Merge Healthcare (MRGE) reported net loss per share of 39 cents in the second quarter of 2010 compared with earnings per share (EPS) of 1 cent in the year-ago period. The loss is primarily due to acquisition and restructuring costs of $5.9 million and a one-time dividend payment of $15.9 million on preferred stock. However, after adjusting for one-time expenses, net loss per share was 3 cents compared with EPS of 7 cents in the year-ago period. The Zacks Consensus Estimate for the quarter was loss of 2 cents per share.
Merge reported revenues of $29 million, up 89% from $15.3 million in the second quarter of 2009. Results for the reported quarter include sales of AMICAS, subsequent to its acquisition on April 28, 2010. However, revenues were lower than the Zacks Consensus Estimate of $34 million.
While revenues from software declined 27% to $6.6 million, revenues from professional services and maintenance recorded an annualized growth of 330% to $5.6 million and 235% to $16.8 million, respectively.
Merge witnessed strong recurring revenues in the second quarter. Recurring revenues were greater than 70% of net sales, compared with 50% of net sales in the year-ago quarter. During the quarter, the company had raised $242 million to finance the acquisition and was successful in eliminating $15 million of annualized expenses, it had targeted.
Merge has made several acquisitions in the past few years, the latest being the April 2010 acquisition of AMICAS Inc for approximately $248 million, which will benefit the company in the long term. While Merge is primarily focused on outpatient imaging sites in the radiology information system, picture archiving and communication systems (RIS/PACS market), AMICAS earns revenues from outpatient imaging sites as well as radiology, cardiology, and enterprise solutions in the hospital market.
The geographical diversity of the two companies will also complement each other. While Merge derived 23% of its revenues in 2009 from international operations, AMICAS’ does not have a significant presence outside the U.S. Moreover, Merge has indirect and e-commerce market channels, which act as additional channels for some of AMICAS solutions.
Merge exited the second quarter with a cash balance of $37.9 million, up from $19.6 million at the end of December 2009. The company had outstanding debt of $194 million at the end of the quarter.
Merge has strong growth potential in the RIS/PACS market in which it operates. There have been several acquisitions in the recent past, which are likely to boost its top line going forward. However, financing of these acquisitions has hit earnings. Moreover, the acquisition of a company like AMICAS brings integration risks in its wake.
Merge’s growth prospects depend strongly on capital investments by hospitals for advanced imaging solutions which are tied to general economic conditions. The U.S. government is increasingly emphasizing the use of healthcare information technology (HIT) which opens up greater opportunities for Merge. However, the presence of many big players has made the diagnostic imaging market highly competitive. We have an Underperform rating on the stock.
MERGE HEALTHCAR (MRGE): Free Stock Analysis Report
Zacks Investment Research
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