Merge Healthcare Incorporated (MRGE) reported fourth-quarter 2014 adjusted net income per share of 4 cents, a penny higher than the year-ago quarter. Reported net income of $1.5 million or 2 cents per share in the fourth quarter compared favorably with the year-ago net loss of $0.3 million or break even on a per share basis.
For full year 2014, Merge Healthcare reported adjusted earnings of 15 cents per share, reflecting a massive year-over-year improvement from a penny earned in 2013. The full year adjusted bottom line was on par with the Zacks Consensus Estimate.
During its earnings release, Merge Healthcare announced the recent acquisition of DR Systems – a privately held San Diego-based company that provides medical imaging information systems, for a total of $70 million. Following this buyout, Merge Healthcare will be able to deploy its iConnect Network services, including pre-authorization services, to a broader client base of DR Systems. The transaction is expected to be accretive to Merge's non-GAAP adjusted EPS in 2015 and beyond.
Quarter in Detail
Total revenue in the reported quarter remained almost flat year over year at $53.6 million. This top line, however, missed the Zacks Consensus Estimate of $55 million. Of the total revenue, 63.6% was generated from subscription maintenance & EDI.
For full year 2014, the company reported revenues of $212.3 million, down 8.4% year over year and short of the Zacks Consensus Estimate of $215 million.
During the fourth quarter, the number of live trials on the Merge eClinicalOS platform increased to 396, representing year-over-year growth of 129%. This led to a whopping 139% increase in revenues from Merge's eCOS platform. However, sales from legacy platforms declined 35%.
In the reported quarter, the company signed 4 significant deals with new customers in the cardiology market which resulted in a 38% increase in total cardiology bookings compared to 2013.
Segments in Detail
Merge Healthcare derives revenues primarily from three segments – Software and others (36.3% of total sales in the quarter), Professional services (15.5%), and Maintenance and EDI (48.3%). Maintenance and EDI registered revenues of $25.9 million, down 1%. Likewise, the Professional services segment also experienced a decline of 14.5% to $8.3 million. Revenues in the Software and others segment increased 9.4% year over year to $19.4 million.
Operational Update
Total costs (excluding depreciation and amortization) dropped 0.7% year over year to $21.1 million. Fourth-quarter adjusted gross margin expanded 30 basis points (bps) from the year-ago quarter to 60.5%.
Sales and marketing expenses were up 7% (to $8.1 million) while product research and development expenses declined 5.8% (to $7 million) on a year-over-year basis. General and administrative expenses slashed a huge 22.2% from the year-ago quarter (to $7.1 million). All these combined resulted in an 8% decline in total operating cost (adjusted) to $22.2 million in the reported quarter.
Accordingly, adjusted operating profit came in at $10.3 million, up 28.9% year over year, leading to a 390 bps expansion in adjusted operating margin. The adjustments excluded restructuring and acquisition-related costs, depreciation and amortization.
Financial Update
Merge Healthcare exited 2014 with cash (including restricted cash) of $42.5 million, compared with $19.7 million at the end of 2013. Cash generated from business operations was $42.6 million, significantly up from $21.3 million as of Dec 31, 2013.
2015 Outlook
Merge Healthcare will provide a business update on the company's market outlook and strategies for 2015, in its conference call.
Our Take
Although fourth quarter revenues at Merge missed the Zacks Consensus Estimate, the earnings improvement provided some relief. The recent acquisition of DR systems, which is expected to expand the company's footprint in medical imaging arena, is also encouraging.
On a positive note, increase in the number of cardiology bookings and significant revenue growth from Merge's eCOS platform was the highlight of the quarter. Significant increase in operating profit was another upside. According to management, the company will be able to achieve positive top-line growth in 2015.
However, Merge Healthcare's growth prospects are highly subject to capital investments by hospitals for advanced imaging solutions, which are in turn, dependent upon generic economic conditions. The company believes that its addressable market has stabilized.
Zacks Rank
Currently, Merge Healthcare carries a Zacks Rank #3 (Hold). Some better-ranked medical stocks are Affymetrix Inc. (AFFX), ANI Pharmaceuticals, Inc. (ANIP) and BioMarin Pharmaceutical Inc. (BMRN). All the three stocks sport a Zacks Rank #1 (Strong Buy).
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