Transcend Services announces unaudited financial results for fourth-quarter of 2009

Jan 28 2010

TRANSCEND SERVICES, INC. (NASDAQ: TRCR), a leading provider of medical transcription services to the U.S. healthcare market, today announced its unaudited financial results for the fourth quarter and year ended December 31, 2009.

“We are also focused on improving profitability by increasing our use of speech recognition technology and offshore resources.”

Fourth Quarter Results

Revenue for the fourth quarter of 2009 increased 67% to a record $21,377,000 compared to $12,833,000 for the fourth quarter of 2008. Acquisitions completed during 2009 contributed revenue of $6,814,000 for the fourth quarter of 2009. Net income for the fourth quarter of 2009 was $1,590,000, or $.17 per diluted share, at an effective income tax rate of 39%. Net income for the fourth quarter of 2009 included a charge of $735,000, or $.05 per diluted share, representing contingent consideration (earn-outs) on 2009 acquisitions in excess of amounts previously estimated. The Company does not anticipate any additional material adjustments to contingent consideration payable for its 2009 acquisitions. Adjusting for this charge, non-GAAP net income increased 38% to $2,051,000, or $.22 per diluted share for the fourth quarter of 2009 compared to $1,489,000, or $.17 per diluted share, for the fourth quarter of 2008 (see table below for a reconciliation of non-GAAP to GAAP financial measures). The effective income tax rate for the fourth quarter of 2008 was 35%.

Gross profit increased 53% to $7,289,000, or 34% of revenue, for the fourth quarter of 2009 compared to $4,769,000, or 37% of revenue, for the fourth quarter of 2008. Excluding the impact of the August 31, 2009 acquisition of Medical Dictation Services, Inc. (“MDSI”), gross profit was 36% of revenue for the fourth quarter of 2009. The 2010 integration plan for MDSI – as with all of Transcend’s acquisitions – includes the conversion of a portion of the acquired business to Transcend’s BeyondTXT platform, leveraging speech recognition technology to improve profitability.

Operating income increased 20% to $2,736,000 for the fourth quarter of 2009 compared to $2,283,000 for the fourth quarter of 2008. Adjusting for the $735,000 contingent consideration charge, non-GAAP operating income for the fourth quarter of 2009 increased 52% to $3,471,000, or 16% of revenue (see reconciliation table below).

Transcend completed a follow-on offering of its common stock in December 2009, raising $27,232,000 after the underwriter’s discount but before transaction expenses. The Company used a portion of the proceeds to reduce indebtedness and ended 2009 with $27,732,000 of cash, cash equivalents and short-term investments and $2,899,000 of debt outstanding (including $2,055,000 related to seller notes from acquisitions). The Company issued 1,725,000 shares of common stock in the offering, increasing the total number of shares outstanding to 10,477,000 as of December 31, 2009.

2009 Results

Results for the year ended December 31, 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 year ended December 31, 2009, revenue increased 47% to $71,764,000 compared to $48,696,000 in 2008. Excluding $15,432,000 of revenue from the Company’s three 2009 acquisitions, revenue increased 16% in 2009 compared to 2008.

Gross profit for 2009 increased 42% to $25,321,000, or 35% of revenue, compared to $17,844,000, or 37% of revenue, for 2008. Excluding the impact of the August 31, 2009 MDSI acquisition, gross profit was 36% of revenue for 2009.

Operating income was $11,083,000 for 2009 compared to $8,947,000 for 2008. Excluding the effect of the $735,000 contingent consideration charge described above, non-GAAP operating income increased 32% to $11,818,000, or 16% of revenue (see reconciliation table below).

Including acquisition-related transaction costs of $269,000 and the effect of the $735,000 contingent consideration charge mentioned above, net income for 2009 was $6,759,000, or $0.75 per diluted share. On a non-GAAP basis, excluding the contingent consideration charge, net income increased 25% to $7,220,000, or $0.80 per diluted share (see reconciliation table below). For 2008, net income was $5,768,000, or $0.65 per diluted share. The effective income tax rate was 37% for 2009 and 36% for 2008. The Company currently expects the effective income tax rate for 2010 to be in the 37%-39% range.

Operations Review and Outlook

"Effective integration of acquisitions is one key to profitability improvement," said Chief Financial Officer Lance Cornell. "We generally expect operating margins from our acquired businesses to be lower than our overall operating margins until we gradually convert a portion of the acquired business to our BeyondTXT platform. The DeVenture conversions are complete. We expect to complete the TRS conversions during the first quarter of 2010 and the MDSI conversions by the end of 2010. In the meantime, we are evaluating opportunities for additional acquisitions in the future."

"Our primary operational goal continues to be to provide industry-leading service to our customers," said President and Chief Operating Officer Sue McGrogan. "We are also focused on improving profitability by increasing our use of speech recognition technology and offshore resources." McGrogan noted that speech recognition technology was used to edit 67% of Transcend's BeyondTXT volume in the fourth quarter of 2009, up from 54% in the fourth quarter of 2008. Offshore processing accounted for 16% of total volume in the fourth quarter of 2009, down from 19% in the fourth quarter of 2008 due to the impact of the MDSI acquisition, which uses 100% domestic resources. "Our goal is to increase the percentage of total volume processed offshore to 25-30% over the next two or three years," McGrogan said.

Leo Cooper, Executive Vice President of Sales and Marketing, added, "We estimate that sales closed during the fourth quarter will generate between $2.4 million and $3.0 million of annual revenue once fully implemented. We are gradually expanding the sales force in 2010. In January, we hired a senior level individual to focus on large hospital system sales and we plan to add one or two additional regional sales managers over the course of the year."

"Our solid fourth quarter results and successful follow-on offering capped a year of tremendous progress at Transcend. Transcend's annual revenue run rate reached $85.5 million in the fourth quarter based on annualized fourth quarter revenue, not including the positive impact of recent sales or potential future acquisitions," concluded Larry Gerdes, Chief Executive Officer.