Earnings Conference Call Transcripts

Conference Call Discussing Earnings for Fiscal 2017 First Quarter Results

Safe Harbor Statement

This transcript of an earnings call contains certain statements that are, or 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 Exchange Act of 1934, as amended, or “Exchange Act,” and are made in reliance upon the protections provided by such acts for forward-looking statements. Such statements are not based on historical fact, but are based upon numerous assumptions about future conditions that may not occur. Forward-looking statements are generally identifiable by use of forward-looking words such as “may,” “should,” “intend,” “estimate,” “will,” “potential,” “could,” “believe,” “expect,” “anticipate,” “project,” and similar expressions. Readers are cautioned not to place undue reliance on any forward-looking statements made by us or on our behalf. Forward-looking statements are made based upon information that is currently available or management’s current expectations and beliefs concerning future developments and their potential effects upon us, speak only as of the date hereof, and are subject to certain risks and uncertainties. We do not undertake any obligation to publicly update or correct any forward-looking statements to reflect events or circumstances that subsequently occur, or of which we hereafter become aware. Actual events, transactions and results may materially differ from the anticipated events, transactions or results described in such statements. Our ability to consummate such transactions and achieve such events or results is subject to certain risks and uncertainties. Such risks and uncertainties include, but are not limited to, the matters set forth below:

  • we offer a comprehensive set of solutions— integrating information technology (IT) product sales, third-party software assurance and maintenance, advanced professional and managed services, proprietary software, and financing, and may encounter some of the challenges, risks, difficulties and uncertainties frequently faced by companies offering a similar set of solutions, such as:
    • managing a diverse product set of solutions in highly competitive markets with a small number of key vendors;
    • increasing the total number of customers utilizing bundled solutions by up-selling within our customer base and gaining new customers;
    • adapting to meet changes in markets and competitive developments
    • maintaining and increasing advanced professional services by retaining highly skilled personnel and vendor certifications;
    • increasing the total number of customers who utilize our managed services and professional services and continuing to enhance our managed services offerings to remain competitive in the marketplace;
    • maintain our proprietary software and update our technology infrastructure to remain competitive in the marketplace; and
    • Reliance on third parties to perform some of our service obligations.
  • our dependence on key personnel, and our ability to hire and retain sufficient qualified personnel;
  • our ability to implement comprehensive plans for the integration of sales forces, cost containment, asset rationalization, systems integration and other key strategies;
  • a possible decrease in the capital spending budgets of our customers or a decrease in purchases from us;
  • our ability to successfully defend any challenges to the validity of our patents, and, when appropriate, license required technology;
  • the creditworthiness of our customers and our ability to reserve adequately for credit losses;
  • the possibility of goodwill impairment charges in the future;
  • national and international political instability fostering uncertainty and volatility in the global economy and financial markets, fluctuations in foreign currency rates and downward pressure on prices;
  • changes in the IT industry and/or rapid changes in product offerings, including the proliferation of the cloud, infrastructure as a service and software as a service, and our dependency on continued innovations in hardware, software and services offerings by our vendors and our ability to partner with them;
  • future growth rates in our core businesses;
  • failure to comply with public sector contracts or applicable laws;
  • our ability to secure our customers’ electronic and other confidential information, and remain secure during a cyber-security attack;
  • our ability to raise capital, maintain or increase as needed our line of credit or floor planning facilities, or obtain non-recourse financing for our transactions or the effect of those changes on our common stock or its holders;
  • our ability to realize our investment in leased equipment;
  • our ability to successfully integrate acquired businesses;
  • reduction of vendor incentives provided to us;
  • significant adverse changes in, reductions in, or loss of our largest customer or one or more of our large customers or vendors; and
  • significant changes in accounting standards including changes to the financial reporting of leases which could impact the demand for our leasing services, or misclassification of products and services we sell resulting in the misapplication of revenue recognition policies.

We cannot be certain that our business strategy will be successful or that we will successfully address these and other challenges, risks and uncertainties. For a further list and description of various risks, relevant factors and uncertainties that could cause future results or events to differ materially from those expressed or implied in our forward-looking statements, see the Item 1A, “Risk Factors” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections in the Form 10-K for the year ended March 31, 2016, as well as other reports that we file with the SEC.

This document may also contain non-GAAP financial information. Management uses this information in its internal analysis of results and believes that this information may be informative to investors in gauging the quality of our financial performance, identifying trends in our results and providing meaningful period-to-period comparisons. For a reconciliation of non-GAAP measures presented in this document, see our earnings press release issued August 2, 2016

August 2, 2016 – FY17Q1

Prepared Remarks

Operator

Good day, ladies and gentlemen. Welcome to the ePlus Earnings Results Conference Call. As a reminder, this conference call is being recorded.

I would like to introduce your host for today's conference, Mr. Kley Parkhurst, Senior Vice President. Sir, you may begin.

Kley Parkhurst, SVP

Thank you for joining us today.  On the call is Phil Norton, Executive Chairman Mark Marron, CEO & President,  Elaine Marion, Chief Financial Officer, and Erica Stoecker, 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 this afternoon and our periodic filings with the Securities & Exchange Commission including our form 10-K for the year ended March 31, 2016 and our 10-Q for the quarter ended June 30, 2016, when filed. The Company undertakes no responsibility to update any of these forward-looking statements in light of new information or future events.  In addition, during the call we may make reference to non-GAAP financial measures and we have posted a GAAP financial reconciliation on the Shareholder Information section of our website at www.eplus.com.

I’d now like to turn the call over to Phil Norton. Phil?

Phillip G. Norton, Executive Chairman

Thank you, Kley. And thank you everyone for joining our Fiscal 2017 Q1 earnings call this afternoon.

As we recently announced, Mark Marron has assumed the position of President and CEO of ePlus, effective Monday August 1. Mark joined ePlus eleven years ago and quickly distinguished himself through both his leadership and business capabilities.  ePlus would not be where it is today without Mark’s contribution to the business over the last eleven years.

In my new role as Executive Chairman, I will continue to work with Mark and our leadership team to ensure a smooth transition, and to help ePlus continue on its current successful trajectory.

We are pleased that ePlus has started Fiscal ‘17 with solid results both on the top and bottom lines.  We are particularly pleased with the strong gross margins we posted in Q1; more evidence that our solutions are resonating with our customers.  We believe ePlus continues to take share in the marketplace given our trailing twelve-month top line growth of 8.1 percent.

While the overall IT environment remains dynamic and challenging, we remain focused on serving our customers and providing them the most value possible through innovative technology solutions to solve their business requirements.

Now, on a personal note, I would like to thank our employees, customers, partners and investors for their support for the last 23 years during my tenure as President and CEO of ePLUS.  Together we have seen the company grow from $43 million in revenue to $1.2 billion and become one of the largest providers of advanced technology solutions in the industry.

I will now turn the call over to Mark for a more detailed discussion of the quarter and of the industry.

Mark Marron, CEO & President

Thank you Phil.

Good afternoon everyone and thanks for joining us on today’s conference call.

First off, I want to thank Phil for his leadership and vision over the last 23 years.  He has built a company that has a strong culture; a company that has a foundation of excellence, based on what is best for the customer and our employees. I’ve worked with Phil for many years, and I look forward to continuing to work with him in the future on strategic initiatives and ensuring a smooth transition.

It is an honor and a privilege to be named CEO of ePlus.  We’ve built a unique approach around providing customers with complex, multi-vendor IT solutions. The case for these solutions is clear: every company is using technology to drive their business outcomes, but they are dealing with technology that is constantly changing, whether it’s the cloud, new approaches to enterprise storage or the proliferation of security threats.  Our service led, engineering-centric business model has helped us become a trusted IT partner for many customers.  We will continue to leverage the expertise we have in-house at ePlus, and utilize our scale and vendor relationships  to provide solutions to some of the most advanced enterprises around the world.

Our financial results for the first quarter of 2017 showed strong growth in net sales and at the adjusted gross billings level.  Our consolidated revenue grew by 10.6% to $298.5 million, and adjusted gross billings of product and services grew 19.6% to $397.5 million.  It’s important to stress that these figures benefited from certain quarter-specific factors, including seasonal spending in the State, Local and Education space. Our gross margin on products and services expanded again this quarter, reaching 20.8%.This is an increase of 80 basis points, and we also realized increases in our operating margin and adjusted EBITDA margin, which both grew at a faster rate than revenue. 

Earnings per diluted share was $1.50, compared with $1.21 in the year-ago quarter, while non-GAAP diluted EPS was $1.54, up from $1.25.  To sum up, we had a solid quarter from a financial perspective.

In this industry, it is important to continuously invest in people, systems and solutions to support future growth.  In recent years, we’ve invested in our client-facing personnel, building up both our capacity and our expertise so we can better serve our customers. This opens up new doors for ePlus in terms of the solutions we can provide, and has allowed us to build out our client base in the mid to Enterprise space.  This includes some of the largest organizations, which tend to have more advanced IT needs, with more predictable budgets for IT spending.

One thing I would like to highlight further is our focus on building out our Business Transformation Group.   We’ve assembled this team over the last 12 months using internal and external resources for a simple goal: to continue our track record of staying ahead of major IT trends, and anticipating  our customers’ IT needs. We’ve assembled subject-matter experts on key topics including security, hyperconverged architecture and cloud computing. They are responsible for understanding where the industry is moving and what will be the most pressing matters for CIO’s and CTO’s in the medium and long-term. By leveraging our lifecycle services, our Business Transformation growth is able to identity important needs for our customers today, as well as lay out a long-term roadmap for the customers’ IT strategy.

The group has already developed some initiatives that we’re excited about for the coming 12 months, and we’re confident it will grow in importance as we move forward.

In conclusion, we had a positive start to fiscal 2017, with robust financial performance. Looking at the broader industry, there is no denying that headwinds in the IT industry remain. The expectation for IT spend in calendar 2016 is still 1-2%, down from calendar 2015. There are also challenges in the storage market, as the industry adapts to greater use of flash storage and the move away from spinning disk. Based on the current outlook, we still believe we will grow modestly ahead of the overall market this fiscal year.

I’ll now turn the call over to Elaine for a closer look at our financials.

Elaine Marion, CFO

Thank you Mark, and welcome all who have joined our call today.

As Phil and Mark highlighted, our first quarter 2017 results show our ability to execute on our strategy, something that drove our fiscal 2016 performance and has continued into fiscal 2017. In a year where industry growth expectations are minimal, we are on track to hit our goal of outpacing the broader IT market.

In the first quarter of fiscal 17, our consolidated revenue grew by 10.6% to $298.5 million. Gross profit increased 14.4% to $67.7 million, which yielded a consolidated gross margin of 22.7%, an increase of 80 basis points. This increase in gross profit and expansion in margin was driven by higher product margins and the continuing shift in our sales towards products and services that are accounted on a net basis, something I will discuss in more detail later in this call.

Total operating expenses were $50.2 million, or approximately 16.8% of total revenues. The largest portion, as always, was salaries and benefits, which was $39.8 million, or 13.3% of net sales. This is above the average range over recent years of 11.6% to 12.4%, due, in part, by the IGX acquisition as well as higher payroll taxes incurred during the first half of the calendar year. G&A expenses were $6.5 million, or 2.2% of net sales, slightly above the level of recent years. Professional fees were $1.8 million, or 0.6% of net sales, in line with fiscal 2016 and fiscal 2015. I’ll go into more detail on expenses when we discuss results from the technology segment.

Our consolidated tax rate for the quarter was 39.0%, compared with a tax rate of 41.5% for last year. This lower tax rate was due to a tax benefit of $400,000 associated with the adoption of the new stock compensation accounting standard. We would expect to end the fiscal year with a tax rate that is comparable to our fiscal year 2016.

Diluted earnings per share for the quarter were $1.50, up 24% from $1.21 in the first quarter of fiscal 2016. Diluted shares outstanding for the quarter were 7.1 million, compared with 7.3 million in the year-ago quarter. Adjusted EBITDA increased 18.4% to $19.3 million, as increased gross profit more than offset higher operating expenses. Our adjusted EBITDA margin expanded 50 basis points to 6.5% compared to 6% from a year ago.

We recently began reporting a new metric, non-GAAP diluted earnings per share, in order to give the market a clearer understanding of performance in operations. This non-GAAP figure excludes acquisition-related amortization expenses and other income.  In addition, this quarter we are also excluding, for comparison purposes, the impact of the tax benefit of $400,000 or $0.06 per share which is related to the adoption of the new share based compensation accounting standard. Our first quarter of fiscal 2017, non-GAAP diluted earnings per share increased to $1.54 from $1.25 last year.

I’ll now turn to our quarterly results from our Technology segment, which accounted for approximately 98% of our total sales. Net sales in the Technology segment grew 11.5% to $291.5 million, while our adjusted gross billings of product and services grew 19.6% to $397.5 million, reflecting an increased demand for our IT solution offering. Adjusted gross billings are sales of product and services adjusted to exclude the costs incurred in the sale of the applicable third-party software assurance, maintenance and services.

Gross margin on product and services rose to 20.8% from 20% in the first quarter of 2016. This 80-basis point increase is attributable to higher product margins and a greater portion of sales of third-party services and software, which are recognized on a net basis.

Operating expenses in the technology segment increased 15.3%, compared to last year, primarily driven by salaries and benefits, which rose 13.8% to $37.5 million in the quarter. Headcount in the technology segment increased by 10.8% to 1,048 employees, about half of which came from the acquisition of IGX last year. We also saw higher variable compensation tied to our gross profit growth.  We reported a $900,000 increase in General & Administrative expenses, which included a small Fx loss associated with the devaluation of British Pounds during the quarter, related to IGX.

Adjusted EBITDA for the technology segment increased 15.2%, to $16.4 million, as higher gross profit again absorbed the impact of higher operating expenses.

Turning now to our results by end market, we remain diversified by industry. On a trailing 12-month basis, the Technology and State, local and education markets were our largest, each accounting for 22% of total net sales. Next was Telecom, Media and Entertainment which accounted for 14%, while the rest of the sales mix split between Financial Services, Healthcare and Other.

Turning now to our financing segment, financing revenues were $7 million, compared to $8.4 million, primarily as a result of lower portfolio earnings.

Direct lease costs fell by 67.1%, due to lower depreciation expense from operating leases. Operating expenses in this segment also declined by 3.3%, mainly due to lower interest expenses tied to lower debt and lower interest rates.

Adjusted EBITDA increased by 40.2% to $2.9 million compared to $2.0 million in the same quarter last year. This was the result of the lower operating expenses I just discussed.

Before I turn to the balance sheet, I want to briefly examine results on a trailing twelve months basis, as we feel that full year results provide a clearer picture of our financial profile, as our results can vary quarter to quarter. On a trailing twelve months basis, net revenues rose 8.1% to $1.2 billion. Gross profit rose 9.4% to $270.6 million, with consolidated gross margin of 21.9%. Opex rose 9.2% to $192.4 million, with salaries and expenses rising 9.6% to $153.9 million. Earnings before tax for the trailing twelve months was $78.2 million, an increase of 1.3% from $77.2 million a year ago, which included non-operating income of $6.2 million from a claim in a class action lawsuit.

Now looking at our balance sheet, we ended the quarter with cash & cash equivalents of $78.8 million. This is down from the previous quarter primarily as a result of the repurchase of 226,792 shares of common stock under the Board authorized plan.  ePlus remains a financially disciplined company with a robust balance sheet that provides us with the opportunity to continue to grow organically and through accretive acquisitions.

In conclusion, we executed well on our strategy and continue to see positive results in operations. We posted a solid start to the fiscal year, and remain confident in our long term strategy of geographic expansion both organically and through acquisition; expanding our services and solution offerings; and making sure we invest in current and emerging technologies to capture future customer IT spend. 

I will now turn the call back over to Mark for closing remarks.

Mark Marron, CEO & President

Thanks Elaine.

In closing, I would like to reiterate that ePlus remains committed to the same strategy today that has always driven our success. We anticipate the trends in the IT industry, identify the highest growth areas, and provide our customers with superior solutions.

By following our strategy we have been able to grow faster than the market while increasing our margins over time. We have a solid balance sheet to fund organic and inorganic growth, and we’re confident we will create further value in our business.

I will now open the floor for questions.

Operator [instructions]

Matt Ramsey - Canaccord Genuity - Analyst

Thank you very much and good afternoon everyone. First of all, Phil, congratulations on your new role and obviously Mark, well deserved and congratulations on the CEO job.  Look forward to working with you more.

Mark Marron - ePlus inc. - CEO

Thanks Matt.

Matt Ramsey - Canaccord Genuity - Analyst

Yes, so I guess my biggest question and I think the one that folks will want to dig into in the coming days is the progression of gross margin in both of the business segments.  I wonder if you could talk a little bit more about that and I guess the sustainability of it and how should we think about I mean is this 20.5% or a bit better, is that a sustainable products and services gross margin going forward?  Obviously, that moves the financials quite a bit. So, thank you.

Mark Marron - ePlus inc. - CEO

Okay, thanks Matt.  So, a couple of different things.  One, for our gross margins this quarter, a lot of things came together.  One of the biggest being the gross to net was a bigger percentage than it normally is, so that affected our gross margins.  As I think, from prior calls, our long-term strategy is to continue to find ways to have margin expansion by increasing our services and the solutions that we sell that are more margin rich.

With that said though, there are a few things that come into play, such as our land and expand program that we had talked about it.  I don't think it was last earnings call, but the prior call to that where we talked about bringing on some of the bigger enterprise customers in the US and in the world and what they are normally based on is kind of project or product base and we'll go in and win those deals and then we'll look to expand our margins over time. So we are very happy with our 80 basis points growth both at a consolidated and at a product and services level.  A lot of that came from our gross to net at a very big percentage.

Matt Ramsey - Canaccord Genuity - Analyst

Got it and I guess just to be more specific then, is this a level we should think about being sustainable and maybe you could just talk about a little bit of the -- obviously that gross to net ratio, but then any other big moving parts that could drive this up or down on a quarterly basis, but I guess the big question is the sustainability of these new levels?

Mark Marron - ePlus inc. - CEO

Well, I do believe there is some upside, but like I mentioned, the gross to net was a bigger percentage.  So that will change the mix from quarter-to-quarter. We are being brought in by vendors and customers into bigger deals where they'll start with smaller margins and then over time, we'll look to bring the blended margins up higher by including more services and multi-vendor kind of complex solutions that those customers are looking for.  So the overall answer would be yes, we're going to look to continue to expand those margins, but this quarter was a little bit outside the norm as it relates to our gross to net.

Matt Ramsey - Canaccord Genuity - Analyst

Got it and then I guess for my last one and then I'll jump back in the queue, Elaine, maybe you could talk about the same question around margins, but the financing segment is a lot smaller obviously, but the last couple of quarters, the margins have been materially higher than we've seen historically. Maybe you could talk about that in a little bit more detail and I guess the same question there is sustainability of that new margin level? Thank you.

Elaine Marion - ePlus inc. - CFO

Sure, in the financing segment, we think that that's an important contributor not only to our operating income, but it also helps us on the technology side, being able to finance equipment when there is not cash availability on the customer perspective. It's going to continue probably along the same lines in the longer term in terms of the contribution to operating income as well as the percentage of revenues, the technology segment is just really outpacing it in terms of revenue growth.

Matt Ramsey - Canaccord Genuity - Analyst

Got it, thanks very much.

Operator

Anil Doradla, William Blair.

Anil Doradla - William Blair - Analyst

Hey guys, congrats on my side for the good results and Mark, extending my congratulations to you too and Phil, for building this great company.  So I have a couple of questions. So Mark, you talked about gaining share, obviously you've had some nice growth here.  Can you share some color as to why you believe it's more market share gainer because the reason why I say this is that some of the end markets that you guys deal with like security, emerging technology, these are very fast growth areas.  So was it largely driven by you guys just being in the fast growth areas or are you seeing some material share gains from some of your competitors.  So, any color on that would be great.

Mark Marron - ePlus inc. - CEO

Okay, thanks.  First off, thanks for the comments earlier Anil. One, we do believe we're in the right spaces that are hot in the market as it relates to security and all the different types of converged and hyperconverged solutions that our customers are looking at.  As we've talked about in prior calls, we've built out our service offerings from everything from assessments all the way through to our -- what we call our optimized services with managed services and staffing and things along those lines.

So we do believe based on where we've invested both in resources and offerings that has helped, one, allow us to bring on net new clients or go wider and deeper with existing clients.  As it relates to some of the verticals, we also saw some upside in state, local, and education mainly in the higher Ed and K-12 space.  We had an uptick in technology, healthcare, and finance as well.  So I guess the overall answer would be is we believe we've invested in the right areas.  We've put the resources in place to be able to provide those solutions and services to our customers and we're focused on some of the different verticals where we think there might potentially be upside by putting that focus on those verticals.

Anil Doradla - William Blair - Analyst

Great, also you talked about the gross and net levels being high.  That's what's positively impacted your gross margins.  Mark, when you dig a little bit deeper into it, can you help us understand what levers you have in terms of -- coming back to the previous question, which was asked was, what levers can you pull to perhaps grow it?  Is it just adding more sales people?  Is it adding more strategic accounts where you're bringing with these partners -- I expect it's a combination of these things, but can you help us understand and appreciate how much control do you have on maintaining these gross to net levels?

Mark Marron - ePlus inc. - CEO

The gross to net.  So here, maybe this will help Anil.  So, one, the gross to net is still always about gross profit, if you will, the actual dollars.  Probably about three years ago, we built up what we'd call is our renewals team and this is the team that works with all of our key vendors and their renewals in terms of making sure that our customers are happy and supported from a renewal -- from a maintenance support, fixes, phone support, and things along those lines.

In addition to that, probably about a year or so ago we built what we called enhanced maintenance services which is where not only will they get that support from the vendor, we provide level one support for those customers.  So what we're seeing is we're getting our renewal rates are increasing as a percentage because we're providing what we believe more value to the customer from a support standpoint.  It's also important to note that it's a key driver for us.  The reason being is if a customer is on maintenance support and doing renewals, you then have a really good chance of going in and either upgrading or selling additional technology.  If you lose that renewal, it's a little bit tougher to go back in and sell products.

Anil Doradla - William Blair - Analyst

So is it in a nutshell, it's basically providing higher levels of technical support, I mean that's what it boils down to?

Mark Marron - ePlus inc. - CEO

Not in total.  So in some cases, yes, where we have the enhanced maintenance services that I had talked about, but in some cases it's just a team that's focused on doing renewals with our customers.  Key thing to note, about four years ago, we made the decision that, that was an important part of our -- what I'd call annuity business, if you will, an important part of our strategy of -- I'll say locking down clients.  So we have the ability to go back in and go wider and deeper with other technologies.  We made that decision to invest in resources at that time to go focus on renewals for our top vendors and then over time, we found ways that we could provide additional support or services that our customers were looking for.

Another example of that, Anil, would be our managed services, which we talked about on prior calls.  This is where we'll do the proactive monitoring and management of their environment.  So if you think about it, we can take a customer from hey here we'll your renewal and you'll get your standard call-ins and bug fixes and things along those lines to -- you've got your enhanced maintenance services where we can provide this higher level of support and kind of one throat to choke especially in like multi-vendor kind of solution standpoint is where it really stands out and then on top of it, we could do this proactive monitoring and management of their environments, we could proactively push if there's any issues within their environment and do quarterly business reviews on things they need to be aware of or start to think about.

Anil Doradla - William Blair - Analyst

Thanks a lot, guys, and contrats.

Mark Marron - ePlus inc. – CEO

Thanks, see you soon.

 

Operator

Matt Sheerin, Stifel.

Matt Sheerin - Stifel - Analyst

Yes, thanks and good afternoon everyone.  Just a couple of questions from me.  I'd appreciate that and I understand that you don't give forward guidance, but if you look at the last year in your September quarter, you had a very, very strong quarter of sequential growth of 20% plus.  I know there is a seasonal strength typically in your September quarter, but the comps are going to be very tough particularly on the topline.  So can you give us any color sort of and the expectations and seasonality here this year what you're seeing versus what you saw last year?

Mark Marron - ePlus inc. - CEO

Well, first off, how are you Matt?  It's tough because this is, as you know, this is a tough compare to last year from a quarter perspective.  We still believe we'll continue to outpace the market and believe that pretty strongly, but there are some things out in the market that are some headwinds that we're dealing with.  So the storage market is fragmented, but we actually believe we're fairly well positioned in that space based on the relationships and abilities that we have with both your spinning disk as well as flash in both existing and emerging vendors, but you've got GDP is down, Gartner projects I think 1% to 2% on IT spending growth this year.  So there's a few things out in the market that have cause for concern.

With that said, we are going to continue forward with our strategy of expanding our footprint, looking to become the cloud solution provider of choice for our customers, become the security go to partner for our customers, and we'll continue to expand and enhance our service offerings and capabilities.

Matt Sheerin - Stifel - Analyst

I know, I understand, that's fair.  You just had such strength last year that obviously the comps look pretty tough and then in terms of your expenses going forward, SG&A, it sounds like you're continuing to invest in skillsets and people.  So what should we be thinking about SG&A here.

Mark Marron - ePlus inc. - CEO

Well, I think it would kind of continue along the lines. You may see some benefits over the coming quarters as it relates over the next 12 months, but we are going to continue to invest in what we call customer facing headcount, Matt.  So, both from a sales and services, we believe that we've built a strong nucleus that we can kind of add on additional resources and grab more market share from some of our smaller competitors and also do a little bit more from an account coverage and working with the vendors to kind of bring on net new both mid and enterprise customers.  So we will continue to invest in key focus areas and what we call customer facing employees.

Matt Sheerin - Stifel - Analyst

And then on storage, could you give us a sense of what percentage of your storage products or your sales are legacy versus flash, emerging technologies?

Mark Marron - ePlus inc. - CEO

We don't really break it out, Matt.  What I can tell you is that for the year-over-year, we were very comfortable with both our legacy as well as emerging vendors that there are enough opportunities and programs in place for us to continue to grow with them.

Matt Sheerin - Stifel - Analyst

Okay, and your comment on strength in state, local, and education and particularly on the education market, the K-12 where there was a little bit of a lull for a couple or three quarters I think tied to some funding issues with E-rate, what are you seeing in that market?

Mark Marron - ePlus inc. - CEO

In terms of the E-rate, let me do this Matt, if you don't mind.  One other thing on the storage that I think a lot of people, not miss but even though you have flash and all the efficiencies and there's cost savings and things like that versus some of the legacy or spinning disk if you will, if you look at the world we live in, when you think about IoT and all the things that kind of go into that, data is growing at a faster clip.  So there really is more opportunity.

The other thing that we think sets us apart is we have the ability to kind of pull together these conversion infrastructures or hyperconverged infrastructures, which is a combination of compute, storage, and networking.  So that's where we think we can continue to grow both with the storage vendors and the other vendors alike while adding in our services.  On the SLED space, we are seeing some uptick in higher Ed and K-12.  On the E-rate side, it's actually down a little, but I believe it's down nationally.  I don't have that for a fact.  So I'd have to check that, but I'm pretty sure overall nationally E-rate spending is down.  I thought I remember seeing it was down like 15% or 20% at a national level, not meaning with ePlus, just overall.  So we've seen our fair share of awards and also what we've taken down with E-rate, but it's down a little bit year-over-year.

Matt Sheerin - Stifel - Analyst

Okay and just lastly from me. Cisco I know is your biggest customer. Could you tell us what percentage of revenue that represented?  Or your supplier, rather.

Elaine Marion - ePlus inc. - CFO

It's right around 49%, 50%.  It's still in that area.

Matt Sheerin - Stifel - Analyst

So no change. Okay, all right, thanks very much and congrats on the promotion and the management changes.

CLOSING COMMENTS [AFTER Q&A)

Operator

Thank you. This does conclude the question-and-answer session of today's program . I'd like to hand the program back to Mark Marron for any further remarks.

Mark Marron - ePlus inc. - CEO

Thank you everyone for joining us today and we look forward to staying in touch in future quarters. Have a nice day. Take care.

Operator

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.