TRANSCEND SERVICES third-quarter revenue up by 52%

Oct 28 2009

TRANSCEND SERVICES, INC. (NASDAQ: TRCR), the third largest provider of medical transcription services to the U.S. healthcare market, today announced its unaudited results for the third quarter and nine months ended September 30, 2009.

Third Quarter Results

Revenue for the third quarter of 2009 increased 52% to $18,491,000 compared to $12,161,000 for the third quarter of 2008. Medical Dictation Services, Inc. ("MDSI"), which was acquired by Transcend on August 31, 2009, contributed revenue of $1,240,000 for the quarter. Excluding revenue from the Company’s three 2009 acquisitions, revenue increased 17% in the third quarter compared to the same period last year. Net income for the third quarter of 2009 increased 24% to $1,835,000, or $0.20 per diluted share, which included costs of $144,000, or $0.01 per share, related to the MDSI acquisition and the termination of the Company's previous financing arrangements. This compares to net income for the third quarter of 2008 of $1,484,000, or $0.17 per diluted share.

"MDSI had a negligible impact on earnings per share in the third quarter due to acquisition transaction costs and the fact that we only recorded one month of results, but we fully expect it to be accretive to earnings beginning in the fourth quarter. We estimate that our three 2009 acquisitions together contributed approximately $.04 to third quarter 2009 diluted earnings per share," said Chief Executive Officer Larry Gerdes.

Gross profit for the third quarter of 2009 increased 46% to $6,574,000, or 36% of revenue, compared to $4,518,000, or 37% of revenue, for the third quarter of 2008. Operating expenses increased 62% to $3,595,000, or 19% of revenue, compared to $2,221,000, or 18% of revenue, for the third quarter of 2008.

Operating income for the third quarter of 2009 increased 30% to $2,979,000, or 16% of revenue, compared to $2,297,000, or 19% of revenue, for the third quarter of 2008. Operating income as a percentage of revenue was affected by the $144,000 of costs mentioned above, increased implementation and support costs related to acquisition integration, and a decrease in the percentage of total revenue that was processed on Transcend's speech recognition-enabled BeyondTXT transcription platform in the third quarter of 2009 versus the same period in 2008 due to the addition of non-BeyondTXT revenue from the three acquisitions completed in 2009.

"As per our integration plan, we expect operating income margins from our acquired businesses to be lower than our overall operating income margins until we gradually migrate a portion of the acquired business to our BeyondTXT platform, continue to expand our use of speech recognition technology, and increase offshore processing," Gerdes said.

Transcend ended the third quarter of 2009 with $7,216,000 of cash and cash equivalents on hand. During the third quarter, the Company borrowed $7,000,000 on a new credit facility and used $9,310,000 of cash to acquire MDSI. Adjusted to include MDSI on a pro forma basis, the Company had 39 days of sales outstanding in accounts receivable as of September 30, 2009 (or 40 days excluding MDSI).

Nine Month Results

Results for the first nine months of 2009 include the post-acquisition operations of MDSI, TRS and DeVenture, which were acquired by Transcend on August 31, April 1 and January 1, 2009, respectively.

For the nine months ended September 30, 2009, revenue increased 40% to $50,387,000 compared to $35,863,000 for the first nine months of 2008. Excluding revenue from the Company’s three 2009 acquisitions, revenue increased 16% for the first nine months of 2009 compared to the same period last year. The gross profit margin was 36% for both periods. Operating income for this year's first nine months increased 25% to $8,347,000 compared to $6,664,000 for the same period last year. Net income for the first nine months of 2009 increased 21% to $5,169,000, or $0.58 per diluted share, compared to $4,279,000, or $0.49 per diluted share, for the first nine months of 2008. The Company’s three 2009 acquisitions together contributed approximately $.07 to earnings per share for the nine months ended September 30, 2009.

Operations Review and Outlook

Mr. Gerdes continued, "Three milestone events occurred during the third quarter. First, the acquisition of MDSI added a business generating over $14 million of revenue per year as of the acquisition date and brought a wonderful group of customers and employees to Transcend. Second, we signed a five-year single-source agreement with Health Management Associates ("HMA") to expand our services from the 45 hospitals we already serve to all 56 HMA hospitals. Finally, we promoted Sue McGrogan to President of Transcend in addition to her previous role as Chief Operating Officer. Sue deserves much of the credit for the customer-centric culture that has been fundamental to Transcend's success over the last several years."

Leo Cooper, Executive Vice President of Sales and Marketing, added, "During the third quarter we closed sales that we estimate will generate between $3.5 million and $4.4 million of annual revenue once fully implemented. This includes between $1.6 million and $2.0 million of incremental revenue related to the HMA agreement. While our sales in the past have predominantly been to individual hospitals, in the future we believe that more purchasing decisions will be made at the group level. Because of our reputation for service excellence, we believe we are well-positioned to compete successfully for this hospital system business."

Sue McGrogan, President and Chief Operating Officer said, "We now expect a 95% retention rate for 2009, versus the 92% rate we estimated last quarter. The reason is that in September we lost a large customer to a small competitor based on price. The customer had such severe problems with the new transcription firm that they quickly decided to terminate their agreement and return to Transcend. Our relationship with this customer is now stronger than ever. Experiences like this are why we are committed first and foremost to providing the best service in the industry."

Lance Cornell, Chief Financial Officer, stated, "For each of our acquisitions, we first complete the organizational and back-office integration, then work to improve margins by migrating as much of the customer base as possible to our BeyondTXT platform. Both of these phases of the DeVenture integration are complete. The first phase of the TRS integration is complete, and the second phase will continue over the next several quarters. We expect to complete the first phase of the MDSI integration in the first quarter of 2010, with the second phase stretching throughout 2010."

Mr. Gerdes concluded, "Based on annualized September revenue, Transcend's annual revenue run rate reached a record $84.1 million, which does not include the impact of recent sales. Our team has proven that it can manage rapid growth while continuing to deliver excellent service to our customers. Our success was recently recognized by Forbes, which ranked Transcend the 6^th best performing small public company in the U.S. based on one and five-year sales growth, earnings per share growth and return on equity. I want to thank our employees for making our company so successful and our customers for placing their trust in Transcend."