Merge Reports Second Quarter Financial Results

Chicago, IL, 30 Jul 2014

Merge Healthcare Incorporated (NASDAQ: MRGE), a leading provider of innovative enterprise imaging, interoperability and clinical systems that seek to advance healthcare, today announced its financial and business results for the second quarter of 2014.

"I am proud to announce that for the third quarter in a row, Merge realized consistent, forward momentum in our financial results. Revenue and adjusted EBITDA continued to grow. In addition, our cardiology business achieved its highest sales quarter ever," said Justin Dearborn, CEO of Merge Healthcare. "From a solutions standpoint, we made good headway in the adoption of our subscription-based services for Merge eClinicalOS™ (eCOS), iConnect® Network and iConnect® Cloud Archive. We also successfully launched iConnect® Retinal Screening ─ the first end-to-end, cloud-based platform that enables automated, early screening detection of diabetic complications, one of the highest healthcare costs realized worldwide. This new advanced interoperability solution gives our large integrated delivery network (IDN) and international customers as well as accountable care organizations (ACOs) an attractive solution to assist them with their population health strategies. Overall, we are excited about this service, as it gives Merge yet another software-as-a-service model to capitalize on and build our recurring revenue stream. With all of these factors combined, I remain optimistic about the remainder of 2014."

Financial Summary:

• Adjusted EBITDA increased in the second quarter of 2014 to $11.2 million, representing 21% of pro forma revenue, compared to $8.5 million and 15% in the second quarter of 2013;
• Adjusted net income grew to $4.4 million (or $0.05 per share) in the second quarter of 2014 compared to $0.9 million (or $0.01 per share) in the second quarter of 2013, which compares to a GAAP net loss in the second quarter of 2014 of $4.0 million (including a charge of $4.8 million associated with the refinancing of our debt), or a loss of $0.04 per share, and a GAAP net loss in the second quarter of 2013 of $28.1 million (including a charge of $23.8 million associated with the refinancing of our debt), or a loss of $0.30 per share;
• Sales were $53.8 million ($54.1 million on a pro forma basis) in the second quarter of 2014 compared to $57.2 million ($57.6 million on a pro forma basis) in the second quarter of 2013;
• Subscription backlog grew to $54.6 million, a 12% increase from the second quarter of 2013; and
• Cash generated from business operations was $8.3 million in the second quarter of 2014 compared to $10.6 million in the prior year, which compares to net cash provided by (used in) operating activities on the statement of cash flows of $4.7 million and ($7.3) million, respectively.

Business Highlights:

• Achieved an all-time record for quarterly Cardiology bookings, recording an increase of over 50% compared to the second quarter of 2013 and contracting seven net new customers;
• Executed seven additional iConnect Network customer agreements for a total of 29 customers since launching the solution in 2013 and signed a second radiology information system (RIS) vendor as a reseller of iConnect Network;
• Completed two, large net new vendor-neutral archive (VNA) deals, including Comanche County Memorial Hospital. The hospital will use Merge's iConnect® Enterprise Archive and iConnect® Access solutions to archive and share images to ensure the seamless flow of patient data, meet Meaningful Use Stage 2 requirements and improve disaster recovery and operational workflow across their continuum of care;
• Realized significant growth with iConnect Cloud Archive (formerly Merge Honeycomb® Archive), signing 20 new customers in past 12 months;
• Launched iConnect Retinal Screening, the first end-to-end, automated, software-as-a-service solution for early screening and detection of diabetic retinal disease. This advanced interoperability, cloud-based platform complements the existing population health strategy of integrated delivery systems and accountable care organizations and eliminates many of the most common barriers to successful screening programs, including IT costs and the ability to capture meaningful eye photographs by normal medical assistants; and
• Went live with over 70 eCOS studies in Q2, increasing clinical sites by 25%, users by more than 27% and active subjects by 30% since the end of the first quarter. These results demonstrate continued growth in eCOS utilization.

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):

	Q2 2014	Q2 2013
Net sales	$53.8	$57.2
Operating income	5.8	1.3
Net loss	(4.0)	(28.1)
Net loss per diluted share	($0.04)	($0.30)
Cash balance at period end	$23.9	$16.8

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

	Q2 2014	Q2 2013
Pro forma results
Net sales	$54.1	$57.6
Adjusted net income	4.4	0.9
Adjusted EBITDA	11.2	8.5
Adjusted net income per diluted share	$0.05	$0.01
Adjusted EBITDA per diluted share	$0.12	$0.09
Non-GAAP and other measures
Subscription, maintenance & EDI revenue as % of net sales	64%	65%
Subscription and non-recurring backlog at period end	$77.8	$73.8
Cash from business operations*	$8.3	$10.6
Days sales outstanding	88	120

*See table at the back of this earnings release for reconciliation.

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.

Pro Forma Operating Group Results:
Results (in millions) for our operating groups are as follows:

Explanation of Non-GAAP Financial Measures
We report our financial results in accordance with generally accepted accounting principles or GAAP. This press release includes certain non-GAAP financial measures to supplement this GAAP information. Non-GAAP measures are not an alternative to GAAP and may be different from and directly comparable with non-GAAP measures used by other companies. A quantitative reconciliation of GAAP net income available to common shareholders to adjusted net income and adjusted EBITDA is included after the financial information included in this press release.

Management believes that the presentation of non-GAAP results, when shown in conjunction with corresponding GAAP measures, provides useful information to it and investors regarding financial and business trends related to results of operations, because certain charges, costs and expenses reflect events that are not essential to recurring business operations. In addition, management believes these non-GAAP measures provide investors useful information regarding the underlying performance of the post-acquisition business operations when compared to the pre-acquisition results of Merge and any significant acquired company. Purchase accounting adjustments made in accordance with GAAP can make it difficult to make meaningful comparisons of the underlying operations of the business without considering the non-GAAP adjustments that are provided and discussed herein. Further, management believes that these non-GAAP measures improve its and investors' ability to compare Merge's financial performance with other companies in the technology industry. Management also uses financial statements that exclude these charges, costs and expenses for its internal budgets. While GAAP results are more complete, these supplemental metrics are offered since, with reconciliations to GAAP, they may provide greater insight into our financial results. Management does not intend for the presentation of these non-GAAP financial measures to be considered in isolation or as a substitute for results prepared in accordance with GAAP.

Additional information regarding the non-GAAP financial measures presented herein is as follows:

• Pro forma revenue consists of GAAP revenue as reported, adjusted to add back the acquisition related sales adjustments (for all significant acquisitions) recorded for GAAP purposes.
• Subscription revenue and the related backlog are comprised of software, hardware and professional services (including installation, training, etc.) contracted with and payable by the customer over a number of years. Generally, these contracts will include a minimum volume / dollar commitment.  As such, the revenue from these transactions is recognized ratably over an extended period of time. These types of arrangements will include monthly payments (including leases), long-term clinical trials, renewable annual software agreements (with very high renew rate), to specify a few contract methods. Backlog is subject to change based on a number of factors, including but not limited to, revenue recognized in the period compared to bookings, customer cancellations and a change in contracting model whereby customers sign pay-for-use contracts with no minimums as opposed to guaranteed minimums over the life of the contract, to name a few reasons.
• Non-recurring revenue and related backlog represents revenue that we anticipate recognizing in future periods from signed customer contracts as of the end of the period presented. Non-recurring revenue is comprised of perpetual software license sales and includes licenses, hardware and professional services (including installation, training and consultative engineering services). Backlog is subject to change based on a number of factors, including but not limited to, revenue recognized in the period compared to bookings and customer cancellations, to name a few reasons.
• Adjusted net income consists of GAAP net income available to common stockholders, adjusted to exclude (a) acquisition-related costs, (b) debt extinguishment costs, (c) restructuring and other costs, (d) share-based compensation expense, (e) acquisition-related amortization (f) acquisition-related sales adjustments, and (g) acquisition-related cost of sales adjustments.
• Adjusted EBITDA adjusts GAAP net income available to common stockholders for the items considered in adjusted net income as well as (a) remaining depreciation and amortization, (b) net interest expense and (c) income tax expense (benefit).
• Cash from business operations reconciles the cash generated from such operations to the change in GAAP cash balance for the period by reflecting payments of liabilities associated with debt issuance and retirement activities, acquisitions, payments of acquisition related fees, interest payments and other payments and receipts of cash not generated by the business operations.  Cash generated from business operations and used to pay restructuring initiatives, acquisition related costs and interest approximates net cash provided by operating activities in the condensed consolidated statement of cash flows.

Management has excluded certain items from non-GAAP adjusted net income because it believes (i) the amount of certain expenses in any specific period may not directly correlate to the underlying performance of business operations and (ii) the adjustment facilitates comparisons of pre-acquisition results to post-acquisition results. In addition, certain adjustments are described in more detail below:

• Acquisition-related amortization expense is a non-cash expense arising from the acquisition of intangible assets in connection with significant acquisitions. Management excludes acquisition-related amortization expense from non-GAAP adjusted net income because it believes such expenses can vary significantly between periods as a result of new acquisitions and full amortization of previously acquired intangible assets.
• Share-based compensation expense is a non-cash expense arising from the grant of stock awards to employees and is excluded from non-GAAP net income because management believes such expenses can vary significantly between periods as a result of the timing of grants of new stock-based awards, including grants to new employees resulting from acquisitions.
• Acquisition-related sales and costs of sales adjustments reflect the fair value adjustment to deferred revenues acquired in connection with significant acquisitions. The fair value of deferred revenue represents an amount equivalent to the estimated cost plus an appropriate profit margin to perform services-related software and product support, which assumes a legal obligation to do so, based on the deferred revenue balances as of the date the acquisition of a significant company was completed.

Management adds back this deferred revenue adjustment, net of related costs, for non-GAAP revenue and non-GAAP net income because it believes the inclusion of this amount directly correlates to the underlying performance of operations and facilitates comparisons of pre-acquisition to post-acquisition results.

Notice of Conference Call
Merge will host a conference call at 8:30 AM ET on Wednesday, July 30, 2014. The call will address second quarter financial and business results for 2014.

To preregister for this teleconference, go to http://emsp.intellor.com?p=416119&do=register&t=8. Upon registration, a confirmation page will display dial-in numbers and a unique PIN, and the participant will also receive an email confirmation with this information.

A replay via the Internet or phone will be available after the call at http://www.merge.com/Company/Investors/Conference-Call-Info.aspx.