Merge Healthcare's CEO Discusses Q2 2012 Results - Earnings Call Transcript

Merge Healthcare, Inc. (MRGE)

Q2 2012 Earnings Call

August 1, 2012 08:30 am ET

Executives

Jeff Surges – Chief Executive Officer

Justin Dearborn – President

Steve Oreskovich – Chief Financial Officer

Analysts

Chad Bennett – Craig-Hallum Capital

Deepak Tyagi – Goldman Sachs

Eric Coldwell – Robert W Baird

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Name - Company

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Presentation

Operator

Good morning and welcome to Merge’s Q2 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 statement. 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. Q2 2012 was a solid one for the company as we saw continued client adoption of our enterprise imaging solutions and subscription pricing model as well as launched several new products.

As you will recall, last quarter we announced the creation of two operating groups – Merge Healthcare and Merge DNA – to provide a greater level of transparency into our operating performance, business strategy and execution. Consistent with this, I will provide an update on the Merge Healthcare side of the business and will ask Justin Dearborn to provide an update on the Merge DNA operating group.

Merge Healthcare represents roughly 85% of our business and in Q2 pro forma revenue was $54.9 million. Further, subscription revenue comprised 7% of total revenue for this operating group. Adjusted EBITDA for the group was $14.5 million or 26.4% of pro forma revenue. Last quarter we made a bold move by announcing our transition to a subscription-based model to align more closely with our clients’ long-term operating plans.

I’m happy to report that we continue to see the client willingness to adopt this type of purchasing model which included subscription-based contracts totaling approximately $2 million. The interest has ranged from some of the large, multi-location imaging groups in the nation to single-doctor practices. Additionally, the uptake has spanned a wide range of our solutions including Merge RIS, Merge PACS, and Merge Eye Care PACS among others.

One such example is Long Island Radiology. With six locations across Long Island the group is rapidly growing. To fuel their projected expansion they wanted a full end-to-end solution but also needed the flexibility of our subscription-based model. Another example is a single-doctor practice and long-time Merge client Horizon Imaging in Alabama. They were looking to upgrade to the latest version of Merge PACS and wanted to be able to accurately manage their cash flow because they are a smaller-sized business. This new model allowed them to do both.

Like these and other practices, we expect to see accelerated adoption in the next two quarters of the year. 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.

While we saw steady adoption of our new model we also experienced solid traction amongst organizations embracing our enterprise imaging strategy with our iConnect suite. Several client wins speak to this fact. Franciscan Alliance selected Merge to image enable their EMR and provide real-time access to radiology and cardiology images across its network of 14 hospitals throughout Indiana. Children’s Hospital and Research Center in Oakland, California, a Level 1 trauma center, selected us to provide real-time access to images and information among its network of providers and its referring physicians.

Additionally, Our Lady of Lourdes, a member of Ascension Health, completed a successful pilot and will be rolling out iConnect to their entire organization as its enterprise-wide image viewer. And finally St. Vincent’s Hospital, the largest hospital in Green Bay, Wisconsin, and a member of the Hospital Sisters Health System, will be partnering with us to implement Merge’s complete cardiology solution suite to capture, manage, and display cardiac images and hemodynamics data across its enterprise.

On top of this client validation we were also recently acknowledged as the #1 Global Market Leader in providing vendor-neutral archive – or VNA – solutions by InMedica, a division of IMS Research. According to the report, Merge’s iConnect VNA customers accounted for 37% of all studies archived in VNAs worldwide in 2011. In total, Merge clients have stored over 200 million studies which equates to over 13 billion images. InMedica predicts that the market for VNA solutions will grow from 75 million studies in just 2011 to 570 million studies by 2016, a 49.9% compounded annual growth rate.

As the industry’s first true standalone vendor neutral archive, iConnect VNA has been successfully integrated with approximately 50 PACS vendors and specialty workstations at over 350 sites across the United States. Again, this is great validation of our approach to enterprise-wide imaging by both clients and industry experts.

Our success in the acute marketplace also includes the progress we’ve made with several strategic partners, in particular with Cerner, one of the largest HIT vendors and our partner for cardiology. This quarter we worked with Cerner on two large opportunities – Citrus Memorial Health System and Tallahassee Memorial Healthcare. Each of these systems decided to add Merge Cardio and Merge Hemodynamics solutions to complement their enterprise Cerner applications.

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