Conference Call Discussing Earnings for Fiscal 2012 First Quarter Results

Safe Harbor

This transcript of an earnings call contains certain statements that are, or may be deemed to be, “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or “Exchange Act,” and are made in reliance upon the protections provided by such acts for forward-looking statements. Such statements are not based on historical fact, but are based upon numerous assumptions about future conditions that may not occur. Forward-looking statements are generally identifiable by use of forward-looking words such as “may,” “should,” “intend,” “estimate,” “will,” “potential,” “could,” “believe,” “expect,” “anticipate,” “project,” and similar expressions. Readers are cautioned not to place undue reliance on any forward-looking statements made by us or on our behalf. Forward-looking statements are made based upon information that is currently available or management’s current expectations and beliefs concerning future developments and their potential effects upon us, speak only as of the date hereof, and are subject to certain risks and uncertainties. We do not undertake any obligation to publicly update or correct any forward-looking statements to reflect events or circumstances that subsequently occur, or of which we hereafter become aware. Actual events, transactions and results may materially differ from the anticipated events, transactions or results described in such statements. Our ability to consummate such transactions and achieve such events or results is subject to certain risks and uncertainties. Such risks and uncertainties include, but are not limited to, the matters set forth below:

  • we offer a comprehensive set of solutions—the bundling of our direct IT sales, professional services and financing with our proprietary software, and may encounter some of the challenges, risks, difficulties and uncertainties frequently faced by similar companies, such as:
    • managing a diverse product set of solutions in highly competitive markets;
    • increasing the total number of customers utilizing bundled solutions by up-selling within our customer base and gaining new customers
    • adapting to meet changes in markets and competitive developments
    • maintaining and increasing advanced professional services by retaining highly skilled personnel and vendor certifications
    • integrating with external IT systems, including those of our customers and vendors; and continuing to enhance our proprietary software and update our technology infrastructure to remain competitive in the marketplace.
  • our ability to hire and retain sufficient qualified personnel;
  • a decrease in the capital spending budgets of our customers or purchases from us;
  • our ability to protect our intellectual property;
  • the creditworthiness of our customers and our ability to reserve adequately for credit losses;
  • the possibility of goodwill impairment charges in the future;uncertainty and volatility in the global economy and financial markets;
  • changes in the IT industry;
  • our ability to raise capital, maintain or increase as needed our line of credit or floor planning facilities, or obtain non-recourse financing for our transactions;
  • our ability to realize our investment in leased equipment;
  • significant adverse changes in, reductions in, or losses of relationships with major customers or vendors; and
  • significant changes in accounting guidance related to the financial reporting of leases; which could impact the demand for our leasing services.

We cannot be certain that our business strategy will be successful or that we will successfully address these and other challenges, risks and uncertainties. For a further list and description of various risks, relevant factors and uncertainties that could cause future results or events to differ materially from those expressed or implied in our forward-looking statements, see the Item 1A, “Risk Factors” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections in the Form 10-K for the year ended March 31, 2011 filed on June 10, 2011, as well as other reports that we file with the SEC.


 

August 5, 2011

Prepared Remarks

Operator
 
Good day, ladies and gentlemen, and welcome to theePlus inc. first quarter fiscal year 2012 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, Senior Vice President
 
Thank you Karen, and thank you, everyone, for joining us. With me today are Phil Norton, Chairman, President and CEO ofePlus, 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 detailed in the earnings release we issued [yesterday] and our periodic filings with the Securities and Exchange Commission, including our Form 10-K which was filed on June 10, 2011.
 
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?
 
Phillip G. Norton, Chairman, President and CEO
 
Thank you, Kley. We reported another solid revenue gain in the quarter ended June 30, 2011, which is our first quarter of fiscal year 2012. Total revenue increased 11.9% over the prior year as customer demand for our advanced IT solutions, products, and services, continued to be robust. The gross margin in our technology business unit improved slightly to 14.2% from 14.1%, which is a good indicator that our mix of products and services continues to be the right mix for our customer base. We continue to gain traction with our key vendors, and our focus on providing cloud-related solutions and security solutions is right on target. As a national systems integrator, we are leveraging our resources – strong balance sheet and liquidity, experienced management, efficient operating platform, acquisition expertise and integration skills – to invest today for future growth, meet customer demand, and provide the right mix of technology solutions to remain a leading visionary in our marketplace.
 
Our strategic vision includes expanding our geographic footprint and building out comprehensive technology solutions offerings. To execute our vision, we have accelerated hiring employees and there have been somewhat unique opportunities in the marketplace to hire groups of people in various markets. Over the past 12 months, our staff grew by 13% or 88 people, and in the past quarter, we hired 30 people of whom more than 90% are customer facing, revenue-producing, salespeople and engineers. Our new staff have allowed us to expand in a number of new markets, including Richmond and the tidewater areas of Virginia, upstate New York, southern California, Phoenix, Chicago, south Florida, and Philadelphia/New Jersey. In our business of selling to enterprise and larger middle market commercial customers, and state, local and educational customers, it is important to have a local presence in a market. With a local presence, we can provide services, and interface regularly with customers and our vendor partners. Our position as a leading systems integrator, with the highest vendor credentials, strong financial resources, and a terrific entrepreneurial culture, allows us to attract some of the best people in the industry, who in turn bring energy and new skillsets to the company.
 
We are meeting customer demand by building new technology solutions practices that leverage our existing vendor relationships and engineering capabilities with the latest trends in technology. Many of today’s solutions require complex architecture, design, and integration of technology from multiple vendors, and services. Whether based in the public cloud, private cloud, or in a hybrid, ePlus has the project management and engineering skills to bring complex cloud and collaboration solutions to completion. Our customers rely on us for their most critical computing requirements. Over the past twelve months, we’ve added a number of key solutions areas, including a robust security assessments practice from our June 2011 acquisition of NCC, to complement our existing security solution; visual collaboration capabilities from the acquisition of ITI, which was completed in November, 2010; the establishment of an advanced audio/visual group; a new staff augmentation organization; a complete retooling and expansion of our managed services offering, and a security operations center.
 
These investments in people, new offices, and supporting infrastructure, as well as deal and integration costs of our acquisitions, put some pressure on earnings in the technology business segment. As a result, segment pre-tax earnings did not increase at the same rate as revenues. Elaine will go into detail in her remarks, but we are very satisfied with the long term growth prospects our new people, locations, and solutions will provide. Effectively, we have seized expansion opportunities which have had an impact to EPS, but we believe will provide long-term growth opportunities.
 
During the quarter, we continued to add to our numerous awards and engineering certifications, with a Cisco Gold recertification, a Cisco Master Security recertification and multiple Microsoft Gold and Silver competencies. We continue to strengthen our relationship with all our key tier 1 partners such as Cisco, HP, IBM, Oracle/Sun, VMware, NetApp, and Microsoft for both vendor-specific authorizations and for specific solution areas such as visual communications and security. We also were ranked #37 in CRN’s VAR500 List, moving up from #86 in last year’s rankings.
 
In the financing business unit, revenues declined 31.6% and pretax earnings declined 44.8%, a result of lower transaction volumes due to fewer sales of leases, a smaller lease portfolio which produced fewer residual gains, and a decline in federal government lease financings. This business unit, which in the quarter consisted of about 4% of our total revenue, is subject to earnings variability due to its high-margin transactions, which may or may not be consummated during a given quarter. These transactions may include federal government lease financings, residual realization, and asset sales as we optimize our portfolio mix. The decline in pre-tax earnings this quarter looks comparatively worse than the prior year’s quarter, when we realized a gain on the sale of financial transactions of approximately $1.1 million more in net revenue or profit than our usual run rate.
 
Our ability to offer financing to our technology customers continues to be a differentiator in the marketplace, and becomes even more important in a recessionary environment, when technology customers turn to leasing to acquire critical infrastructure. We are keenly focused on providing leasing to our customers to facilitate purchases even with budget and cash constraints. We are one of the few third-party equipment vendors which offers integrated leasing, asset management, and supply chain optimization through our proprietary business processes and software.
In the federal space, there has been a lot of uncertainty due to the budget crisis, but our experience has been that when there are budget cuts, leasing volume increases as the federal government utilizes leasing to acquire assets and services. We have one of the most experienced teams in the country, as many of our finance professionals have been providing federal government financing services for more than two decades. We have a specialized sales team which is redoubling their efforts to build pipeline in this space and capture opportunities as they arise.
 
The financing business has been a significant contributor to ePlus’ earnings for many years, and it remains a key driver to our overall business. In a recession, it has been our experience that the return on our lease portfolio increases, because customers retain older equipment and we realize higher residual gains. We are well positioned to increase both commercial and federal lease production as opportunities arise, and our long term experience managing the portfolio from a credit and risk perspective should optimize our returns in the business segment.
 
Moving on to our intellectual property portfolio, on May 23, 2011, the trial court in our litigation against Lawson Software, Inc. issued an injunction, ordering Lawson and its successors to immediately stop selling and servicing products relating to its electronic procurement systems that infringe our patents. The injunction also prevents Lawson from any ongoing or future maintenance, training or installation of its infringing software products. Lawson has appealed the ruling, however, its requests that the injunction be stayed have been denied.
 
In summary, we are satisfied with our first fiscal quarter results. In the tech space, we’ve invested in headcount and acquisitions to meet our strategic objectives for future growth for both revenues and earnings. Our financing business remains profitable with high margins, and it becomes an important business driver in a recessionary environment. We have released a new version of its flagship eprocurement software, Procure+ version 7. And we continue to focus on shareholder value by executing our share repurchase plan. We believe ePlus is very well positioned for future growth and to deliver the best valued advanced technology solutions to our customers.
I’d like to turn the call over to Elaine Marion, our CFO, who will discuss specific financial results, and I’ll return to answer questions at the end of this call.
 
Elaine Marion, CFO
 
Thanks Phil.
 
I’d like to review the consolidated financial results, followed by our segment breakdowns.
 
As Phil has described, our revenue trends have remained favorable. On a consolidated basis, revenues totaled $211.5 million, an increase of $22.5 million or 11.9%, compared to $189.0 million in the same quarter last fiscal year. Net earnings decreased 21.4% to $3.7 million or $0.44 per diluted share, as compared to $4.7 million, or $0.57 per diluted share, in the same quarter last fiscal year. On a sequential basis, revenues were consistent and net earnings were up 4.1%.
As of June 30, 2011, stockholders’ equity was $214.9 million or $25.00 per share and Total cash and cash equivalents were $61.6 million. During the three months ended June 30, 2011, werepurchased 66,680 shares of our outstanding common stock at an average cost of $24.51 per share for a total purchase price of $1.6 million.
 
As for our two business segments.
 
In our technology sales segment, revenues in the first quarter were $203.9 million, an increase of $26.1 million or 14.7%, as compared to $177.8 million for the prior year’s quarter. During the quarter ended June 30, 2011, we implemented new revenue recognition guidance for multiple deliverable arrangements and recognized $4.9 million of revenues for products that were delivered during the quarter that were sold together with services. In previous periods, we were required to defer this type of revenue until the services were complete. In addition, demand for products and services increased over the prior year, partly due to additional product and service offerings obtained through the acquisition of NCC Networks in June 2011 and ITI Technologies in November 2010, and from sales by new employees we have hired
 
The gross margin on products and services improved slightly to 14.2%, as compared to 14.1% in the same quarter last year.
 
Total SG&A costs in the segment were $26.5 million, an increase of $3.3 million or 14.3%, as compared to $23.2 million during the same quarter last year. Salaries and benefits expenses increased $3.5 million to $20.7 million, compared to $17.1 million during the three months ended June 30, 2010. This increase was driven by increases in the number of employees and increases in commission expenses as a result of increases in gross profit. The technology sales business segment had 695 employees as of June 30, 2011, an increase of 93 employees from 602 at June 30, 2010. More than 70% of the increase in headcount relates to sales, marketing and engineering personnel, who are customer facing and revenue generating.
 
General and administrative expenses increased $949 thousand, or 33.7%, primarily due to increases in office locations as a result of our continued expansion efforts and an increase in our reserves for credit losses.
 
Professional and other fees decreased 35.9% to $2.1 million, compared to $3.2 million during the three months ended June 30, 2010. These decreases are primarily due to decreased legal and other fees related to the patent infringement litigation.
 
As a result of the foregoing, technology sales segment earnings before tax as compared to the prior year increased $276 thousand, or 7.4%, to $4.0 million for the three months ended June 30, 2011.
 
Now, turning to our financing business segment -
 
Total revenues in this segment decreased by $3.5 million, or 31.6%, to $7.7 million for the three months ended June 30, 2011, as compared to the prior year, due to a reduction of $1.1 million in net gain on transfers of financial assets, coupled with decreases in earnings from our investments in direct financing and operating leases due to a reduction in the lease portfolio.
 
At June 30, 2011, our investment in leases were $121.7 million, compared to $133.4 million at June 30, 2010, a decrease of 8.8%. The decrease in the lease portfolio was due to lease terminations, cash collections and transfers of leases, partially offset by the addition of new leases. Fee and other income decreased $542 thousand due to decreases in remarketing fees.
 
Total costs and expenses decreased $1.7 million, or 24.0%, mostly driven by decreases in direct lease costs and salaries and benefits. Direct lease costs decreased $738 thousand, or 26.0%, to $2.1 million due to a decrease in depreciation expense for operating leases and a decrease in our reserve for credit losses. Salaries and benefits decreased primarily due to decreases in accrued bonuses and a reduction of 5 employees in this business unit.
 
During the three months ended June 30, 2011, interest and financing costs decreased 52.6% to $362 thousand, as compared to $763 thousand during the same period last year. These decreases were primarily the result of lower non-recourse note balances as we utilized our cash for new leases, thus funding fewer leases with non-recourse debt. Non-recourse notes payable decreased 46.6% to $25.0 million at June 30, 2011 as compared to $46.9 million at June 30, 2010. These non-recourse notes payable are generally recourse to the underlying leased equipment and the lessee.
 
As a result, segment earnings before tax decreased $1.8 million, or 44.8%, to $2.3 million for the three months ended June 30, 2011. While we experienced a decrease in earnings from our financing segment, we continue to earn a positive return on this portfolio. Our financing capabilities and strong financial condition continue to be a differentiator in the marketplace and we continue to look for opportunities to use our strong cash position for such investments.
 
In conclusion, we have made significant progress on our strategic plan which includes extending our geographical presence and improving our advanced technology solutions offerings through the opportunities we executed over the past year. We are confident that these investments will help us achieve our strategic objectives.
 
That concludes my remarks.


Questions and Answers

 
Operator, we'd like to open the call to questions.
 
Operator: [Operator Instructions]
 
Operator: Thank you. [Operator Instructions] And our first question comes from the line of Alex Kurtz from Sterne, Agee.
 
<Q – Alex Kurtz – Sterne, Agee & Leach, Inc.>:
 
Yes, thanks for taking the question. Can you comment about strength in different verticals for your products and services, that you’re selling into such as the government versus general enterprise, sort of, how you saw that to flow through the quarter and into sort of the rest of the year? Thank you.
 
<A – Phillip Norton – Chairman, President & Chief Executive Officer>:
 
Well, in the commercial section we’ve seen the sales continue to be robust up to this period of time. It’s hard to judge based on what’s happening in the financial markets, what people will do in the future.
 
In the state and local government, which is where we have another large portion of our business, up to this line we seen no drop-off and we have, you know, as you could see better sales than the year before. In the federal space, we really only deal through – through the integrators and do very little direct government financing.
 
And that part of the business is kind of on hold. People are not making a lot of big decisions today. And I think it may open up some between now and the September, which it usually does now with the debt default [ph] had so (20:51) in past.
 
<Q – Alex Kurtz – Sterne, Agee & Leach, Inc.>:
 
Okay, thank you.
 
<A – Phillip Norton – Chairman, President & Chief Executive Officer>:
 
Thank you, Alex.
 
Operator:Thank you. And I see no further questions at this time.
 
Phillip G. Norton, Chairman, President & CEO
 
I would like to thank everyone for joining us. If you all have any questions you can, Kley, Elaine, or myself and look forward to hearing from you in the future. Thank you. Bye.
 
Kley Parkhurst, SVP
 
Thank you.