Transcend second quarter revenue increases 38% to $30,662,000

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 second quarter ended June 30, 2011.

Second Quarter Results

Transcend's diluted earnings per share increased to $0.33 for the second quarter of 2011 compared to $.15 for the second quarter of 2010. During the second quarter of 2011, the Company incurred $139,000 of acquisition-related transaction costs which impacted diluted earnings per share by approximately $(.01). The results for 2010 include the $(.06) per diluted share impact of two unusual expenses: $601,000 of transaction fees related to an unsuccessful acquisition and $445,000 related to a cumulative stock-based compensation adjustment. Excluding these two unusual expenses, non-GAAP diluted earnings per share for the second quarter of 2010 was $.21 (see table below for a reconciliation of GAAP to non-GAAP results). The improvement in earnings was primarily due to the positive impact of acquisitions and gross margin improvement.

Revenue for the second quarter of 2011 increased $8,453,000 or 38% to $30,662,000 compared to $22,209,000 for the second quarter of 2010, including $6,729,000 of revenue contributed by the Heartland and DTS acquisitions. Excluding these two recent acquisitions, revenue increased 8%.

Gross profit for the second quarter of 2011 increased 53% to $12,313,000, or 40% of revenue, compared to $8,031,000, or 36% of revenue, for the second quarter of 2010.

Operating income for the second quarter of 2011 increased 120% to $5,934,000, or 19% of revenue, compared to $2,692,000, or 12% of revenue, for the second quarter of 2010. Excluding the two unusual 2010 expenses mentioned above, operating income increased 59% for the second quarter of 2011 compared to non-GAAP operating income of $3,738,000 or 17% of revenue for the same quarter of last year.

The effective income tax rate for the second quarter of 2011 was 40% compared to 41% in the second quarter of 2010.

Net income for the second quarter of 2011 increased 131% to $3,624,000 compared to $1,568,000 for the second quarter of 2010. Excluding the two unusual expenses mentioned above, net income for the second quarter of 2011 increased 59% compared to non-GAAP net income of $2,273,000 for the second quarter of 2010.

As of June 30, 2011, the Company had $22,393,000 of cash, cash equivalents and short-term investments on hand, $30,349,000 of net working capital and no debt outstanding. During the second quarter of 2011, the Company acquired DTS America, Inc. ("DTS") for a net cash investment of $8,781,000 (plus $600,000 to be paid in the future). The Company also invested $1,446,000 in capital expenditures and capitalized software development costs during the second quarter, including $1,017,000 related to Transcend's new Encore transcription platform.

Year-to-Date Results

Revenue increased $15,545,000, or 35%, to $59,960,000 for the six months ended June 30, 2011 compared to revenue of $44,415,000 in the same period in 2010. Gross profit increased $8,966,000, or 58%, to $24,477,000 in the six months ended June 30, 2011 compared to $15,511,000 in the same period in 2010. Gross profit as a percentage of revenue increased to 41% in the six months ended June 30, 2011 compared to 35% for the same period in 2010. Operating income increased $7,083,000, or 138%, to $12,219,000 in the six months ended June 30, 2011, compared to $5,136,000 in the same period in 2010. Included in 2011 and 2010 operating expenses are acquisition-related costs of $221,000 and $1,279,000, respectively. The costs for 2010 were related to an unsuccessful acquisition. Also included in 2010 is a $676,000 cumulative adjustment for stock-based compensation expense. The effective tax rate was 40% for both periods. Net income increased $4,338,000, or 142%, to $7,385,000 in the six months ended June 30, 2011, compared to $3,047,000 in the same period in 2010. Fully diluted earnings per share increased $0.39, to $0.67 for the six months ended June 30, 2011, compared to $0.28 for the same period in 2010.

Operations Review and Outlook

Susan McGrogan, President and Chief Operating Officer, stated: "I am extremely pleased to report that during the second quarter, we sold new business that we expect to generate between $6.4 million and $7.9 million of annual revenue once fully implemented. This was the strongest sales quarter we have had in recent years and should positively impact our organic revenue growth rates in the fourth quarter. We typically see lighter volumes in the second and third quarters and this year was no exception. The sequential quarter impact of seasonality is roughly 1% of revenue and $(.01) per diluted share."

"Our gross profit margin increased four points compared to the same quarter last year, from 36% to 40%," continued Ms. McGrogan. "This was down a little over one point from the first quarter of 2011. About half of the sequential quarter decline is attributable to the impact of the DTS acquisition and the remainder is primarily a result of investments in personnel to manage our growth. We expect to be able to improve the DTS margins over the next 18 months as we integrate the operations and convert some of the DTS customers to our platform. We edited 85% of our BeyondTXT and 77% of our Gemstar platform volume using speech recognition technology in the second quarter, which was about the same as the first quarter and compares to 72% of our BeyondTXT volume in the second quarter of 2010. We processed 37% of our work offshore in the second quarter, about the same as the first quarter and up from 17% in the second quarter of last year due to the Heartland acquisition.

Lance Cornell, Chief Financial Officer, added: "We continue to make progress on our integration of Heartland, particularly in India, and we are in the middle of the first stage of the DTS integration. Both are progressing according to our plans and DTS was slightly accretive to earnings in the second quarter excluding transaction costs. We were excited to announce the acquisition of Baltimore-based Salar earlier this week. Our strategy is to offer complete clinical documentation solutions for our customers, giving them as much flexibility as possible to choose different methods for documenting patient care depending on the unique needs of the physicians and the hospital. If they choose dictation, we offer our traditional outsourced transcription services or a platform for their in-house transcription department. If they choose physician self-editing solutions, we can offer our BeyondSpeech solution for Radiology and expect to be able to offer a solution for HIM as a module of Encore around the end of the year. And some customers will prefer template-based solutions for certain types of documentation. Salar's TeamNotes^TM product meets that need with a highly customized approach that maximizes physician productivity and adoption, particularly in cases where electronic medical record implementations have not realized their potential. We are excited to work with Todd Johnson and his team at Salar to integrate the Salar products into our clinical documentation strategy."

Larry Gerdes, Chief Executive Officer, concluded: "A significant milestone in our history occurred on June 27^th, when we announced the general availability of Encore^TM, our new SaaS transcription platform. We have invested significant resources into the development of Encore^TM and we are excited about the role this new platform will play in our future. We plan to migrate all of the customers on our BeyondTXT and Gemstar platforms to Encore^TM over the next two years. I want to congratulate our technical teams for this success. As we look forward, we plan to build on our second quarter sales momentum and our new offerings - both acquired and internally developed - to provide the industry with a robust suite of products and services to meet their clinical documentation needs. This is a very busy and exciting time for our employees and I want to thank everyone at Transcend for their diligence and loyalty to our customers.

Source: Transcend Services, Inc.