ePlus inc (PLUS) 2015 Q2 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 Erica Stoecker, General Counsel. You may begin.

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

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, 2014, and our 10-Q for the quarter ended September 30, 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, Erica and good afternoon everyone. Thank you for joining us to review our second quarter and first half fiscal 2015 results and discuss our views on industry trends.

This was another quarter of solid execution for ePlus. We continued to execute on our strategy by providing products and services that address our clients IT needs, specifically in the areas of cloud, mobility, security, storage and managed services. Attracting and training the best engineering talent in the business in order to build our professional capabilities and increasing the work we do for existing clients as well as expanding our client roster.

Total revenues were up 9.7%, driven primarily by a 9.6% increase in our technology segment revenues, which accounted for 97% of total revenues for the period. This quarter's results also benefited from 13.6% revenue growth in our financing business .

A key takeaway from our second quarter and first half performance is the market improvement in gross margin on products and services which is a metric that has been consistently expanding as we transition from a value added reseller to an IT solutions provider. We have truly emerged as a go-to resource for our clients by providing them with the consulting and professional services they need to execute their most critical IT projects in the areas of cloud, security, data center and managed services.

Another important achievement is the strong growth in operating income, substantially outpaced revenue growth again in this year's second quarter, up by a factor of almost 4. And for the first half, operating income increased at a rate almost 3.5 times higher than revenue growth. We consider this performance very impressive in light of our ongoing investment in engineers and professional sales people that are supporting the growth of our higher margin services business, driving new business with both existing and new customers.

We ended the first half with a total of 920 employees in our technology segment, of which 75% represented engineers, sales and other client-facing personnel.

Diluted earnings per share for the second quarter was $1.63, a 53.8% increase over the same period last year, benefiting from our strong operating performance as well as an 8.4% reduction in the weighted average number of shares outstanding, thanks to our stock buyback program.

For the first half of fiscal 2014, our reported diluted earnings per share was $2.86. Exclusive of a special gain in this year's first quarter, non-GAAP diluted EPS was $2.75, very strong comparisons over $2.03 reported in last year's first half and reflective of the high level of customer demand for our products and services.

Now I'd like to ask our Chief Operating Officer, Mark Marron to provide additional color on business developments at ePlus.

Thanks Phil. As Phil just mentioned, we've been focused on high-end IT solutions that are growing faster than the overall market, namely security, cloud, storage and mobility. This is in line with trends that are becoming increasingly apparent to us in the first half of this fiscal year, namely to changes in CIO priorities within the more complex IT environment.

Where previously, CIOs were more focused on managing IT infrastructure for efficiency, today the real mandate is to have the right technology in place to drive revenue growth, increase employee productivity and most importantly, provide data and perimeter security. As a result, CIOs now, more than ever, have to turn to a partner to manage the day to day IT needs of the company.

This environment makes our integrated consultative approach a major competitive advantage. We can partner with our clients to understand their environment, build and support their infrastructure then provide managed and other services going forward. This is our PBSO services methodology, which stands for Plan, Build, Support and Optimize.

One example of this is a large contract we won from an international law firm that was moving its data storage to another state. This would be a complex project for any client, but with the legal firm, security of the data is paramount. Additionally, management of the data would have required two engineers; one at headquarters and one at the storage center, which would have been counter to the CIO's mandate to improve the productivity of the firm's attorneys and administrative spend.

The customer decided that ePlus was the right choice. The five-year contract that we won this quarter calls for us to provide staff on site at the data storage location to manage day to day operations, supported by remote monitoring of their system 24 by 7. So if there was an issue at 2 a.m. for example, ePlus manages services team can both identify the problem and provide a solution with little or no involvement by the client.

The benefit of this type of project is that we're in regular contact with the CIO now. We know their business, we're in a position to meet additional requirements they have, whether relating to product sales, financing or additional value added services.

Another good example of this is in the area of security. We've all seen the headlines and security breaches are growing at a double-digit rate every year. Yet a recent survey found that more than 40% of CIOs are working with a flat or declining security budget.

We were engaged on a small contract to examine the security needs of a company in the financial sector, one whose research regularly moves the financial markets. We came in with our vCISO, our Virtual Chief Information Security Officer program to assess their security needs and how they could be addressed. After providing this assessment, the company decided that we were the ideal partner to actually execute the project. They hired us on this $2 million contract to upgrade their security and cloud infrastructure, then provide managed services to ensure the systems remain at the cutting edge of information security.

Now with respect to new offerings for our clients, one important development is the rollout of ePlus on-demand IT services. This is literally a 1-800 number that a customer can call and say I need some IT support or staff and receive assistance on short notice.

These national services include short-term staff needs, staging and deployment and managed [out casting] and they can cover a period of time ranging from a few hours to a period of several years. This flexibility means that clients can match their IT resources to their IT needs almost in real time.

For ePlus, we can just demonstrate our expertise, get to know the client's needs and then build relationships for future business.

Another area that we're very excited is the continuing development of our cloud practice and specifically today, our FlexPod business, where NetApp recently named us FlexPod partner of the year. FlexPod is an increasingly popular option for medium and enterprise sized businesses looking for a flexible multivendor converged infrastructure option as they transition into the cloud.

We have the ability to fully integrate these complex multivendor solutions in our nationwide integration centers. ePlus now provides FlexPod managed services as well and we're certified for level one maintenance calls for both Cisco and NetApp.

What that means is that we can rollout FlexPod to medium and enterprise sized businesses, we can monitor and manage the product we install, we're able to handle level one maintenance calls, so effectively, we become the single responsible party for the entire lifecycle. So we're able to handle more of the day to day operations for our CIO clients, our partners have fewer maintenance calls to deal with and most importantly from our end, we're seeing improved margins.

To sum up, not only are we expanding our customer base organically and through acquisitions such as our acquisition of Evolve Technology Group in August, a leading reseller into California's SLED market, but we're really going deeper into each individual client relationship. As Phil mentioned earlier, we're adding client-facing staff so we have greater resources available to meet the needs of both new and existing clients in todays' must-have technologies.

All of this means we believe we are well positioned to take market share and grow our margins.

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

Thank you Mark. As you've heard, our results for the second quarter of fiscal 2015 were strong across all key metrics; revenues, gross margins, operating income and diluted EPS.

Consolidated revenues were up 9.7%, led by increased revenues in both our business segments technology and financing. Consolidated gross margin for the quarter was 21.5%, up sequentially from 20.7% in the first quarter and 19.5% in the second quarter of fiscal 2014.

Our second fiscal quarter is generally our strongest quarter for third-party maintenance contract sales. These sales are accounted for on a net basis and were an important contributor to the improvement of our gross margin this quarter.

Turning to expenses, our operating expenses were up by $5.5 million or about 14.5% compared to the year ago quarter. Nearly 50% of this increase was due to an increase in variable compensation, namely commissions and bonuses linked to our improved revenue and gross margin. The next biggest factor in higher expenses was headcount growth, which was up by about 4% from a year ago.

Operating income was up 38.3% to $20.3 million, with about two-thirds of that growth coming from the technology segment. Operating margin for the quarter was 6.8% compared with 5.4% in the second quarter of fiscal 2014.

Net income for the quarter was $12 million, an increase of 39% from $8.6 million we reported in the second quarter of fiscal 2014.

Earnings per share were $1.63 on a share count of 7.3 million compared to $1.06 in the second quarter of fiscal 2014 on a share count of approximately 8 million.

Drilling down to our segment results, the technology segment saw a 9.6% increase in revenue to $288.4 million, driven by a strong demand from existing customers and our ability to expand our customer base.

Trailing 12-month revenues as of September 30, 2014 were all well diversified across our customers vertical markets. The technology market accounted for approximately 21%; telecom, media and entertainment was 18%; financial services represented 11%; SLED was 21%; health care was 9%; and other, which includes professional services, energy, retail, aerospace, etc. was 20%.

Gross margin on product and services was 19.5% compared to 17.8% a year earlier, benefiting in part from the greater proportion of revenue from the sale of third-party maintenance contracts. Operating expenses were 15.8%, led by higher variable costs from higher growth products, such as commissions and bonuses, combined with growing headcount, most of which is customer-facing.

Segment earnings were up 28.5%, almost 3 times more than the total segment revenue.

Moving to the financing segment, we had positive comparisons from a year ago. Segment revenue was up 13.6% to $9.1 million. In the second quarter, we benefited from increased closed contract earnings and renewals [strength] and expenses were down in the quarter with lower direct lease costs due to lower depreciation expense from investments and operating leases.

Operating income rose by approximately $1.7 million to $2.7 million.

Looking briefly at our consolidated year to date results, similar to the results for the quarter, the trend is very much solid revenue growth and expanding margins. Revenues grew 7.4% to $569.8 million, led by a 7.9% increase in the technology segment.

Financing revenue fell by approximately $800,000 due to a high base of comparison in the first half of 2014, when we had large transactional gains.

Gross profit was up 14.1%, again led by the technology segment, with a consolidated gross margin of 21.1%. As in the second quarter, we saw a higher proportion of revenue consolidated on a net basis.

Operating expenses were up 10.1% with an increase in headcount and variable compensation. Operating income grew 25% to $35.1 million and operating margin was 6.2% compared to $28 million and 5.3% the year earlier.

Net income for the first half of the fiscal year was $21.4 million, including a gain related to the retirement of a liability in the first quarter. Excluding this gain, non-GAAP income was $20.6 million, an increase of 25.2% from the first half of fiscal 2014.

Recorded earnings per diluted share for the first half were $2.86, up from $2.03 from the year earlier. Excluding the gain, non-GAAP diluted earnings per share were $2.75 compared to $2.03 the year before, an increase of 35.5%.

Moving to the balance sheet. We had cash and cash equivalents of $62.9 million, down from $80.2 million at the end of fiscal 2014. The cash position is lower as we used cash generated from our business for certain strategic investments such as share repurchases and the acquisition of Evolve Technology Group.

Total shareholders' equity was $256.1 million with 7.5 million shares outstanding.

To summarize, we produced strong quarterly and year to date results and our balance sheet remains robust. This gives us flexibility to continue to invest in strategic initiatives to drive organic revenue growth, make acquisitions that are accretive and strategic and to continue to invest in building our services and advanced technology solutions that are most in demand from our customers.

I will now turn the call back to Phil for closing comments.

Thanks Elaine. To sum up, this has been a strong first half for ePlus. We remain focused on delivering products and services in areas that are growing faster than the overall IT spending. Our technical expertise enables us to provide solutions in an increasingly complex IT environment and we are focused on driving both organic growth, as well as execute on strategic acquisitions, driven by our strong balance sheet and integration expertise.

All of this gives us confidence in ePlus' growth prospects for the remainder of fiscal year 2015 and beyond. Operator, we would now like to open the call to questions.

(Operator Instructions) Bhavan Suri, William Blair.

Very nice job there. Pardon the background noise; I'm on the road. I just wanted to touch base and see if you could give a little color on what percentage of revenue was recurring? I know you're not going to give us exact, but just sort of a little color on how those projects went, because obviously the gross margins ticked up nicely.

Bhavan, as you know, we don't do forward-looking with our services projections, both from a transactional or from an annuity. Two of the examples that I gave in my presentation, talk about managed services which is an annuity service, if you will. We're continuing to expand our capability in that space, so we've just recently added FlexPod managed service capabilities, Meraki managed service capabilities and we're going to look to expand the offerings that our customers are looking for in that space.

Also as I mentioned, we talked about some of the on-demand services, so basically being able to provide real time services to our customers when they need them most, whether in a short burst of hours or days or over multiple years. So we're going to continue to build out our service capabilities from assessment, all the way through to optimization services.

And then if you look at the business today and you look at what customers are asking, is there an area where you feel you need to add incrementally or maybe a supplier to serve that? Obviously, clearly, you're meeting most of their needs, but is there an area outside of security, storage, the cloud based services that customers are asking for that you feel like it's an area for investment for you guys?

Bhavan, there's a lot of things as you kind of touched on. So you've got kind of the cloud computing, you've got the cyber security, you have security issues, you've got mobility issues, you've got big data. You've got a lot of the software defined stuff that's going on across some of the bigger vendors that are out there. You have CIOs that are really worried about how do they bring together these multivendor complex solutions, if you will, not having the internal resources to do it. You've got a lot of legacy monetization going on. All while they're trying to consolidate vendors.

So what we're trying to do from our end is we're going to continue to invest in what I call customer-facing sales and services personnel that can address the needs that our customers have across the areas that I addressed earlier and then provide the services that they're looking for, which is really at the beginning of the day is the upfront kind of assessment, looking at their systems and walking them through what is the right solution, let's just for example say from a cloud architecture standpoint, what's the right solution.

But also being able to staff it for them, provide managed services and provide the level one support so they have one place to go instead of having to go to multiple vendors.

Congrats guys again. Nice job and I'll talk to you guys soon.

Matt Sheerin, Stifel.

Just a couple of follow-ups regarding the gross margin. Elaine, you talked about the third-party maintenance contracts being a big driver of that sequential growth. Could you give us an idea of how much that contributed versus the fact that you're doing more services and as Mark talked about, the full service component for your customers? I'm just trying to get an idea on the year-over-year basis. You're talking about 130 basis point or more increase year-over-year. So I'm trying to figure out how much of that is services versus maintenance and how sustainable are gross margins relative to kind of a 20% number?

Maybe I'll try a couple of different things on this, since we don't really break it out on that. So the good news on this for ePlus, if you will, is the customers are voting with their dollars and they're looking for the support and renewals from ePlus. We've got a dedicated team that works with our customers to understand all of their existing assets that they have out there and what becomes due for renewal and then working with them on how they can potentially reduce cost if stuff is at end of life, end of support.

The other thing that we're doing is we are looking to work with our customers on helping their spend and breaking out over three and five-year periods. We also had an update, quite honestly, Cisco's year end ends in July, so there's normally a big uptick in what they call smart net renewals, which normally gives us a bigger uptick in that space.

And then what we're trying to do with those customers is provide not only just the resell of a maintenance renewal, the services comes into play, Matt, with the stuff that I talked about in terms of the managed services around those units, if you will. And then the level one support.

So the important thing about the level one support, which we call enhanced maintenance support for our customers, if you've got a multivendor solution like FlexPod, if you had an issue with that product, you'd have to call Cisco, NetApp, VMware and others. Being we provide that level one support, they can come to ePlus.

Now the good news for us is we understand what the issues are and we're able to work with the client and a lot of times that opens up opportunities for additional sales and/or services. For the customer it makes it a lot easier, where they're not dealing with support calls, they're not dealing with the vendors. And I'm not saying the vendors do this, where they're pointing at each other saying hey, it's not us, it's the other guy. So we're kind of that one throat to choke, if you will, that helps us kind of one, from a customer stickiness and two, it helps us with our blended margins and services going forward.

So it sounds like you feel like gross margin, at least on a year-over-year basis, should continue to move in the right direction. Then talking about it--.

And I'm not sure I said that. (Multiple speakers) What I'm saying is, we're putting the headcount, the services and the programs in place to help our customers in today's challenging environments and we'll do everything we can to provide the solutions that they're looking for.

Well maybe I can ask it another way. I appreciate that you don't give forward guidance, but looking at the December quarter, given that the September quarter is a big quarter on the maintenance contracts and then the mix of business may be different than would we expect that gross margin would be down sequentially?

Well, I don't know if you can predict that, Matt, because if you think about it, at the calendar year end, you have a lot of year end budget, year-end spend and a lot of times they'll come up the customers are looking for -- it opens up opportunities for us, quite honestly, potentially with some of our leasing business as well, because customers that may need technology now but don't have the budget and are looking for payment plans. It's tough to give you a real feel. And since we don't give that forward guidance, it's tough to give you a real concise answer here.

Okay, that's fine. And could I ask you to go through the end market percentages again, because I didn't get all of that down.

Sure. Technology was 21%; telecom, media and entertainment was 18%; financial services was 11%; SLED was 21%; healthcare 9% and other was 20%. Those will also be in our 10-Q as well.

And relative to last year or maybe last quarter, which segments have recently been strongest for you?

In relation to the percentages that we disclosed at year end, we've had very little changes. Everything is fairly stable across all customer end markets.

Mark, can I get you to maybe talk about the SLED market? I know it's been a focus for you. I know the K through 12 opportunity has been strong for a lot of resellers and distributors. How is that going and what's left in terms of that whole upgrade cycle we're seeing in terms of school districts?

A couple of different things there, Matt. Elaine eluded to the five verticals, if you will, and the percentages. Our SLED business is up a little over the trailing 12 months previously. We feel like we're well positioned in terms of the contracts that we're on.

So let me give you a couple of different things here. One, the gentleman that actually built and ran our SLED business was just promoted to Executive Vice President of Technology Sales for all of ePlus, based on the programs of business and relationships he's built in that space. Secondly, we see a big upside as it relates to that space as per the acquisition with Evolve that we just made in this quarter.

We see what's nice about that is we're able to pick up contracts and relationships that we didn't have in California and on the West Coast that we now can expand to the rest of our sales team or SLED team out there. The benefit of all the team, even though this is not a SLED piece, what we're seeing is we're not able to go back into their customers and sell all the other technology that we're selling. But we do see a lot of opportunity across the SLED space as it relates to spend, Matt. We haven't seen any slowdown and we haven't seen anything go from a market share or pipeline standpoint.

Just a couple more, if I can. Just regarding your OpEx, I know you're continuing to invest in sales, in technical support and engineering. Could you give us an idea of any plans for continued headcount additions and what they might do to your SG&A?

As I think you heard when Elaine went through the numbers, what I think is pretty good is we're continuing to invest in customer-facing sales and services reps where there is opportunities; whether it's across the cloud, security, big data, all the things that we discussed earlier.

What's really nice about our numbers, at least in my opinion, is when you've got your EBT or your operating income growing at a bigger percentage than your GP and your revenue, that means, in my opinion, you're making the right investment in headcount and driving margin rich solutions.

So we're going to continue to invest as we see the market evolve. But as you know, this market is constantly changing, it's emerging. We brought on a cloud team to help us build out our cloud practice even further in terms of the offerings we can make to our customers and how we help them make these moves to the cloud.

We'll continue to build out our security practice, because as you know, the market's getting hotter and hotter. Most companies don't have the security talent. They have outdated systems and they need help. So we'll continue to invest in the customer-facing headcount in the areas that are hot in the market and our customers are looking for help.

But the good news is, if you look at some of the stuff that Elaine talked about, a lot of the expense was up was commission, well that's good news, because we're driving more GP since our reps are paid on gross profit. And the headcount we're adding, as a percentage, is less than what we're driving to the bottom line.

Prabhakar Gowrisankaran, Canaccord.

Congrats on the strong quarter. Most of the questions have been asked. Let me ask a few more. One, I just wanted to see if you could provide more color on the multiyear managed service contracts that you talked about? You gave one example. Do you think that will become a template for more and more customers will sign these multiyear contracts? If you can provide any color on the managed services side.

It's hard to give you a -- is it a template that we'd like to see, we could replicate going forward; without a doubt. As you know from previous calls, we've made major investments in our managed services, both from a resource, from a tools. About nine months ago, we opened our third managed service center. As I discussed earlier, we've increased the managed service offerings that we have across FlexPod, Meraki, with the wireless and everything along those lines.

The intent is we do want to become that sole provider to our customers of going in assessing their environment, suggesting the solutions that they need. In a lot of cases it's multivendor solutions that they need. Building out those solutions in our integration centers. Providing the managed services so the proactive monitoring and managing of their environment. So it's not just hey the patient died and here's what they died of; it's hey, here's what the problem is and this is what we need to do to address it.

And then providing the ongoing staffing needs that a lot of our customers need in this market, that they don't have the expertise. So that's kind of the model as we go forward and that's what we're training our sales team.

Off the cuff a little bit, but we just had our entire sales team kind of present our services methodology to all of their management and then did it on a national level. So it's that important to us and we believe it's that important to our customers.

The other question I had was just on the Evolve Technology acquisition. I know you talked about they're strong in California SLED. Is there a profile of product [versus] services and the gross margin profile similar to ePlus or better? I know you talked about they provide advanced IP solutions too, similar to you guys, so if you can provide any color there?

Prab, what we've seen so far, obviously it's only been a few months in terms of the acquisition. Prior to the acquisition, similar type margins, if you will. But if you remember our acquisition strategies, it's to build out our territory coverage, so we're not in Sacramento, where we weren't before.

Second is, they were on a lot of contracts that we were not on, so we're able to leverage those contracts to continue to grow our business across all of California now. Third is they have a bunch of customers that were mainly Cisco only that we can go back in and sell additional vendors. And we've had multiple vendors coming to us to look to add us to their contracts based on the Evolve acquisition and the relationships they have within the state and other areas.

So it's a nice -- it's a territory coverage, it's an expertise in the SLED space and from a vendor perspective, we have the ability to go back and sell more technology to their customers. If I could add, the one other thing they had which continues with our strategy is they've got some nice security expertise and they also have a training center that we're able to leverage both internally and externally with customers.

The last question I had, I think this was asked before; in terms of the overall margins, it's at a high watermark if you look back seven, eight quarters. I know you benefited from the maintenance contracts, but would you be close to these levels, assuming your services mix expands and I'm assuming services volumes are much higher than the product ones?

Prab, once again, that's a tough one without the forward-looking piece. So the one thing I'll say, that we've said in prior is on your products if you're doing it right, you may be getting 10 to 15 on services; you'll get 35 to 45 on managed services and staffing and things like that. You could potentially get more once you build your models and have all your expense in your business.

So, we see the renewals as a first place, if you will, to touch a customer, provide the support that they need and then they're looking to add on on these value added services, if you will, that a lot of our customers have been asking for.

I'm showing no further questions at this time. I'd like to turn it over for closing remarks.

Operator, I'd like to thank everyone for joining us today. Have a nice evening. Take care.

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.