Transcend 2010 third quarter revenue increases 24% to $22,916,000

TRANSCEND SERVICES, INC. (NASDAQ: TRCR), a leading provider of clinical documentation services to the U.S. healthcare market, today announced its unaudited financial results for the third quarter ended September 30, 2010.

Third Quarter Results

Revenue for the third quarter of 2010 increased 24% to $22,916,000 compared to $18,491,000 for the third quarter of 2009. Excluding revenue contributed by Transcend's August 2009 acquisition of MDSI, revenue increased 10%.

Gross profit for the third quarter of 2010 increased 32% to $8,671,000, or 38% of revenue compared to $6,574,000, or 36% of revenue, for the third quarter of 2009.

Operating income for the third quarter of 2010 increased 43% to $4,270,000, or 19% of revenue, compared to $2,979,000, or 16% of revenue (including $144,000 of MDSI transaction-related costs) for the third quarter of 2009.

Net income for the third quarter of 2010 increased 43% to $2,615,000 compared to $1,835,000 for the third quarter of 2009 and diluted earnings per share increased to $0.24 compared to $0.20 for the third quarter of 2009.

The Company had $29,993,000 of cash, cash equivalents and short-term investments on hand, $33,135,000 of net working capital and nominal debt outstanding as of September 30, 2010. There were 38 days of revenue in accounts receivable as of September 30, 2010.

Nine Month Results

For the first nine months of 2010, revenue increased 34% to $67,331,000 compared to $50,387,000 for the first nine months of 2009. The gross profit margin was 36% for the first nine months of both 2010 and 2009. Operating income for the first nine months of this year was $9,406,000, including $1,337,000 of expenses related to acquisition costs and $676,000 related to pre-tax, non-cash cumulative stock compensation expense adjustments, compared to operating income of $8,347,000 for the first nine months of 2009. Net income for the first nine months of 2010 was $5,662,000, or $0.52 per diluted share. Excluding the $2,013,000 of costs mentioned above, non-GAAP net income for the first nine months of 2010 was $6,960,000, or $0.64 per diluted share (see reconciliation table below).

Operations Review and Outlook

Susan McGrogan, President and Chief Operating Officer, stated: "We were extremely pleased with our 43% net income growth this quarter, which we attribute primarily to improved gross profit margins on a higher revenue base. We have improved our gross profit margins by four points this year from 34% in the first quarter to 38% in the third quarter. This was the result of a tremendous team effort and reflects the full impact of the initiatives we discussed last quarter. We processed 54% of our total volume on our BeyondTXT platform in the third quarter, up from 50% in the first quarter of this year. Our margins are typically higher on BeyondTXT due to our use of speech recognition technology and other operating efficiencies. Of the volume processed on BeyondTXT in the third quarter of 2010, 76% was edited using speech recognition technology, compared to 64% in the third quarter of 2009. We processed 19% of our volume offshore in the third quarter of 2010 after dipping to 16% at the beginning of this year due to the impact of our 2009 acquisitions. We're very pleased with our progress on both our speech recognition and offshore initiatives. More importantly, we have continued to provide excellent service to our customers, as evidenced by our 99% retention rate through the third quarter."

Lance Cornell, Chief Financial Officer, added: "During the third quarter, we paid off a $2.0 million note, had software development and other capital expenditures of $1.4 million and still increased our cash and short-term investments balance to $30.0 million. We have an extremely healthy balance sheet which gives us great flexibility as we consider strategic uses for our cash. We expect our capitalized software development costs to stay above historical levels throughout 2011 as we bring new offerings to market. Encore^TM, our new software as a service (SaaS) platform, is still on track for general availability at the beginning of 2011. We are excited that in 2011 we will be offering flexible solutions for clinical documentation that give our customers more choices: traditional outsourcing, a speech recognition-enabled platform for their in-house transcriptionists or physician self-edit solutions, all using a data-rich underlying document structure."

Larry Gerdes, Chief Executive Officer, concluded: "Moving beyond our strong third quarter results, we look forward to the integration of our recently announced Heartland acquisition. With Heartland, our annualized revenue run rate grows to approximately $110 million, we gain a wonderful set of new customers and achieve what we think is a healthy blend of domestic and offshore capacity: approximately 70% / 30%, respectively. We expect Heartland to be accretive to earnings per share starting in the first quarter of 2011. Their operating metrics will reduce our overall gross profit and operating margins by approximately two points initially, with their results hopefully improving as we complete the integration, similar to what we have seen with our 2009 acquisitions. As we enter the last two months of 2010, we will continue to develop new acquisition opportunities. We are excited about how Transcend is positioned to capitalize on the need for clinical documentation solutions in the years ahead as we continue to focus on providing the best services and solutions to our customers and creating a great work environment for our employees."

Source: TRANSCEND SERVICES, INC.