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Merge Technologies, Inc. (NASDAQ:MRGE)

Q1 2010 Earnings Call

May 6, 2010 8:30 am ET

Executives

Julie Pekarek - Head of IR

Justin Dearborn - CEO

Steve Oreskovich - CFO

Paul Merrild - SVP of Marketing and Business Development

Analysts

Eric Martinuzzi - Craig-Hallum Capital

Corey Tobin - William Blair & Company

Eric Coldwell - Robert W. Baird & Co.

Akshay Madhavan - Redwood Capital

Raymond Meier

Julie Pekarek

Good morning and welcome to Merge Healthcare's first quarter 2010 earnings call. I am Julie Pekarek, Merge's Head of Investor Relations. Joining me on the phone today are Justin Dearborn, our Chief Executive Officer; Steve Oreskovich, our Chief Financial Officer; and Paul Merrild, our Senior Vice President of Marketing and Business Development.

This call will begin with Steve's discussion of our financial results from the last quarter. Due to the recent completion of our AMICAS acquisition, Steve will also discuss certain financial data regarding each of the respective companies in the first quarter of 2010. Justin will follow Steve with an overview of our business progress over the past quarter and will also provide a detailed discussion of the acquisition of AMICAS.

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

In addition, we may refer today to non-GAAP financial measures. These measures are supplemental to our 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 our earnings release.

With that, I will turn the call over to Steve.

Steve Oreskovich

Thank you, Julie. Good morning everyone and thank you for joining us. As Julie mentioned, I will review our financial results for the first quarter of 2010 and compare the results to both the fourth quarter and the first quarter of 2009. I will also review certain first quarter 2010 financial information for AMICAS.

As Julie mentioned, I will provide some non-GAAP information that we currently use internally to manage our business, including recurring revenue as a percentage of total revenue, non-recurring revenue backlog, and adjusted EBITDA.

A detailed reconciliation of GAAP net income to adjusted EBITDA is located in the tables at the back of the earnings release that we issued last night, a copy of which can be obtained from the Investors section of our website at www.merge.com.

In addition, I will focus my comparative remarks primarily on the fourth quarter of 2009 as such period includes a full quarter's activity from our two 2009 significant acquisitions.

Before I begin, I would like to welcome our bondholders as well as the preferred and common stockholders who have recently invested in the company through the respective placements about one week ago. We are grateful to both, as the funds you provided helped us bring to market a leading provider of medical imaging software solutions in North America with significant cross-selling opportunities and further scale to increase our international distribution channels.

Net sales for the first quarter of 2010 totaled $20 million, which grew 4% from the $19.3 million in the fourth quarter and 30% from $15.3 million in the first quarter of 2009.

Net sales for the first quarter include in excess of 60% from recurring revenue, which is consistent with the fourth quarter of 2009.

Non-GAAP net sales, which considers the purchase accounting impact to GAAP revenue was $20.3 million for the first quarter.

Based upon the information we received, GAAP net sales for AMICAS for the first quarter was $29.4 million, of which 65% was recurring revenue and the non-GAAP net sales amount was $30 million. We are pleased with the continued strength of the recurring revenue base of both companies.

We are also happy with the backlog of consigned customer orders, which will produce non-recurring revenue in future quarters. Our non-recurring revenue backlog as of March 31st increased to $8.9 million. The non-recurring revenue backlog for AMICAS as of March 31st was $35.3 million, resulting in $44.2 million on a combined basis.

Our gross margin increased to 68% in the first quarter compared to 66% in the fourth quarter, primarily as a result of an increase in the mix of software and other sales as a percentage of overall sales.

Both operating and net income in the first quarter were significantly impacted by $5.9 million worth of acquisition-related expenses incurred primarily as a part of the AMICAS acquisition.

The most notable of these is the payment of $4.3 million, which represents our half of a breakup fee paid to a former suitor for the company. As a result of such costs, we had a GAAP operating loss of $3.2 million in the first quarter of 2010, compared to operating income of $1.5 million in the fourth quarter of 2009. Excluding the acquisition-related costs in both periods, operating income for the first quarter would have been $2.8 million, compared to $1.7 million in the fourth quarter.

In the first quarter, there was a GAAP net loss of $3.2 million or $0.04 per diluted share compared to the fourth quarter net loss of $2.1 million or $0.03 per diluted share. Please recall that the net loss in the fourth quarter of 2009 includes a charge of $3.3 million as a result of the early retirement of prior debt.

In the first quarter of 2010, AMICAS incurred $6.3 million of acquisition-related costs, including a $4.3 million breakup fee, which led to a GAAP net loss of $1.8 million. Exclusive of such costs, it would have been net income of $4.6 million in the quarter.

Our adjusted EBITDA in the first quarter was $5.6 million, compared to $4.9 million in the fourth quarter of 2009. Adjusted EBITDA, as a percentage of non-GAAP net sales, increased to 27% for the first quarter compared to 24% in the fourth quarter of 2009 on the strength of our operational execution from prior acquisitions. The adjusted EBITDA for AMICAS was $7.1 million or 24% of non-GAAP net sales for the first quarter.

In the first quarter of 2010, the cash balance decreased by $3.8 million to $15.8 million as of March 31st, primarily as a result of the payment of $4.9 million of the acquisition-related costs incurred in the period.

The cash and marketable securities balance for AMICAS decreased to $1.8 million in the first quarter of 2010 to $45.9 million as of March 31st, primarily as a result of the payment of $5.9 million of acquisition-related costs incurred in the period. In other words, exclusive of acquisition-related costs paid in the quarter, the combined company has generated cash of $5.2 million.

Net accounts receivable increased by $3.7 million to $20.9 million as of March 31st and days sales outstanding for the first quarter increased slightly to 85 days from 82 days in the fourth quarter of 2009. We expect our DSO to decrease in the second quarter based on strong cash collections in April.

As we are currently in the process of accounting for the AMICAS acquisition, which we completed about a week ago, I asked for patience until next quarter’s call or until we've filed certain documents with the SEC, where we will provide more detailed information on the accounting impacts of the transaction.

That said, I can provide the following data. As indicated, we completed the acquisition on April 28th. We paid approximately $224 million at $6.05 per share and based on approximately 37 million shares outstanding. Further, shortly before the close, AMICAS paid vested option and restricted stockholders, approximately $23 million, representing the difference between the $6.05 per share price and the respective exercise price.

The transaction will be accounted for under the acquisition method of accounting, which we required that the assets and liabilities be measured at their fair values as of April 28. This will most likely result in a significant adjustment to the deferred revenue balance of AMICAS and future GAAP revenue.

This will also significantly increase the goodwill and certain intangible assets. The intangible assets will lead to additional non-cash amortization charges over the life of the respective asset.

We also expect to incur between $7 million and $9 million of restructuring costs, primarily in the second and third quarters as a result of our reorganization activities. We will have $200 million of debt with annual interest payable at 11.75% or $23.5 million of which the first semi-annual payment will be due in November.

The debt was issued at a discount and we also incurred fees associated with the issuance of the debt. Therefore, these two items will be amortized over the five-year life of the debt and result in a non-cash impact to our financial statements.

We have approximately $42 million worth of preferred stock and an additional 7.5 million shares of common stock outstanding. The preferred stock carries an annual compounding dividend of 15%, which is payable only at our discretion based on the allocation of proceeds from this transaction with these holders.

In the preferred stock dividend, our earnings per share calculation only, not net income, will be impacted in the future.

With that, I would like to now turn the call over to Justin for his comments.

Justin Dearborn

Thank you, Steve. Well, it was another very active quarter for Merge and our share price had some wild fluctuations. Some of this, I believe, has been tied to the disclosure of and then the ongoing status of the acquisition of AMICAS. Our investors have had a hard time understanding the story, given the overall lack of messaging and acquisition rationale we were able to provide during the process.

So I will provide some much needed color now.

The AMICAS acquisition was financially complex and more contentious transaction than it needed to be, but it is an important step forward to both companies. I am going to step to the reasons why we acquired AMICAS, the business changes that have resulted, and finally the marketing impact we expect.

One of the key reasons for acquiring AMICAS was our need to be a larger and more efficient provider. In the U.S. medical imaging market, most of the vendors are supplying software, and them the company went to a larger priority product line like a modality and general HIT solution. Public independent software companies like Merge and AMICAS are becoming a rare breed with differentiated products and loyal customer bases, but increasing cost of being public and delivering competitive solutions.

The combination of Merge and AMICAS creates a more scalable organization that can remain nimble enough to compete effectively, but have the scale and size to do so efficiently. The combination of two public companies operating in the same overall space creates an opportunity to reduce the cost structure of back office operations without affecting the performance of the business. We are also able to deliver solutions and support in more cost-effective delivery model.

Another strong reason for acquiring AMICAS is a significant cross-selling opportunity. From a solution point of view, we do have all lab and radiology RIS and PACS in the outpatient imagine space in the U.S. with the remainder of our respective product lines are highly complementary.

For the most part, Merge has targeted different customers in AMICAS who have been almost entirely new customer base for these cross-selling efforts. While Merge primarily focused on outpatient imaging sites in the RIS/PACS market, AMICAS had a more balanced revenue stream from outpatient imaging sites as well as radiology, cardiology and enterprise solutions in the hospital market.

We offered legacy Merge customers solutions in revenue cycle management, specialty cardiology PACS and enterprise content management, while legacy AMICAS customers will have access to Merge’s CAD, Master Patient Index, interoperability and patient experience solution.

With the combined customer base of 1,400 hospitals and 2,200 imaging center sites as well as 250 reseller partners, ranging from the largest modality vendors to the EMR solution providers, we have a large cross-sell opportunity.

Our cross-selling opportunity extends globally as well. We will utilize our international footprint to distribute AMICAS products. AMICAS had an immaterial in the national presence, while 22% of Merge’s sales will derive from outside of the U.S. in 2009. Last year, Merge signed new distribution contracts in 24 countries, some of which are in highly underpenetrated regions of the world.

With these contracts in place and a newly expanded solution set to offer our channel partners, we believe we will see improved results internationally. We have already begun to make business changes made necessary by the acquisition. We will be communicating our product strategy to our customers by the end of this quarter.

We have migrated from a business unit to a functional structure from most parts of the organization.

Antonia Wells is transferring from running our indirect business our Merge OEM group to heading up the entire Merge R&D team based in Toronto.

Nancy Koenig, formally President of Merge's direct business will now our direct sales organization for all of Merge.

Keith Stahlhut from the AMICAS executive team will head our national accounts team, and Toni Skokovic from our Merge OEM team will be responsible for all indirect channel.

Paul Merrild, former Senior Vice President of Marketing and Business Development at AMICAS joins us too in marketing, product management and corporate strategy at Merge.

Glen Lefeber, also from the AMICAS team who run our customer support group and Jeff Smith who ran direct sales for Merge for the past few years will once again lead our implementation services team.

Board exception to the functional organizational design is our eClinical group, which will continue to be run by Jon DeVries as a business unit.

We believe this organizational structure is a good blend of talent for Merge and AMICAS that will drive organizational efficiencies and excellence. Under each function is a large team of quality dedicated employees. We'll be asking a lot of our employees in making the combined company work quickly, and I thank each employee in advance for their efforts.

We're now in a very unique position in the market with a scale to be a Tier 1 competitor and the confidence that comes from over 20 plus years each focused on medical imaging software. The combination of Merge and AMICAS brought together a total of 260, full time equivalent resources that fall under R&D. This is an enormous and talented team.

For the past 25 years, for instance, our development team in Canada has been developing applications that are licensed backed from the largest and most demanding software and equipment makers in the world.

This team is recognized for the quality and innovative solutions that they consistently deliver. Both AMICAS and Imagine have been customers of Merge since 2006. Merge and AMICAS have both built long-term relationships with some of the leaders in medical imaging and now count many of the largest providers in the imaging services across the continuum of care among our customers.

These customers have successfully built businesses despite reimbursement and market challenges and our ability to provide them with the latest technology has been mission-critical.

To Merge of these hospital customers both in enterprise class imaging and interoperability infrastructure structure and best-of-breed departmental solutions for radiology, cardiology and perioperative needs.

We offer the comprehensive solution for outpatient providers to address their software needs of their clinical, administrative and financial requirements. In the upcoming quarter, we expect to release our patient experience solution. There will be a lot more to come on this exciting offering.

We have a financial structure that has significant recurring revenue and higher predictability. In 2009, in the first quarter of 2010, both companies generated recurring revenue that went over 60% of the annual revenues. We believe the financial makeup of the new organization should continue to create this sort of stability from a revenue standpoint.

Outside of the very involving acquisition process, we managed to operate in a business as usual mode at both Merge and AMICAS as indicated by our very strong Q1 results, and I am very proud of the teams for remaining focused.

Merge Fusion signed several new RIS/PACS customers and key distributors in Latin America in Q1. One key new customer for us was Complete Women's Imaging, located in New York. This customer required a comprehensive image and information management and distribution solution that also accommodated the unique workflow of breast imaging.

Merge selected after an extensive evaluation process, because of our complete end-to-end offering of the women's health intensive practices, which includes our Merge Mammo and CADstream breast MRI products in addition to our RIS and PAC solutions

We also continue to see traction from our Cedara WebAccess solution. The zero-client image and information building platform is now in use in end-user health organizations globally though our partnerships with the EHR, HIE and telecommunications vendors.

We also continue to build business in China through our full service operations in Shanghai. Our team just returned a couple of weeks ago from the China Medical Equipment Fair, where we had large suite of solutions on display and met with some of the largest distributors in China.

Our CAD business received a boost from the Australian government recent approval of breast MR. This governmental step is critical for our CAD product in any country as our solution is recognized as an essential workflow tools with imaging procedure.

As an example, the potential impact of revenue from our Australian distributor jumps 50% in one quarter post approval. One of the major events for both companies in Q1 was the health information management in system society or HIMSS Conference, which took place in the first week of March in Atlanta.

This was an important show for Merge to continue building recognition in the broader health IT space. We were able to show a cohesive picture of the new health IT offerings Merge has to offer hospital.

At the show, we launched our new Merge Patient Kiosk. The self-service tool for patient check-in has been successfully deployed at several Merge customer sites and integrates seamlessly in to RIS.

The Merge Patient Kiosk is the first component of our broader patient experience offering a solution set underdevelopment that focuses on the consumer and their role in healthcare IT landscape.

At the show, we also introduced our Enterprise Master Patient Index our EMPI solution. This product is critical to any broad exchange of health information and our underlying technology has the benefit of being stable and tested application in the enterprise IT world for over 10 years.

We've completed the existing the existing application and for the unique need in healthcare and have added the imaging functionality that is core to our expertise, because all conclusion provides with a competitive and proven application for hospital and health information exchanges and also a platform broader health IT integrations.

Team has also served as a launch of our new eFILM MOBILE application. This new product is available on the iPhone. eFilm Workstation version 3.3 was released as well to provide integration with eFilm MOBILE.

The solution allows for the more control of any eFilm Workstation, which provide significant workflow, freedom for radiologist. As part of this launch, we announced a partnership with the Massachusetts General Hospital to investigate overall mobile imaging workflow solutions.

We believe that products such as eFilm MOBILE that deliver solutions leveraging alternative technologies such as the iPhone and iPad will become increasingly important as providers leverage more technologies and anywhere, anytime care delivery.

We also demoed our Perioperative solution at HIMSS, who are very small piece of our business today. This market segment is highly under penetrated and suffers from many of the same workflow and interpretability challenges as medical imaging.

We have a best-of-breed product that solves many of these issues and has been universally recommended by our customers as well has score very high in the most recent class report.

Finally, I want to note the importance of HIMSS to our OEM sales efforts. In support of our ongoing leadership and medical imaging standards, we participated in Connectathon the resulting interpretability showcase at HIMSS.

During the Connectathon testing, which connects vendor solutions to promote better electronic information exchange, Merge demonstrated interpretability with every vendor pairing, which included some of the largest companies in the world.

As many of you know, interoperability is a critical component of the overall healthcare IT landscape as envisioned in the government stimulus and healthcare reform legislation. We believe that success at events such as the Connectathon positions us well for the future of interoperability.

We also now see new partnership with the Orion Health who licensed our WebAccess solution to bring medical images and information into its physician portal solutions.

Merge also participated at the European Congress of Radiology, or ECR conference which is held every March in Vienna. This show is an important event and it provides the venue to attract new channel partners as well as solidify existing partner relationships for Europe and the Middle East.

Now, from a market perspective, there continues to be legislative changes that impact providers of imaging services. These changes may impact both technical and professional reimbursement from providers. While these changes could create short-term economic pressure for providers, we remain convinced that the non-evasive and minimally evasive imaging procedures are a critical part of a long-term solution to delivering quality care and detaining cost in health care.

Additionally, with the recent Health Care Reform bill, many of more Americans will have access to healthcare, which will include imaging services. So, while there maybe short-term economic pressure on a procedural basis, we believe the long-term prospects for growth of imaging services will remain strong and this growth will acquire solutions from companies like Merge.

Despite the uncertainty related to reimbursement, there is also an unprecedented interest in using information technology to improve quality and productivity throughout our healthcare delivery system.

While, specific legislation related to imaging remains unclear, we believe that Merge is well positioned to benefit from the increased use of IT in general, for practicing medicine in both the direct and the indirect manner in a more efficient manner.

These changes will drive an increased interest in IT, interoperability and access to information for all aspects of healthcare. With our solutions for standards compliance toolkit, imaging and interoperability, Merge is well positioned in the market.

The last five quarters, we have ended our earnings call with a note of caution and with good reason. Between a negative macroeconomic climate and the healthcare market turmoil brought out by government priorities in legislation it would have been imprudent to be optimistic. However, this call is little different.

We have just completed a transformative acquisition. We believe that we are the largest vendor providing imaging information management solutions, not incumbent but with competing and sometime constructing priorities. We have been excellent opportunity in business with providers who want a partner focused on their specialty and their imaging information management goals and objective.

We are financially strong, have significant growth opportunities and the talent and vision to deliver innovative and quality solutions. We appreciate the confidence placed in us by our new investors as well as, as our loyal shareholders. We look forward continuing to report good news on our business progress. I would like to conclude by thanking our employees again for staying focused during a very public and arduous process.

And with that, we will open up for questions.

Question-and-Answer Session

Operator

(Operations instructions). Your first question comes from the line of Eric Martinuzzi.

Eric Martinuzzi - Craig-Hallum Capital

Congratulations on completing your transaction. I have a question about your comment in the press release, Justin. You talk about early signs of the market improving and when you say market with Merge, you are really talking about three different markets. I was wondering if you could address those, the large hospital IDM, the small hospital outpatient imaging center and then the OEM environment.

Justin Dearborn

Sure, I was speaking broadly. Prior to the transaction, we didn't have a good presence in the hospital market. We did have some offerings that we would sell into the hospital market. So that was a small data point, but I think budgets are freeing up. So there is more activity.

We're definitely seeing that in the hospital market again with a smaller data point prior to this transaction. On the imaging side, and really equipment side, as you remember, about half the business of Merge was selling indirect through OEMs, just a general up-tick in Q1 on activity. So pipeline, meetings, discussions just feels much better than it has the past five quarters.

Eric Martinuzzi - Craig-Hallum Capital

And, then the larger partner conversations. Obviously, given your much greater footprint in imaging informatics and the like, the key players I'm wondering, since April 28, have you been in touch with the household names in imaging, do they regard you? Do you have basically a bigger voice in the market?

Justin Dearborn

So, I talked to some customers. I'm trying to figure out where question was headed, but I guess I will just interpret it. To me, is there an additional conflict maybe in the channel as we become a bigger player on the RIS/PACS side in North America, but that's the question. I haven't had many of those conversations with those the groups at the modality vendors are pretty separate. So we haven't taken any calls. We reached out to a few of the large OEM customers and haven't had any issues or any pushback around the transaction.

Eric Martinuzzi - Craig-Hallum Capital

I was, also on the more optimistic side, opportunities or potential business that maybe wouldn't have seen had you not had this scale, had you not done this transaction?

Justin Dearborn

The broader healthcare, a key market for some of the EMR players than some of the traditional ones, HIS vendors and there is some great opportunity, AMICAS had some nice relationships, some public, some in the works. So you will see some, hopefully, press releases out of us in the next quarter or so around that. But as far as the modality vendors, I don’t believe there is much else from the AMICAS product line that we will be able to offer them, frankly.

Eric Martinuzzi - Craig-Hallum Capital

Okay, and then just, I know you are limited in what you can say post integration, but still trying to get your arms around things, but you talked about, in the slide deck, and this is going back probably a month ago, the slide deck that was used on the debt road show. There was a run rate, finance, I believe EBITDA number that was put out and that was a $57 million number and that did include $15 million of synergies. I am curious to know, how soon you believe you can get to that run rate. Is this a 2011 number? Is this a rate now number? Is it a Q4 2010 annualized? Could you comment there?

Steve Oreskovich

Sure, this is Steve, Eric. We believe that’s a Q4 2010 annualized number. Some of the restructuring cost that will come through as part of affecting those synergies will flow through in the second and third quarters, to hit P&L. So if you are looking from a clean quarter P&L perspective, Q4 of 2010.

Operator

Your next question comes from the line of Corey Tobin.

Corey Tobin - William Blair & Company

A couple for you here. We will start with some housekeeping ones. Steve, what's the stock comp breakout on the P&L by expense line item? Please?

Steve Oreskovich

Sure, Corey. It's very minimum in cost to sales. It's only about 6,000. Sales and marketing is 83, product research and development is 62 and the majority is in G&A, that’s 203,000, comprising the 354 for Q1.

Corey Tobin - William Blair & Company

Okay, great. And then just looking outside the AMICAS transaction for a second. What was the revenue contribution from Confirma and etrials in the quarter.

Steve Oreskovich

Sorry, Corey. Did you mean, with respect to the AMICAS transaction, did you say?

Corey Tobin - William Blair & Company

No, I am saying, looking at the prior transactions, putting the AMICAS aside for a second, because obviously that didn’t contribute in the quarter, but what was the revenue from Confirma and etrials in the quarter.

Steve Oreskovich

Sure. Given that we fully integrated those in to the existing operations and are cross selling dose products through that the different business units, we have not broke that out for this quarter and we will not break that out given that it will be, if we were just trying to look at it on a pure legal entity basis it would start to be misleading because we have got revenue being generated through various of the business units now in cross selling efforts.

Corey Tobin - William Blair & Company

Okay, got it. Now looking at the P&L, there is this, I guess pro forma revenue which includes the add back from revenues that were written down in the prior acquisitions. What would you expect that to be for the next couple of quarters?

Steve Oreskovich

Well, it will be significant in the second and third quarter as a result of the closing of the AMICAS transaction. I don’t have a specific amount for you sitting here today we are in the process of working with valuation experts to openly see what that amount is. We will on the second quarter indicate that in detail and also how it will roll out through the forward booking 12-month period. So, I apologize that I don’t have that for you today. That being said, we do expect it to be significant impact.

Corey Tobin - William Blair & Company

I know, I understand. I know you guys have been quite busy, so completely understood. And a final one, if I could, real quick, any thoughts on the product lines and really what the go-to-market strategy is? Specifically I'm speaking, of course, in the PACS and RIS areas where it seems like there maybe some overlap between the two of it, but I guess it's really more like three different companies' product offerings.

Paul Merrild

Hey, Corey it's Paul Merrild. So the issue of technology choices and product overlap and so on and so forth. It's actually interesting. If you put the solution set from both companies side-by-side, there isn't as much overlap as you would anticipate. In fact, a lot of it is pretty complimentary. So we're pretty excited about that.

There is clearly overlap in the area of radiology PACS and RIS and for both of those and for all of the products frankly, we're going through a very through analysis right now actually as we speak, including looking at the numbers, looking at the underlying technology and looking at the opportunities and we anticipate being prepared to share that with our customers and everybody in the next couple of months and we'll have a lot more solid direction around that very shortly.

Operator

Your next question comes from the line of Eric Coldwell.

Eric Coldwell - Robert W. Baird & Co.

I think in the slide presentation on the debt road show, it also mentioned that the cost to achieve the $15 million in synergies would be similar to the $15 million. Could you verify if that's correct and then true that up with the comment that you're looking at a restructuring of $7 million to $9 million here in the second and third quarter and tell us what the delta is between the $7 million to $9 million versus the 15.

Steve Oreskovich

Sure, Eric, this is Steve. The slide deck, we were being very conservative at that point in time. We have much greater information since that point in time, which was, I think about a month ago or so, so the $7 million to $9 million we mentioned earlier, I mentioned earlier today and we also mentioned it in the 8-K is truly the cost or a cash out that we expect in order to effect that $15 million in synergies.

Eric Coldwell - Robert W. Baird & Co.

Okay, good. Just a couple of clarifications. Making sure we understand the model impact. With the debt issuance, the original issue discount and the financing cost, will you be excluding those costs, the amortization of those, will you be excluding that from your adjusted net income and adjusted EPS?

Steve Oreskovich

Given the fact they are non cash costs, yes, we will but we will and specifically comp out as non cash cost on a separate line.

Eric Coldwell - Robert W. Baird & Co.

Okay, could you just remind us quickly what the financing cost will be in total and what the quarterly amortization will be?

Steve Oreskovich

Real quickly, I think the last time we looked at that, Eric, we were estimating about $9.5 million. I don’t have that final number sitting here today. We are still getting it, in the process of gathering, pardon me, a couple of the vendors' invoices. So once we have that all paid, we will indicate that amount. In addition, we will be filing probably before the end of the month an 8-K that will update all of that information. So you should be able to pull more specific data from that 8-K with respect to those amounts.

Eric Coldwell - Robert W. Baird & Co.

And, Steve, that was $9.5 million, specific to the financing or the combination of the OID and the financing.

Steve Oreskovich

Specific to the financing and the OID, as well.

Eric Coldwell - Robert W. Baird & Co.

I am sorry. So, both.

Steve Oreskovich

It is a combination of both, sorry.

Eric Coldwell - Robert W. Baird & Co.

Okay, sorry, that’s great. And on the preferred, the discount on the issuance there, are we correct in assuming that you are going to treat that as a one time non-GAAP item in the second quarter?

Steve Oreskovich

Yes, and it will impact the earnings per share calculation only there will be no flow through the P&L on that item.

Eric Coldwell - Robert W. Baird & Co.

Okay. I will be expected. Just housekeeping, what is the combined headcount of the company today and where would you expect that to be by year end?

Justin Dearborn

Sure, this is Justin. Combined company’s when we put them together last week and closed the transaction with around 760. I won’t give guidance on where it will at the end of the year because there is a combination of we did do some restructuring, obviously, but we have quite a few open racks as well. So it will come out somewhere in the middle, but we need to obviously hit our synergy number that we have been projecting to the street. So get some further clarity on that, as we go in to the next quarter, but it will be down from where we started last week.

Eric Coldwell - Robert W. Baird & Co.

Got it. Did you make an acquisition in the quarter?

Justin Dearborn

There was an insignificant purchase of assets from certain company, yes?

Eric Coldwell - Robert W. Baird & Co.

Is that DocuSys?

Justin Dearborn

Yes.

Eric Coldwell - Robert W. Baird & Co.

Could you tell us what the rationale and what you are doing with the asset purchase?

Paul Merrild

This is Paul Merrild. So, DocuSys is a platform in the perioperative space and as you know we have either Frontiers business presence in that space already. We look at the DocuSys platform an opportunity as again complementary to what we had with Frontiers and much like the question regarding radiology PACS and risks. We are evaluating those technologies in the market spaces as to the best way to bring those things together, but we do believe there is an opportunity in the perioperative space and we felt the DocuSys with the tuck-in to the presence that we had already established.

Eric Coldwell - Robert W. Baird & Co.

What was the total cost on that captured in the statement of cash flows this quarter? I think it was about $1.4 million?

Steve Oreskovich

It is, Eric. You're correct.

Eric Coldwell - Robert W. Baird & Co.

I think this is the topic you suggest that you wouldn't really have to handle on until a later date, but amortization of merger related intangibles on the AMICAS deal. Do you have any sense on how much that might be or how that will phase over the next few years. I assume the amortization will be higher initially and then decline over time, but could you give us some color around that perhaps?

Steve Oreskovich

I can tell you that looking at past reports typically out of the bucket, when you do the math of taking the total purchase consideration less the net assets acquired that remaining bucket and splitting that between goodwill and the amortizable asset, intangible assets typically that split is been about two-thirds goodwill, one-third the amortizable assets and also I believe that report generally had the life of those assets running out somewhere in the neighborhood of eight to nine years. So if you were looking to use general parameters that would be a base point, beyond that I don't have more specific data for you today.

Eric Coldwell - Robert W. Baird & Co.

It would be safe to assume though that the amortization would be higher initially based on some of the shorter term intangibles burning more quickly, correct?

Steve Oreskovich

That is correct.

Eric Coldwell - Robert W. Baird & Co.

One more question. Non-recurring backlog, a new metric that you're providing, how do we interpret that? What's the read through? Do you have average duration of that non-recurring backlog? Does that typically burn through in six months, five months, 10 months? How do we think about that?

Steve Oreskovich

Sure, good question, Eric. So it's comprised of software and hardware, as well as professional services and from estimating standpoint or our perspective, its generally about two-thirds of that will convert in the forward looking 12 months period.

Operator

Your next question comes from the line of Akshay Madhavan.

Akshay Madhavan - Redwood Capital

The first question has to do with your EBITDA, I believe you did about [$4.7] million on a combined basis and rather than ask your guidance, I just wanted to see if there were any issues with actually annualizing that number for the remainder of the year, ex your restructuring and integration savings? Were there any one-time items that for instance, would have benefited you in the first quarter that we would not see in the next three quarters?

Steve Oreskovich

Good question, Akshay. No, there is nothing specific to the first quarter that we would believe you would have to adjust for.

Akshay Madhavan - Redwood Capital

Okay, let me put it in a different way. If you had no integration expenses, pardon me, acquisition savings during the remainder of the year, it would be fair to assume that you would do $50 million of adjusted EBITDA for this year?

Steve Oreskovich

Taking the first quarter number and annualizing it, yes, that would be fair.

Akshay Madhavan - Redwood Capital

The second question has to do with your cash balance. I was hoping that you would be able to provide cash balance pro forma for the acquisition and all the related initial expenditures?

Steve Oreskovich

Sure. So, I believe in the 8-K that we filed on April 6th that the road show deck that I think others have referred to previously indicated about $27 million, roughly estimated post acquisition. We believe that we are going to be coming in slightly better than that amount.

Akshay Madhavan - Redwood Capital

Do you want to tell us how much more slightly?

Steve Oreskovich

Not having all the numbers and the vendor information sitting here in front me. I don’t want to state a specific amount, but I would think its’ at least $1 million better than that amount.

Operator

Your next question comes from the line of [Raymond Meier].

Raymond Meier

I wanted to ask if you would discuss your non-recurring revenue visibility provided by backlog. For example what timeframe is the backlog recognized? What is your historical cancelation rate?

Steve Oreskovich

This is Steve, Ray. Hopefully I answered it appropriately for Eric, but we would expect about 65% roughly two-thirds of that to convert in the forward-looking 12-month. So, backlog at any time if you took it 65% would come in within the next four quarters. With respect to the [firmness] about backlog, we at Merge just started tracking that. I can give you one quarter view. We did not see much of an adjustment downward on that backlog, but again that these are representative of firm buying the contract orders in hand. So, I would not expect that significantly be adjusted from quarter-to-quarter.

Raymond Meier

Okay good. You would mention in your remarks earlier that the AMICAS acquisition provided better scale. What’s scale do you feel is optimal in the space and maybe include a discussion of your appetite for further acquisitions?

Justin Dearborn

Yes, we’ve stated I think in a few calls in the past and definitely out in different meetings. Just being a public company, the number had to be in north of $100 million just to cover the infrastructure or the costs they are associated with that.

In this space, you might put it a little higher that because of the additional infrastructure required going through FDA audits and the different quality processes that are required for this space. So, definitely north of $100 million, we fell we have the scale, but yet still as I mentioned earlier nimble enough to design products and bring them to market faster than our competitors, our larger competitors. So we're in a good spot right now. We definitely can cover the overhead of being a public company operating in the space.

Appetite for further acquisitions, obviously we have some work ahead us in the next few quarters. With this transaction, so I don't foresee any large acquisitions on the near-term horizon as well as obviously we have some debt covenants and some things to be concerned about from that respect and we're not that interested in using our stock at this price to be very candid.

Operator

Your next question comes from the line of Bill Dezellem.

Steve Oreskovich

Bill, are you there? I think we will wrap up the Q&A session. Again, thank you everyone for being on the call and thank you for your patience. I know we don't have all the answers right now. We are a week in to the acquisition. We'll have definitely a more data on the next call and you'll see some filings happening as well, but thank you for your patients and your support.

Operator

Thank you for your participation. This concludes today's Merge Healthcare earnings announcement. You may now disconnect.

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Source: Merge Technologies, Inc. Q1 2010 Earnings Call Transcript

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