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Why Merge Healthcare Inc. Shares Slid

By Sean Williams – Jan 8, 2014 at 1:31PM

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An internal review brings bad news for shareholders.

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 (NASDAQ: MRGE), a software solutions provider for the health-care industry, dipped as much as 10% after revising its previously announced subscription backlog totals.

So what: According to Merge Healthcare's press release, an internal review noted that a former employee in its eClinics business had falsified the existence of a number of contracts. Because these contracts don't exist, it will negatively impact the company's subscription backlog. However, since this revenue is as of yet unrecognized, it will not require a restatement of previously reported results. The end result is a $15.2 million reduction in bookings to $41.2 million from $56.4 million.

Now what: Merge has been a battering ram for pessimists over much of the past year and this is only going to give them more fuel for the fire. Although I'm glad that Merge discovered this problem, it's a bit disconcerting that it went on for more than a year without being discovered. Furthermore, a close to 30% reduction in its backlog is a pretty sizable hit, even if it is just future revenue and something on the order of 6%-7% of what it would typically report as full-year revenue. With three straight sizable earnings misses under its belt, I would certainly use this latest news as all the more reason to keep your distance until the top- and bottom-line growth show otherwise.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policy.

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