Conference Call Discussing Earnings for Fiscal 2011 Third Quarter Results

February 4, 2011

Prepared Remarks

Operator
 
Good day, ladies and gentlemen, and welcome to the ePlus inc. fiscal third 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, Mary and thank you, everyone, for joining us. With me today are Phil Norton, Chairman, President and CEO of ePlus, Elaine Marion, our Chief Financial Officer, and Erica Stoecker, our General Counsel.
 
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 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, I will turn the call over to Phil Norton. Phil?
 
Phil Norton
 
Thank you, Kley.
 
ePlus continues to hit on all cylinders, and we achieved yet another quarter of year-over-year growth in revenue and profitability. We are experiencing continued demand from our customers for our advanced technology solutions, and consistent execution by our team. And as revenues are rising faster than costs, our operating model has demonstrated efficiencies and scalability. For our fiscal third quarter ended December 31, 2010, revenue increased 29% over the prior year and net earnings increased 63% on a non-GAAP basis which excludes the goodwill impairment charge in last year’s results. I am very encouraged by the continued momentum in our business. While we have certainly benefited from positive external factors driving overall growth in IT spending, ePlus has also been investing in ways to grow our customer base and marketshare through strengthening our team, expanding our product and services offerings, and continuing to invest in new technologies such as video collaboration and the cloud. I’d like to highlight a few of these achievements for the December quarter:
 
First, we announced in November that we completed the acquisition of Interchange Technologies, Inc., or “ITI”, a Tandberg Platinum Partner with advanced expertise in audio and video communication technologies. This acquisition brought us several strategic benefits. We immediately gained Tandberg Platinum Partner status, adding to our current credentials as a Cisco TelePresence authorized technology provider as well as a Cisco Master Unified Communications provider and a Cisco WebEx certified collaboration solutions partner. More importantly, with this acquisition we are now able to provide our customers with a single source for a full spectrum of solutions and services in the teleconferencing, audio and video, unified communications, and collaboration market space to meet their diverse and growing business communications needs.
 
This acquisition was part of our overall effort to build a stronger visual communications and collaboration practice. We now have the the capability to design powerful video and distribution solutions around our clients’ specific needs for enhanced collaboration. With this practice, we are expanding the networked technology offerings already available from ePlus and enhancing our ability to deliver complete infrastructure solutions.
 
Second, during the quarter, we made several key additions to strengthen our team, ending the quarter with 691 employees compared to 653 at the end of December 2009. Most of the new hires are customer facing, sales and engineering personnel, to help expand our go-to-market capabilities and solutions delivery capabilities. This expansion of our experienced staff will help us continue to build out our national practices for advanced technologies and ensure that ePlus maintains its reputation for high quality expertise and service.
 
In addition, ePlus was recently recognized by Everything Channel’s CRN Magazine as one of the Top Healthcare Value Added Resellers. The healthcare market has tremendous growth opportunities for ePlus and this recognition as a leader in this space should help us continue to expand our client base. According to IDC Health Insights, growth in implementation of electronic medical records and health information exchange technologies will help spur worldwide growth of Healthcare IT spending over the next three years to over $13 billion. As a result, support for electronic medical records, collaboration technologies, and related infrastructure needs have increased, presenting an ideal opportunity for ePlus in this market. In addition, our experience and capabilities to provide financing for technology in this marketplace is a real competitive differentiator.
 
With these new capabilities and initiatives, we see numerous opportunities to continue growing our business.
 
Along with our top line strength, it is important to highlight our even more significant increase in net earnings. As I mentioned previously, on revenue growth of 29%, we were able to expand our net earnings by 63%. With a continuing discipline in controlling costs, and investments we’ve made in automation and our IT infrastructure, our business model is scalable. The results show that we are able to leverage our operating platform to increase earnings.
 
As we move forward, we will continue to focus on driving organic growth while also evaluating potential acquisition opportunities, such as the ITI acquisition that we completed last quarter. We remain disciplined in our approach and will continue to search for the right opportunities that fit our criteria.
 
Overall, I am very pleased with the continued progress evident in our third quarter financial results and believe ePlus is well positioned for the future.
 
On a final note, I would like to mention our announcement earlier this week that we received a favorable jury verdict in the patent case which we filed in May 2009. On January 27th, a jury in the United States District Court for the Eastern District of Virginia unanimously found that Lawson Software Inc. infringed certain ePlus patents relating to electronic procurement systems, which allow our end-users to perform such functions as electronically checking inventory and generating purchase orders from multiple vendors. The jury also determined that all the ePlus patent claims tried in court were valid. We see this verdict as an affirmation that companies like ours can continue to innovate and invent with the assurance that our investment will be preserved. We are now seeking an injunction to preclude not only Lawson’s sales of its infringing software products, but also any of Lawson’s maintenance, installation, implementation and other services for its infringing software products.
 
With that, 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 positive momentum that we experienced in the first half of fiscal 2011 continued into the December quarter.
 
Total revenues for the quarter were $230.5 million, an increase of $51.8 million, or 29%, compared to $178.7 million in the December quarter of last year.
 
For the quarter, net earnings totaled $7.5 million, or $0.89 per diluted share, compared to $2.3 million, or $0.27 per diluted share, in the same quarter of the previous year. Earnings for the quarter compare favorably to the non-GAAP net earnings we reported for the same quarter last year, of $4.6 million or $0.54 per diluted share. In that quarter, we recorded a $4.0 million pre-tax goodwill impairment charge relating to our leasing reporting unit. A non-GAAP reconciliation table is provided in our earnings release for your reference.
 
From a segment perspective, fiscal third quarter revenues in the technology sales business segment totaled $220.9 million, up $55.7 million, or 34%, on a year-over-year basis. The gross margin percentage for sales of product and services in this segment increased to 15.4%, compared to 13.4% in the prior year. The increase was due to an improvement in product sales margins and manufacturer incentives.
 
In the financing business segment, total revenues for the third quarter were $9.6 million, down $4 million, or 29%, compared to the third quarter last year.
 
As of December 31, 2010, we had $123.1 million of investment in leases-net, compared to $124.7 million at September 30, 2010, a decrease of $1.6 million.
 
For the third quarter, professional and other fees, salaries and benefits, and general and administrative expenses increased approximately $3.0 million year over year due to increased legal fees related to the patent infringement litigation, higher commission and bonuses related to the increase in sales, and slightly higher salary expenses due to the additions we made to our team.
 
Turning to the balance sheet, cash and cash equivalents totaled $59.0 million at December 31, 2010, compared to $68.3 million at September 30, 2010. Cash balances declined as a result of normal working capital needs due to the expansion of sales, combined with our continued use of early pay discounts and a continued reduction in the funding of non-recourse loans for our lease portfolio. Non-recourse notes payable totaled $34.8 million as of December 31, 2010, down from $41.3 million as of September 30, 2010. Shareholders' equity was $207.4 million, up from $199.6 million as of September 30, 2010.
 
During the quarter, we repurchased 6,725 shares of our common stock for approximately $200 thousand, pursuant to our stock buy-back program. The remaining authorization under the current program is approximately 495,000 shares. We continue to evaluate uses of our cash including share repurchases, acquisitions similar to the ITI transaction, which complement our business from a technology or geographic perspective, and investing in ways to strategically grow our business with additional sales personnel and training.
 
In summary, with a strong balance sheet and a solid business model, we are well positioned to capitalize on external and internal growth drivers to move ePlus forward.
 
That completes my portion of today's call. Operator, we'd like to open the call to questions.
 
Operator: [Operator Instructions] Our first question comes from the line of Peter Collery from S.C. Fundamental.
 
: Hi. So I have two questions. The first, of which maybe unfair, but I’m going to try it anyway. And that is that obviously in the last couple of quarters revenues and profits have both, say taken a material step up, is it fair to sort of assume that this is the new normal, or is – are there unusual factors going on right now that might leave you to think that the future isn’t going to be as good as what you’ve been able to do in the last couple of quarters?
 
: This is Phil Norton. Well, I think as we have in the past we don’t give forward projections. A good measure of what happens with ePlus is early based on the economy and general economy and also in the IT space. So we hope that we will be able to continue on this trend, but it really is our basis for what happens to the economy to where we’re at.
 
: So would it be fair to say, though the economy is – I mean most people would say the economy is not shining right now. Would it be fair to say that – I mean, do you feel like you’re the beneficiary or some kind of a boom in capital spending or is this -- I don’t know what’s your sense about the economy generally?
 
: Well. Our sense have been in the last quarter -- last two quarters that there has been in the enterprise and commercial markets has been improving and the buyers have been more aggressive then they have been in the past couple of years. So we felt that we’ve seen more activity and we can’t tell what the activities are going to be in the future, but it’s been a significantly better in the last couple of quarters.
 
: Okay. The other question, the litigation that you just won is there revenue just likely to be associated with, what are the implications to that, are you likely to get damages or does it mean that competitors won’t be as competitive or how does that all workout?
 
: Well, it’s ongoing and there is another date with the judge and I think its March 3. And we can’t tell what is going to happen, because you know the judge is going to have to rule on certain things at that point in time and we’re optimistic that they will be in our favor. But now we really don’t know until all the aspects of the litigation act are included.
 
: This is request for damages out there that yours is the next step?
 
: No. You know that’s something that, that’s really with our lawyers and you know we are not going to comment on what’s happening on the litigation on the next step.
 
: Okay. Well, obviously you guys have put together series absolutely super quarters and you deserve to be congratulated.
 
: Thank you, Peter.
 
: Thank you.
 
Operator: Thank you. [Operator Instructions] As there are no further questions in the queue, I would like to turn the conference back to Phil Norton for closing remarks.
 
Phil Norton
 
Thank you for participating on our call this morning. We appreciate your interest in ePlus and hope you can join us again next quarter. Thank you very much.
 
Operator: Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program. And you may all disconnect at this time.