August 07, 2013
Good day, ladies and gentlemen, and welcome to the ePlus Earnings Results First Quarter Fiscal Year 2014 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. Today’s conference is being recorded.
I would now like to turn the call over to Mr. Kley Parkhurst.
Kley Parkhurst, Senior Vice President
Thank you, Catherine, and thank you, everyone for joining us today. With me are Phil Norton, Chairman, President and CEO of ePlus; Mark Marron, COO and President of ePlus Technology; Elaine Marion, 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 and Exchange Commission, including our Form 10-K for the year-ended March 31, 2013, 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 posted solid results for the first quarter of our fiscal year 2014. For the quarter ended June 30, 2013, revenues grew 6% to $259.3 million, our 14th consecutive quarter of increased revenue, a clear demonstration that ePlus is building and delivering solutions that our customers demand. We believe that we have the right focus on providing advanced technology solutions in the highest growth areas in our industry, including managed services, security, BYOD, big data and cloud. We have over 2,300 loyal customers, the right mix of products and solutions, and believe we can continue to capture market share from our competitors and wallet-share from our existing customers to enhance future growth.
Over the past year, we have continued to focus on our strategic growth initiatives, aggressively hiring top talent in the industry to build our sales force and sales management nationally, in new locations and to strengthen our existing locations. We are hiring engineering professionals to meet current customer demand in managed services and professional services, and to facilitate future opportunities in the market. And we are building out a new network operations center in Raleigh, NC. to increase capacity as well as take advantage of the region’s rich technical talent pool, drawing from multiple universities and military installations nearby
Year over year, our headcount increased by 83 people, or 10%, the majority of which are sales and engineering personnel. There is a lag between the time we hire these personnel and the positive effect on the bottom line, as it can take some time to generate revenues related to complex, multi-month engineering projects. We also hired additional administrative and IT staff to scale operations. As a result of these headcount investments, which are necessary to capture the market segments which we find most attractive such as managed services and security, SG&A expenses increased at a higher rate than our gross profit. For the quarter, SG&A increased 14%. Net earnings were down slightly to $7.9 million, and fully diluted earnings per common share were $0.97 per share, as compared to $8.1 million and $1.00 per share in the quarter ended June 30, 2012. We are fully confident that the investment in human resources is necessary to handle expected future growth and scale our operations to meet customer demand.
In particular, due to the high demand for managed services, we added 17 people in our managed services area. We continue to focus on expanding our security solutions and engineering services. We have hired multiple regional security architects to drive presales customer engagements in support of our end-user salesforce, under the direction of our national security practice leadership. We are addressing our customers’ security needs in the three fast emerging areas: cloud, big data, and BYOD, by providing assessments, architecture, and management through our Security Operations Center. Security is an increasingly relevant concern to all of our customers, and is a foundational pillar in our solutions graphic, because it touches almost every other solution we sell and customers are demanding it.
Today we announced our new designation as a Master Cisco Cloudbuilder, Cisco’s highest cloud builder tier. This specialization recognizes ePlus as having the capabilities to build and deploy cloud-ready integrated infrastructures based on Cisco solutions and technology partner cloud offerings such as NetApp’s Flexpod and EMC’s VBlock. It also includes eWorkspace solutions including Cisco, Citrix, and VMWare. ePlus has built and delivered end-to-end cloud solutions, and developed cross-industry expertise in virtualized and highly agile compute, network, and storage infrastructures. The master cloud builder designation is a strong complement to our own branded solution, ePlus’ eCloud, an offering that is comprised of four components: cloud readiness assessments; pre-bundled, pre-packaged solutions from major manufacturers; cloud automation and management tools; and cloud support services.
Our financing business exhibited renewed strength this quarter, with lease and financing origination volumes increasing as customers lock in low interest rates. Customers are continuing to value our lease process automation. Using our proprietary software and processes, we provide direct, tangible cost reductions and process efficiencies for the ongoing order processing of equipment, including procurement, payment, and asset management. Sophisticated customers are viewing leasing as a combination of payables outsourcing, strategic sourcing, procurement services, and financial controls. The result is lower costs, better information, and higher productivity.
A significant component of the increase this quarter was leasing to the federal government, which tends to be larger transactions. Overall, our financing segment is continuing to expand, and we announced two new senior managers this quarter. We are also continuing to see higher origination volumes through both technology vendors and federal integrators, who appreciate our fast and reliable approach to providing financing for their customers.
We continue to review many acquisition opportunities, and given our balance sheet resources, we have the capital resources to execute acquisitions and hire people 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 conservatively. We are also focused on finding acquisitions that can accelerate our growth in key technologies and solutions areas.
We are committed to investing in our people, acquiring new technology solution expertise and delivery capabilities, expanding our national footprint, and lowering operating costs. We are working to expand recurring revenues through our managed services, staff aug, leasing, and “collaboration as a service” offerings. Our customers rely on us for the key elements of their IT infrastructure, not only supporting and scaling their current environment, but also planning for the future, whether it is the Cloud, BYOD, or big data. We offer differentiated services as compared to our peer group, including asset management; supply chain services through OneSourceIT which includes optimized ordering processes, electronic invoicing, and many other eprocurement functions; and financial services, to help our customers select, procure, finance, and manage needed goods and services.
In summary, we remain highly focused on executing our growth plans and improving shareholder value. At the end of this call, I’d be happy to answer any questions, but first, I’d like to introduce Elaine Marion, our CFO.
Elaine D. Marion, Chief Financial Officer
Thank you, Phil.
As Phil mentioned, we continue to drive top line growth as consolidated revenues for our first quarter grew 6.0% to $259.3 million, the 14th quarter of revenue growth on a year over year basis. The growth in quarterly revenues is attributable to increases across both the technology and financing segments.
In the technology segment, revenue for the quarter increased 5.2% to $248.5 million compared to the prior year’s quarter, primarily from increased demand for products and services from our Fortune 100 customers. In the financing segment, revenues for the quarter increased 28.2% to $10.8 million compared to $8.4 million in the quarter ended June 30, 2012. The increase in revenues was due to higher net gains on sales of financial assets driven primarily by financing of federal government contracts originated through our systems integrator customers, and earnings generated from our financing portfolio consisting of notes receivable and investment in leases. Year over year, our financing portfolio increased 18.0% or $20.9 million to $138.3 million at June 30, 2013 from $117.4 million in the prior year. We are seeing an overall increase in demand for leasing by our customer base, as well as new vendor financing programs that we have established over the last year.
In the technology segment, the gross margin on sales of product and services increased 70 basis points to 17.7% for the quarter ended June 30, 2013, from 17.0% for the same quarter last year. The increase in gross margin was primarily due to a larger amount of revenues from the sale of third party software assurance, maintenance and services, which are presented on a net basis.
Net earnings were $7.9 million, and fully diluted earnings per common share were $0.97, compared to $8.1 million in net earnings and $1.00 per share in the quarter ended June 30, 2012. As Phil mentioned, as part of our strategic plan, we are aggressively hiring personnel to meet current demand and to facilitate future growth, and as a result, in the technology segment, total overhead expenses increased to $35.6 million for the quarter compared to $31.0 million in the same quarter last year. We had 860 employees in the technology segment as of June 30, 2013 as compared to 777 a year earlier. Most of the 83 net new employees are sales and engineering personnel as we continue to invest in such personnel in order to build out our geographic footprint and expand our solution offerings. Technology segment earnings before tax was $9.6 million for the quarter, compared to $10.8 million in the same quarter last year.
In the financing segment total costs and expenses were $7.0 million, compared to $5.7 million in the same quarter last year. The increase was driven by higher direct lease costs due to an increase in depreciation expense for operating leases. The increase in total costs and expenses was also attributable to higher commissions due to the increase gross profit during the quarter. As a result, segment earnings before tax for the quarter increased 38.9% to $3.8 million from $2.7 million for the same quarter in the prior year.
As of June 30, 2013, we had $72.7 million of cash and cash equivalents, as compared to $52.7 million on March 31, 2013. We continue to identify investment opportunities to expand the business, such as acquisitions and the build out of our national footprint. Our liquidity and strong balance sheet provide us the resources to execute quickly when opportunities arise. As of June 30, 2013, our total stockholders’ equity was $246.2 million as compared to $238.2 million on March 31, 2013.
That concludes our prepared remarks. Operator, please open the line for questions.
QUESTION AND ANSWER SECTION
Operator: Thank you. Our first question comes from John Lewis. Your line is open.
<Q – John Lewis>: Hey, guys. Good afternoon.
<A>: Hi, John.
<A>: Hi, John.
<Q – John Lewis>: I had a couple of quick questions regarding your managed service opportunity. Can you just give a little color in terms of the – how the contracts work in terms of how – what are the average length of a contract, how much does – how do you place the contract and really what the opportunity is given your current customer base?
<A – Phil Norton>: John, I’m going to have Mark Marron answer that. He is our chief operating officer and responsible for managed services.
<A – Mark Marron>: Thanks, Bill. Hey, John how are you?
<Q – John Lewis>: Hey, Mark.
<A – Mark Marron>: A couple of different things on managed services, maybe taking one quick step back on this. Managed services is one of the key areas that we think of for growth as we move forward. It’s basically management and monitoring different assets from servers, storage, video, security for our customers, the average length of the contract is normally three years. We we do have contracts for as much as five years, but the average is three years.
<Q – John Lewis>: In – and can you talk little bit about the size of the contract typically, I mean I know these are for large organizations, but is this $10,000 contract year, $200,000 contract? What is Ballpark in terms of the opportunity going after?
<A – Mark Marron>: Hey, John it’s hard to give you an exact figure, only because it’s based on the different assets that we’re managing, it’s based on the different sizes of the companies. It can range anywhere from effectively $50,000 year to $600,000 a year just to give you a feel of the different types of deals that we’re seeing.
<Q – John Lewis>: Got it, and if you look at your base today of 2,000 plus customers, do you think this is appropriate for small sub-factor?
<A – Mark Marron>: I’m sorry so meaning, when you say a small subset of those, we actually – we actually feel that this is a service that many of our customers are looking for, some of our 2,400 customers we feel our managed service capabilities would be a fit for most this was in a lot of cases we’re selling the servers, the storage, the networking and the things that they are looking for a company like ePlus and this service to provide for them. So it’s actually a natural fit for us to go back to all of our existing customers with our managed service offerings.
<Q – John Lewis>: And you guys are positioned to do that today?
<A – Mark Marron >: And we are in position to do that today, and we are doing it.
<Q – John Lewis>: Got it, got it.
<A – Phil Norton>: John, John, this is Phil. One other thing on that is, what we see as customers out there are constrained on budget for IT, that they are trying to outsource some of the functions they used to do themselves and this is one important function which we can bring more talent to the table then they have internally, and so we can do a better load balancing of the hours worked and be able to charge a higher fee and still lower cost for our customers.
<Q – John Lewis>: While you’re rolling this out, is this holding down earnings in anyway? Is there a lot of front loaded cost in this business?
<A – Mark Marron>: Well, if you look at the way these contracts go, it’s almost like infrastructure as a service. We have a lot of cost that go into making the managed services big enough. We have people, we have to hire in advance based on our projections and the contracts come over a three-year period of time. So, as we build up, the base it starts to produce very high margins, but it costs us a little bit for the period of time till we get build up to a break-even.
<Q – John Lewis>: I will jump back in the queue. I appreciate the answers.
<A>: Thanks John.
Operator: Thank you. Our next question comes from Gregg Hillman, First Wilshire Securities. Your line is open.
<Q – Gregg Hillman>: Yeah. Hi. Good afternoon. Just I guess two questions, about being a systems integrator, how many dedicated programmers you have working for the company right now?
<A – Elaine Marion>: How many – sorry, Gregg, not sure we understand your question. How many dedicated programmers working for ePlus or?
<Q – Gregg Hillman>: Yes.
<A – Elaine Marion>: We don’t typically have programmers. We have engineers. We don’t really – we don’t write code or software for customers. With our ePlus Systems, we have programmers, is that what you are referring to?
<Q – Gregg Hillman>: Yeah, I am talking about software programmers, people that write code.
<A – Elaine Marion>: Okay. For our ePlus systems, we probably have probably 25 to 30 programmers maybe.
<Q – Gregg Hillman>: Okay. And do you have programmers for other divisions?
<A – Elaine Marion>: No. ePlus systems is the only part of our business where we have our own proprietary software. The other software that we sell is third-party software.
<Q – Gregg Hillman>: Okay. And are these programmers working with like your procurement suite of products or they’re working doing something else?
<A – Elaine Marion>: Yes, they are working with our procurement suite of products.
<Q – Gregg Hillman>: Okay. And then Phillip, I had a question for you just in terms of currently critical mass for the company. The company has grown so fast, it seems like at some point how did you get the critical mass and then to get to this platform that you’re growing from right now and you need to build out your platform for growth anymore than where you’re at right now and what you’re trying to do to increase the growth opportunity in the future?
<A – Phil Norton>: If I look back a couple years ago, our earnings were flat and we were adding a lot of people for taking on new business and it significantly changed the business by having more engineering talent. We are starting up managed services. I think that’s going to – I think that’s going to be a factor of how fast we grow. There is – we’re not someone who is trying to actually hire a lot of people unless we know there is a need for it. So we see the need today and as we get more volume and more business requirement to add other people will diminish.
<Q – Gregg Hillman>: Okay and what’s the importance of your brand right now? Is this the ePlus brand you have value or some of your other brand. If you go to market, do you do it under brands other than ePlus?
<A – Phil Norton>: Not really.
<Q – Gregg Hillman>: Okay, and then does that have value or is just the relationship with this various companies you bought over the year with their customers and gradually just building up or you like or have you reached such a critical math that there is a such thing and value to the ePlus brand?
<A – Phil Norton>: I think sure we’re building value in ePlus brand, but to this point it’s really regional and it’s really the ability of our sales force, which is very large, to get out in front of customers and provide events of which we do a significant number. Each one of our regions -- I think that’s really where the branding part comes in, but in general up to date has been really sales and on the ground and engineering providing services to our customers.
<Q – Gregg Hillman>: Okay, and in terms of the way you positioned your managed services relative to other offerings, this needs to be like a lot of managed service companies for cloud computing -and what not – is it basically that you’re just able to [indiscernible] more feet on the street and customer relationships that eventually leased manage services or do you – is your managed service offering really differentiated in unique or better than something else that’s currently out there?
<A – Mark Marron>: Hey, Greg. This is Mark. Here’s one thing that will maybe kind of give you a better picture, what we believe we have at ePlus is we have the ability to provide the full solution that our clients are looking for, which means from the upfront assessment sitting with clients, assessing their existing environment in this new environment they are moving to, providing the analysis and the solution that they are looking for and then on top of that being able to provide the managed services, staffing and other solutions that they may look at in terms of repurchase or procure other product. So it’s – the big picture message is they are able to deal with ePlus for all of those different pieces as compared to dealing with multiple different resellers and to our vendors.
<Q – Gregg Hillman>: So, nobody else does – does the same thing.
<A – Mark Marron>: Well, no not all, not all have leasing for example, not all have procurement, not all have managed service capabilities. So, if you look at where a lot of our clients are looking or most of them are looking to obviously reduce their costs, they’re looking to consolidate the vendors and/or resellers that they deal with. One of the strengths we have is that we can address things in each of those three areas. The other things that we do as it relates to managed services, it ties to all the key areas or I should say focused areas of where the markets going. So if you look the BYOD, Big Data, Cloud, Security, we have managed services offerings that tie into selling both of those products, being able to implement and install all of those products for our clients and then optimize that solution by providing managed service capabilities as they go forward.
<Q – Gregg Hillman>: Okay. And it’s not – you’re not unique in this offering but there is not – so, how many other people have the same capabilities that you do in the country right now?
<A – Mark Marron>: Well we’d like think we’re unique, but maybe that’s just my opinion Greg. In terms of overall – I couldn’t guess right now in terms of how many different resellers have all those capabilities tied together.
<A – Phil Norton>: There is still no direct competition. I think size is an important factor here and the ability to grow this and having the capital to be able to invest because it’s heavy investment and then be able to provide different services from monitoring and to threat analysis from security and other issues that may come up and be able to actually send people, to be able to determine what the problem is and take that requirement away from the manufacturer and the manufacturers are moving more and more to having the partners do the work process themselves, so they reduce their costs. So, I think the future is going to be significant for us.
<Q – Gregg Hillman>: Right. So, and then in terms of what are your thoughts relative to your addressable market?
<A>: What do you mean by that?
<Q – Gregg Hillman>: Well, for this new – your new beefed up across the company with all the additional services what will be addressable market? I guess this for while, I guess it must be a lot bigger. It’s in the tens of billions maybe, but how are these managed services offering to?. I’m just trying to get a sense of, I guess, I know there is a lot of different markets here, I want to get a sense of what your addressable market is and your share of market for – from the very, it sounds like mature addressing, in particular procurement software and managed services for example?
<A – Phil Norton>: Well, I think it’s a very big market if you look at. We are – $1 billion is probably 0.1% of addressable market in the country. We have 2,000 customers that gives us a base that’s significantly higher than most of our competitors, and the amount of capital as I mentioned before to get in this business and to be able to provide the service is a significantly higher than most people have on their balance sheet, I think we’re positioned better than most of our competitors because we have a strong balance sheet, we’re able to invest in these new opportunities and I think it’s a limited number of ours, and I think in today’s environment, I think we look much more like an integrator and being able to provide complex solutions to our customer base and we’re driving higher up into the market, into the higher mid-market, and to the enterprise and having a lot of success there.
<Q – Gregg Hillman>: And then so, do you think that the current situation your [indiscernible] result with another round of consolidation in the industry, because a lot of people can’t kind of keep up with you so to speak?
<A>: It’s not just keep up with us, there’s other people that are, in our peer group that are also because the market is so big, there’s no way that we could cover it. But I think, I call it the have and the have-nots, the people who have invested heavily in the engineering, and very talented people, are the ones that are being able to provide the best services to the larger customers. The vendors themselves, whether it’s HP, CISCO, EMC, are all moving towards the channel and trying to get them to drive more services and be able to provide to our bigger customers and that takes a significant amount of resources and they’re – I can’t give you the exact number, but it’s a very small, the number of people who can do that. So, I think we’re significantly differentiated ourselves as one of the ones that have the capabilities and most of the people don’t have the money or the capabilities.
<Q – Gregg Hillman>: So you have a lot of run rate left to grow. There is no reason why you can’t grow a lot in the next five to 10 years?
<A – Phil Norton>: Well, I can say this, we continually try to plan where we’re going. We think that there are opportunities in the market are significant and we think that we have as good or better reputation. We’ve been able to help our customers architect and design cloud offerings as well as the managed services and that’s a significant growth part of the business also. And I think that we’re well positioned to capture market share from our competitors and prove our offerings to our customers.
<Q – Gregg Hillman>: Okay. Thanks very much for all of your comments guys.
<A>: Thanks Gregg.
Operator: I’m showing no further questions. I would now like to turn the call back to Phil Norton for any further remarks.
Phillip G. Norton, Chairman, President & Chief Executive Officer
I would like to thank you very much for taking the time to join our conference call. And if you have any questions please feel free to contact us. Thank you very much.
Operator: Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone, have a great day.