INVESTOR RELATIONS
CONFERENCE CALL
8/18/05
Kley Parkhurst: Thank you, Jackie. Good morning, this is Kley Parkhurst,
Senior Vice President of ePlus and I would like to welcome you to our conference
call to discuss our June 30, 2005 first quarter of 2006 financial results. The
conference call this morning will include prepared remarks, followed by a
questions and answer period. Joining me today is Phil Norton, the Chairman,
Chief Executive Officer, and President of ePlus, and Steve Mencarini, Senior
Vice President and Chief Financial Officer.
Before we begin the formal presentation, let me read our Safe Harbor
Statement:
The statements made during this call, which are not historical facts, may
be deemed to be forward-looking statements within the meaning of Section 21E of
the Securities Exchange Act of 1934. Actual results may vary due to general
economic conditions and other risks and uncertainties, including those risks and
uncertainties detailed in our Securities and Exchange Commission filings. We
refer you to the disclosure contained in our Quarterly Report on Form 10-Q for
the quarter ended June 30, 2005 under the headings "Factors That may Affect
Future Operating Results" and in our Annual Report on Form 10-K for the year
ended March 31, 2005 under the heading "Risk Factors" and "Management's
Discussion and Analysis of Financial Condition, Liquidity, and Capital
Resources.
All information discussed during this conference call is as of August 18,
2005. ePlus inc. undertakes no duty to update this information.
A live webcast of this call, playback, and audio play back are available.
Please refer to our press release, or email info@eplus.com, or go to our
website, www.eplus.com/investor for more information.
It is my pleasure to introduce Phil Norton, the chairman, chief executive
officer, and president of ePlus inc. Phil:
Phil Norton: Thank you for joining us.
The results for the quarter ended June 30, 2005, the first quarter of our
new fiscal year, were in line with expectations, and we continue to be gratified
by customer retention and growth - both organic and via acquisition - as
reflected by the 40% increase in revenues to $150 million.
This increase in revenues resulted from continued strong growth in our
Technology Sales Business Unit. Sales of Product increased 47% to $134.9
million, reflecting our role as a leading channel partner for Tier 1 vendors
such as Cisco & HP. We have focused on building stronger relationships with
selected manufacturers and we are the `goto' partner in many markets. Also in
the Technology Sales Business Unit, Fee and other income increased 94%. This
increase includes revenues attributable to our ePlus Consulting unit which we
acquired from Manchester in 2004, as well as increased professional services and
software revenues. We have continued to invest in our engineering staff to
increase our services revenue. Our advanced technology service offerings
provides us the opportunity to grow margins and cross sell into our customer
base, and we have seen a dramatic increase in opportunities for implementing
solutions such as IP Telephony and storage, for both new and existing customers.
We feel that the continuing focus and investment in professional services will
create margin expansion and increase profits over time.
In our Technology Sales Business Unit, the Gross Margin in Sales of Product
declined to 9.5% this quarter, which reflects our willingness to compete for and
retain new and existing customers. Our strategy is to grow our customer base,
capture their order process, and then cross sell and upsell our Enterprise Cost
Management business automation solutions, professional services, and other ePlus
products to increase future margins. Winning and retaining these customers is
critical for the future opportunities that can only be generated if you have the
customer relationship, and we are pleased to report that ePlus added more than
100 new customers last quarter.
Our Financing Business Unit increased its leased equipment portfolio to
$196.4 million, up from $180.5 million in the prior year June quarter end, and
up from $189.5 million on March 31, 2005. Lease Revenues declined 7% to $11.3
million from $12.2 million, while Direct Lease costs increased 41%. In
conjunction with lower off-lease sales of product and reduced fee income, the
pretax earnings in the Financing Business Unit declined to $2.7 million, or 49%.
The decline in the revenues and earnings in this business is primarily
attributable to fewer gains on financings and sales of direct finance leases. In
addition, due to lower overall interest rates and increased competition from the
likes of aggressive bank lessors, hedge funds and consolidated third party
finance companies, our new lease originations have tended to be at a lower
internal rate of return than in prior years.
We are pleased that we have been able to grow our lease asset base in this
competitive environment. Similar to customer retention in the Technology Sales
Business Unit, we are investing in new customers and deals to create future
opportunities for residual realization, cross-sell and upsell of Enterprise Cost
Management solutions, and other opportunities that can only be generated by
having customer relationships.
A significant factor in lower earnings this quarter was a continuing
reduction in the volume of federal government lease financings. As has been
recently reported by Dell and other government resellers, federal government
sales have dropped significantly. Over the past few quarters we've reported a
similar drop in our federal government financing business. Although the future
volume is unpredictable, we have seen an uptick of activity in this business
unit and we are optimistic about the future.
Earnings for last quarter were lower due to a higher than optimal cost
structure as a result of rising Sarbanes Oxley compliance and auditing costs,
legal fees and expenses relating to our patent lawsuits, and legacy costs from
the Manchester acquisition. For example, our headcount grew from 573 to 651, due
to the Manchester acquisition and increases in our engineering and software
development units.
Some of these costs will be continuing, such as Sarbanes Oxley & auditing,
which are required, and our patent infringement lawsuit against SAP. But we are
committed to driving the long term profitability of the company and enhancing
shareholder value. Many of our efforts will require an investment and may
depress short term earnings. For example, we elected to use a mostly internal
team to drive our Sarbanes Oxley 404 compliance effort. Using an internal team
will create long term benefits for the company, as we will have re-engineered
and made more efficient many business processes in the company. But it has
increased both direct and indirect costs in these past few quarters, as key
operating managers have not been able to focus on reducing costs and optimizing
margins in their core business units. It is an investment made today which will
have a long term payout, and we must be diligent in adhering to good corporate
governance and compliance.
We also have specific business objectives that we believe will improve
profitability:
o We will improve back-office efficiencies by streamlining business
processes, reducing headcount, and implementing better technology. In the
next few quarters, we will enhance our Enterprise Cost Management suite
with a commercial version of OneSource. OneSource is a single portal to
automate the customer order process and reduce administrative overhead for
both buyer and seller, facilitate electronic commerce, and increase
efficiency due to better information and transaction visibility. OneSource
will provide better access to product information, place and accept orders,
provide tracking and audit functionality, workflow, and invoicing. This
product will be provided to customers at no cost, and it will act as a
front-door to the full suite of ECM products and solutions. With OneSource,
we believe the ePlus Technology business can grow sales with current
customers and attract new customers at higher margins. In addition, it will
increase our sales per employee which will lead to reduced costs over time.
o We have continued to outsourcing software development to India, with
correspondingly lower costs. Our offshore development program, led by our
ePlus Consulting management team with deep experience, will allow us to
accelerate development cycles, produce better software, and reduce
headcount and costs in this unit.
o Another area of focus is to grow our professional services significantly in
the next year, by focusing on selected vendor relationships. Over the past
year, our Cisco business has increased 300%, and we will continue to focus
on Internet Telephony and our patent-pending server-less office. We have
made a sizeable investment to improve our engineering staff, which is now
almost 200 strong, especially in the Cisco IPT space. We are one of fifteen
vendors supported by Cisco's National Accounts management team. With high
level certifications with all of the Tier 1 vendors and a national
footprint, we can compete against the biggest systems integrators, but we
also have capabilities which make us unique in the middle-market, such as
our Remote Network Operations Center, Enterprise Cost Management, and
leasing.
o We have added a small ticket leasing product in our financing business unit
to increase penetration into our technology and healthcare business which
should improve spreads and margin and we believe that this will give us the
opportunity to grow our financing business by up to 20%.
o We are re-engineering our software platform to meet the needs of the
growing on-demand marketplace, a great potential opportunity for ePlus to
create recurring revenues and cross sell our technology sales and leasing
products.
o We will continue to identify strategic acquisitions that will bring us into
new markets, add new customers, and increase our professional services
offerings and opportunities.
Our balance sheet remains strong. Total Assets and Shareholders Equity on
June 30, 2005 were $364.4 million and $132.9 million, respectively. Cash and
cash equivalents were $22.2 million as compared to $8.8 million at the quarter
ended June 30, 2004. Our cash number fluctuates from quarter to quarter
corresponding with our working capital requirements, but with fungible lease
assets and strong borrowing capability, we have the ability to raise cash as
needed.
We believe ePlus is positioned for growth in revenues and earnings. Over
the past few years, and with the Manchester acquisition, we have built a
national footprint. We have made the investments in infrastructure, personnel,
and technology to grow revenues and increase margins without significantly
increasing fixed costs.
Our product set is well positioned to capture three market trends: internet
telephony, outsourcing, and the on-demand services for procurement, supplier
enablement, and spend management. Enterprise Cost Management is the best
solution value to reduce administrative costs in the indirect supply chain, and
we have the national footprint and customer base to execute on these three
opportunities.
We successfully defended our intellectual property and we will continue to
prosecute infringement in a cautious and systematic approach.
Thank you for your time and we are ready to answer any questions you may
have. Operator:
Operator: I'm currently showing no questions. I would like to turn the
floor back to Kley Parkhurst.
Kley Parkhurst: Thank you, Jackie. If you have any questions you'd like to
ask, we will be here all day. Thanks for calling.
Operator: Thank you, this does conclude today's teleconference. You may now
disconnect your lines, and have a wonderful day.