November 4, 2011
Good day, ladies and gentlemen, and welcome to the ePlus Second Quarter 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. [Operator Instructions] 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, Jaron and thank you, everyone for joining us. 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 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, for the year-ended March 31st, 2011 our form 10-Q for the quarter ended June 30th 2011, and our 10-Q for the period ended September 30th 2011, which should be filed on or around November 7th, 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'll the 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 September 30, 2011, which is our second quarter of fiscal year 2012. Total revenue increased 12.8% over the prior year, as customer demand for advanced IT solutions, products and services continue to be healthy. The revenue gain in sales of products and services was attributable to both the organic growth throughout our platform from existing customers and gaining new customers. The investments we have made over the past 12 months in acquisitions, opening new offices, creating new solutions and our adoption of new revenue recognition guidance which Elaine will provide in more detail on later in this call.
In the past 12 months, we've added staff in new geographic areas including Rochester, New York and the Tidewater area of Virginia and considerably enhanced our staffing levels in southern California, Richmond, Virginia and select markets in Texas. Subsequently, all of our staff additions are experienced sales professionals with proven historical sales performance and highly experienced IT engineers. We have hit the ground running in these markets as our results are beginning to show. We have also gained new office locations and new solution sets with the acquisition of ITI in November 2010 and MCC in June 2011.
With the ITI, we gained the Tandberg Platinum service station which we are able to use nationwide and also our new location in Southern New Jersey. Our acquisition of MCC brought us a security specialization and a security operational center, which extends our managed services offerings. This is also our first branch in the upper Midwest and we intend to continue to invest in this region to build the strong ePlus presence to offer all of our products and services. While the IT market has grown this year, so has its competitiveness and we have found ourselves under some pricing pressure, which has affected the gross margin on sales of products and services. This quarter we had a number large transactions with enterprise customers, which were very price competitive and we also used price to gain market share with some strategic customers.
Combined with a reduction and vendor incentive plans the gross margin in our technology business units decrease to 13.9% from 14.4% last year. However, our margins still remains near the top of our historical range as a national bar [ph] and a key partner to Tier 1 manufacturers. We can compete aggressively in the marketplace to protect our customer base and gain new customers. Our intent overtime is to continue to improve our gross margins by selling our advanced technology solutions such as managed services, security, cloud Evelyn [ph] and video which tend to be higher margins.
During the quarter our sales of Cisco products and services surpassed 50% as a percentage of total sales of the products and services, and we want to the Cisco TelePresence Video Master Authorized Technology Provider Partner award. We're also focused on continuing to strengthen our relationship with Tier 1 manufacturers such as HP, VMware, IBM, NetApp, DMC, Oracle, Microsoft, Apple and Dell. As a multi line bar, it enables us to best serve our customers in emerging world of today's cloud computing and multi vendors' tax solutions.
In the financing business we've a made strategic decision over the last several quarters to reduce the sales of leases and effort to increase our portfolio level by sustaining our credit and pricing standards. There are a number of factors in the marketplace to make leasing a competitive business today with the interest rates low and corporate cash balances high and lot of companies, which utilize leasing historically, are purchasing equipment outright. In addition, manufacturers are using leasing and internal transfer pricing to operate zero or low percentage rates to gain market share and protect their customer base. As a result, our lease portfolio has declined to approximately $108 million over the last several years. Today, we are focused on originating deals in two sectors, healthcare and federal government contractors, in order to rebuild our financing business segment to return to historical asset levels and profitability.
As a result of lower transaction volumes and a smaller portfolio of leases in the financing business segment, revenues declined 15.8% and pre-tax earnings declined 31.5% in the financing business segment. This business segment, which in the quarter consisted of about 4% of our total revenue is subject to earnings variability due to high margin transaction, which may or may not be consummated during a given quarter. These transactions may include certain lease financing, residual realization, and asset sales as we optimize our portfolio mix. We are one of the fewer third party equipment vendors that offer integrated leasing, asset management, and supply chain optimization through our proprietary business processes and software.
Our strong balance sheet is the core strength of ePlus. We are continuing to invest our cash and high returning assets such as leases [indiscernible] quickly for additional discounts, acquisitions and our stock repurchase program. During the quarter, we announced a new 500,000 share repurchase program on buying approximately 388,000 shares over the past six months. We have the capabilities to invest in new people, solutions, acquisitions, as opportunities arrive and we will continue to make these investments to enhance shareholder value over the long-term.
Moving on to our intellectual property portfolio, we have filed a motion seeking at finding the [indiscernible] in contempt of the injunction that Trial Court granted in May. We anticipate a hearing on the motion will held in December 2011.
In a moment, Elaine Marion, our CFO will provide more details on our earnings and consolidated results. We are satisfied with the progress we've made though organic growth and our strategic acquisitions and geographic expansion and employee hiring. Over the past 12 months, we added 102 people in the technology business segment. 15% of our total staff and added or significantly expanded in five locations.
While acquisition and personnel costs will reduce earnings in the near-term, these investments are necessary for the long-term prosperity of the company. We are very confident in our ability to continue to execute on all of our new initiatives and excited about our strategic expansion plans.
I would like to turn the call over to Elaine Marion, our CFO who will discuss the specific financial results and I will return to answer questions at the end of the call.
Elaine Marion, CFO
Thanks, Phil. I'd like to review the consolidated financial results followed by our segment breakdown. As Phil has described our revenue trends have remained favorable. On a consolidated basis revenues totaled $262.9 million, an increase of $29.8 million or 12.8% compared to $233 million in the same quarter of last fiscal year.
Net earnings decreased 10.7% to $7.1 million or $0.85 per diluted share as compared to $7.9 million or $0.94 per diluted share in the same quarter last fiscal year. On a sequential basis revenues increased 24.3% and net earnings nearly doubled as a result of the gross profits from increased volume during the quarter.
As for our two business segments, in our technology sales segment, revenues for the first quarter were $254.8 million, an increase of $31.3 million or 14% as compared to $223.5 million in the prior year's quarter. The increase in revenue is attributable to three elements: each about a third of the increase. First, increased organic demand from current and net new customers from our existing sales platforms; second, new customers and services resulting from the investments we've made in the past 12 months, including acquisitions, new hires and building new branches and third a change in revenue recognition guidance for multiple element arrangements for products and services, which was effective April 1st of this year. These changes for products that were delivered during the quarter and were sold together with services. Previously, we were required to defer the type of revenue until the services were completed.
A gross margins on products and services declined to 13.9% as compared to 14.4% in the same quarter of last year and was affected by the mix between products and services, vendor incentive earned and competitive pricing pressures as Phil noted earlier. In the past five years our gross margin has ranged from 11.2% to 14.7% and a subject to change due to competitive margin variables constantly changing vendor incentive programs, vendor mix and the mix between products and services that we sell. In any given period, our margin can vary due to changing vendor programs, achieving or pre determine vendors' specific volumes or product line goals for example.
Our corporate goal is to maintain the highest possible margin by optimizing vendor incentive programs and developing our own proprietary solutions such as managed service, staff augmentation and video solution, where we have more control over pricing and delivery within the confines of the competitive market. We are very pleased with our progress in this regard.
Sales incentives – sorry, salaries and benefits expense increased $3.6 million to $21.8 million compared to $17.1 million during the three months ended September 30th, 2010. This increase was driven by a large number – by a larger number of employees and increases in commission expense as a result of a larger amount of gross profit. The technology sales business segment has 700 employees as of September 30, 2011, an increase of 102 employees from 598 employees at September 30, 2010. Substantially all of the increases relating to sales, marketing and engineering personnel were a customer facing and revenue generating.
General and administrative expenses increased $947,000 or 28.5% partially due to the acquisitions of NCC and ITI, as well as higher travel and other expenses associated with the increase in sales and support personnel.
Professional and other fees decreased 41% and $2 million compared to $3.3 million during the three months ended September 30th 2010, primarily due to a reduction in legal and other fees related to the patent infringement litigation. As a result, segment earnings before taxes remained consistent with the prior year at $9.2 million.
Now turning to our financing business segment, total revenues in this segment decreased $1.5 million or 15.8% to $8 million for the three months ended September 30th 2011 as compared to the prior year. Due to a reduction in net gain on the sales off lease equipment coupled with decreases in earnings from our lease portfolio.
At September 30th 2011 we had $108.9 million of investment in leases compared to $124.7 million at September 30th 2010. The decrease in the lease portfolio was due to lease terminations, cash collections and sales of leases partially offset by the addition of new leases.
Totaled cost and expenses decreased $291,000 primarily due to decreases in interest and financing cost as a result of lower non-recourse note balances as we elected not to leverage our lease portfolio. Non-recourse notes payable decreased to 24.4% to $23 million at September 30, 2011 as compared to $41.3 million at September 30th 2010. The non-recourse debt is generally recourse from the lessee and the underlying leased equipment and the lease off. As a result, segment earnings before tax decreased $1.2 million or 31.5% to $2.6 million for the three months ended September 30th 2011.
Moving on to the balance sheet, as of September 30, 2011, stockholders' equity was $214.5 million or $25.85 per share. The total cash and cash equivalents were $45.4 million as compared to $75.8 million on March 31st, 2011. We continue to take advantage of early paid discounts from vendors and reduced non-recourse financing, both of which have reduced expenses. In addition, the normal growth of the business requires working capital and our accounts receivable grew to $151.7 million from $121.8 million as of March 31st, 2011.
In addition, we have been successful in repurchasing stock in the open markets, having repurchased approximately 388,000 shares of our outstanding stock at an average cost of $24.96 per share, for a total purchase price of $9.7 million in the six months ended September 30th, 2011. While such activities have reduced working capital, particularly when revenues and accounts receivable have increased, we will believe our current working capital will position to accommodate growth and investments.
We can increase our liquidity several ways. We could discontinue our stock repurchase program, stock paying vendors early, begin funding leases with non-recourse debt or sell leases. In addition, we have excess barrowing capacity in our financing arrangement with GE Commercial Distribution Finance Corp.
In conclusion with the strong balance sheet and solid business model, we have made significant progress on our strategic plan, which includes the expanding our geographical presence and improving our advanced technology solutions offering through the opportunities we have executed over the past years. We are confident that these investments will help us achieve our strategic objective over the long-term and are well positioned to enhance shareholder value. That concludes my remarks and operator we would like to open the call for questions.
we'd like to open the call to questions.
Questions and Answers
Operator: Thank you. Our first question comes from the line of Brad Evans from Heartland.
<Q – Brad Evans – Heartland>:Thank you for taking the questions. So I just – I would love your thoughts on just the macro environment in terms of – I know you don't give guidance, but as you look at the volatility that's in the marketplace just with the stock market, how has that translated into customer's appetite for technology here, what are you hearing from the sales force at this point?
<A – Phillip Norton – Chairman, President & Chief Executive Officer>Well, if you look at our numbers from last quarter, we were able to increase sales by 12%. All of the disruption was going on about the debt ceiling in Congress, we really didn't see degradation in our sales during that period of time from across our customer base and I think we have a pretty sound base that goes across commercial all way to enterprise. I think that that part for this month is going to have some difference, but we don't see climate changing at least now for this quarter and if you look at the trends, we can't really tell it after first quarter of this year, because everyone's budget kind of and for the most part December 31, but right now we seeing the climate being consistent what has been in the past.
<Q – Brad Evans – Heartland>:So, is it possible this – so your third quarter, the calendar fourth quarter, is it possible that you see a combination of maybe some budget flushing on top of some maybe some heightened incentive activities from the vendor side to maybe drive activity, is that something that might occur?.
<A – Phillip Norton – Chairman, President & Chief Executive Officer>:Yes. They don't really tell us their future plans, so it's hard for us to guess on that. I would say right now we haven't seen significant changes from the vendors.
<Q – Brad Evans – Heartland>:Okay, that's good insight. I just want to clarify just in terms of your exposure to the government vertical, in total around 20% of sales that are tied to government – the government verticals, is that roughly correct?
<A – Phillip Norton – Chairman, President & Chief Executive Officer>:Approximately. We don't really breakdown-
<Q – Brad Evans – Heartland>:Okay
<A – Phillip Norton – Chairman, President & Chief Executive Officer>:But it hasn't really changed that much in this area
<Q – Brad Evans – Heartland>:Okay. I know it's a crystal ball type of question, but in the event of with the austerity measures that might be actually coming to the federal government, how do you see that playing out for the appetite for technology spend. I know that there is some speculation that there may not be as impacted as government tries to drive productivity through technology investments, but I guess that's more of a wish, but what are your thoughts in terms of how the government might – that vertical might act over the next say 6 to 12 months?
<A – Phillip Norton – Chairman, President & Chief Executive Officer>:First of all, in our public sector business the federal government plays a smaller role. I think we do have significant business with the systems integrators and most of that are long term contracts and their funding doesn't seem to get back as much. I couldn't really speak for the rest of federal budgets, because we really don't deal directly with that many agencies. From the state and local and I think for the most part we will look at some of the trends on IT [indiscernible] for the whole industry is up 2%. So it will really depend on whether or not a cut back significantly [indiscernible] really hasn't dropped off that much as compared [indiscernible].
<Q – Brad Evans – Heartland>:Let me just ask one more question around the government. Does the state local vertical feel more stable than the federal government or is it not discernible?
<A – Phillip Norton – Chairman, President & Chief Executive Officer>It's not discernible right now.
<Q – Brad Evans – Heartland>:Okay. Thanks. Nice quarter. I appreciate it.
<A – Phillip Norton – Chairman, President & Chief Executive Officer>Thanks Brad.
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, President & Chief Executive Officer & Chief Executive Officer
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.