ePlus inc (PLUS) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the ePlus earnings result first quarter fiscal year 2014 conference call. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). Today's call is now being recorded. I would like to turn the call over to Mr. Kley Parkhurst.

Thank you, Kathryn. With me are Phil Norton, Chairman, President and CEO of ePlus, Mark Marron, COO and President of ePlus Technology, Elaine Marion, Chief Financial Officer, and Erica Stoker, our General Counsel.

I would like 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 risks and uncertainties detailed on the earnings release we issued yesterday and our periodic filings with the Securities and Exchange Commission, including our Form 10-K for the year ended March 31, 2013. The company undertakes no responsibility to update any of these forward-looking statements and in light of new information or future events.

I would now like to turn the call over to Phil Norton. Phil?

Thank you, Kley. We posted solid results for the first quarter of our fiscal year 2014. For the quarter ended June 30, 2013, revenues grew 6% to $259.3 million, our 14th consecutive quarter of increased revenue, a clear demonstration that ePlus is building and delivering solutions that our customers demand. We believe that we have the right focus on providing advanced technology solutions in the highest growth areas in our industries, including managed services, security, BYOD, Big Data, and cloud. We have over 2300 loyal customers, the right mix of products and solutions, and believe we can continue to capture market share from our competitors and wallet share from our existing customers to enhance future growth.

Over the past year we have continued to focus on our strategic growth initiatives, aggressively hiring top talent in the industry, to build our sales force and sales management nationally, in new locations and to strengthen our existing locations. We are hiring engineering professionals to meet current customer demand, in managed services and professional services, and to facilitate future opportunities in the market. And we are building out a new network operations center in Raleigh, North Carolina, to increase capacity as well as take advantage of the region's rich technical talent pool, drawing from multiple universities and military installations nearby.

Year over year, our headcount increased by 83 people, or 10%, the majority of which are sales and engineering personnel. There is a lag between the time we hire these personnel, and the positive effect on the bottom line, as it can take some time to generate revenues related to complex multi-month engineering projects. We also hired additional administrative and IT staff to scale operations.

As a result of these headcount investments which are necessary to capture the market segments which we find most attractive, such as managed services and security, SG&A, expenses increased at a higher rate than our gross profit. For the quarter, SG&A increased 14%, net earnings were down slightly to $7.9 million, and fully diluted earnings for common share were $0.97 per share, as compared to $8.1 million and $1 per share in the quarter ended June 30, 2012.

We are fully confident that the investment in human resources is necessary to handle expected future growth and scale our operations to meet custom demand. In particular, due to the high demand for managed services, we added 17 people in our managed services area. We continue to focus on expanding our security solutions and engineering services. We have hired multiple national security architects to drive presales, customer engagements in support of our end user sales force under the direction of our national security practice leadership. We are addressing our customers' security needs in the three fast emerging areas, cloud, Big Data, and BYOD, by providing assessments, architecture and management through our security operations center. Security has been an increasingly relevant concern to all of our customers, and is a fundamental pillar in our solutions graphic because it touches almost every other solution we sell and customers are demanding it.

Today we announced our new designation as a Master Cisco Cloud Builder, Cisco's highest Cloud Builder tier. This specialization recognizes ePlus as having the capabilities to build and deploy cloud-ready, integrated infrastructures based on Cisco's solutions and technology partner cloud offerings such as Netapps, FlexPod and EMC's VBlock. It includes e-workspace solutions, including Cisco, Citrix, and VMware. EPlus has built and delivered end-to-end cloud solutions and developed cross-industry expertise and virtualized in highly agile compute network and storage infrastructures.

The Master Cloud Builder designation is a strong commitment to our own brand of solution, ePlus eCloud, An offering that's comprised of four components -- cloud readiness assessment, prebundled, prepackaged solutions from major manufacturer, cloud automation and management tools, and cloud support services.

Our financing business exhibits renewed strength this quarter, with lease and financing origination volumes increasing, as customers lock in low interest rates. Customers are continuing to value our lease process automation, using our proprietary software and processes. We provide direct, tangible cost reductions and process efficiencies for the ongoing order processing of equipment, including procurement, payment, and asset management.

Sophisticated customers are viewing leasing as a combination of payable outsourcing, strategic servicing, procurement services, and financial controls. The result is lower costs, better information and higher productivity. A significant component of the increase this quarter was leasing to the federal government, which tends to be larger transactions. Overall, our financing segment is continuing to expand and we announced two new senior managers this quarter.

We are also continuing to see higher origination volumes through both technology vendors and federal integrators, who appreciate our fast and reliable approach to providing financing for their customers. We continue to review many acquisition opportunities and given our balance sheet resources, we have the capital resources to execute acquisitions and hire people in new territories. Our strategic growth plan of building a national footprint through a balanced program of acquisitions and new hires is an optimal way to build the company conservatively. We are also focused on finding acquisitions that can accelerate our growth in key technologies and solution areas.

We are committed to investing in our people, acquiring new technology solution expertise, and delivery capability, expanding our national footprint, and lowering operating costs. We are looking to expand recurring revenues through our managed services and staff augmentation, leasing, and collaboration as a service offering. Our customers rely on us for the key elements of their IT infrastructure, not only supporting and scaling their current environment, but also planning for the future, whether it is the cloud, BYOD, or Big Data.

We offer differentiated services as compared to our peer group, including asset management, supply chain services through one-source IT, which includes optimized ordering processes, electronic invoicing, and many other e-procurement functions and financial services to help our customers select, procure, finance, and manage needed goods and services.

In summary, we remain highly focused on executing our growth plans and improving shareholder value. At the end of this call, I would be happy to answer any questions, but first, I would like to introduce Elaine Marion, our CFO.

Thank you, Phil.

As Phil mentioned, we continue to drive top line growth, as consolidated revenues for our first quarter grew 6% to $259.3 million, the 14th quarter of revenue growth on a year over year basis. The growth in quarterly revenue is attributable to increases across both technology and financing segments.

In the technology segment, revenue for the quarter increased 5.2%, to $248.5 million, compared to the prior year's quarter, primarily from increased demand for products and services from our Fortune 100 customers.

In the financing segment, revenues for the quarter increased 28.2%, to $10.8 million, compared to $8.4 million in the quarter ended June 30, 2012. The increase in revenues was due to higher net gains on sales of financial assets, driven primarily by financing of federal government contracts originated through our systems integrator customers, and earnings generated from our financing portfolio, consisting of notes receivable and investment in leases.

Year over year our financing portfolio increased 18%, or $20.9 million, to $138.3 million, at June 30, 2013, from $117.4 million in the prior year. We are seeing an overall increase in demand for our leasing by our customer base, as well as new vendor financing programs that we have established over the last year.

In the technology segment, the gross margin on sales of product and services increased 70 basis points, to 17.7% for the quarter ended June 30, 2013, from 17% for the same quarter last year. The increase in gross margin was primarily due to a larger amount of revenues from the sale of third-party software assurance, maintenance, and services which are presented on a net basis.

Net earnings were $7.9 million, and fully diluted earnings per common share were $0.97, compared to $8.1 million in net earnings, and $1 per share in the quarter ended June 30, 2012.

As Phil mentioned, as part of our strategic plan, we are aggressively hiring personnel to meet current demands and to facilitate future growth and as a result, in the technology segment, total overhead expenses increased $35.6 million for the quarter compared to $31 million in the same quarter last year. We had 860 employees in the technology segment as of June 30 June 30, 2013, as compared to 777 a year earlier. Most of the 83 net new employees are sales and engineering personnel, as we continue to invest in such personnel in order to build out our geographic footprint and expand our solution offerings. Technology segment earnings before tax was $9.6 million for the quarter compared to $10.8 million in the same quarter last year.

In the financing segment, total cost and expenses were $7 million, compared to $5.7 million in the same quarter last year. The increase was driven by a higher direct lease cost due to an increase in depreciation expense for operating leases. The increase in total cost and expenses were also attributable to higher commissions due to the increase in gross profit during the quarter. As a result, segment earnings before tax for the quarter increased 38.9% to $3.8 million from $2.7 million for the same quarter in the prior year.

As of June 30, 2013, we had $72.7 million of cash and cash equivalents, as compared to $57.2 million at March 31, 2013. We continue to identify investment opportunities to expand the business, the acquisition and the buildout of our national footprint. Our liquidity and strong balance sheet provide us with resources to execute quickly when opportunities arise. As of June 30, 2013, our total stockholders' equity was $246.2 million as compared to $238.2 million on March 31, 2013.

That concludes our prepared remarks. Kathryn, can you please open the line for questions?

Thank you.(Operator instructions). Our first question comes from John Lewis. Your line is open.

Hey, guys, good afternoon.

Hi, John.

Hi, John.

I had a couple -- hi. I just had a couple of quick questions regarding your managed service opportunity. Can you just give a little color in terms of how the contracts work in terms of how -- what are the average length of a contract, how much does the -- how do you price the contract? And really what the opportunity is given your current customer base?

Well, John, I'm going to have Mark Marron answer that. He's our Chief Operating Officer and responsible for managers.

Thanks, Phil. Hey, John, how are you?

Hey, Mark.

A couple of different things here. Managed services, maybe taking one quick step back on this, managed services is one of the key areas that we think for growth as we move forward. It's basically management and monitoring different assets from servers, storage, video, security for our customers. The average length of the contract is normally three years. We have -- we do have contracts for as much as five years but the average is three years.

And can you talk a little bit about the size of a contract, typically? I mean, I know these are for large organizations. Are these $10,000 contract a year or $200,000 contract? Just ballpark in terms of the opportunity that you are going after.

Hey, John, it's hard to give you an exact figure only because it's based on the different assets that we are managing. It's based on the different sizes of the companies. It can range anywhere from effectively $50,000 a year up to $600,000 a year, just to give you a feel of the different types of deals that we are seeing.

Got it. And if you look at your base today of, you know, 2,000 plus customers, do you think this is appropriate for small subsect or -

I'm sorry, so meaning when you say a small subsect -

Do you -

With We actually feel that this is a service that many of our customers are looking for. So of our 2400 customers, we feel our managed service capabilities would be a fit for most, because in a lot of cases we are selling the servers, the storage, the networking, and the things that they are looking for a company like ePlus and this service to provide for them. So it's actually a natural fit for them to go back to all of our existing customers with our managed service offerings.

And you guys under a guy are in a position to do that today?

And we are in position to do it today and we are doing it.

Got it. Got it.

John, this is Phil. One other thing on that -- what we see is customers out there are restrained on budget for IT, that they are trying to outsource some of the functions they used to do themselves, and this is one important function which we can bring more talent to the table and the people that we have internally, and so we can do a better load balancing of the hours worked and be able to charge a higher fee and it's still a lower cost for our customers.

While you are rolling this out, is this holding down earnings in any way? Is there a lot of front-loaded cost in this business?

Well, if you look at the way these contracts go, it's almost like infrastructure as a service. We have a lot of costs to go into making the managed services big enough. We have people that we have to hire in advance on -- based on our projections, and the contracts come over three or a period of time. As we build up the base, it starts to produce very high margins, but it costs us a little bit for the period of time until we get a build up to a break even.

I will jump back in the queue. I appreciate the answers.

Thanks, John.

Thank you. Our next question comes from Greg Hillman, First Wilshire Securities. Your line is open.

Yes, hi, good afternoon. Just, I guess, two questions. About the assistance figure, how many dedicated programmers do you have working for the company right now?

How many -- sorry, Greg, not sure we understand your question. How many dedicated programmers working for ePlus? Or -

Yes.

We don't typically have programmers. We have engineers. We don't really -- we don't write code or software. Is that what you are referring to?

Yes, I'm not talking about software programmers. People that write code.

Okay. For our ePlus Systems, we probably have probably 25 to 30 programmers maybe.

Okay. And -- okay, and do you have programmers for other divisions?

No, ePlus Systems is the only part of where we have our own proprietary software. The other software we sell is third-party software.

And are these programmers working with, like, your procurement suite of products or are they working doing something else?

Yes, they are working with our procurement suite of products.

Okay. And then -- and Philip, I had a question for you, just in terms of kind of like critical mass for the company. The company has grown so fast. It seems like at some point, how did you get to critical mass? And then to get to this platform, that you are growing from right now, and do you need to build out your platform for growth any more than where you are at right now and what you are trying to do? Do you think you can grow faster in the future?

I went back a couple of years ago, our earnings were flat. We were adding a lot of people for taking on a new business, and it significantly changed the business by having more engineering talent and starting up managed services. I think that's kind of -- I think that's going to be a factor of how fast we grow. We're not someone that's trying to actually hire a lot of people unless we know there's a need for it. So we see the need today and as we get more volume and more business, the requirements to add other people will diminish.

Okay. And what's the importance of your brand right now? Does the ePlus brand have value? Do you go to market under other brands than ePlus?

Not really.

Okay. And then -- and then does that have value or is it just the relationship with these various customers you bought over the years? These companies and just gradually building up or are you like -- or have you reached such a critical mass that there is such a thing as value to the to the ePlus brand?

I think slowly but surely, we are building value in the ePlus brand, but to this point, it's really regional and it's really the ability of our sales force, which is very large, to get out in front of customers and provide events of which we do a significant number in each one of our regions. I think that's where the branding part comes in. But to general, up to date, it's been really salesmen on the ground and engineers providing services to our customers.

Okay. And in terms of the way you position your managed services relative to other offerings, there seems to be a lot of managed service companies for cloud computing and whatnot. Is it basically that you have more feet on the street, and customer relationships that lead to managed services? Or is your service offering really differentiated or unique or better than something else that's currently out there?

Hey, Greg, this is Mark. Here's one thing that will maybe kind of give you a better picture. What we believe we have at ePlus is we have the ability to provide the full solution that our clients are looking for, which means from the upfront assessment, sitting with clients assessing their existing environment and this new environment they are moving to, providing the analysis and the solution that they are looking for, and then on top of that, being able to provide the managed services, staffing, and other flexibilities that they may look at in terms of how they purchase or procure other product. So the big picture message is they are able to deal with ePlus for all of those different pieces as compared to dealing with multiple different resellers and/or vendors.

So nobody else -- don't the other VARs do the same thing?

No. Not all have leasing, for example, not all have procurement, not all have managed service capabilities. So if you look at where a lot of our clients are looking for, most of them are looking to, obviously, reduce the costs. They are looking to consolidate the vendors and/or resellers that they deal with. One of the strengths we have is that we can address things in each of those three areas.

The other things that we do, as it relates to managed services, it ties to all the key areas, or I should say focus areas of where the market is going. So if you look at BYOD, Big Data, cloud, security, we have managed service offerings that tie into selling both of those products, being able to implement and install those products for our clients, and then optimize that solution by providing managed service capabilities as they go forward.

Okay. And it's not -- you are not unique in this offering, so how many other people have the same capability set that you do in the country right now?

Well, we would like to think that we are unique, but maybe that's just my opinion, Greg. In terms of overall, I couldn't guess how many different resellers have all of those capabilities tied together.

Greg, this is Phil Norton. I think size is an important factor here, and the ability to grow this, and having the capital to be able to invest, because it's heavy investment and then being able to provide different services from the monitoring and to threat analysis from security and other issues that may come up and be able to actually send people to be able to determine what the problem is, and take that requirement away from the manufacturer. And the manufacturers are moving more and more to having the partners do the work versus themselves so they reduce their costs. So I think the future is going to be significant for us.

Right. So -- and then in terms of what's your size relative to your addressable market?

What do you mean by that?

Well, for this new -- your new beefed-up company with all the additional services, what would be the addressable market? I mean, I guess just for a VAR, I guess it must be a lot bigger. It's in the tens of billions maybe, but you have all of these managed services offerings too. I mean, I'm just trying to get a sense of -- I guess -- I know there's a lot of different markets. I want to get a sense of what your addressable market and your share of markets in some of the subsegments that you are addressing, in particular, your procurement, your software and managed services, for example.

Well, I think it's a very big mark, if you look at it. We are $1 billion, is probably one-tenth of 1% of the addressable market in the country. We have 2,000 customers. That gives us a base that's significantly higher than most of our competitors. The amount of capital, as mentioned before, to get in this business and to be able to provide this service is a significantly higher than most people have on their balance sheet. I think we are positioned better than most of our competitors because we have a strong balance sheet.

We are able to invest in these new opportunities. I think it's a limited number of VARs and I think in today's environment, I think we look much more like an integrator and being able to provide complex solutions to our customer base and we're driving higher up into the market, into the higher midmarket and into the enterprise and having a lot of success there.

And then so, do you think that current situation will result in another round of consolidation in the industry because a lot of people can't keep up with you, so to speak?

Well, it's not just keep up with us. There are other people that are in our peer group that are also because the market is so big, there's no way that we could cover it, but I think -- I call it the have and the have-nots. It's the people would have invested heavily in engineering and very talented people are the ones that are being able to provide the best services to the larger customers.

The vendors themselves, whether it's HP, Cisco, EMC, are all moving towards the channel and trying to get them to drive more services and be able to provide to the bigger customers and that takes significant amount of resources, and -- I can't give you the exact number but it's very small the number of people that can do that. So I think we are significantly differentiated ourselves as one of the ones that have the capabilities and most of the people don't have the money or the capabilities.

So you have a lot of runway left to grow? There's no reason why you can't grow a lot in the next five to ten years?

Well, I can say this -- we continually try to plan where we are going. We think that the opportunities in the market are significant, and we think that we have as good or better reputation. We have been able to help our customers architect and design cloud offerings as well as managed services, and that's a significant growth part of the business also. And I think that we are well positioned to capture the market share from our competitors and prove our offerings to our customers.

Okay. Thanks very much for all of your comments, guys.

Thanks, Greg.

I'm showing no further questions. I would now like to turn the call back to Phil Norton or any further remarks.

We'd like to thank you very much for taking the time to join our conference call, and if you have any questions, please feel free to contact us. Thank you very much.

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