ePlus inc (PLUS) 2004 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the ePlus quarterly earnings conference call. (OPERATOR INSTRUCTIONS). It is now my pleasure to turn the floor over to your host, Mr. Kley Parkhurst. Sir, you may begin.

Good morning. This is Kley Parkhurst, Senior Vice President of ePlus. I would like to welcome you to our conference call this morning to discuss our June 30, 2004, which is the first quarter of 2005, financial results.

The conference call this morning will include prepared remarks followed by a Q&A period. Joining me today is Phil Norton, the Chairman and Chief Executive Officer and President of ePlus, and Steve Mencarini. Senior Vice President and Chief Financial Officer.

Before we begin the formal presentation, I would like to read our Safe Harbor statement. The statements made during this call which are not historical facts may be deemed to contain forward-looking statements under the Private Securities Litigation Reform Act of 1995. Actual results may vary due to general economic conditions and other risks and uncertainties, including those risks and uncertainties detailed in our Securities and Exchange Commission filings.

All information discussed during this conference call is as of August 18, 2004. EPlus Inc. undertakes no duty to update this information. We refer you to the disclosure contained in our annual report on Form 10-K for the year ended March 31st, 2004 under the headings "Risk Factors" and "Factors That May Affect Future Operating Results" and in our quarterly report on Form 10-Q for the quarter ended June 30, 2004 under the heading "Factors That May Affect Future Operating Results" for a description of these risks and uncertainties. These filings are available at the SEC Web site, www.SEC.gov and can also be accessed via our Web site, www.eplus.com.

A live webcast of this call, playback and audio playback are available. Please refer to our press release or e-mail info at ePlus.com or go to our Web site for more information.

It is my pleasure to introduce Phil Norton, the Chairman, Chief Executive Officer and President of ePlus Inc.. Phil?

Thank you for joining us. I am pleased today to discuss our 31st consecutive quarter of profitability. The results for the quarter ending June 30, 2004, the first quarter of our new fiscal year, were in line with our expected results, and we were positively surprised by the strong growth in revenue.

First, revenues increased 34 percent to a record $106.7 million, the highest in our corporate history. This increase was driven by a 40.9 percent increase in the sales of product to $92 million. Of this increase, less than 10 percent is attributable to our acquisition of Manchester on May 28. We will be discussing the Manchester acquisition in great detail later in this call, but it is important to note that we experienced organic growth in product sales of more than 35 percent for the quarter.

We believe this is a strong indication of renewed capital spending by our customers, which is being driven primarily by the need to refresh their technology platforms after several years of underinvestment. This strong growth is a very important indicator that ePlus Enterprise Cost Management solutions keep customers coming back to ePlus and that our sales have recovered nicely. In other words, when our customers purchase, they return to purchase from ePlus to take advantage of our automated solutions and the excellent technical services and support that we offer.

The increase in revenues is more remarkable when you realize that we did almost 34 percent more revenue with a significant net decrease in headcount from the June '03 quarter to the June '04 quarter. Net of the new Manchester employees, our headcount decreased more than 10 percent, and the bulk of that decrease is directly attributable to the internal systems integration and operational convergence that we accomplished in the first half of 2003.

By centralizing purchasing and accounting in our technology sales unit, we were able to reduce the administrative overhead in the unit and as we will discuss in more details in regards to the Manchester acquisition. Acquire new customers and salespeople without adding significantly to our headcount.

Between January '03 and June of '04, we transformed ePlus technology from a collection of independent operating companies with 332 employees on March 31, 2003 to 279 employees excluding Manchester. All IT fulfillment accounting, purchasing and contract administration is performed at our Herndon headquarters. The strength of this model is demonstrated not only by our ability to handle this quarter's significant revenue growth but also in how we are able to execute acquisitions, such as the Manchester acquisition.

Manchester had approximately 230 personnel involved in the business we acquired, and we have or will employ approximately 130 former Manchester employees. We expect to hire approximately 11 people to fulfill the extra purchasing and accounting workload relating to the acquisition. On the day after the acquisitions closed, all new orders were processed through our systems, and this is the first rollout of our centralized Web-based accounting, order entry and CRM systems and acquisition. By using our software, we were able to leave behind overhead expenses that we would have had to assume historically and immediately convert customers to our systems.

As this approach proves itself, we will be able to accelerate the pace of acquisitions in this marketplace and be in a much better position to aggressively grow the business than before. If all goes as expected, we expect the Manchester acquisition alone to increase our sourcing revenues up to $100 million and to be the model for future ePlus acquisitions. Currently the monthly bookings from the Manchester assets are running slightly ahead of expectations, although it has been a short time and these historical results may not be sustainable.

Most importantly, we can say today that we have retained all of Manchester's significant customers and salesman and converted them over to the ePlus infrastructure. We have gained a major presence in New York City, Long Island and the New York Metropolitan area, which we did not have before and we have made significant inroads with historical and potential customers as we roll out our cross-selling strategy and Enterprise Cost Management platform to them. We have gained a strong foothold in Florida, which is an important market to support many of our national accounts such as VHA and Visa. We have added a location in Baltimore to better serve our customers in the Washington/Baltimore Metropolitan area.

Indeed, this is the future model for ePlus, a marriage of our historical strategy of acquiring customers and geographic locations and a renewed ability to execute using our refined operating platform, which really allows us to streamline and integrate operations immediately. Since we went public in 1996, we have acquired 10 companies, and I would expect our rate of acquisitions to increase in the future subject to finding suitable targets at the right price. We will continue to focus on buying synergistic companies in adjacent geographic territories which have desirable customers, salesmen and culture, and bring new technical certifications and resources to cross-sell our existing customers.

Getting back to the quarter's financial results, net income declined slightly from $2.4 million to $2.3 million. There are several factors for this slight decline. First, as we announced previously, we expect that the Manchester acquisition would be dilutive for a few quarters. In June we absorbed a full month's overhead but with only about two weeks of sales, and this shaved a few cents off our earnings per share.

Second, the increase in cost of Sarbanes-Oxley compliance are affecting every public company, but for companies such as ePlus, the relative impact is obviously greater. Although some of the costs such as management time, systems, etc. are not easily measured, we estimate that the actual out-of-pocket costs could be 1 to 3 cents per share every quarter.

Third, as we announced previously, we are engaged in a patent enforcement lawsuit versus Areva, and the costs per quarter are rising significantly. If the case goes to trial as expected, the costs over the next 12 months could be up to 20 cents per share.

To summarize the quarter, our gross margin dollars were higher than the prior year's quarter, but the bottom-line results were offset by the Manchester acquisition, Sarbanes-Oxley compliance costs and accelerating legal costs. Our balance sheet remains strong. Total assets and shareholders equity on June 30, 2004 were $299.7 million and $113.4 million respectively as compared to $294.2 million and $111.6 million on March 31, 2004.

Cash declined to $8.8 million at the quarter ended June 30, 2004 from $25.2 million at fiscal year-end March 31, 2004. Uses of cash included $5 million for Manchester, but the primary use was working capital to support the significant expansion of sales and the purposeful decrease in nonrecourse fundings in our lease business to increase the net interest spread in our lease portfolio. For example, in the June '03 quarter, we funded 17.7 million versus 2.9 million in June '04 quarter.

Our liquidity and ability to raise cash as needed remains strong. As of June 30, 2004, we had borrowed $500,000 of our $45 million credit facility with National City line. During the quarter, we increased our floor planning agreement with GE Capital Distribution finance from $33 to $50 million, and today we will file an 8-K announcing a seasonal capacity increase from $50 million to $75 million. Although there are many challenges for ePlus in this economy and our competitive markets, ePlus has liquidity and capital to meet them.

We believe that ePlus has the best solution set to meet the diverse needs of our customers. A number of customer wins during the quarter demonstrate the logic of combining our Enterprise Cost Management software solution with our core operating businesses. Georgia-Pacific Corporation, one of the world's largest manufacturers of paper and building products, is using ePlus Procure+ software and hosting services to improve their electronic purchasing of technology-related equipment in more than 350 locations across the United States. The ePlus system strengthens Georgia-Pacific's cost control by improving employees' ability to research products and pricing from preferred suppliers and by giving managers advanced insight into spending patterns.

Georgia-Pacific licensed the Procure+ software to replace an internal eprocurement system that had been in use for several years. Under the agreement, ePlus is responsible for hosting and managing an electronic catalog consolidating IT products from over 100 designated vendors and incorporating all contract pricing negotiated with those vendors by Georgia-Pacific.

Georgia-Pacific's selection of ePlus was based in part on ePlus' existing electronic catalogs for IT vendors included in the project, reducing both ramp-up time and deployment costs. Of course, ePlus has expensive expertise and knowledge of IT catalogs as we use them everyday in our IT fulfillment business. Norbert Ore, Group Director of Strategic Sourcing and Procurement, put it best. We purchase a lot of IT equipment every year, so we rely on our electronic procurement system to ensure contract compliance and cost control. EPlus offers a proven solution with mature functionality, sensible pricing and the ability to quickly assemble custom online catalogs and additional integrated tools. Their system is a good match for our needs.

Steve Mencarini and I would be very happy to answer any questions at this time.

(OPERATOR INSTRUCTIONS). Chris Penny, Friedman Billings Ramsey.

Good morning. A question on your customers that you have had through this cycle. Can you give us a sense -- I guess in terms of same-store sales growth type sense -- from a buying standpoint what some of those customers are doing today versus a year ago? How do you see the attitude out there for buying property right now or buying equipment?

Well, as I said in the call, what we are really seeing is twofold. There is a slight optimism that business is getting better and that they need to retool, and then there is a requirement that they keep updated to meet competition by refreshing their technology. Most of the technology that is out there is almost five years old. They have not made new investments, and I think the refresh of technology is more of a driving factor than improved economic environment. I think people are still hesitant on those things, as well as the fact that they have grown some and the economy has grown some. So there is just an inherent need of 5 or 10 percent additional expenditures.

And with the addition of Manchester, you've got a pretty big salesforce now. Is there any -- are you restructuring or changing any of these sales compensation in terms of trying to enhance more cross-sells of technology or anything else that you may be shifting in the next six months or year?

Well, I think what we're seeing is the first thing that we have learned in all of our acquisitions with Manchester is for the first few months that we try to maintain their focus onto what they did well before and what they were selling before. I think it is proven out in the sense that we have seen the sales that we were expecting from those customers. In meeting with most of the large customers, they have found that there has been no drop-off in-service, that they have been getting everything they have gotten before and a little bit more, and at the end of last month, we actually had our first training session with our new salesforce from Manchester to integrate them into selling the whole product line. We think that we have a good model now that we're starting to get significant cross-sell from all of our salesmen, and we think the results of that will be positive. We don't feel that we need to make a change in that today.

I guess my question relates to more the technology side. Aside from the reselling and the leasing, one of the parts of the model that has always been on the come is the technology where that's the highest margin product out there, and it seems to kind of come in fits and starts. What are the plans there in terms of maybe accelerating that now that you have a --?

What we had done in the last six months is we have increased the sales for the software products as far as the number of salesmen, the structure of that where we have committed salesmen in each geographical area where we have a significant number of salesmen that are on the ground and are working directly with the manager in each location to go to each one of our customers, to not only present but to sell our product set to our installed customer base, and we have a focused effort on that. Each manager is basically compensated for additionally as well as salesmen for selling the software products and for selling the products that they are not normally trained in but have a good awareness of what the product set is.

Turning to the cash, how do you expect the cash to grow in the second half? I don't know if you're going to give me an indication at what level you can (inaudible) at, but given the large amounts of working capital required in the quarter, where would we expect to see cash end up by the end of the year?

I think -- we think it is going to stay pretty flat to where it is. One of the things that we have said for the last several quarters is that we are using a significant part of our cash to fund leases where we don't go outside to other lines or to our banks to fund those on very good credits. We're going to continue to hold in that position to give us a higher earnings rate unless we see interest rates starting to move up drastically. So we would expect that our cash would stay around the $8 to $10 million level.

One last question. I guess the question on that then from stock buyback perspective, does that diminish or will that diminish the role of your stock buybacks you've had in the past?

Right now we have an approval from the board to buy up to $5 million of stock back. I believe that is the number, correct, Steve?

We have 440 -- 4.4 million left allocation.

Of the 5 million, we have 4.4 million left. I think as we go through the quarter we see that the cash is relatively flat going forward, then we will try to use that stock buyback allocation. One of the reasons that we held back was we were making the Manchester acquisition. We wanted to look through what cash was going to be needed and to make sure that our expectations of the cash flow from the acquisition and the requirements from there were going to be relatively static after we bought it. I think we have a little bit of time left before we will absolutely know that. But that is what we have been anticipating, and that is what we intend to execute as long as it stays constant.

We just increased our line with GE for the floor planning that will add stability for more liquidity.

Just one last question on the lawsuit that you mentioned. If it does go to court, I just want to clarify that you said it would be about a 20 cent hit all-in cumulatively? Is that the way I read that?

Yes. Well, that is what our expectations are based on what we have been told by our outside counsel.

And as the timeline is right now, when would you anticipate that to happen?

Well, all these things take a little bit longer than we expect, but it is over 12 to 18 months, and I think that will basically be a trial if it goes that far, goes to conclusions, appeals and all those things.

Thank you.

(OPERATOR INSTRUCTIONS). Sir, I am showing no further questions at this time.

Thank you very much.

Do you have any closing comments, sir?

No. We will be here all day if people have any follow-up questions.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.