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Q4 Consensus Revenue Expectations

|Includes: Merge Healthcare Incorporated. (MRGE)

Full Disclosure: I am short MRGE stock.

"Read not to accept, nor reject, but to weigh and consider." - Francis Bacon

On Thursday of this week MRGE will release its full year and fourth quarter financial results for 2011.

The Q4 consensus GAAP organic revenue estimate that excludes any contribution from the OIS acquisition is $64.5 million.

On August 5 of last year MRGE acquired OIS for more than $30 million. Investors will recall that on the Q3 conference call, after having owned OIS for almost two full months - a company that generated revenue of more than $18 million in FY2010 and which is expected to generate $14 million in FY2012 - management said it did not provide a meaningful revenue contribution to the reported GAAP Q3 revenue number. That reported number happened to fall roughly in line with Street expectations for organic growth. (See my previous post entitled "Q3 - OIS Negligible Revenue Contribution?").

As of the close of Q4, having owned OIS for five months, I think the market will naturally be looking for a Q4 reported GAAP revenue number much larger than the original $64.5 million ex. OIS consensus estimate. I think the market will be expecting at least $68 million in GAAP reported revenue and it will not be as forgiving as it was last quarter with respect to the OIS component and the residual, implied, organic number. Here's the simple math:

$64.5 million, consensus GAAP organic revenue estimate for Q4
+$3.5 million, OIS GAAP revenue contribution estimate for Q4 ($14 million/4).
= $68 million expected GAAP Revenue for Q4.

I believe that a reported number less than this will disappoint. And whatever is reported on a GAAP basis, investors will almost surely subtract about $3.5 million (conservative, considering OIS recorded $18 million in 2010) to isolate what amount came from MRGE.

If the numbers are indeed underwhelming, management may attempt to mitigate any sell off by raising FY 2012 guidance and emphasizing the whole Merge Honeycomb project, but I believe this will have a somewhat limited effect because I think management has lost some credibility over the past six months.

Disclosure: I am short MRGE.