Transcend Services, Inc. ( TRCR)

Q3 2010 Earnings Call

October 28, 2010 11:00 am ET

Executives

Larry Gerdes - CEO

Lance Cornell - CFO

Susan McGrogan - President & COO

Analysts

Colleen Lang - Lazard Capital

Ryan Daniels - William Blair

Brad Hoover - Sidoti & Company

Stephanie Haggerty - Register Financial

Frank DiLorenzo - Singular Research

Lenny Dunn - Freedom Investors

Sasha Kostadinov - Shaker Investments

Presentation

Operator

Good morning my name is Amanda and I’ll be your conference operator today. At this time I would like to welcome everyone to the Transcend Services Third Quarter Earnings conference call. All lines have been on mute to prevent any background noise. After the speaker’s remarks there will be a question and answer session. (Operator Instructions) Thank you Mr. Gerdes you may begin the conference.

Larry Gerdes

Thank you Amanda, good morning. I’m Larry Gerdes Chairman of the Board and Chief Executive Officer of Transcend Services Incorporated. Joining me today for this conference call are Lance Cornell, Transcend’s Chief Financial Officer and Susan McGrogan our present Chief Operating Officer. This call is regarding Transcends operating results for the quarter ended September 30 th 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

Good morning, we like to ensure that everyone understand 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 offering, our relationships with other companies or customer 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 third 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, we were pleased with our results for the third quarter and the progress we’ve made in improving our growth and operating profit margins. Next Lance will give an overview of our financial results.

Lance Cornell

Thanks Larry, revenue for the third quarter of 2010 increased 24% to $22,916,000 compared to $18,491,000 million for the third quarter of 2009. Excluding revenue contributed by the August 2009 acquisition of MDSI, revenue increased 10%. Gross profit increased 32% to $8,671,000 for the third quarter of 2010 compared to $6,574,000 for the third quarter of 2009. Gross profit as a percentage of revenue was 38% this quarter compared to 36% in the same quarter of 2009 as well as the second quarter of this year. This is the second consecutive quarter that we have increased our gross profit margin by two points and was certainly a key highlight for the quarter. We will discuss the reason for the increase in the moment when we review operations.

Operating income for the third quarter of 2010 increased 43% to $4,270,000 or 19% of revenue compared to $2,979,000 or 16% of revenue for the third quarter of 2009. Please note that the operating income in the third quarter of last year included $144,000 of MDSI transaction related cost.

Net income for the third quarter of 2010 increased 43% to $2,615,000 compared to $1,835,000 for the third quarter of 2009 and diluted earnings per share increased to $0.24 compared to $0.20 for the third quarter of 2009. As a remainder the impact of our December 2009 issuance of 1,725,000 of common stock in a public offering is approximately $0.03 per diluted share each quarter. Our balance sheet continues to be very healthy we have $30 million of cash, cash equivalent and short term investments on hand and $33.1 million of networking capital as of September 30 th. We paid off a $2 million note during the quarter leaving only a nominal amount of debt outstanding. We invested about $1.4 million in software development and other capital expenditure during the quarter and the bulk of this amount related to the development of Encore our transcription platform which we expect will be available at the beginning of 2011.

Once we did an excellent job of collecting our receivables with only 38 days of revenue and accounts receivable as of September 30 th. Let me take a moment to discuss the financial aspects of our recently announced acquisition of Heartland, we paid $6.5 million for its brand and its subsidiary which all do business under the Heartland name. This included the payoff of approximately $1 million of debt to their majority shareholder. In addition we agreed to assume approximately $1 million of Heartland transaction and severance related cost net of cash acquired. So from an economic perspective the total cash requirement was approximately $7.5 million. With this acquisition we plant our own flag in India and become a global company with roughly 3500 transcriptions worldwide. We expect the transaction to have a nominal impact on earnings per share in the fourth quarter since transaction cost will approximately offset any profit realized on the operation and we expect it to be modestly accretive starting in the first quarter of 2011.

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