Merge Reports Financial Results & Announces the DR Systems Acquisition

Chicago, IL, 25 Feb 2015

Merge Healthcare Incorporated (NASDAQ: MRGE), a leading provider of health information systems for medical imaging, interoperability, and communication, today announced its financial and business results for the fourth quarter of 2014.

“In the fourth quarter of 2014, Merge extended its positive financial momentum experienced throughout the year. Revenue was in line with previously announced guidance and we exceeded our adjusted EBITDA guidance for 2014. Just as important, we generated GAAP net income of $1.5 million and earnings per share of $0.02 in the fourth quarter,” said Justin Dearborn, chief executive officer of Merge Healthcare. “We made great strides in re-focusing the business following a challenging 2013, and we are confident that with a renewed commitment to Merge’s core strengths we can achieve topline growth in 2015,” Mr. Dearborn continued.

Merge Healthcare also recently acquired DR Systems, a privately held San Diego-based company with a strong reputation for customer satisfaction in medical imaging information systems. The combined entities provide an unprecedented array of highly rated healthcare information technology products.  According to the KLAS Research ratings released on January 29, 2015, the go forward business will rank #1 in cardiovascular information systems, #1 in hemodynamics monitoring and #1 in radiology information systems. “I’m thrilled to add the talents, technologies, and intellectual property that have made the DR Systems brand synonymous with customer satisfaction. Merge and DR Systems share a common heritage of creating and maintaining long-term partnerships with our healthcare customers. This acquisition reflects Merge’s commitment to delivering solutions that enable our healthcare partners to elevate their clinical success, financial results, and the health of their communities. This acquisition also greatly expands our market share, which we believe is extremely important given the provider consolidation that is underway. Further, the acquisition will allow us to deploy our iConnect Network services, including pre-authorization services, to a broader client footprint immediately,” stated Mr. Dearborn.

Murray Reicher, M.D., F.A.C.R., founder, chairman, and chief executive officer of DR Systems, will assume the role of chief medical officer of Merge Healthcare. Dr. Reicher is a board-certified diagnostic radiologist and Fellow of the American College of Radiology, and is recognized for his numerous scientific publications, inventions, and presentations in the fields of neuroradiology, musculoskeletal MRI, and health information technologies.

Dr. Reicher commented, “We are joining Merge based on our joint vision of providing a rapidly advancing, unified system for all medical imaging arenas, including radiology, cardiology, and pathology. Together, we will enable our customers to connect to consumers and healthcare providers in ways that promote service, patient compliance, and improved population health.”

“We’re committed to supporting DR Systems’ clients, and we want them to have confidence that we have the vision, scale, and resources to help them achieve their plans for their organizations’ futures. We are also excited to have Dr. Reicher join Merge and know that he will be a remarkable asset to the company,” added Mr. Dearborn.

Following the acquisition, support for DR Systems’ core platform will remain in place. Current implementations will continue, and Merge plans to support and advance all product lines going forward. Merge will work with all clients to support their short-term and long-term business needs.

The transaction is expected to be accretive to Merge’s non-GAAP adjusted EPS in 2015 and future years. Non-GAAP adjusted net income and EPS are defined later in this press release and exclude share-based compensation expense, transaction costs, acquisition-related amortization and deferred revenue and related cost of sale adjustments.

Merge Healthcare financed the acquisition through a combination of approximately $20 million of cash on hand and $50 million of cash raised from the sale of shares of newly issued convertible preferred stock, at a $4.14 per share common equivalent calculated based on Merge’s 30-day volume weighted average common stock price, to a group of investors arranged by Guggenheim Corporate Funding, LLC (“Guggenheim”), the agent under Merge’s existing credit facility. “We believe this investment is a testament to Guggenheim’s confidence in the future of Merge Healthcare and the opportunities that will arise from the acquisition of DR Systems,” noted Mr. Dearborn.

Financial Summary:

• Adjusted EBITDA increased by 35% in the fourth quarter of 2014 to $12.1 million (or 23% of GAAP sales), compared to $9.0 million (or 17% of GAAP sales) in the fourth quarter of 2013;
• Adjusted net income grew by 59% to $5.4 million (or $0.05 per share) in the quarter compared to $3.4 million (or $0.04 per share) in the fourth quarter of last year;
• GAAP net income in the fourth quarter of 2014 was $1.5 million (or $0.02 per share), compared to a net loss in the fourth quarter of 2013 of $0.3 million (or $0.00 per share);
• GAAP sales were consistent in the fourth quarter with the prior year at $53.6 million;
• Cash balance grew by $8.0 million, or 23%, in the quarter to $42.5 million as of December 31, 2014 and by $22.8 million, or 116%, since December 31, 2013; and
• GAAP net cash provided by operating activities in the quarter grew to $12.6 million, or 34%, from $9.4 million in the fourth quarter of last year.

Business Highlights: 

• Awarded “Best in KLAS” for Merge’s Cardiology PACS for the second year in a row; hemodynamic solution ranked as “Category Leader” for the fourth consecutive year.
• Signed four significant deals with new customers in the cardiology market in the fourth quarter, and delivered a 38% increase in total cardiology bookings compared to 2013.
• Delivered significant enterprise enhancements to Merge PACS™ and signed two significant Radiology PACS deals with new customers in the fourth quarter of 2014.
• Recognized by IHS as global market share leader for VNA solutions and signed six iConnect® Enterprise Archive engagements in the fourth quarter of 2014.
• Increased the number of live trials on Merge eClinicalOS™ to 396, representing a 129% YOY increase in the number of live trials utilizing this platform, which translates to a 139% increase in revenue on the eCOS platform, while sales from legacy platforms declined by 35%.  Further, revenue from eClinical comprised approximately 85% of total Merge DNA net sales in 2014 compared to 60% in the prior year with eCOS platform revenues increasing to 50% of Merge DNA’s revenue in 2014 compared to just over 15% in the prior year.  Going forward, we expect all Merge DNA revenue to come from our clinical trials platform, whereas in 2014 and 2013 there was approximately $5 million and $16 million, respectively, from other product lines in the segment.

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):

Non-GAAP results and other measures compared to the same quarter in the prior year are as follows (in millions, except percentages and per share data):

A reconciliation of GAAP net income (loss) to adjusted net income and adjusted EBITDA is included after the financial information below.  See “Explanation of Non-GAAP Financial Measures” for definitions of each of these non-GAAP measures and the reason the Company’s management believes that the adjustments made to arrive at the non-GAAP financial measures provide useful information to investors regarding the Company.