ePlus inc (PLUS) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the ePlus Third Quarter Fiscal Year 2012 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

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

Thank you, Jervan, and thank you, everyone, for joining us today. With me are Phil Norton, Chairman, President, and CEO of ePlus; Elaine Marion, our Chief Financial Officer; and Erica Stoecker, 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 this morning and our periodic filings with the Securities and Exchange Commission, including our Form 10-K for the fiscal year ended March 31, 2011, our Form 10-Q for the quarter ended September 30, 2011, and our 10-Q for the period ended December 31, 2011, which should be filed on or around February 6, 2012. The Company undertakes no responsibility to update any of these forward-looking statements in light of new information or future updates. With that said, I will turn the call over to Phil Norton. Phil?

Thank you, Kley. We reported another solid revenue gain in the quarter ended December 31, 2011, which is the third quarter of our fiscal year 2012. Total revenue increased 18.5% 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 driven by demand growth from existing customers, gaining new customers, the investments we have made over the past 12 months, and acquisitions opening new offices and developing new solutions, and our adoption of new revenue recognition guidance. We are pleased to see the investments the Company has made in the past year starting to drive positive results. Our focus remains on building recurring revenue streams with multifaceted managed services, which build on our strengths and staff augmentation, video, collaboration, and security and allow us to capture the increased demand for advanced IT solutions.

We continued to execute our growth strategy by aggressively investing in people, expanding into new geographies, and broadening our solution set and making selective acquisitions. In the past 12 months, through organic growth and acquisitions, we added 65 net new employees and expanded our reach in Rochester, New York; the Tidewater area of Virginia; Southern California; Richmond, Virginia; New Hampshire; Chicago and Texas. Most of the additional staff are experienced sales professionals with proven customer-facing revenue producing sales performance, and highly experienced IT engineers. We have also added new solution sets and gained more than 400 new customer accounts through 3 acquisitions. On the solutions side, we have significantly expanded and improved our managed services capabilities to offer a broader range of services.

On the acquisition front, most recently we acquired VantiCore, LLC on January 6, 2012. VantiCore is a Cisco-focused solution provider headquartered in Bedford, New Hampshire. VantiCore's expertise and Advanced Unified Communication's collaboration in customer contact center solutions are an excellent complement to our existing unified communications, data center and managed services practices. These solutions enriched ePlus' existing suite of integrated offerings and top Cisco certification. We gained increased market presence in New England as well, and are strategically positioned to provide the highest level of service to customers in Vermont, Maine, New Hampshire, and Massachusetts. Similarly, prior acquisitions, such as NCC in June 2011, brought us a security specialization, a security operations center, extending our managed services offering and the new Chicago-area location, while ITI in November 2010 added the Tandberg Platinum certification, which we can use nationwide, plus a new southern New Jersey location.

Now, turning to the demand environment -- while the IT market has grown this year, it has been accompanied by competitive pricing and somewhat reduced vendor incentives, which reduced gross margin about 70 basis points year-over-year in our technology business units. But as a result of our recent acquisitions and investments, on a sequential basis, the trend has turned this quarter as gross margins increased by almost 100 basis points to 14.8%, as compared to the September quarter. Our strategy is to continue to improve our gross margin by selling more of our advanced technology solutions, such as managed services, security, cloud enablement, and video. We also remain focused on continuing to strengthen our relationship with Tier 1 manufacturers such as Cisco, HP, VMWare, IBM, NetApp, EMC, Oracle, Microsoft, Apple, and Dell, as being a multi-line VAR 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, despite challenging market conditions in the past year, we are pleased to report an improvement in revenues and earnings in the segment. As a result of an increase in the net gain on sales of leases, notes and the lease of equipment, revenues increased 9.9% and pretax earnings increased 25.7% on a year-over-year basis. The size of our lease portfolio is stable year-over-year, as we're able to originate leases to maintain our portfolio. We remain focused on originating financing transactions in two sectors - - healthcare and federal government contractors. This business segment, which in the quarter consisted of about 4% of our total revenue, is subject to earnings comparability due to high margin transactions, which may or may not be consummated during a given quarter. These transactions may include certain sales of leases and notes and the residual realization as we optimize our portfolio mix. We are one of the few third party equipment vendors that offer integrated leasing, asset management and supply chain optimization through our proprietary business processes and software.

Moving onto our intellectual property portfolio and our litigation against Lawson Software, we have filed a motion seeking a finding that Lawson is in contempt of the injunction ordering it to stop selling servicing, maintaining, training, or installing it's infringing products. We anticipate that an evidentiary hearing on our motion will be held the week of February 27, 2012 and oral arguments will be held at the end of April 2012.

Turning to our cash position, we continue to deploy our cash to enhance shareholder value. During the quarter, our cash balance increased 19% from last quarter to $54.1 million, and we amended the share repurchase plan to authorize additional repurchases of up to 500,000 shares from November 15, 2011 through September 15, 2012. Over the past nine months, including some shares authorized in the latest plan, we have repurchased approximately 705,000 shares. We've also continued to invest our cash in higher returning initiatives, such as increased staffing and solutions, leases paying vendors quickly for additional discounts and acquisitions. We are confident in our ability to continue to execute on all of our initiatives and excited about our strategic expansion plans. Our value-added solutions, focused strong balance sheet, and seasoned management team enabled us to continue to gain market share.

Now, I would like to turn the call over to Elaine Marion, our CFO, who will discuss the detailed 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 $272.6 million, an increase of $42.6 million, or 18.5%, compared to $230 million in the same quarter last fiscal year. Net earnings increased 15.8% to $8.7 million, or $1.10 per diluted share, as compared to $7.5 million, or $0.89 per diluted share, in the same quarter last fiscal year. On a sequential basis, revenues increased 3.7% and net earnings increased 23.8%, as a result of the gross margin expansion and increased volume of sales of products and services and sales of leases and notes during the quarter.

As for our two business segments, in our technology segment, revenues for the third quarter were $262.6 million; an increase of $41.7 million, or 18.9%, as compared to $220.9 million in the prior year's quarter. The increase in revenue is attributable to three elements, each representing about one-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 12 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, 2011. This change is 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 14.8% as compared to 15.5% 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 three years, our gross margin has ranged from 13.5% to 15.5% 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. Salaries and benefits expense increased $3.8 million to $22.9 million compared to $19.1 million during the three months ended December 31, 2010. This increase was driven 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 698 employees as of December 31, 2011; an increase of 69 employees from 629 employees at December 31, 2010. Substantially all of the increase relates to the sales, marketing, and engineering personnel who are customer-facing and revenue-generating. General and administrative expenses increased $1.2 million, or 36%, partially due to the acquisitions of NCC, and ITI, as well as higher travel and other expenses associated with the increased sales and support personnel. Professional and other fees decreased 23.7% to $2.5 million compared to $3.3 million during the three months ended December 31, 2010, primarily due to a reduction in legal and other fees related to the patent infringement litigation. As a result, technology sales segment earnings before taxes increased 3% to $10.4 million in the three months ended December 31, 2011 compared to $10.1 million in the prior year.

Now, moving onto our financing business segment. Total revenues in this segment increased $900,000, or 9.9%, to $10 million for the three months ended December 31, 2011, as compared to the prior year. This increase was due to an increase in the net gain on sales of leases and notes, and an increase in other lease income, partially offset by a decrease in earnings from our lease portfolio, as a number of leases were added during the month of December, but did not significantly contribute to the earnings in the quarter. At December 31, 2011, we had $120.3 million in investment and leases compared to $123.1 million at December 31, 2010. Non-recourse notes payable decreased 32.7% to $23.4 million at December 31, 2011, as compared to $34.8 million at December 31, 2010. The non-recourse debt is generally recoursed to the lessee and the underlying lease equipment and not to ePlus. As a result, segment earnings before taxes increased $800,000, or 25.7%, to $4.1 million in the three months ended December 31, 2011.

Moving onto the balance sheet, as of December 31, 2011, stockholders equity was $216.5 million or $26.98 per share. The total cash and cash equivalents were $54.1 million as compared to $75.8 million on March 31, 2011. We continue to take advantage of our strong balance sheet by repurchasing our common stock, making acquisitions, and utilizing early pay discounts from vendors. For the nine months ended December 31, 2011, we repurchased 705,000 shares of our outstanding common stock at an average cost of $25.68 per share, for a total purchase price of $18.1 million. If needed, we can increase our liquidity in several ways. We can discontinue our stock repurchase program, stop paying vendors early, begin funding leases with non-recourse debt, or sell leases. We also have excess borrowing capacity in our financing arrangement with GE Commercial Distribution Finance.

In conclusion, we will continue to use our financial strength to grow our platform through acquisitions, hiring of talented people, and expanding our offerings to meet the needs of our customers. We will continue to execute on our strategic vision, which includes extending our geographical presence and improving our advanced technology solutions offerings through the opportunities that we have developed as a result of the actions we've taken. We are confident that these investments will help us achieve our strategic objectives over the long-term and enhance shareholder value. That concludes my remarks, and Operator, we'd like to open the call for questions.

(Operator Instructions) Nick Mauro, Sidoti and Company.

I know there's a lot that goes into the gross margin that can be volatile, but what can you attribute the gain from the September quarter to this quarter? Because it went up over about 1% or so.

Primarily the mix of products that we sell between services and products, and also the type of products that we sell. In addition, we also increased our rebates as a percentage of sales. That being different quarter-over-quarter.

Okay. With the VantiCore acquisition, what's the timetable on getting that going, and how much of an impact could it have to revenues?

They're a relatively small company. They enhance our engineering capabilities in the New England area. We think they'll be up and running immediately. What impact it will have will be over time, as we're able to go now into their customer base, and increase the sales of our products and services that they don't offer.

Okay. Lastly, just an outlook into the rest of 2012, what's the demand look like for the IT products?

If you look at what we've seen in the last quarter, the demand has been very high. Everyone in the industry has some risk with hard drives and things of that nature, but in general we don't really forecast what we're going to be doing ourselves.

Okay. All right. Thank you.

(Operator Instructions) Gregg Hillman, First Wilshire Securities Management.

For your sales line, what percentage of that is reoccurring?

We don't break that out.

Okay. When you sell a piece of equipment, does it normally have a service contract with it?

We sell a lot of Cisco SMARTnet, which has a maintenance contract with it, yes. As far as our internal managed services, we're really starting to ramp that up, and put a lot of focus on that, but we don't break that out as far as a percentage of the sales.

Okay. When you say internal managed services, would that fall in the 4% of the professional revenue or professional fees, or does that fall in the sales line?

It falls in sales of product and services.

Okay. In terms of this offering for managed services, do you own server farms yourself and provide that service?

You said server farms?

Yes. Do you own them?

We don't do hosting for clients, no.

I didn't quite catch that. You said you do own them or --?

No, we do not host servers for clients.

Okay. Then, can you just explain your strategy for to develop this capability for managed services? You mentioned it in a variety of areas -- for video security and whatnot; can you just explain, is this unique in the industry? Or are a bunch of other people doing the same thing?

Basically, there's a large number of people in this business, whether it's IBM, all the way down to VantiCore, who we just bought, provides managed services. There's a varied difference in what's offered. We have a system where we provide monitoring networks up and down that reduces costs for people. Servers to manage what are working and not working, as well as storage, and we are adding significant new capabilities quarterly.

Okay. But I mean, is this just catch-as-catch-can? That you're doing an add-on to some of your existing customers, or can you sell that managed services as a stand-alone product?

Either one.

What would be your addressable market in the United States for managed services?

The first thing we have to attack is the addressable market of our customer base, which is around 1,500 customers. That's who our salespeople are going after, as well as new clients, which we're bringing on, providing those services to them. But as far as the addressable market, it's large, but I have no numbers.

Okay, I'll get back in queue. Thanks.

(Operator Instructions) Brad Evans, Heartland.

I was curious, the 19.2% growth rate on the technology solutions side, what was the organic growth rate in the quarter?

I don't have that broken out, Brad. I'd have to get that to you.

Okay. We can follow-up after, perhaps. So, it sounds like the -- I don't want to put words in your mouth, but relative to last quarter, it sounds like the tenor of the market has at least stabilized to improved modestly? Is that a good way to characterize it?

I would say that's one of the results in this quarter, is that customers have been continuing to buy at a little faster pace than what they have in prior quarters. I also think it's the number of places that we've added, and the number of salespeople we've added, and a couple of the acquisitions in the last year, which are now starting to produce a lot more revenue and margins. I think all in all, it's a mix of several things.

Okay. That's very helpful. I know there's a lot of things going on within the technology sales SBU with acquisitions and obviously, the professional fees and what have you, but very stout total revenue growth of almost 19%. We only saw about a 3% increase in the segment earnings. When do you think we might start to see more operating leverage in that segment as you are able to deliver more of that revenue growth to the operating line?

We're continuing trying to improve that all the time. I think last quarter, we improved it over the quarter before. But as you're growing and adding new capabilities and services to keep up with the competition, there's always a delay factor before that comes through, but I think that we will continue to drive forward with these acquisitions and the growth that we have been able to do in the past. We hope we can do it in the future. But a lot of that depends on the market, and it's very competitive.

Got it. The investments you're making organically in Southern California, in Texas, and in Georgia, those are all in there right now?

I don't think we mentioned Georgia.

Okay. All right.

But they're all ones that we're trying to grow, and some we're growing organically and some we're growing by acquisitions. The benefit for the acquisitions is we acquire new customers, and for the most part, the acquisitions we made are either centered on one type of technology, which enables us to upsell the significant other technologies that we hold in our portfolio. Over time, I think that increases our ability to go wider and deeper into our accounts, and be able to get more control over what those accounts are spending.

Okay. Last question for me. The share count for the fourth quarter, should we be using 7.8 million shares? Is that about right?

We're continuing our repurchase, so it depends on the market and our plans.

Elaine, do you have the share count at the end of the quarter?

At the end of the third quarter?

At the end of the third quarter, yes.

I'm sorry. I thought you said fourth quarter that you were looking for me to project.

I did, but I'll just ask the question a different way. If you have the share count at the end of the third quarter, that would be helpful.

The diluted is 7.9 million, actually it's 8 million in round numbers.

Okay. Thank you very much.

Gregg Hillman, First Wilshire.

First of all, for the litigation against the Lawson Software, why is that important enough to mention?

A lot of our investors have been interested in this, and it's been a continuing litigation for the past year or so. We have invested some considerable amount of our assets in it, so that's why we feel the need to mention it.

How much have you invested in it, in terms of, I guess, lawyers?

I'm not sure whether I've disclosed that number or not. It's been going over probably three fiscal years now.

What's the run rate recently for spending on that thing?

It's decreased on a year-over-year basis. Last quarter, I think we spent about $1.5 million, down from about $2.3 million or so.

Last quarter meaning your third quarter, the September quarter?

Yes. We spent $2.5 million for the three months ended December 31, 2011, and that's a decrease from $3.3 million in the prior year.

Okay. I just wanted to ask you about competition for a company, let's say like PC Mall, that's just selling equipment over the Internet to commercial customers, do they have an advantage versus what you're doing?

I don't believe so. I think for the most part, it's a disadvantage because we found that it's lower margins; unless you can get in there and sell solutions, you can't increase your margins. We have a telesales and business development arm that calls into our accounts and finds new opportunities. But in our opinion, that requires a significant amount of infrastructure for telesales, as well as doing a lot of low margin transactions.

Phil, speaking of margins, you mentioned in the call I think at one point, rebates and also less vendor allowances. Can you tell me what's going on there? The trend, in terms of vendor allowances, and also your trends in terms of giving rebates?

This is Elaine. We don't give rebates to our customers. These are manufacturer incentives that we receive.

Okay.

These programs are very complex and ever-changing by the manufacturers. We don't have any insight into those programs on a long-term basis, what products or solution sets they're targeting at any one period of time. We do our best to garner as much of those incentives as we can. We have a whole team of people here that monitor and calculate those. I feel like we get the most we can out of those incentives, but they're difficult to predict on how they're going to be changing in the future.

Phil, could you comment about your overall dependence on Cisco as a vendor, if whether they can push you around, or is that a benefit because it's harder for other people to get certification to service all their products?

As far as pushing us around, I don't think Cisco has ever dealt with their partners that way. They're probably the most partner-friendly of the major vendors. They have a lot of focus on helping the partners grow, and we don't feel like it is a disadvantage, for a couple of reasons. One, no one really has come out with a viable alternative for unified communications and networks. And so that's going to be something that will be provided for years to come that will not be affected to any degree, we don't believe, in any degree to cloud services. It will enable us to have a strong foothold with our customers, and also put us in the right position where we can sell our other products and services to those customers. A large part of our managed services is around Cisco and Cisco networks, so we think in the long run it's a benefit to us.

Okay. Is Cisco growing faster or slower than you?

I don't own any Cisco stock, and I don't really follow their trends. I believe that we're growing a little bit faster.

Okay. Thanks.

At this time, I would like to turn it over to our speakers for any closing remarks.

We would like to thank you all for joining us, and we appreciate your interest in ePlus.

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