Merge Healthcare (MRGE) reported an adjusted EPS of 3 cents in the first quarter of fiscal 2011, lower than the prior-year quarter’s result of 5 cents. According to the Zacks Consensus Estimate, the company was expected to break even during the quarter.
Merge reported revenues of $52.7 million in the quarter, surpassing the Zacks Consensus Estimate of $51 million. Revenues in the year-ago quarter were $20.0 million. The reported quarter include sales of AMICAS, which was acquired in April 2010.
Merge derives revenues from three sources – software and others, professional services, and maintenance and EDI − which recorded an annualized growth of 99.4% to $18.6 million, 124.3% to $8.4 million and 273.2% to $25.6 million, respectively, during the quarter. Recurring revenues were 65% of net sales during the quarter, compared to 55% of the year-ago quarter.
Solid revenue growth across all segments of Merge triggered 125.5% increase in gross profit to $30.5 million. However, gross margin contracted by 950 basis points hit by 244.5% increase in total cost of sales. The adjusted operating margin (excluding the impact of certain one-time expenses) was down by 196 bps to 16.2% during the quarter.
Merge exited the quarter with cash (including restricted cash) of $47.7 million compared to $41.0 million at the end of December 2010. Cash from core business operations increased to $8.9 million compared to $0.8 million in the year-ago quarter.
Merge’s growth prospect is highly dependent on capital investments by hospitals for advanced imaging solutions which are tied to general economic conditions.
However, there is immense potential in the diagnostic imaging market, especially with government’s emphasis on HIT and an ageing population. Consequently, to better penetrate the market, Merge has increased its sales force, which in turn is likely to exert pressure on margins.
Presently, we remain Neutral on Merge.
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