August 11, 2009
Prepared Remarks
Operator: Good afternoon, and welcome to the Fiscal First Quarter 2010 Earnings Conference Call for ePlus. Today’s conference is being recorded. At this time, all participants are in a listen-only mode. And after management completes its prepared remarks, we’ll open the call to questions. [Operator Instructions].
I’ll now turn the call over to Kley Parkhurst, Senior Vice President at ePlus. Please go ahead.
Kleyton L. Parkhurst, Senior Vice President
Thank you, Anthony, and thank you everyone, for joining us on today’s call. With me today are Phillip Norton, ePlus' Chairman, President, and Chief Executive Officer and Elaine Marion, our Chief Financial Officer.
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 including without limitation, possible adverse effects resulting from the recent financial crisis in the credit markets, and general slowdown in the U.S. economy, such as our current and potential customers delaying or reducing technology purchases, increasing credit risks associated with our customers and vendors, reduction of vendor incentive programs, the possibility of additional good will impairment charges and restrictions on our access to capital necessary to fund our operations, the demand for an acceptance of our products and services, our ability to adapt our services to meet changes in market development, the possibility of defects in our products or catalog content data, our ability to protect our intellectual property, our ability to reserve adequately for credit losses, and other risks and uncertainties detailed in the earnings release we issued yesterday and our reports filed with the Securities and Exchange Commission. The company does not undertake to update any of these statements in light of new information or future events.
With that, I’ll turn the call over to our Chairman, President, and Chief Executive Officer, Phillip Norton.
Phil?
Phillip G. Norton, Chairman, Chief Executive Officer and President
Thank you, Kley. Good afternoon, everyone, and thank you for joining us. While our year-over-year figures continue to demonstrate the challenges of the IT business, a better indicator of the state of our business is the sequential improvement we have seen. I would still characterize the economy and the IT market as difficult. We believe it will take a few more quarters before it stabilizes.
January and February were particularly challenging. However, we saw improvement in the period from March through June. As a result, for our first quarter ended June 30, 2009, total revenues increased 13.6% sequentially to $152.4 million.
An important indicator to us is our gross margin. During the first quarter, gross profit margins in our products and services business increased about 100 basis points to 14.2% as compared to both the same quarter last year and the prior sequential quarter. The improvement in gross margin is attributable to improved business operations and analytics, which has led to increased efficiencies, such as reducing or eliminating low margin product lines, small vendors, and unprofitable customers.
We believe our strategy of continuing to focus on advanced technology solutions and the higher value they derive is the right one. During the quarter we were awarded a Cisco TelePresence Certification. We were selected as VMware’s top partner in the Americas. We achieved Cisco Powered Designations for Managed Unified Communications and Managed Security Services. And we were one of the first channel partners to become a Cisco Data Center Unified Computing Authorized Technology Provider, allowing us to get involved in Cisco’s latest technology platform.
As a result of increase in sales, improved gross margin, and our continuing focus on holding the line on costs, net earnings improved $1.1 million to $1.9 million or $0.23 per share as compared to the prior sequential quarter. For the first time in several quarters, our investment and lease assets on our balance sheet increased. They were $119 million as of March 31, 2009 and we finished June with $123 million on the balance sheet. We believe that leasing is a necessary and beneficial financing alternative for our customers, who can utilize leasing to acquire the IT equipment and software needed now within today’s budget restrictions and strident cost save – cutting initiatives.
We will continue to focus on originating high credit quality leases that are fundable on a non-recourse basis to build our portfolio, lock in recurring revenue and corresponding earnings, and capture more customer spend. Capturing organic growth opportunities within our customer base and adding new customers by leveraging our existing branch network, tele-marketing channel, and e-commerce platform remains a top priority. We continue to review potential acquisition targets, which could be a strategic fit. Our strategies include expansion into new geographic markets, tuck-under acquisitions to supplement existing branches or VARs with specific technology focuses, which can be leveraged nationwide.
The values, which are core to our daily business operations, also apply to acquisitions. Our core values are being fiscally conservative, credit oriented, and most importantly, whether investing in new technology initiative or business opportunity, having a clear path to accretive earnings and a moderate to high return on investment. We have been looking at many acquisition opportunities and will continue to do so until we find a target that meets our objectives.
During the quarter, ePlus common stock was added to the Russell 2000 and 3000 indices. As a result of our company’s rising market capitalization, we are pleased that our stocks’ performance has merited inclusion in these indices and we look forward to continuing to operate the business in the best interests of our customers, employees and shareholders.
That completes my prepared remarks, I will now ask Elaine to walk you through the financial statements.
Elaine?
Elaine D. Marion, Chief Financial Officer
Thanks, Phil. As Phil noted, this was a good quarter for ePlus on a sequential basis. The technology sales business unit generated 142.2 million of total revenues, a 17.6% sequential increase. This quarter, we benefited from the mix and volume of products and services sold and changes in incentives provided to us by manufacturers.
On a year-over-year basis, total revenues in the technology sales business unit were down just over 15%. This decline is attributable to our customers purchasing lower volume, not the loss of customers. Six out of our top 10 customers this quarter were 10 ten customers in the same quarter last year. We believe our product mix and advanced technology services along with our e-commerce platform and leasing will help us retain customers through this economy and position us for future growth.
On a consolidated basis, the gross margin for products and services improved sequentially and year-over-year, 100 basis points to 14.2%. The improvement in gross margin is attributable to some efficiencies we’ve gained by better managing the business as Phil mentioned. Overall, it demonstrates that we have the ability to increase both sales and gross margins, which we believe is a pretty important indicator of the strength of our business approach.
The total revenues in the financing business unit, which is largely comprised of lease revenue and also includes the sale of leased equipment, were down more than 22% sequentially. This is primarily the result of having fewer leased assets on the balance sheet throughout the quarter. The sequential increase in leased assets on the balance sheet occurred towards the end of the quarter.
A continuing focus on expenses helped keep general and administrative expenses including salaries and benefits to 21.4 million, which was down sequentially about 3% and about 8% on a year-over-year basis. We continue to scrutinize discretionary spending on a company-wide basis and we’re constantly looking for ways to improve productivity. For example, we allowed our National City PNC line of credit to expire in July. We had historically very low utilization and with no projected need for capacity in the future, we will save on the annual commitment fee and other costs and expenses both internal and external required to maintain the line.
Looking at the balance sheet, we finished the quarter with 103.3 million in cash and cash equivalents. The slightly lower cash balance as compared to March 31 is due to an uptick in sales sequentially, the increase in leased assets at the end of the quarter and deferring the arrangement of non-recourse debt by using our cash to fund a few investment grade leases, which should produce higher interest earnings than what is available in the market.
As I mentioned on the last call, we have been highly focused on credit and collections for new and existing customers to ensure that our receivables are strong, credit losses are minimal, and to enhance working capital by reducing days sales outstanding and it’s working. We’ve seen improvement in our over 60-day receivable balance since March 31, 2009.
Non-recourse notes payable was 75.1 million as of June 30, representing a $9.9 million reduction this quarter and a reduction of about 20 million on a year-over-year basis. The reduction in non-recourse notes payable reduced interest expense about $200,000 on a sequential and year-over-year basis. That benefit was slightly offset by higher interest rates.
In summary, we continue to focus on containing costs, maintaining and enhancing gross margins, retaining and adding customers, and exploring M&A opportunities. While the next few quarters will prove to be challenging in terms of revenue and earnings, we believe ePlus is well positioned with a solid balance sheet and the right business mix to execute on future opportunities.
That completes my prepared remarks. Phil?
Questions and Answers
Operator: Thank you. [Operator Instructions]. We’ll take our first question from John Lewis with Osmium Partners.
<Q – John Lewis>: Hi. Good afternoon, guys.
<A – Elaine Marion>: Good afternoon.
<A – Phillip Norton>: Hey, John.
<Q – John Lewis>: Yeah, I guess it was pretty straightforward. It was a good call. I guess just a couple quick questions. I noticed you guys filed a lawsuit against four – I guess four companies. I think you settled with one. Can you give any more color on what – any more color on that lawsuit that’d be helpful?
<A – Phillip Norton>: Not really. I don’t think it’s something that we discuss about -
<Q – John Lewis>: Could you just say are they – is it a large corporation like – obviously, you guys have – had a suit with -
<A – Phillip Norton>: No, our outside attorneys have basically told us not to be commenting on the lawsuit. I think it’s filed publicly that you could look up.
<Q – John Lewis>: Okay. Okay, that’s helpful. I think we’re pretty well situated on the rest of what you guys commented on. Okay, thanks, that’s all I had.
<A – Elaine Marion>: Thank you.
<A – Phillip Norton>: Thanks, John.
Operator: [Operator Instructions]. We’ll take our next question with Pat Retzer of Rezter Capital.
<Q>: Hi, guys.
<A – Elaine Marion>: Hi.
<A – Phillip Norton>: Hi, Pat.
<Q>: I wanted to complement you on a great quarter both sequentially and year-over-year relative to your competitors.
<A – Elaine Marion>: Thank you.
<Q>: I noticed you mentioned rebuilding the lease portfolio after somebody made a great decision a year and a half, two years ago to dramatically downsize it. Can you talk about the conditions in that market with regard to margins, competition etcetera and what we should expect to see there in terms of that portfolio continuing to grow?
<A – Phillip Norton>: Well, first of all, I mean, we have always tried to manage our portfolio to the extent that lessees or transactions, which we don’t feel have the yield potential that we are looking for or have the desired credit that we are looking for that we have sold those off as sales of leased equipment. So it wasn’t a purpose of downsizing, it was just managing our risk. And based on what’s happened in the market, we think that was a good decision at that time.
As far as the market today, I think the market is in a situation where people aren’t spending money for equipment to buy and so therefore the opportunities for leasing with reasonable credits with a low-risk profile are going to be somewhat limited until we start to really break out of the recession.
And the ones that really need financing are much higher risk credits and so therefore we try to steer clear of them. In some cases where we have higher rated credits with less risk, we’ve retained some of those on our balance sheet to get better yields for our money. And I think as the market opens up, we’ll be in a great position to add additional opportunities so long as they meet the credit criteria, and within our risk profile.
<Q>: Okay. So the leases you’re putting on today relative to recent history, are those wider than normal spreads or pretty much in line, or how would you characterize that?
<A – Phillip Norton>: Well I think that they vary from the commercial market to the government market, and it varies according to the lessee. I would say the rates in general are within 100 or 200 basis points either way of what we have done in the past, although the spreads are much wider because the – what you base them off of is at a much lower rate.
<Q>: Okay. And then from the standpoint of competition for the leases, have you seen a fair number of competitors drop out of the market?
<A – Phillip Norton>: Well, we’ve seen a retraction from the market by CIT and GE and some of the financial institutions have started to limit their financing and leases too within their market areas and not national-wide. So we have seen some additional opportunities due to that. And we also have noticed that several of the larger competitors have reduced the number of vendors that they are now financing, especially in the State and Federal marketplace. And I think that provides us a lot more opening for additional business as the demand grows.
<Q>: Okay. So I mean relatively this is a pretty wonderful time to be sitting there with a quite slimmed-down portfolio and a huge pile of cash on the balance sheet.
<A – Phillip Norton>: Especially since our customers appear to be paying on time.
<Q>: Right. Okay. Thanks.
<A – Elaine Marion>: Thanks, Pat.
<A – Phillip Norton>: Thanks, Pat.
Operator: [Operator Instructions]. It appears there are no further questions at this time.
