New Merge Healthcare Business Model Tanks Stock

The stock price of medical imaging software vendor Merge Healthcare Inc. fell 40 percent in morning trading on May 8 as the company announced changes to its business model and failed to meet expectations in the first quarter of 2012.

Revenue rose nearly 16 percent to $61 million, but investors had expected $64.7 million, and earnings per share of 3 cents were a penny less than expected. Those numbers, combined with news of splitting the company into two divisions, a change in operations “being driven by our clients’ purchasing requirements for subscription-based pricing to align more closely with their long-term operating plans,” was enough to make many investors flee.

Merge is creating two operating groups: Merge Healthcare comprising its core imaging products and representing 85% of revenue, and Merge DNA (Data & Analytics) to focus on products and services for consumers. Current CEO Jeff Surges will lead the Merge Healthcare group and Justin Dearborn, who has served as president and CFO, will lead Merge DNA. Former CFO Steve Oreskovich will return to the position.

Increased demand for subscription pricing will in the short term affect revenues, Surges said in a statement. “With a subscription pricing model, we will recognize significantly lower upfront revenue, but anticipate more revenue over the contract term. While we expect our revenue to grow year-over-year in 2012, the trends toward subscription pricing has changed our initial 2012 revenue and adjusted EDITDA expectations.”