Earnings Conference Call Transcripts

Conference Call Discussing Earnings for Fiscal 2010 Fourth Quarter and Annual Results

June 15, 2010

Prepared Remarks

Operator

Good day ladies and gentlemen, and welcome to your ePlus inc. earnings results conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions). As a reminder, this conference call is being recorded.

I would now like to turn the call over to your host, Kley Parkhurst.

Kley Parkhurst

Thank you Melina, and thank you, everyone for joining us today. With me today on the call are Phil Norton, Chairman, President and CEO of ePlus; and Elaine Marion, our Chief Financial Officer.

I want to take a moment to remind you that the statements we make this morning that are not historical facts may be deemed to be forward-looking statements and are based on management's current plans, estimates, and projections. Actual and anticipated future results may vary materially due to certain risks and uncertainties including, without limitation, the following:

  • possible adverse effects resulting from the recent financial crisis in the credit markets and general slowdown in the U.S. economy, such as our current and potential customers delaying or reducing technology purchases; increasing credit risk associated with our customers and vendors; reduction of vendor incentive programs; the possibility of additional goodwill impairment charges,
  • restrictions on our access to capital necessary to fund our operations,
  • the demand for and acceptance of our products and services,
  • our ability to adapt our services to meet changes and market developments,
  • the possibility of defects in our products or catalog content data,
  • our ability to protect our intellectual property,
  • our ability to reserve adequately for credit losses, and other risks and uncertainties detailed in the earnings release we issued yesterday and our periodic filings with the Securities and Exchange Commission.

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

With that said, I will turn the call over to Phil Norton. Phil?

Phil Norton

Thank you Kley. With our products and services revenues increasing each of the past four sequential quarters, ePlus has been well positioned to capture sales as our customers have resumed spending on IT.

We are optimistic that the demand for technology and related services will continue, especially for projects that generate cost savings and improved productivity, as customers replace worn-out assets with new technology.

In addition to the four consecutive quarters of revenue improvement, our gross margin improved during the fourth fiscal quarter ended March 31, 2010 more than 100 basis points, as compared to the fourth quarter in the prior fiscal year. This improvement reflects a number of factors, including our leverage from our sales growth, product mix, and higher manufacturer incentives.

We recently announced that ePlus increased its ranking on the prestigious VAR 500 list compiled by Everything Channel to number 86, from number 94 the prior year. This listing acknowledges the top technology integrators in the industry and serves to reinforce the value proposition we offer our customers every day.

Cisco, HP, and Oracle/Sun continue to be important vendors to us, and for the fiscal 2010 represented approximately 37%, 18%, and 7% of sales of products and services, respectively.

We continue to strengthen our relationship with our key tier 1 partners such as Cisco, HP, Oracle/Sun, VMware, NetApp, and Microsoft for both vendor-specific authorizations and for focusing on specific solution areas such as visual communications and security.

In the Cisco realm, we achieved the Master Managed Services certification which recognizes ePlus as having attained expertise in all phases of the Cisco lifecycle methodology, and gained Cisco's Advanced Security Specialization, allowing us to sell, deploy and support Cisco’s comprehensive network solution security solutions.

We also became an authorized technology provider in two Cisco advanced technologies, including the TelePresence ATP, and Data Center Unified communication -- Computing ATP, which recognizes ePlus is having fulfilled the training and program prerequisites to sell, deploy, and support the Cisco Unified Computing System in the United States.

Finally, we gained Cisco Powered designations for Managed Unified Communications and Managed Security Services by establishing the resources and procedures to deploy, manage, and support Cisco Powered Managed Business Communications, Managed Firewall, and managed IDS/IPS services.

And we continued to be recognized for excellence in customer satisfaction for the fifth consecutive quarter. Additionally we began working toward Tandberg Platinum Partner status which we anticipate completing in the 2nd quarter of fiscal year 2011.

In the HP marketplace, we hold eleven multiple Elite statuses, and we are a leader in HP’s new converged infrastructure offerings, having installed the channel’s first HP BladeSystem Matrix sale in the United States. As a result of this first installation by a channel partner, we were awarded sales excellence Award by HP during VMworld 2009.

During the year, we gained the HP PartnerONE small and medium business Elite status, and the national HP PartnerONE solution Elite designation, which identifies HP solution partners that aggressively drive revenue growth by delivering HP products and solutions with expert skills and customer support.

We are continuing to focus and strengthen our data security offerings. And in addition to the Cisco security authorizations, we received the data loss prevention specialization from Symantec Corporation. This designation recognizes ePlus as having fulfilled the training and program prerequisites to deliver a unified solution to discover, monitor, and protect confidential data, whether it is stored or used.

Our VMware business continues to thrive. In addition to our commercial and enterprise business, we have specialized in service provider solution partnering with VMware and have become part of VMware’s unique service provider licensing program, VSSP. We are one of the two such specialized VMware partners nationally to hold this designation.

We recently announced the promotion of Mark Marron to Chief Operating Officer of ePlus inc. and President of ePlus Technology, our wholly-owned subsidiary which provides IT solutions. Mark has been with ePlus since 2005 as Senior Vice President of Sales and has been instrumental in facilitating our sales strategies and improving vendor partnerships. Mark has over 20 years of diverse industry experience, and I am pleased to have him as part of our senior management team here in Herndon.

I would like to turn the call over to Elaine Marion, our CFO, who will discuss specific financial results.

Elaine Marion

Thanks Phil. As Phil indicated earlier, we closed the year with a particularly strong fourth quarter in terms of revenues and earnings. Total revenues for the quarter were $180.4 million, an increase of $46.2 million or 34.5%, compared to $134.2 million in the fourth quarter of last year. Net earnings totaled $3.5 million or $0.42 per diluted share, compared to $800,000 or $0.10 per diluted share in the fourth quarter last year.

From a segment perspective, fourth-quarter revenues in the technology sales business segment totaled $168.1 million, up $2.9 million or 1.8% sequentially and up $47.1 million or 38.9% on a year over year basis. This performance marked our first year over year increase since the third quarter of fiscal 2009.

Total revenues in the financing business segment for the fourth quarter were $12.3 million, down $1.2 million or 8.9% sequentially and down $800,000 or 6.3% compared to the fourth quarter last year. Despite increased sales of leased equipment on both a sequential and year-over-year basis, lower lease revenues and lower fee and other income led to sequential and year-over-year decline in this segment. As we have indicated on our earnings calls in previous quarters, sales of leased equipment are a function of our overall risk mitigation efforts and therefore can vary substantially from quarter to quarter. Lower lease revenues generally reflect a reduction in the number of leases retained in our portfolio.

For the fourth quarter, professional and other fees, salaries and benefits, and general and administrative expenses increased approximately $2.7 million or 11.6% on a year over year basis. These increases are primarily a result of higher compensation expenses relating to higher sales, and legal expenses relating to our patent infringement lawsuit.

For the fiscal year, revenues declined by $13.8 million or 2% to $684.3 million. Net earnings on a GAAP basis were $12.7 million or $1.50 per diluted share, as compared to $12.8 million, or $1.52 per diluted share last year.

The fiscal year 2010 and 2009 results include goodwill impairment charges of $4.0 million and $4.6 million, respectively. These charges were non-cash effects to earnings, and did not affect the company's liquidity, cash flows from operating activities or covenants. Excluding the impairment charges, the non-GAAP net earnings totaled $15.2 million or $1.79 per diluted share in fiscal year 2010, compared to $15.5 million or $1.84 per diluted share last year.

Turning to the balance sheet, cash and cash equivalents totaled $85.1 million at fiscal year end. By comparison, cash and cash equivalents totaled $107.8 million at March 31, 2009. The decrease in cash was due to a gradual increase in sales during the current fiscal year, which increased accounts receivable and inventory, the deferment of non-recourse financing associated with certain lease investments and corresponding growth in lease investments, and our share repurchase program.

Nonrecourse notes payable totaled $53.6 million as of March 31, 2010, as compared to $85 million as of March 31, 2009.

We continued to repurchase stock this quarter under our Board authorized share repurchase plan. During the fiscal fourth quarter, we invested approximately $3.6 million to repurchase almost 217,000 shares, bringing our 12-month totals to $6.1 million for approximately 378,000 shares at an average cost this fiscal year of $16.18 per share. As of March 31, 2010, there were 439,141 shares available for repurchase under our current buyback authorization.

That completes my portion of today's call. Operator, we'd like to open the call to questions.

Question and Answer Section

 

<A – Operator>:

(Operator Instructions). John Lewis, Osmium Partners.

<Q – John Lewis>:

Just a couple of quick questions. I guess first off, several years ago I think one of the stated uses of cash were to consider M&A opportunities. I know the market's been fluctuating pretty dramatically, but can you give any comment or update on what you are seeing out there from that standpoint?

<A – Phil Norton>:

John, it's nice to hear from you again. I think the activity for us has been broad and wide and deep. However, we are still seeing most of the opportunities at more inflated prices based on future performance and not based on past performance. So I think there's still some more fallout before we start to see a large number of acquisitions.

We've gone through several, and Kley Parkhurst has been going on lots of different calls and lots of different searches, but we have not been able to make the right selection yet.

<Q – John Lewis>:

Fair enough. On a related note, given your very strong balance sheet, it looks like you guys have been buying back stock, but I guess -- it's great. I understand the restrictions in terms of daily trading volumes, but I guess in January I think I looked back two years ago, your share count was 8.1, 8.2. Today we're back to 8.1, 8.2 despite some pretty decent share repurchases over the last few years. With that said, would you consider something more aggressive like a Dutch tender or some other way to -- or even possibly a dividend, just in light of -- well, I guess maybe I should just hit on the buyback.

Just -- it seems like your book value is up almost at $23. Your stock is at $17, $18. There's an opportunity to really take equity out of the market at a fairly low valuation, especially I guess given the circumstances. So what -- I guess what are your general thoughts there?

<A – Phil Norton>:

Well, I believe that the average price that we paid has gone up. I think what has occurred in the marketplace is that the stock price has gone a little higher than our average price that we were willing to buy at. It's kind of gone faster. So we just have to look at that.

As far as the other alternatives, we will take that to the Board and have them look at that and whether or not they think that's the proper use of the cash at this point in time. I still think that's a viable alternative. But it's something that we have to make sure is the right time if we go to execute that. And that's both on the Dutch tender and on dividends, and I will tell you that we will bring that up to the Board and do an analysis of that and see what they determine.

<Q – John Lewis>:

Okay.

<A – Operator>:

Patrick Retzer, Retzer Capital.

<Q – Patrick Retzer>:

Congratulations on another nice quarter. I had a question. Your lease revenue, both for the quarter and the year, versus the previous year and quarter, were down significantly, even though the investment in leases and leased equipment is up significantly. Can you explain why there's that disparity?

<A – Elaine Marion>:

Yes. There were some large transactions that occurred at the end of the fourth quarter. So we didn't see the earnings for those transactions in that -- or a significant amount in that quarter or for the year.

<Q – Patrick Retzer>:

Okay. So we should expect a substantial ramp-up in lease revenue for the first quarter of fiscal 2011?

<A – Elaine Marion>:

We will earn -- we will have lease earnings related to those leases, yes, during the first quarter.

<Q – Patrick Retzer>:

Can you give me an estimate of what the magnitude of those sort of last-minute leases were?

<A – Elaine Marion>:

I can't. It's not public information.

<Q – Patrick Retzer>:

Okay. Will it would be if you said it on this call, but okay, that's all I had. Thanks.

<A – Operator>:

(Operator Instructions). I'm showing no further questions at this time.

<A – Phil Norton>:

Thank you for participating in our call this morning. We appreciate your interest in ePlus and hope you can join us again next quarter. Thank you very much.

<A – Kley Parkhurst>:

Thank you operator.

<A – Operator>:

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the conference, and you may now disconnect.