ePlus inc (PLUS) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the ePlus third-quarter fiscal year 2014 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. As a reminder, this conference call is being recorded.

I would now like to introduce our host for today's conference, Kley Parkhurst, Senior Vice President. You may begin.

Thank you, Destiny. Thank you everyone for joining us today. With me are Phil Norton, Chairman, President and CEO of ePlus; Mark Marron, Chief Operating Officer and President of ePlus Technology; Elaine Marion, Chief Financial Officer; and Erica Stoecker, General Counsel.

I want to take a moment to remind you that the statements we make this afternoon that are not historical facts may be deemed to be forward-looking statements and are based on management's current plans, estimates and projections. Actual and anticipated future results may vary materially due to certain risks and uncertainties detailed in the earnings release we issued this afternoon and our periodic filings with the Securities and Exchange Commission including our Form 10-K for the year ended March 31, 2013 and subsequent Forms 10-Q.

The Company undertakes no responsibility to update any of these forward-looking statements 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 had a very strong quarter. Revenues increased 10.4% to $267.2 million. Net earnings increased 17.5% to $10.6 million and fully diluted earnings per share increased 18.9% to $1.32 per share. During the quarter, we announced and implemented a 750,000 share repurchase plan. We will go into more financial and operational details during the prepared remarks. But one highlight of the quarter was a sharp increase in the gross margin on products and services which increased 140 basis points to 18.9% based in part on our stated strategy of success in transitioning to a higher-margin service-led business model.

Our financial results illustrate our ability to achieve double-digit revenue growth as a provider of complex integrated solutions at one of the highest gross margins in the industry. Our services led business model addresses our customers' complex computing and business requirements for the entire IT lifecycle. From the upfront assessment phase through managed services ultimately optimizing and securing and managing our customers' IT environment.

For the quarter net earnings increased at a faster rate than revenues which reflects an increase in gross profit from both a higher gross margin and more revenues as well as our ability to hold the line on cost.

As we discussed last quarter, we are trimming underperforming personnel while continuing to invest in sales and engineering talent to address the huge opportunity in security, storage, BYOD, cloud and others. We are continuing to focus on our key strategic objectives expanding our national presence through organic growth and acquisitions, growing sales through existing customers by offering our full suite of products and services, becoming more operationally efficient, focusing on profitability, and continuing to hire, retain and train the best employees.

We continue to review many acquisition opportunities and given our balance sheet resources, we have the capital to execute acquisitions and expand 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 effectively. We are also looking for acquisitions that can accelerate our growth in key technologies and solution areas.

I will be happy to answer questions at the end of the call but for more detail on the quarter, I would like to turn the call over to Mark Marron, Chief Operating Officer of the Company and President of ePlus Technology, our largest segment. Mark?

Thank you, Phil. I would like to address some of our accomplishments we made during the quarter both from an operational as well as from a sales and services standpoint. We as a management team and as a Company are very focused on the corporate objectives that Phil highlighted and I will touch on some of the progress we have made in each of these objectives over this past quarter.

As it relates to expanding our national presence and footprint, in November we acquired AdviStor, a storage focus solution provider in the Rochester market. Now this transaction plays to both of our primary acquisition strategies. One, it expands us geographically; and two, it brings an additional technology capability that we didn't have in that area.

Now while we already hired a strong group in Rochester as a greenfield effort to start a new office a few years back, our customers and vendor partners were actually looking for us to expand our capabilities and reach in this market. AdviStor and its principles have a long history in the greater Rochester market and this deal instantly increased our presence, it created new customer relationships and increased our sales and engineering delivery capabilities. So while we already had a strong engineering and sales focus around Cisco technologies in this market, we really wanted and needed additional storage expertise that AdviStor was able to provide. So if you think about it, AdviStor's focus in that area is a great addition to our portfolio because it allows us to expand our multivendor solution capabilities, it expands our customer base and we on-boarded some great employees.

This AdviStor transaction was also a perfect example of ways we have improved and enhanced our operational efficiency so we believe we have created an excellent platform to integrate acquisitions and enhance operational efficiency. So on day one, all of AdviStor's customers, deals in progress, accounts receivable, accounts payable have been loaded into our systems. All of their personnel have been trained on our systems. We had support staff on site and dedicated online resources for post-closing support so if you think about it on day one, they were fully integrated which ensured compliance and efficiencies and provided immediate opportunities to cross sell our entire portfolio of goods and services to their customers.

We have used this process and methodology with all of our technology segment acquisitions so I think it is a key differentiator for us.

While I am in the upstate area in the Rochester and upstate New York region, during the quarter we announced a multiyear managed service and staffing deal with Eastman Kodak Company. So Kodak is a company in transition and it outsource IT functions to us to reduce costs and gain efficiency. Some of the services we provide to Kodak are the following.

Our managed service team is monitoring and managing Kodak's entire Cisco route switch and wireless infrastructure. We have a help desk staff on site for service delivery management and engineering support. This includes everything from responding to troubled tickets, moves, adds, changes, configurations and network architecture engineering design. We are also providing a 24x7 on-site break/fix coverage for 17 sites around the United States and Canada.

So this is a great example in my mind of the services-led business model that Phil mentioned a little bit earlier which provides the support and services our customers are looking for across many areas. It is a strategic focus for us as we look to provide customers the help and guidance they need from the discovery and assessment phase all the way through optimization of their environment.

Now at this point I would like to take this time to just recognize Dan Farrell for his contribution to building out our services business. Dan was our Senior Vice President of services and we have really made some great strides over the last three years under his leadership. He has done a great job in enhancing our service offerings and building out our capabilities to design and implement solutions our customers need in today's challenging environment.

But most importantly I think Dan has improved the customer experience and our customer satisfaction levels by developing a project management approach and reporting methodology that ensures successful deployments and provides the transparency our customers require in order to understand what is occurring in their IT environment and ultimately find ways to reduce their total cost of ownership for even the most complex IT platforms.

I guess a good example of this would be that we recently won our 11th customer satisfaction award from Cisco. So within our services business, as Phil said, we are moving more toward a services lead model.

One area we are focused on building out is our value-added recurring revenue streams. Examples of this include expanding our managed service offerings and our staffing capabilities such as the Kodak example I highlighted a little earlier. Yesterday in fact, we announced our newest managed service center to handle expanding demand for our managed service offerings and to prepare for our soon to announce enhanced managed services which is a vendor certified Tier 1 First-Wall program. The new managed service center is actually our third in the United States. It's located in Raleigh, North Carolina and we feel that is a vibrant market with a deep pool of technically talented people.

We are also confident that our managed services will continue to drive customer loyalty by providing the real-time support that many of our customers require while continuing to support our overall growth and profitability goals.

Phil also mentioned our plan to grow sales to our existing customers by offering a full suite of products and services. This really includes being able to provide all the traditional solutions are around compute, storage and network but also being able to support the emerging technologies like cloud, Big Data, BYOD and security. One of the biggest challenges our customers face today is how to utilize different cloud technologies with security being a key component of any solution.

The cloud solution market continues to provide us with ample opportunities to engage our customers with cloud readiness assessments, consulting and cloud enablement services.

Our services methodology of plan, build, support and optimize actually helps our customers address the uncertainty and confusion about what cloud solution is right for them so whether it is public, hybrid or private, we help our customers move their workflows to the correct safe and secure environment which meets their business needs cost-effectively.

Also in last quarter's call, Phil also mentioned one of our focus areas was to build out our national security practice so I am pleased to report that we have continued to add resources in our region to provide our customers with the consultative services and support they require to help secure their applications and IT environments from hacking and other malicious attacks.

It is also important to note that we leverage the security expertise and knowledge of NCC Networks, which is a previous acquisition we did in the Midwest about two and a half to three years ago to help us build out our national security practice. This is how we leverage the strengths and resources of an acquisition in this case to help us build out our overall security offerings of all ePlus customers.

A good example of some of the things that we are building out in the security space from an expertise standpoint is the fast emerging technologies such as next-generation firewall to address today's accelerating security risks. To give you an example of the opportunity in this market, Gartner Group estimates that only 10% of the firewalls in place to date meet the requirements to protect against sophisticated attacks and project that 35% will meet requirement by the end of 2014. Both these older firewalls will need to be replaced and security is expected to be one of the highest growth areas in IT.

Security is a growing concern for all of our customers whether big, small, public or private. In addition, if you think about it, security touches almost every one of our technologically complex integrated solutions including datacenter, networking, infrastructure, giving us a broad array of products and services on which we can leverage sales and security products and services.

We are also keenly focused on building and investing in relevant technologies that will keep ePlus on the forefront of delivering value to customers. For example, in the Big Data arena, we were selected as one of the first companies in Cloudera's Connect Partners Program. Cloudera provides one of the most innovative uses of Apache Hadoop for a range of business applications. We will look for ways to market and sell Apache Hadoop based Big Data management software and services.

What is important to note is we will always look to leverage our existing technology resources and capabilities to supplement what we do in some of these new emerging technology areas. For example, we were chosen for Cloudera's program in part because ePlus is the top net FlexPod reseller in the United States. Having built expertise and engineering capability over many years, FlexPod is the reference architecture that has been optimized for Cloudera deployment so by using our expertise and legacy technology with the hot technology of an emerging vendor, we have really achieved the ability to protect our base business as well as capture high growth opportunities.

There are many examples of this throughout the business but it is important to know that ePlus is cognizant of and investing in rapidly advancing technologies that our customers demand.

Turning now to our finance segment, we are continuing to find that customers and manufacturing partners are valuing our process automation, our responsiveness and our ability to offer customized financing solutions that are tailored to their unique requirements. In this segment, our manufacturer partners are relying on us more than ever to meet their requirements for rapid turnaround on financing transactions. We remain focused on increasing volumes to increase profitability through gain on sale transactions and build our on-balance sheet portfolio for the long-term to create recurring portfolio earnings and increased earnings from post-contract transactions.

Elaine will cover leasing in more detail during her presentation.

So in summary if I could, we remain focused on our corporate objectives of building out our national footprint, expanding and enhancing the solutions, services and support offerings our customers expect from ePlus in both traditional and emerging technologies while 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 want to turn it over to Elaine Marion, our CFO, who will discuss our financial results. Elaine?

Thank you, Mark. As Phil mentioned for the quarter ended December 31, 2013, consolidated revenues grew 10.4% to $26.2 million, the 16th quarter of consolidated revenue growth on a year-over-year basis. Our financial results were strong compared to the prior year's quarter as net earnings increased 17.5% to $10.6 million and fully diluted earnings per share increased 18.9% to $1.32 per share.

For the nine-month period, consolidated revenues increased 6.8% to $797.6 million while net earnings were consistent at $27.1 million. Diluted earnings per share was $3.34 with 8 million diluted shares outstanding for the nine months ended December 31, 2013 compared to $3.38 per share based on 7.9 million diluted shares outstanding for the same period last year.

Moving to the technology segment, revenue for the quarter increased 12.4% to $257.9 million compared to the same quarter last year and for the nine months ended December 31, 2013, the technology segment had revenues of $769.5 million, an increase of 7.3% as compared to the prior year.

Our revenue growth stems from increases in demand by our Fortune 100 customers as well as overall increases in our ePlus Professional Service revenues.

In the technology segment, gross margin on sales of products and services increased 140 basis points to 18.9% for the quarter ended December 31, 2013 driven by an increase in sales of third-party software assurance, maintenance and services which are presented on a net basis as well as improvements in product margins.

For the nine months ended December 31, 2013, our gross margin on sales of product and services increased 60 basis points to 18.1% from 17.5% in the prior year primarily due to higher ePlus services revenue as well as higher sales of third-party software assurance, maintenance and services.

Earnings from our technology segment were $15.2 million for the quarter, up 49.5% or $5.1 million from the prior year's quarter. Total overhead expenses increased 13.5% to $35.3 million for the quarter compared to $31.1 million in the same quarter last year.

On a year-to-date basis, overhead costs increased 12.4% to $105.4 million. These increases were attributable to increases in salary and benefits due to increases in personnel, higher commissions and higher healthcare costs.

We had 903 employees in our technology segment as of December 31, 2013, an increase of 93 employees from the prior year. Most of the increase in personnel relates to sales and engineering positions as we continue to invest to expand our geographic presence and solutions offerings.

Turning to the financing segment, revenues decreased 26.7% to $9.2 million compared to $12.6 million in the quarter ended December 31, 2012. The comparative prior period had net gains from the early termination of certain lease agreements and the buyout of the related equipment. As of December 31, 2013, we had $140.1 million in investments in notes and leases compared to $123.1 million at December 31, 2012, an increase of $17 million or 13.8%.

For the nine months ending December 31, 2012, revenues in our financing segment decreased 4.3% to $28.1 million primarily due to decreases in marketing income and broker fee income. Total cost and expenses decreased $900,000 during the quarter due to lower commissions and broker fees.

For the nine months, total cost and expenses increased $1.3 million due to increases in direct lease costs of $2.2 million which was primarily offset by lower commissions and broker fees. As a result, earnings from our financing segment were $2.8 million for the quarter compared to $5.3 million in the prior year period and $7.6 million in the nine-month period compared to $10.1 million in the prior year.

Cash and cash equivalents were $40.5 million at December 31, 2013, down from $52.7 million at March 31, 2013, in part due to share repurchases of $7.8 million and purchases of equipment and software that we finance for our customers. Our total stockholders' equity was $259.7 million as of December 31, 2013 compared to $238.2 as of March 31, 2013.

In summary, ePlus experienced robust financial performance this quarter and is well positioned to execute our strategic growth plan.

Operator, this concludes our prepared remarks. Please open the line for questions.

(Operator Instructions). (inaudible) Canaccord.

Thanks for taking my question. A few quick questions, on the technology segment, you highlighted the strong growth. Is there a particular segment within (inaudible) that you saw stronger growth (inaudible) security or if you can just add some color on the subsequent (inaudible)?

This is Mark Marron here. In terms of the growth was across a couple of different areas. Some of our larger enterprise customers we had nice growth in our services business. Security, we had nice growth in our security numbers during the quarter as well. So those are the three off the top of my head that we had some nice growth year-over-year.

The second question I had was the gross margins, I know you pointed to a huge bump up from the year ago quarter. I know (inaudible) you benefit from (inaudible) but are you also seeing higher margins across the product portfolio or (inaudible)?

Sorry, we are having trouble hearing you. Did you say across the portfolio?

Across your product portfolio. I know the services have benefited it, but was it also better margins and products?

This one is a little tougher to answer just for one reason is I think it is across the product portfolio because in the areas that we are focused on which is in the datacenter cloud space, infrastructure management, you see in collaboration space we are providing all the services that our customers look for both from installation, implementation, configuration, managed service and staffing. So that increased our blended margins across all of our focus areas that we are looking for.

We also had one other thing that played into that is we had a very strong quarter with our maintenance renewals which we feel pretty good about some of the processes and plans we put in place. That helped as well.

The last question I had was on your North Carolina managed services datacenter. If you can just give us some color on how you plan to roll it out, what type of customers you are looking for in managed services?

In terms of rolling it out, we have already rolled it out. So we have got offices in Pennsylvania, California and now in North Carolina mainly because of the demand that we were seeing from our existing customers as well as some of the new customers that we have been pitching our service capabilities to. We are also as I mentioned in my presentation, we are rolling out basically an enhanced maintenance program. We are providing Tier 1 support to our customers that we are finding a lot of customers are looking for that one place to go or one throat to choke that can go across multiple vendor solutions providing both the Tier 1 support that they need and then the proactive management and monitoring that they need.

So we are building out these capabilities across all three managed service centers. What it does for us if you think about it, East Coast, West Coast from a timing standpoint, it also gives us the capability to provide the support in the timeframes that our customers are looking for across the entire US.

Okay, great. One more on just IT spending, what are you seeing out there in terms of do you expect growth or do you expect (inaudible) to see growth. Can you provide any color on what you are seeing for IT spending?

We haven't seen anything that would dictate that we have seen IT spending slow down at this point. But I don't have any material percentages from an IDC or a Gartner that I can share with you but in our customer base and potential new customers, we haven't seen any slow down.

Okay, great. Thanks a lot.

Thanks for taking my questions. I guess following up on the Raleigh question, do you have I guess additional headcount to add there going forward? Just curious how many and sort of how long you would expect it to be fully ramped?

It is Mark Marron here. We have added most of the headcount that we need to support our managed service offerings and capabilities across the three sites. In fact, that is where we had some of our SG&A what I would say headcount and expense adds has been in the managed service center. And the way that we will do it as we go forward is we have metrics in place as the business grows, we will add to capacity as is needed.

So as the business grows and the customers that we are supporting grows, we will continue to add people. The good news is that we have states in each of the offices now to add incremental headcount as this business grows or as we hope this business grows.

Okay, got you. Thanks. On the Kodak win, can you share a little bit more around who you competed against, who you are in general seeing in terms of competitors in these sorts of offerings with larger customers? And what was the hook or key to winning that one in particular?

I think there were a few things that were the hook or the key as it relates to the Kodak piece. One, I don't remember off the top of my head who the competitor was. I wouldn't want to embarrass them on this call if you will so I will keep that to ourselves. We run across the traditional players that play in this space maybe somebody like a Datalink when you mention storage, would be somebody that we would go against from a managed service capacity.

But I think what set it apart was we had some multiple resources that Kodak thought were very talented and capable individuals that could lead a team to provide all of the things that they were looking for on site. So maybe when I have talked about the 24x7 on-site break/fix and some of the other things we are doing with the help desk, they felt very comfortable with the resources that we had and what we could bring to the table.

The other thing that we think kind of set it apart was when we walked them through our managed service offerings and what we can do from a proactive monitoring and management. And then also the reporting that we provide back to them so some of the dashboards and reporting that we provide back to them so they could understand what was happening in their environment and adjust accordingly.

So we do quarterly business reviews with them and we actually walk through where things stand, where things might improve, anything they need to be aware of as we progress with this contract.

Okay, helpful. And then did you sense or can you talk to any pockets of strength or weakness in terms of your customer verticals?

I'm sorry, it sounded like you said something with customer verticals.

Yes, just any strength or weakness that you are seeing across industries that you sell into?

Yes, we haven't seen any downturn in any of the markets. What is nice about our business for the most part, we are not dependent on any one vertical. Each quarter a different vertical will be up or down versus another but we haven't seen anything significant in any of the verticals either significantly up or significantly down from past history.

Great. All right, thank you for taking my questions.

No problem. Thanks for your time.

(Operator Instructions). I am showing no further questions. I would like to turn it back over to management for closing remarks.

We would like to thank you for joining us and we will see you in another quarter.

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