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No More Surges At Merge

Posted Aug 09 2013 2:05pm
The PACS and HIT business can be volatile, and the nameplates on the corner-offices tend to change fairly rapidly.

Merge's most recent Earnings Report and Earnings Call (transcript here ) tell a Tale of Two Merges, with the best of times hopefully ahead of them, and the worst of times behind.

The report states the situation in no uncertain terms
Chicago, IL (Aug. 9, 2013) 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 second quarter of 2013. Merge also announced that its board of directors has accepted the resignation of Jeffery A. Surges as Chief Executive Officer and Director of the Company and appointed Justin C. Dearborn, as the Company’s new CEO. Additionally, Merge announced that Nancy Koenig has been promoted to Chief Operating Officer of the Company from EVP, Operations and also has been elected to the Company’s Board of Directors to fill the vacancy created by Mr. Surges’ resignation.

“Speaking on behalf of all of Merge’s Directors, I want to apologize for the company’s very disappointing second quarter results,” said Michael W. Ferro, Jr., Merge’s Chairman of the Board and largest shareholder. “We all strongly believe in the company, its products and its employees. Our new leaders, Justin Dearborn and Nancy Koenig, resurrected Merge five years ago, and they are the right team to get the company back on track. I, personally, plan to continue to invest in Merge, whether in response to opportunities in the market or otherwise.”

Mr. Dearborn said, “Merge’s value proposition continues to be very strong in three distinct market areas: imaging and interoperability, cardiology, and clinical trials. Our spending, on bringing innovative solutions to market, has outpaced our end user markets’ readiness for a variety of macro-economic reasons currently clouding hospital spend decision making. We saw a continued reluctance amongst large health systems to move forward with enterprise purchases. Unfortunately, this pause has overshadowed the fourth quarter in a row of very strong bookings and revenue growth from our clinical trials group.” Mr. Dearborn joined Merge in 2008 and has served as CEO, Chief Financial Officer and most recently as President and CEO of Merge’s DNA reporting segment.
In the conference call that followed, newly-minted (well, re-minted) CEO Justin Dearborn reiterated the mea culpa
First, let me say that the entire board of Merge is extremely disappointed with the company's results. On behalf of the board, and especially its Chairman and our largest shareholder, we apologize for these results. They are unacceptable and we are working day and night to turn this situation around.

Following the acquisition of AMICAS in April of 2010, our plan was to grow our sales and marketing teams and focus on large enterprise sales or system-wide deals with longer sales cycles and lumpier but large upfront revenue. While we have had some success in the past and expect even more in the future, the market did not develop as fast as we had anticipated and no longer justifies the cost structure that we built. We believe that the large, attractive opportunities still exist in the market, but we need to scale our cost to match their timing. We will continue to focus on per-study pricing arrangements that provide for better predictability and we will deliver additional solutions in hosted environments, creating a healthier business model for Merge and our customers...

I am fortunate to have the support of the management team as well as our board. Nancy Koenig, who is promoted Chief Operating Officer and elected to the Board of Directors, knows the industry, the company and its products and can help drive the company forward on a more streamlined basis. Michael Ferro, Nancy and I worked together for 15 years in 2 different public companies. We successfully resurrected Merge 5 years ago when it had a few million dollars in the bank, rapidly declining revenues and was on the verge of bankruptcy. We, along with the existing management team, can once again grow Merge, albeit, we are starting from a much, much better position. Additionally, Steve Tolle, a 25-year industry veteran, has been promoted as Chief Product Officer. Over the past year, under Steve's leadership, we have taken important steps forward in aligning our entire solution portfolio and bringing several critical innovations to market. Steve will continue to guide our corporate-wide product strategy and will take on additional responsibility for our marketing and overall strategy for our health care offerings...
And buried deeper in Mr. Dearborn's statement,
I am fortunate to have the support of the management team as well as our board. Nancy Koenig, who is promoted Chief Operating Officer and elected to the Board of Directors, knows the industry, the company and its products and can help drive the company forward on a more streamlined basis. Michael Ferro, Nancy and I worked together for 15 years in 2 different public companies. We successfully resurrected Merge 5 years ago when it had a few million dollars in the bank, rapidly declining revenues and was on the verge of bankruptcy. We, along with the existing management team, can once again grow Merge, albeit, we are starting from a much, much better position. Additionally, Steve Tolle, a 25-year industry veteran, has been promoted as Chief Product Officer. Over the past year, under Steve's leadership, we have taken important steps forward in aligning our entire solution portfolio and bringing several critical innovations to market. Steve will continue to guide our corporate-wide product strategy and will take on additional responsibility for our marketing and overall strategy for our health care offerings.
And finally as far as personnel changes,
To ensure we continue to focus on this market and the opportunities it presents, Kurt Hammond, who has been with Merge and other affiliated companies for over 10 years, has been promoted to President and will be responsible for all go-to-market activities for our imaging and interoperability solutions. Kurt brings 22 years of health care and sales marketing experience.
I'm not sure why they left Kurt for last, but at least he got on the list! Is the role of President more symbolic than that of CEO? Merge didn't mention Kurt in the Earnings Report at all. I've actually just emailed with Kurt, and the REAL story is, "The change for me is to take over what we are calling the iConnect Business Unit. Four units under Justin – OEM/Int’l + eClinicals + Cardiology + iConnect…looking at our business in more of a “vertical” model for the go to market, strategy and P&L."  So there you have it! How many presidents can you have in one company?

Merge has just in the past few moments sent out the obligatory "don't worry" email to its customer base, which includes me:
1. Your solution and product roadmaps are safe.

We take our commitments to you seriously and the changes we have announced will not impact the product investment priorities that we have already shared with you.
None of the actions taken have impacted the teams that build, support or service our core solutions.
We have over 75 product releases planned for Q3 and Q4, including major enhancements to core product.

2. We will continue to invest in research, development and innovation at an accelerated pace.

Our solutions investments are paying off as we've recently been rewarded the Frost & Sullivan Product Leadership award for Imaging and Interoperability as well as were again named the #1 VNA in the world, this time by IHS.
We will continue to invest in product enhancements and innovations to provide you with value from your investment with Merge.
In fact, we will spend approximately 14% of our total revenue in 2013 on product R&D. This is much higher than most HCIT vendors.

3. Merge is financially sound.

We remain focused on sound financial principles. Just like any of your businesses, cost structures must continually be aligned with sales expectations.
Additionally, as we previously announced, we refinanced our debt adding over $14M of cash flow annually to our business via a lower interest rate.
And last, cash generated from our business operations in Q2 was the highest amount for any quarterly period in the last three years.
And Kurt isn't mentioned in this email, either! Let's hope he doesn't take it personally.

As a Merge customer, I welcome these changes. I got to know Nancy and Justin upon my visit to Merge following the AMICAS takeover, and I was impressed with them then. as now.  I've know Kurt since my earliest AMICAS days, and of course I think very highly of him. Michael Ferro remains in financial control of Merge, and I trust that he and the gang can pull Merge out from the financial doldrums, if anyone can. Remember, this was a company on the verge of bankruptcy, that had to be "resurrected" by Merrick Ventures. They've come a long way.

While I wouldn't have believed you a few years ago had you told me I'd be saying this, I am a (well, mostly) happy Merge customer. Godspeed to the new leadership.
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