ePlus inc (PLUS) 2010 Q2 法說會逐字稿

Good day, everyone and welcome to today's fiscal second-quarter 2010 earnings conference call for ePlus. Today's conference is being recorded. And now for opening remarks and introductions, I would like to turn today's conference over to Mr. Kley Parkhurst with ePlus. Please go ahead, sir.

Thank you, Lisa and thank you, everyone, for joining us on today's call. With me today are Phil Norton, Chairman, President and CEO of ePlus and Elaine Marion, our Chief Financial Officer.

I want to take a moment to remind you that the statements we make this morning 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 risks and uncertainties, including without limitation possible adverse effects resulting from the recent financial crisis in the credit markets and general slowdown in the US economy 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 and 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 last week and our periodic filings with the Securities and Exchange Commission.

The Company undertakes no responsibility to update any of these forward-looking statements in light of new information or future events. With that, I will turn the call over to Phil Norton. Phil?

Thank you, Kley. Good morning, everyone and thank you for joining us. ePlus financial performance in the second quarter of fiscal year 2010, which ended September 30, 2009, showed a sequential improvement in top-line revenues, net earnings and earnings per share. While it is still too early in this economic cycle to predict when IT purchasing may return to prior levels, and we continue to show a year-over-year decline in both revenues and earnings, we believe that last quarter's sequential improvement indicates that customers are purchasing again.

The motivations for resumed purchasing are varied, but seem to be driven by either the necessity to replace aging equipment or to take advantage of operating cost savings by investing in new technologies such as virtualization. Later in this presentation, Elaine will go over our specific financial results. But for now, I will discuss some of the broader trends that are driving ePlus's performance.

As indicated last quarter, gross profit dollars and gross margin percentages are important indicators for us as we manage the overall mix of products and services revenue throughout the quarter. In the second quarter, gross profit from products and services totaled $22.9 million and our gross margin percentage on products and services was 14.6%. This was the second consecutive quarter with sequential improvement for both metrics and the gross margin percentage is higher than it was a year ago.

Our ability to increase the gross margin in today's economy is very important and is attributable to few key strategies that we have had in place for several quarters. First, we are continuing to get better at participating in vendor incentive programs to maximize rebates, marketing funds and other programs that vendors use to drive sales. Our investment in our vendor partnerships and the internal engineering talent is continuing to enhance margins.

Second, our focus on advanced technology solutions and the higher value add we provide to our customers allows us to sell higher margin products and services. And lastly, we are focused on using our data analytics to review current and historical purchasing patterns of our customers to capture more customer spend and add-on sales using internal sales resources and telemarketing representatives. Put together, ePlus continues to optimize its sales of products and services to maximize gross margin dollars and gross margin percentages.

Speaking of advanced technologies, over the course of the quarter, we announced several awards that go to the heart of our ability to deliver the right solutions to our customers. We received a sales excellence award for the first HP blade system matrix sale through the US reseller channel. In addition, we received the customer satisfaction excellent gold star from Cisco for the fourth straight quarter. This is the highest customer satisfaction distinction and measures presales and post sales and support over a rolling 12-month period.

I would like to turn now to our patent portfolio. During the quarter, we recorded $3.4 million in revenue attributed to a settlement and license agreement with three different companies. These actions were taken on the same patents we successfully prosecuted a few years ago. And there is an ongoing suit against a fourth company.

We continue to invest in our intellectual property and broaden our portfolio. During the quarter, we received a patent titled Systems and Method for User Creation and Direction of a Rich Content Lifecycle, which assists in the development of rich content. We market this capability under our Content+ trademark. Our intellectual property represents an important differentiator for ePlus.

Financial performance in the leasing segment is down year-over-year, primarily because we have a smaller lease portfolio, which is the result of a strategic decision a few years ago to build cash. With the turmoil in the financial services market, especially in the commercial finance sector as a number of market participants have been under stress, we believe we have an opportunity to gain marketshare, especially in the middle market.

We remain focused on improving operating performance by reducing costs, improving purchasing practices and optimizing our participation in vendor incentive programs. Discretionary cost items such as travel, recruiting fees and outside services, have been and will continue to be heavily scrutinized.

We continue to be an active participant in the M&A marketplace, are engaged in reviewing many transactions and are proactively seeking strategic opportunities. We believe there will be opportunities to fit our strategy and valuation parameters. However, we will continue to be very disciplined in our approach.

In summary, despite the continued difficult economic conditions, ePlus has a strong balance sheet, which allows us to focus our efforts to expand our business with existing clients and win new clients. We believe we are well-positioned to deliver what customers want today on two fronts. First, customers want to reduce the cost of doing business with their vendors and we believe our electronic procurement software, OneSource IT, in combination with our leasing and outsourced business and process services offers a better solution than our competitors.

Second, customers seek to reduce their internal operating costs by optimizing their IT infrastructure through virtualization and intelligent investments in newer technology. Our focus on advanced technologies and our delivery of top-flight engineering services provides the best solutions for our customers. We will continue to focus on customer acquisition to further our marketshare gains and position the Company for long-term growth. That completes my prepared remarks. I will now ask Elaine to walk through the financial statements. Elaine?

Thanks, Phil. As Phil noted, this was a good quarter for ePlus sequentially and there was also some improvement in year-over-year comparisons, which are worth noting. Sequentially, net earnings for fiscal second quarter ended September 30, 2009 increased $3.1 million, or 163% as compared to $1.9 million in the first quarter ended June 30, 2009. And earnings per diluted share increased $0.35, or 152% as compared to 23% and $0.23 in the first quarter.

Also, on a sequential basis, revenues increased $20.3 million or 13.3% as compared to $152.4 million in the fiscal first quarter. Net earnings totaled $5 million, or $0.58 per diluted share as compared to $64 million, or $0.74 per diluted share in the second quarter of the prior fiscal year. For the six months ended September 30, 2009, net earnings totaled $6.9 million, or $0.81 per diluted share as compared to $10.1 million, $1.18 per diluted share for the first six months of the prior fiscal year.

Technology sales business segment generated $152.6 million of total revenues, up 14% sequentially. The results benefited from the $3.4 million in patent licensing and settlement revenues that Phil mentioned in his remarks. We had a good mix of product and services with Cisco, Hewlett-Packard and Sun Microsystems' products representing approximately 40%, 18% and 5% respectively of total products and services revenues. On a year-over-year basis, total revenues in the technology sales business segment were down slightly more than 10%. This is an improvement compared to the year-over-year decline in the fiscal first quarter. The gross margin for product sales and services for the quarter was 14.6%, a 40 basis point improvement sequentially and a 60 basis point improvement year-over-year.

Revenues generated in the financing business segment, which include primarily sales of leased equipment, lease revenues and fee and other income, declined $34.3 million to $10.1 million for the quarter ended September 30, 2009 as compared to the quarter ended September 30, 2008 and were largely unchanged sequentially.

The decline in revenues in the financing business segment compared to the prior year's second quarter is attributable to its smaller balance of investment and leases and leased equipment, which generates less lease revenue and a decline of sales of leased equipment, which can vary from quarter-to-quarter based on the Company's risk mitigation strategy. We continue to feel that lease financing is an important part of our overall value proposition and a competitive differentiator for us in the marketplace.

For the quarter, salaries and benefits were down 2% on a year-over-year basis, slightly more than 5% for the first six months. We made a gradual reduction in headcount to 657 employees as of September 30, 2009 compared to 674 employees a year ago.

In addition, commissions expense was reduced to lower year-over-year sales in the quarter and for the six months ended September 30, 2009. Partially offsetting these cost savings were increased legal fees incurred in relation to the patent infringement lawsuit, which resulted in increased professional and other fees for the quarter ended and for the six months ended September 30, 2009.

Based on our reduced nonrecourse debt level and a general decline in interest rates compared to a year ago, interest expenses were reduced more than 25% on a year-over-year basis. We continue to maintain liquidity on the balance sheet. As the business has expanded sequentially, some cash was converted to other assets in the normal course of business. As of September 30, 2009, cash and cash equivalents totaled $88.3 million as compared to $107.8 million on March 31, 2009.

The reduction in cash is attributable in part to increases in accounts receivable from $82.7 million to $93.3 million, which was due to a sequential increase in sales and an increase in investment and leased equipment from $119.3 million to $124.2 million from March 31, 2009 to September 30, 2009 and share repurchases.

During the quarter, we repurchased 14,858 shares at an average cost of $15.37 per share. Our total investment was approximately $228,000. Since the inception of our initial repurchase program on September 20, 2001, as of September 30, 2009, we have repurchased about 3.4 million shares of our outstanding common stock at an average cost of $10.92 per share for a total purchase price of $37.5 million.

Furthermore, our lease portfolio has expanded slightly. We reduced the amount of nonrecourse notes payable from $85 million to $64.6 million from March 31, 2009 to September 30, 2009. As Phil mentioned earlier, this will allow us to generate higher net earnings in the leasing segment by using our cash to retain higher-yielding assets.

As I mentioned on the last call, we have been and continue to be highly focused on credit and collections for new and existing customers to ensure that our accounts receivable are solid, to minimize credit losses and to enhance working capital. We continue to perform very well in these areas.

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 could prove to be challenging in terms of revenue and earnings because of uncertain economic conditions through our fiscal year-end, we believe ePlus is well-positioned with a solid balance sheet and the right business mix to execute on future opportunities. That concludes my remarks.

Are you ready for questions? Mr. Parkhurst, are you ready for questions?

(Operator Instructions). Mark Argento, Craig-Hallum Capital.

Good morning, guys. Question -- could you give us a little bit more color around your hardware and services revenue? Could you break out, if you have it, what percentage was more kind of pass-through hardware revenue versus actual value-added services revenue?

I will let Elaine take that.

We don't currently break that out in our filings.

Could you help us think about -- I know it has been a focus of the Company to increase the value proposition to customers. Have you made any progress to that point in terms of the mix of revenue?

We wouldn't really be able to comment on the mix of revenue, but what I would say is that we have a continuing effort to hire and to train higher-level engineers to enhance the engineering services. And a good portion of our product sales are in complex solutions such as IP telephony and security and storage and virtualization, of which, without the higher-level engineering services, we wouldn't be competitive. And I believe it is one of the reasons that we have been able to increase our margins and enhance the capabilities of the Company. And I think over time, that will turn into services revenue separate from hardware.

And when you guys go into an engagement, do you typically -- is it an all bundled price or do you typically bundle or break out the services, consulting services portion relative to let's say the sale of equipment and voiceover IP, bid particular, the equipment versus the integration? Are those typically all bundled or are they separate?

I think it can work both ways, but in most cases, we have a focus on being project management-oriented and presenting a project management plan that breaks out the services in some cases for the larger transactions. And we are continuing to drive that methodology through our whole business model to enhance our ability to become a service organization, as well as a product organization. We have made some significant changes structurally in the Company in the last -- over the last year where we have or the last six months where we have broken the engagement teams from being directly reporting to regional manager of sales to reporting into the head of the technology group so that we will have a strong differentiation between service and sales going forward.

And then could you talk a little bit about the patents? I know you said you had a settlement in this quarter particularly, but a little bit more about the patents and really what the technology is behind that?

Well, I would -- the patents that we are presently under litigation and we have some -- try to restrain from anything that would potentially hurt us, but what is -- they are basically procurement patents, in which there are several different things that you have to go through in each case to make sure that someone would be infringing. In this last case, we had four different people that we were prosecuting the patents against. And three of them decided that it was in the best interest of them to settle. Another one is -- we are presently in litigation and I really can't discuss that.

Do you believe that the patents are applicable? Is this for targets or for people that could be infringing or is there an opportunity to assert those patents in a broader venue?

I think that is something that we have our technology people and our attorneys looking at, but we try to focus on what we believe are the ones we presently come across. And I think our attorneys will advise us if there are other people at different points in time that we would be able to pursue patent cases or licenses.

And then I think in your prepared comments, you also mentioned looking at M&A. Could you give us an idea of what you are seeking out in a potential M&A target, what things would you like to -- what types of business or size or framing that up for us if you could?

Well, --. (technical difficulty).

Mr. Parkhurst, this is the operator. We are unable to hear you. Everyone, please stand by. Mr. Parkhurst, this is the operator. Please pick up the handset or release the mute option on the speakerphone. Mr. Parkhurst?

Yes, ma'am.

This is the operator. Brian Kinstlinger, Sidoti & Co.

Hi, good morning. I was curious if you could characterize the seasonality in your business. Is the fourth quarter a generally seasonally strong time and would you think that this year, given the recession or just coming out of it, would be more or less pronounced than usual?

Last year, I think we saw still I think a reasonable level of spend and it didn't go into total tailspin until the first quarter of the calendar year, our fourth quarter. And I think that we will probably see the same thing we saw last year, but it is all based on what happens in Congress and other places. But last year, we started to see a lot more sales at the end of the year because of people having budgeted money that they hadn't spent earlier in the year and we saw an uptick. So I think based on the economy, I don't think we see a tailspin this quarter. I think first quarter is going to all depend on what happens with retail sales and the economy.

Now I mean outside of a recession. In most years, do you see seasonal strength in the fourth quarter or the December quarter? And then my other question is did October suggest that you continue to see a modest pickup?

I think our fourth-quarter sales are normally, what would you say, Elaine?

A little softer probably than the third quarter.

Yes. And third quarter is where we have a lot of [sled] business or state and local government, so that usually is a little bit higher. But I think we will -- based on where we are now, I still think the economy is still soft and it is pretty hard to figure out where it is. Although I think based on Cisco's projections and other people it appears like there will be some pickup.

And what percentage of revenue is state and local and are the budgets having an impact or hurting that business right now?

We don't really break out the percentage, but it has had an intermittent impact. The impact it has had is people will be planning on projects, but wait until the budgets get approved. For example, in Pennsylvania, they had to wait for a long period of time, which is where one of our big state and local markets are. Also, in New Jersey, they hadn't signed new contracts. There was a time of waiting for that. So you had to use other avenues. I think, indirectly, the budgets have affected some of that business.

Now you say that you don't break out revenue, but I mean is it meaningful? The budgets are such a problem right now. Are we talking about half your business is state and local? Is it less than a quarter?

Well, let me put it this way, it is meaningful because it has a reasonable percentage. I can't give you the exact number, but it is -- I think it has been in line with what our reduction in overall sales are.

The Sun Oracle deal obviously has taken a while to close and Oracle really hasn't talked too much until recently about their plans for Sun. Has it at all impacted your Sun business, which I think you said is 5% to 10% of revenue I think? I couldn't remember.

So far, I think our Sun business has been at the same or similar level as it has been in the past to our overall percentage. From an Oracle standpoint, I think that is still going to take a while to put in place. I don't see a dramatic increase in Sun sales because Oracle bought them. I think it will take a period of time for them to start driving more of the data-based sales and the ERP sales and give Sun big advantage over other manufacturers when implementing ERP systems. But I think long term it will have a positive effect on Sun sales.

Okay, thank you.

(Operator Instructions). Patrick Retzer, Retzer Capital.

Hi, guys. Congratulations on a good quarter.

Thank you.

Hey, I think the gentleman from Craig-Hallum asked a question regarding your comments on looking at potential acquisitions. He asked something along the lines of what size company or in what business or part of the business do you think an acquisition is more likely to occur. And I believe the line got cut off before you could respond.

Oh, I'm sorry. Well, we believe, as we started, I don't know if this is going over that. The pricing on acquisitions still has not equaled the reality yet. People are still trying to sell past performance versus future projections. And so therefore, pricing is still a little high. We have reviewed several transactions and pricing, I guess, is still out of whack a little bit. However, I mean we are looking at, in general, transactions where there is revenue less than $100 million and that they are geographically in places where we are not, that they have significant cost savings that we would be able to enact. And they have similar product sales and services that we provide today.

And also, we are also looking at smaller companies that may have specific capabilities in both engineering and in product sales in areas in the country where we are already established to help build up additional capability and drive sales and revenue in different specific technologies.

Okay. Would you say prices are approaching reality or with the run-up in the stock market over the last six months, are they moving further away?

Well, I think they are starting to approach reality. For the most part, the companies we would be looking at are not driven by stock prices since they are not public. And if you look at the state of the finance market when it comes to CIT and GE and the distributors, Tech Data, Ingram, Arrow, they are all being I think very cautious on credit and accounts receivables. And therefore, that is the biggest driver for most of the people that we are looking to acquire, that they would be challenged from a credit standpoint and that their ability to get liquidity or to borrow is limited somewhat. And the tighter that becomes, the more relevant it becomes to their ability to grow.

And in most cases because of the liquidity issues, they are downsizing rather than growing. And so we believe that there will be better targets and better opportunities both from acquisitions and acquiring better people in the marketplace.

Okay, and you had some comments on the lease portfolio. I see you have started to rebuild that. You added about $5 million while paying off $20 million of nonrecourse debt. Do you see that rebuilding process continuing? And if so, is that $5 a quarter about the right rate we should look for or will that start to ramp up?

Well, I think it has to do with credit quality, number one. Two, the opportunity for us to enhance the yield without taking any large risk and making sure that we have good control over the future such as fair market value leases in general and whether or not we are in a strong enough cash position to be able to hold more on our balance sheet as the market improves. And this will give us significantly higher yield than earning a 0.5% in treasuries with accounts that we know are strong, have made it through the downturn and have good earnings cycles going forward and we have a long history with them.

So I think we will see a build-up of that. To what degree, I think it will be more opportunistic as we have better credits that we can finance and the need for cash for acquisitions or something of that nature is reduced and we will invest more because that can give us a much higher yield.

Okay. And should we assume you will continue to buy back stock on an ongoing basis?

I think our program is how long, Elaine?

A year, from September 15, 2010.

That program is in place until September of next year. At the present time, we intend to continue forward on that.

Okay. And then finally, over the course of the year, you have, it looks like, made an effort to tell the story on the Company a little bit with conference calls and maybe a couple of small road trips. Do you see that process continuing to advance in the foreseeable future?

We are making every effort to do that.

Okay, thanks, guys.

Thanks, Pat. Have a good day.

You too.

(Operator Instructions). There are no further questions. I would like to turn the conference back over to Phil Norton for any additional or closing remarks.

Thank you very much for attending the call. We are sorry for the communications snafu. However, I hope we answered everyone's questions and we look forward to discussing this with you further next quarter. Thank you very much.

That concludes today's teleconference. Thank you for your participation.