ePlus inc (PLUS) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the ePlus second quarter earnings call. (Operator Instructions).

I would now like to introduce your host for today's conference, Kleyton Parkhurst, Senior Vice President.

Thank you, Gervon, and thank you everyone for joining us today. With me today are Phil Norton, Chairman, President and CEO of ePlus; Elaine Marion, our Chief Financial Officer; and Erica Stoeker, our General Counsel.

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 detailed in the earnings release we issued yesterday and our periodic filings with the Securities & Exchange Commission including our form 10-K for the year ended March 31, 2011, or form 10-Q for the quarter ended June 30, 2011, and our 10-Q for the period ended September 30, 2011, which should be filed on or around November 7, 2011. 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 Phillip Norton. Phil?

Thank you, Kley. We reported another solid revenue gain in the quarter ended September 30, 2011, which is our second quarter of fiscal year 2012. Total revenue increased 12.8% over the prior year as customer demand for advanced IT solutions, products and services continued to be healthy.

The revenue gain in sales of products and services was attributable to both organic growth throughout our platform from existing customers and gaining new customers. The investments we have made over the past twelve months in acquisitions, opening new offices, creating new solutions, and our adoption of new revenue recognition guidance which Elaine will provide more detail on later in this call.

In the past twelve months we have added staff and new geographic areas including Rochester, New York, and the Tidewater area of Virginia, and considerably enhanced our staffing levels in southern California, Richmond, Virginia, and select markets in Texas. Substantively all of our staff additions are experienced sales professionals with proven historical sales performance, and highly experienced IT engineers. We have hit the ground running in these markets as our results are beginning to show.

We have also gained new office locations and new solution sets with the acquisition of ITI in November of 2010 and NCC in June 2011. With the ITI we gained the Tandberg Platinum Certification, which we're able to use nationwide, and also a new location in southern New Jersey. Our acquisition of NCC brought us a security specialization and a security operations center which extends our managed services offerings. It is also our first branch in the upper Midwest, and we intend to continue to invest in this region to build a stronger ePlus presence to offer all of our products and services.

While the IT market has grown this year, so has competitiveness. And we have found ourselves under some pricing pressure which has affected the gross margin on sales of products and services. This quarter we had a number of large transactions to enterprise customers which were very price competitive and we also used price to gain market share with some strategic account customers. Combined with a reduction in vendor incentive plans, the gross margin in our technology business unit decreased to 13.9% from 14.4% last year.

However, our margins still remains near the top of our historical range as a national VAR and a key partner to Tier 1 manufacturers we can compete aggressively in the marketplace to protect our customer base and gain new customers. Our intent over time is to continue to improve our gross margins by selling our advanced technology solutions such as managed services, security, cloud enablement and video, which tend to be higher margin.

During the quarter our sales of Cisco products and services surpassed 50% as a percentage of the total sales of products and services and we won the Cisco TelePresence Video Master Authorized Technology Provider Partner award. We are also focused on continuing to strengthen our relationship with Tier 1 manufacturers such as HP, VMware, IBM, NetApp, EMC, Oracle, Microsoft, Apple and Dell as a multi-line VAR, it enables us to best serve our customers in the emerging world of today's cloud computing and multi-vendor stacked solutions.

In the financing business we have made a strategic decision over the last several quarters to reduce the sales of [leases] in an effort to increase our portfolio levels by sustaining our credit and pricing standards. There are a number of factors in the marketplace that make leasing a competitive business today. With the interest rates low and corporate cash balances high, a lot of companies which utilize leasing historically are purchasing equipment outright.

In addition, manufacturers are using leasing and internal transfer pricing to offer zero or low percentage rates to gain market share and protect their customer base. As a result, our lease portfolio has declined to approximately $108 million over the last several years. Today we are focused on originating deals in two sectors, healthcare and federal government contractors, in order to rebuild our financing business segment to return to historical asset levels and profitability. As a result of lower transaction volumes and a smaller portfolio of leases in the financing business segment, revenues declined 15.8% and pretax earnings declined 31.5% in the financing business segment.

This business segment, which in the quarter consisted of about 4% of our total revenue, is subject to earnings variability due to high margin transactions, which may or may not be consummated during a given quarter. These transactions may include certain lease financings, residual realization, and asset sales as we optimize our portfolio mix.

We are one of the few third party equipment vendors that offers integrated leasing, asset management, and supply chain optimization through our proprietary business processes and software.

Our strong balance sheet is a core strength of ePlus. We have continued to invest our cash in higher returning assets such as leases, paying vendors quickly for additional discounts, acquisitions, and our stock repurchase program.

During the quarter we announced a new 500,000 share repurchase program, while buying approximately 388,000 shares over the past six months. We have the capabilities to invest in new people, solutions, acquisitions, as opportunities arrive and we will continue to make these investments to enhance shareholder value over the long-term.

Moving onto our intellectual property portfolio, we have filed a motion seeking a finding that Lawson is in contempt of the injunction that the trial court granted in May. We anticipate a hearing on the motion will be held in December, 2011.

In a moment Elaine Marion, our CFO, will provide more details on our earnings and consolidated results. We are satisfied with the progress we have made through organic growth and our strategic acquisitions,geographic expansion and employee hiring. Over the past twelve months we added 102 people in the technology business segment, 15% of our total staff, and added or significantly expanded at five locations.

While acquisition and personnel costs have reduced earnings in the near term, these investments are necessary for the long-term prosperity of the Company. We are very confident in our ability to continue to execute on all of our new initiatives and excited about our strategic expansion plans. I would like to turn the call over to Elaine Marion, our CFO, who will discuss the specific financial results, and I will return to answer questions at the end of the call.

Thanks, Phil. I would like to review the consolidated financial results followed by our segment breakdown.

As Phil has described, our revenue trends have remained favorable. On a consolidated basis revenues totaled $262.9 million, an increase of $29.8 million or 12.8% compared to $233 million in the same quarter last fiscal year.

Net earnings decreased 10.7% to $7.1 million or $0.85 per diluted share as compared to $7.9 million or $0.94 per diluted share in the same quarter last fiscal year.

On a sequential basis revenues increased 24.3% and net earnings nearly doubled as a result of the gross profit from increased volume during the quarter.

As for our two business segments, in our technology sales segment, revenues for the first quarter were $254.8 million, an increase of $31.3 million or 14% as compared to $223.5 million in the prior year's quarter.

The increase in revenue is attributable to three elements, each about a third of the increase. First, increased organic demand from current and net new customers from our existing sales platform. Second, new customers and services resulting from the investments we made in the past twelve months including acquisitions, new hires, and building new branches and, third, a change in revenue recognition guidance for multiple element arrangements from products and services which was effective April 1 of this year. This change is for products that were delivered during the quarter and were sold together with services. Previously we were required to defer this type of revenue until the services were complete.

The gross margin on products and services declined to 13.9% as compared to 14.4% in the same quarter last year and was affected by the mix between products and services, vendor incentives earned and competitive pricing pressure as Phil noted earlier.

In the past five years our gross margin has ranged from 11.2% to 14.7% and is subject to change due to competitive market variables, constantly changing vendor incentive programs, vendor mix, and the mix between products and services that we sell.

In any given period our margin can vary due to changing vendor programs, achieving or missing predetermined vendor specific volume quotas or product line goals, for example. Our corporate goal is to maintain the highest possible margin by optimizing vendor incentive programs and developing our own proprietary solutions, such as managed services, staff augmentation and video solutions, where we have more control over pricing and delivery within the confines of the competitive market.

We are very pleased with our progress in this regard. Sales and -- salaries and benefits expense increased $3.6 million to $21.8 million compared to $17.1 million during the three months ended September 30, 2010.

This increase was driven by a large number of -- by a larger number of employees and increases in commission expense as a result of a larger amount of gross profit.

The technology sales business segment had 700 employees as of September 30, 2011, an increase of 102 employees from 598 employees at September 30, 2010. Substantially all of the increase relates to sales, marketing, and engineering personnel who are customer facing and revenue generating.

General and administrative expenses increased $947,000 or 28.5% partially due to the acquisitions of NCC & ITI as well as higher travel and other expenses associated with the increase in sales and support personnel.

Professional and other fees decreased 41% to $2 million compared to $3.3 million during the three months ended September 30, 2010, primarily due to a reduction in legal and other fees related to the patent infringement litigation. As a result, segment earnings before taxes remained consistent with the prior year at $9.2 million.

Now turning to our financing business segment, total revenues in this segment decreased $1.5 million or 15.8% to $8 million for the three months ended September 30, 2011, as compared to the prior year, due to a reduction in the net gain on the sales of off leased equipment coupled with decreases in earnings from our lease portfolio. At September 30, 2011, we had $108.9 million of investment in leases compared to $124.7 million at September 30, 2010.

The decrease in the lease portfolio is due to lease terminations, cash collections and sales of leases partially offset by the addition of new leases.

Total costs and expenses decreased $291,000 primarily due to decreases in interest and financing costs as a result of lower non recourse note balances as we elected not to leverage our lease portfolio.

Non recourse notes payable decreased 34.4% to $23 million at September 30, 2011, as compared to $41.3 million at September 30, 2010. The non recourse debt is generally recoursed to the lessee and the underlying leased equipment and not to ePlus.

As a result, segment earnings before tax decreased $1.2 million or 31.5% to $2.6 million for the three months ended September 30, 2011.

Moving onto the balance sheet, as of September 30, 2011, stockholders equity was $214.5 million or $25.85 per share. The total cash and cash equivalents were $45.4 million as compared to $75.8 million on March 31, 2011.

We continue to take advantage of early pay discount from vendors and reduce non recourse financings both of which have reduced expenses. In addition, the normal growth of the business requires working capital and our accounts receivable grew to $151.7 million from $121.8 million as of March 31, 2011. In addition, we have been successful in repurchasing stock in the open market, having repurchased approximately 388,000 shares of our outstanding stock at an average cost of $24.96 per share for a total purchase price of $9.7 million in the six months ended September 30, 2011.

While such activities have reduced working capital, particularly when revenues and accounts receivable have increased, we believe our current working capital is sufficient to accommodate growth and investments.

We can increase our liquidity several ways. We can discontinue our stock repurchase program, stop paying vendors early, begin funding leases with non recourse debt, or sell leases.

In addition, we have excess borrowing capacity in our financing arrangement with GE Commercial Distribution Finance. In conclusion, with a strong balance sheet and a solid business model, we have made significant progress on our strategic plans, which includes extending our geographical presence, and improving our advanced technology solutions offerings through the opportunities we have executed over the past year. We are confident that these investments will help us achieve our strategic objectives over the long-term and are well positioned to enhance shareholder value.

That concludes my remarks, and, operator, we would like to open the call for questions.

Thank you. (Operator Instructions). Our first question comes from the line of Brad Evans with Hartland.

Good afternoon, everybody.

Hi, Brad.

Hi, Brad.

Thank you for taking the questions. Phil, I would love your thoughts on just the macro environment in terms of -- I know you don't give guidance. But as you look at the volatility that's in the marketplace, just with the stock market, how is that translated into customers' appetite for technology gear and what are you hearing from the sales force at this point?

Well, if you look at our numbers from last quarter, we were able to increase sales by 12% when all of the disruption was going on about debt ceiling in Congress, we really didn't see degradation in our sales during that period of time from across our customer base, and I think we have a pretty sound base that goes across commercial all the way to enterprise. I think that part of this month is going to have some difference, but we don't see climate changing at least now for this quarter and if you look at the trends, we can't really tell about the first quarter of this year because everyone's budget is kind of, for the most part December 31, but as of right now we see the climate being consistent with what it has been in the past.

So we -- is it possible this -- so your third quarter, the calendar fourth quarter, is it possible that you see the combination of maybe some budget flushing on top ofmaybe some heightened incentive activity from the vendor side to maybe drive activity? Is that something that might occur?

They don't really tell us their future plans, so it is hard for us to guess on that. I would say right now we haven't seen significant changes from the vendors either.

Okay. That's good insight. I just wanted to clarify just in terms of your exposure to the government vertical, is in total around 20% of sales that are tied to the government vertical?Is that roughly correct?

It is approximately. We don't really break down that (inaudible - multiple speakers.)

Okay.

It hasn't really changed that much. It has been the same.

I know it is a crystal ball type of question, but in the event of -- with the austerity measures that might be eventually coming to the federal government, how do you see that playing out for appetite for technology spend? I know that there is some speculation that it may not be as impacted as the government tries to drive productivity through technology investments, but I guess that's more of a wish, but what are your thoughts in terms of how the government might -- that vertical might act over the next say six to 12 months?

First of all, in our public sector business the federal government plays a smaller role. We do have significant business with the systems integrators. Most of them are long-term contracts, and their funding doesn't seem to get cut back as much. I couldn't really speak to the rest of the federal budgets because we really don't deal directly with that many agencies. From the state and local, I think for the most part if you look at some of the trends on IT that I have read it is for the whole industry it is up 2%, so it will really depend on whether or not they cut back significantly, if it affects it, but in the past it really hasn't dropped off that much as compared to how many people they let (inaudible).

Let me just ask you one more question around the government. Does the state local vertical feel more stable than the federal government or is it not discernible?

For us it is not discernible right now.

Okay. Thanks. Nice quarter. Appreciate it.

Thanks, Brad.

(Operator Instructions.)At this time I am showing no further questions. I would like to turn it over to our speakers for any closing remarks.

We would like to thank you very much for taking the time for our conference call. If you have any questions, you can contact Kleyton Parkhurst. Thank you very much.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect. Everyone have a great day.