Conference Call Discussing Earnings for Fiscal 2014 Third Quarter Results

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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 information technology (IT) hardware, third-party software, and associated maintenance plans; 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 with a key set of vendors;
    • 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;
    • continuing to enhance our proprietary software and update our technology infrastructure to remain competitive in the marketplace; and
  • Reliance on third parties to perform some of our service obligations.
  • our dependence on key personnel, and 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 and/or rapid changes in product offerings;
  • 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;
  • the reduction of vendor incentive programs and
  • significant changes in accounting standards including changes to the financial reporting of leases which could impact the demand for our leasing services, or misclassification of products and services we sell resulting in the misapplication of revenue recognition policies.

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, 2013, as well as other reports that we file with the SEC.

February 5, 2014

Prepared Remarks

Operator

Good day, ladies and gentlemen, and welcome to the ePlus Third Quarter of Fiscal Year 2014 Earnings Call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to introduce our host for today's conference Kley Parkhurst, Senior Vice President.

Kley Parkhurst, Senior Vice President

Thank you Destiny, and thank you everyone for joining us today. With me today are Phil Norton, Chairman, President and CEO of ePlus; Mark Marron, Chief Operating Officer and President of ePlus Technology, Elaine Marion, Chief Financial Officer; and Erica Stoecker, General Counsel.

I want to take a moment to remind you that the statements we make this afternoon 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 this afternoon and our periodic filings with the Securities & Exchange Commission including our form 10-K for the year ended March 31, 2013 and subsequent Forms 10-Q. The Company undertakes no responsibility to update any of these forward-looking statements in light of new information or future events.

I’d now like to turn the call over to Phil Norton. Phil?

Phillip G. Norton, Chairman, CEO and President

Thank you, Kley.

We had a very strong quarter. Revenues increased 10.4% to $267.2 million. Net earnings increased 17.5% to $10.6 million. And fully diluted earnings per share increased 18.9% to $1.32 per share. During the quarter we announced and implemented a 750,000 share repurchase plan. We will go into more financial and operational detail during the prepared remarks, but one highlight of the quarter was a sharp increase in the gross margin on products and services, which increased 140 basis points to 18.9%, based in part on our stated strategy and success in transitioning to a higher margin, services-led business model. Our financial results illustrate our ability to achieve double-digit revenue growth as a provider of complex integrated solutions, at one of the highest gross margins in the industry. Our services-led business model addresses our customers’ complex computing and business requirements for the entire IT lifecycle, from the upfront assessment stage through managed services, ultimately optimizing, securing, and managing our customers IT environment.

For the quarter, net earnings increased at a faster rate than revenues, which reflects an increase in gross profit from both a higher gross margin and more revenue, as well as our ability to hold the line on costs. As we discussed last quarter, we are trimming underperforming personnel while continuing to invest in sales and engineering talent to address the huge opportunities in security, storage, BYOD, cloud, and others.

We are continuing to focus on our key strategic objectives: expanding our national presence through organic growth and acquisitions; growing sales to existing customers by offering our full suite of products and services; becoming more operationally efficient; focusing on profitability; and continuing to hire, retain, and train the best employees.

We continue to review many acquisition opportunities, and given our balance sheet resources, we have the capital to execute acquisitions and expand in new territories. Our strategic growth plan of building a national footprint through a balanced program of acquisitions and new hires is an optimal way to build the company effectively. We are also looking for acquisitions that can accelerate our growth in key technologies and solutions areas.

I’ll be happy to answer questions at the end of the call, but for more detail on the quarter, I would like to turn the call over to Mark Marron, Chief Operating Officer of the Company and President of ePlus Technology, our largest segment. Mark?

Mark Marron, Chief Operating Officer

Thank you, Phil.

I’d like to address some of our accomplishments we made during the quarter from both an operational, as well as the sales and services standpoint. We, as a management team and as a company, are very focused on the corporate objectives that Phil highlighted, and I’ll touch on some of the progress we’ve made in each of these objectives over the past quarter.

As it relates to expanding our national presence and footprint, in November, we acquired AdviStor, a storage focused solutions provider in the Rochester market. Now, this transaction plays to both of our primary acquisition strategies: one; expands us geographically, and two; brings in additional technology capabilities we didn’t have in that area. While we had already hired a strong group in Rochester as a green field effort to start a new office a few years ago, our customers and vendor partners were actually were looking for us to expand our capabilities and reach in this market. AdviStor and its principals have a long history in the greater Rochester market, and this deal instantly increased our presence, it created new customer relationships, and increased our sales and engineering delivery capabilities. So, while we already had a strong engineering and sales focused around Cisco technologies in this market, we really wanted and needed additional storage expertise that Advistor was able to provide. So if you think about AdviStor’s focus in this area is a great addition to our portfolio, and the acquisition allowed us to expand our multi-vendor solutions capabilities, it expands our customer base, and we onboarded some great employees.

The AdviStor transaction is also a perfect example of ways we have improved and enhanced our operational efficiency. So, we believe we have created an excellent platform to integrate acquisitions and enhance operational efficiency. So, on day one, all AdviStor customers, deals in progress, accounts receivable, and accounts payable had been loaded into our systems; all personnel had been trained on our systems; we had support staff on site; and dedicated online resources for post-closing support. So, if you think about it, they were fully integrated immediately, which ensured compliance and efficiencies, and provided immediate opportunities to cross sell our entire portfolio of goods and services to their customers. We have used this process and methodology with all our technology segment acquisitions. So, I think it’s a key differentiator for us.

While I am talking about Rochester and Upstate NY region, during the quarter we announced a multi-year managed services and staffing deal with the Eastman Kodak Company. Kodak is a company in transition and it outsourced IT functions to us to reduce costs and gain efficiency. Some of the services we provide to Kodak are the following:

• Our Managed Services team is monitoring and managing Kodak's entire Cisco router/switch and wireless infrastructure

• We have a helpdesk staff on-site for service delivery management and engineering support, this includes everything responsible to trouble tickets, move/adds/changes, configurations and network architecture engineering design, and

• We are also providing 24X7 on-site break/fix coverage for 17 sites around the United States and Canada.

So, this a great example, in my mind, of our services led business model Phil mentioned, which provides the support and services our customers are looking for across many areas. It is a strategic focus for us as we look to provide customers the help and guidance they need from the discovery and assessment phase all the way through optimization of their environment. At this point, I’d like to recognize Dan Farrell for his contributions in building out our services business. Dan is our SVP of Services and we have made great strides over the last three year under his leadership. He has done a great job enhancing our services offerings and building out our capabilities to design and implement solutions our customers need in today’s challenging environment. But, most importantly, I think Dan has improved the customer experience and our customer satisfaction levels by developing a project management approach, and reporting methodologies, that ensure successful deployments and provide the transparency our customers require in order to understand what is occurring in their IT environments, and ultimately find ways to reduce their total cost of ownership for even the most complex IT platforms. I guess a good example of this would be that we recently won our 11th Customer Satisfaction award from Cisco, which is a real achievement.

So, within our services business, one area we are focused on is building our value-added recurring revenue streams. Examples of this include expanding our managed service offerings and our staffing capabilities, such as the Kodak example I highlighted a little earlier. Yesterday, we announced our newest managed services center, to handle expanding demand for our managed service offerings, and to prepare for our soon-to-announce Enhanced Management Services, or EMS, which is a vendor-certified Tier 1 first call program. The new managed service center is actually our third in the United States, is located near Raleigh, North Carolina, which is a vibrant market with a deep pool of technically talented people. We are confident that managed services will continue to drive customer loyalty by providing the real time support that many of our customers require while continuing to support our overall growth and profitability goals.

Phil also mentioned our plans to grow sales to our existing customers by offering full suite of products and services. This really includes being able to provide all of the traditional solutions around compute, storage and network, but also being able to support emerging technologies like Cloud, Big Data, BYOD, and security. One of the biggest challenges our customers face today is how to utilize different cloud technologies with security being a key component of any solution. The Cloud solutions market continues to provide us with ample opportunities to engage our customers with cloud readiness assessments, consulting and cloud enablement services. Our services methodology of plan-build-support-optimize, or PBSO, helps clients address the uncertainty and confusion about what cloud solution is right for them. So, whether it is public, hybrid, or private, we help our customers move their workloads to the correct, safe and secure environment which meets their business needs cost effectively.

In last quarter’s call, Phil also mentioned one of our focus areas was to build out our national security practice, so I am pleased to report that we have added resources in our regions to provide our customers with consultative services and support they require to help secure their applications and IT environments from hacking and other malicious attacks. It is also important to note that we leveraged the security expertise and knowledge of NCC Networks, which is a previous acquisition we did in the Midwest two and a half to three years ago to help us build out our national security practice. Once again, we are leveraging the strengths and resources of an acquisition, in this case to help us build our overall security offerings to all ePlus customers. A good example of the expertise we are building out in the Security Market in fast emerging technologies such as “next generation firewall” to address today’s accelerating security risks. To give you an example of the opportunity in the security market, Gartner Group estimates that only 10% of the firewalls in place today meet the requirements to protect against sophisticated attacks, and projects 35% will meet requirements by the end of 2014. All of these older firewalls will need to be replaced, and security is expected to be one of the highest growth areas in IT. Security is a growing concern for all of our customers, whether big or small, public or private.

In addition, if you think about it, security touches almost every one of our technologically complex, integrated solutions, including data center, networking, and infrastructure, giving us a broad array of products and services on which we can leverage sales of security products and services.

We are also keenly focused on building and investing in relevant technologies that will keep ePlus on the forefront of delivering value to customers. For example, in the big data arena, we were selected as one of the first companies in Cloudera’s Connect Partners program. Cloudera provides one of the most innovative use of Apache Hadoop for a range of business applications, and we will look for ways to market and sell Apache Hadoop‐based, big data management software and services.

What is important to note, is we will always look to leverage our existing technology resources and capabilities to supplement what we do in some of these new emerging technology areas. For example, we were chosen for Cloudera’s Program, in part, because ePlus is the top NetApp Flexpod reseller in the United States, having built expertise and engineering capability over many years. Flexpod is a reference architecture that has been optimized for Cloudera deployments. So, by fusing our expertise in legacy technology with the ‘hot’ technology of an emerging vendor, we have achieved both the ability to protect our base business, as well as capture high growth opportunities. There are many examples of this throughout the business, but it is important to know that ePlus is cognizant of, and investing in, rapidly advancing technologies that our customers demand.

Turning now to our financing segment, we are continuing to find that customers and manufacturer partners are valuing our process automation, our responsiveness, and our ability to offer customized financing solutions that are tailored to their unique requirements. In this segment, our manufacturer partners are relying on us more than ever to meet their requirements for rapid turnaround on financing transactions. We remain focused on increasing volumes to increase profitability through gain on sale transactions, and build our on-balance sheet portfolio for the long term, to create recurring portfolio earnings and increased earnings from post-contract transactions. Elaine will cover Leasing in more detail during her presentation.

In summary if I could, we remain focused on our corporate objectives of building out our national footprint, expanding and enhancing the solutions, services and support offerings our customers expect from ePlus in both traditional and emerging technologies, while executing on our growth plans and improving shareholder value. At the end of this call, I’d be happy to answer any questions, but first, I want to turn it over to Elaine Marion, our CFO, who will discuss our financial results.

Elaine D. Marion, Chief Financial Officer

Thank you, Mark.

As Phil mentioned, for the quarter ended December 31, 2013, consolidated revenues grew 10.4% to $267.2 million, the 16th quarter of consolidated revenue growth on a year over year basis.

Our financial results were strong compared to the prior year’s quarter as net earnings increased 17.5% to $10.6 million, and fully diluted earnings per share increased 18.9% to $1.32 per share.

For the nine month period, consolidated revenues increased 6.8% to $797.6 million, while net earnings were consistent at $27.1 million. Diluted earnings per share was $3.34 with 8.0 million diluted shares outstanding for the nine months ended December 31, 2013, compared to $3.38 per share based on 7.9 million diluted shares outstanding for the same period last year.

Moving to the technology segment, revenue for the quarter increased 12.4% to $257.9 million compared to the same quarter last year and, for the nine months ended December 31, 2013, the technology segment had revenues of $769.5 million, an increase of 7.3% as compared to the prior year. Our revenue growth stems from increases in demand by our Fortune 100 customers as well as overall increases in ePlus professional service revenue.

In the technology segment, gross margin on sales of product and services increased 140 basis points to 18.9% for the quarter ended December 31, 2013, driven by an increase in sales of third party software assurance, maintenance and services, which are presented on a net basis, as well as improvements in product margins. For the nine months ended December 31, 2013, our gross margin on sales of product and services increased 60 basis points to 18.1% from 17.5% in the prior year primarily due to higher ePlus services revenue, as well as higher sales of third party software assurance, maintenance and services.

Earnings from our technology segment were $15.2 million for the quarter, up 49.5% or $5.1 million from the prior year’s quarter. Total overhead expenses increased 13.5% to $35.3 million for the quarter, compared to $31.1 million in the same quarter last year.

On a year to date basis, overhead costs increased 12.4% to $105.4 million. These increases were attributable to increases in salaries and benefits, due to increases in personnel, higher commissions, and higher healthcare costs.

We had 903 employees in our technology segment as of December 31, 2013, an increase of 93 employees, from the prior year. Most of the increase in personnel relates to sales and engineering positions, as we continue to invest to expand our geographic presence and solutions offerings.

Turning to the financing segment, revenues decreased 26.7% to $9.2 million compared to $12.6 million in the quarter ended December 31, 2012. The comparative prior period had net gains from the early termination of certain lease agreements and the buyout of the related equipment. As of December 31, 2013, we had $140.1 million of investments in notes and leases, compared to $123.1 million at December 31, 2012, an increase of $17.0 million, or 13.8%.

For the nine months ending December 31, 2013, revenues in our financing segment decreased 4.3% to $28.1 million, primarily due to decreases in remarketing income and broker fee income.

Total costs and expenses decreased $900 thousand during the quarter due to lower commissions and broker fees. For the nine months, total costs and expenses increased $1.3 million due to increases in direct lease costs of $2.2 million which was primarily offset by lower commissions and broker fees. As a result, earnings from our financing segment were $2.8 million for the quarter, compared to $5.3 million in the prior year period, and $7.6 million for the nine month period, compared to $10.1 million in the prior year.

Cash and cash equivalents were $40.5 million at December 31, 2013, down from $52.7 million at March 31, 2013, in part due to share repurchases of $7.8 million and purchases of equipment or software that we finance for our customers. Our total stockholders’ equity was $259.7 million as of December 31, 2013, compared to $238.2 million as of March 31, 2013.

In summary, ePlus experienced robust financial performance this quarter, and is well positioned to execute our strategic plan for growth.

Operator

This concludes our prepared remarks, please open the line for questions.

QUESTION AND ANSWER SECTION

Operator

Our first question comes from the line of Prabh Gowrisankaran from Canaccord. Your line is open.

<Q -- Prabh Gowrisankaran >: Hi. Thanks for taking my question. Two quick questions. On the technology segment you highlighted the strong growth. Is there a particular segment within it that you saw strong results like storage networking, security or if you can just add some color on that growth?

<A – Mark Marron>: Well Prabh, this is Mark Marron here. It was in terms of the growth was across a couple of different areas. Some of our larger enterprise customers, we had nice growth in our services business. Security, we had nice growth in our security numbers in the quarter as well. So, those are the three of the top of my head that we had some nice growth year-over-year.

<Q -- Prabh Gowrisankaran>: Then the second question I had is, didn’t the gross margins, I know you pointed to, it’s a huge bump up from a year ago quarter, I know probably see few benefits from services, but all such thing higher margins they are across the product portfolio or is it the result of something else?.

<A – Kley Parkhurst>: Sorry, we had problem hearing, did you say across the portfolio?

<Q -- Prabh Gowrisankaran >: Across your product portfolio, which is I know the services added benefited it, but we get also better margins in products?

<A – Mark Marron>: Okay. And this one’s a little tougher to answer just for one reason as I think it is of course the product portfolio, because in the areas that we’re focused on, which is in the data center cloud space, infrastructure management, you see in collaboration space we’re providing all the services that our customers look for both from installation, implementation, configuration, managed services and staffing. So that increased our blended margins across all of our focus areas that we’re looking for.

<Q -- Prabh Gowrisankaran >: Okay.

<A – Mark Marron>: And we also had one another thing that played into that as we had a very strong quarter with our maintenance renewals. We feel pretty good about some of the processes and plans we put in place that helped as well.

<Q -- Prabh Gowrisankaran >: Great. And the last question I had was on your North Carolina managed services data center. If you can just give us some color on how you plan to roll that out, what type of customers you are looking for on the managed services?

<A -- Mark Marron>: So in terms of rolling it out, we’ve already rolled it out, so we got offices in Pennsylvania, California, now in North Carolina, mainly because of the demand that we were seeing from our existing customers as well as some of the new customers that we’ve been pitching our service capabilities to. We’re also as I mentioned in my presentation, we’re rolling out basically an enhanced maintenance program. We’re providing Tier 1 support to our customers, that we’re finding lot of customers are looking for that one place to go or one product to shop, technical across multiple vendor solutions providing both the Tier 1 support that they need, and then the proactive management and monitoring that they need. So we’re building out these capabilities across all three managed service centers. What it does for us, if you think about it East Coast, West Coast from a timing standpoint, it also gives us the capability to provide the support in the timeframes that our customers are looking for across the entire U.S.

<Q -- Prabh Gowrisankaran >: Okay. Great. And one more on just IT spending, we were seeing out there in terms of we expect growth, we expect half year growth, can you provide any color on what you see in quality spending?

<A – Mark Marron>: Well, we haven’t seen anything that would dictate that we’re seeing IT spending slowdown at this point, Rob that I don’t have any material percentages from an IDC or Gartner that I can share with you. But in our customer base and potential new customers, we haven’t seen any slowdown.

<Q -- Prabh Gowrisankaran >: Okay. Great. Thanks a lot.

<A>: Thanks, Prabh.

Operator: Thank you. Our next question comes from the line of Matt E. Galinko. Your line is open.

<Q – Matt Galinko>: Hi. Thanks for taking my questions.

<A>: Hi, Matt.

<Q – Matt Galinko>: Hi. Just – I guess following up on the Prabh’s questions, do you have I guess this more head count and there going forward, just curious how many and sort of how long you would expect it to be fully ramped?

<A – Mark Marron>: Yeah. Hey Matt its Mark Marron here. We’ve added most of the head count that we need to support our managed service offerings and capabilities across the three sites, in fact that’s where we had some of our SG&A, what I say, head count and expense adds has been in the managed service center and the way that will do and as we go forward is we have metrics in place as the business grows, we’ll add the capacity as its needed. So as the business grows and the customers that were supporting growth will continue to add people. The good news is that we have space in each of the offices now to add incremental head count as business grows or as we hope this business grows.

<Q – Matt Galinko>: Okay, gosh, thanks. And then on the Kodak deal, could you share a little bit more around, who you compete against, I guess in general seeing in terms of the competitors and new sorts of offerings with larger customers and what was the hook or key to winning that one in particular?

<A – Mark Marron>: Well I think there are a few things that are the hook or the key as it relates to Kodak piece is one, I don’t remember of the top of my head who the competitor was, I wouldn’t want to embarrass them on this call, if you will. So I’ll keep that to ourselves. We run across the traditional players that play in the space, maybe somebody like a Datalink – when you talk about -- when you mention storage, would be somebody that we go against from a managed service capacity.

But I think what set us apart was we had some local resources that Kodak thought were very talented and capable individuals that could lead us a team, to provide all the things that they were looking for on site. So, meaning, when I talk about the 24/7 on site break fix and some of the other things we’re doing with the helpdesk, they felt very comfortable with the resources that we had and what we can bring to the table. The other thing that we think, kind of set us apart was, that we want them through our managed service offerings and what we can do from a proactive monitoring and management and then also the reporting that we provide back to them. So some of the dash boards and reporting that we provide back to them so that can understand what was happening in their environment and adjust accordingly. So we do quarterly business reviews with them, and we actually walk through where thing stands, where things might improve, anything they need to be aware of as we progress with this contract.

<Q – Matt Galinko>: Okay. Helpful. And then can you – did you sense there – can you talk to any pockets of strength or weakness in terms of your customer vertical?

<A – Mark Marron>: I’m sorry, it’s not related to something with customer verticals.

<Q – Matt Galinko>: Yeah, just any strength or weakness that you’re seeing across the industries you’re selling to?

<A – Mark Marron>: Yeah, we haven’t seen any downturn in any of the markets. What’s nice about our business for the most part, we are not depending on any one vertical. Each quarter a different vertical, the up or down versus another, but we haven’t seen anything significant in any of the verticals either significantly up or significantly down from past history.

<Q – Matt Galinko>: Great. All right. Thanks for taking my questions.

<A – Mark Marron>: No problem. Thanks for your time.

<Q – Matt Galinko>: Thanks

Operator

And I’m showing no further questions, and I’d like to turn it back over to management for closing remarks.

Philip G. Norton, CEO

I would like to thank you for joining us and we’ll see you in the coming quarter.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program. You may all disconnect.