Operator:  Good morning and welcome to the Fourth Quarter Earnings Conference Call for ePlus.  Today’s call is being recorded.  After management completes its prepared remarks we will open the call to answer questions.  At this time I would like to turn the call over to Mr. Kley Parkhurst, Senior Vice President of ePlus.  Please go ahead, sir.

 

Thank you, Kristin, and thank you everyone for joining us on today’s call.  The statements in this conference call that are not historical facts 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 and Exchange Act of 1934, as amended.  Actual and anticipated future results may vary materially due to certain risks and uncertainties, including, without limitation, possible adverse effects resulting from the recent financial crisis in the credit markets and general slowdown of the U.S. economy such as our current and potential customers delaying or reducing technology purchases, increasing credit risk associated with our customers and vendors, reduction of vendor incentive programs, the possibility of additional goodwill impairment charges, and restrictions on our access to capital necessary to fund our operations; the demand for and acceptance of, our products and services; our ability to adapt our services to meet changes in market developments; the impact of competition in our markets; the possibility of defects in our products or catalog content data; our ability to hire and retain sufficient personnel; our ability to protect our intellectual property; a decrease in the capital spending budgets of our customers; our ability to consummate and integrate acquisitions; the creditworthiness of our customers; our ability to raise capital and obtain non-recourse financing for our transactions; our ability to reserve adequately for credit losses; and other risks or uncertainties detailed in our reports filed with the Securities and Exchange Commission.  All information set forth in this conference call is current as of today and ePlus undertakes no duty or obligation to update the information presented.

With that, I will turn the call over to our Chairman, President and Chief Executive Officer, Phil Norton.

 

Phil?

 

Thank you, Kley.  Good morning, everyone, and thank you for joining us.  With me on today’s call is Elaine Marion, our Chief Financial Officer.  In a moment, I will ask Elaine to go through our fourth quarter and annual financial results, and then we’ll be available for questions. 

 

Like other market participants in the IT market, our sales of product and services  revenues declined in the fourth quarter and for the entire year. The climate for technology spending, for customers of every size and industry, including state and local governments, is challenging.  We last saw a meaningful deterioration in IT spending with the Y2K/dot-com bubble, which further declined due to  the events of 911.  Today, like the last recession, the road to recovery is uncertain, and perhaps more so now because of the global nature of this recession.  It seems to be affecting every industry.  Furthermore, there are liquidity, debt and financing issues that customers must face, which could further delay IT investment  Our goal at ePlus is to position the company to weather the recession, and be best positioned to not only regain our base, but be able to capture market share when spending improves.  And I think we are in a great position to do so.  

 

The company has managed our balance sheet to improve liquidity.  Furthermore, we’ve focused our efforts on reducing operating costs, improving margins, and eliminating products and services that are not profitable or scalable..   The result is that we have $108 million of cash on the balance sheet, the highest in the company’s history.  This places ePlus in a better position to ride out this recession and to have the liquidity to execute opportunities and grow quickly.

 

A primary driver of customer spend today is cost-savings and measurable ROI.  Two of the best solutions are unified communications and virtualization.  We  are pleased to say that ePlus has been investing in these technologies for many years and as a result, is a top partner of Cisco,  Hp, VMware and most other major technology vendors.  Just recently, we were awarded VMware’s Americas Partner of the Year, VMware’s highest honor for its channel partners.  Today we are delivering the real value customers need to lower their costs, and ePlus has become a trusted advisor to our most important customers.  Our lease offerings also are a significant differentiator from the competition and highly valued by customers.  Customers continue to turn to leasing as a cost-effective way to acquire IT products and meet financial or budget constraints, and to maintain working capital and liquidity.  With leasing, we can sell these customers equipment they may otherwise defer purchasing.  

 

We’ve held the line on costs, without the potentially demoralizing effect of broad reductions in headcount, which will enhance the retention and loyalty of our employees and customers.  One of the strengths of our business is the personal relationships we have with our customers and partners, and the ability to provide the most cost-effective solutions to our customers.  The people of ePlus are the heart and soul of the company -- whether it is our engineering teams solving a complex problem, our sales team identifying an opportunity, or our customer service teams providing assistance. Over the past few years, we’ve been able to hire some of the best and brightest talents in the industry, and we believe that our commitment to our people will be the catalyst that helps us return to growth in the future.

 

Based on our strong financial position, the economic downturn could serve as a competitive advantage for ePlus.  If we are patient and continue to be as disciplined as we have been in the past, then we believe that there will be good acquisition opportunities.  The weak financial position of some of our competitors will create opportunities for us to gain marketshare, and hire top talent, which is consistent with the opportunities we have taken advantage of in the prior downturns.

 

We remain committed to delivering value to our shareholders.  In the fourth quarter, we repurchased an additional 133,791 shares at an average cost of $10.64 per share.  For the full year ended March 31, 2009, we acquired 436,664 shares at an average cost of $9.95 per share – for a total purchase price of $4.3 million.  Since the inception of our first stock repurchase program on September 20, 2001, the Company has spent approximately $37 million to repurchase roughly 3.4 million shares.

 

That completes my prepared remarks.  I will now ask Elaine to walk you through the financial statements.

 

Elaine?

 

Thank you, Phil, and thank you everyone for joining us today.  Rather than repeating what is written in the press release and 10-K, I would like to highlight a few areas, and then would be happy to address questions along with Phil and Kley at the end.

 

For our fourth quarter ended March 31, 2009, sales of products and services, our largest source of revenue, were down 29% as compared to the prior year’s quarter.  This decline resulted from current economic conditions which affected most of our customer base, both commercial and governmental, as customers cancelled or deferred IT purchases across the board.

 

While our revenues declined in the fourth quarter, the gross margin on sales of product and services remained at slightly over 13% for the quarter, and was almost 14% for the year, the highest annual gross margin we have experienced for many years.  This improvement in gross margin is a result of our continued success in selling advanced technology solutions, such as unified communications and virtualization, which are driven, in part, by improving relationships with top vendors.

 

Ours is a highly transactional business and we have limited visibility into customer’s future spending plans, which can also be modified at the last minute due to liquidity or budgetary constraints or changing technology plans.  What we can say is that our entire enterprise is geared towards delivering the highest possible customer satisfaction, and we believe we have wisely invested with the right partners to deliver the best solutions to our customers.  The result, we hope, is that when our customers start spending robustly, they will continue to rely on ePlus and purchase from us. With respect to sales of leased equipment, we sold a significant portion of the portfolio in several different transactions during the prior fiscal year, and this  contributed to a 76% decrease in sales of leased equipment for the quarter.  For the year, leased equipment sales were down 90%.  Lease revenues also declined 12% for the quarter and 20% for the year, as a result of having a smaller portfolio of  leases.  Our decision to sell a portion of our lease portfolio and accelerate the non-recourse debt funding process has helped to create the balance sheet liquidity we now enjoy.  We may use our balance sheet strength to try to rebuild the portfolio back to prior levels with a focus on high-quality leases, although our increased scrutiny on credit quality makes this unusually challenging in today’s economy.

 

 

 

With lower revenues and limited visibility into the near term spending trends, we are focused on three operating initiatives: cost containment; maintaining credit quality, and making selective investments in the business.  We are reducing costs in non-disruptive ways that won’t impact our ability to capture future growth, such as eliminating unnecessary travel and entertainment expenses, optimizing internal software, improving interfaces between applications and business processes for maximum efficiency, and virtualizing our own data centers to reduce the number of servers and lower ongoing maintenance costs. 

 

We are making sure that our credit portfolio -- in both the financing and technology sales segments -- are the best they can be by closely monitoring new transactions and receivables..  As a result, our accounts receivable aging is excellent and writeoffs have been minimial. 

 

We are making selective investments to improve the business, such as implementing a Cisco Telepresence platform in 3 main offices; opening a call center to better reach our exising customers and better execute vendor demand generation  campaigns, and strengthening our national practice bench to improve our vendor relationships and gain more value from their incentive programs.

 

In conclusion, our balance sheet is the strongest it has ever been.  At March 31, 2009, we had cash of $108 million, shareholders equity of $174.5 million, and tangible equity (equity less goodwill) of $153 million, or almost $19 per share.  We had only $102 thousand of recourse debt.  While the near term will remain challenging in terms of revenue and earnings, we are enthusiastic about the scalable enterprise we have built and future opportunities.  We are in an excellent position to capture growth opportunities or make strategic acquisitions such as we done successfully in the past. 

 

That completes my portion of the call.  I will now ask Kristin to open the call to questions.

 

Operator:  And we’ll take our first question from Patrick Retzer with Retzer Capital Management.

 

<Q>: Good morning.

 

<A – Phillip Norton>: Morning, Pat .

 

<Q>: As Elaine talked about you know you made a strategic decision some time ago to sell off a major portion of the lease portfolio which in retrospect considering the credit crisis and recession was a wonderful move.  And she mentioned that you’re going to rebuild that portfolio over a period of time now.  Can you talk about the types of spreads you can capture on leases currently?

 

<A – Phillip Norton>: Well I think it comes out a little across the map in the sense that it really is very credit driven in this – in what levels you can go and what the amount of investment you have to make.  So it’s – at the present time we wouldn’t be able to tell you the exact numbers that we are seeing.  But in every case where most likely two to 300 basis points higher than we have been in the past because the spreads that they’re getting from lenders for most of the middle market credits is either non-existent or very high.

 

<Q>: So on a historical basis this is the best time you’ve seen to be putting leases on the books?

 

<A – Phillip Norton>: I would say it’s the best time if you’re able to make the correct credit decision which we have been good at in the past but we have to be very careful because they’re looking out two, three years and the banks are restricting their credit lines to a year.  So if a company is heavily debted, we have to be very careful on not getting caught with them being squeezed by the credit lines, being pulled.

 

<Q>: Right, okay.  In previous economic slowdowns you guys have made some wonderfully accretive acquisitions at bargain prices.  Do you anticipate getting that opportunity this time around as well?

 

<A – Phillip Norton>: Well I think what we’ve seen and we are actively out in the marketplace looking for opportunities but, and the creativity of investment bankers due to the recession hasn’t stopped their ability to have you look, try to look backwards to last year’s performance versus the future performance of the company based on lower sales, so what we’ve seen is that the reality of what the market price for these companies should be is just now coming into effect.  Now we’ve looked at numerous opportunities so far but we’ve found that the prices haven’t really readjusted to the reality but, and you really don’t want to buying a broken company, you want to buy a company that has real synergies of what you’re doing or location or capabilities that would make it significantly accretive to the company.  I think we’ll see that but we haven’t really seen really great opportunities yet.

 

<Q>: Okay.  Can you give any color on business since the fiscal year end?  I understand you don’t want to give guidance but have things stabilized?  Have they bounced up a bit?  Is there anything you can tell us about the period since then?  Or even the outlook?

 

<A – Phillip Norton>: I think what we can say is in general we’ve seen the attitude of our customers and the marketplace improve somewhat in the sense that they are looking a lot more, that there seems to be a little less control over budgets being expanded.  I think people are starting to feel like they can spend a little bit that they couldn’t do in the first quarter and we think there’s opportunities for improvement in the marketplace.

 

<Q>:  Okay.  And then finally, I mean your trading almost at cash per share at about two thirds of book value.  I mean, I think it’s a wonderful investment opportunity.  Are you doing anything to, or working on doing anything, to get this story out as far as planning any sort of road shows or research coverage?

 

<A – Phillip Norton>: By the encouragement of several of our investors we are looking at opportunities to go out and tell the ePlus story, and we’re preparing to do that.  And I think it should be forthcoming quickly.

 

<Q>: Okay.  Well, thanks a lot.  Keep up the good work.

 

<A – Phillip Norton>: Thank you, Pat.

 

Operator:  We’ll take our next question from Kevin Hanrahan with KMH Capital Advisors .

 

<Q>: Good morning, gentlemen.  Congratulations on your share buy-back program.  I think that’s been a good use of some of your cash.  I know you have some authorization to go.  Could you give us the details on that again?  How much is left in authorization.  And then I have a couple follow ups.

 

<A – Phillip Norton>: Elaine’s looking that up.

 

<Q>: Okay.  You know basically I guess I was going to ask some of the same questions that my old friend Pat was asking.  Pat and I used to work together a long time ago.  Basically I was thinking if you can tell us if you’re going to buy back more shares or if you’re going to use some of your cash for acquisitions.  You know, you’ve got enough cash to do both.  I guess you could buy back some shares and make acquisitions as well.

 

<A – Phillip Norton>: As we’ve done in the past we think this is the best opportunity to find acquisitions.  One of the things that I can you give a little philosophy on what we look for and/or give you a little more color on that.  For the most part the history that we’ve seen is that if we can’t take cost and savings out right up front, the real failure in the past of VARs and in acquisitions in general are the fact that people don’t do a good job of integration and get savings right away.  And without that most acquisitions fail.  So in our process we have very experienced people that have done it before.  We’re looking for opportunities that are reasonably large in which there are significant administrative costs that we can take out.  And therefore be accretive immediately versus waiting for a long period of time.  So the financial situation has created I think opportunities for us.  We’re continuing to look and I think we’ll have some opportunities to try to make those kind of acquisitions.  As far as the stock buy-back has been continuous now for a period of time, I think the Board has favored doing that and bringing shareholder value since it’s a discount to cash and I think they’ll continue to do that in a measurable way.

 

<Q>: Okay.

 

<A – Phillip Norton>: Elaine has the number as far as...

 

<A – Elaine Marion>: The remaining authorized shares to be repurchased as of March 31, 2009 is 462,165.

 

<Q>: All right, got you.  Right.  So your second buy-back when you reauthorized, it was 500,000 shares, I think that was.  So you’ve eaten into that somewhat as well?

 

<A – Elaine Marion>: Correct.  Yes.

 

<Q>: Right.  That’s great, that’s great.  And I would echo Pat’s thoughts about some coverage.  I mean it seems like this company is doing well in its industry and yet there’s no coverage at all.  I congratulate you for running the company that way.  It seems like I see the partnerships if you would or the companies that you work with, Cisco, Microsoft, VMWare, you’re winning awards so it seems like the company is right there with some of the leading technology companies in this country and yet there’s no coverage at all.

 

<A – Phillip Norton>: Well, we have a focused effort on trying to do that and we have an IR firm that’s helping us and I think in the end as we come out of the recession I think the investment banks that are...

 

<Q>: Still standing?

 

<A – Phillip Norton>: They’re still defending their franchise to stay in business.

 

<Q>: Sure.

 

<A – Phillip Norton>: I think they’re not really adding a lot of coverage since they don’t see an enormous amount of activity in the market itself.  So we’re going at every avenue to try to move coverage forward and we’ll do that until we’re successful.

 

<Q>: All right.  Thank you, sir.  Best of luck to ePlus.

 

<A – Phillip Norton>: Thank you.

 

Operator:  This does conclude today’s question-and-answer session.  At this time I’d like to turn the conference back over to Mr. Phil Norton for any additional remarks.

 

We’d like to thank all of you for participating and this will be available on webcast and when will that be Kley?

 

This afternoon for about two weeks.

 

And so if anyone else would like to replay or give it to any analyst that might be interested in covering ePlus we’d appreciate that and thank you very much.

 

Thank you.

 

Thank you.

 

Operator:  This concludes today’s conference and we thank you for your participation.