ePlus inc (PLUS) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the ePlus earnings results call.

At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions).

As a reminder, this conference call is being recorded.

I would now like to turn the call over to Kley Parkhurst, Senior Vice President. Sir, you may begin.

Thank you, Destiny, and thank you, everyone, for joining us today. With me at 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 31st, 2014, and our 10-Q for the quarter ended June 30th, 2014, when filed.

The Company undertakes no responsibility to update any of these forward-looking statements in light of new information or future events.

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

Thank you, Kley, and good afternoon, everyone. Thank you for participating in our call to review first quarter fiscal 2015 results and discuss our views on business trends.

This was another successful quarter for ePlus, as we executed on our strategy to continue to achieve profitability and sustainable growth. This included providing increasing complex IT solutions by leveraging our expertise in the high-end segments of the market, such as mobility, cloud, storage, and security; increasing our service business, which goes hand in hand with these more complex solutions; expanding our industry-leading technical staff and sales team, who both drive and support our continued growth; and maintaining and building upon the strong relationships we have with both our traditional vendor partners and leading players in emerging technologies.

First quarter revenues increased 5% on a year-over-year basis, led by a 6% increase in products and services revenues from our Technology segment, which accounted for 97% of our business this quarter. This more than offset the year-over-year decline in revenues from our Financing segment, where quarterly revenue trends tend to be uneven.

The percentage increase in operating income was twice that of sales in the first quarter, primarily reflecting an improved sales mix and our focus on higher-margin products. This was driven by an 80 basis point expansion in the Technology segment's gross margin on products and services, to 18.5%, and a 40 basis point increase in company-wide gross margin to 20.7%. These are both industry-leading numbers that speak to ePlus' transition to an IT solutions company.

We continue to add our technical services and sales teams to support this transition and to expand our platform for future growth, and ending first quarter with a total of 957 employees, of which 72% represent sales, marketing, and engineering personnel.

Reported diluted EPS for the quarter was $1.25, 29% ahead on a year-over-year basis. Excluding a special gain, first quarter non-GAAP diluted EPS increased 17.5% to $1.14, benefiting from the solid operating and financial performance of the quarter, as well as a 5.3% reduction in the weighted average of shares outstanding, thanks to our stock buy-back program.

While one quarter does not make a trend, we are encouraged by the solid demand we are seeing across our expanded customer base, and I'd like to ask our Chief Operating Officer, Mark Marron, to give you more insight into our market position and business plans.

Thank you, Phil. The strategy that Phil outlined in his remarks is addressing the needs that we are seeing every day in the marketplace, particularly with reference to the cloud and security, along with all the value-added services and support customers expect.

Our customers are facing challenges of selecting, and, in some cases, building the appropriate cloud that will provide a long-term home for their business data. The next hurdle is moving huge quantities of data from legacy data centers on to the cloud. When you add this to the increasingly more complicated security environment and the multiple point solutions available, you can easily why CIOs need a partner for their IT needs, rather than simply a vendor.

One of the ways we're trying to help is through value-added assessments and our executive services portfolio of offerings. One offering that we provide to our customers is what we call a Virtual Chief Security Officer of VCSO engagement that helps them build a three-to-five-year roadmap to secure and protect their IT environment.

It's a great service for mid-size customers who are struggling to create a comprehensive, long-term, and integrated security plan, made especially difficult given the myriad of point solutions available, and the fast-moving pace of technology amid ever-changing security threats. Mid-size customers cannot always afford the on-staff expertise to do this in house, and are relying on VCSO services from ePlus. And to put the impact of security on our overall business in perspective, our security pipeline has grown in the last 12 months, through June 30th, 2014, by more than 50%.

In regards to services, our integrated consultative approach enables us to partner with our customers to understand their current environment, build and support their infrastructure, and then provide managed and other services such as supplemental staffing to support their business needs going forward.

We then utilized our PBSO services model, which stands for plan, build, support, and optimize. And really what that does, it helps our customers match their business needs and IT concerns. Part of the success of this model can be seen in the 80 basis points improvement that Phil mentioned in our gross margin on products and services that we achieved in the first quarter.

Our service offerings are an essential part of our business model. Our professional services business was the fastest-growing portion of our Technology business.

In our managed service business, we continue to invest in the resources, tools, and facilities to expand our capabilities in order to meet customer demand and provide additional value-added, higher-margin services.

Another value-added service we are focused on is enhanced maintenance services, or EMS, a one-stop bundled solution that combines our managed services with vendor maintenance and warranty services. This provides customers with a one-stop solution through ePlus to maximize efficiency and optimize services for the maintenance and support of their IT infrastructure.

In the first quarter of fiscal year 2015, we continued to hire top-tier talent in customer-facing positions. The Technology segment grew its headcount by 5.2%, and almost one-half of the new hires were in services. This has, obviously, increased expenses in the Technology segment, but with our transition to higher margin products and services, this is, of course, a cost we are more than able to absorb.

Turning to our customer base, we now have over 2,800 customers, an increase of 20% during our last fiscal year. In addition to our focus of adding net new customers throughout our platform in diverse industries and geographies, we are also keenly focused on steadily growing our wallet share with existing customers. This gives us the ability to go wider and deeper with our customers across hardware, software, services, and financing solutions.

Our Financing business segment continues to be well positioned for growth, as well, in that customers are focused on consumption-based monthly payment type structures that fit into the CIO's operating budget, with payments spread over multiple years, rather than an up-front payment coming out of the capital budget.

In that sense, Financing is moving towards an as-a-service model, just like software and infrastructure. We believe that we can lever our 20-plus years of expertise in this area to benefit both our customers and vendors.

We also continue to achieve important recognition from our key partners. We received multiple recognitions at the Cisco Partner Summit, including Cloud Builder of the Year, Commercial Partner of the Year for the Americas, and SLED Partner for the US and Canada West.

We were also recognized by HP as top growth partner for HP storage.

To sum it up, we see opportunities to add new customers and expand our business with existing customers, and our range of products and services continues to grow in traditional and emerging technologies.

I would now like to turn over the call to our CFO, Elaine Marion, for a financial review of the quarter's results.

Thanks, Mark. As Phil said earlier, our first quarter results demonstrated solid revenue growth and significant gross margin expansion. Consolidated revenues were up 5%, led by 6% growth in the Technology segment, which more than offset the decline in the Financing segment, caused primarily by a gain on sale in the first quarter of fiscal 2014.

Gross margin for the quarter was 20.7%, up from 20.3% in the first quarter of 2014, led by an 80 basis point improvement in the margin for products and services. Operating income increased 10.4% to $14.7 million, after absorbing a 6% increase in operating expenses, resulting primarily from a 4.1% increase in headcount, and higher compensation related to our growth in our gross profit. Most of our sales force cost is commission-based, and, thus, costs vary with our gross profit.

Our reported net income this quarter included a non-operating gain of $1.4 million in the Financing segment related to the repurchase of a financing arrangement which had been accounted for previously as a secured borrowing.

Our earnings per diluted share were $1.25, up 29% from $0.97 on a 5.3% decrease in weighted average shares outstanding to 7.6 million from 8 million. Excluding the one-time net gain of $1.4 million, our non-GAAP earnings per diluted share were $1.14, an increase of 17.5% from last year.

Drilling down to our segment results, Technology revenue was up 6% to $263.4 million, with strong demand, especially from our large and middle-market commercial customers. Similar to previous quarters, we saw revenue growth in services outpacing the growth in products.

Gross margin on products and services in the Technology segment expanded 80 basis points to 18.5%, driven by higher product margins, a higher proportion of revenue coming from services, and also sales of third-party software assurance, which are reported on a net basis.

Technology segment earnings were $12.4 million, an increase of 30% from last year's first quarter. This strong performance was achieved despite a 6.9% increase in operating expenses, resulting primarily from salary and G&A increases of 10% and 20%, respectively.

These increases reflect the 5.2% increase in headcount, in line with our strategy of adding staff in the professional services and sales areas, higher compensation, and also various G&A expenses, such as software licenses, maintenance, and advertising. These additional operating costs were offset, in part, by a year-on-year reduction in legal expenses of approximately $1 million, primarily from our patent litigation case.

In our Financing segment, revenue was $8.9 million, down from $10.8 million a year earlier. Revenue in this segment tends to be uneven from quarter to quarter, with results fluctuating due to the timing of post contract transactions and sales transactions. In the first quarter of the prior fiscal year, we had gains on sales of transactions of $4.3 million, while in the first quarter of fiscal 2015, these sales totaled $2.1 million. That delta largely accounts for the lower year-on-year revenue.

On a GAAP basis, which included the non-recurring $1.4 million gain on the retirement of a liability I mentioned earlier, segment earnings were $3.7 million, essentially flat from a year earlier. Excluding that gain, non-GAAP segment earnings were $2.3 million.

Looking quickly at the balance sheet, our cash position was $67 million from $80 million on June 30th, 2014. The main contributing factor was share repurchases of $27.2 million, which included the 400,000 shares repurchased for $19 million as part of the secondary offering. The balance sheet remains very strong with total shareholders' equity of $249 million, up from $246 million a year earlier.

Yesterday we announced that we have amended our credit facility with GE Capital Commercial Distribution Finance to increase our credit limit by $50 million to $225 million. This expansion strengthens our ability to support our customers with advanced technology solutions, and enhances our financial flexibility as we continue to grow the business.

I would now like to turn the call back to Phil.

Thanks, Elaine. To sum up, first quarter results represented a strong start to fiscal 2015. ePlus continued to gain market share by providing customers sophisticated solutions to complex IT issues, and supporting them with a full suite of IT services.

As Mark mentioned, we are addressing a larger and more diversified customer base today than we had one year ago, providing significant cross-sell opportunities and the vertical expertise that helps bring in new customers. At the same time, we plan to continue to be a consolidator in our industry by considering accretive acquisitions that expand our geographic reach, adds software to enhance our customized solutions and/or deepen our services offerings. We have sufficient resources to support organic growth, as well as investments and acquisitions to enable us to grow faster than the industry average.

I would now like to open the call to questions.

Thank you. (Operator Instructions). Our first question comes from Matt Sheerin of Stifel. Your line is open.

Yes, thanks. Good afternoon, everyone.

A question for Mark. Could you give us a little bit more color, Mark, in terms of the strength you saw in terms of the verticals? And also, give us an idea, maybe rough percentage of your breakdown of end markets in the Technology segment by vertical?

Okay. So -- hey, Matt, first of all, thanks for joining. The first thing is, the verticals as a percentage of our overall business really hasn't changed quarter over quarter. We -- we're -- as we mentioned on the last call, we're vertical independent, if you will, so we're not tied to any one vertical. So, they're all in the anywhere from 10% to 12% to maybe 20% range if you're looking at across some of the bigger verticals, which would be technology, telecommunications, financial services, media and entertainment, and SLED, just to give you a few.

As it relates to -- sorry, your first piece was a little more color as it relates to --

Yes, just in terms of -- like, where -- I mean, it sounds like, I mean, you're saying that the demand you saw across your customer base. Was there any one stronger where you saw more market share opportunities, for instance, in one area versus the other?

Yes, Matt. Maybe to put that into perspective, really where we're seeing that is really from the mid -- from the large enterprise through to the mid-market. As I've mentioned in my piece, is that last -- this previous fiscal year over the year before, we've actually added over 20% net new customers, up to over 2,800 customers, and most of those were in the mid-market or enterprise space.

So, we're still seeing significant interest from those sized customers across all of our offerings, whether they be cloud-related, security-related, and all the associated services that go with it.

Okay. And then a bigger picture. I know, Phil, I appreciate that you don't give specific guidance and you have a ton of visibility going forward, but if you look at the growth rate that you were growing, basically, high single digits, low double digit in Technology in the last two quarters of last year, or your last fiscal year, and slowed a little bit, still mid-single-digit growth, which is probably closer to end market, do you feel, particularly given that you're adding your services capability and your headcount, that you should be able to grow at a faster rate than kind of mid single digits?

Basically, I don't think we would add headcount if we didn't believe that we would continue to grow at a faster pace. We have a lot of opportunities that are out there in our pipeline that appear very good, and we think that we need the additional people in place and investing in them. And unless we believed that we would do better, then we would not be hiring anyone.

In effect, if you don't mind if I could jump in, Matt, one thing that we feel pretty -- we believe, IDC is stating that the IT spend is expected to increase by 4% this year. We believe we'll continue to exceed that expectation, market expectations.

Okay. And just last for me, just regarding the Finance segment, which has been trending down in revenue, it sounds like, though, you think that there's another cycle coming where your customers may shift to more of a leasing model. Do you have any visibility into when you think that's going to pick up?

I don't know if we have any visibility, Matt. What I think we're starting to see from a lot of our customers, they're continuing to look at the different type of OpEx or consumption models that are out there, specifically in the software space. They're looking to -- instead of a capital, take it as an OpEx. And we're seeing some of our larger customers coming to us, looking to see what we can do with our leasing capabilities, and our resell -- from a technology standpoint, putting solutions together to take advantage of that.

Okay. All right. Thanks a lot, Mark.

No problem, Matt. See you soon.

Thank you. Our next question is from Prabhakar Gowrisankaran of Canaccord. Your line is open.

Hi. Thanks for taking my question. Just piggybacking on Matt's questions, in the Technology segment, you talked about cloud and security. Is there anything specific in security, or a specific vendor that you saw strength in, or in terms of these new large enterprise and mid-market customers?

Yes, I don't -- hey, Prab, it's Mark here. I don't think it was any one particular vendor. So, we're really kind of focused on, if you think of what's going on in the market, everybody's trying to secure their perimeter, kind of keep the bad guys out, and then making sure that they don't have -- securing the data. So, they don't have data loss prevention.

So, we've got most of our focus as it relates to both the vendors and the solutions in those spaces, and then what we're doing on top of it is providing the services that our customers are looking for, which is the combination of assessments where we'll go in and do all the types of assessments to let them know where their existing infrastructure stands and the potential holes that they have.

We'll also do, as I mentioned earlier, we've got a VCSO capability where actually he'll build three-to-five year roadmaps for our customers, and it's not -- that's just not your quick fix, where here's a point solution that solves an initial problem. It's something that building a roadmap to make sure that as we continue to go with all of the hackers and cybersecurity initiatives that are going on, we're building a long-term footprint that they'll be successful, and not -- hopefully, not have any breaches or data loss, if you will.

And as I think you know, in the market, a lot of regulation, and authorities out there are looking to have more -- I call it tightness around the security space as it relates to companies understanding if they've been attacked, if they've had any incidences that they should be aware of, and I think customers are becoming more and more cognizant of having those tools in place.

Okay, great. And the other question I had was on the gross margin. You saw a nice pickup. Is that more because you're selling higher -- higher-end security and routers and stuff? Is this margin level sustainable, or -- in terms of product margins?

Well, Prab, I think what you see is, over time, we've continued to evolve as a company and what we're really focused on is your more margin-rich solutions, which are normally -- it's not product-fulfillment-like solutions, if you will. There's got to be services.

So, if you listen to a lot of what we've talked about with the headcount that we're adding, it's all customer facing. Over 50% of it was in the services space. So, those are you pre-sales and post-sales resources that clients need in order to bring together these complex integrated solutions.

So, yes, that's why the margins are going up, and we believe that we're very well positioned as we go forward.

Okay. And the last question I had was on the Financing segment, you talked about the consumption model. Is that leasing across mainly like cloud buildout? Do you see it in specific areas, this new leasing model is taking hold? Or is it just your existing customer base trying to add on more infrastructure?

Well, what it is, Prab, really, we're not limited, if you think about it. So, as the world moves to this -- these OpEx and consumption models, you've got infrastructure as a service, you've got Software-as-a-Service. You've got video as a service. You have disaster recovery and backup as a service.

What we're seeing from our customers is the need, instead of having that big upfront capital expense, they're looking to do the monthly payments, kind of OpEx play, if you will, and we're leveraging our leasing capabilities to provide the solutions that customers need now, with a payment term over a three-year or five-year period.

This is Phil Norton. I think also it's very important to understand the vendors were looking for that same type of structure, so that they're able to meet the customers' needs. So, it will -- it could broaden our reach into several of the vendors that we're dealing with today, and I think it's very positive for the leasing company.

Great. Thanks for taking my questions.

Thanks, Prab.

Thanks, Prab.

Thank you, and our next question comes from Bhavan Suri of William Blair. Your line is open.

Hi, guys. Can you hear me?

Hey, Bhavan, we can hear you?

Great. So, I apologize, there's been a bunch of earnings calls, so, I might be asking you questions that may have been asked, but one thing I wanted to focus on was, was there any areas where you're seeing clients specifically interested in that you think are sort of a little immature and that you need to sort of go out and invest and to build, or do you feel that in terms of what the clients are looking for you've got pretty coverage from a technology perspective?

Okay, all right. Bhavan, I believe that we're -- we -- there's two things. Let me take a step back so you know how we look at technology.

So, we obviously work very closely with our key vendors to understand where they're going with their technology. We also have an advanced technology group and an emerging technology group within ePlus that are chartered with understanding where the market's going and what are the right solutions. So, we do believe that we are adding the headcount in the right spaces, where the market is either hot or growing.

Some of the easy ones, obviously, cloud, security, as you look at ACI, and all the software-defined plays that are out there over time, we're going to continue to look at those and have headcount where we can help our customers.

Some of the bigger areas, we've noted previously, that we're adding headcount is in the services space, and if you think about it, what a lot of customers are chartered -- and, Bhavan, you know this better than me, if you look at the cloud, everybody talks about security, which is a big piece, but there's so many cloud offerings out there, customers are confused on what's the right one for them, based on their size, based on what efficiency, based on whatever cost savings they're looking for.

And the way that you're able to help the customers is by having those services or systems engineers that are available to sit with them, understand their legacy systems, and, as they move to the cloud, make the recommended suggestions on what's the right, either cloud architecture or public cloud for them.

So, that's why we do believe we're adding headcount in the right spaces that are what I call margin rich.

Great. That's helpful. And then, as you look at the sales hires and, more importantly, the services hires you've made and you think about sort of the ramp and, obviously, you've changed the incentive program for the sales force to be gross margin related, as you look at the close rates for new business, new business that involves services, that might involve some finance bundling, how are those close rates? Do you feel like they've picked up over the last year? Do you feel like they've kind of been at a steady state?

How shall we think about the trend there?

I don't know -- Bhavan, I don't know if I could give you a trend of meaning things are closing quicker or whatever. What I'd put it in is, from an ePlus perspective, I think what you're looking at is, what's nice about ePlus is, when we got to a customer, it's not just a product sale, if you will.

What we have, based on all the different things we have, we have the ability to kind of do the upfront assessments and consultative approach with our services team. We have the ability to, potentially, go in with maybe a leasing proposal or solution, if you will, with our customers, to kind of get the foot in the door, and then look for technology and/or services.

We also have proprietary procurement software that some of our customers are looking for from an asset management and spend management, and maybe we can leverage that to get in the door to provide some value, and then look to expand both our technology and leasing capability.

So, I don't know if I can give you anything market-related that things are closing quicker. What I can tell you is whatever I tell you in terms of how fast we're growing our profits, it's never fast enough for Phil. So, that's probably the easiest way to put it in perspective. All right?

That's good to see Phil's still cracking the whip over there.

Yes.

(laughter)

You've got it, Bhavan.

And then, when you look at -- a couple of my other companies on the software side have had pretty good quarters from a federal perspective, from a government spend perspective, and you guys don't have huge exposure, but are you seeing an uptick in that, and could that be a benefit as you look forward more near term than longer term?

Well, we are seeing more business coming forward in the state and local, and that's where we -- that's where most of our focus is. We do deal with the systems integrators, and we've seen some pickup in that business, that deal with the Fed, but, really, we do not have a real direct sales group on the federal market, so, most of our government spend is limited to the Fed and systems integrators. And we see some pickup of those.

Okay. Okay, and then the last one from me is just -- you've seen continued consolidation of space. You've seen sort of some marginalization of the smaller players. Two questions, I guess, there.

One, as you think about acquisitions, would you acquire some of these guys just to gain -- not that you need more scale, but to gain sort of customer scale? Or are you really focused on technology?

And then two, sort of in that trend of consolidation in the space, do you worry that some of the other guys, like CDW, might try and move up markets to become more enterprise players rather than sort of the sub-2000-company-type players?

Well, first of all, CDW in the higher level we haven't -- enterprise, we really haven't seen them be competitive on solutions. We have seen them in several situations where it's more product-driven and price-driven.

Okay.

I think that's where we're seeing that.

On the acquisition side, we have to look at it two ways. One is new technology or people that have started out and don't have the resources to grow, but have really built new technology in the cloud and security and mobility that we're able to, potentially, buy.

And then there's the other one is basically locations. And we still have several places in the country that we are not really well established, as well as some of the other major areas in the country, New York, Irvine, San Jose, Washington, that we really can add additional companies at a much smaller scale and we think that's very accretive, and also enables us to do more of them and have a broader reach for what we can go after.

That's helpful, Phil. And I said last question, but one more quick one. You guys have --

Mark wants to --

Hey, Bhavan, can I add one thing, just to put it into perspective? What's nice with our acquisition strategy, it's territory coverage, it's technical expertise, it's accounts and people. And as it relates to accounts, when you talk about some of the smaller players out there, they may have some very nice accounts, but they didn't have either the financial capability or the resources to be able to sell some of these bigger, more complex, integrated solutions. That's where we, potentially, if we acquire them, there's an upside for us, because we have both the financial capability and the resources to help them go sell solutions they weren't able to sell before.

So, just capture a larger share of that customer's wallet, so to speak?

Yes.

Yes, okay. Just sort of just higher level, and maybe it's to Phil, but when you look at it, you guys have a really nice business of building out a cloud platform. Obviously, you've done that for Verizon and other folks. And then you have the managed services business that you're building out to sort of help people migrate to the cloud, and then you can sort of provide them a pseudo-private cloud environment.

If you look out five years, maybe even further, any sense of sort of which one you think you'll be doing more of? Is it more of Verizon sort of public cloud, or sort of the private cloud environments where you'll create sort of the private infrastructure for these players?

I think there's two different ways we have to look at it. One is the private cloud or hybrid cloud, which is a big part of Verizon's business. I don't think we'll stop. I think that will continue for all of the big players, and I think that's a great opportunity for us.

On the public cloud side, we're investing in people that really understand how we can take advantage of it and deliver good options for our customers and making sure that we can be profitable there, and I think both of them will grow. I think the -- I think it's IHS, one of the Gartner folks, said that in 2017 there'd be a $2 trillion overall market for IT, and 12% would be cloud.

So, I think it's got a lot of hype. I think it's growing pretty fast, but I don't think it's going to be the main driver for a few more years. So, it gives us a lot of opportunity to increase our capabilities and to drive more business in that area.

Thanks. That was my last question. Thanks, guys.

Thanks, Bhavan.

Thank you. And I'm showing no further questions at this time. I'd like to turn the call back over to Phil Norton.

We'd like to thank you for joining our call today, and we hope to see you or hear from you three months from now. Thank you very much.

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.