ePlus inc (PLUS) 2010 Q1 法說會逐字稿

Good afternoon, and welcome to the Fiscal First Quarter 2010 Earnings Conference Call for ePlus. Today's conference is being recorded.

At this time, all participants are in a listen-only mode, and after management completes its prepared remarks, we'll open the call to questions. (Operator instructions)

I will now turn the call over to Kley Parkhurst, Senior Vice President at ePlus. Please go ahead.

Thank you, Anthony, and thank you, everyone, for joining us on today's call.

With me today are Phillip Norton, ePlus Chairman, President, and Chief Executive Officer, and Elaine Marion, our Chief Financial Officer.

I want to take a moment to remind you that the statements we make this afternoon that are not historical facts may be deemed to be forward-looking statements and are based on management's current plans, estimates, and projections.

Actual and anticipated future results may vary materially due to certain risk and uncertainties, including, without limitation, possible adverse effects resulting from the recent financial crisis in the credit markets and general slowdown in the US economies, such as our current and potential customers delaying or reducing technology purchases; increasing credit risk associated with our customers and vendors; reduction of vendor incentive programs; the possibility of additional goodwill impairment charges and restrictions on our access to capital necessary to fund our operations; the demand for and acceptance of our products and services; our ability to adapt our services to meet changes in market developments; the possibility of defects in our products or catalog content data; our ability to protect our intellectual property; our ability to reserve adequately for credit losses; and other risks and uncertainties detailed in the earnings release we issued yesterday and our reports filed with the Securities and Exchange Commission. The Company does not undertake to update any of these statements in light of new information or future events.

With that, I'll turn the call over to our Chairman, President, and Chief Executive Officer, Phillip Norton.

Thank you, Kley.

Good afternoon, everyone, and thank you for joining us.

While our year-over-year figures continue to demonstrate the challenges of the IT business, a better indicator of the state of our business is the sequential improvement we have seen. I would still characterize the economy and the IT market as difficult. We believe it will take a few more quarters before it stabilizes.

January and February were particularly challenging; however, we saw improvement in the period from March through June. As a result, for our first quarter ended June 30, 2009, total revenues increased 13.6% sequentially to $152.4 million.

An important indicator to us is our gross margin. During the first quarter, gross profit margins in our products and services business increased about 100 basis points to 14.2%, as compared to both the same quarter last year and the prior sequential quarter.

The improvement in gross margin is attributable to improved business operations and analytics, which has led to increased efficiencies, such as reducing or eliminating low-margin product lines, small vendors, and unprofitable customers.

We believe our strategy of continuing to focus on advanced technology solutions and the higher value they derive is the right one during the quarter.

We were awarded a Cisco TelePresence certification. We were selected as VMWare's "Top Partner in the Americas." We achieved Cisco Power designations for Managed Unified Communications and Managed Security Services, and we were one of the first channel partners to become a Cisco Data Center Unified Computing Authorized Technology Provider, allowing us to get involved in Cisco's latest technology platform.

As a result of an increase in sales, improved gross margin, and our continuing focus on holding the line on costs, net earnings improved $1.1 million to $1.9 million, or $0.23 per share, as compared with the prior sequential quarter.

For the first time in several quarters, our investment and lease assets on our balance sheet increased. They were $119 million as of March 31, 2009, and we finished June with $123 million on the balance sheet.

We believe that leasing is a necessary and beneficial financing alternative for our customers, who can utilize leasing to acquire the IT equipment and software needed now within today's budget restrictions and strident cost-cutting initiatives.

We will continue to focus on originating high-credit quality leases that are fundable on a non-recourse basis to build our portfolio, lock in recurring revenues and corresponding earnings, and capture more customer spend.

Capturing organic growth opportunities within our customer base and adding new customers by leveraging our existing branch network, telemarketing channel, and e-commerce platform remains a top priority.

We continue to review potential acquisition targets which could be a strategic fit. Our strategies include expansion into new geographic markets, tuck-under acquisitions to supplement existing branches, or VARs with specific technology focuses which can be leveraged nationwide.

The values which are core to our daily business operations also apply to acquisitions. Our core values are being fiscally conservative, credit oriented, and most importantly, whether investing in a new technology initiative or business opportunity, having a clear path to accretive earnings and a moderate to high return on investment.

We have been looking at many acquisition opportunities and will continue to do so until we find a target that meets our objectives.

During the quarter, ePlus common stock was added to the Russell 2000 and 3000 indices. As a result of our Company's rising market capitalization, we are pleased that our stock's performance has merited inclusion in these indices, and we look forward to continuing to operate the business in the best interests of our customers, employees, and shareholders.

That completes my prepared remarks. I will now ask Elaine to walk you through the financial statements. Elaine?

Thanks, Phil.

As Phil noted, this was a good quarter for ePlus on a sequential basis. The technology sales business unit generated $142.2 million of total revenues, a 17.6% sequential increase.

This quarter, we benefited from the mix and volume of products and services sold and changes in incentives provided to us by manufacturers.

On a year-over-year basis, total revenues in the technology sales business unit were down just over 15%. This decline is attributable to our customers purchasing lower volumes, not the loss of customers.

Six out of our top 10 customers this quarter were top 10 customers in the same quarter last year. We believe our product mix and advanced technology services, along with our e-commerce platform in leasing will help us retain customers through this economy and position us for future growth.

On a consolidated basis, the gross margin for products and services improved sequentially, and year over year, 100 basis points to 14.2%. The improvement in gross margin is attributable to some efficiencies we've gained by better managing the business, as Phil mentioned.

Overall, it demonstrates that we have the ability to increase both sales and gross margin, which we believe is a pretty important indicator of the strength of our business approach.

The total revenues in the financing business unit, which is largely comprised of lease revenue and also includes the sale of leased equipment, were down more than 22% sequentially. This is primarily the result of having fewer leased assets on the balance sheet throughout the quarter. The sequential increase in leased assets on the balance sheet occurred towards the end of the quarter.

A continuing focus on expenses helps keep general and administrative expenses, including salaries and benefits, to $21.4 million, which was down sequentially about 3% and about 8% on a year-over-year basis.

We continue to scrutinize discretionary spending on a company-wide basis, and we're constantly looking for ways to improve productivity. For example, we allowed our National City/PNC line of credit to expire in July. We had historically very low utilization, and with no projected need for capacity in the future, we will save on the annual commitment fee and other costs and expenses, both internal and external, required to maintain the line.

Looking at the balance sheet, we finished the quarter with $103.3 million in cash and cash equivalent. The slightly lower cash balance, as compared to March 31, is due to an uptick in sales sequentially, the increase in leased assets at the end of the quarter, and deferring the arrangement of non-recourse debt by using our cash to fund a few investment-grade leases, which should produce higher interest earnings than what is available in the market.

As I mentioned on the last call, we have been highly focused on credit and collections for new and existing customers to ensure that our receivables are strong, credit losses are minimal, and to enhance working capital by reducing day sales outstanding, and it's working. We've seen improvements in our over-60-day receivables balance since March 31, 2009.

Non-recourse notes payable were $75.1 million at of June 30, representing a $9.9 million reduction this quarter and a reduction of about $20 million on a year-over-year basis. The reduction in non-recourse notes payable reduced interest expense about $200,000 on a sequential and year-over-year basis. That benefit was slightly offset by higher interest rates.

In summary, we continue to focus on containing costs, maintaining and enhancing gross margin, retaining and adding customers, and exploring M&A opportunities.

While the next few quarters will prove to be challenging in terms of revenue and earnings, we believe ePlus is well positioned with a solid balance sheet and the right business mix to execute on future opportunities.

That completes my prepared remarks. Phil?

Thanks, Elaine.

Anthony, I think we're ready for questions.

Thank you. (Operator instructions)

We'll take our first question from John Lewis with Osmium Partners.

Hi. Good afternoon, guys.

Afternoon.

Hey, John.

So, yes, I guess it was pretty straightforward. It was a good call. I guess just a couple quick questions.

I noticed you guys filed a lawsuit against four -- I guess four companies. I think you settled with one. Can you give any more color on what's -- any more color on that lawsuit? That'd be helpful.

Not really. I don't think it's something that we discuss about the --

Could you just say if -- are they -- is it a large corporation, like a -- I know, obviously, you guys had a suit with --

No, our outside attorneys have basically told us not to be commenting on the lawsuit. I think it's filed publicly that you could look up.

Okay. Okay, that's helpful. I think we're pretty well situated on the rest of what you guys commented on. Okay, thanks. That's all I had.

Thank you.

Thanks, John.

(Operator instructions)

We'll take our next question with [Patrick Retzer] with [Retzer Capital Management].

Hi, guys.

Hi, there.

Hi, Pat.

Hi, Pat.

Hey, I wanted to compliment you on a great quarter, both sequentially and year over year, relative to your competitors.

Thank you.

I noticed you're starting, and you mentioned rebuilding the lease portfolio after somebody made a great decision a year-and-a-half, two years ago to dramatically downsize it. Can you talk about the conditions in that market with regard to margins, competition, etcetera, and what we should expect to see there in terms of that portfolio continuing to grow?

Well, first of all, I mean we have always tried to manage our portfolio to the extent that lessees or transactions which we don't feel have the yield potential that we are looking for or have the desired credit that we are looking for, that we have sold those off as sales of leased equipment. So it wasn't a purpose of downsizing; it was just managing our risk, and based on what's happened in the market, we think that was a good decision at that time.

As far as the market today, I think the market is in a situation where people aren't spending money for equipment to buy and so, therefore, the opportunities for leasing with reasonable credits with a low risk profile are going to be somewhat limited until we start to really break out of the recession.

And the ones that really need financing are much higher risk credits, and so, therefore, we try to steer clear of them. And in some cases where we have higher-rated credits with less risk, we've retained some of those on our balance sheet. They get better yields for our money.

And I think as the market opens up, we'll be in a great position to add additional opportunities so long as they meet the credit criteria and are within our risk profile.

Okay, so the leases you're putting on today, relative to recent history, are those wider than normal spreads or pretty much in line, or how would you characterize that?

Well, I think they vary from the commercial market to the government market, and it varies according to term. I would say the rates in general are within 100, 200 basis points either way of what we have done in the past, although the spreads are much wider because what you base them off of is a much lower rate.

Okay. And then from the standpoint of competition for the leases, have you seen a fair number of competitors drop out of the market?

Well, I mean we've seen a retraction from the market by CIT and GE, and some of the financial institutions have started to limit their financing and leases, too, within their market areas and not nationwide.

So we have seen some additional opportunities due to that, and we also have noticed that several of the larger competitors have reduced the number of vendors that they are now financing, especially in the state and federal marketplace, and I think that provides us a lot more opening for additional business as the demand grows.

Okay. So I mean, relatively, this is a pretty wonderful time to be sitting there with a quite slimmed down portfolio and a huge pile of cash on the balance sheet.

Especially since our customers appear to be paying on time.

Right. Okay, thanks.

Thank you.

Thanks, Pat.

(Operator instructions)

It appears there are no further questions at this time. I'd like to turn the conference back over to Phil Norton for closing remarks.

We'd like to thank you all for joining us today, and we appreciate your time and interest in the ePlus. Everyone, have a good day. Thank you.

Thank you.

Thank you.

Once again, this does conclude today's conference call. We thank you for your participation.