Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Larry Gerdes - Chairman of the Board and CEO

Lance Cornell - CFO

Sue McGrogan - President and COO

Leo Cooper - EVP of Sales and Marketing

Transcend Services Inc. (TRCR) Q1 2010 Earnings Call April 28, 2010 ET

Operator

Good morning. My name is Terris [ph] and I will be your conference operator today. At this time, I would like to welcome everyone to the Transcend Services First Quarter 2010 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer session. (Operator Instruction) Thank you.

I would now like to turn the call over to Mr. Larry Gerdes, CEO. You may begin, sir.

Larry Gerdes

Thank you, Terris [ph]. 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 is Lance Cornell, Transcend's Chief Financial Officer and Sue McGrogan, our President and Chief Operating Officer and Leo Cooper, our Executive Vice President of Sales and Marketing.

This call is regarding Transcend's operating results for the quarter ended March 31st, 2010. After we discuss our financial and operational results, we'll conduct a question-and-answer period.

Now, I will ask Lance to state our disclaimer.

Lance Cornell

Good morning, everyone. We'd 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, service offerings, our relationships with other companies or customers, and our ultimate role in the market. There is a 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 first 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 31st, 2009.

Larry Gerdes

Thanks, Lance. Before just we discussed our results, I'd like to comment on our attempted acquisition of Spheris, which was the second largest transcription company in the industry, until it was acquired last week by MedQuist. As many of you know we participated in a Chapter 11 auction to buy [ph] Spheris.

Our due diligence had convinced us that Spheris was an attractive opportunity and the chance to by a large competitor doesn’t come along often. Ultimately, however the auction price exceeded the maximum price we were willing to pay and we declined to bit further. I am proud of our team for the discipline we exhibited during the process.

As a result of the acquisition of Spheris by MedQuist, we are now the second largest medical transcription company in the industry. Intangible benefit to the process is that it raise the level of awareness of Transcend in the industry, which will hopefully provide us opportunities we otherwise might have missed. We’d be happy answer any questions you might have about this transaction.

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

Lance Cornell

Thanks Larry. Revenue for the first quarter of 2010 increased 49% to $22,206,000 compared to $14,930,000 for the first quarter of 2009. Excluding 5,368,000 of revenue contributed in the first quarter of 2010 by our two most recent acquisition revenue increased 13%. Gross profit increased 40% to $7,480,000 or 34% of revenues for the first quarter of 2010 compared to $5,343,000 or 36% of revenue for the first quarter of 2009.

The decrease in the gross profit margin was primarily due to the impact of our August [ph] 2009 acquisition of Medical Dictation Services, Inc., or MDSI. Excluding MDSI, our gross profit margin was 36% in the first quarter of 2010.

Operating income was $2,675,000 for the first quarter of 2010 which included $678,000 of cost [ph] related to the bad prosperous [ph].

Excluding these cost, non-GAAP operating income increased 32% to $3,353,000 or 15% of revenue compared to $2,546,000 or 17% of revenue for the first quarter of 2009. The two point decrease in non-GAAP operating margin is primarily due to the two point decrease in the gross profit margin.

Excluding the acquisition related costs and depreciation and amortization, selling general and administrator expenses was 16.6% of revenue this quarter versus 17.0% in the first quarter of 2009.

I should point out that we do expect to incur another 400 to 500,000 of costs related at the Spheris bid [ph] in the second quarter of 2010 for a total of $1.1 to $1.2 million between the two quarters.

Now, our effective income tax rate for the quarter was approximately 38% compared to 37% in the first quarter of 2009. Net income for the first quarter of 2010 was $1,632,000 or $0.15 per diluted share including the $678,000 of cost related to the Spheris bid.

Adjusting for these acquisition related cost non-GAAP net income increased 30% to $2,50,000 or $0.19 per diluted share for the first quarter of 2010, compared to $1,578,000 or $0.18 per diluted share for the first quarter of 2009.

It's also important to know that the dilutive impact of the issuance of 1,725,000 shares of common stock in the December 2009 public offering was approximately negative $0.03 per diluted share in the first quarter of 2010.

Our balance sheet continues to be healthy. We generated approximately $2.9 million of cash flow from operations in the first quarter and had $28,785,000 of cash, cash equivalents in short-term investments on hand, and $ 2,378,000 of debt outstanding as of March 31st, 2010.

The number of days of revenue and accounts receivable was 39 days as of March 31st, and we are investing significant resources in the next generation of our transcription platform this year capitalizing approximately $630,000 of software development costs in the first quarter related to that platform. And this level of investment will continue through the bulk of 2010.

Now, I would like to turn the call over Sue for our operational analysis.

Sue McGrogan

Thanks. As Lance just mentioned we incurred significant costs to pursue the Spheris acquisition. And the auction process, most of the legal work had to be done in advance just to be qualified to participate in the auction. We decided to take the risk and incur the cost because the opportunity was too compelling to ignore. Now that Spheris is behind us we are actively pursuing other acquisition opportunities.

In fact, we are hosting this call from the annual medical transcription in the industry association convention which is attended by many other transcription companies and as a wonderful venue to see how everyone is position. We certainly hope to complete one and more acquisitions in the second half of 2010.

We usually keep you update on how we’re doing on retaining our customers. I am proud to report that no customers of left Transcend during the first quarter. High customer retention will always be critical to pass the test and we started off 2009 extremely well.

Let me comment for a moment on our sales results. We sold new business that we expect to generate between $3.5 and $4.3 million of annual revenue once fully implemented. While pleased with these results for the momentum we see in sales some of these sales were related from the fourth quarter and more contribute until the third quarter.

One of the sales is to hospital is part of a larger system and we hope to leverage our success there and expand our presence within that system, once we proven ourselves. Looking forward, we know from our sales efforts if there are opportunities to win new business as a result of the Spheris/MedQuist combination in the coming months.

Our most important gross profit margin initiative at this time is the conversion of as many of our acquired MDSI customers to BeyondTXT as possible. This is our last significant integration project from our 2009 acquisitions. It is proven challenging to obtain commitments from some of the MDSI customers move forward. In those cases this is due to a lack of IT resources on a hospital side.

We bought our first MDI customer live on BeyondTXT in April and we should convert a couple more by the end of the second quarter, the progress is slower than we would like. We will continue to work hard to convert messages businesses possible by year-end. Now, I would like to update you on our other gross profit margins improvement initiative.

I am very pleased to report that the percentage of revenue on our BeyondTXT platform increased to 50% of total revenue compared to 45% in fourth quarter of 2009. The increase was due to large part of customer conversion. On BeyondTXT we can advantages of speech recognition technology to drive higher productivity in gross profit margins.

Another key to improvement is maximizing the percentage of our BeyondTXT volume that is edited using speech recognition technology versus traditional typing. After we bring the customer up on BeyondTXT it takes several months before all positions are through to profile [ph] are at high enough quality threshold to start editing. We added to 67% of our BeyondTXT volume in the second quarter compared to 53% in the first quarter of 2009.

We’ve actually been covering around 70% recently and we’re very pleased with this progress. We’ve also increased the volume of our work process offshore in the first quarter of this year by 39% over the same quarter of last year. This still only represents 16% of our total volume and we know there is a lot of room throughout.

Our goal is to generally increase our offshore volumes although the percentage of total volume processed offshore can varied depending on the impact of acquisition and a rate of the top-line growth.

Lastly, let me brought [ph] the efforts of our entire Transcend team embedded [ph] together to pursue the Spheris opportunity without mixing up the all of our other initiatives.

Now, turn the call back to Larry to give some more brief on our technology initiatives.

Larry Gerdes

Thank you, Sue. Let me ramp up by giving you an update on our data and technology initiatives. As many of you know, one advantage we have over most transcription companies is that our data is intelligently structured using [inaudible].

We are currently concluding pilots for our first application developed to take advantage of this structured data which is called Beyond Alerts. With Beyond Alerts we’re mining the data contained in the reports we produce for certain conditions and occurrences then reporting the results to the hospital personal, the aim, the tracking of the hospital core measures. This can increased efficiency and ensure that patients who qualify for core measure tracking are not mixed.

Based on the results of our pilots, we should be able to commercialize this offering later this year. Although, we don’t expect it to be a significant source of revenue in the near-term, we continue to spend most of the costs and we believe that it will increase customer loyalty because of it extend our reach in the new areas for hospital outside the HIM department.

We are also encouraged that this data initiative is just scratching the surface of ways in which we can help our customers improve their operations and we expect to expand the applications in the coming months. Our partner, Multimodal Technologies has -- have been very supported in this effort. As it minimizes their long-term strategy for data. We will work closely with their model as we continue to expand this effort.

We are also making significant progress on the development of our next generation yet to be named transcription workflow platform. This platform is being developed with the customer in mind and will be marketed directly to hospitals who want to license their own transcription platform either because they have in-house transcriptionists or because they want more control over the process.

It will allow them to have access to be operating efficiencies offered by model speech recognition technology that we have integrated into the platform. We expect to finish core development and enter beta testing in the fourth quarter of this year.

We are all excited about the role that Transcend can play in the industry as the need for healthcare documentation evolves and the adoption of electronic medical record or EMR solutions increases.

I want to thank our customers for their continued trust in Transcend and our employees for their dedication to providing excellent service and innovated solutions to our customers.

Now, Leo Cooper will join us for the question-and-answer period. At this point we would like to open up the lines for your questions. Therese?

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Your first question comes from Ryan Daniels with William Blair & Company.

Ryan Daniels – William Blair & Company

Yes. Good morning, everyone.

Lance Cornell

Good morning, Ryan.

Ryan Daniels – William Blair & Company

I was hoping we could drill down a little bit more on the gross margins; I appreciate all the color you offered there. I guess I was a little surprised to see down, obviously it’s very modestly sequentially, but it sounds like it actually moved to more people or more customers to BeyondTXT going from 45% and I think in Q4 at 50% this quarter. I would have thought that would actually stabilize to maybe even boost this gross margin. So, one any color there, and then number two maybe looking forward, do you think margin should be relatively flat going forward? Did you expect a modest improvement there? Thanks.

Larry Gerdes

[inaudible] Lance will just touch based on that.

Lance Cornell

Sure, related to your first question, I think what we saw in Q1 versus Q4 was really not much a change. It was 34% of the quarter spent. We haven’t planned on much impacted dollar from the MDSI conversions in the first quarter. We knew that it would be late in the first quarter into the second quarter before we started converting our customer bases. So weren’t expecting too much of a change there, otherwise it’s been more or less business as usual now. When we do convert customers it’s important to remember that once they come on BeyondTXT there is a lag before you see the improvement from the speech recognition. It takes its curve that we work up pretty quickly, but a new hospital on BeyondTXT will take about six months before you maximize all of the positions voice profiles. You start getting draft within the first several weeks, but other physicians will take longer if they are lower volume and that sort of thing. So, you have to keep that in mind too.

As far as the outlook for gross margins in the near term, I think that if need to look at the fact that we will continue to work on the base graft migration. Of course, we are always looking to improve the volume that we added using speech recognition technology and increasing the offshore volume and the only offsetting pressure going the other way would be that pricing in the industry, as we’ve said before, is very competitive right now. And that, to the extent that we are selling larger systems in competitive situations, we expect those to be at -- on average a lower price point than our existing base of business. And HMA is an example of that which has already been factored into the margins when we signed the agreement back at the beginning of the fourth quarter of last year.

Ryan Daniels – William Blair & Company

Okay. Great. That’s helpful, Cornell. And then maybe, I don’t know who wants to hit this, but may be Sue, I think you have commented on it. It sounds like the MDSI clients are a little bit more challenging than you may have initially thought to get them to move onto the BeyondTXT platform. And I am curious, you know, that’s kind of a normal challenge? I know you probably faced that always with your integration, but if you look at TRS or DeVenture, it seems like that might have migrated a little more quickly than you expect with MDSI. So, I don’t know if it’s a different customer base or maybe it’s just a, you know, end markets a little more challenge today given everything going on in health cares. So hospitals are less focused, but any color there would be helpful as well?

Sue McGrogan

Sure. I can tell you, we are hitting it very, very hard. I think the reason that we are having more of an issue with MDSI than we did with DeVenture or TRS is that the industry is a little different now. IT -- the IT resources on the hospital side have become, with all this healthcare, IT going on and EMR, we are seeing the -- themselves of not having the bandwidth to help. So we are looking at a lot of different ideas. I mean, for example, one of the things we are doing is talking to the customers. We are doing another sweep of going to visit them, offering them some resources that we have to help them. There is nothing more important to me right now than migrating those customers and the team. So we have got a team that’s really targeting on that and I think on the next call you’ll see a big improvement there.

Lance Cornell

Yes typically, and I think we’ve talked about this before too, the conversions are the type of thing that we like to do by building the trust and building the relationship first before we move them over because the last thing that we want to do is open up contract negotiations that are really, would get the customer to say, well what’s in it for me. So it’s a really a tall platform, it's not theirs. So, we’re asking them to do us a favor by providing a little bit of help to make sure the interfaces are working correctly. And, it really is just that it’s a favor and can be difficult to get them to commit the resources.

That’s very helpful, Cornell. Maybe two more quick ones, and then I’ll hop off. The first one just any update on the M&A pipeline? I know you probably -- looking for the break one for the MDSI integration efforts that are ongoing, and too certain why you are working on Spheris? But how do you see that shaping up if we look over the next two, three, four quarters, maybe what you’re seeing in the marketplace?

Lance Cornell

Sure. I’d say it’s fair to say that we did take break off of a good 30, 45 days in there while we are focused pretty intensely on Spheris. But we already had a pipeline going into that process and that did -- actually within the first week after the Spheris auction, we added several potential opportunities to that pipeline. So, its active, I don’t expect just to close anything in the second quarter, but I certainly hope that we can get some at least one if not more than the second half of the year.

Ryan Daniels – William Blair & Company

Sure. And I assume being part of those the auction also helped your visibility down on the M&A front because people know now you’re going to acquire, is that safe?

Lance Cornell

I think so -- I think, obviously because we did the acquisitions last year, lot of people already know that, but Spheris rate that level of awareness even further.

Ryan Daniels – William Blair & Company

Okay. And then the last one I had and I am going to hoop off -- just any update on beyond speed. I don’t know you mentioned that up front, but I think he wants to nurture and maybe just started this quarter with HMA and [inaudible] being received?

Sue McGrogan

Actually, we had some GE integration, I wouldn’t say issues just some GE the integration delays. We’re actually launching that next week at one of our HMA sides and we’re very excited about how that’s going to go, spend a lot of time with them. Obviously, adoption is so important for different [ph] adoption. We’ve got a team just dedicated to that. They are doing a great job. We really went slowly with this first one and then I think they are going to roll out relatively quickly. So we have more information for you on the next call.

Ryan Daniels – William Blair & Company

I really, just Larry, I am Ryan; I was very happy see that last week GE certified the integration efforts?

Sue McGrogan

Yes.

Ryan Daniels – William Blair & Company

And that’s the good relationship to have.

Larry Gerdes

Sure, even though we had a hope we would probably start these conversions early in April. It’s now going to be at the end of April. It won’t slow up the speed by which they would like us to make these conversions because they just like us to do as quickly as we possibly can.

Sue McGrogan

And HMA is such a good partner. They understand that you know, if this is a new thing for us and we’re working very closely together with their teams. So, I’m really excited about that.

Ryan Daniels – William Blair & Company

Okay, thanks for the color and congrats on the great retention in the new sales this quarter.

Sue McGrogan

Thank you.

Larry Gerdes

Thanks Ryan.

Operator

Thank you. Your next question comes from Tom Gallucci, with Lazard Capital.

Larry Gerdes

Hi Tom. Good morning to him [ph].

Colin Sebastian – Lazard Capital

Hi, this is actually Colin going on for Tom this morning. How are you?

Larry Gerdes

Hi, Colin, I’m fine.

Sue McGrogan

Fine.

Colin Sebastian – Lazard Capital

I reset [ph] a quick question, just to start. Did you now see any negative impacted of from the weather, should be a weather we saw during the first quarter, and also at the flue it seems like some of the hospital companies has being reporting somewhat weak volume numbers just if you have any thoughts on impact you guys had on the volume --?

Sue McGrogan

This is Sue and I will take that. I mean, we definitely did especially with our MDSI customers. They were in the mid-Atlantic state in Onion. It was, they shut down for a few days, a couple of times and we had the transcriptionist, they were complaining rate enough, enough work. We all also we’re staying a while. We don’t have the business theater [ph], there so definitely an impact on the MDSI revenue. You know, so, yes, the answer to that, yes, but more so MDSI.

Colin Sebastian – Lazard Capital

Okay, great, thanks. And just any thoughts, what do you guys thinking about for this year in terms of organic volume growth?

Lance Cornell

Yes, I think as you know, last quarter fourth quarter was 13% we’re still right around that 13% rate. We’d love to get it up in to the 15% range that’s still our goal to grow about 15%. So we have been just a hair shy [ph] of that. Although, really our first quarter revenue was -- and frankly all of our operating results were right in line with our budget estimates.

Colin Sebastian – Lazard Capital

Okay, great. Thanks so much.

Lance Cornell

Thank you.

Sue McGrogan

Thank you.

Operator

Thank you. Your next question comes from Brad Hoover with Sidoti & Company.

Brad Hoover – Sidoti & Company

Hi, good morning.

Larry Gerdes

Good morning, Brad.

Sue McGrogan

Good morning, Brad.

Brad Hoover – Sidoti & Company

I am just following up on Ryan question. Do you think to move all the MDSI customers in 2010 or is that going to trickle into 2011 a little bit?

Larry Gerdes

Well, it will trickle into 2011. We’ve always thought like it would take us probably 15 months or so to do it. So, we’ve always known that we wouldn’t get it all done in 2010. And as Lance and Sue and I’ll let Lance comment here. But as they mentioned we want to do it in the way that the customer cooperates. We don’t have to make price concessions to do it. And we don’t think that all of them will go. We think at the end of the day there’ll still be two or three of the customers that might remain on their old platform, we’ll have to see. We went through the same process really actually in a different light with HMA. Lance will –

Lance Cornell

I was just going to add that in all of our acquisitions DeVenture and TRS and now MDSI we never assumed that we’ll get a 100% of it over. It's how quick we can get whatever portion of the business that we can get. And we’re still hoping to get all of that by the end of the year. We have a lot of work to do to make sure that that does happen, but that would leave probably like Larry said a couple customers that would be down the road at some point but with no definitive plan.

Sue McGrogan

We’ve also established a good working relationship with the folks over [inaudible] who or is the platform that all these clients are on. And we’re looking at different ways to work with them so it could be a win-win and maybe go faster and I only have been established pretty good partnership with them.

Brad Hoover – Sidoti & Company

Okay, great, thanks for the color on that. And then on G&A, I think historically the first core has been low as a percent of revenue in terms of full year. We definitely saw another full increase in this first quarter. Was there anything the way to Spheris at all or is that something off that G&A was up a little bit higher as you resulted at prior first quarters?

Lance Cornell

While we excluded out that as much as we could capture the Spheris cost we split that out separately so that you could identify it. And I am sure there is a little bit of cost buried in everyone’s efforts but didn’t make into that number, but pretty most why we separated it out.

Outside of that, if you look at SG&A, I will break it down a little bit, the depreciation and the amortization as a percentage of revenue is up primarily because of amortization of the intangibles from the acquisitions, but if you look at the rest of SG&A excluding the depreciation and amortization and adjusted for that acquisition related costs for Spheris, we are actually doing a little bit better work 16.6% of revenue, as I stated a few months ago in Q1 of this year versus 17.0% last year, not a huge difference roughly around 17% of revenue in both quarters.

Brad Hoover – Sidoti & Company

Okay. And then with -- I know you have been working on the rebranding effort in this, one thing up and kind of where that stands and then how we should think about that in relations to sales and marketing expenses as you through the year, since that was I think flat from fourth quarter?

Leo Cooper

Okay. At this point, I’m glad you asked that question because we have worked so hard on our rebranding and our marketing efforts and we are literally are in the process right now of rolling out the whole rebranding process starting with a spot on new website which will have an opportunity to see that next week and we will have it up by Monday of next week. And as a part of this process we also are very excited to have hired a new marketing manager to assist us, you know, in implementing and developing new programs going forward. So, I guess the best way to say it is that we have planned a very, very aggressive marketing plan as compared to what we’ve had in the past and are very, very much in the midst of rolling that process out, including trade shows, new sales collateral, which we develop two pieces already with traditional work in process and so on and so forth. So, we’re excited about it and excited to have our new marketing manager on board as well.

Unidentified Analyst

Okay, great. Okay, let’s just assume that sales and marketing will increase sequentially as we go this year.

Larry Gerdes

We certainly will see that, yes.

Unidentified Analyst

Okay, and then just lastly guys. You mentioned that the pilots of that hospital core measures and you’re obviously incurring those, your cost that are associated with that. Is that in the gross margin line or is that more of the operating expenses or where do you do see those cost raising up?

Lance Cornell

The bulk of that cost is actually down in G&A with [indiscernible] consultants and that sort of thing. So, that does explain, if you look at Europe for the year, we certainly didn’t have those costs last year.

Unidentified Analyst

Yeah, okay. All right.

Larry Gerdes

Thanks, Fred.

Operator

Thank you. Your next question comes from [inaudible]

Unidentified Analyst

Yes, very good revenue performance in the first quarter. I really appreciate it. Couple of questions on the margin side. Once, what is your target to, for gross margins, once you converted these acquisitions? What level do you seek to achieve in gross margins?

Unknown Company Speaker

Well, I think if we – just with the MDSI conversion alone, if we were able to maximize that once we see the full impact of speech, that takes the company’s gross margins back into the roughly 36% range. And then the question is just the [inaudible] offshore and what happens with pricing on new contracts and that sort of thing, which its kind of difficult to predict what the net result of the impact of those three things will be.

Lance Cornell

Okay, but to the extent you have such an active acquisition program, one would expect that you are constantly going to have new MDSI like situations to integrate and that you consistently therefore be below the 36% number on an ongoing basis.

Larry Gerdes

Yes, if you look at the core business, then clearly our plan is to improve the margins post integration and more than offset any lower pricing on bigger system contract by the use of editing and offshore, and we got approved that we can do that. But you are right, generally speaking – in every acquisition is unique, but generally speaking we’ll see acquisitions come in at lower gross margins until we can integrate the businesses slowly.

Lance Cornell

There is one unique twist to that, that is as we finish the development of our BeyondTXT Next Generation 4 platform at the end of this year and early next year, we’re not only going to make that platform available for large hospital systems, we will also make it available for transcription companies that need a new technology. So, even though it's not predictable, I would hope that there might even be opportunities for some of that migration or transition to happen prior to us making an acquisition, which would be a much better scenario if it could be accomplished.

Unidentified Analyst

Just to shift on the new platform that you’re developing, will this change your revenue model or you would be selling this more or less upfront as opposed to achieving the recurring revenue that you get now from these customers?

Larry Gerdes

The plan is to license the new platform as in AST [ph] and the licenses would be based on the volume of work processed each month. So it will be recurring revenue stream just like the transcriptionist. However, we would expect it to be at higher margins because obviously we don’t have the significant way or component related to that that we do now. Likewise front-end speech or beyond speech is – it affords the radiologist, in particular the opportunity to do their own editing of their documents. And so the hospital is paying us a technology charge basically to have that system implemented, and its still volume based recurring revenue but it’s at higher margin because again in that particular case the doctor is providing the labor, not Transcend.

Unidentified Analyst

Good. Thank you very much.

Larry Gerdes

You are welcome.

Operator: Thank you. Your next question comes from Lenny Dunn with Freedom Investors Corp.

Lenny Dunn - Freedom Investors Corp.

Good morning.

Larry Gerdes

Good morning, Lenny.

Lance Cornell

Good morning.

Lenny Dunn - Freedom Investors Corp.

Most of my questions has been answered but I did have something I’d like you to address. Spheris, we see quite a bit of business from MedQuist when people wanted to leave MedQuist for the problems they have with them. Now MedQuist has repurchased Spheris so these customers were kind of forced back into MedQuist where they really didn’t have a very good relationship. Do we have a shot at getting some of that?

Larry Gerdes

Very good question, Lenny, with consolidation like this and major mergers, there’s always some turmoil in the customer base. I’m going to let [inaudible] in a second to some of the efforts that he and his team are doing out in the marketplace just to make sure that we’re available, but we know that MedQuist is a good big company and they’re going to do everything they can to retain those customers in the Spheris base. But we hope that the opportunity presents itself. For those hospitals would like to make a change or if they were a previous customer that there is an opportunity for us. I think that’s a very pertinent question. Leo, would you add to that?

Leo Cooper

To simply add what Larry just said in that. A lot of the customers [inaudible] or going to be in a wait and see mode. We do know we had an opportunity to hold with those customers. So we now got, we know many of those that did come originally from MedQuist. So, Lenny, we would hope that as time goes by, it goes up, goes up. Particular customers would give us an opportunity since they’re going to be a nice [inaudible] to change. They’re going to be in the state of transition of some sort, but that would give us the opportunity to compete for the business that are, and again time will tell. But we know who those folks are, we’re in contact with those people and we want to make sure that they understand the Transcend story and that they are aware that we are a viable alternative whenever they’re willing to take a look.

Lenny Dunn - Freedom Investors Corp.

Yeah. I would think they would have because when we’re doing your due diligence that they would have – well, very aware of you at that point?

Larry Gerdes

Well, one thing I will add Lenny. This process with the Spheris auction was so quick, and it had to be done to make a level playing field. We weren't provided access to the customers’ names, all we were provide were financial information. So when Leo and his team talk to customers, it was through previous relationships, people they already knew out in the field. And so, it wasn’t through anything that we could determine from any kind of due diligence effort. But it's a small marketplace, everybody have pretty good feel for their individual territory. And so some of our sales folks had worked into previous companies, so they had some knowledge of where the customer stood. So it was one of those fields where it’s just not that simple that we would have gotten any customer information or knowledge from the due diligence, that due diligence had to be done on an awfully global basis.

Lance Cornell

That’s an excellent point, Larry. That is in fact why we were able to even talk to the ones that we did talk to because they had so many different people trying to reach out to them from the other transcription companies as well. But I don’t think it’s important to point out that particularly in the large system these are big installations that are very, very intricate and can be time consuming.

So I think we will have to look at those folks that may have been with MedQuist at one time that were interested. So those were number of years ago as well, and I suspect that they are certainly going to evaluate whether or not they want to jump to make a change or do they want to sit back and see how the performance level is going to be, given a different day and a different time. So I think that they will see a lot of lot of wait and see, but we are certainly optimistic that as time goes by that Transcend will be given an opportunity and we certainly intend to stay in contact with those customers that we are aware of.

Susan McGrogan

And one thing that I would like to add is that, if customers reach us to depart MedQuist here, we have its score card and we want to get a big percent to those customers and that’s the expectation. So we are working very hard to continue to provide the excellent service we do get our name out there in the market, people know Transcend now a little bit better than they have. We just want – if someone’s going to leave, we hope they come to us.

Lenny Dunn - Freedom Investors Corp.

Well, thank you. That kind of answers my question. And you know obviously we are a large player now, three years back we were small players so I mean I’ve looked at you.

Larry Gerdes

Yeah, exactly.

Lance Cornell

Exactly.

Larry Gerdes

Matter of fact that’s why you are seeing us participate in larger decisions now too.

Operator: Thank you.

Larry Gerdes

Thank you.

Operator: Your next question comes from Andy Plimpton with Mast Capital.

Andy Plimpton – Mast Capital

Hi, guys. I was curious if any restrictions under this [ph] talking to the Spheris customers as the result of the content share agreement or anything like that, and in addition what percentage of the Spheris customers are former MedQuist customers?

Larry Gerdes

As far as prohibitions, the only prohibition is that we can’t use confidential information that we obtained during due diligence in order to exploit any market opportunity, but in our case because we weren’t able to access detailed customer information during the due diligence, there is not much of an opportunity to do that anyway, so it is mostly using the information that we already have from just being in the marketplace. And so we’ll continue on that basis.

And the percentage, I don’ know the answer to that. We know that there are quite a few that our former MedQuist clients that moved to Spheris, but I don’t know that we know the exact percentages.

Lance Cornell

No. We don’t, we didn’t, we’ve never given that information, so we have no way of knowing.

Susan McGrogan

We knew there were a lot of them. We did. We made a lot of phone calls, we have never given a customer list and, but I think there is a lot of opportunity out there. But with respect, I mean with due respect to Spheris team, we had some great meetings with them, I think they are good company and I just can’t say enough about how much our team enjoyed in a meeting with the Spheris team. We wouldn’t do anything underhanded or anything like that to get business. Like I said, I think we did, we’re good enough that we can win business fair and square and if customers want to leave them, hopefully they’ll come to us.

Larry Gerdes

I would say this too. And this is very anecdotal but now the Transcend, as Lenny said is the size we are. And now that we are the only other somewhat large transcription provider, and our profile has been raised through this process, any customers across the country that want to make a decision, especially if they are a larger, I’ll be surprised if there isn’t a larger percent of the time we’ll go consider Transcend just because of that.

Andy Plimpton – Mast Capital

Great. The other quick question I had was, I guess, in one of the metrics filings, they said that CBay is no longer going to be marketing for new business in the U.S. And I was curious if you’ve seen that should be true and if you’re expecting to see benefits from that in terms of, two of the top five or six players are now no longer marketing in the industry?

Susan McGrogan

This is Sue. I’ve heard that, I don’t know how it will affect us much because that’s really what we expected. We expected that MedQuist would have, they offer both: a blended model and offshore model and domestic. And it's very hard I think to go out there as a strictly offshore company and try to sell just that. So that makes a lot of sense, I don’t think it will affect us either way. It just – because MedQuist and CBay really thought of them as one anyway. So that I think just it's hard in this industry, a lot of people still want domestic only or a blend. Very, very hard to sell 100% offshore.

Andy Plimpton – Mast Capital

Okay, great. Thanks a lot.

Larry Gerdes

Thank you.

Operator: Thank you. And at this time there are no further questions.

Larry Gerdes

Thank you, Terre. Well, I just want to close by thanking you again for the support for Transcend. We’ve got mixed reactions from our investors on our participation in the Spheris auction. But I do want our shareholders to know the reason we participated in that auction was because not only did we see it as an opportunity, but its really an endorsement of the fact that our company has come so far in its depth and breadth and capacity to do make major acquisition and major integrations.

One thing we didn’t say in our comments about the base scribe migrations from MDSI, and that is the great job that Sue and her team has done on integrating MDSI into Transcend. We’ve lost no customers which is always our goal. They have remained very happy. We’ve done a great job with that. So I think that Spheris exercise although it was hard work and it took a lot of our team’s time was well worth that I am very proud of the teams, the managers in Transcend and others that were involved in that because they’ve shown very well and we would have been a great match for Spheris but I am extremely [ph] proud of the fact that we had the discipline to stop when we did because we knew what our valuation models would lead to. So we are very excited about the future.

As Lance mentioned, we’re excited about what we've gotten accomplished this year to date. We’re tracking right on our business plans and our internal budgets and we feel good about it. We’re going to work very hard on gross margin initiatives as many of you have asked us. We like the new momentum we’re seeing in sales and the sales pipelines we’re building.

And so we are also seeing one other thing that Sue just mentioned to me, and we are starting to see recognition among major hospital, organizations and groups, and we just recently signed as a preferred vendor for the Children’s Hospital Association for the country. And even though that’s a preferred vendor, while we still will compete with others for that business, it’s a real endorsement of where Transcend is. So, I would hope that in the next few months you’ll see more of that coming from us, announcements of large relationships.

So, thank you again for your support. We look forward to the next call and the rest of this year.

Susan McGrogan

Thank you.

Operator

Excuse me, Ms. McGrogan, we did have one more question coming in, can we take it?

Larry Gerdes

Sure, you can.

Operator

And this question comes from Simon Baruch. He is a private investor.

Simon Baruch

Good morning. There was an item in the 10-K regarding the contingent consideration for that TRS acquisition? Would they claim to an additional 1.9 million? Is there any update on that and does this affect the way you may calculate in the future any contingent consideration?

Larry Gerdes

There is really no update. They did submit a dispute on the calculation. We feel pretty strong, the calculation is very plain contractually and that there is nothing there but we’re still working through that process to resolve it. As far as, how we book contingent consideration in the future, it’s a new role, you obviously need to make an estimate of the correct value upfront. It’s just an estimate, so I don’t know that we’ll ever be able to nail down exactly. And it really just depends on what the formula is that needs particular acquisition. So you can’t really answer that without knowing what the specific deal is.

Simon Baruch

Okay. Thank you.

Larry Gerdes

Thank you.

Operator: Thank you. And there are no further questions.

Larry Gerdes

Great, well, thank you.

Susan McGrogan

Thank you.

Operator: You’re welcome. This concludes today’s Transcend Services First Quarter 2010 Earnings. Thank you for your participation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Transcend Services Inc. Q1 2010 Earnings Call Transcript
This Transcript
All Transcripts