Conference Call Discussing Earnings for Fiscal 2015 Third 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 similar companies, 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;
    • continuing to enhance 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 decrease in the capital spending budgets of our customers or purchases from us;
  • our ability to protect our intellectual property and 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;
  • uncertainty and volatility in the global economy and financial markets;
  • 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;
  • our ability to secure our and our customers’ electronic and other confidential information;
  • 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;
  • 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 losses of relationships with major 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, 2014, 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 February 5, 2015.

February 5, 2015

Prepared Remarks

Operator

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

I would now like to turn the call over to Kley Parkhurst, Senior Vice President. You may begin.

Kley Parkhurst, SVP

Thank you Eric, and thank you everyone for joining us today. With me today are Phil Norton, Chairman, President and CEO of ePlus; Mark Marron, Chief Operating Officer and President of ePlus Technology, 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, 2014 and our 10-Q for the quarter ended December 31, 2014, 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 our website at www.eplus.com.

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

Phillip G. Norton, Chairman, CEO and President

Thank you Kley and good afternoon everyone. Thanks for participating in today’s call to review third quarter and nine month results and the trends that we have seen to date in fiscal 2015.

To summarize:

We are pleased to report on excellent Q3 results, in which we saw:

• double-digit revenue growth

• significant gross margin expansion; and

• 61.4% increase in diluted earnings per share on a reported basis, or a 24.2% increase, if you exclude non-operating earnings related to a class action lawsuit claim

We think this performance is particularly noteworthy as it was achieved while we continue to make investments in people and technology in order to support future growth.

Our results to date support the strategy that we have discussed with investors, and that is understood and rewarded throughout our organization—namely that we expect our market share gains to come from our focus on the fastest growing segments in the market, including data center infrastructure, networking, security, cloud and collaboration. And, we have built a solid professional services capability to provide customers with complex IT solutions around these needs. This is differentiating ePlus in the marketplace and has enabled us to report revenue growth of almost 10% for the nine months ended December 31, 2014, well ahead of the industry forecasts that we have seen for domestic IT spending on both products and services.

Year-to-date growth in profitability was driven, in part, by a 90 basis point increase in our consolidated gross margin, to 21.2%. Operating income was up 20.7%, and non-GAAP diluted eps, excluding non-operating income, increased 31% to $4.38. Our share count decreased 7.5%, primarily due to share repurchases.

Nine month figures from our technology segment further substantiates how ePlus’ positioning as an advanced solutions provider, with an emphasis on consultative selling, multi-vendor integration, and focus on the fastest growing segments and vendors in the industry is resonating with clients. Segment revenues increased 10.4% and segment earnings were up 24.9%, thanks to a more favorable business mix and increased services penetration. The leasing segment had slightly lower operating income for the quarter and nine month periods, due to a shift in business mix from end-user FMV type leases to vendor-originated full pay out leases, and a lower volume of financing transactions with federal government integrators. Also during the quarter, we received non-operating income of $6.2 million related to a claim in a class action suit.

The leasing segment continues to be an important facilitator and competitive differentiator for technology sales transactions, and Mark Marron, our COO, will provide an example later in this call.

Now, I would like to turn the call over to Mark who will provide additional detail on third quarter business developments at ePlus. Mark:

Mark Marron, Chief Operating Officer

Thank you Phil, and good afternoon everyone. ePlus has many advantages in the marketplace, that distinguish us both from the traditional IT reseller as well as single point solution providers, and also make ePlus the preferred go-to partner of leading technology vendors. I’d like to provide some additional color on our results this quarter, and talk about why we believe ePlus is able to compete and win market share in the high growth IT areas that Phil discussed.

• First, we have an engineering-centric, consultative approach to all customer engagements. This is where we leverage our PBSO model, which stands for Plan, Build, Support and Optimize. This model allows us to provide the services and support our customers’ needs, from the upfront analysis and design, to configuration and integration of solutions, all the way through to proactive monitoring and managing their environments. It gives us multiple, regular touch points with our clients that allow us to understand their business requirements better, and build technology roadmaps through which we can provide additional product and services.

• Second, as a nimble company with expertise in the most in-demand solutions, and excellent relationships with emerging vendors, we can tailor our offerings to be responsive to the needs of today’s CIOs, who face pressure to maximize their IT budgets and deliver business outcomes. In many cases, our customer’s business is IT, and the CIO is directly responsible for revenue growth and profitability. They need a partner like ePlus to facilitate their plans.

• Third, our vendor relationships and certifications give us flexibility to approach IT challenges from a variety of different angles and our highly trained technical staff enable us to provide clients with increasingly complex solutions to their IT problems.

Let me spend a few minutes highlighting some real examples of how we leverage these advantages and provide value to our customers.

One example of how these differentiators drive business development is the case of an international financial institution, one that has traditionally outsourced a significant portion of its IT needs. They had reached the expiration of their Cisco SMARTnet maintenance contract, which had been provided by another vendor, and were initially looking for just a few competing bids on the procurement side to award the renewal primarily based on price. We took a more value added approach. We examined their networking infrastructure and identified numerous areas that were deficient and needed to be optimized. During the sales process, we brought our security experts into the customer to better understand their long term requirements for security and how that aligned with our Managed Services strategy. A key to winning the contract was our ability to provide security assessment and remediation services. At the end of the process, the customer signed a multi-million dollar, multi-year contract covering SMARTnet maintenance, managed services, and ongoing security services. The contract has a healthy gross margin, and the ongoing, multi-year term provides us with a platform for continuous interaction with the customer’s IT infrastructure, giving us unique insight into this customer’s IT needs and the opportunities to cross-sell and up-sell synergistic products and services in the future.

Another example of our ability to tailor our solutions and respond to individual CIO needs relates to a recent a win we had in the mobility space. In the third quarter, we spoke to an insurer with a national footprint who was seeking to upgrade their Citrix technology for their insurance agents in the field. The CIO’s mandate was clear: he needed to add users to the Citrix system, and he also had to upgrade functionality, specifically in file sharing between agents, and he had to accomplish this by the end of 2015. Execution of the project, which was urgent, was going to be delayed due to budgetary constraints…. their budget wasn’t going to increase until 2016. This is a common dichotomy between real time business needs and IT budget shortfalls that our customers face all the time. In this situation, ePlus’ financing capability was crucial. We were able to leverage our finance knowledge to sell the urgently needed solution. From our perspective, we facilitated a sale that might have been delayed or not happened at all, increasing revenue and gross margin. From the customer’s perspective, they used a single point provider to meet their business needs, in an easy and timely manner. Our financing intellect was definitely the differentiator in the sale, and it is a competitive advantage that ePlus has in our marketplace.

Another example. Last quarter, we discussed the launch of our new on-demand staffing business. I’m pleased to report that demand for this service among our customer base has been strong. To pick a single example, we have a major New York-area hospital that was an existing client, and had recently purchased technology for a network refresh. As you can imagine, this is a major undertaking that requires extra staffing, but only for a temporary period. The management at the hospital went straight to ePlus staffing for these extra resources. At the end of December, we had six team members working on-site, and it soon grew to 10. Our client benefited by having the temporary staff needed to support the network refresh, without having to take on any additional full-time employees. From ePlus’ perspective, not only are we generating significant revenue per month, but because our staff is engaged in the everyday IT organization of this client, we have excellent visibility into the customer’s IT and business requirements, and we have the opportunity to provide additional products and services as opportunities arise.

Before I turn the call over to Elaine for a closer look at our financials, I want to mention some of the ways we’re expanding our capabilities. In November, we announced that we are now certified to provide managed services for FlexPod. We’re already NetApp’s FlexPod national partner of the year, and we’re certified by both NetApp and Cisco to handle implementing and configuring virtualized data center solutions and can provide level 1 support. With the addition of FlexPod managed services, we’re able to help our customers through the entire lifecycle, including assessment, design, configuration and logistic services in our integration centers, installing and implementing the solutions, and providing proactive managed services and staffing to optimize their environments.

Another interesting offering is video managed services. Video conferencing is an increasingly popular solution among businesses to enhance collaboration, accelerate business outcomes, and reduce travel costs, and is a natural solution for middle market and enterprise accounts. We’re providing technology so that anyone with a screen can video chat, which is a real advantage for these customers. Being able to proactively monitor and support these environments for our customers is key to delivering ROI. Last but not least, we were recently certified by HP as a Gold Cloud Builder Specialist partner, allowing us to work with clients to transition them to the cloud with HP’s industry-leading private HP CloudSystem. HP is a key vendor in this space, and this certification is just one of the ways we’re staying at the leading edge of cloud solutions to further expand our capabilities and solutions we can provide to our customers.

To sum up, we continue to build and improve the solutions our customers are looking for in today’s complex IT marketplace, while optimizing, simplifying, and providing flexibility in how they purchase and pay for these solutions.

I will now turn the call over to Elaine for a closer look at our results for the quarter and the first nine months of the year.

Elaine D. Marion, Chief Financial Officer

Thank you Mark. Results for the third quarter and year to date were strong, led by very positive year-over-year comparisons in our technology segment.

On a consolidated basis, third quarter revenue rose 14.6% to $306.2 million, driven by a 15.5% increase in technology segment revenues. Consolidated gross margin was 21.4%, up 20 basis points from a year earlier.

Operating income rose 13.9%, or $2.5 million, to $20.6 million, resulting in an operating margin of 6.7%. Net income was $15.5 million, including non-operating income of $6.2 million related to the Company’s claim in a class action lawsuit. Excluding this non-operating income, non-GAAP net earnings was $11.9 million, an increase of 12.4% from the $10.6 million reported in the third quarter of fiscal 2014. Non-GAAP earnings per diluted share were $1.64, on 7.3 million weighted average shares outstanding, from $1.32 per diluted share in the third quarter of 2014, based on weighted average shares outstanding of 8.0 million.

Turning to our segment results, technology segment revenues rose 15.5% to $297.8 million, up from $257.9 million in the third quarter of fiscal 2014. This increase reflects the strong demand for our IT solutions, both products and services from our medium and large customers.

Gross margin on sales of products and services expanded to 19.4%, from 18.9% a year earlier. A major factor in this 50 basis point expansion was the positive growth in service revenue and margin.

Operating expenses in the technology segment grew 17.7% to $41.6 million. This was primarily the result of higher salaries and benefits expense from increased variable compensation as a result of increased gross profit and 24 additional employees. General and administrative expenses increased 36.1%, as we incurred incremental expenses associated with recent acquisitions, as well as higher depreciation expense stemming from an upgrade of our internal data center equipment. Segment earnings grew 18.3%, to $18.0 million. Segment margin was 6.0%, up slightly from the third quarter of fiscal 2014.

In the financing segment, third quarter revenues were $8.4 million, compared with $9.2 million a year earlier. The lower revenues were primarily attributable to lower transactional gains from financing transactions sold to third parties, due to lower average margins on the volume of assets sold.

Direct lease costs fell in the quarter, as did operating expenses. Segment operating income for the quarter was $2.5 million, compared with $2.8 million a year earlier. Our financing segment results include the non-operating income of $6.2 million previously discussed. As a result, the financing segment’s earnings were $8.7 million for the third quarter.

Turning now to our year-to-date consolidated results, our performance was strong, with operating income and net income growing significantly ahead of revenue. Revenue in the first nine months of fiscal 2015 was up 9.8% year-over-year, led by a 10.4% increase in technology segment revenue.

Consolidated gross margin for the first nine months of the fiscal year was 21.2%, up from 20.3%. Gross margin on sales of product and services was 19.2%, compared with 18.1% a year earlier, thanks to a significant increase in the sale of third party maintenance contracts which are recorded on a net basis.

The largest factor in the 12.1% increase in operating expenses was higher salaries and benefits tied to variable compensation. G&A expenses were also higher for several reasons, including acquisition expenses, software licenses and marketing and advertising.

Consolidated operating income grew 20.7%, more than twice as much as revenue, to $55.6 million. Consolidated operating margin year-to-date was 6.4%, compared with 5.8% in the first nine months of fiscal 2014.

Nine month net earnings were $36.9 million, inclusive of non-operating income of $7.6 million. On a non-GAAP basis, which excludes non-operating income, diluted earnings per share was $4.38, up 31.1% from last year.

Moving to the balance sheet, at December 31, 2014, we had cash and cash equivalents of $51.5 million, compared with $80.2 million at the end of fiscal 2014. The lower cash balance is due to acquisition of Evolve Technology Group in August 2014, as well as the buyback of nearly 691 thousand shares of our common stock this fiscal year. Total stockholders’ equity was $270.2 million and total shares outstanding were 7.4 million.

In summary, our third quarter and year to date results show positive comparisons across key financial metrics, affirming our strategy to provide high value complex IT solutions.

I will now turn the call back to Phil for closing comments.

Phillip G. Norton, Chairman, CEO and President

Thanks Elaine

In summary, we are very pleased by our performance in the first nine months of our fiscal 2015. We believe that ePlus is moving towards fiscal 2016 with positive momentum and we plan to continue to invest in a measured way in technology and people, to make sure that we anticipate and address customer needs.

• We are specialized in IT areas that are growing faster than overall IT spending;

• Our technical expertise enables us to provide customized solutions in an increasingly complex IT environment; and

• We are continuing to focus on growth organically and through acquisitions.We have highly focused go to market and incentive plans for our salesforce to sell wider and deeper within our own customer base, and capture market share from competitors, as well as the resources to make additional acquisitions that add to our capabilities and expand our geographic reach.

All of this supports our confidence in ePlus’ future growth prospects.

Operator, we would now like to open the call to questions.

Operator

And our first question comes from Bhavan Suri of William Blair.

Bhavan Suri - William Blair & Company L.L.C., Research Division

Bhavan Suri - William Blair & Company L.L.C., Research Division

Just to jump in really quickly. As you look at the deals here, if you look at what happened in the quarter, any color on the percentage where customers bought or leveraged all 3, the VAR kind of product part of the business, the services, sort of the implementation, the consulting and then also the financing?

Mark P. Marron - Chief Operating Officer and President of ePlus Technology, Inc

Bhavan, Mark here. We had numerous opportunities and deals that we closed that leverage everything from product, services and our leasing capabilities. In fact if you look at the one that I kind of highlighted, that was one leveraging our financing capabilities to help a client get technology now that they needed now but didn't have budget for another year. In addition to that, we provided both product and services, specifically in the Citrix kind of mobility space that they were looking for. But we had numerous other opportunities that we were leveraging both our services capabilities whether it be on-demand services with staffing, managed services or professional services with both product and financing involvement. There's one other thing, Bhavan, that we believe does sets us apart. Normally when you go in and you meet with a customer, you're trying to understand what their IT needs or initiatives are and what they're working on. And then based on that, you try to come up with the different solutions of how you can help them get there. And in a lot of cases, financing is something that they at least want to consider.

Bhavan Suri - William Blair & Company L.L.C., Research Division

Yes. I guess -- so then just to put that question a little bit on its head, you're obviously clearly growing faster than the market. But there must be deals you lose. And the question is, given the 3-kind-of-pronged approach, plus the PBSO approach, why would you lose deals given that you could offer financing, you'll offer the services, support and manage services. And clearly you have great relations with NetApp, Cisco, HP, et cetera?

Mark P. Marron - Chief Operating Officer and President of ePlus Technology, Inc

Bhavan, anybody that tells you they doesn't -- they don't lose deals, step back and watch for the lightning to hit and then kind of come back to the table. Here's what I would tell you. Every deal is different. So if you think about it, a customer may have an existing relationship with another reseller or systems integrator. Somebody may have -- they may lead on price where they're just basically giving it away, where you potentially is a lost leader for them. There's many different things that go into the equation that you could potentially lose. What we feel good is that we can address a lot of the customer's needs in the areas that are hot -- or I should say technologies in area that a lot of the CIOs have needs in, specifically trying to decide how and where to leverage the cloud. As we heard today or yesterday with Anthem in terms of what they went through with multiple other companies, security is top of mind and high on a lot of people's charts, if you will, of IT spend going forward. And then most of the companies, not all, don't have all the IT resources that they need to be able to implement and really get the benefit out of these solutions. And that's where we feel we have the ability to go across all those different areas and make a difference for our customers.

Bhavan Suri - William Blair & Company L.L.C., Research Division

That's helpful. And then one quick one for Elaine here. When you look at the on-demand staffing business, how do those margins compare vis-à-vis, say, the managed services business or the consulting business? Or the gross margin?

Mark P. Marron - Chief Operating Officer and President of ePlus Technology, Inc

Bhavan, I can probably handle that. So here's the easiest thing. Since we don't break out our services, the easiest thing traditionally in the market, if you think about it, the on-demand, you're normally looking at about 25 to 30 points in terms of margin is kind of what the industry average is.

Bhavan Suri - William Blair & Company L.L.C., Research Division

From a gross margin perspective, right?

Mark P. Marron - Chief Operating Officer and President of ePlus Technology, Inc

Yes.

Elaine D. Marion - Chief Financial Officer and Principal Accounting Officer

Yes.

Mark P. Marron - Chief Operating Officer and President of ePlus Technology, Inc

So -- and then managed services, it's actually higher. And we've kind of talked about this. Once you built your offerings, you've got your resources in place to support the customers, you've got all your processes in place, as you continue to grow that business you would hope that your margins would continue to grow. But more importantly, you're able to provide more value-add to the customer based on the size and capabilities of the offerings and the value in terms of the reporting that you give back to the executives in those companies.

Bhavan Suri - William Blair & Company L.L.C., Research Division

Okay. And then -- yes, yes, And then when you look at the L1 support you're offering -- and I'll jump off after this. I apologize. This is the last quick one. When you look at L1 support, and clearly you're doing implementation consulting to some level of customizations, you go to L2, would you guys -- I mean is there an upsell in terms of price to do the difference between the L1 and L2 support?

Mark P. Marron - Chief Operating Officer and President of ePlus Technology, Inc

Well, you're -- I'm assuming you're talking about level 1, level 2 when you say L1.

Bhavan Suri - William Blair & Company L.L.C., Research Division

Exactly, yes.

Mark P. Marron - Chief Operating Officer and President of ePlus Technology, Inc

Second -- one is we don't have the ability with the vendors to do level 2. So we provide the level 1, and then if we can't handle it, it's passed on to them. The easiest thing to say as it relates to your question a little, Bhavan, is that what we're starting to see is a lot of the traditional customers that were just renewing with us as it relates to what you'd call maintenance renewal are now seeing the value of both our managed service capabilities, which is that proactive monitoring and management, as well as the Level 1 support. Specifically, when you get into these multivendor kind of complex solutions, instead of having to try to call 3 different vendors, you can actually just call ePlus, and it's our responsibility to get the response and the answer that you need at the time you probably need it the most. One other small point just to kind of note out is that -- we kind of pride ourselves on, we just received, I think it was our 13th time, the Customer Sat award from Cisco. So it's just another proof positive of how seriously we take supporting our customers, not just in terms of selling them a solution, but the ongoing support and maintenance that they require.

Bhavan Suri - William Blair & Company L.L.C., Research Division

Gotcha, Gotcha. Okay, that is it for me.

Mark P. Marron - Chief Operating Officer and President of ePlus Technology, Inc

Thanks Bhavan.

Operator

Our next question comes from Matt Sheerin from Stifel.

Matthew Sheerin - Stifel, Nicolaus & Company, Incorporated, Research Division

Just a couple of questions from me. Regarding the growth that you saw in the Technology segment of 15.6% year-over-year, what was the pro forma organic growth versus acquisitions?

Elaine D. Marion - Chief Financial Officer and Principal Accounting Officer

The majority of it was definitely organic, the vast majority of it.

Mark P. Marron - Chief Operating Officer and President of ePlus Technology, Inc

Yes, Matt, I think we may have talked about this before. The acquisitions we've done so far recently have been relatively small, more kind of tuck-under acquisitions. And a lot of times, it's either to get a technical expertise or get access. For example, we did Evolve back in August -- thank you -- nice company with a lot of really good people from what we can see. They had SLED contracts that we're able to leverage. They had a security training center. And we think we're going to have the ability to go back to their customers and sell all the traditional ePlus stuff that we sell, whether it be Cisco, NetApp, EMC. Our service capabilities that we're going to help expand them, they have those capabilities as well as our financing capabilities. But don't know the percentage of, but it would be relatively small and mostly organic.

Matthew Sheerin - Stifel, Nicolaus & Company, Incorporated, Research Division

I gotcha. I guess the point is that 3 quarters in a row here you've seen accelerating revenue growth on a year-over-year basis, and it sounds like the services and also the addition of your headcount. So as you look into the March quarter and then the rest of the year, how are you feeling about growth rates, how are you feeling about sort of the demand environment right now? And what are your plans for headcount additions this year?

Mark P. Marron - Chief Operating Officer and President of ePlus Technology, Inc

So let me try and answer a couple of those. So in terms of the market, we haven't seen any decrease in terms of the IT demand, so whether that's at the mid-market or enterprise. So we still see it maintaining where it's at now. As it relates to headcount, as we've kind of talked about on numerous times -- and Elaine keep me honest here -- in terms of the past year, we added about, I think, 50 headcount year-over-year; and most of those are what I'd call customer-facing, meaning sales and/or services. We're going to continue to invest in our service offerings, both building out the service offerings and our capabilities and the resources to be able to support that. I'm trying to think of what else, Matt, to kind of help you -- give you an answer for what you're looking for. We see security is a hot topic. I mentioned Anthem before with Bhavan. We're seeing some nice uptick both in our customer base and in the market as it relates to security in some of these services that we can provide to our customers. So we're going to continue to invest in the headcount to kind of build that out. We believe we'll continue to outpace the market in terms of as it relates to growth. We believe our services will continue to outpace our product as a percentage of each. And we're going to target the high-growth areas in the market. One thing we may have touched on last time, Matt, and for everybody on the call, we do have an emerging technology/advanced technology team that is constantly looking at where the market's going, and that's part of the team that's helping us set the direction in terms of where we invest in offerings and where we invest in headcounts. And we're going to continue to kind of follow that lead as we go into this next year.

Matthew Sheerin - Stifel, Nicolaus & Company, Incorporated, Research Division

Okay. That's helpful. And on the gross margin, that was basically just down a tad sequentially. Actually, the Technology segment margin were still good because I know last quarter you benefited from Cisco-related warranties, and it sounded like in the opening statement Phil talked about mix benefiting that. Could you maybe get into more detail about why the gross margin was a little bit better than perhaps we expected and expectations for that as you get through the year?

Elaine D. Marion - Chief Financial Officer and Principal Accounting Officer

Yes, Matt. The expansion this quarter was primarily the result of the expansion of our -- of services revenue and also the gross margin of the services revenue that we had in the quarter. As you know, the third-party maintenance that we have that we sell throughout the year, that generally ranges about 20% of our growth revenue, and we do disclose that in the MD&A portion of our 10-Q. That generally ranges about 20%. Our second quarter, which is Cisco's year end, is in July. That does have an impact that quarter, a positive impact on our margins because we generally do have more renewals in that quarter than other quarters. For example, our -- that quarter in our fiscal year '15 that percentage went up to 27%, which had that positive impact on our margins for that quarter.

Matthew Sheerin - Stifel, Nicolaus & Company, Incorporated, Research Division

Okay. And I appreciate the fact that you're not breaking out the services revenue or contribution to operating profit. But is there a plan at all to give us a little bit more visibility into that business?

Mark P. Marron - Chief Operating Officer and President of ePlus Technology, Inc

Matt, it's Mark. We are discussing that as a management team. But at this point there's -- we're not prepared on this call to tell you what that'll be, but we are discussing different ways we might be able to provide additional information.

Matthew Sheerin - Stifel, Nicolaus & Company, Incorporated, Research Division

Okay. Fair enough. And then just, Elaine, on the cash flow, it looks like your cash flow is down. Could you just talk about the cash flow characteristics in the quarter and working capital requirements?

Elaine D. Marion - Chief Financial Officer and Principal Accounting Officer

Sure. Generally our quarters are sort of back-end loaded in terms of build and AP. This quarter was particularly that way. So it did have an impact on our cash. In general, the change in cash from a year-end perspective is really -- the share buyback that was $19 million and also the acquisition of Evolve. But then that should all level out in terms of, you know, given some time.

Matthew Sheerin - Stifel, Nicolaus & Company, Incorporated, Research Division

Okay, that’s it for me.

Elaine D. Marion - Chief Financial Officer and Principal Accounting Officer

Thank you Matt.

Operator

And the our next question comes from Prab Gowrisankaran from Canaccord. Please go ahead.

Prabhakar Gowrisankaran - Canaccord Genuity, Research Division

I have a couple of questions, one on the Evolve acquisition. I know it is a slightly lower-margin business. If you can add any color on the cross-selling benefits you're seeing and how the integration is going? What are you seeing so far?

Mark P. Marron - Chief Operating Officer and President of ePlus Technology, Inc

Prab, it's Mark here. It's still early. Obviously, we just did it in August. What we've seen is they've got a very nice management team in terms of the reps and the rest of the personnel. We think they'll fit nicely within ePlus. We see some of the contracts and some of their knowledge in the SLED space is going to help us in the California market that we traditionally didn't have. So we think we'll see some upside there potentially. As I think I mentioned earlier, they also have a security training center. So there's some security expertise that we have that we believe we're going to be able to leverage across both Northern and Southern California. And then the third piece would be is we think we're going to be able to go back into their existing accounts and potentially sell other products and other offerings, like our financing capabilities that they didn't have the ability to do before.

Prabhakar Gowrisankaran - Canaccord Genuity, Research Division

And the second question I had was just on do you have any sort of long-term targets for your -- just qualitative colors in terms of Managed Services and Advance Services growth? I know you get the level 1 support and the renewals, but is there a target for you to try and get those advance services to a certain percentage of revenue? Or what are your plans there?

Mark P. Marron - Chief Operating Officer and President of ePlus Technology, Inc

Prab, that's one of the things we've been talking about that so far we haven't broken out, but the easiest thing is most of where -- not most of, a lot of where we're investing is in our services personnel: So being able to provide both the upfront presales capabilities that our sales teams need; co-sales in terms of being able to install and implement; and then managed services; the on-demand with staffing; and the level 1 support. For example, 9 or 10 months ago, we added our third managed service center down in Raleigh. So we're going to continue to build out our capabilities in that space and continue to build out our offerings. A little bit earlier I had talked about how we just added managed services for FlexPod and for video. And we're going to continue to look at the market in terms of where we need to expand our service offerings and capabilities, and we'll continue to do that as we see the market change.

Prabhakar Gowrisankaran - Canaccord Genuity, Research Division

Ok, great thanks a lot.

Mark P. Marron - Chief Operating Officer and President of ePlus Technology, Inc

Thanks Prab, see you soon.

Operator

And there are no further questions at this time.

Kleyton L. Parkhurst - Senior Vice President and Assistant Secretary

Thank you for joining us, and we're available for additional follow-up questions later today or tomorrow.

Mark P. Marron - Chief Operating Officer and President of ePlus Technology, Inc

Thank you. Take care.

Operator

Ladies and gentlemen, that does conclude today's conference. Thank you for your attendance. You may now disconnect. Everyone, have a great day.