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
Transcend Services, Inc. (TRCR) Q3 2010 Earnings Call October 28, 2010 11:00 AM ET
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 30th 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 30th. 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 30th. 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.
As been the case with other acquisitions, Heartland operating margins are lower than ours with operating income as a percentage of revenue in the single digit currently with our goal being to improve the profitability over the course of 2011 so although Heartland will be accretive. We expect our overall growth and operating margins to drop by about two points initially and hopefully recover over the course of next year or so as we integrate the companies and optimize capacity and efficiency in India. And now I would like to turn the call over to Susan for a discussion of our operations.
Susan McGrogan
Thanks Lance, I’m pleased to report our customer retention rate remains strong at 99% based on annualized revenue. We operate in a very competitive market and I believe our high customer retention rate prove that consistent delivery of excellent services at a reasonable price ensure that our customers will stay with us here for years.
Two point improvements in our gross profit margins compared to the second quarter of this year was the result of the full quarter impact of the incentives that we discussed last quarter. We increased the mix of work profit on our BeyondTXT platform to 54% of total volume compared to 50% in the first quarter of this year. Of the volume processed on BeyondTXT for the third quarter of 2010, 76% of that using speech recognition technology compared to 72 % in the second quarter of this year and 64% in the third quarter of 2009. We processed 19% of our volume offshore in the third quarter of 2010 after dipping to 16% at the beginning of this year due to the impact of the 2009 acquisitions. We have been successful in controlling some of our operating cost as we have grown such as compensation and equipment lease expense and of course we continue to focus on training to make sure our medical language specialist product is profitable.
We are very pleased with our progress in all these incentives and it clearly show in the results this quarter. One year that we know has room from Heartland sale we sold just under two million of new business in the third quarter about the same as we did in the second quarter. We need to get better if we are going to hit the higher end of our organic growth. We formally launched Encore and BeyondAlerts solutions four weeks ago at AHIMA, our largest trade show of the year and I think we had the stronger show ever.
I have been very pleased with Transcend sales team we have been training this week ago with our team and they have not only sales experience and operational knowledge and a definite customer focus. They have excellent relationship with the Heartland customers and are excited about the new offering that Transcend bring to the table. We now fix regional sales force plus an inside sales resource and we plan to expand our regional sales force further over the next year.
I want to take a few minutes to discuss with the acquisition of Heartland means to us from operational perspective. Strategically we believe it was important to have our own operation in India to have flexibility to allocate resources globally based on the needs of our customers. Heartland as one of the premier Indian transcription operations and we are excited to Mahindra on board as the country manager for India along with his three center manager and his team. Cathy Clemons was actually hired from Heartland several months ago will drive the operational integration and manage the business. The very strong team and we look forward to working together. With Heartland a mix of domestic versus offshore work shift to approximately 70%-30% which we think is a good healthy balance. We will not displace any US based transcriptionist in fact we plan to grow the domestic work force and we simultaneously grow our Indian work force. We have a number of projects that we are launching now to improve the profitability of the Heartland business. This include optimizing capacity emphasizing training to improve productivity improving the ratio of t transcriptionist to support staff and migrating the Heartland team in our operation model over time.
I’m going to India myself in a week and I look forward to meeting the team and working on this initiatives. As with all acquisition our first priority is to keep all customers. Heartland has a strong customer focus and their customer service group is consistently recognized by their customers as one of their strengths. For the Heartland customer base we were able to offer a broader more flexible array of solutions to meet their need. Some customer may want to have a portion of their work completed in the US and we can easily accommodate their wishes.
We will also offer our Encore platform for those who want to manage their own transcription department position itself added solutions and data mining solution. We have been busy talking to customer and introducing them to Transcend and our capabilities. Lastly I would like to thank the Transcend team for all their hard work over the last quarter. I can’t say enough about the team we’ve build here in Transcend definitely the best in the industry.
I’m also excited about the team of professionals who are coming out of Heartland, our teams are already working together and it’s definitely a great cultural fit in terms of work epic and commitment to our customers and employees. And now I will turn the call back to Larry.
Larry Gerdes
Thanks Susan, I would like to give everyone a quick update on our technology initiatives. Scott Robertson who heads our information technology initiatives and his team have done an excellent job of keeping our various development initiatives tracking close to their original time length. We still expect Encore our next generation transcription platform to be generally available in the beginning of 2011. With Encore we will offer a solution to the hospital to desire to manage their own transcription platform for their transcription department under a software as a service or SAS model. This is a market that was previously close to Transcend. We continue to enhance BeyondSpeech our physician self edit solution for our existing customer in response to customer feedback from our first implementation. And our BeyondAlerts data mining solution continue to generate interest in the market place. We expect each of these to contribute modestly to revenue in 2011, Heartland’s GEMSTAR platform like our BeyondTXT platform utilizes multi model technology speech understanding software so there is no immediate need to migrate customers from GEMSTAR to BeyondTXT or Encore although we expect some customers who want to migrate to take advantage of some of our new capabilities. We have a lot of flexibility to customize approaches for each customer based on their needs.
I would like to mention that Transcend was recently ranked 10th on Forbes list of the 100 best small companies in America. The ranking are based on earnings growth, sales growth and return on equity. Transcend had been ranked in the top 20th for three consecutive years now. It’s always nice to be recognized for our results. To conclude let me say that we are excited about Transcend role in the industry as the need for healthcare documentation evolves and the adoption of meaningful use of electronic medical record increases. We thank all of you for your support and support of Transcend, at this point we would like to open up the line for your question.
Amanda?
Question and Answer session
Operator
(Operator Instructions) your first question is from Tom Gallucci, with Lazard Capital.
Colleen Lang - Lazard Capital
Hi, good morning. This is Colleen Lang on for Tom. I just had a quick question. On the 10% same-store growth you saw in the quarter, how much of that was a function of the weak overall hospital utilization trends we've seen and how much is it from weaker sales?
Larry Gerdes
First of all let me just say and I’ll let Lance jump in it’s not really same store, it’s 10% organic growth from our own sales efforts. Lance I’ll let you
Lance Cornell
Right to reiterate that include the new sales and what we saw during the quarter in terms of hospital volumes is what we typically see with seasonality that it is the back end of the quarter volume started to pickup as summer vacations ended and people got back to work and back into the hospitals actually in some cases. So I don’t think that year-over-year there is a dramatic increase from volume changes, I think it’s more related to just the new sales and obviously customer hasn’t had much of an impact at all.
Colleen Lang - Lazard Capital
Okay, great. And then on the sales front, can you detail a little bit more what you're going to do to beef up your efforts as we look towards 2011?
Susan McGrogan
We are real excited, as I said we are excited about bringing Heartland on board and we feel that we had a great bunch of meeting this weekend. And I’m excited about what we can do we are looking at potential increasing the sales force as you can imagine we have a lot of planning to do. We have a good plan going forward, we probably going to keep only six through the end of the year and then later in new sales at various points during the course of next year,
Larry Girds
The only thing I add is I think we are now starting to see some of the leveraged opportunity if we become recognized as the larger provider and by that I mean we are starting to see interest from larger healthcare groups who want a standard solution across their system. The other thing of course the happens is these various agreements we’ve signed in the past will generating opportunities for us actually one of which relatively large the system after the end of the quarter with one of the more major children’s hospital.
Susan McGrogan
We’ve increased our marketing efforts this year and we are seeing a lot of growth due to that and a lot of potential new business and momentum so. We have a great AHIMA trade show as I alluded to AHIMA is American Health Information Management Association is our large show and it was great we had some much with that show so I’m really pleased with where we are going I think we have some upward momentum. I’ve really never felt better about our sales opportunity.
Colleen Lang - Lazard Capital
Okay, great. And then just one last one, now with completing Heartland, just your thoughts on your acquisition pipeline through the end of the year and into next year. Thanks.
Lance Cornell
We are still maintaining an active acquisition pipeline. I would be surprised if we completed something between now and the end of the year. I think we got our hands full with the Heartland integration but certainly as we go into next year we would expect to continue acquire as you know we have got plenty of cash on our balance sheet to do that at least for the smaller to mid size transcription companies. I would also point out that as we look down the road in the future, there will come a point and we’ve talked about this internally where we will broaden our scope out beyond traditional transcription companies to follow the path that some of the data initiatives are taking with our customers. And if it makes sense to expand into others to better serve our customers we will consider doing that. But for now we are still looking primarily at transcription companies.
Colleen Lang - Lazard Capital
Okay. So the first priority for use of cash would be transcription, then second other ancillary businesses?
Lance Cornell
Right
Operator
Your next question is from Ryan Daniels of William Blair
Ryan Daniels - William Blair
Hey, guys, good morning and congrats again on the quarter and the recent acquisition. Just a quick question on the gross margin side. If I'm doing my math correct, it looks like Heartland is maybe 1200 basis points below you guys. And I'm curious how much of that you think you can recover over time and how much of that could be permanent because the majority of their business is OUS and probably priced a little lower because of that. And how much of it is just kind of scale and operating platform that you think over the next year or two you can capture and bring towards your margin?
Larry Gerdes
It’s a good question and the answer it does depend to a large degree surely two thing one is to the extend that we can get leverage out of the customer relationship and grow that base of business which we are hopeful that we can obviously that helps out the overall picture but unlike our previous acquisitions the bulk of the margin improvement opportunity comes over in India. And this is the first time that we will working on our Indian integration strategy so we certainly want to be cautious about what we think and happen over there. but we know for a fact from looking at our numbers versus their numbers that we can improve productivity and some of the things that we’ve mentioned on the call. So our long term goal for any acquisition we do is that acquired business would generate EBITDA or operating income on a standalone basis that’s north of our own EBITDA and operating income. So in this case I think it will certainly take us all of 2011 to get there and will just have to see how quickly we can make the improvements and the changes with the Indian workforce. Part of it too is that India has some excess capacity right now in a couple of their centers and there is some fixed cost that go into that model so to the extent that we can increase volume in those centre and leverage the volume across that fixed cost base. The incremental cost is lot lower than the average cost over there so that’s part of the equation.
Susan McGrogan
This is Sue, we also feel there is a definite room for improving productivity we both have the partner in the technology and we’ve seen great efficiency and we feel that’s best for the business. We feel we can do that with our Heartland.
Larry Gerdes
Heartland has done a excellent job of implementing speech recognition technology but they have only done in the past year where as we really did it in the 2006 and 2007 timeframe. And I think just like what we experienced we learned through that process we found that we had to increase training of our folks to make sure that they are productivity and I think Heartland at that same point whether they rolled it out very quickly and now there is an opportunity to fully leverage the technology to get the productivity improvements that they should be able to see
Lance Cornell
As a matter of Ryan a part of Sue’s team were over there right now already this week evaluating that.
Ryan Daniels - William Blair
Okay. And when you talk about productivity of the workforce over in India, do you mean getting up your standards for kind of what you currently see in your 19% over in India? Because I assume there's some deviation between your US workforce, be it cultural or them being English as a second language, that they're naturally less productive. So I assume you're kind of referring to getting them up to your Indian corporate standards versus US.
Susan McGrogan
I believe at the end of day overtime there should be no difference in the Indian transcription versus the US based however there are some colloquialisms and the - just naming conventions and things difficult time list. However there are less productive but we feel there are less productive generally about 50% of what a domestic worker can do. But editing we have seen gains, significant gains from our current vendors and we actually get a lower cost from our vendors so we are going to move them into that model.
Ryan Daniels - William Blair
And is there any thought about moving away from your current vendors? If you've got excess capacity why not move away from third party and put it in house if you will? Or is that not an option?
Susan McGrogan
We really value our vendors and actually they have been…there is no plan to change away from our vendor. We feel a blended model there can work very well.
Larry Gerdes
We actually probably looked at some of our vendor partners over their support and open the evaluation but we need all the capacity we can get.
Lance Cornell
Heartland actually uses a couple of third party vendors in India just like Transcend does so we will continue to use that model. It’s also complicated by the fact that some of our vendors work on certain specific platform and so it may not be efficient to ask the Heartland workforce to pickup a entry platform. Let them stay focused on the GEMSTAR platform primarily.
Ryan Daniels - William Blair
Okay, that makes sense. And then maybe two more quicker ones. This is a little nitpicky, but Lance, in the quarter, it looked like there was a stock comp adjustment year to date of $667,000 and last quarter it was $445,000. Was that just the $230,000 difference sequentially, was that just normal stock comp in the period or was that another catch-up from prior year period?
Lance Cornell
Actually there was no stock comp adjustment in the quarter, the $676,000 the prior quarter and I think the two numbers.
Ryan Daniels - William Blair
I think you had $445,000 in Q2 reported and then in this report it's $676,000.
Lance Cornell
It was about $440,000 in the second quarter but we also made an adjustment to Q1 of $230,000 so that’s the $676,000 total.
Ryan Daniels - William Blair
Okay. So the core earnings this quarter were actually even a little bit stronger than it looks I guess is the punchline.
Lance Cornell
Yes, actually this is a very, very clean quarter it doesn’t have anything in there that’s very unusual.
Ryan Daniels - William Blair
Okay, perfect, perfect. And then last one and I'll hop off. Just how much room do you continue to see in kind of the core business to drive margin? You guys have done a great job year to date. I assume a lot of that's converting MDSI over to BeyondTXT and driving more offshore and driving more speech rec. Do you still see a lot there? Have you kind of come to maximum levels or you're pretty comfortable with where the core business is running today.
Susan McGrogan
As a part of that question, the answer is we haven’t really migrated many base and that’s we actually it other ways to increase the margins for efficiency but base scribe is still there to be migrated over time. We have to do whatever the customers are happy with and it’s their pay. Look they generate the work on our pay so we have do whatever we have to do to keep them happy. And so we’ve decided to really put that on the backburner I wouldn’t say but it just something that there always going to be there for us but there is a definite increase there. and I have another for your last question about Indian partners, our current vendor do about 275 lines an hour, Heartland is below an 150 lines an hour so that kind of gives you more flavor on the line for hour with our vendors versus the employees.
Ryan Daniels - William Blair
Okay, that's all great color. Thanks a lot and congrats again.
Operator
Your next question is from Brad Hoover with Sidoti & Company.
Brad Hoover - Sidoti & Company
Hi, good morning. Just going back to Heartland, I know you touched on this a little bit before, but comparing your Indian service providers with those of Heartland, how much extra capacity would you say Heartland gives you on the offshore front versus what you currently have with your providers before this acquisition?
Susan McGrogan
Right now we have to get over there kind of right size it and see it what’s going on. They have a lot of layers touch points we call them to the document in terms of QA, Editors and then transcriptionist so they may have capability but it may not be the capacity I don’t say that we want but we have to look they may touching the documents too many times. So we have to go over and look just kind of look at the organization as a whole and understand what the capacity is because we need to do it the right way and not build capacity the same way and we aren’t as profitable as some of our vendors for example.
Lance Cornell
Another way to look at that, there is definitely empty seats in the six centers at certain times during the day, Heartland because they were 100% offshore had to work very hard to staff their night shift which is the day time in the US when the volume are the highest. With Transcend the need to staff the night shift become less crucial and they can focus on staffing the day shift so there is going to some of those capacity changes that go on to as we integrate the two companies.
Brad Hoover - Sidoti & Company
Okay, great, thanks. And then on the new sales, I guess lower than expected numbers the last couple quarters in your mind. How much of that could you contribute to hospitals focusing on clinical software versus maybe just own internal sales efforts and getting a new head of sales in front of Heartland?
Susan McGrogan
I will say what I’ve seen in the industry is that people with all the healthcare regulation there is a lot of focus on healthcare IT and hospitals there are not making changes generally so it’s good for us and bad for us. We are seeing less decision due to the IT resources necessary for switching so I think that’s part of it. I also think so of it some of it is not fielding the best team. The leadership we’ve had I do want to say though our best sales guy continue to be Jeff McKee and he's been with year-over-year and we really appreciate all the work we have done. So when I talk about the sales team it’s not I want to make it clearly Jeff McKee is doing a wonderful job. We just didn’t have I think the sale leadership that’s heard of and we are definitely on the right track.
Brad Hoover - Sidoti & Company
Okay, great. And then just lastly, just curious your thoughts on the competitive landscape. Obviously, MedQuest getting (inaudible) six months ago was a change and more recently Nuance has bought a couple service providers. Just curious to kind of hear your comments on the industry and the degree of competition for new business and what changes you may be seeing there? Thanks, guys.
Larry Gerdes
I don’t think the position has changed that much. We still have our wins and we hope to continue to win more I think MedQuest has done a good job of trying to hold down to their customer base and the spear of customers as well. We’ve said the last two or three quarters that the competition has been relative intense but I haven’t seen a significant change in that I actually think that probably if anything Transcend is getting recognized more and more for our size and what we deliver to the market so I think we are starting to see ourselves involved in more decision. Sue do you agree with that?
Susan McGrogan
Yes definitely.
Lance Cornell
I do think we will see an increased focus on the service side of the business from Nuance in 2011 as a result of what they recently so we know that’s going to be a part of their offering of course the customers perspective they perceived Nuance primarily the technology provider as opposed to a service provider.
Brad Hoover - Sidoti & Company
Thanks for the comment guys.
Operator
Your next question is from Stephanie Haggerty from Register Financial.
Stephanie Haggerty - Register Financial
Another nice quarter I had two questions. One is, you haven't talked at all in this Heartland discussion about the fact that they are a major supplier to HCA, which of course we all know is one of the largest hospital chains in the United States. Could you talk about the kind of business that they had with HCA and how much of it relative to their total?
Susan McGrogan
Heartland had their business…hi Stephanie how you are doing? Heartland has a great relationship with HCA and that was one of the attractive points for us because we don’t have much traction in sale that was one of the deals we all kind of embarked years ago one of the only possible lost in a while. And there is competition within HCA and as you know we recently got on the HPG list the HealthTrust Purchasing Group which HCA goes by they really look to that list. So I actually have a meeting in Nashville tomorrow with HCA and we are going to discuss the go forward strategy with regard to Heartland and Transcend.
Lance Cornell
HCA to answer your other question represents little over half of Heartland total revenue right now. We are excited that it gives an nice presence in HCA something we were planning to grow overtime regardless with HealthTrust Purchasing Group agreement that Sue mentioned. This just gives us a little bit of head start to be able to do that.
Stephanie Haggerty - Register Financial
It's a great head start and I wish you luck with this. I wanted to ask you a question too about the capitalization of the software costs. Where do we expect that to go and at what point does it start getting written off?
Lance Cornell
Once we go generally available on Encore which will be around just planned on it being right around the first of the year we would start depreciating what we have capitalized for the platform through that point. And part of this is still to be determined probably have a $7 million and I’m sure…I’m sorry a seven year life. And there will be ongoing cost as we continue to roll out new pieces to that platform throughout 2011 and there will be other things that will be capitalizing I’m sure in 2011 but we will start the deprecation and bulk of it in the earlier 2011.
Stephanie Haggerty - Register Financial
Okay. Well, I think you've got a great challenge ahead of you guys, but you've shown that you certainly have the ability to move the margin. Good luck.
Operator
Your next question is from Frank DiLorenzo from Singular Research
Frank DiLorenzo - Singular Research
Good morning. Thanks for my question. I have a question, just going back, you had said there's going to be an approximate initial 2% drop in margins to the Heartland acquisition. Is that going to occur fully in the fourth quarter here or in the first quarter of 2011?
Lance Cornell
The fourth quarter you are going to see their contribution to this roughly neutral to earnings related to the transaction cost out side of the transaction cost you would just take the two point impact and it would be in effect for roughly two thirds of the quarter. So it will be a little less than the full impact.
Frank DiLorenzo - Singular Research
Okay, and then going forward, just looking at your margins here for the third quarter, is that something you have a target to get back to say over the next 12 to 18 months? I'm assuming long-term you'd like to exceed it, but you sort of have an internal goal where once you have the acquisition fully in hand to get your margins back to where you are this quarter?
Lance Cornell
You said that correctly.
Larry Gerdes
We actually we want to be conservative. We probably surprised ourselves over the efforts we have had over the last two quarters. We did this response with the fact that the base scribe migration were going to go a little slower than we expected. So it will take us a some time but our team continue to amaze us with their ability to drive cost.
Frank DiLorenzo - Singular Research
Just one other question on the Heartland. Have you disclosed the growth rate they've been experiencing over the past one, past three years? Is it similar to yours, below that?
Lance Cornell
Actually we haven’t disclose but I can just tell you in general but their revenue is actually down because they lost a pretty large division of HCA back and Sue eluded to that on the same time we lost of couple of hospital. They lost on as well so they have seen some declines in revenue primarily related to that.
Frank DiLorenzo - Singular Research
Okay, and as far as your recent agreements with HealthTrust and Child Health Corporation, you talked on it slightly, but what type of traction are you seeing there as far as actually getting real results, winning some new business going forward?
Susan McGrogan
We are seeing a lot of (inaudible) we just recently did a web air which was attended by lot of their members we signed a relatively large contract right after the quarter close third quarter close. It’s afterward and we will be implementing in early February and we are real excited about that because the premier partner and we feel there are going to help us getting into other facilities. With regard to HPG we’ve focused on sending out a lot of marketing materials to the HPG purchasing group. We have established relationship with the flocks at HPG and we are hoping that our HPG partnership along with Heartlands will help us get into more of the HCA division and play in those bigger divisional deals. Not only with HCA but with other larger group.
Larry Gerdes
And the other thing I would say because we are going to offer the market place a platform in addition to our service offering that places to the flexibility that some of this larger systems need among their hospitals because then the hospital are left with the choice of making a decision on do they want to manage their own platform or they want us to do the entire service offering while still having that provide benchmark through the current entire system through some of our data initiatives because they all on the platform. I’m particularly excited about what flexibility that offers the larger systems.
Operator
Your next question is from Lenny Dunn with Freedom Investors.
Lenny Dunn - Freedom Investors
I was very impressed with the margin improvement. When you look at the drop you're anticipating in overall margins, to my mind it should be looked at as if you maintain the margins on your original business and you look at the Heartland acquisition as an add-on business, yes, it does bring the overall down, but it it's still additive to earnings, which is what I look at. Now a couple of things I've noticed always that our fourth quarter is our strongest quarter because the snowbirds come back to Florida, etcetera and usually the third quarter is weak there and we still have, even though it's not as large percentage wise as it used to be, a pretty good-sized Florida presence. So we should be able to anticipate both better sales and earnings in the fourth quarter all things being equal. Would that be too much of a leap of faith?
Susan McGrogan
No I mean I agree, I think fourth quarter stock has been really strong, we are looking forward to a real strong fourth quarter.
Lenny Dunn - Freedom Investors
Okay. And with the Heartland acquisition, it looks to me to be a very good fit because they were always number two and you were number one in the class ratings the last half a dozen years, I mean if you average it out. So you are getting high quality even if the efficiency needs to be worked on a little. That's also accurate, right?
Susan McGrogan
Actually that’s interesting because I never focused on Heartland for a long time and we in the some saying that we had a couple of HMA help manage their hospital when they first opened and I knew their sales team. Cathy Clemons now work for us. I have always had a respect for Heartland so I was really excited about this deal. There were some I had to do some convincing to Lance, to Larry but I really felt that operationally and the fit was so good and so I told them we will make it work. And I think it’s good, they have a great combination, great base and there were some things that happened over the last several years, last year even that hurt them and their margins. But I really do think that we are going…we got a lot of opportunity there
Lenny Dunn - Freedom Investors
The last thing is on the sales front. The size of the Company and the size of the sales force that you need to make it work doesn't it necessarily require somebody that's officially a sales manager. You really just have to get the right profiles in there, because if you had four or five Jeff McKee's we'd have all the sales we needed.
Susan McGrogan
And the operational on what I mentioned during the call was that the operational perspective and sales was still in this industry. People want to buy from who they know and people that know their business and are going to help them. And with the Heartland sales people there model was more of they would go in and help customers as well. So they have a very, very strong operational knowledge as well as a sales knowledge. And as you know sales is mostly about relationship and they’ve got some great relationship. I feel that we have a great team now I had to make some changes to the sales organization this quarter. They were difficult but I think they were necessary and we now have I think we are fielding the best team.
Lenny Dunn - Freedom Investors
With any sales organization you have to keep trying different people until you get the right fit. But when you get the Jeff McKee's of the world that's all you need. You don't need somebody with a high-powered resume you have need somebody who knows how to develop relationships and a self-starter and just goes out there and gets the business.
Larry Gerdes
And other thing we have not really done as good a job is we would have liked and we are getting better and that is selling into the larger system wide decision and the larger relationship and Heartland made that part of our basic sales strategy for the last several years so they a little experienced with it than we do.
Lenny Dunn - Freedom Investors
They may actually bring things to the table just as Sue did when she was acquired. Great quarter, very impressive.
Operator
(Operator Instructions) your next question is from Sasha Kostadinov with Shaker Investments
Sasha Kostadinov - Shaker Investments
Thank you very much, you talk about the 200 basis point impact on gross margin, is that versus the margin that you were able to achieve this quarter or the average over the last four quarters?
Lance Cornell
It’s correct, it’s oppose the current margins to this quarter.
Sasha Kostadinov - Shaker Investments
That's excellent. Okay. And what kind of an impact to your G&A expenses are you bringing on with the Heartland acquisition?
Lance Cornell
That’s a good question, that partially depends on how we classify some of the expenses over in India and we consider those G&A or cost of operations to the extend that we strip out some of their non direct cost and put those in G&A. there will be some impact there but it’s really not going to be very heavy typically once we do the initial integration. You can look at this companies as running pretty much at the gross margin level in whatever you are doing there is dropping to the bottom line. I couldn’t give you an exact percentage of what we end up as G&A versus cost it’s really still have work to do on how we allocate the cost.
Sasha Kostadinov - Shaker Investments
That’s helpful, what was your capital expenditure in the quarter?
Lance Cornell
About 1.4 million
Sasha Kostadinov - Shaker Investments
And what are the plans for the full year?
Lance Cornell
The fourth quarter will be comparable to the third quarter
Sasha Kostadinov - Shaker Investments
Thank you very much, excellent quarter.
Operator
At this time there are no further question I’ll turn the call back to management for further remarks
Larry Gerdes
This is Larry, we again appreciate to support everybody given Transcend. Our stock prices strengthen over the last several weeks which we have felt good about. I can’t tell how excited we are about both the Transcend team and the strength that brings to the table but also the integration effort that Sue has led with her team in the few short days we’ve had with Heartland. We’ve said in the past and we continue we feel with the three new initiatives that we are bringing to the marketplace currently and over the next quarter we have broaden our market by almost double because we now can provide a platform in addition to our services and we have always felt obligation to use our cash prudently but to use our cash in our acquisition. So I know some of the shareholders have been a little frustrated in fact when we thought we would make an acquisition in the first three quarter it took us a little longer than we thought. And of course that hasn’t used the bulk of our checks so we certainly have plenty of flexibility going forward. But the people of Transcend have really risen to the occasion this year. This margin initiative that you have seen Sue and Lance lead over the last two quarters is meaningful as the most of the investors know and it will continue. So in conclusion I just want to thank the Transcend team and our new Heartland as long as our investors we’ve got a exciting future and we expect to play a meaningful role in this road toward more effective clinical documentation. So thanks again and we look forward to our next call.
Operator
This completes today’s conference 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!