
Non-GAAP and other measures    
Subscription, maintenance & EDI revenue as % of net sales 65% 59%
Subscription and non-recurring backlog at period end $86.8 $62.4
Days sales outstanding 120 99
 
A reconciliation of GAAP net income (loss) 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 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 arrangements will include monthly payments (including leases), long-term clinical trials, renewable annual software agreements (with very high renew rate), to specify a few contract 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) debt extinguishment costs, (c) restructuring and other costs, (d) share-based compensation expense, (e) acquisition-related amortization (f) acquisition-related sales adjustments, and (g) acquisition-related cost of 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 and (c) 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 debt issuance and retirement activities, 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:
  • Debt extinguishment expense is comprised of both non-cash expenses, such as the remaining unamortized balance of costs associated with the issuance of the old debt and unamortized balance of the discount when the old debt was issued, as well as contractually owed cash charges to the holders of the old debt to allow us to retire it early.  Management excludes this expense from non-GAAP net income because it believes such expense does not directly correlate to the underlying performance of operations, rather is an expense that is specific to a transaction that we would expect to occur infrequently.
  • 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.
  • Share-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 at 8:30 AM ET on Friday, August 9, 2013.  The call will address second quarter results, followed by a business update on the company’s market outlook and strategies for the remainder of 2013.

Participants may preregister for this teleconference at http://emsp.intellor.com?p=412850&do=register&t=8.  Once the participant registers, a confirmation page will display dial-in numbers and a unique PIN, and the participant will also receive an email confirmation of this information.

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 25 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.