INVESTOR PRESENTATION Merge Healthcare June 2011

Transcription

1 INVESTOR PRESENTATION Merge Healthcare June 2011

2 forward looking statement 2 The matters discussed in this presentation may include forward-looking statements, which could involve a number of risks and uncertainties. When used in this presentation, the words will, believes, intends, anticipates, expects and similar expressions are intended to identify forward-looking statements. Actual results could differ materially from those expressed in, or implied by, such forward-looking statements. Except as expressly required by the federal securities laws, the Company undertakes no obligation to update such factors or to publicly announce the results of any of the forward-looking statements. Some of the products and/or product features discussed in this presentation may be works in progress and not yet generally available for sale.

3 about Merge Healthcare Traded on NASDAQ Exchange (MRGE) Over 750 employees worldwide Revenue guidance of $235M for FY11 compared to $140 for FY10 (GAAP)/$190M Pro Forma 2011 Market Cap between $286M - $504M (1/05/2011 vs. 5/10/2011) Co-founder and #1 provider of DICOM solutions globally

4 what we do 4 any image. anywhere. any time. We develop information technology to create a better electronic healthcare experience Our solutions range from standards-based development toolkits to sophisticated clinical applications We can image-enable any existing ologies or -ographies Our solutions have been used by leading healthcare providers, vendors and researchers worldwide for over 20 years

5 our clients 5 Over 1,500 Hospitals: Including the top 20 hospitals on the US News and World Report America s Best Hospitals Honor Roll 4,000 Clinics and Labs: Representing one-third of U.S. imaging centers, nearly half of all digital ortho groups and over 1,200 labs 250 OEM Clients: Including the leading modality manufacturers and distributors 70% of top pharma companies

6 our global offices 6

7 our executive team 7 Michael Ferro Chairman Justin Dearborn CFO Steve Brewer EVP, Product Solutions Nancy Koenig EVP, Operations Jeff Surges CEO Toni Wells EVP, Development Steve Martin SVP, Global Sales Dr. Cheryl Whitaker Chief Medical Officer

8 today s problem: collaborative healthcare is rare 8 A consolidated view to all labs, meds, allergies, and images from different providers via a web browser does not exist Healthcare is competitive providers only share within their network certain providers do not want consumers to be portable Most providers do not want to allow connectivity into their back end systems due to security and bandwidth Most physicians do not have digital access to historical images from other facilities

9 today s problem: health records are not complete without images 9 Diagnostic content and results are shared on CDs, film and paper today Physicians do not have digital access to prior content from other facilities preventing them from fully understanding the patient and the disease Content and results must be diagnostic quality to meet FDA guidelines static content does not work for diagnosis, second opinions, and prior image comparisons

10 medical images are the youtube of healthcare 10 80% of the data storage in healthcare comes from medical images An average diagnostic image of the heart is the same size (3 GB) as the video file for the movie, Titanic The technology that enables secure web image sharing is very expensive to build and operate Health records are incomplete if they do not contain images

11 "The needs of radiology must be addressed in any national infrastructure in order to accomplish the broader goal of providing the best patient care possible. Keith Dreyer, DO, PhD RSNA's RadLex Steering Committee Chair of the American College of Radiology IT and Informatics Committee- Government Relations Subcommittee

12 The role of imaging as a meaningful use aspect raises a number of important and interesting issues. We can t have an effective electronic health information system if we can't move images. David Blumenthal, MD former National Director for Health Information Technology

13 addressable market for our current portfolio 13 Meaningful Use (Radiology & Ortho)* $2B US Imaging software & services* $1B Global (non-u.s.) imaging software & services $1B Interoperability NA healthcare IT software & services** $1B annual market size annual market size annual market size annual market size Interoperability global healthcare IT software & services $2B Digital Pathology (total market opportunity) $1B Imaging in Clinical Trials $.5 annual market size annual market size annual market size TOTAL ANNUAL MARKET OPPORTUNITY $8.5B * Total Stimulus Funding Available ** Source: Frost & Sullivan

14 our solutions 14 Merge iconnect: Image and health data interoperability platform Clinical Solutions: Imaging and information solutions for radiology, cardio, ortho, surgical, anesthesia & lab Image Toolkits & Device Connectivity: Provider of 85% of DICOM solutions to modality vendors and health system device integration Consumer Engagement: Patient kiosk and emerging consumer opportunities

15 merge iconnect: image interoperability platform 15 Specialty Departments PACS 2 PACS 1 PACS 3 any image. anywhere. any time. Merge iconnect Consumers - PHR Hospital Information Systems Person Identification Image Archive Referring Physicians Zero Client Viewer Imaging Centers Disaster Recovery Physician Referrals Pharma Companies Clinical Trial Network

16 consumer engagement: public access via merge kiosks 16 Full-service live remote help via multilingual avatars Create an account Take your vitals Use a physician locator and print directions for appointment Determine eligibility and health insurance options Upload your historical records

17 recent highlights 17 Merge Healthcare to Acquire Ophthalmic Imaging Systems (June 6, 2011) Center for Diagnostic Imaging Partners with Merge Healthcare to meet Meaningful Use Requirements (May 3, 2011) Merge Leads $1B Stimulus Funding Opportunity for Radiologists (April 13, 2011) Merge Healthcare Appoints Dr. Cheryl Whitaker as Chief Medical Officer (April 8, 2011) Elmhurst Memorial Healthcare Selects Merge Cardiology Solutions For New Facility (April 1, 2011) Merge Healthcare Expands Capabilities In Revenue Cycle Management (March 9, 2011)

18 emerging trends 18 Meaningful Use Our core solutions in Radiology and Ortho will quality for Meaningful Use Certification Enterprise Wide Imaging Health systems are moving away from departmental solutions to enterprisewise strategies for imaging Archiving Growth For many health systems, medical images are the largest and fastest growing element of storage growth Spending predicted to DOUBLE* Interoperability Interoperability is required to address Meaningful Use, ACOs, and bundled payments HIEs Health Information Exchanges are a vital for the industry's success with ARRA * Bain & Company survey

19 growth strategies 19 Cross Sell & Upsell Current Clients Cardiology & Radiology two largest imaging specialties Archive, Interoperability and Connectivity Average client has only 1 Merge solution Meaningful Use Achieve Phase 1 for clients Prepare for Phase 2 and 3 Expand EMR portfolio International Expansion State and Federal Opportunities

20 client conference: MergeLIVE 20 What: Merge Client Conference When: Tuesday, Oct 4 Friday, Oct 7 Who: 400+ Merge clients Where: Chicago Why: Upsell and cross sell current clients Generate new leads among client base Nurture current pipeline opportunities Educate and share best practices Build affinity for Merge brand This is one of the single biggest marketing and sales opportunities of 2011!

21 FINANCIAL HIGHLIGHTS Justin Dearborn May 2011

22 full year income statement Years Ended December 31, Net sales: Software and other $ 42,420 $ 33,037 $ 27,561 Professional services 23,175 11,830 8,586 Maintenance and EDI 74,737 21,974 20,588 Total net sales 140,332 66,841 56,735 Cost of sales: Software and other 13,762 3,730 5,121 Professional services 15,411 6,731 6,044 Maintenance and EDI 24,418 5,593 5,628 Depreciation, amortization and impairment 10,972 3,323 3,279 Total cost of sales 64,563 19,377 20,072 Gross margin 75,769 47,464 36,663 Operating costs and expenses: Sales and marketing 20,697 9,203 9,313 Product research and development 20,064 10,689 13,240 General and administrative 22,012 13,005 20,461 Acquisition-related expenses 9,674 1,225 - Trade name impairment, restructuring and other expenses 5,006 1,613 11,816 Depreciation, amortization and impairment 6,840 2,766 3,530 Total operating costs and expenses 84,293 38,501 58,360 Operating income (loss) (8,524) 8,963 (21,697) Other income (expense): Interest expense (17,218) (2,716) (1,750) Interest income Other, net 522 (6,147) (564) Total other income (expense) (16,638) (8,813) (2,046) Income (loss) before income taxes (25,162) 150 (23,743) Income tax benefit (13,646) (135) (60) Net income (loss) $ (11,516) $ 285 $ (23,683) Less: preferred stock dividends 19, Net income (loss) available to common shareholders $ (30,592) $ 285 $ (23,683) Net income (loss) per share - basic $ (0.38) $ 0.00 $ (0.51) Weighted average number of common shares outstanding - basic 80,231,427 60,910,268 46,717,546 Net income (loss) per share - diluted $ (0.38) $ 0.00 $ (0.51) Weighted average number of common shares outstanding - diluted 80,231,427 62,737,821 46,717,546

23 proforma p&l trend: past four quarters 23

24 revenue snapshot Revenue consists of perpetual software licenses and sale of hardware* and professional services and maintenance** Non Recurring Revenue Includes perpetual software licenses, hardware, and professional services Non-recurring backlog $42.3 Q1 11 Non Recurring 35% Recurring 65% Recurring Revenue Includes maintenance contracts*** SaaS offering, DICOM toolkit and EDI * Recognized upon delivery ** Recognized over respective periods services are provided *** Renewed annually

25 strategic investments R&D Commitments Sales Commitments 70 issued Patents Research & Development represents 13% of our total spend in Q Sales & Marketing represents 17% of our total spend in Q Sales force grown from 60 to % 17%

26 balance sheet and cash flow 26 $47.7M Cash $200.0M Debt Year Ended December 31, (unaudited) (in millions) Cash received from (paid for): Issuance of debt and equity $ $ 25.2 $ 14.5 Principal payments on notes - (19.6) - Interest expense (11.9) (1.9) (1.0) Early retirement penalty on debt - (2.7) - Debt and equity issuance costs (9.9) - (2.4) Acquisitions (216.2) (2.8) - Restructuring initiatives (3.5) (1.9) (5.5) Acquisition related expenses (9.6) (1.2) - Property and equipment purchases (1.5) (1.1) (0.5) Sale of property Other non-operating cash flows Core business operations (2.0) Increase in cash $ 20.3 $ 1.8 $ 3.6 Three Months Ended March 31, (unaudited) (amounts in millions) Cash received from (paid for): Acquisitions $ - $ (1.4) Restructuring initiatives (0.6) (0.4) Acquisition related costs (0.4) (4.9) Preferred stock deposits, net of escrow Debt and equity issuance costs - (1.6) Property and equipment purchases (0.3) (0.6) Settlements with former officers (0.9) - Core business operations Increase (decrease) in cash $ 6.7 $ (3.8)

27 2011 financial guidance 27 Merge has provided 2011 guidance as follows: Revenue EBITDA % % $190M $235 - $240M 15% 10% 5% 25% 23% 2010 Actual 2011 Guidance 2010 Actual 2011 Guidance

28 our sustainable competitive advantage 28 Leading pure play company specializing in imaging Diagnostic content and results are the cornerstone for the interoperability, hosting, and archiving markets Interoperability solutions for diagnostic content and results are essential to deliver a complete health record Business model and technology innovation such as CAD, interoperability and cloud solutions We are at the beginning of what we expect will be the fastest transformation of any industry in US history

29 investment highlights 29 Significant Growth Revenue guidance of $235M 163% YOY Top line growth 135% YOY EBITDA growth Favorable Macro Industry Conditions Economic and government environment are driving change Meaningful Use will help to accelerate demand Revenue Visibility High recurring revenue model Large, diversified client base Strong, Seasoned Leadership Deep management team with extensive healthcare experience Track record for making and integrating acquisitions

30 APPENDIX May 2011

31 appendix: non GAPP reconciliation 31 Pro Forma Three Months Ended March 31, Net loss available to common shareholders $ (1,890) $ (1,130) Acquisition related costs Restructuring and other (36) - Stock-based compensation expense 1, Amortization ofsignificantacquisition intangibles 3,088 2,432 Adjusted net income (loss) $ 2,328 $ 1,911 Depreciation and amortization 2,061 2,545 Net interest expense 6,354 6,558 Non-cash preferred stock dividend 1,566 1,566 Income tax expense (benefit) Adjusted EBITDA $ 13,154 $ 12,674 Adjusted net income (loss) per share - diluted $ 0.03 $ 0.02 Adjusted EBITDA per share - diluted $ 0.15 $ 0.15 Fully diluted shares (if net income) 86,391,245 84,023,293

32 appendix: non GAPP reconciliation 32 Three Months Ended March 31, Net loss available to common shareholders $ (3,155) $ (3,152) Acquis ition related cos ts 104 5,938 Res tructuring and other (36) - Stock-based compensation expense 1, Amortization of significant acquisition intangibles 3, Acquisition-related sales adjustments 1, Acquisition-related cost of sales adjustments (72) - Adjusted net income $ 2,328 $ 3,969 Depreciation and amortization 2,061 1,557 Net interes t expens e 6,354 (10) Non-cas h preferred s tock dividend 1,566 - Income tax expense (benefit) Adjus ted EBITDA $ 13,154 $ 5,564 Adjus ted net incom e per s hare - diluted $ 0.03 $ 0.05 Adjus ted EBITDA per s hare - diluted $ 0.15 $ 0.07 Fully diluted s hares (if net incom e) 86,391,245 76,508,293

33 footnotes regarding 2011 financial guidance 33 Amortization & depreciation in cost of goods sold of approximately 10.5 million, of which 7.5 million relates to the amortization of intangibles from significant acquisitions Approximately 8 million of depreciation and amortization within operating expenses, of which 5 million relates to the amortization of intangibles from significant acquisitions Approximately 26 million of interest expense (including the amortization of debt issuance and debt discount costs) A non-cash preferred stock dividend of approximately 7 million Approximately 3 million of non-cash stock-based compensation expense Minimal impact to expense for income taxes (maybe a few million, primarily non-cash expense related to the Canadian operations)

34 explanation of non-gapp financial measures 34 Merge Healthcare reports its financial results in accordance with generally accepted accounting principles, or GAAP. This press release includes certain non-gaap financial measures to supplement its GAAP information. Non-GAAP measures are not an alternative to GAAP and may be different from 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 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 is as follows: Pro forma revenue consists of GAAP revenue as reported, adjusted to reflect the acquisition of AMICAS as if it had occurred at the beginning of the respective periods presented and to add back the acquisition related sales adjustment (for all significant acquisitions) booked for GAAP purposes.

35 explanation of non-gapp financial measures cont. 35 Recurring revenue is generated from agreements that generally contain a stated annual amount and which we have a high likelihood of renewing each year. More specifically, this includes revenue generated from our DICOM toolkit and efilm Workstation product lines, long-term contracts associated with our Sales as a Service (SaaS) related offerings, and EDI and maintenance contracts across the entire business. Non-recurring revenue 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 all other sources of revenue not included as recurring revenue, primarily from perpetual software licenses, hardware and professional services (including installation, training and consultative engineering services). Adjusted net income consists of GAAP net income available to common stockholders, adjusted to reflect the acquisition of AMICAS as if it had occurred at the beginning of the respective period presented and, to the extent such items occurred in the periods presented, excludes (a) one-time preferred stock deemed dividend at issuance date, (b) one time income tax benefit, (c) impairment of investments, (d) sale of non-core patents, (e) acquisition-related costs, (f) restructuring and other costs, (g) stock-based compensation expense, (h) acquisition-related amortization, and (i) acquisition-related cost of sales adjustments and adds back (j) the acquisition-related 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, (c) non-cash preferred stock dividends and (d) income tax expense (benefit). Cash from core 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 our acquisitions, payments of acquisition related fees, interest payments and other payments and receipts of cash not generated by the core business operations.

36 explanation of non-gapp financial measures cont. 36 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, the following 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 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. Stock-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.