Transcend fourth quarter revenue increases 26% to $26,976,000

TRANSCEND SERVICES, INC. (NASDAQ: TRCR), a leading provider of clinical documentation solutions to the U.S. healthcare market, today announced its unaudited financial results for the fourth quarter and year ended December 31, 2010.

Fourth Quarter Results

Transcend recorded stronger than expected diluted earnings per share of $0.26 for the fourth quarter of 2010, including $(0.01) per diluted share of acquisition transaction costs, due in large part to the contribution from the October 21, 2010 acquisition of Spryance Inc. d/b/a Heartland ("Heartland").

Revenue for the fourth quarter of 2010 increased 26% to $26,976,000 compared to $21,377,000 for the fourth quarter of 2009, including $3,722,000 of revenue contributed by Heartland. Excluding the Heartland business, which is now generating an annual revenue run rate of over $19 million, revenue increased 9%.

Gross profit for the fourth quarter of 2010 increased 43% to $10,445,000, or 39% of revenue, compared to $7,289,000, or 34% of revenue, for the fourth quarter of 2009.

Operating income for the fourth quarter of 2010 increased 85% to $5,062,000, or 19% of revenue, compared to $2,736,000, or 13% of revenue, for the fourth quarter of 2009 (2009 includes a $735,000 contingent consideration charge related to an acquisition). Excluding the contingent consideration charge for the fourth quarter of 2009, operating income increased 46%. Operating income for the fourth quarter of 2010 includes $182,000 of Heartland acquisition transaction costs.

The effective income tax rate for the fourth quarter of 2010 was 43% compared to 39% in the fourth quarter of 2009. Most of the rate increase can be attributed to non-recurring items including the impact of non-deductible Heartland acquisition transaction costs.

Net income for the fourth quarter of 2010 increased 80% to $2,857,000 compared to $1,590,000 for the fourth quarter of 2009 and diluted earnings per share increased to $0.26, including $(0.01) of acquisition-related transaction costs, compared to $0.17 for the fourth quarter of 2009 (the impact of the contingent consideration charge on diluted earnings per share in the fourth quarter of 2009 was approximately $0.05).

During the fourth quarter of 2010, the Company used cash of $6,492,000 to fund the acquisition of Heartland and $742,000 to fund capital expenditures, most of which related to development of the new Encore transcription platform. As of December 31, 2010, the Company had $26,899,000 of cash, cash equivalents and short-term investments on hand, $30,554,000 of net working capital and nominal debt outstanding.

2010 Results

Revenue increased 31% to $94,307,000 for 2010 compared to $71,764,000 in 2009. The gross profit margin was 37% of revenue for 2010 compared to 35% for 2009. Operating income for 2010 was $14,469,000, which includes $1,518,000 of expenses related to acquisition costs and $308,000 related to non-cash cumulative prior year stock compensation expense adjustments, compared to operating income of $11,083,000 for 2009, which includes $735,000 of contingent consideration expense. Net income for 2010 was $8,520,000, or $0.79 per diluted share, compared to $6,759,000, or $0.76 per diluted share for 2009. Excluding the expenses described above for each year, non-GAAP diluted earnings per share was $0.89 for 2010 compared to $0.81 for 2009.

Operations Review and Outlook

Susan McGrogan, President and Chief Operating Officer, stated: "We exceeded our own expectations this quarter, due primarily to our team's ability to realize profitability improvements in the Heartland business faster than we had anticipated. In addition to immediate day one synergies, we were able to simultaneously increase volume, improve productivity and re-align staff in India over the course of the fourth quarter, resulting in a lower cost per report. We had expected Heartland to negatively impact our gross and operating margins by approximately two points in the short-term. That simply didn't happen. I'm extremely proud of what the team in India - and those in the U.S. who supported them - achieved in such a short span of time."

Lance Cornell, Chief Financial Officer, added: "Our gross margins actually increased one point to 39% in the fourth quarter compared to the third quarter of 2010, capping off a year in which we expanded gross margins by five points from where we were in the fourth quarter of 2009. Of the volume processed on our higher-margin BeyondTXT platform in the fourth quarter of 2010, 83% was edited using speech recognition technology, compared to 67% in the fourth quarter of 2009. The gross margin contribution from the Heartland volume, approximately 95% of which is processed on our speech-recognition enabled Gemstar platform, had only a slight negative impact on our overall gross margin in the fourth quarter of 2010. The BeyondTXT and Gemstar platforms together represent approximately 65% of our total revenue as we enter 2011. Once we have completed our integration, we expect our offshore resources to produce approximately one-third of our total volume. Our higher effective tax rate certainly impacted us in the fourth quarter. We currently expect the 2011 effective tax rate to be in the 41% - 42% range since we will be in a higher marginal tax bracket in the U.S. and will be accounting for uncertain transfer pricing tax positions in India. Heartland has approximately $7.3 million of net operating loss carry-forwards available as of the acquisition date to reduce taxable income in future years."

Larry Gerdes, Chief Executive Officer, concluded: "I am extremely pleased to report that we finished 2010 with a 98% customer retention rate for the year. If we consistently provide excellent service to our customers, make Transcend the best place to work in the industry for our employees and execute well on our initiatives for operational excellence, the results should speak for themselves. That was clearly the case in 2010. As we look forward to 2011 and beyond, we are excited to begin offering additional clinical documentation solutions to our customers, including our Encore platform for those customers who have in-house transcription departments and want to take advantage of speech recognition technology, data solutions to leverage the structured data in our documents and near real-time speech applications for physicians who self-edit their documents. We will also 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 and the role we can play in enhancing our customers' meaningful use of electronic medical records."