CORRECTING and REPLACING -- Merge Reports 2012 Subscription Backlog Up 62%

Delivers Third Quarter Revenue of $61 Million and Announces 2013 Guidance of Pro Forma Revenue Range of $265 - $275 Million

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| Source: Merge Healthcare

CHICAGO, Oct. 31, 2012 (GLOBE NEWSWIRE) -- In a press release issued earlier today by Merge Healthcare Incorporated (Nasdaq:MRGE) with the same headline, please note that the first table of the Pro Forma Operating Group Results section was erroneously omitted. The full and correct release follows:

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 third quarter of 2012.

"Our third quarter results continue to demonstrate our transition to a subscription model with both new and existing clients," said Jeff Surges, CEO of Merge Healthcare. "Additionally, we are providing annual guidance for 2013 on revenue, adjusted EBITDA and subscription backlog growth based on the progress we have made in 2012."

Financial Highlights:

  • Revenue increased to $60.4 million ($61.0 million on a pro forma basis) in the quarter, from $60.1 million ($60.6 million on a pro forma basis) in the third quarter of 2011;
  • Adjusted EBITDA was $12.5 million, representing 21% of pro forma revenue in the quarter, compared to $14.5 million and 24% in the third quarter of 2011;
  • Subscription-based pricing arrangements in which software, hardware and professional services are recognized ratably over a number of years generated 15.1% of total revenue in the quarter and subscription backlog grew 62% since the prior year end;
  • Established 2013 guidance of revenue in the range of $265 - $275 million with an adjusted EBITDA range of 22-24% and expected subscription backlog growth by the end of 2013 of at least $25 million.

Business Highlights:

  • Added 15 iConnect® contracts with leading healthcare systems including Dignity Health, Huntington Hospital, Erie Country Medical Center and Coosa Valley, among others;
  • Contracted with clients to store over 3.65 million studies in the Merge Honeycomb Archive via subscription-based payment models, including the largest orthopedics practice in the nation;
  • Over 776 Meaningful Use eligible providers from 110 Merge clients received $3.1 million in incentives with an additional $10.9 million in incentive payments expected by year end;
  • eClinical segment signed over 150 contracts in the quarter resulting in a greater than 100% growth in bookings.

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):

  Q3 2012 Q3 2011
Net sales  $ 60.4  $ 60.1
Operating income  6.0  7.0
Net loss attributable to common shareholders  (3.8)  (1.0)
Net loss per diluted share ($0.04) ($0.01)
     
Cash balance at period end  $ 42.2  $ 44.7
Cash from business operations*  9.2  8.8
 
*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):

  Q3 2012 Q3 2011
Pro forma and Non-GAAP results    
Net sales  $ 61.0  $ 60.6
Adjusted net income  0.9 5.3
Adjusted EBITDA 12.5 14.5
     
Adjusted net income per diluted share  $ 0.01  $ 0.06
Adjusted EBITDA per diluted share  $ 0.13  $ 0.16
     
Non-GAAP and other measures**    
Subscription, maintenance & EDI revenue as % of net sales 61.0% N/A
Subscription and non-recurring backlog at period end  $ 71.4 N/A
Days sales outstanding 106 101
     
**Comparable information for periods prior to Q3 2012 is not available.

Reconciliation of GAAP net income (loss) to adjusted net income (loss) and adjusted EBITDA is included after the financial information, below.

Pro Forma Operating Group Results:

Results (in millions) for our operating groups, which we commenced reporting in the second quarter of 2012, are as follows:

         
  Three Months Ended September 30, 2012
  Healthcare DNA Corporate/Other Total
Net sales:        
Software and other  $ 18.2  $ 3.3    $ 21.5
Service  8.0  3.5    11.5
Maintenance  27.2  0.8    28.0
Total net sales  53.4  7.6    61.0
Gross Margin  32.9  3.1    36.0
Gross Margin % 61.6% 40.8%   59.0%
Expenses  23.1  4.3    27.4
Segment income (loss)  $ 9.8  $ (1.2)    8.6
Operating Margin % 18.4% -15.8%   14.1%
Net corporate/other expenses (1)      $ 10.3  10.3
Loss before income taxes        (1.7)
Adj. EBITDA reconciling adjustments  4.5  1.6  8.1  14.2
Adjusted EBITDA  $ 14.3  $ 0.4  $ (2.2)  $ 12.5
Adjusted EBITDA % 26.8% 5.3%   20.5%
         
(1) Net corporate/other expenses include public company costs, corporate administration costs, acquisition-related expenses and net interest expense.
 
  Net Sales in the Three Months
Ended September 30, 2012
  Backlog as of September 30, 2012  
  Healthcare DNA   Healthcare DNA  
Revenue Source $ % $ % Total $ % $ % Total
Maintenance & EDI (1)  $ 27.3 51.1%  $ 0.7 9.2% 45.9%          
Subscription  2.3 4.3%  6.9 90.8% 15.1%  $ 10.9 26.0%  $ 29.5 100.0% 56.6%
Non-recurring  23.8 44.6%  --  0.0% 39.0%  31.0 74.0%  --  0.0% 43.4%
Total  $ 53.4 100.0%  $ 7.6 100.0% 100.0%  $ 41.9 100.0%  $ 29.5 100.0% 100.0%
  87.5%   12.5%     58.7%   41.3%    
                     
(1) Due to the variability in timing and length of maintenance renewals, we do not believe backlog for this revenue component is a meaningful disclosure.

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 contracts will include monthly payments (including leases), long-term clinical trials, renewable annual software arrangements (with very high renew rate), to specify a few 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) restructuring and other costs, (c) stock-based compensation expense, (d) acquisition-related amortization, and (e) acquisition-related cost of sales adjustments and add backs (f) the acquisition-related 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, (c) non-cash preferred stock dividends and (d) 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 our 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:

  • 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.
  • Stock-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 on Thursday, November 1 at 8:30 am EDT to discuss its financial results for the third quarter of 2012. Jeff Surges, Justin Dearborn, and Steve Oreskovich will lead the call. Participants may preregister for this teleconference at http://emsp.intellor.com/?p=411359&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 20 years of innovation, Merge is helping to reduce costs and improve the quality of healthcare worldwide. For more information, visit merge.com.

The Merge Healthcare logo is available at http://www.globenewswire.com/newsroom/prs/?pkgid=10757

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.

 
MERGE HEALTHCARE INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
     
  September 30, December 31,
  2012 2011
  (Unaudited)  
Current assets:    
Cash (including restricted cash)  $ 42,212  $ 39,272
Accounts receivable, net   70,306  71,014
Inventory  4,455  4,718
Prepaid expenses  10,228  5,678
Deferred income taxes  3,451  3,393
Other current assets  24,646  20,199
Total current assets  155,298  144,274
     
Property and equipment, net  5,472  4,391
Purchased and developed software, net  21,025  23,924
Other intangible assets, net   38,695  45,152
Goodwill  214,277  209,829
Deferred tax assets  6,554  9,209
Other assets  12,845  13,608
Total assets  $ 454,166  $ 450,387
     
Current liabilities:    
Accounts payable  $ 19,478  $ 22,114
Interest payable  12,379  4,935
Accrued wages  5,941  6,972
Restructuring accrual  757  1,407
Other current liabilities  15,918  11,580
Deferred revenue  48,108  51,246
Total current liabilities  102,581  98,254
     
Notes payable  249,869  249,438
Deferred income taxes  1,994  1,891
Deferred revenue  1,161  1,679
Income taxes payable  734  727
Other liabilities  4,752  5,927
Total liabilities  361,091  357,916
Total Merge shareholders' equity   92,637  92,003
Noncontrolling interest  438  468
Total shareholders' equity  93,075  92,471
Total liabilities and shareholders' equity  $ 454,166  $ 450,387
 
 
MERGE HEALTHCARE INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
         
  Three Months Ended Nine Months Ended
  September 30, September 30,
  2012 2011 2012 2011
Net sales        
Software and other  $ 21,232  $ 20,060  $ 69,251  $ 56,370
Professional services  11,277  11,999  30,573  30,914
Maintenance and EDI  27,885  28,018  84,434  81,057
Total net sales  60,394  60,077  184,258  168,341
Cost of sales        
Software and other  9,143  8,909  29,140  20,167
Professional services  6,511  5,403  18,415  15,482
Maintenance and EDI  7,288  7,409  23,886  22,060
Depreciation and amortization  1,912  2,228  5,692  7,074
Total cost of sales  24,854  23,949  77,133  64,783
Gross margin  35,540  36,128  107,125  103,558
Operating costs and expenses:        
Sales and marketing  10,807  10,235  32,474  26,781
Product research and development  8,268  7,195  24,310  20,964
General and administrative  7,783  7,500  23,829  22,354
Acquisition-related expenses  (762)  743  2,444  1,222
Restructuring and other expenses  830  1,151  830  1,115
Depreciation, amortization and impairment  2,651  2,352  8,183  10,225
Total operating costs and expenses  29,577  29,176  92,070  82,661
Operating income  5,963  6,952  15,055  20,897
Other expense, net  (8,105)  (8,207)  (23,213)  (22,555)
Income (loss) before income taxes  (2,142)  (1,255)  (8,158)  (1,658)
Income tax expense  1,684  (242)  3,410  2,629
Net loss  (3,826)  (1,013)  (11,568)  (4,287)
Less: noncontrolling interest's share  (12)  (18)  (30)  (18)
Net loss attributable to Merge  (3,814)  (995)  (11,538)  (4,269)
Less: preferred stock dividends  --  --  --  3,153
Net loss attributable to common shareholders of Merge  $ (3,814)  $ (995)  $ (11,538)  $ (7,422)
         
Net loss per share - basic  $ (0.04)  $ (0.01)  $ (0.13)  $ (0.09)
Weighted average number of common shares outstanding - basic  92,177,703  87,675,038  91,800,824  85,422,352
         
Net loss per share - diluted  $ (0.04)  $ (0.01)  $ (0.13)  $ (0.09)
Weighted average number of common shares outstanding - diluted  92,177,703  87,675,038  91,800,824  85,422,352
 
 
MERGE HEALTHCARE INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
       
    Nine Months Ended
    September 30,
    2012 2011
Cash flows from operating activities:      
Net loss    $ (11,568)  $ (4,287)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:      
Depreciation, amortization and impairment    13,875  17,299
Share-based compensation    4,245  3,043
Change in contingent consideration for acquisitions    1,250  128
Amortization of notes payable issuance costs & discount    2,010  1,765
Provision for doubtful accounts receivable and allowances, net of recoveries    1,287  785
Deferred income taxes     2,700  7,190
Unrealized gain on equity security    (982)  --
Realized gain on sale of equity security    --  (405)
Change in assets and liabilities, net of effects of dispositions:      
Accounts receivable    (193)  (12,746)
Inventory    263  1,248
Prepaid expenses    (4,507)  (270)
Accounts payable    (2,703)  (2,472)
Accrued wages    (1,031)  2,396
Restructuring accrual    (650)  (448)
Deferred revenue    (4,402)  (8,092)
Accrued interest and other liabilities    9,694  4,777
Other    (4,143)  (3,977)
Net change in assets and liabilities (net of effects of acquisitions)    (7,672)  (19,584)
Net cash provided by operating activities    5,145  5,934
Cash flows from investing activities:      
Cash paid for acquisitions, net of cash acquired    (876)  (477)
Purchases of property, equipment and leasehold improvements    (1,976)  (1,569)
Change in restricted cash    (38)  940
Distribution from investment in equity security    --  405
Net cash used in investing activities    (2,890)  (701)
Cash flows from financing activities:      
Proceeds from issuance of term notes    --  53,560
Note and stock issuance costs paid    --  (1,528)
Proceeds from exercise of stock options and employee stock purchase plan    924  878
Principal payments on notes payable    (35)  (4,591)
Principal payments on capital leases    (267)  (5)
Redemption and retirement of preferred stock    --  (41,750)
Preferred stock dividends    --  (7,328)
Net cash provided by (used in) financing activities    622  (764)
Effect of exchange rate changes on cash    24  127
Net increase (decrease) in cash    2,901  4,596
Cash and cash equivalents, beginning of period (net of restricted cash) (1)  38,566  39,382
Cash and cash equivalents, end of period (net of restricted cash) (2)  $ 41,467  $ 43,978
       
(1) Restricted cash of $707 and $1,647 as of December 31, 2011 and 2010, respectively.
(2) Restricted cash of $745 and $707 as of September 30, 2012 and 2011, respectively.
 
 
MERGE HEALTHCARE INCORPORATED AND SUBSIDIARIES
RECONCILIATION OF NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS TO ADJUSTED EBITDA
(in thousands)
(unaudited)
         
  Three Months Ended
September 30,
Nine Months Ended
September 30,
  2012 2011 2012 2011
Net loss attributable to common shareholders  $ (3,814)  $ (995)  $ (11,538)  $ (7,422)
Acquisition related costs  (762)  743  2,444  1,222
Restructuring and other  830  1,151  830  1,115
Stock-based compensation expense  1,429  923  4,245  3,043
Amortization of significant acquisition intangibles  2,727  3,020  8,179  11,712
Acquisition-related sales adjustments  564  512  1,621  3,260
Acquisition-related cost of sales adjustments  (124)  (66)  (327)  (354)
Adjusted net income  $ 850  $ 5,288  $ 5,454  $ 12,576
Depreciation and amortization  1,836  1,560  5,696  5,587
Net interest expense  8,143  7,939  24,023  20,872
Non-cash preferred stock dividend  --  --  --  3,153
Income tax expense  1,684  (242)  3,410  2,629
Adjusted EBITDA  $ 12,513  $ 14,545  $ 38,583  $ 44,817
         
Adjusted net income per share - diluted  $ 0.01  $ 0.06  $ 0.06  $ 0.14
Adjusted EBITDA per share -- diluted  $ 0.13  $ 0.16  $ 0.41  $ 0.51
         
Fully diluted shares  94,178,002  90,984,403  94,419,712  88,174,901
         
  Pro Forma Three Months
Ended September 30,
Pro Forma Nine Months
Ended September 30,
  2012 2011 2012 2011
Net loss attributable to common shareholders  $ (3,374)  $ (549)  $ (10,244)  $ (4,516)
Acquisition related costs  (762)  743  2,444  1,222
Restructuring and other  830  1,151  830  1,115
Stock-based compensation expense  1,429  923  4,245  3,043
Amortization of significant acquisition intangibles  2,727  3,020  8,179  11,712
Adjusted net income  $ 850  $ 5,288  $ 5,454  $ 12,576
Depreciation and amortization  1,836  1,560  5,696  5,587
Net interest expense  8,143  7,939  24,023  20,872
Non-cash preferred stock dividend  --  --  --  3,153
Income tax expense  1,684  (242)  3,410  2,629
Adjusted EBITDA  $ 12,513  $ 14,545  $ 38,583  $ 44,817
         
Adjusted net income per share - diluted  $ 0.01  $ 0.06  $ 0.06  $ 0.14
Adjusted EBITDA per share -- diluted  $ 0.13  $ 0.16  $ 0.41  $ 0.51
         
Fully diluted shares  94,178,002  90,984,403  94,419,712  88,174,901
 
MERGE HEALTHCARE INCORPORATED AND SUBSIDIARIES
CASH FROM BUSINESS OPERATIONS
(unaudited)
                 
    Three Months Ended
September 30,
  Nine Months Ended
September 30,
    2012   2011   2012   2011
    (amounts in millions)
Cash received from (paid for):                
Issuance of debt and equity    $ --     $ --     $ --     $ 53.6
Debt and equity issuance costs    --     (0.5)    --     (3.0)
Retirement of debt    --     (4.6)    --     (4.6)
Redemption of preferred stock    --     (1.2)    --     (41.8)
Payment of preferred stock dividends    --     --     --     (7.3)
Interest paid    --     --     (14.8)    (10.9)
Acquisitions    --     (1.5)    (0.9)    (2.1)
Restructuring initiatives    (0.7)    (0.7)    (1.2)    (1.6)
Acquisition related costs    (0.3)    (0.5)    (0.8)    (0.9)
Proceeds from stock option exercises    --     --     0.7    -- 
Property and equipment purchases    0.3    (0.3)    (2.0)    (1.6)
Settlements with former officers    --     --     --     (0.9)
Other non-operating cash flows    --     --     --     0.4
Business operations    9.2    8.8    21.9    24.4
Increase (decrease) in cash    $ 8.5    $ (0.5)    $ 2.9    $ 3.7
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