ePlus inc (PLUS) 2005 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the ePlus conference call.. At this time, all lines have been placed on a listen-only mode, and the floor will be open for questions following today's presentation. It is now my pleasure to turn the floor over to Mr. Kleyton Parkhurst. Sir, the floor is yours.

Thank you, Matt. Good morning. This is Kley Parkhurst, Senior Vice President of ePlus, and I would like to welcome you to our conference call to discuss our financial results for the period ended December 31st 2004. The restated results for the quarter ended September 30, 2004, and the patent infringement settlement was announced yesterday.

The conference call this morning will include prepared remarks, followed by questions-and-answers period. Joining me today is Phil Norton, the Chairman, Chief Executive Officer, and President of ePlus Inc., Ken Farber, President of ePlus Systems, and Steven Mancarini, Senior Vice President and Chief Financial Officer of ePlus Inc.

Before I begin the formal presentation, let me 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. We refer you to the disclosure contained in our annual report on Form 10-K for the year ended March 31, 2004, under the headings Risk Factors and Factors That May Affect Future Operating Results and, when filed, in our quarterly report on form 10-Q/A for the quarter ended September 30, 2004 and the December 31, 2004 Form 10-Q, under the heading Factors That May Affect Future Operating Results for a description of these risks and uncertainties.

All information discussed during this conference call is as of February 15, 2005. ePlus Inc. undertakes no duty to update this information. More information about potential factors that could affect ePlus Inc's business and financial results is included on the Company's annual report on Form 10-K for the fiscal year ended March 31, 2004 and, when filed, the quarterly report on form 10-Q/A for the quarter ended September 30, 2004 and the quarterly report on form 10-Q for the quarter ended December 31, 2004 when filed -- including, without limitation, under the captions Risk Factors, Management's Discussion, and Analysis of Financial Conditions and Results of Operations.

A live webcast of this call, playback, and audio playback are available. Please refer to our press release for e-mail -- info@ePlus.com -- or go to our website, www.ePlus.com, for more information. It is my pleasure to introduce Phil Norton, the Chairman, CEO, and President of ePlus Inc. Phil?

Thank you for joining us. On today's call, we're going to discuss the three news items we released yesterday -- the September 4th restatement, our third-quarter earnings, and the settlement of our patent infringement litigation. To discuss the financial restatement, I would like to turn the call over to Steve Mancarini, our CFO. Steve?

Thank you, Phil. Yesterday, we announced the financial restatement for our second quarter, ended September 30, 2004. The net effect of the restatement was to reduce revenues by 743,000, lower earnings by 439,000, and to reduce earnings by share -- per share by 5 cents to 22 cents fully diluted from 27 cents. The restatement was the result of a human error, relating to the booking of a complicated lease financing transaction. In this transaction, we inadvertently recorded a cash receipt as income, rather than extinguishing a previously reported notes receivable. The error was not discovered during our normal periodic internal review. (indiscernible) uncovered by internal or external reviews during the preparation of the September 10-Q. However, we made the discovery during the preparation of our December 10-Q, and we're working at getting an amended form 10-Q/A prepared as quickly as possible.

To safeguard against future occurrences of errors related to this particular type of lease financing arrangement, we will discontinue this type of transaction. We currently only have two lease transactions of this particular type in our entire portfolio, which consists of almost 3000 individual lease schedules. I would be happy to answer any questions about the restatement at the end of the call. Phil?

Yesterday -- yesterday we announced earnings for the quarter ended December 31, 2004 of $1,600,000 or 38 percent less than the same quarter in the prior year. These are disappointing results but are primarily due to cyclicality in our federal financing business and higher costs in certain categories. Revenues in our leasing company were lower than the prior year, especially in the federal government sector. Our federal government financing business provides lease financing to large government prime contractors and subcontractors. It is a transaction-driven business and can be subject to significant fluctuations quarter to quarter.

In addition to these normal fluctuations, the Fed's first quarter is October to December, which can be more volatile than others. Given the election, which adds uncertainty to the quarter, we weren't able to produce the revenues that we had in the prior year's quarter. This is a high-margin business, which creates net fee income. So any loss of revenues makes a significant impact on earnings. Revenues and net margins have declined in the commercial leasing business, due to lower interest rates and a more competitive market. In addition, over the past few quarters, companies have begun to replace older equipment with new equipment, which has helped our technology sales business but lowered the gains we have been realizing from our lease portfolio. Therefore, in the December quarter, our lease revenues declined about 1.7 million, while direct lease costs declined only $150,000. Fee and other income, which is partially attributable to the federal sector, declined $800,000. So, the gross margin associated with leasing declined more than $2 million.

While most of this is due to transactional variability in the federal sector, we would expect that commercial business will continue to be flat. Despite this reduction, we remain committed to the leasing business. It continues to be a great platform for cross selling our software, technology products, and advanced technology solutions. The process automation that we provide helps companies comply with Sarbanes-Oxley, reduce overhead and streamline processes. This business gives us the unique ability to get involved in an underserved part of the supply chain and compete against software only vendors, managing payables, facilitating electronic payments, and managing assets over their durable life.

Finally, it is countercyclical, often producing better results in a recessionary environment. It is a great balance for our other businesses.

Our other two business units produced good results for the quarter. Our technology fulfillment and advanced solutions business continues to flourish. We experienced and 85-percent increase in total revenues to $149 million, driven by 111-percent increase in sales of product, the acquisition of Manchester, as measured by sustained revenues, customer retention, and the quality of people we hired is terrific. We continue to gain advanced vendor certifications and are gaining visibility every day with key vendors, such as HP, Cisco, and Microsoft, who are bringing us into customers and showcasing our solutions at jointly-sponsored seminars.

In the software business, we held our first customer summit, which is a great foundation for future collaboration between ePlus and its customers. We signed 12 new agreements, including 5 new customers, one of which was our first Spend Plus (ph) visual engine deal with a Fortune 500 company, 3 upgrades and 4 renewals. We announced 5 new or upgraded software solutions, including new versions of Content+, Procure+ and Content+ supplier portal, which is a super tool for supplier self-management and supplier enablement.

Any discussion of our software business leads us to the most positive recent development, which is the 37-million all-cash settlement of our patent infringement lawsuit. I'd like to introduce Ken Farber, President of the ePlus systems, of our software Company, to speak about the settlement. Ken?

Thank you, Phil, and good morning. I'll describe the details of the settlement in a moment, but let me first discuss a few of the intangible benefits of this court case and our patents as it impacts our software business.

As you know, on May 6, 2004, we filed a lawsuit against the software vendor in the United States District Court for the Eastern District of Virginia. On February 7, 2005, the jury found that this vendor had willfully infringed 3 ePlus software patents relating to electronic procurement systems. The verdict found that all ePlus patent claims tried in court were valid and that the defendants had willfully infringed in every instance. Prior to the commencement of the damages phase of the trial, we entered into a settlement and licensing agreement to settle our dispute. The ePlus patents at issue were developed during e-commerce's infancy in '94 and described inventions involving electronic procurement. We were an early innovator in the field, and we continue to innovate.

It's important to realize that of the 20 or so people who worked for our predecessor at the time the patents were filed, more than 15 work for ePlus today. We were and we continue to be a software innovator whose focus is delivering the best solutions to our customers. Our customers have always known this. Now, the broader market knows.

ePlus continues to be an innovator in our software and business process area, bringing new ideas to market to meet the needs of our customers. We actively seek to protect our innovation, and we have many other patent applications filed and pending -- although our primary focus is running the profitable businesses, we will defend our intellectual property.

The validity of the 3 patents that were infringed were affirmed in court. To streamline the legal process, the court ordered the trial on 8 representative claims, although we believe that all 79 claims and all three patents were infringed. The inventions are broad and well-defined and, at the same time, cover the following functionalities, which include but are not limited to performing electronic searches, selections, and comparisons, as well as reviewing items of multiple supplier catalogs. It provides functionality to find equivalent items and suitable replacements. System generates purchase orders for multiple vendors and electronically checks inventory. The terms of the settlement were in the best interest of ePlus and our customer.

Arriba will pay ePlus $37 million in cash, to be paid in 3 installments prior to March 31, 2005. In addition, each party has cross-licensed the other's patent applications and foreign patents, currently owned at settlement, required 3 years thereafter from the date of the settlement.

I'd like to explain some key elements of the settlement and why settlement on these terms were in the best interest of ePlus. ePlus is in the software business. We strive to provide the best Enterprise Cost Management solutions to our customers, to develop world-class software that meets the real needs at the right value. We have some customers in common with the defendant. We have no desire to cause any disruption to our customers, their customers, or our mutual customers. A fair settlement is the best solution for our customers.

Second, getting cash as soon as possible is the best way to mitigate credit risks and avoid future problems with collecting ongoing royalties. If the other party fails to make a payment within 24 hours of its due date, our license to them is revoked, and there is no refund. Third, settlement now avoids lengthy appeals and related significant future legal expenses. Fourth, the cross license agreement enables both Companies to continue to innovate without the threat of future litigation. And fifth, the license agreement to our patents is not assignable without future consideration. I would be happy to take any questions on this matter at the end of the call. Phil?

(inaudible).

Excuse me, gentlemen, would you like to take questions?

Sorry. You're on again.

0h. Let me finish. Sorry. In summary, we believe that resolving this matter by settlement eliminated the inevitable time and expense of appeals. The settlement is good for both Companies, customers, and a good value for ePlus shareholders. It has allowed us to put this case behind us and focus on our core business. The process has raised the visibility of ePlus in the market and may lead to more sales opportunities in the future. We would be happy to answer any questions.

(Operator Instructions). Chris Penny, Friedman, Billings Ramsey & Co.

Phil Norton, a question for you with your comments on the leases side. What's the direction? Should we be seeing leases increase or decrease on the balance sheet over the next year?

Well, if you really look at the revenues, for the last couple of years, they have been relatively flat. We've seen consolidation in the business. GAPX sold their technology lease portfolio to the CIT, and one of the reasons is that they had a 30-percent drop, I believe, in their originations. We've been able to maintain a flat -- relatively flat revenues and originations. We believe that it will stay that way for a period of time. I think the business has continued to help us sell other products and services, and we are focusing more on making sure that we have better profitability in the future. We were somewhat surprised that the government business dropped off that much last quarter.

Alright. And now that we're halfway through this quarter, has there been any pickup in the government business?

Well, the government business has picked up as far as opportunities. The way that our business works in that marketplace is it's mostly driven by large contractors and vendors, and most of their sales, unfortunately, are driven towards the end of their quarter. So, their focus in driving the conclusion of this business usually occurs next month. So, the pipeline of opportunities is, we believe, significant, but it really depends a lot on the vendors we're dealing with and the government deciding to lease rather than purchase. So, our opportunities are very good, but we really don't find out until the last 2 to 3 weeks of the quarter -- whether or not we will be successful in having a big quarter -- or as we did last quarter, less than desirable.

In terms of the reselling side of the house. What do you anticipate for margins -- gross margins in that business over the next year?

Well, the margins, as we look in the past, have been relatively consistent, but last quarter, we saw the margins slide a little bit. I believe there was an announcement by Dell that they felt there was going to be some reduction in sales or in margin in the technology business. We haven't seen that yet, but I think they have a better view to the overall market than we do. So, I would assume that it's going to go down a little bit, as there's a lot of competition for gaining customer share.

And then just lastly, as it relates to your settlement -- while 1, with the cash that you're going to have, I guess net of tax -- somewhere around 20 or 22 million gives you a pretty good cash balance. What do you anticipate doing with the cash?

We have a couple of things that we have to look at and plan and go over with our Board. We have some potential acquisitions that we think would enhance the business. We have additional people that we need to add from a sales standpoint, and we will go through that in the next 60 to 90 days and decide what the board's advice and guidance -- what the best thing to do with that cash is.

I guess -- so you are considering several things -- one being acquisitions -- more stock buyback?

Right now, we have a stock buyback planned that has been approved, and we want to look at the relative -- what our cash balances are today --- what our needs are. And we would assume that we would have the opportunity to buy some stock back, but that's after we have completed the review of what our requirements going forward for acquisitions are -- or for growth in the Company.

Okay. And then in terms of the software itself, what -- what were the total software sales in the quarter?

We haven't broken that out. And so, I really haven't -- I can't discuss that.

So -- but would this -- I'm just trying to get a sense of -- you've gone through and protected some pads in your software. The majority of revenue right now is in leasing and reselling. Do you anticipate, over the next year or 2 years or even the next 6 months, that we might be able to see a good uptick in software sales?

Well, we feel very strong about the fact that we -- as we said, we have 12 customers who we -- either are new customers or upgrades or license renewals. As we look at the business, we are very competitive with our product with anyone in the marketplace. I think this lawsuit and settlement does reinforce the fact that we have patented technology that's leading edge and that we believe it puts us at the forefront. It will give us more exposure and give us more sales opportunities on RFPs. It will give us the ability to have better name recognition, and it will have branded ePlus as a player in the software business. So, I would hope we can take advantage of those opportunities and make real in-roads into all of the software businesses that we are in today.

(Operator Instructions). David Rosen, Whitney.

I'm sorry. I got on the call a little bit late. Just to focus on the royalty stream that you would otherwise -- that you'd be getting from Arriba -- is that -- am I looking at that properly? Are you going to have net of your cross-licenses royalty stream, and if so, can you try and articulate -- if you've done so already I apologize, but can you try and articulate what that would look like on a forward-looking basis?

Ken, do you want to take that?

Sure. Absolutely. The settlement agreement that we entered into is a licensing settlement agreement. So it's a fully paid-up license for the term that the patents are enforced. So, rather than going into the volatility of a royalty rate, we had decided that the best way to do this would be to do it as a license fee going forward, fully paid up.

What I am actually a little bit surprised by is -- I guess the -- you had made a request for somewhere -- more than -- the midpoint would be more than double what you received, and you knew that could be treble damages. I'm just -- and I understand that it's better -- something in the bag than just waiting for something on the come. But it seemed to me that the opportunity -- when you already had the jury verdict -- you're giving up a lot to get this and you're going to go to court in a couple of days. I'm surprised that you took this deal, and I would love to hear your comments on that. And the second thing I guess is -- well maybe I will have you answer that and then I have one more follow-up question.

Sure. Phil, would you like me to take that?

Yes, please.

Okay. The thing to understand is that we were certainly willing to go forward if we had to, and there was a sincere and strong interest on the part of the defendant to settle the case -- probably because of the things that you had mentioned in terms of treble damages -- the possibility of an injunction and the like. We didn't settle out of weakness. We believe we settled out of strength, and it was in the best interest for all parties involved to get this done. We felt that it was tried in one of the best courts in the land. The jury heard the decision. It was unanimous, and every single claim was upheld. The verdict indicated willful infringement.

But you could treble damages and you could do these things and then go for injunctions and have this thing go on for a year and a half. We have mutual customers. We have to continue doing business with them. We didn't want to hold that as ransom, and we felt that in a position of strength, we had continued to work with the defendant. And they continued to provide offers to us on the table, and we believe that this offer was one that was negotiated in strength and was the best for all parties involved. We can move on, and we can concentrate now on our core business.

Do you believe that there are other companies that infringe upon these patents, and are you going to pursue that avenue?

Well, again, we're looking at concentrating on our core business. We're happy that the litigation is done with. And both parties will get on with their work and innovation and creating new solutions and selling to the marketplace. In terms of other infringers that may be out there, it's not anything that today we are out there pursuing. If something does come to our attention, then certainly, we will protect our patents, as we have with Arriba, and we will use the fullest extent of the law to do so. But we're not actively going out there to pursue further litigation at this time.

Ken, one thing I think I can add there -- we are currently reviewing the possibility of establishing an official licensing program. We think that there is significant opportunity for that, and we are reviewing that at the present time.

Okay. So, on a forward-looking basis, if I look that your numbers -- and it looked like this quarter, your professional fees were actually a lot lower than they were in the previous quarter. Should I -- would I look at this on a forward-looking basis and say that professional fees will drop down to virtually nil?

Do you mean as far as legal expenses or -.

Yes. I mean what else is in that professional line?

Well, we can't break that out, but I think we have said in the past that our legal fees for this were extremely high, and they should drop down to a very low number.

What were your legal fees for this quarter?

Audible bauble (inaudible -- whispering)

We haven't broken that out, but I think in previous quarter, we -- if you go back on that statement, we had outlined approximately what the costs were in that quarter.

I guess the one thing that I'm kind of a little bit -- why do you not disclose -- this is not something that is of a competitive nature. Why wouldn't you disclose, and also, why are you hesitant to disclose your software sales? I figure that's not a competitive issue. That's maybe something that as investors we should hear.

Well, we have not broken out in the past, and, therefore, we -- from NASD standpoint -- can't break them out in a call. We're looking at doing that going forward, but we haven't decided to do that yet as a percentage of our revenues.

Okay. That would be very helpful for us to actually understand what your assets are and what the value of the Company is.

Marvin Slayton, Seaside Consulting.

The prior caller answered my question regarding the possibility for additional sales -- or additional pursuit of the infringers. Are you going to send out a notice to possible infringers? -- or you said an official licensing program, Phil. Are you going to actually put other e-commerce vendors on notice? -- because from the sounds of the -- I think you said there were 79 or 78 items and 8 primary items that Arriba had breached on -- that they were fairly broad-based and pretty applicable to e-commerce in general. I wonder what Ken thinks about that idea?

Ken, could you take that?

Yes. Certainly. In terms of providing notice -- I'm certainly not an attorney -- but the -- we're not going to be sending out letters if that's the question. I mean, certainly, there's things that you do in terms of patent registrations, and when you are awarded patents, you mark your products. You give notice. You put out press releases. You put the patent numbers on websites -- on different types of material. And by law, that's what is considered giving notice. So, Phil indicated that we are looking at various things that we may consider in the future, in terms of potential licensing programs, but putting people on notice without any merit to -- do they infringe or not infringe -- is just something that we're not prepared to do and nor are we thinking about doing at this juncture.

(Operator Instructions). Dan Hooper (ph), Peninsula Capital Management.

Why would anyone pay you a licensing fee if Arriba doesn't have to pay you a licensing fee, and they were found guilty?

I'm sorry. Can you repeat that question?

Why is anyone going to sign up for a licensing fee if the Company that was found guilty of infringing your patent doesn't have to pay a licensing fee going forward.

Okay. Well, let me just clarify for you what the jury had found. The jury had found that the defendant in this case, Arriba, was infringing -- was willfully infringing the patents, and we settled the case before damages were assessed by the court. The settlement agreement is a licensing fee. It gives them the right to utilize the methods of the patent for the term of the patent. So, in effect, it is a licensing fee. The licensing fee that we may look into is providing others that are interested in the potential of licensing the same methods and to receive the same protection. Again, it would be a licensing fee to allow them to use the methods going forward as well.

Right. But presumably, you would have wanted something for the years they have been violating your patents. So, it doesn't seem like you've got much for the business going forward.

Business going forward fluctuates. And as I said, we felt that we negotiated in a position of strength. There's a lot of different ways that you can structure a license fee, and for the reasons that are described -- receiving the $37 million in cash this quarter without having to worry about royalties and how well they do or how well they might not do -- we wanted to end the litigation on both sides and be done with it. And as far as patents and litigation is concerned, we think that we received a good result from this license agreement.

So you don't think that if it went to the damages part of the trial, you would've gotten more?

That's speculation -- something I can't speculate. Everybody is aware of treble damages and things that could have occurred, but it could have potentially been so unrealistic and it could have been injunctions that were stayed and appeals that were made -- that we could be in the same situation 2 years ago and not ever -- 2 years from now, not received anything and, at the same time, not knowing what the condition financially would be of the defendant at that time. So, it was better to take the course of action we decided to take at this juncture.

Gentleman, at this time, there appear to be no further questions.

Thank you, Matt. We'll be here for the remainder of the day if anyone has any follow-up on questions. Thank you.

Thank you. This does conclude today's teleconference.