Merge Healthcare Incorporated (MRGE) reported third-quarter 2014 adjusted net income per share of 4 cents, an improvement from a penny earned in the year-ago quarter. Reported net income of $1.7 million or loss of 2 cents per share in the third quarter compared favorably with the year-ago net loss of $4.1 million or loss of 4 cents per share.
The positive piece of news naturally lifted investors’ confidence. The company’s share price rallied nearly 12% since the third-quarter earnings announcement to close at $2.62 yesterday.
Quarter in Detail
Total revenue in the reported quarter declined 5.6% year over year to $54 million. On a pro forma basis, sales declined 6.1% year over year to $54.2 million, but steered ahead of the Zacks Consensus Estimate of $53 million. Of the total revenue, 64% was generated by subscription maintenance & EDI. Subscription backlog dropped 1% to $76 million over the prior-year quarter.
Segments in Detail
Merge primarily derives revenues from three segments – Software and others (34% of total quarterly sales), Professional services (16.8%), and Maintenance and EDI (48.8%). Maintenance and EDI registered revenues of $26.4 million, down 3.9%. Likewise, the Professional services segment also experienced a decline of 13.1% to $9.1 million. Revenues of $18.5 million in the Software and others segment were down 4.2% year over year as well.
Operational Update
Total costs (excluding depreciation and amortization) fell 16.3% year over year to $20.8 million. Accordingly, third-quarter adjusted gross margin expanded 488 basis points (bps) from the year-ago quarter to 61.5%.
Sales and marketing expenses were down 9.5% year over year (to $7.7 million) while product research and development expenses declined 18.3% (to $6.5 million) on a year-over-year basis. General and administrative expenses slashed a huge 34.9% from the year-ago quarter (to $6.3 million). All these cumulatively led to a 21.5% decline in total operating cost (adjusted) to $20.5 million in the reported quarter.
Accordingly, adjusted operating profit came in at $12.7 million, a huge 103.5% jump year over year leading to a 1259 bps expansion in adjusted operating margin. The adjustments excluded restructuring and acquisition-related expenses.
Financial Update
Merge exited the quarter with cash (including restricted cash) of $34.5 million, compared with $19.7 million at the end of 2013. Year-to-date net operating cash flow was $30.0 million in the quarter, down from $11.9 million in the year-ago period.
2014 Outlook
The company reiterated its top-line guidance for 2014. Merge expects net sales in 2014 to remain in the range of $212–$225 million (essentially flat with the 2013 number), leading to adjusted net income per share in the range of 9 cents to 13 cents. The Zacks Consensus Estimate for revenues of $215 million lies close to the lower end of the guided range.
Our Take
Although third quarter revenues at Merge beat the Zacks Consensus Estimate by a whisker, the year-over-year sales decline is disappointing.
On a positive note, significant increase in operating profit was an upside. According to Merge, its first three quarters’ revenues coincide with almost half of the midpoint of its full year 2014 revenue guidance.
On the other hand, 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, the stock carries a Zacks Rank #2 (Buy). Some other well-placed stocks in the broader medical industry are Boston Scientific Corporation (BSX), Abaxis, Inc. (ABAX) and ICU Medical, Inc. (ICUI), all carrying a similar Zacks Rank #2.
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