Merge Healthcare Incorporated Management Discusses Q3 2013 Results - Earnings Call Transcript

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 |  About: Merge Healthcare Incorporated. (MRGE)
by: SA Transcripts

Merge Healthcare Incorporated (NASDAQ:MRGE)

Q3 2013 Earnings Call

October 30, 2013 8:30 am ET

Executives

Justin C. Dearborn - Chief Executive Officer, Director, Chief Executive Officer of Merge Dna and President of Merge Healthcare

Steven M. Oreskovich - Chief Financial Officer, Chief Accounting Officer and Treasurer

Analysts

Ryan Daniels - William Blair & Company L.L.C., Research Division

Eugene M. Mannheimer - B. Riley Caris, Research Division

Chad M. Bennett - Craig-Hallum Capital Group LLC, Research Division

Operator

Thank you for joining today's Merge Healthcare 2013 Quarter 3 Earnings Call. My name is Carla and I will be moderating today's call. The call will last approximately 1 hour including a question-and-answer period at the end. [Operator Instructions] I would now like to turn it over to Merge Healthcare.

Unknown Executive

Good morning, and welcome to Merge's third quarter 2013 earnings call. Today's call is being hosted by Justin Dearborn, Chief Executive Officer; and Steve Oreskovich, Merge's Chief Financial Officer.

Before we get started, please consider that the comments today may contain forward-looking statements under the Private Securities Litigation Reform Act of 1995 and not historical facts. Actual results may differ. Various critical factors that could affect future results are set forth in the company's recent SEC filings and press releases. The company undertakes no obligation to update or revise any forward-looking statements.

In addition, there may be references to non-GAAP financial measures. These measures are supplemental to the GAAP financial measures and should not be viewed as an alternative to them. For greater information regarding these metrics, please see the related discussion in the company's earnings release.

With that, I will turn the call over to Merge's CEO, Justin Dearborn.

Justin C. Dearborn

Thank you. And thank you to everyone for joining us this morning.

Q3 was a challenging quarter for Merge. The new management team stepped up and kept the organization focused on the future growth of the company while increasing cash flow and returning a portion of our debt ahead of schedule. And Merge's status as a market leader in the imaging and the interoperability field was confirmed, as we received several third-party accolades for our innovative solutions.

I'd like to address the industry trends and challenges we are seeing, which are driving market uncertainty. As I mentioned during the last earnings call, Q2 was a challenging quarter not only for Merge but for many other vendors in the health care information technology industry. Market drivers have not changed significantly in the past 90 days.

In Q3, we witnessed spending delays in both ambulatory and acute or hospital settings. And while Q3 is generally a soft quarter in health technology spending, we attribute additional hesitation in spending to several external pressures. In the hospital or the acute market, budgets have been negatively impacted by the federal budget sequester that was applied on April 1, which cut $11 billion in Medicare reimbursements for fiscal year 2013. Additional potential budget reduction efforts stalled forward progress on decision-making amongst our largest clients and prospects. Regulatory mandates, including the conversion from ICD-9 to ICD-10 and Meaningful Use Stage 2 has focused technology investments in core hospital information systems and revenue cycle management and not in other important but not mandated projects.

In the nonhospital or ambulatory market, the industry is experiencing a movement towards consolidation, with many physician and radiology practices being acquired by larger systems. This move towards consolidation can result in purchasing delays and, at a minimum, complicate decision-making. Despite the spending pause, we have continued to develop innovative technologies to help meet the inevitable market demand.

In the ambulatory radiology market, the majority of our clients will need to upgrade their current products to stay in compliance with either ICD-9 or Meaningful Use. To help our customers embrace these changes, we are working diligently to update our financial systems and radiology information systems for ICD-10 coding and certifying virtually all of our existing imaging, interoperability and workflow products for Meaningful Use Stage 2 over the next few months.

Merge is the industry leader for radiology Meaningful Use. We launched the first comprehensive certified RIS to support Stage 1 requirements. And recently, the U.S. Department of Health and Human Services data showed that Merge RIS solution is the most widely used Certified Electronic Health Record Technology by radiologists.

Despite market conditions, we do see encouraging trends and areas of sales opportunity in 3 core areas of our business. First, in interoperability. As more health care organizations adopt the cloud as a viable, cost-effective solution to help manage images across the enterprise, we've seen our backlog for Merge Honeycomb Archive, a cloud-based archiving solution with a subscription pricing model, gain momentum. We've also realized 2 large net new customer wins in both the hospital and ambulatory sectors and have a significant sales opportunity to advance the market with the new iConnect Network.

Recently, Frost & Sullivan, a worldwide leader in market research, recognized Merge's experience in this area. In August, Merge officially announced that we received the 2013 Product Leadership Award for clinical imaging and interoperability. This Best in Interoperability Award acknowledges our industry leadership with the entire iConnect Enterprise Clinical Platform, which includes iConnect Access and iConnect Enterprise Archive and Merge's VNA solution.

According to recent industry reports, the entire global VNA market is now estimated to be valued at $165 million and is expected to reach $335 million by 2018. For the second year in a row, IHS has named Merge as the world leader in VNA solutions. More studies are being archived by Merge clients than any other solution provider. In total, Merge clients have accumulated over 237 million exams, which equates to over 15 billion images.

Meaningful Use is driving the momentum for advanced imaging interoperability, and with Stage 2 fast approaching, we are seeing more ambulatory customers look for image-sharing solutions like iConnect Access. According to industry data, the total combined market opportunity for images sharing is approximately $300 million. Since 2012, Merge has seen 39 new clients adopt iConnect Access to image-enable their EMR. With enhanced sharing solutions coming out in early 2014, we expect to see healthy growth in this market.

Merge secured several new customer wins in the third quarter. I'd like now to share the details on 2 of these wins. First, Sinai Health System in Chicago, Illinois, a net new multimillion dollar enterprise deal. The contract is structured as a monthly fee model with ratable revenue recognized over a 5-year period. Sinai provides a real world example of a large health system selecting Merge to deploy single integrated platform for vendor-neutral archiving, image sharing and radiology and cardiology image management across their entire continuum of care as part of their enterprise imaging strategy. This was a competitive transaction wherein we displaced 2 large modality-centric vendors.

The second is Imaging Healthcare Specialists, a large radiology ambulatory practice located in San Diego. IHS was a 7-figure win, and again, this net new customer was looking for a single vendor-neutral solution from an innovative partner. It chose Merge's iConnect Enterprise Clinical Platform for VNA and image access, as well as our entire outpatient radiology suite of products to manage their practice, displacing an entrenched regional vendor.

These 2 significant September contract awards, along with our third-party recognitions, prove that even with our current industry challenges, Merge is well positioned for long-term success in the interoperability market.

The second area of the business where we've seen annual growth is within our cardiology segment. Merge Hemo sales increased by 40% year-to-date in 2013 compared to the prior year. Merge Hemo is a real-time documentation tool that improves the efficiencies in the cardiac cath lab, featuring a unique touch screen interface and automated reporting for physicians and technologists. The solution has received the distinct honor of being named the class category leader in hemodynamics for the past 2 years.

Industry data suggests steady growth in North America for cardiology through 2017. With several customer wins in Q3, including Confluence Health, Central Washington Hospital & Clinics for Merge Hemo and Merge Cardio and a strong pipeline, our expectations for cardiology remain high.

The third area where we've seen year-over-year growth is our eClinical business. Over 12 months ago, we strategically migrated this group to an almost 100% SaaS business model and platform that gives a competitive edge in the clinical trials market and build a recurring revenue base. It was a bold move and the excellent results we have seen to date prove that it was the right decision. We saw eClinical sales revenue increase 39% in the third quarter of 2013 from the third quarter of 2012, while backlog increased by 127% in the past year. The group's strong performance and success in making the change to a SaaS business model gives us confidence that we can achieve the same level of operational success and build greater customer loyalty for other Merge product offerings, including Merge Honeycomb and the new iConnect Network.

In late 2012, we began the development of iConnect Network to provide a national network that allows hospitals, physicians and imaging centers to exchange imaging information electronically. Merge recognized the pressure organizations will face with the onset of Meaningful Use Stage 2 and is delivering an answer. With iConnect Network, organizations can meet Meaningful Use Stage 2 requirements for imaging without implementing costly interface technology and deliver information directly into a referring physician's electronic health record system. This move will enable these referring physicians to attest to Meaningful Use Stage 2 and receive additional federal incentives.

iConnect Network is off to a strong start. We have 2 beta customers, Radiology Ltd. in Tucson, Arizona and Long Island Radiology, kicking off testing and implementation now, and have 15 additional clients ready to move to implementation in the near-term. Our immediate test market for the solution is our large ambulatory client base that includes over 1,000 imaging centers. We'll be rolling out the solution to a broader audience at the annual RSNA conference in Chicago, coming up in just a few short weeks. We plan to offer additional services for iConnect Network in early 2014, including online patient scheduling, electronic physician referrals and precertification services. We believe that the solution represents significant white-space market opportunity that Merge is uniquely positioned to capture.

Now I'll let Steve Oreskovich provide additional comments on the quarter's financial information.

Steven M. Oreskovich

Thanks, Justin.

Total pro forma revenue was $57.7 million in Q3, compared to $61 million in the prior year. Revenue generated through subscription and other highly predictable sources accounted for approximately 66% of total revenue, or $37 million. Our subscription backlog had sequential quarter growth of $7.6 million to $69.5 million in Q3 and 73% of growth in the last 12 months. The clinical trials platform comprised 76% of the total at quarter end. We also saw growth of 15% in the health care subscription backlog in the third quarter. Revenue generated through perpetual license agreements, also referred to as nonrecurring revenue, lagged again in Q3, as overall market conditions did not significantly improve. That said, we haven't seen any unusual material losses in pipeline deals due to competition. As a result, nonrecurring revenue backlog in the health care segment decreased by $2.6 million in the quarter to $22.3 million, and revenue of $20.7 million was up $1 million from Q2 but down $3 million from Q3 in 2012.

Gross margin, on a pro forma basis, was 54% in the quarter compared to 59% in Q3 2012. Please recall that the mix of software and hardware sales will continue to fluctuate and may impact our gross margin on a quarterly basis. For instance, hardware revenue was 20% of overall pro forma revenue in the quarter compared to 13% last year. A large portion of the percentage increase in the hardware revenue can be attributed to sales of kiosks in the quarter, as we continue to methodically withdraw from this market and focus our efforts towards higher-profit-generating solutions.

Cost associated with sales, R&D and G&A decreased to $26.2 million in the quarter compared to $26.9 million in Q3 of 2012. The expenses for Q3 2013 include $2.3 million of noncash charges, primarily associated with the conclusion of purchase accounting of a prior immaterial acquisition and the noncash settlement of a 2-year-old acquired lawsuit. Excluding these costs, Q3 would've decreased by $3 million compared to the prior year, primarily from savings associated with the cost-alignment actions taken in the middle of the quarter, as well as other cost-saving initiatives undertaken earlier in 2013.

As defined in our press release, adjusted EBITDA for the quarter, which is significantly less than the amount calculated per our term loan, due to certain noncash adjustments including those previously mentioned, was $7.2 million or 13% compared to $12.5 million or 21% in the prior year. Adjusted net income was $0.02 per share in the quarter, up from $0.01 per share in the prior year.

As it relates to the rest of 2013, we expect Q4 to generate stronger adjusted EBITDA compared to Q3, as Q3 had an unusually high hardware sales mix, only 1/2 a quarter of cost savings realized in our August restructuring and onetime noncash charges that impacted the quarter. Q4 should only have additional costs related to RSNA.

Cash generated from business operations grew significantly in the quarter to $15.3 million, which drove the overall increase in cash of $3.5 million to $20.3 million at September 30. This compares to generation of $9.2 million in Q3 of last year. Driving the increase was collection efforts, which also produced a decrease in accounts receivable of $10.3 million in the quarter. This provided us the ability to not only decrease our accounts payable by $5.6 million in the quarter, but also feel very comfortable making a voluntary payment of $6 million more principal than required under our loan. The voluntary payment is above our regular quarterly interest and minimum principal payment of $4.5 million, bringing the total cash expended in servicing our debt in the quarter to $10.5 million.

I'd like to spend a little time discussing our philosophy surrounding cash and our debt, as well as provide additional transparency into the calculation of the leverage ratio covenant under our debt. As we previously stated, we continue to evaluate the most appropriate use of cash generated from the business, whether that be reinvestment into the business, making voluntary loan repayments or otherwise. Further, we are very comfortable operating the business with about $15 million of cash on hand. This is due to the rigor we spend surrounding cash forecasting and the fact that we also have a $20 million unused revolver.

In addition, the leverage ratio on our term loan currently requires that net debt cannot be more than 5.5x a loan-defined adjusted EBITDA, which differs from our publicly reported amount for certain noncash and other expenses or gains. For example, in Q3, our market-reported adjusted EBITDA was $7.2 million, while the amount calculated under the loan agreement was $8.8 million. Within that debt, Merge is only credited for the cash on hand to a limit of $15 million. As such, not only does a voluntary payment make sound business sense, as it lowers remaining interest payments over the life of the debt; in Q3, the $6 million of principal reduction equated to savings of $2 million in interest. It also lowers our net debt, providing further cushion towards meeting the leverage ratio.

We also reduced our net debt by another $3.5 million with the buyout and sale of operating leases on the digital kiosks. Finally, the leverage ratio under the loan is currently at 5.1x as of September 30, and we continue to remain focused on compliance on a quarterly basis going forward.

I'll now turn it over to the operator to facilitate Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Now it looks like we do have a question. Ryan, go ahead.

Ryan Daniels - William Blair & Company L.L.C., Research Division

Just want to dive into a couple of things on the financials up front. The Merge DNA business, can you talk a little bit about the $4.2 million in nonrecurring sales there? Was that something to do with the kiosk operating leases that you sold that you just discussed?

Justin C. Dearborn

Correct, Ryan. This is Justin. So we brought forward the other leases and sold the machines, so as part of our strategy to really harvest that business and slowly retract from that business. We have some open contracts that we have to fulfill through the end of 2014 but we're slowly backing out of that industry.

Ryan Daniels - William Blair & Company L.L.C., Research Division

Okay. So we should look at the sales, that $4.2 million is really more of a onetime nonrecurring DNA and not expect that line to continue at that rate going forward. That's a fair assumption?

Justin C. Dearborn

Correct. What it did, though, is basically, consolidate 4 to 5 quarters of revenue into the 1 quarter. So again, as part of the effort to move out of that space, we thought it was best to get out of the operating leases and just sell the units outright.

Steven M. Oreskovich

You should also, Ryan -- yes, Ryan, this is Steve. You should also start to see an expression of an increase in the operating margin from that operating segment going forward, as well, because it was a very low margin business with the kiosks.

Ryan Daniels - William Blair & Company L.L.C., Research Division

Okay, perfect. That's helpful color. And then just a question on the iConnect Network solution. You mentioned in the press release, 15 agreements. But you commented that they're called early adopter agreements. Can you just give a little bit of color on kind of how that's progressing? And what these early adopter agreements are versus a typical agreement?

Steven M. Oreskovich

So an early adopter agreement signs a customer up in a noncommitted way to be first mover into the product line and then we expect to convert those to contracts this quarter, final contracts with final pricing.

Ryan Daniels - William Blair & Company L.L.C., Research Division

Okay, great. And then in regards to the cost reductions, it sounds like that took place in August and the full benefit of that will manifest in the fourth quarter and help margin profile going forward. But is your kind of thought around the annual benefit still around the $6 million range? Or has that changed at all as you went through some of the processes?

Steven M. Oreskovich

No, the $6 million should be about right from an annualized basis, Ryan.

Ryan Daniels - William Blair & Company L.L.C., Research Division

Okay. And then last question and I'll hop back in the queue. Just given the changes in the sales force, it sounds like you haven't seen, per your earlier comments, any disruption to competitive losses, it's rather just disruption and end market kind of taking a freezing. But have you seen any issues with the sales force shrinking and the ability to sustain the pipeline and kind of hit the deal metrics that you're looking at going forward?

Justin C. Dearborn

No, and I'll say unfortunately not. So obviously that's an area we can ramp back up fairly quickly but we haven't seen a need to do that yet. So we do believe we're covering the territories appropriately and we have the appropriate pipeline coverage.

Operator

We do have another question. Gene, your line is unmuted.

Eugene M. Mannheimer - B. Riley Caris, Research Division

Just relating back to some of the large announcements that you referenced on the call. Can you characterize your pipeline today? Are there similar opportunities of that enterprise nature? And what would be the timeline to convert those?

Justin C. Dearborn

Gene, this is Justin. So there are, and I do believe the pipeline remains strong. The challenge the last few quarters is just putting a stake in the ground and getting customers to sign agreements. So there is activity. There's a lot of RFP action. The pipeline looks good. Q4 is typically the best quarter, so we don't see that trend breaking. But given some of the uncertainties caused -- coming from D.C. and some of the regulation changes, there's just been a pause that we've seen, at least on some of these enterprise transactions. So hopefully, we do believe some will get unstuck in Q4. But overall, the activity is still sound. As Steve pointed out, we don't believe we're losing to any competition; we're just losing to inaction right now.

Eugene M. Mannheimer - B. Riley Caris, Research Division

Okay, good, good. And then you also talked a little bit about the IHS, Imaging Healthcare Specialists, deal. Did you happen to mention whether that was a license or a monthly subscription?

Justin C. Dearborn

I did not, but that's a license.

Eugene M. Mannheimer - B. Riley Caris, Research Division

Okay, so you took the majority of that revenue in the third quarter?

Justin C. Dearborn

On the license side, yes.

Steven M. Oreskovich

The professional services will roll out, Gene, over the next couple of quarters.

Operator

And we do have another question. Chad, your line is unmuted.

Chad M. Bennett - Craig-Hallum Capital Group LLC, Research Division

Steve, can you talk about what the schedule is over the next couple of years, from a kind of leverage ratio standpoint? When it changes and what it changes to?

Steven M. Oreskovich

Yes. So it starts in the first quarter of 2014, to start to ratchet down 1/4 a turn, down to 4.25 after it sequentially moves down on a quarterly basis. And then it's flat from -- at 4.25 throughout the rest of the term loan.

Chad M. Bennett - Craig-Hallum Capital Group LLC, Research Division

So in the March quarter of next year, it goes to 4.25?

Steven M. Oreskovich

No, no. It will go down from 5.5 to 5.25, then to 5, then 4.75, 4.5, and then finally down 4.25. So it will ratchet down on a quarterly basis starting in Q1 of '14.

Chad M. Bennett - Craig-Hallum Capital Group LLC, Research Division

Okay. The -- and where did the kiosk, I guess, the accelerated kiosk revenue hit in the revenue items? Was it in the software and other this quarter?

Steven M. Oreskovich

Yes. So it's in 2 places. You'll see it in software and other. And then in the DNA segment, it will show up in the nonrecurring line as well. Depending on which cut of the overall revenue base you're looking at, whether you're looking at the nonrecurring versus subscription or whether you're looking at software versus pro serve versus maintenance.

Chad M. Bennett - Craig-Hallum Capital Group LLC, Research Division

Right. And then, Justin, so how should we think about the way you guys now are looking at the overall business, but the different segments or products within your business, in terms of potentially monetizing those in a different way? And if, in fact, quite frankly, you have the bandwidth to manage a bunch of different end markets and a bunch of different products with different growth rates and different level investment profiles. Can you speak to how you think of that these days?

Justin C. Dearborn

Yes. So we have simplified things a little bit, Chad. So I think we've been, hopefully, been very clear on the kiosk business. So that was an investment made a few years ago in the patient engagement. We dipped our toe in that, we did not lose any money, but it just didn't have the attributes we wanted, too capital intensive. So we're backing out of that, so that gets very little attention, if any, from me. We've reorged our go-to-market in 3 areas and put leadership in place in 2 of those areas. They're new. And then the clinical trials business has continued to be led by the gentleman who did the turnaround there about 1.5 years ago. So I was more heavily involved in that. But over the past 1.5 years, I think he has proven to operate a great business. He's grown the revenue, backlog, innovated with a net new product being released to the market. So I feel very comfortable with that group and the leadership there.

And then on the 2 new go-to-market segments, put very seasoned feed domain experts involved there. So not only sales expertise, but really on the clinical side, strong leadership there. So I look at it -- we really have 3 direct reports there, 1 running our cardiology business, the other running kind of everything else: interoperability, and really our core radiology products and our clinical trials business. So each of the 3 get different levels of attention based on activity. The clinical trials business, frankly, is running very smoothly. And again, that's been in place -- that team's been in place for 7 quarters. And again, their track record kind of stands on its own there. The other 2, just trying to add value where I can with customers. Obviously, the market's been slow, so we're doing what we can there to continue to build mind share in a pretty tough market right now. But we are confident it's going to turn and we're confident we have the right leadership there to execute on that when the market does open back up.

Chad M. Bennett - Craig-Hallum Capital Group LLC, Research Division

Okay. Is there -- last question for me, maybe for Steve, I think. Is there a reason why subscription revenue on the DNA side was down sequentially?

Steven M. Oreskovich

Yes. So that will, if you look at what Justin had mentioned about the transaction in the quarter, it captured about 4 to 5 quarters' worth of subscription revenue. And part of that capture was this quarter, as well. So that's what's accounting for it, as we exit the -- all of DNA has both the clinical trials, as well as the kiosk revenue, highly subscription on both sides. Obviously, with the kiosk being on an operating lease, the intent was to have the cost match the revenue stream. So when you pull the revenue stream forward, we pull the cost forward as well. And that's really what's offsetting continued strong growth on the clinical trials side. Sequentially, we did mention in the prepared remarks that clinical trial revenue was up 40% compared to -- sorry, compared to the last year, not sequentially. Sorry, Chad. So that's really -- you get that offsetting factor there that's sort of masking the strong growth again on the clinical trials side.

Chad M. Bennett - Craig-Hallum Capital Group LLC, Research Division

So how much kiosk subscription revenue is left in the DNA segment?

Steven M. Oreskovich

I think it's roughly the backlog amount in there. If you do the math, it's -- I don't have it in front of me, but overall -- the overall backlog, 76% of that is clinical trials, so if you took total company subscription backlog, 76% is clinical trials. And then you can back that number out of what's the total for the DNA operating segment backlog because we break that out separately and that will give you your number. I think it's $2 million to $3 million. But I'm not sure, I don't have the math in front of me, Chad.

Operator

Evan [ph], your line is unmuted.

Unknown Analyst

I wanted to go to health care subscription backlog. I know we've been thinking for a long time, subscription mix was going to increase there and it really hasn't for the last year. But this quarter, I actually thought by far the best we've seen it. And I was wondering if you could get into what's the primary driver of that? Is it Honeycomb? Is it a combination of things? And how should we think about that going forward? Is it -- does it increase in mix further?

Justin C. Dearborn

Sure, this is Justin. Yes, good question. So few traditional, say, deals, I know we talked about Mt. Sinai, that is a subscription ratable deal. So a few -- I'll say core traditional products sold in that model. And as we talked a lot in the past, that is our preference, although we have to balance it out. We can't make that decision. And we can sometimes influence it but we can't ultimately make the decision for the client. But we do offer both models in just about every sales cycle. But we need to balance it as a company, where we think the recurring revenue will really grow is Honeycomb and iConnect Network and solutions we only offer in a ratable recognition or a per-study model. It's tough, we have such a large installed base, too. We have $100-plus million in maintenance revenue. Very difficult, if not impossible, to flip those clients to a per-study model once they've had the feeling they've already paid for the software. Now they are paying us an annual maintenance fee, but so -- very little opportunity in the installed base to turn that to a ratable-revenue model. But go forward, again, our new product offerings are only being offered in a transaction or a ratable record revenue model. And we do still have again, the opportunity in our core solutions to sell that way. Again, we offer both. But again, it's the customer ultimately who makes the decision based on their budgets.

Unknown Analyst

Next question. I might have missed it in the comments, but you were talking about getting necessary Stage 2 certification in radiology, I think. What's the timeline there? And is there anything else I'm thinking about or missing in what you need to sort of be ready for Stage 2 across your client base?

Steven M. Oreskovich

So we're expecting to have all of our radiology viewers certified by the end of January. We've already had some of them go through certification. Our Eye Care PACS was certified in September. We are also putting our RIS through comprehensive certification. Our 8.0 release, which goes out the door in January, as well.

Unknown Analyst

All right, good. And I wanted to go back to DNA. If I strip out even the kiosk sales, am I correct in saying that, that would've been detracting from the EBITDA margin profile this quarter? And I guess what I'm getting at is, the EBITDA margin sort of trends that we've seen for core eClinicals are very strong. And what should we think about that sort of target margin being in the long run? Because, quite frankly, it's getting to be -- if I look at my model next year, it's getting to be a substantial piece of the overall mix. And I want to make sure I'm not missing anything on the margin pile and the ultimate growth trajectory.

Steven M. Oreskovich

It's a good question. As far as the transaction in the quarter, I would say it was net neutral to slightly positive, from an overall margin perspective. But you're talking in the low digits, single digits, not similar to the rest of the business. As far as the expression of where we expect it could go in the future, I think the trending, if you back out the $4.2 million this quarter with a slight margin on it, would give you about where it should be, and could continue to increase but not significantly after that. I think you're now, getting into the low to mid-30s. So we would expect it to continue to go up, but I don't think you'd -- we have an expectation for it to get into the mid to high 40s. Because if it got there, we would be underinvesting in the business, quite frankly.

Justin C. Dearborn

Yes. So just to add on to that. So we are managing that business pretty tightly from an EBITDA perspective. And I say manage it, meaning up and down. So we don't want to be too high there just because we do believe there's great opportunity in that space, so we are investing. So net business is of scale right now, and we can see when we add 2 or 3 new sales folks to the team in a new region, that does impact it immediately. So again, adding $300,000 or $400,000 of cost shows up, just given the size of that business. So we are managing it. We are, we think we are managing it to an appropriate EBITDA contribution margin, just given the opportunities in that space.

Thank you, everyone, for your questions. And to summarize, I'd like to take these final moments to reiterate the strength and viability of our business. We have industry-leading solutions in critical clinical areas that will see renewed investment and adoption from providers. Now despite the overall pause, health care IT remains a great market to serve. Our hemodynamics and clinical trials solutions saw very strong bookings growth during a period of macro budget paralysis. We have significant sales opportunities with our interoperability solutions, including a net new white-space opportunity for iConnect Network. We have continued to invest in our core products, and have leveraged these products to extend our solutions into closely adjacent areas. We have temporarily adjusted our cost structure, as well as lowered our debt service cost by almost 50%, annually. Customers can be confident that we will continue to invest in our core products and identify opportunities in the market that add value to our client base and capitalize on them.

We've been pioneers in the industry for over 25 years. The first, as a cofounder of the DICOM standard and developer of eFilm, the world's most downloaded medical imaging application. We're also the first to offer a certified Meaningful Use radiology information system, the first to offer MRI-CAD, the first to offer a touch screen hemodynamics application, and the first to offer both a vendor-neutral archive and a zero-client web viewer. And we're not done yet. We look forward to continued innovation as we move forward and advance interoperability within the new iConnect Network, the first electronic image exchange network.

Thank you, and we'll see some of you at RSNA in December.

Operator

Thank you for joining our call today. The event is now complete. You may now disconnect.

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