Earnings Conference Call Transcripts

Conference Call Discussing Earnings for Fiscal 2018 First Quarter Results

Safe Harbor Statement

 

This transcript of the earnings call that occurred on August 2, 2017, 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 of the earnings call, 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:

 

  • national and international political instability fostering uncertainty and volatility in the global economy including exposure to fluctuations in foreign currency rates and downward pressure on prices;
  • significant adverse changes in, reductions in, or loss of our largest volume customer or one or more of our large customers or vendors;
  • reduction of vendor incentives provided to us;
  • we offer a comprehensive set of solutions— integrating information technology (IT) product sales, third-party software assurance and maintenance, our advanced professional and managed services, our proprietary software, and financing, and encounter the following challenges, risks, difficulties and uncertainties:
  • 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 competent 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;
  • performing professional and managed services competently;
  • maintaining 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 to maintain certain customer relationships, 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; 
  • the creditworthiness of our customers and our ability to reserve adequately for credit losses;
  • the possibility of goodwill impairment charges in the future;
  • 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 contracts may not be adequate to protect us, and we are subject to audit in which we may not pass, and our professional and liability insurance policies coverage may be insufficient to cover a claim;
  • our ability to raise capital, maintain or increase as needed our lines of credit with vendors or floor planning facility, or obtain debt for our financing transactions or the effect of those changes on our common stock or its holders;
  • changes to or loss of members of our senior management team and/or failure to successfully implement succession plans;
  • disruptions or a security breach in our IT systems and data and audio communications networks;
  • our ability to realize our investment in leased equipment;
  • our ability to successfully perform due diligence and integrate acquired businesses;
  • our ability to protect our intellectual property rights and successfully defend any challenges to the validity of our patents, or allegations that we are impinging upon any third party patents, and the costs associated with those actions, and, when appropriate, license required technology; 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 or inaccurate costs and completion dates for our services which could affect our estimates.

 

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, 2017, 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, 2017, a copy of which is posted on our website at www.eplus.com/presentations.

 


 

August 2, 2017 – FY18 Q1

Prepared Remarks

Operator

Good day, ladies and gentlemen, and welcome to the ePlus Earnings Conference Call. I would now like to introduce your host for today's conference, Mr. Kley Parkhurst. Sir, you may begin.

Kleyton L. Parkhurst, SVP

Thank you for joining us today.  On the call is 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, 2017 and our form 10-Q for the quarter ended June 30, 2017, 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.

 

Reclassifications of prior period amounts related to numbers of shares and per share amounts have been made to conform to the current period presentation due to the March 31, 2017 stock split. The effect of the stock split was recognized retroactively in the stockholders’ equity and in all share data. The financial statements include the effect of the stock split on per share amounts and weighted average common shares outstanding for each of the three-month periods ended June 30, 2017 and 2016.

 

I’d now like to turn the call over to Mark Marron. Mark?

Mark Marron, CEO & President

Thanks Kley and thank you for participating in today’s call to discuss our first quarter 2018 results. We were very pleased with our financial and operating results for the first quarter of our 2018 fiscal year. Net sales increased 23% from the prior year’s first quarter, to $367 million, with gains in both our Technology and Financing segments.

 

The majority of this quarter’s revenue growth was organic, driven by growth across our customer base, plus the continued rollout of several large competitive projects to some of our largest customers.  Even normalizing for those large projects in the quarter, our growth significantly outpaced the overall market.

 

Based on our operating model, we were able to convert sales growth into  strong  earnings metrics, as net earnings and diluted EPS increased 25.8% and 28%, respectively, while we continued to invest to support future growth.

 

Elaine Marion, our CFO, will discuss our financial results in detail so I will focus on several business highlights.

 

We continue to focus on the high growth areas of Cloud, Security and Digital Infrastructure and the consulting and managed services that our 3,200 mid-market and enterprise customers are looking for in today’s IT environment.  Sales of our security products and services as a percentage of adjusted gross billings was 17.1%, up from 13.7% only one year ago and 16.1% for all of fiscal 2017, supporting our expectation for continued strong demand from customers and our success in meeting this need. We continue to see opportunities with today’s cyber security threats. Customers are looking for ePlus to provide consultative services and assessments to help evaluate and build road maps for the future. For one customer, ePlus was asked to evaluate all industry leading next-gen firewalls and then help select the final two vendors. We then helped perform in-depth,  4-week POCs for each vendor and worked closely with the customer to develop the final selection criteria. This project enables the customer to have the capability for strategic growth and ease of integration of additional mergers and acquisitions. As a result of this project ePlus was asked to assist with their end point strategy and deployment as well.

 

Our strong first quarter earnings performance was achieved in spite of a 12.1% year-on-year increase in headcount in our technology segment.  While we continue to maintain our cost-discipline, we also continue to invest in our future by bringing on and retaining customer facing engineering and sales personnel to deliver advanced solutions to our customers. 

 

I would also like to highlight the success of our Financing business segment, which posted a 29% revenue increase in the first quarter, representing the second consecutive quarter of double-digit growth. As you know, this business is transactional and can produce uneven results.  Importantly, however, we see our presence in this business as a positive differentiator for ePlus. We can offer options at the point of sale (buy or lease) as well as long-term, automated, managed programs which can even be tied into the customer’s ERP systems.     Much of the recent momentum in our financing segment is a result of sales coordination and the cooperation we are seeing between our operating segments.

 

Turning now to acquisitions, in May, we closed on the acquisition of OneCloud Consulting, a long-time partner, with whom we’d had many successful joint customer engagements over the past few years.  With this acquisition, we have expanded our ability to drive transformative solutions for our customers along the lines of IT automation, software-defined initiatives, microservices and containers, application modernization and cloud management.  This includes being able to support customers whether they have a cloud-first strategy or to help them modernize existing legacy systems with hybrid or private cloud environments..  Effectively, combining OneCloud with ePlus’ full range of advanced technology solutions, managed and professional services, financing and lifecycle management tools, allows us to offer one of the most comprehensive portfolios in the technology consulting and services market today.  So far, we have seen early interest from our customers in openstack opportunities, network automation, staffing and our training capabilities.

 

Acquisitions remain an important component of our growth strategy, and our balance sheet and operational and integration capabilities can readily support additional transactions. We continue to seek out strategic deals that deepen our expertise around high-growth solutions and broaden our geographic footprint. 

 

In summary, we are very pleased with our first quarter financial results, and as importantly, the progress we are making across our strategic objectives. While we do not expect to maintain this top line growth rate, our results reflect our strong competitive positioning in the higher growth areas of IT services, the consultative approach we take to help our customers find the right solutions, and the strength of our business model.

 

I will now ask Elaine  to review our first quarter 2018 financial results.

 

Elaine Marion, CFO

Thank you Mark, and thank you, everyone, for joining us today.

 

We are pleased to report a strong start to fiscal 2018. We experienced double-digit growth in the first quarter for net sales, adjusted gross billings and earnings. Our strategy is to grow revenue faster than the overall market by focusing on high growth solution areas, such as cloud, security and digital infrastructure, while emphasizing services to provide key business outcomes for our clients.

 

Now let me give you some color on our financial performance in the first quarter of fiscal 2018. Our net sales grew 23.0% to $367.2 million year-over-year. The top line increase included several large projects for major enterprise customers. We also saw increases from customers in the Technology, Telecom and the Financial industries. 

 

We reported double-digit year-over-year gross profit growth. Our gross profit increased 14.7% from a year ago to $77.6 million, while our gross margin decreased 160 basis points to 21.1% year to year.  This decline was primarily due to a shift in product mix, and a large, competitively bid project which partially shipped during the quarter.

 

Operating expenses increased 13.8% to $57.1 million, principally due to higher salaries and benefits, reflecting the year-over-year headcount increase of 11.3% to 1,223 employees and higher healthcare costs. The higher headcount was largely due to recent acquisitions.  As a reminder, the acquisition of the IT equipment and services business of Consolidated Communications in December 2016 added 48 employees, and our more recent acquisition, of OneCloud, added 57 employees. The personnel additions include 113 sales and engineering positions.

 

We reported operating income of $20.5 million, up 17.3% year to year. The higher gross profit from both the technology and financing segment contributed to the upside as did our carefully managed expenses, which grew at a slower pace than revenue.

 

In the first quarter of fiscal 2018, we had a lower effective tax rate of 35.4%, mainly due to a $1.4 million benefit associated with the vesting of share based compensation.  Excluding the tax benefit, our effective tax rate was 41.9% for the quarter. 

 

Net earnings of $13.4 million increased 25.8% on 23% net sales growth. Fully diluted earnings per share were $0.96, up 28% from last year's $0.75 result.

 

Non-GAAP diluted EPS were $0.90, up 16.9% year to year. This metric excludes acquisition-related amortization expense and other income on a tax-adjusted basis and the tax benefit recognized for the vesting of share based compensation during the quarter. Our weighted average diluted share count was 14 million for the June quarter, down 1% from the prior-year's first quarter share count of 14.2 million, which is adjusted for the 2-for-1 stock split on March 31, 2017.   Adjusted EBITDA was up 17.2% year-over-year and amounted to $22.6 million while our adjusted EBITDA margin decreased 40 basis points to 6.1%.

 

I will now discuss the quarterly results from our technology segment, which is our largest segment, accounting for 97.5% of revenue this quarter. Technology net sales of $358.1 million were up 22.9% over last year’s first quarter. Several large projects for major enterprise customers contributed to the upside, as did growth from our Technology, Telecom and Financial clients.

 

As for customer end-markets, technology and SLED continue to be our largest, on a trailing twelve month basis, accounting for 25% and 19% of the technology segment net sales, respectively.  Telecom, media and entertainment made up 15% of net sales and healthcare, 11%. The remainder includes financial services at 13%, and 17% from several other client types.

 

Adjusted gross billings of product and services of $481.7 million were up 21.2% from $397.5 million a year ago. As a reminder, adjusted gross billings are sales of product and services adjusted to exclude costs incurred for applicable third-party software assurance, maintenance and services.  The gross margin on sales of products and services was 19.2%. This 160 basis points year-over-year decline was due to a shift in product mix and a large competitively bid project partially delivered during the quarter.

 

Technology segment operating expenses of $53.6 million increased 14.0% from $47.0 million in the prior fiscal year first quarter. This was due primarily to higher salaries and benefits, which were up $5.6 million or 15.0%. This increase includes $1.8 million of incremental variable compensation due to the increase in gross profit. The remaining increase was due to additional personnel and an increase in healthcare costs. As of June 30, 2017, we had 1,175 employees in our Technology segment, a 12.1% increase compared with 1,048 employees as of June 30, 2016.

 

General and administrative expenses increased $400 thousand, or 6.2% due to increases in travel and software license and maintenance fees.  Professional fees were up $300 thousand, or 18.9%, due to legal and accounting fees incurred for the OneCloud acquisition.

 

Technology segment adjusted EBITDA was up 10.6% to $18.1 million, with the adjusted EBITDA margin of 5.1% down 50 basis points year to year due primarily to the decline in gross margin of products and services.

 

Moving to the financing segment performance. We had a solid first quarter and delivered a 29% increase in net sales totaling $9.1 million. Gross profit improved by $1.9 million or 31.5% to $8.0 million year to year. The increase was the result of higher revenue from an increase in sales of financing transactions originated in the quarter and revenue upside from volume-based consumption financing arrangements.

 

Operating expenses were up by 10.3% to $3.5 million, largely due to an increase in reserves for credit losses of $200 thousand. Adjusted EBITDA of $4.4 million was up 55% year-over-year due to the higher transactional gains and consumption based financing arrangements I mentioned previously.

 

Moving to the balance sheet, we ended the quarter with cash and cash equivalents of $98.2 million. Inventory levels and deferred revenue remained high, reflecting large projects underway with high credit quality customers.   Our cash conversion cycle at 26 days at the end of the first quarter of fiscal 2018 was down from 38 days for the fourth quarter of Fiscal 2017, but up from 18 days a year ago. The year over year increase was due to the step-up in inventory for the committed projects that I previously mentioned, but sequentially, we are moving in the right direction.

 

Going forward, we will continue our strategy of identifying emerging trends and developing diversified IT solutions for our existing and new customers. We still anticipate the Company will grow ahead of the low-single digit level of the overall IT market as our focus on cloud, security and digital infrastructure continues to be successful, as evident in our top line growth.

Thank you for your time today. I will now turn the call back to Mark.


Mark Marron, CEO & President

Thanks Elaine.

 

Our results in the first quarter were very strong, and ePlus remains well-positioned to generate revenue growth ahead of overall IT spending.  We will continue to make investments to broaden our portfolio and capabilities around security, cloud, digital infrastructure and related services which meet the business outcome requirements of our customers in today’s market.

 

Operator, I would now like to open the call for questions.

QUESTION AND ANSWER

Operator

Our first question is from the line of John Mucher with Stifel.

John M. Mucher – Stifel

I'm on here for Matt today. Just one question from me. Looks like your tech's end markets grew almost 40% year-over-year. How much of that is related to your largest customer in that segment? And then what are the expectations for that revenue contributions as wind down as the projects are completed? And then kind of what are your expectations in terms of growth as you look to replace that?

 

Mark Marron - ePlus Inc. - President and CEO

So, John, you broke up a little bit. Are you talking about our tech segment and the growth that we saw in this quarter?

John M. Mucher – Stifel

Yes, like, the end markets year-over-year. I mean, how much of that is from that largest customer? And then what are the plans to replace that growth in the future as those projects wind down?

Mark Marron - ePlus Inc. - President and CEO

Okay. Yes. So there are a couple different things. What we've discussed in prior quarters, John, was how we're going about covering the accounts both at a midmarket all the way to enterprise. And as we've kind of scaled our solutions to move up the stack, what we've seen is we've been brought into bigger, higher-ended market and enterprise accounts. As it relates to the quarter, what I can tell you is, even with the large deal that we had mentioned, we would still significantly outpace the IT market spending overall. It helped drive our top line by a good percentage. It actually lowered our gross margin since it was a competitive deal. The good news is that would increase our GP dollars and ultimately, we benefited on the bottom line based on expense control and everything else. So all the earnings metrics wound up the way we hoped it would. As any deal -- any large deal that you deal with, there is always cycles that are involved with some of these bigger deals. So I can't predict what the future would hold as it relates to replacing that revenue.

Operator

And our next question is from the line of Matthew Galinko with Sidoti

Matthew Galinko – Sidoti

I guess, just going back to M&A and how the pipeline for deals is looking and your capacity to integrate any subsequent deals from your prior?

 

Kley Parkhurst - ePlus Inc. - SVP of Corporate Development and Assistant Secretary

Thanks, Matt. I'd describe it as a target-rich environment right now. I think in our industry with technology changing, there is an entrepreneurial spirit and new companies are forming and have formed over time and they sort of mature and then are ripe for consolidation. So we believe there is lots of targets, and we're looking at a lot of different deals. Our strategy is still to expand geographically by doing greenfield as well as tuck-under acquisitions in markets that we're already in, as well as execute ones that really solve a -- or create opportunities for transformational and emerging technologies like OneCloud that we just did, which has turned out to be -- we think, will be very good. Valuations are not reflecting in the private market, the same appreciation that's happened in the public market. So I think there is still a lot of viable accretive acquisitions that can be done. And in terms of integration operations, I think our operating platform for buying a solution provider or a VAR remains one of the strongest in the industry. Hopefully that answers your questions.

Matthew Galinko – Sidoti

That is, that's helpful. And it kind of leads to a couple of follow-ups, if you don't mind. One would be, you did reach somewhat outside of the U.S. on a prior deal. So I'm just wondering if international continues to be any kind of focus for you in terms of subsequent M&A. And then maybe just how you think about the competitive landscape as you go into these deals? Are there typically multiple bids for the assets you're looking at? Or are you more or less alone?

Mark Marron - ePlus Inc. - President and CEO

Matt, it's Mark. So I'll start with your second question first. So normally there are multiple bidders or multiple players involved in the acquisitions that we look at, at least the ones we have seen in the past. As it relates to the international, you're referring to 2 things, I believe. One, we acquired IGX about 1.5 years ago. And that was our first foray into the international space. And then with the OneCloud acquisition that expanded our capabilities or our reach, if you will, into Asia-Pac for the first time. Part of the reason that we're doing, some of our bigger customers are looking for us to support them on a global or worldwide basis. So for the right opportunities, yes, we'll continue to look at what's out there and see if we can expand our footprint. But once again, it would have to be the right opportunity.

Operator

And I'm not showing any further questions in the queue. I would like to turn the call back to management for any final remarks.

Mark Marron - ePlus Inc. - President and CEO

Okay. Thank you, operator. If I could close with just one thing. We feel good about the quarter that we delivered. We believe in our strategy in terms of how we're executing against our growth strategy. We believe we have a strong balance sheet that allows us to continue to invest in headcount as well as offerings that our customers are looking for. And we'll continue to look for the right opportunities to continue to expand both our capabilities as well as offerings. With that, I'd like to thank all of you for participating in today's conference call, and we look forward to seeing some of you at the upcoming investor conferences. Thank you, and have a good day.

Elaine Marion  - ePlus Inc. - CFO

Thank you.

Kley Parkhurst - ePlus Inc. - SVP of Corporate Development and Assistant Secretary

Thank you.

Operator

And ladies and gentlemen, with that we conclude the program, and you may all disconnect. Have a wonderful day.