Transcend third quarter revenue increases 41% to $32,202,000

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 third quarter ended September 30, 2011.

Third Quarter Results

Transcend's non-GAAP diluted earnings per share increased to $0.33 for the third quarter of 2011 compared to GAAP diluted earnings per share of $.24 for the third quarter of 2010. The non-GAAP results exclude $449,000 of expenses for three unusual items:

• transition costs (supplemental compensation) for newly outsourced transcriptionists related to one hospital system contract of $236,000;
• restructuring costs in India of $110,000; and
• transaction costs related to the acquisition of Salar, Inc. of $103,000.

Including these three unusual expenses, GAAP diluted earnings per share was $0.30 for the third quarter of 2011.

Revenue for the third quarter of 2011 increased $9,286,000 or 41% to $32,202,000 compared to $22,916,000 for the third quarter of 2010, including $7,625,000 of incremental revenue contributed by the Heartland (10/21/10), DTS (4/30/11) and Salar (7/31/11) acquisitions. Excluding the impact of these three acquisitions, revenue increased 7%.

Gross profit for the third quarter of 2011 increased 44% to $12,455,000, or 39% of revenue compared to $8,671,000, or 38% of revenue, for the third quarter of 2010. Excluding the $346,000 of India restructuring costs and onboarding costs described above, non-GAAP gross profit was $12,801,000 or 40% of revenue in the third quarter of 2011.

Operating income for the third quarter of 2011 increased 27% to $5,436,000, or 17% of revenue, compared to $4,270,000, or 19% of revenue, for the third quarter of 2010. Excluding the three unusual expenses mentioned above, non-GAAP operating income increased 38% to $5,885,000 or 18% of revenue for the third quarter of 2011 compared to the same quarter of last year.

The impact of changes in foreign currency exchange rates was $379,000 included in net other expense during the quarter, or approximately $(0.02) per diluted share. This was approximately offset by a lower effective income tax rate for the third quarter of 2011 of 34% compared to 38% in the third quarter of 2010. The decrease in the effective tax rate was due primarily to the favorable resolution of tax contingencies in India.

Net income for the third quarter of 2011 increased 28% to $3,347,000 compared to $2,615,000 for the third quarter of 2010. Excluding the three unusual expenses described above, non-GAAP net income for the third quarter of 2011 increased 38% to $3,621,000 compared to the third quarter of 2010.

As of September 30, 2011, the Company had $12,299,000 of cash, cash equivalents and short-term investments on hand, $22,222,000 of net working capital and no debt outstanding. The Company also has approximately $16.0 million of federal net operating loss carry-forwards available to offset future taxable income. During the third quarter of 2011, the Company acquired Salar, Inc. for $11,000,000. The Company also invested $1,502,000 in capital expenditures and capitalized software development costs during the third quarter, including $976,000 related to Transcend's new Encore transcription platform.

Year-to-Date Results

For the nine months ended September 30, 2011, revenue increased 37% to $92,162,000 and gross profit increased 53% to $36,932,000. The gross profit margin increased to 40% of revenue compared to 36% of revenue for the same period in 2010. Operating income increased 88% to $17,655,000 for the nine months ended September 30, 2011. Net other expense was $279,000 for the nine months ended September 30, 2011, compared to $79,000 for the same period in 2010. The effective tax rate was 38% for the nine months ended September 30, 2011 compared to 39% for the same period last year. Net income increased 90% to $10,732,000 for the nine months ended September 30, 2011. Diluted earnings per share increased $0.45, to $0.97 for the nine months ended September 30, 2011, compared to $0.52 for the same period in 2010.

Operations Review and Outlook

Susan McGrogan, President and Chief Operating Officer, stated: "Our sales were strong in the third quarter. We sold new business that we expect to generate between $3.8 million and $4.7 million of annual revenue once fully implemented. This brings our year-to-date sales to between $11 and $14 million, which is a record pace for us. We are particularly excited to see a trend toward first-time outsourcing of hospitals' transcriptionists in our sales this year. Approximately 55% of the value of this year's sales came from first-time outsourcing, which is much higher than it has been in recent years. We had higher than normal attrition during the quarter, losing three customers that totaled roughly $3.0 million of annual revenue. About half of this amount was from one large Heartland customer that we knew was at risk when we acquired that business last year. These three customers contributed only $104,000 of revenue in the third quarter. While we always hate to see any attrition, some customer losses are inevitable. We are thankful that our sales for the last two quarters have been particularly strong, far surpassing customer attrition."

Lance Cornell, Chief Financial Officer, added: "We were very pleased with our 39% gross profit margin for the quarter, especially given the large number of unusual items that occurred. As part of an ongoing effort to maximize efficiency, we restructured our operations in India, incurring $110,000 in non-recurring costs, primarily for severance. We successfully implemented a large outsourcing contract under which we hired over 50 transcriptionists from several hospitals, incurring $236,000 of incremental onboarding costs in the form of supplemental compensation to help ease the transition to Transcend. This supplemental compensation was in excess of what is normal in these situations and ceased on September 16^th. We also had a full quarter of results from our DTS acquisition. Our acquisitions typically depress our overall margins for several quarters until we can convert some of the customers to our Encore platform, and DTS is no exception, although the impact to our overall gross profit margin was less than 1%. We edited 83% of our BeyondTXT and 90% of our Gemstar platform volume using speech recognition technology in the third quarter. We processed 37% of our work offshore in the third quarter, about the same as the second quarter and up from 19% in the third quarter of last year due to the Heartland acquisition."

"We are excited about the potential of our recent acquisition of Salar," continued Mr. Cornell. "The strong clinical documentation expertise of the Salar Group adds depth to our team. Several of our customers and prospects have already expressed interest in Salar's TeamNotes^TM template-based clinical documentation solutions and TAP Charge Capture^TM solution. Salar had no impact on earnings for the quarter due to transaction costs. Going forward, we expect most Salar sales to take the form of subscriptions instead of perpetual licenses, which means the revenue and profitability will likely grow gradually as we layer in new recurring subscription revenue. Although it's a relatively small business today, we believe it is strategically important because it allows us to expand our offering to include three modes of clinical documentation: traditional outsourced transcription, a physician self-edit solution and now a template-based solution."

Larry Gerdes, Chief Executive Officer, concluded: "This was an important transitional quarter for Transcend - one in which we incurred some additional costs to position ourselves for improved performance in the future. I applaud our management team for making the right decisions to foster long-term growth. As we look forward, our focus will remain first and foremost on providing excellent service to our customers. It's also important to us that Transcend be recognized as the best place to work in the industry, which we hope will be evidenced by customers continuing to trust us with the outsourcing of their transcriptionists. We will continue to strive for operational excellence by, among other things, continuing to improve efficiency in India, converting as much volume as possible to our Encore^TM transcription platform and controlling operating costs as we grow. I want to thank everyone at Transcend for their hard work and dedication to our customers."

Source: TRANSCEND SERVICES, INC.