Transcend Services second-quarter 2010 revenue increases 31% to $22,209,000

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 second quarter ended June 30, 2010.

“Our two percentage point gross profit margin improvement over the first quarter of this year exceeded our own expectations and was the result of a multi-disciplinary team effort”

Second Quarter Results

Revenue for the second quarter of 2010 increased 31% to $22,209,000 compared to $16,966,000 for the second quarter of 2009. Excluding revenue contributed by Transcend's two most recent acquisitions, revenue increased 12%.

Net income for the second quarter of 2010 was $1,568,000, or $0.15 per diluted share, including $601,000 of pre-tax costs related to an unsuccessful bid to acquire Spheris and a $445,000 pre-tax, non-cash cumulative stock compensation expense adjustment related to the period from January 1, 2006 through March 31, 2010. Excluding these costs, non-GAAP net income increased 29% to $2,273,000, or $0.21 per diluted share, for the second quarter of 2010 compared to $1,756,000, or $0.20 per diluted share, for the second quarter of 2009 (see table below for a reconciliation of non-GAAP to GAAP financial measures). The effect of the December 2009 issuance of 1,725,000 shares of common stock in a public offering was approximately ($0.03) per diluted share in the second quarter of 2010.

Transcend's gross profit margin for the second quarter of 2010 increased by two percentage points - from 34% to 36% - compared to the first quarter of 2010. Compared to 2009, gross profit increased 31% to $8,031,000, or 36% of revenue, for the second quarter of 2010 compared to $6,115,000, or 36% of revenue, for the second quarter of 2009.

Operating income was $2,692,000 for the second quarter of 2010 compared to $2,822,000 for the second quarter of 2009. Excluding the costs mentioned above, non-GAAP operating income for the second quarter of 2010 increased 32% to $3,738,000, or 17% of revenue (see reconciliation table below).

The Company had $27,735,000 of cash, cash equivalents and short-term investments on hand and $2,067,000 of debt outstanding as of June 30, 2010. The number of days of revenue in accounts receivable was 39 days as of June 30, 2010.

Six Month Results

For the first six months of 2010, revenue increased 39% to $44,415,000 compared to $31,896,000 for the first six months of 2009. The gross profit margin was 35% for the first six months of this year compared to 36% for the first six months of last year. Operating income for the first six months of this year was $5,136,000, including $1,279,000 of expenses related to the attempt to acquire Spheris described above and $676,000 related to pre-tax, non-cash cumulative stock compensation expense adjustments. Net income for the first six months of 2010 was $3,047,000, or $0.28 per diluted share. Excluding the $1,955,000 of costs mentioned above, non-GAAP net income for the first six months of 2010 was $4,309,000, or $0.40 per diluted share (see reconciliation table below).

Operations Review and Outlook

"Our two percentage point gross profit margin improvement over the first quarter of this year exceeded our own expectations and was the result of a multi-disciplinary team effort," stated Susan McGrogan, President and Chief Operating Officer. "Our implementation team migrated Clients to our BeyondTXT platform and increased our BeyondTXT speech recognition usage to 72% of our BeyondTXT volume, up from 67% in the first quarter of this year. Our operations managers worked to increase our offshore volume to approximately 17% of our total volume in the second quarter, up from 16% in the first quarter. Our finance team bought out several leases, resulting in reduced equipment lease expense. Our human resources team worked closely with our operations managers to reduce costs and improve the productivity of our medical language specialists. I couldn't be more proud of our team for achieving numerous individual victories that contributed to meaningful improvement in overall results."

Larry Gerdes, Chief Executive Officer, stated: "Our customer retention rate remains strong at approximately 99% based on annualized revenue lost through June 30^th as a percentage of our revenue run rate at the beginning of the year. We estimate that sales closed during the second quarter will generate between $1.6 and $2.0 million of annual revenue once fully implemented. In addition, we signed two important agreements with future revenue potential. The first is an agreement with Healthtrust Purchasing Group, which enables us to market under the HPG umbrella to the roughly 1,100 hospitals, including over 160 Hospital Corporation of America (HCA) hospitals, that are HPG members. Second, we signed an agreement with Child Health Corporation of America (CHCA), a system with over 20,000 physicians and 43 member hospitals, as one of two preferred providers of transcription services. We currently work with two CHCA hospitals and hope to expand our relationships in the future. Although these two agreements don't generate any immediate new revenue, we are hopeful that they will prove valuable over time and we are excited to establish and deepen relationships with their respective hospitals."

Lance Cornell, Chief Financial Officer, stated: "Our adjustments to stock compensation expense of $445,000 in the second quarter and $676,000 year-to-date are non-cash items and we expect the impact of any changes in estimates used to value equity awards to have an immaterial impact on future stock compensation expense. Capital expenditures were $1,373,000 for the second quarter, bringing the total for the year to $2,747,000. The year-to-date total includes $1,635,000 of capitalized software development costs, primarily related to our next generation transcription platform and approximately $600,000 related to storage and voice capture capacity expansions at our data centers. We expect capitalized software development costs to remain above typical historical rates for the remainder of the year."

Mr. Gerdes concluded: "We are excited that our new Software as a Service (SaaS) platform, which is scheduled for general release at the beginning of 2011, will enable us to tap into the market for in-house transcription departments in need of a speech recognition-enabled platform. This is particularly relevant in larger system sales where a mixture of solutions is required. While staying focused on our current customers, new customer sales and the development of new offerings, we also continue to pursue several potential medical transcription company acquisition opportunities. With our reputation for service excellence and industry-leading technology, we believe Transcend is well-positioned to capitalize on the increasing demand for efficient documentation of patient care."