Zacks_Analysts' Blog : Merge Misses by a Penny, Margins Up - Analyst Blog

Merge Healthcare (MRGE) reported adjusted EPS of 6 cents in the third quarter of fiscal 2011, surpassing the prior-year quarter level of 4 cents but missing the Zacks Consensus Estimate by a penny.

Solid growth across all the company’s segments triggered a 33% year-over-year increase in total revenue to $60.1 million in the quarter, almost in line with the Zacks Consensus Estimate. The increased adoption of Meaningful Use solutions coupled with growing demand for enterprise imaging solutions were primarily responsible for the growth.

Merge derives revenues from three sources – software and others, professional services, and maintenance and EDI. The three segments registered annualized growth of 55.1% to $20.1 million, 75.8% to $11.9 million and 10.2% to $28.0 million, respectively, during the quarter. Recurring revenues were nearly 57.5% of net sales during the quarter, compared with 65% in the year-ago quarter.

Gross margin during the quarter increased 600 basis points (bps) to 60.1% from 54.1% in the year-ago quarter. The adjusted operating margin (excluding the impact of certain one-time expenses) expanded 310 bps to 18.6% during the quarter. 

Merge exited the quarter with cash (including restricted cash) of $44.6 million compared with $41.0 million at the end of fiscal 2010. Cash from core business operations was $8.8 million compared with $8.0 million in the year-ago quarter.

Outlook

Merge provided revenue guidance for fiscal 2012. The company expects to report revenues in the range of $288– $300 million. The Zacks Consensus Estimate of $268 million is within the guidance range.

Merge’s growth prospect is highly dependent on capital investments by hospitals for advanced imaging solutions, which are in turn tied to the general economic condition. The presence of many big players like General Electric Co (GE) and McKesson Corporation (MCK) has made the diagnostic imaging market highly competitive. However, there is immense potential in the diagnostic imaging market, especially with government’s emphasis on HIT and an ageing population.