Earnings Conference Call Transcripts

Conference Call Discussing Earnings for Fiscal 2011 Second Quarter Results

November 5, 2010

Prepared Remarks

Operator
 
Good day, ladies and gentlemen, and welcome to the ePlus inc. fiscal second quarter earnings results conference call. At this time all participants are in a listen-only mode. Later, we will have a question-and-answer session, and instructions will follow at that time. As a reminder, today's conference is being recorded.
 
I would now like to turn the conference over to your host for today, Mr. Kley Parkhurst, Senior Vice President. Sir you may begin.
 
Kley Parkhurst
 
Thank you, Joe, and thank you, everyone, for joining us. With me today 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:
  • 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.
 
I'm happy to report that the continued rebound of IT spending in the U.S. helped ePlus achieve its sixth consecutive quarter of increased revenues. For our fiscal second quarter ended September 30, 2010, revenue increased 36% over last year, and 24% sequentially. While positive industry trends have certainly contributed to positive results, we believe that our success has also been due to our singular focus on improving and expanding our engineering capabilities for solutions that are in high demand from our existing customers, as well as prospective customers. Our focus, discipline, and investment in professional services continues to facilitate a transition to higher value, advanced technology solutions, garnering attention not only from our end-user customers, but our vendor/partners as well. Combined with targeted demand generation campaigns, our telemarketing efforts, and the hiring of qualified salespeople and practice managers, I believe we have the correct formula to drive the business going forward.
 
While an increase in revenues is a very positive sign that we offer the desired solutions to our customers, what is really significant about last quarter is increased earnings relative to revenues. On a revenue gain of 36%, net earnings increased 58% to $7.9 million. This gain in earnings is the result of the efficiency of our centralized operating platform, which has proven scalability and is being leveraged to drive earnings.
 
ePlus continues to focus on advanced technology solutions to meet our customer needs. In August, ePlus was re-certified for the sixth consecutive year as a Gold Partner in the Microsoft Partner Program. As a Gold Certified Partner, we have demonstrated expertise with Microsoft technologies and proven ability to meet customer needs. Microsoft Certified Partners receive a rich set of benefits, including access, training, and support that give us a competitive advantage in the marketplace.
 
ePlus was awarded the 2010 New York Metro Partner of the Year and VAR Sales Excellence by Microsoft for the East Region Small and Mid-Market Solutions Partner category. These awards acknowledge our Company as a Microsoft partner that has demonstrated success in sales execution, including revenue attainment, opportunity identification, innovation, and the ability to open new markets.
 
We also realized several Cisoc achievements, including a Customer Satisfaction Excellence Gold Star, which recognizes ePlus for delivering outstanding customer service to clients in the United States. Our team also recently completed a quadruple Cisco audit and received four re-certifications, including Gold Partner, Master Unified Communications Specialization, Master Security Specialization, and Managed Services Master Certification. These achievements illustrate our ability to meet Cisco’s rigorous standards for networking competency, service, support, and customer satisfaction. In addition, ePlus continues to be recognized as a distinguished Cisco Channel Partner with the highest level of unified communications and security expertise, lifecycle services, and success in sales as well as expertise in developing and delivering managed services.
 
As of September 30, our largest vendors, including Cisco, HP and Oracle/Sun products represented approximately 47%, 18% and 5% of our product and services sales, respectively, and continue to be an important part of our business.
 
During the quarter, we also renewed our relationship with VHA, Inc., a nationwide network of non-profit hospitals. VHA has been a customer of ePlus since 2004, and this agreement extended our relationship for an additional three years. We offer a broad range of IT products and services as well as leasing services for IT and medical equipment to VHA, which operates more than 1,400 VHA member healthcare institutions and more than 28,000 non-acute facilities nationwide.
 
While we are pleased with six quarters of sequential revenue growth, we are continuing to search for acquisition candidates which complement our core business and expand our presence in new markets and geographies. We remain disciplined in our approach and will continue to search for the right opportunities that fit our criteria.
 
In conclusion, I am very pleased with our second quarter financial results and believe ePlus is well-positioned for the future.
 
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 touched upon, the momentum with which we started our fiscal year accelerated into the September quarter with another period of significant growth in revenues and earnings. Total revenues for the quarter were $234.5 million, an increase of $61.8 million, or 36%, compared to $172.7 million in the September quarter of last year. On a sequential basis, revenues grew 24.1% or $45.5 million over the quarter ended June 30, 2010. For the quarter, net earnings totaled $7.9 million, or $0.94 per diluted share, compared to $5.0 million or $0.58 per diluted share in the September quarter last year.
 
From a segment perspective, fiscal second quarter revenues in the technology sales business segment totaled $223.5 million, up $60.8 million or 37% on a year-over-year basis. The gross margin percentage for sales of product and services in this segment declined slightly to 14.5% compared to 14.6% in the prior year.
 
In the financing business segment, total revenues for the second quarter were $11.0 million, up $900 thousand, or 9.1%, compared to the second quarter last year. At September 30, 2010, we had $124.7 million of investment in leases-net compared to $133.4 million at June 30, 2010, a decrease of $8.7 million.
 
For the second quarter, professional and other fees, salaries and benefits, and general and administrative expenses increased approximately $3.4 million year-over-year due to increased legal fees related to the patent infringement ligation, higher commissions and bonuses related to the increase in sales and slightly higher salary expenses.
 
Turning to the balance sheet, cash and cash equivalents totaled $68.3 million at September 30, 2010 compared to $79.3 million at June 30, 2010. Non-recourse notes payable totaled $41.3 million as of September 30, 2010, down from $46.9 million as of June 30, 2010. Shareholders' equity was $199.6 million, up from to $190.4 million as of June 30, 2010.
In mid-August, we were pleased to announce that our board of directors amended our share repurchase plan which authorized the Company to repurchase a maximum of 500,000 shares of ePlus’ outstanding common stock over a 12-month period commencing on September 16, 2010.
 
During the quarter, we continued to repurchase stock and we spent approximately $1.7 million to repurchase slightly more than 99 thousand shares at an average cost of $17.52 per share. As of September 30, there were approximately 500,000 shares available for repurchase under our current buyback authorization. Since the inception of our initial repurchase program on September 20, 2001 through September 30, 2010, we have repurchased 3.9 million shares of our outstanding common stock at an average cost of $11.62 per share for a total purchase price of $45.5 million.
 
In summary, with a strong balance sheet and scalable, efficient operations, we are well positioned to take advantage of growth opportunities whether they are to expand our organic business through prudent investment in our technologies, people, and potential acquisitions.
 
That completes my portion of today's call. I’d like to turn the call back to Phil for a few remaining remarks. Phil:
 
Phil Norton
Thank you Elaine. On top of successful tangible results in the quarter, I’d like to thank NASDAQ for the opportunity to ring the opening bell on October 13, 2010. The positive response we received from customers, employees, shareholders, friends, and vendor/partners has been incredible. The positive momentum it created has been wonderful, and the recognition of our achievements as a public company for 14 years is very satisfying to all of our employees, who have worked very hard. Again, I’d like to thank NASDAQ for the opportunity to ring the bell.
 
Now, lets open the call to questions.
 
Q&A
 
Operator: [Operator Instructions] Our first question comes from Matt Sprattford with Sidoti & Co.
 
<Q>: Hey, guys. How are you?
 
<A – Elaine Marion>: Hi, Matt.
 
<Q>: I was just wondering if you can comment on your backlog heading into Q3?
 
<A – Elaine Marion>: Could you say that again?
 
<Q>: I was just wondering if you can comment on your backlog heading into Q3?
 
<A – Elaine Marion>: The backlog was down slightly from a quarter-to-quarter. Some of the product constraints that we were seeing previous in the year did get relieved.
 
<Q>: How about sequential – I’m sorry, how about year-over-year?
 
<A – Elaine Marion>: I don’t have that number off the top of my head on a year-on-year basis.
 
<Q>: Okay. No problem. Next thing I was curious about is, I was just wondering what caused the gross margin compression this quarter, and can you give you us some insight into your expectations for that looking forward?
 
<A – Elaine Marion>: The gross margin changed, I believe it was from 14.5 to – 14.6 to 14.5, so it was a very slight decline. It’s hard just to narrow it down to one particular aspect, but because there is a lot of movement in the manufacturer incentive programs, probably related something to that.
 
<Q>: Got you. And then finally I was just – probably more of a question for Phil but I was just wondering what new markets you guys are looking to expand into?
 
<A – Phillip Norton>: Well, we have a lot of work to do in our present markets and we are continuing to look for acquisitions in other geographic areas in the country. Do you mean customer markets or business markets?
 
<Q>: Specifically – just geographically more than anything, but where are you targeting acquisitions?
 
<A – Phillip Norton>: Well, today we are really – East Coast, West Coast and basically Texas and Georgia and Florida. And our goal is to expand into the Midwest and also in the Southwest and Southeast on a short-term. Long-term we need to get presence in the Midwest and we found that it’s much more difficult to open new offices and much easier if you are able to make right kind of acquisition. So we are strongly moving in the area of acquisitions and reviewing lots of different opportunities.
 
<Q>: All right. That’s very helpful, thank you. That’s if for me. Thanks guys.
 
<A – Phillip Norton>: Thanks, Matt.
 
<A – Elaine Marion>: Thanks, Matt.
 
Operator: Our next question comes from Jayson Noland with Robert Baird.
 
<Q – Jayson Noland>: Yes. Thank you. Congratulations on the quarter and leverage in your model.
 
<A – Elaine Marion>: Thank you, Jayson.
 
<Q – Jayson Noland>: A question on just kind of major categories. So, where are you seeing the most strength in your business right now, is it mostly data center related?
 
<A – Phillip Norton>: Well, I think on – each manufacturer in some respects focuses on different things. What we try to do is focus on solution selling. Data center – data center right now is probably the heaviest emphasis for all of our major manufacturers. We don’t see that really stopping because of the virtualization needs and the fact that a truly virtualized data center reduces the footprint and the cost for customers, and I think the most important aspect of that is cloud computing, even though we’ve looked at – or the whole industry is kind of enamored with the word, it’s something that is taking hold, is being really pushed out by the major players in the marketplace, we think that we are well positioned from a engineering capability. Internally we’ve had our own cloud computing service for our own internal needs and we think we are one of the better positioned companies in the country to provide those services to our customer.
 
<Q – Jayson Noland>: Okay and outside of cloud computing, are you seeing – we hear about the virtual desktop and video and wireless LAN security are some of these kind of smaller areas, do you have projects in some of those areas also?
 
<A – Phillip Norton>: Well, I would say, when I talk about virtualization in the cloud, VDI is an extremely important aspect to that. We believe that we have a significant capability in that area to help our customers that not only drives a lot of software and hardware drive significant amount of services. We believe that our investment 4.5 years ago of taking 35 engineers and spending one full week at our sales meeting to train them on VMware has turned out to be a significant advantage to us in the marketplace.
 
From a video standpoint, we have, you know, really have a heavy focus on that and we have hired expert from – to head up our advanced security solutions, which I think based on what I see Cisco doing with TANDBERG, what we understand from our customer base and their needs, that is going to be – have a large impact on the whole IT services area and products and as well as meaningful brand for a broadband and the need for experts to help customers navigate through those additional needs.
 
<Q – Jayson Noland>: Okay. Last question from me, kind of bigger picture. Consolidation and I guess cloud computing seems to favor large vendors, do you expect to see kind of companies continue to shift more of their business to suppliers like Cisco and HP and may be squeezing smaller solution vendors?
 
<A – Phillip Norton>: Well, I think that’s kind of a misnomer in some respects because I think the bigger gainers are going to be private clouds. And so the expertise to help customers develop their own private clouds and virtually virtualizing their data center. It’s still going to be very significant for the next five years at least because you have issues on security, you have issues on changes in the marketplace. And I think you’ll see very, very large service providers and vendors trying to offer their cloud services for real heavy database users that have enormous amount of data that they are able to maintain and be able to access through the cloud. But I don’t see that it’s going to hurt ePlus. I think it can hurt some of the smaller people in the marketplace who have the inability to hire the right engineers for providing those solutions.
 
<Q – Jayson Noland>: I guess I was referring to point products as opposed to somebody like a Cisco or HP that kind of outfit a datacenter in whole.
 
<A – Phillip Norton>: Well, they actually can’t. I mean – because they don’t really all have – no one really has all the products, there are shortcomings in all of them, whether it’s security, and that’s why you are seeing a lot of consolidation and a lot of vendors trying to buy up the areas that they are not efficient in. But when we look at our overall trends in spend, we still see about 60% of the spend coming from major vendors and about 40% of the spend coming from the non-major vendors. So, I don’t believe we’re going to see that change because – for the near future and the longer-term. In enterprise accounts that may change more significantly than the middle market. But I think there is still a need for the non-heavyweights in the market.
 
<Q – Jayson Noland>: Okay. Thanks for taking the questions. Congratulations again.
 
<A – Phillip Norton>: Thank you.
 
<A – Elaine Marion>: Thank you.
 
Operator: I am showing no further questions on the phones. I would now like to turn the conference back over to Mr. Norton.
 
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.
 
Operator: Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may now disconnect. Everyone have a great day.