Conference Call Discussing Earnings for Fiscal 2012 Third Quarter Results
- 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 “Risk Factors” and “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 and form 10-Q for the period ended September 30, 2011, as well as other reports that we file with the SEC.
February 6, 2012
We'd like to open the call to questions.
Operator: Thank you. [Operator Instructions] And first on the line we have Nick Morrow with Sidoti & Company.
<Q – Nick Mauro, Sidoti>:Hey guys, how are you doing?
<Q – Nick Mauro>:Just I know there is a lot that goes into the gross margin that could be volatile but what can you attribute the gain from the September quarter to this quarter, say went up – over about percent or so?
<A – Elaine Marion, CFO>:Primarily the mix of the products that we sell between services and products and also the type of products that we sell in addition we also increased our rebase as a percentage of sales
<Q – Nick Mauro>:Okay.
<A – Elaine Marion, CFO >:That’s been different quarter-over-quarter.
<Q – Nick Mauro>:Okay. And then with the VantiCore acquisition what’s kind of the timetable on getting that going and how much of the impact could it have to revenues?
<A – Phil Norton>:Well, they’re relatively small company, they enhance our engineering capabilities in the New England area, we think they’ll be up and running immediately. What impact it will have over time as we’re able to – adding to their customer base and increase sales of our products and services that they don’t offer.
<Q – Nick Mauro>:Okay. And lastly just kind of an outlook into the rest 2012 what’s the demand look like for the IT products?
<A – Phil Norton>:Well, what we’ve seen in the last quarter and our demand has been very high we have some realign the industry has some risk, but hard drives and things of that nature. But in general we don’t really forecast what we’re going to be doing ourselves.
<Q – Nick Mauro>:Okay, all right. Thank you.
Phillip G. Norton[Operator Instructions]. And next in line we have Gregg Hillman with First Wilshire Securities Management.
<Q – Gregg Hillman—First Wilshire>:Yeah, good morning. Yeah, could you talk, previous sales, your sales line what percentage of that is reoccurring?
<A—Elaine Marion>:We don’t break that out.
<Q – Gregg Hillman>:Okay. When you sell a piece of equipment like this, you normally have like a service contract with it?
<A—Elaine Marion>:We sell a lot Cisco SMARTnet which has maintenance contract with it, yes as far as our internal Managed Services, we’re really starting to ramp that up and put a lot of focus on that but we don’t break that out as far as percentage of the sales.
<Q – Gregg Hillman>:Okay and when you say internal Managed Services would that fall into like the 4% the professional revenue or professional fees or does that fall in the sales line?
<A—Elaine Marion>:It falls in sales of products and services.
<Q – Gregg Hillman>:Okay and in terms of this offering for Managed Services, I mean do you own server farms yourself and provide that service?
<A—Phil Norton>:You said server farms?
<Q – Gregg Hillman>:Yeah, do you own them?
<A—Phil Norton>:We don’t do hosting for clients.
<Q – Gregg Hillman>:I didn’t quite catch that, you said you do own them or?
<A—Phil Norton>:No we do not host servers for clients.
<Q – Gregg Hillman>:Okay, well then can you just explain your strategy for to develop this capability for managed services. I guess you mentioned then in a variety of areas for video security and what not, can you just explain is this normal, is this unique in the industry or is there a bunch of other people that you’re doing, you’re doing the same thing?
<A—Phil Norton>:Basically there is a large number of people in this business whether it’s IBM, all the way down to VantiCore, who we just bought provides managed services. There is very difference in what it offered and we have a system where we provide monitoring that works up and down, reduces cost for people, servers, the management are working or not working as well as storage and we’re adding significant new capabilities quarterly.
<Q – Gregg Hillman>:Okay. But I mean are – is this just a kind of Catch as Cash Can that you’re doing an add-on to some of your existing customers or can you sell that managed services just like a standalone product?
<A—Phil Norton>:Either one.
<Q – Gregg Hillman>:And where would be your addressable market to the United States for managed services?
<A—Phil Norton>:Well, first thing we have to tackle is the addressable market of our customer base, which is around 1500 customers and that’s who our sales people are going after as well as new clients, which would bring on providing those services to them but as far as the addressable market I wouldn’t, its large but I have no numbers.
<Q – Gregg Hillman>:Okay, okay, I’ll get back in queue. Thanks.
Operator:[Operator Instructions]. And next in the line we have Brad Evans with Heartland.
<Q – Brad Evans, Heartlant>:Good afternoon.
<Q – Brad Evans>:Hello, everybody. I was curious, the 19.2% growth rate on the technology solutions side, what was the organic growth rate in the quarter?
<A—Elaine Marion>:I don’t have that broken out Brad; I’ll have to get back to you.
<Q – Brad Evans>:Okay. We can follow up after perhaps. So, it sounds like the, I don’t wan to put words in your mouth but relative to last quarter, it sounds like the tenure of the market has at least stabilized to improve modestly, is that a good way to characterize it?
<A—Elaine Marion>:I would say that’s one of the results in those quarter that customers been continuing to buy at a little faster pace than what that they have in prior quarters. But I also think it’s a number of places that we’ve added and a number of sales people we’ve added and a couple of the acquisitions in the last year which are now starting to produce a lot more revenue and margins. So, I think all-in-all it’s a mix of several things.
<Q – Brad Evans>:Okay. That’s very helpful. I know there is a lot of things going on within the technology sales SBU with the acquisitions and obviously the professional fees and what have you. But the very stout total revenue growth of almost 19%, we only saw about a 3% increase in segment earnings. When do you think we might start to see more operating leverage in that segment as you are able to deliver more of that revenue growth to the operating line?
<A—Phil Norton>:We continue in trying to improve that all the time. I think last quarter we improved it over the quarters before. But as you’re growing and adding new capabilities and services to keep up with the competition, there’s always a delay factor before comes through, but I think that we will continue to drive forward with these acquisitions and the growth that we have been able to do in the past we hope we can do in the future. But a lot of that depends on the market and it’s very competitive.
<Q – Brad Evans>:Got it. So, the investments you’re making organically in Southern California and Texas and Georgia, those are all in there right now?
<A—Phil Norton>:I don’t think we mentioned Georgia.
<Q – Brad Evans>:Okay. All right.
<A—Phil Norton>:They’re all ones that we’re trying to grow and some are growing organically and some we’re growing by acquisitions. And the benefit to the acquisitions is we acquire customers and to the most part the acquisitions we made are either they are centered on one type of technology which enables us to up sell the significant other technologies that we hold in our portfolio. So, over time I think that increases our ability to go wider and deeper into our accounts and be able to get more control over what those accounts are spending.
<Q – Brad Evans>:Okay. Last question from each, the share count for the fourth quarter, should we be using 7.8 million shares, is that right?
<A—Elaine Marion>:Well, we’re continuing our repurchase, so it depends on the market and our plans.
<Q – Brad Evans>:Elaine do you have the share count at the end of the quarter?
<A – Elaine Marion>:At the end of the third quarter?
<Q – Brad Evans>:At the end of the third quarter yes.
<A – Elaine Marion>:I’m sorry, I thought you said fourth quarter that you’re looking for me to project...
<Q – Brad Evans>:No I did though I’ll just ask the question different way if you have the share count at the end of the third quarter that would be helpful?
<A – Elaine Marion>:The diluted it’s 7.9 million actually 8 million round up.
<Q – Brad Evans>:Okay thank you very much.
<A – Elaine Marion>:Yes.
Operator:And we have a follow from Gregg Hillman with First Wilshire.
<Q – Gregg Hillman>:Yeah first of all yeah for litigation against the losses so why is that important enough to mention?
<A – Elaine Marion>:A lot of our investors have been interested in this and it’s been continuing litigation for the past year or so and we have invested considerable amount of our assets in it so that’s why we feel the need to mention it.
<Q – Gregg Hillman>:How much of you’ve invested in it in terms of I guess lawyers?
<A – Elaine Marion>:I think, I’m not sure whether I’ve disclosed that number or not. It’s been going over probably three fiscal years now so.
<Q – Gregg Hillman>:What’s the run rate recently for spending on that thing?
<A – Elaine Marion>:Well it’s decreased on year over year basis last quarter I think we said about 1.5 million down from about 2.3 million or so.
<Q – Gregg Hillman>:You mean the last quarter being your third quarter the September quarter?
<A – Elaine Marion>:Yeah we spent $2.5 million for the three months ended December 31, 2011 but that’s a decrease from $3.3 million in the prior year.
<Q – Gregg Hillman>:Okay and just in terms of, and I just wanted to ask you by the competition for a company, let’s say, like PC Mall, they’re just selling I guess equipment over the Internet to commercial customers. Do they have an advantage versus what you’re doing?
<A—Phil Norton>:I don’t believe so. I think for the most part it’s a disadvantage because we now there is a lower margin unless you can get in there and sell solutions; you can’t increase your margins. And we have a tele sales and business development arm that calls into our account to find new opportunities. But in our opinion that requires a significant amount of infrastructure for our tele sales as well as doing a lot of low margin transactions.
<Q – Gregg Hillman>:Yeah. So, speaking of margins, you mentioned in the call, I think at one point rebates and also less vendor allowances. And can you tell me what’s going on there, the trend, in terms of vendor allowances and also your trends in terms of giving rebates?
<A – Elaine Marion>:This is Elaine. We don’t, we don’t give rebates to our customers. These are manufacture incentives that we receive...
<Q – Gregg Hillman>:Okay.
<A – Elaine Marion>:These programs are very complex and ever changing by the manufacturers. So we don’t have any insight into those programs on a long-term basis and what product or solution set they’re targeting at any one period a time. We do our best to garner as much of those incentives as we can. We have a whole team of people here that monitor and calculate those. So, I feel like we get the most we can, although out of this incentive, but they’re difficult to predict on how they’re going to be changing in the future.
<Q – Gregg Hillman>:Okay. And so, you couldn’t comment about your overall dependence on Cisco as a center whether they can push you around or is that a benefit because it’s hard for other people to get certification to service all their products?
<A—Phil Norton>:Well, as far as pushing us around, I don’t think Cisco has ever dealt with their partners that way. They’re probably the most partner-friendly of the major vendors. They have a lot of focus on helping the partners grow and that we don’t feel like it is a disadvantage for couple of reasons. One, no one really has come out with a viable alternative or unified communications and networks. And so, that’s going to be something that’s be provided for years to come that will not be affected to any degree. We don’t believe in any degree the cloud services. So, it will enable us to have a strong foothold with our customers and also put us in the right position where we can sell our other products and services to those customers. A large part of our managed services is around Cisco and Cisco networks. So, we think in the long run it’s a benefit to us.
<Q – Gregg Hillman>:Okay. Is Cisco growing faster or slower than you?
<A—Phil Norton>:Well, you I don’t own any Cisco stock and we not really follow their trends. We believe that we’re growing a little bit faster.
<Q – Gregg Hillman>:Okay, okay thank you.
Operator:And I’d like to turn over to our speakers for any closing remarks.
Phil Norton, Chairman, President & Chief Executive Officer
We’d like to thank you all for joining us and we appreciate your interest in ePlus.
Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program. You may all disconnect. Everyone have a great day.
Operator:Thank you. Our first question comes from the line of …
Operator:At this time I'm showing no further questions. And I'd like to turn over to our speakers for any closing remarks.
Phillip G. Norton, Chairman, CEO and President
We'd like to thank you very much for taking the time for our conference call. If you have any questions, you can contact Kley Parkhurst. Thank you very much.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect. Everyone have a great day.