February 7, 2013
Good day, ladies and gentlemen, and welcome to the ePlus Earnings Call for the three months ended December 31, 2012, which is the company’s third quarter of its fiscal year 2013. 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 Huie, and thank you everyone for joining us today. 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 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 yesterday and our periodic filings with the Securities & Exchange Commission including our form 10-K for the year ended March 31, 2012, and our Form 10-Q for the three and nine months ended December 31, 2012, when filed. 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 are pleased with our financial results for the quarter and year to date. Despite a weaker IT market as reported by analysts, revenues for the quarter increased 8.0% over the prior year’s quarter. Based on the revised earnings-per-share issued today, fully diluted earnings-per-share increased 3.7% on a year-over-year basis to $1.11 per share from $1.07 per share. For the nine months ending December 31, 2012, revenue grew 23.1% to $746.8 million, and net earnings grew 39% to $27.1 million. We continue to deliver the advanced technology solutions that our customers demand, and are investing in ePlus-branded value added solutions to add future revenue and margin.
Our revenue growth for the quarter and year to date was driven primarily by our larger customers, who are continuing to utilize our advanced technology solutions and engineering delivery capabilities to serve their business needs. We expect these large customers to continue to build private and hybrid clouds, drive virtualization, and upgrade their networks, and we will continue to invest in the technologies and engineering resources to enable their success. The majority of our revenue is derived from corporate, education and state and local customers. We have very little direct business with the federal government.However we see a potential opportunity on the leasing side of the business, to increase financing of procurement contracts for IT equipment and software on behalf of prime contractors. Historically, we have experienced that leasing becomes more critical to fulfilling the government’s mission during periods of reduced spending. Using leasing, agencies and departments can acquire mission critical equipment using operating funds instead of capital funds.
At the end of the quarter, we experienced sizeable growth in deferred revenues and open orders as a result of a number of advanced integration projects for several of our large customers. These complex projects take time to build, and were not scheduled to ship by the end of the quarter. Elaine will provide additional financial detail, but the selection of ePlus to provide these services is important for a number of reasons. First, it demonstrates the value of our multi-vendor approach and integration capabilities to both our customers and vendor partners. Second, we have the engineering expertise, project management discipline, and physical facilities to run complex projects. Third, ePlus’ strong balance sheet and working capital capacity gives our customers the confidence to rely on ePlus for almost any size project. We are truly a trusted partner.
We are focused on investing and building our own value added solutions, which should help us expand margins, increase customer retention, and generate recurring revenues. These services, under the umbrella of the ePlus Service Advantage, include managed services, staff augmentation services, and professional services. For example, yesterday we announced the general availability of ePlus Enable, a value added service which combines enhanced managed services and executive consulting services. This is a unique combination of bundled services to help customers improve their operational efficiencies and maximize their return on technology investments.
We are also expanding the unique value paradigm of customer engagement, reporting, and optimizing supply chain efficiencies through our proprietary OneSource IT software platform. For example, we have used our classic asset management software, Manage+, as a template for the future release of OneSource Asset Management, which will be an integrated component of OneSourceIT for managing and tracking corporate assets, managing expensive vendor maintenance agreements, and analytics. Our goal in building these proprietary solutions is twofold: to differentiate ePlus from our competitors by providing better and more cost effective solutions, and to enhance margins and recurring revenues.
During the quarter, we continued to add to our engineering certifications and capabilities, and rolled out new solutions. ePlus was recognized by Cisco as an Authorized Digital Media System Partner in the United States; we offered a new line of midrange storage systems by NetApp; and we created and announced our proprietary BYOD Readiness Assessment. In addition, we joined the Cisco and Citrix Partner Accelerator Initiative which focuses on desktop virtualization, the next frontier in efficient virtualized solutions.
In December, we paid a special dividend of $2.50 per share of common stock from cash on hand, which was raised by selling a portion of our lease portolio. We continue to maintain a strong, liquid balance sheet to take advantage of opportunities as they arise.
ePlus’ success has been driven in part by our ongoing commitment to deliver the most advanced technology offerings. Looking ahead, our strategy remains committed to investing in our people, acquiring new technology capabilities and expanding geographic locations, and improving our efficiency and delivery capabilities.
With that, I would like to turn the call over to Elaine Marion, our CFO, who will discuss our financial results in more detail.
Elaine D. Marion, Chief Financial Officer
Thank you, Phil.
Today, we issued a press release revising our previously reported diluted earnings per share to $1.11 for the quarter ended December 31, 2012 from $1.05 and earnings per share for the nine months ended December 31, 2012 to $3.38 from $3.35.
Based on additional consultations with the our independent registered public accounting firm, we determined that the initially reported earnings per share calculation had incorrectly used the number of actual shares, rather than the weighted-average number of shares, in respect of the cash dividend declared during the quarter. In particular, the Company declared a dividend of $2.50 per share based on shares outstanding on December 17, 2012 of 8,151,201. In the prior calculation of earnings per share, we accounted for the dividend, or distributed earnings, using actual shares outstanding rather than the weighted-average shares for the three- and nine-month periods.
We continue to drive strong revenue growth as this is our 12th quarter of year over year growth. Our consolidated revenues for the current quarter grew 8% to $242.0 million as compared to $224.0 million in the quarter ended December 31, 2011. Net earnings increased 3.3% to $9.0 million in the third quarter of fiscal year 2013, as compared to $8.7 million in the prior year.
This quarter we implemented the Two Class Method of calculating earnings per share because we have a small number of stocks that can participate in net earnings along with the common shareholders. Under the two-class method both basic and diluted EPS are calculated for each class of common stock and participating security considering both dividends declared (or accumulated) and participation rights in undistributed earnings. The two-class method results in an allocation of all undistributed earnings as if all those earnings were distributed, which can result in a substantial reduction in both basic and diluted EPS as we are required to allocate total earnings for the period between common shareholders and participating securities. Our fully diluted earnings per common share for the quarter was $1.11 per share compared to $1.07 per share in the prior period.
For the nine months ended December 31, 2012, total revenue increased 23.1% to $746.8 million, and total costs and expenses increased 22.1% to $700.8 million. Net earnings were $27.1 million for the nine months or $3.38 per diluted share, an increase of 46.3%, as compared to $19.5 million, or $2.31 per diluted share, during the nine months ended December 31, 2011.
Before discussing the segment results, I wanted to address the increase in our consolidated accounts receivable balance from March 2012. As you are aware, our working capital generally fluctuates as a result of changes in demand for our products and services. However, changes in certain elements of working capital may not coincide with changes in other elements of our financial statements and this instance occurred during the current quarter. More specifically, our accounts receivable balance increased by $50.3 million, or 29.3%, from December 31, 2011, despite the 8% increase in our revenues during the quarter. The increase in accounts receivable was due to the advanced integration projects that were billed and deferred as of quarter-end. Our deferred revenue increased by $34.6 million from December 31, 2011 and substantially all of this increase in deferred revenue was billed in towards the end of the quarter and remains in our accounts receivable as of December 31, 2012. Accordingly, the increase in our accounts receivable does not impact our cash flows and is not the result of changes in payment terms or slowed collections from our customers.
In the technology business segment, total revenues increased 7.2% to $229.4 million compared to $214.1 million in the quarter ended December 31, 2011. The increase in revenues was due to increases in customer demand, particularly from Fortune 100 companies, and investments we made over the last twelve months to improve our product and service offerings and expand our geographical footprint. In addition to the increase in deferred revenues I previously discussed, we had an increase in open orders, which totaled $73.3 million as of December 31, 2012 compared to $56.0 million as of December 31, 2011. Open orders represent orders received from our customers that have not been billed. These orders are normal course of business orders, which we expect to be processed within our customary time frame.
Our gross margin on sales of products and services is subject to variability due to changes in the amount of vendor incentives earned and the pricing and product mix of sales to our customers. Our gross margins were 17.5% and 18.2% during the quarters ended December 31, 2012 and 2011, respectively, and 17.5% and 17.8% for the nine months ended December 31, 2012 and 2011, respectively. The decreases in gross margin were primarily due to a decrease in the amount of vendor incentives earned during the periods as well as the product mix of sales to our customers. Our gross margin on sales of products and services was 18.0% for the quarter ended September 30, 2012 and the sequential decrease in margins was primarily due to a decrease in the amount of third party software assurance, maintenance and services sold, which are presented on a net basis.
Total costs and expenses were $219.2 million compared to $203.7 million in the same quarter last year, an increase of 7.6%. The increase in costs and expenses was primarily due the increase in cost of sales, as well as increases in personnel. We had 810 employees as of December 31, 2012 as compared to 698 a year earlier. Most of the 112 net new employees are sales, marketing and engineering personnel relating to acquisitions and strategic hires as we build out our geographic footprint and expand our solution offerings. Segment earnings before tax decreased $0.2 million to $10.2 million for the quarter.
Moving to our financing business segment, total revenues increased 26.6% to $12.6 million compared to $10.0 million in the quarter ended December 31, 2011. The increase in revenues was driven by higher financing revenue, primarily as result of net gains realized from the early termination and buyout of certain leases. During the quarter we sold $48.1 million of investments in leases and notes, a portion of those proceeds was used to pay the special dividend. We have historically sold tranches of our portfolio to diversify risk, increase liquidity, and take advantage of opportunities in the marketplace.
Total costs and expenses increased $1.4 million, or 23.0%, to $7.3 million, due to increases in direct lease costs primarily due to additional depreciation expense for equipment under operating leases and the write off of unamortized initial direct costs related to leases sold during the quarter. In addition, salaries and benefits increased due to higher commissions from the increase in revenues. Segment earnings before tax were $5.3 million compared to $4.1 million for the same quarter prior year.
As of December 31, 2012, the Company had $42.2 million of cash and cash equivalents, as compared to $33.8 million on March 31, 2012. As of December 31, 2012, the Company had total stockholders’ equity of $229.6 million and 8.2 million shares outstanding, as compared to $219.6 million and 8.0 million shares, respectively, as of March 31, 2012. In addition, we declared and paid a special cash dividend of $2.50 per share of common stock during the quarter ended December 31, 2012. The dividend payment in the quarter totaled $20.1 million.
That concludes our prepared remarks. Operator, could you open the line for questions.
QUESTION AND ANSWER SECTION
Operator: We'd like to open the call to questions.At this time I'm showing no questions. And I'd like to turn over to our speakers for any closing remarks.
Phil Norton, ePlus inc - President, CEO, Chairman
We'd like to thank you very much for taking the time for our conference call. If you have any questions, please 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.