Transcend Services, Inc. (TRCR)

Q2 2010 Earnings Call Transcript

July 29, 2010 11:00 am ET

Executives

Larry Gerdes – Chairman, Founder and CEO

Lance Cornell – CFO

Susan McGrogan – President and COO

Analysts

Tom Gallucci – Lazard Capital Markets

Ryan Daniels – William Blair

Brad Hoover – Sidoti & Company

Lenny Dunn – Freedom Investors

Sasha Kostadinov – Shaker Investments

Stephanie Haggerty – Register Financial

Craig Hoagland – Anderson Hoagland and Associates

Presentation

Operator

Good morning. My name is Gennetta and I will be your conference operator today. At this time, I’d like to welcome everyone to the Transcend Services second quarter 2010 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator instructions) Mr. Gerdes, you may begin your conference.

Larry Gerdes

Thank you, Gennetta. Good morning. I am Larry Gerdes, Chairman of the Board and Chief Executive Officer of Transcend Services Inc. Joining me today for this conference call are Lance Cornell, Transcend's Chief Financial Officer; and Susan McGrogan, our President and Chief Operating Officer. This call is regarding Transcend's operating results for the quarter ended June 30, 2010. After we discuss our financial and operational results, we will conduct a question-and-answer period.

Now, I will ask Lance to state our disclaimer.

Lance Cornell

Thanks, good morning. We would like to ensure that everyone understands that our commentary and responses during this conference call may contain forward-looking statements dealing with topics such as our business strategy, our anticipated future results, our service offerings, our relationships with other companies or customers and our ultimate role in the market. There is the risk that these forward-looking statements or predictions may differ materially from results because of factors such as company decisions, market conditions, business relationships and/or performance of various third parties associated with Transcend including but not limited to their access to capital and their financial condition.

Please realize that we will not necessarily provide updates to any such statements other than as required by law. Finally, more information about potential risk factors is included in the second quarter press release and the periodic reports that the company files from time to time with the Securities and Exchange Commission, including the company's Form 10-K for the year ended December 31, 2009.

Larry Gerdes

Thanks, Lance. Before I start my comments, I would like to congratulate Lance on receiving an honor recently as CFO of the Year for the State of Georgia by the Atlanta Business Chronicle. We’re very proud of what Lance has done here the last 5.5 years at Transcend and it was recognition well deserved.

We are very pleased with our results for the second quarter and the progress we've made on a number of our initiatives, particularly our gross profit margin improvement initiatives. We will speak to these in more detail in a few minutes.

Now, I’d like to turn the call over to Lance to discuss our financial results.

Lance Cornell

Thank you. 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 our two most recent acquisitions, revenue increased 12% which is in line with our goal of 10% to 15% organic growth.

Gross profit increased 31% to $8,031,000 for the second quarter of 2010 compared to $6,115,000 for the second quarter of 2009. Gross profit as a percentage of revenue was 36% for both periods. But more importantly, we increased our gross profit margin by two full percentage points compared to the first quarter of this year from 34% to 36% and we will cover the reasons for the increase in a moment when we discuss operations.

Operating income was $2,692,000 for the second quarter of 2010 which included $601,000 related to the bid to acquire Spheris and a $445,000 pre-tax non-cash cumulative stock compensation expense adjustment for the period January 1, 2006 through March 31, 2010. Excluding these costs, non-GAAP operating income increased 31% to $3,738,000 or 17% of revenue compared to $2,822,000 or 17% of revenue for the second quarter of 2009. Like the gross profit margin, this also represents a two percentage point increase compared to the first quarter of this year on a non-GAAP adjusted basis.

Our effective income tax rate for the quarter was approximately 41% compared to 37% in the second quarter of 2009. The increase in the effective rate is due primarily to permanent book tax differences related to the cumulative stock compensation adjustment. And this is a discrete item for the second quarter and we expect the rate to return to the 38% to 39% range for the balance of the year, barring any unusual tax situations.

Net income for the second quarter of 2010 was $1,568,000 or $0.15 per diluted share including the $1,046,000 of costs that I just mentioned. 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. Just as a reminder, the impact of our December 2009 issuance of 1,725,000 shares of common stock in a public offering is approximately negative $0.03 per diluted share each quarter.

Our balance sheet continues to be healthy. We had $27,735,000 of cash, cash equivalents and short-term investments on hand as of June 30. This is down by a little over $1 million from March 31 due primarily to Spheris acquisition related expenses, settlement of outstanding lease obligations and higher than normal capital expenditures.

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