Merge Healthcare Incorporated MRGE reported second-quarter 2015 adjusted net income per share (considering share-based compensation as a regular expense) of 8 cents, beating the Zacks Consensus Estimate by an impressive 100%. Adjusted EPS also improved a massive 166.7% from the year-ago quarter.
The solid sales growth observed by management in the second quarter contributed to the impressive year-over-year improvement in the bottom line.
Reported net income of $2 million or a penny per share improved significantly from the year-ago net loss of $4 million or loss of 4 cents per share, respectively.
Quarter in Detail
Total revenue in the reported quarter improved 21.9% year over year to $65.6 million. The top line closely beat the Zacks Consensus Estimate of $64 million. Overall revenue growth included organic growth of 6%. Of the total revenue, 62% was generated by subscription maintenance & EDI.
During the second quarter, clinical trials transaction revenue on the eCOS platform grew more than 40% year over year, while total clinical trial revenue, including legacy platforms, declined 10%, in line with management’s expectation. eCOS transaction and related professional services revenue comprised 75% of total clinical trial revenue. Further, healthcare segment booking increased over 35% on a year-over-year basis.
In the reported quarter, the company closed six deals with a transaction value of greater than $1 million, with significant net new customer signings across all solutions.
Segments in Detail
Merge Healthcare derives revenues primarily from three segments – Software and others (34.6% of total sales in the quarter), Professional services (15.2%), and Maintenance and EDI (50.2%). Maintenance and EDI registered revenues of $32.9 million, up 28.5%. Likewise, revenues at the Software and other segment were up 25.8% at $22.7 million. Revenues in the Professional services segment, however, declined 1.7% year over year to $10 million.
Operational Update
Total cost of sales (excluding depreciation and amortization) increased 7.7% year over year to $23.6 million. Second-quarter adjusted gross margin improved 480 bps to 64%, owing to improved hardware and software sales and maintenance revenue.
Sales and marketing expenses spiked 41.8% (to $11.5 million) while product research and development expenses increased 17.9% (to $8.7 million) on a year-over-year basis. General and administrative expenses rose 25.1% from the year-ago quarter to $8 million. All these expenses combined resulted in a 30% rise in total operating cost (adjusted) to $28.2 million in the reported quarter.
Nevertheless, adjusted operating profit came in at $13.8 million, up 34.4% year over year. As a result, adjusted operating margin expanded 240 basis points to 20.5%. The adjustments excluded restructuring and acquisition-related costs, depreciation and amortization.
Financial Update
Merge exited the quarter with cash (including restricted cash) of $20.6 million, compared with $42.5 million at the end of 2014. Net cash flow from operating activities was $8.4 million, compared to $14.6 million as of June 30, 2014.
Merge exited the second quarter of 2015 on a promising note. Both the top and the bottom line outshone the Zacks Consensus Estimate. Per management, the company witnessed robust sales growth in the second quarter. Merge is upbeat about the company’s award-winning cardiology solutions which, according to management, continue to win market share and open up enterprise imaging cross-selling opportunities.
Moreover, during the second quarter, Merge signed an enterprise agreement to supply its Merge Hemo solution to a 400-bed regional medical center. It also won a standalone Merge Hemo contract from a not-for-profit system in a campus comprising four hospitals with more than 40 clinics. Such contract wins are expected to boost the company’s revenue growth, going forward.
However, Merge Healthcare’s growth prospects are highly subject to capital investments by hospitals for advanced imaging solutions, which in turn, are dependent on generic economic conditions. The company believes its addressable market has as of now stabilized and thus offers hope.
