ePlus inc (PLUS) 2006 Q2 法說會逐字稿

Good morning ladies and gentlemen. My name is Nelson and I will be your conference facilitator today. At this time, I would like to welcome everyone to the ePlus Inc. conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. (Operator Instructions). Thank you. It is now my pleasure to turn the floor over to your host, Mr. Kley Parkhurst. Sir, you may begin your conference.

Thank you, Nelson, and good morning. This is Kley Parkhurst, Senior Vice President of ePlus, and I'd like to welcome you to our conference call to discuss our second fiscal year 2006 financial results for the quarter ended September 30, 2005. The conference call this morning will include prepared remarks, followed by a questions and answer period. Joining me today is Phil Norton, the Chairman and Chief Executive Officer and President of ePlus; Steve Mencarini, Senior Vice President and Chief Financial Officer and Bruce Bowen, Executive Vice President and President of ePlus Group.

Before we begin the formal presentation, let me read our Safe Harbor statement. These statements made during this call which are not historical facts may be deemed to contain forward-looking statements within the meaning of Section 21-E of the Securities Exchange Act of 1934 under 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 call is as of November 15, 2005. 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 31, 2005, 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 September 30, 2005, 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 and www.SEC.gov and they 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@ePlus.com or go to our web site, www.ePlus.com, for more information. It is my pleasure to introduce Phil Norton. Phil?

Thank you for joining us this morning. The results for the quarter ended September 30, 2005, the second quarter of our 2006 fiscal year as compared to the same quarter last year were in-line with expectations. We continued to focus on customer retention and growth, both organic and via acquisition as reflected by the 14% increase in revenues to $174 million. This revenue figure, the largest in ePlus history, represents a 16% quarter-over-quarter sequential growth which indicates that our enterprise cost management approach resonates with customers' quarter over quarter.

This increase in revenues resulted from continued strong growth in our Technology Sales business unit. Sales of product increased 15% to $171 million, reflecting our role as a leading channel partner for Tier 1 vendors, such as Cisco and HP.

We have focused on building stronger relationships with selected manufactures and we are a go-to partner in many markets. We have continued to invest in our engineering staff to increase both sales and services revenue. Our Advanced Technology service offering provides us the opportunity to grow margins and cross-sell into our customer base and we have seen a dramatic increase in opportunities for implementing solutions such as IP telephony and data storage for both new and existing customers. We feel that the continuing focus and investment in Professional Services will create margin expansion opportunities and differentiate ePlus from the competition and lead us to our goal of increasing profitability over time.

In our Technology Sales business unit, the gross margin in sales of product declined to 9.7% this quarter from 10.7% in the prior year, but it is an increase over the 9.5% gross margin generated in the prior sequential quarter. It appears that based on our current market conditions, margins have stabilized. The lower margins reflects our willingness to compete for and retain new and existing customers. Our strategy is to grow our customer base, capture their order process and then cross-sell and up-sell Enterprise Cost Management business automation solutions, Professional Services and other ePlus products to increase future margins.

Winning and retaining these customers is critical for the future opportunities that can only be generated if you have the customer relationship and we are pleased to report that we continue to add new customers each quarter.

Our Financing Business unit increased its leased equipment portfolio to $208 million. This is a $20 million increase since our March year-end. Lease revenues were flat at $12 million and direct lease costs increased 30%. This combination of higher assets, flat revenues and higher lease costs is due to a higher mix of operating leases and also a growing portfolio which will generate a greater amount of depreciation in conjunction with lower off-lease sales of product and reduced fee income. The pretax earnings in the Financing Business unit declined 64% to $936,000, as compared to $2.6 million the prior year. The decline in revenues and earnings in this business is primarily attributable to fewer gains on financing and sales of direct finance leases. And in addition, due to the lower overall interest rates and increased competition from the likes of aggressive bank lessors, hedge funds and consolidated third-party finance companies, our new lease originations have tended to be at a lower internal rate of return than in prior years.

We are pleased that we have been able to grow our lease asset base in this competitive environment. Similar to customer retention in the Technology Sales business unit, we're investing in new customers and deals to create future opportunities for our residual realization, cross-sell and up-sell of enterprise cost management solutions and other opportunities that can only be generated by having customer relationships.

A significant factor in lower earnings this quarter was continuing lower federal government lease financing, a trend we have been discussing for several quarters. Although this activity is cyclical, we are optimistic about the future. During the quarter, we experienced a number of significant expenses which, while they cannot be characterized as one time or non-reoccurring expenses, should be of limited duration. One notable expense is the $590,000 attributable to our patent infringement lawsuit. At our current tax rate, this equates to about $0.04 last quarter. This level of expense will continue for at least a few more quarters and as we defend our intellectual property. Cross-motions for summary judgment will be heard in December and a trial date is scheduled for March, 2006. We will continue to pursue this using our best efforts until it is resolved favorably for the benefit of ePlus and we will continue to protect our intellectual property and patents against infringement.

In summary, with revenues up 14%, our salaries and benefits and general and administrative costs only increased 3%. This demonstrates that our previous headquarter centralization of most of our internal processing abilities can handle future growth opportunities in a cost-effective manner. With the gross margin and sales of products stabilized in the 10% range over the past few quarters, we are holding the line on operating costs and this is our basis to realize improved operating results. Our bottom-line earnings may, however, be negatively affected by legal costs associated with our patent litigation over the next few quarters.

We have also had specific business objectives that we believe will improve profitability. ePlus is investing heavily in building an on-demand platform of capabilities for our ECM solutions. This means we will be able to provide IT utility backbone for a variety of businesses processes, applications and infrastructure (indiscernible). We will improve back-office efficiencies by streamlining business processes, reducing headcount and implementing better technology. We improved the bottom-line performance of our customers through a diversified business process and information technology outsourcing solutions, IT sourcing, IT consulting, leasing and financing solutions and software solutions.

In the first quarter of 2006, we will enhance our enterprise cost management suite with a company-wide rollout of One Source to our more than 2000-plus customers. One Source is designed to be a single portal to automate the customer order process and reduce administrative overhead for both buyer and seller, facilitate electronic commerce and increase efficiency due to better information and transaction visibility. One Source will provide better access to product information, place and accept orders, provide tracking and audit functionality, workflow and invoicing. This product will be provided to customers at no cost and will act as a front door to the full suite of ECM products and solutions. With One Source, we believe the ePlus technology business can gross sales with current customers and attract new customers at higher margins. In addition, we believe it will increase our sales per employee, which will lead to reduced costs overtime.

Another area of focus is to grow our Professional Services significantly in the next year by focusing on selected vendor relationships. Over the past year, our Cisco business has increased 300% and we will continue to focus on Internet telephony and our patent pending serverless office. We have made a sizable investment to improve our engineering staff, which is now almost 200 strong, especially in the Cisco IPP (ph) space. We are one of 15 vendors supported by Cisco's national accounts management team with high-level certifications with all the T1 vendors and a national footprint. We can compete against the biggest systems integrators, but we also have the capabilities which make us unique in the middle market, such as our remote network operations center, enterprise cost management and leasing.

We have added a small ticket leasing product in our Financing Business unit to increase penetration into our technology and health care business, which should improve spreads and margins. We are re-engineering our software platform to meet the needs of the growing on-demand marketplace, a great potential opportunity for ePlus to create recurring revenues and cross-sell our technology, sales and leasing products. We will continue to identify strategic acquisitions that will bring us into new markets, add new customers and increase our Professional Services offerings and opportunities.

Our balance sheet continues to be strong. Shareholders equity at the end of the quarter was $133 million and cash was $16 million. Our strategy of reducing non-recourse debt fundings and redeploying cash and solid lease receivables through realized higher interest and earnings has been successful. At the end of the quarter, we had over $209 million of lease assets against a nonrecourse financing balance of $125 million by increasing our floor planning and AR financing line with GE Capital distribution finance from $33 million to a seasonably available $75 million and our $35 million credit facility with National City Bank and BB&T. We remain well capitalized and are able to raise cash quickly, if needed, as opportunities arise.

We continue to use our capital to repurchase stock under our share repurchase program. During the quarter, we repurchased 115,300 shares of outstanding common stock at a total cost of $1,453,960. Since the inception of the Company's initial repurchase program on September 30, 2001, and as of September 30, 2005, we have repurchased 2,396,200 shares of common stock at an average cost of $10.42 per share, for a total cost of $24,964,091.

We believe ePlus is positioned and revenues and earnings over the past few years and with the Manchester acquisition, we have built a national footprint. We have made the investments in infrastructure, personnel and technology to grow revenues and increase margins without significantly increasing fixed cost.

Our product set is well positioned to capture three market trends -- Internet telephony, outsourcing, and the on-demand services for procurement, supplier enablement and spend management. Enterprise cost management is the best solution value to reduce the administrative cost in the indirect supply chain and we have a national footprint and customer base to execute on these three opportunities. We successfully defended our intellectual property and we will continue to prosecute infringement in a cautious and systematic approach.

Thank you for your time and we are ready to answer any questions you may have.

(Operator Instructions). Sir, there appear to be no questions.

Thank you very much. Thank you Nelson. We would like to conclude the call now.

This concludes today's ePlus Inc.'s conference call. You may now disconnect.