Why Merge Healthcare Shares Were Eviscerated

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Merge Healthcare Inc. , a cloud-based software developer for the health care indsutry, imploded, falling as much as 45% after reporting its second-quarter earnings results and announcing the resignation of its CEO.

So what: For the quarter, Merge delivered a 9% decline in revenue to $57.2 million despite an 82% increase in its subscription backlog from the year-ago period. GAAP losses, however, ballooned to $0.30 per share from a loss of just $0.06 per share last year. On an adjusted basis, Merge's $0.01 EPS profit fell $0.04 shy of Wall Street's expectations, while its revenue was well short of the $65.5 million the Street had forecast. Merge acknowledged in its press release that its results were "disappointing." The press release also outlined a transition that sees Jeffrey Surges resign as CEO, to be replaced by former Merge CEO Justin Dearborn. In the wake of cost reductions executed this quarter, Merge also warned shareholders to expect a $1 million to $2 million restructuring charge in the third quarter.

Now what: Today's move lower could certainly be an overreaction to the downside on Surges' resignation and Merge's earnings miss. Then again, it's also hard to overlook how a company in a field that should be growing by double digits is seeing revenue fall by nearly double digits and GAAP losses increase by a factor of five. Dearborn should be a good choice as CEO moving forward as he was responsible for turning around Merge from a similar tailspin once before. Still, without any visible catalysts on the horizon, I'd suggest sticking to the sidelines until Merge gives investors a reason to believe in this company once again.

What Merge's efficiency-improving software solutions really prove is that rising health care costs continue to be a hot button issue. Even legendary investor Warren Buffett called this trend "the tapeworm that's eating at American competitiveness." To learn more about what's happening to the health care system -- and how to potentially profit from this trend -- click here for free, immediate access.

The article Why Merge Healthcare Shares Were Eviscerated originally appeared on Fool.com.

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