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Conference Call Discussing Earnings for First Quarter 2023 Results

Safe Harbor Statement

This transcript of the earnings call that occurred on August 3, 2022, 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 an economic downturn, exposure to fluctuations in foreign currency rates, interest rates, and pressure on prices;

·           supply chain issues, including a shortage of IT products, may increase our costs or cause a delay in fulfilling customer orders, or increase our need for working capital, or completing professional services, or purchasing IT products or services needed to support our internal infrastructure or operations, resulting in an adverse impact on our financial results;

·           the duration and ongoing impact of the COVID-19 pandemic, including but not limited to the impact and severity of new variants, vaccine efficacy and immunization rates, the closure of non-essential businesses and other associated governmental containment actions, and the increase in cyber-security attacks that have occurred while employees work remotely;

·           domestic and international economic regulations uncertainty (e.g. tariffs and trade agreements);

·           the creditworthiness of our customers and our ability to reserve adequately for credit losses;

·           loss of our credit facility or credit limits with our vendors may restrict our current and future operations;

·           significant adverse changes in, reductions in, or loss of our largest volume customer or one or more of our large volume customers or vendors;  

·           managing a diverse product set of solutions in highly competitive markets with a number of key vendors:

·           increasing the total number of customers using integrated 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 recruiting and retaining highly skilled, competent personnel and vendor certifications;

·           increasing the total number of customers who use 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 updating our technology infrastructure to remain competitive in the marketplace;

·           reliance on third-parties to perform some of our service obligations to our customers, and the reliance on a small number of key vendors in our supply chain with whom we do not have long-term supply agreements, guaranteed price agreements, or assurance of stock availability;

·           our dependence on key personnel to maintain certain customer relationships, and our ability to hire, train 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 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, software as a service and platform as a service;

·           our dependency on continued innovations in hardware, software and services offerings by our vendors, availability of those products from our venders and our ability to partner with them;

·           significant and rapid inflation may cause price and wage increases, as well as increases in operating costs which may impact the arrangements that have pricing commitments over the term of the agreement;

·           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;

·           exposure to changes in, interpretation of, or enforcement trends in legislation and regulatory matters;

·           future growth rates in our core businesses;

·           reduction of vendor incentives provided to us;

·           failure to comply with public sector contracts or applicable laws and regulations;

·           our ability to secure our own and 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 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 price;

·           disruptions or a security breach in our or our vendors’ or suppliers’ IT systems and data and audio communications networks, supply chains or other systems;

·           our ability to realize our investment in leased equipment;

·           our ability to successfully perform due diligence and integrate acquired businesses; and

·           our ability to protect our intellectual property rights and successfully defend any challenges to the validity of our patents, or allegations that we are infringing upon any third-party patents, and the costs associated with those actions, and, when appropriate, license required technology.

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 our Form 10-K for the year ended March 31, 2022 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 3, 2022, a copy of which is posted on our website at www.eplus.com/investors.


August 3, 2022

Prepared Remarks


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.

Kleyton Parkhurst, SVP

Thank you for joining us today. On the call is Mark Marron, CEO and President; Elaine Marion, CFO; Darren Raiguel, COO and President of ePlus Technology; 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 and Exchange Commission, including our Form 10-K for the year ended March 31, 2022, and our Form 10-Q for the year ended June 30, 2022 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've included a GAAP financial reconciliation in our earnings release, which is posted on the Investor Information section of our website at www.eplus.com.

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

Mark Marron, CEO, President

Thank you, Kley, and thank you, everyone for participating in today's call to discuss our results for the first quarter of fiscal 2023. We had a solid start to our fiscal year, generating double-digit year-over-year growth in both net sales and adjusted gross billings. Demand in the quarter was broad based with nearly every one of our vertical markets and customer size segments experiencing gains. First quarter consolidated net sales increased 10%, driven by continued solid performance in our technology segment, where net sales grew 12.1% over the same period last year. Despite ongoing supply chain issues that limited the availability of certain technologies, our team continued to execute well, managing vendors and meeting the needs of customers. Growth was driven primarily by our hybrid cloud and security offerings, reflecting continued strong customer investment in these critical IT areas.

First quarter adjusted gross billings increased 10.9% to nearly $702 million. Over the past 12 months, adjusted gross billings has expanded to nearly $2.7 billion, a 14.4% increase from the prior period. In particular, I am pleased with the steady growth in our security business, which accounted for 22.1% of adjusted gross billings in the first quarter, up from 19.4% in the same period last year. Security continues to play a critical role for our customers and our recent acquisition of Future Com, a security focused solution provider in Dallas, Texas, further bolsters our security presence in the market.

Technology services remain one of the key engines, advancing our strategy and driving our long-term growth. First quarter services revenue totaled $63.1 million, increasing 13.5% from the same period last year, on rising customer demand for our consulting and suite of managed services. As we noted last quarter, our services mix is trending towards recurring long-term revenue as opposed to project-driven services, bolstering our annuity quality revenue stream and our overall visibility for these important offerings.

Our service offerings are a key competitive differentiator for ePlus, and we continue to invest in our team and in our capabilities to address the unique and multifaceted needs of our customers. As our customers adapt their businesses to meet the IT challenges of today and the future, they increasingly look to partner with companies like ePlus, which have the comprehensive capabilities and a suite of offerings that align with their specific technology roadmaps.

We just announced another ePlus Cloud Managed Service offering, this time for Microsoft Azure, expanding the comprehensive approach we have taken with our cloud services platform and integrated consultative solutions. This new offering helps customers manage complex public cloud environments and workloads, helps offload the task of managing Azure deployments and can reduce and optimize cloud cost, future spend and automation while leveraging proven security best practices to reduce risk. We have been able to help customers who are struggling with delayed products and services deployed to Azure and who lack the resources to manage complex cloud environments. To further enhance our market positioning and extend our capabilities, we successfully expanded our employee base by nearly 6% in the first quarter, with most of our new hires for customer-facing roles. Our continued investment in personnel, despite the challenging job environment, strengthens our competitive position and enhances our long-term growth opportunity through a broaden set of capabilities.

Turning now to our financing segment, first quarter sales were $9.6 million, compared to $16.3 million last year reflecting the variability of this business on a quarter-to-quarter basis. The decline in net sales was due to a challenging comparison with the prior year period, which benefited from several large transactions. As I've mentioned many times over the years, results in our financing segment can be lumpy due to large transactional gains from originated volumes and post-contract transactions. We feel good about our pipeline in our financing business and believe it gives us a competitive advantage relative to our peers.

Net earnings declined 5% as compared to last year's strong compare primarily due to lower results in the financing segment, higher year-over-year SG&A and FX losses that Elaine will touch on later. Shortly after the close of the first quarter, we were pleased to announce the acquisition of Future Com, Ltd., a provider of cybersecurity solutions, cloud security and security consulting services. And we welcome their talented employees to the ePlus team.

Future Com is an excellent complement to our existing security business enhancing our engineering, sales and service delivery capabilities in Texas and the surrounding region while further strengthening our suite of security solutions. Future Com has expertise in several high growth and high impact segments of the security market from network monitoring and performance to cloud security management. It's great to have the Future Com team onboard at ePlus as we strive to deliver the most comprehensive and trusted third party security solutions in the market today.

The fundamentals of the IT market remain favorable, reflecting continued customer investments in areas that are essential to drive growth, enhance efficiency and mitigate risk. Our positive view of the market is further supported by continued growth in both our backlog and open orders, both of which increase solidly on a year-over-year basis. At the same time, global supply chain issues remain a headwind, delaying project implementation timelines and increasing our customer committed inventory. The ePlus team continues to perform admirably in navigating this challenging environment, developing innovative solutions and working closely with our many channel partners to minimize the impact on our customers.

I will now turn the call over to Elaine Marion, our CFO, to provide details on our first quarter financial results. Elaine?

Elaine Marion, CFO

Thank you, Mark. And good afternoon, everyone. Adding to Mark's comments, the ePlus team executed effectively in the first quarter of fiscal 2023, laying the foundation for continued momentum throughout the remainder of the year. As Mark noted, fiscal 2023 started off with a 10% year-over-year net sales increase to $458.4 million, driven by strong performance in the technology segment where net sales were up 12.1%, totaling $448.8 million. These positive comparisons reflect broad based demand and double-digit growth in both product and service. Specifically, product and service revenues increased 11.9% and 13.5% to $385.7 million and $63.1 million, respectively. We reported strong adjusted gross billings of $701.9 million, 10.9% above the $633 million reported in the first quarter of fiscal 2022, highlighting market share gains and our focus on higher growth areas. The adjusted gross billings to net sales adjustment were 36.1%, compared to 36.8% in the first quarter of fiscal 2022. Sales trends by end market in our technology segment on a trailing 12-month basis were consistent with prior quarters with telecom, media and entertainment and healthcare, our largest markets accounting for 29% and 16% of segment net sales respectively.

Technology, SLED and financial services represented 14%, 14% and 9%, respectively, with the remaining 18% being a combination of several other customer types.

First quarter 2023 financing segment revenue was $9.6 million compared to $16.3 million in the last year's first quarter, resulting from the reduction of sales of leased equipment, portfolio earnings and transactional gains reflecting the variability of this business. We reported a 7.6% increase in consolidated gross profit to $113.5 million compared to $105.5 million last year. However, consolidated gross margin declined 50 basis points to 24.8%. We saw the same dynamic in the technology segment as gross profit was $105.7 million, up 10.7% relative to the prior year's quarter. However, gross margin decreased 30 basis points to 23.5%, as higher product margin was more than offset by lower service margin.

More specifically, product gross margin increased 20 basis points to 21.6%, driven by a change in mix while service margin was 35.6% compared to 39% a year ago, primarily due to higher third-party costs tied to staffing or professional services. Gross profit in the financing segment amounted to $7.9 million compared to $10.1 million a year ago.

The personnel investments Mark mentioned combined with an increase in variable compensation and changes in reserves, drove a consolidated SG&A increase of 11.6% to $76.8 million and consolidated operating expense growth of 10% year-over-year to $80.3 million. Our total head count at the end of June 2022 was 1,637 compared to 1,547 in the prior year, and 88% of the head count added were customer facing.

Despite higher OpEx, our operating income for the quarter of $33.2 million was up 2.2%. As we move to the bottom line, after factoring in foreign currency transaction losses, consolidated net earnings in the first quarter of fiscal 2023 were $22.3 million or $0.84 per diluted share, compared to $23.5 million or $0.87 per diluted share in the last year's first quarter. Non-GAAP diluted earnings per share were $0.99 compared to $0.98 in the year ago quarter, adjusted EBITDA was $38.3 million similar to the year ago quarter. Our diluted share count at the end of the quarter was 26.7 million compared to 26.9 million in the first quarter of fiscal 2022 after adjusting for the stock split in December of 2021. Our effective tax rate was 28%, similar to 27.8% in the year ago quarter. Our balance sheet remains solid with cash and cash equivalents of $83.5 million compared to $155.4 million at the end of fiscal 2022.

The economy wide supply chain issues continue to delay our customer projects, and as a result, contributed to the inventory increase of 59.2% to $246.9 million at the June quarter end compared to the end of fiscal 2022. This situation is the main cause of the increase in our cash conversion cycle of 46 days compared to 32 days in the year ago quarter. However, our cash conversion cycle improved slightly sequentially from 48 days at the end of the March quarter.

As part of our capital allocation strategy, we may monetize a portion of our financing portfolio of $144 million and have a $375 million credit facility with Wells Fargo. I'd like to remind you of several large outside financing transactions that contributed EPS of $0.36 to our second quarter last year, which we do not expect to replicate. Although the results in our financing segment can vary from quarter to quarter due to the timing and size of transactions, this business provides a unique point of differentiation for ePlus as our financing options offer our customers flexibility in managing their IT budgets, particularly when budgets are pressured. While we are working through some near-term challenges with the supply chain and macroeconomic environment, we believe our continued market share gains and the favorable business environment position us well for the future.

With that, I will now turn the call back over to Mark. Mark?

Mark Marron, CEO, President

Thank you, Elaine. In summary, we are off to a solid start to the year, delivering double-digit growth in net sales and adjusted gross billings while advancing our strategy with a terrific acquisition that expands our capabilities in the growing enterprise security market. We remain focused on providing superior services and solutions for our more than 3,500 customers, leveraging our broad capabilities across the technology stack to drive growth and build long-term shareholder value.

Operator, please open the line for questions now.

Question and Answer


[Operator Instructions] And your first question comes from the line of Maggie Nolan with William Blair. Your line is open.

Maggie Nolan, William Blair

Hi. Thank you. Elaine, I wanted to ask what the impact was of the change in reserve for credit losses and your updated thoughts on credit risk from here.

Elaine Marion, CFO

Hey, Maggie. Can you hear me? It was about $1 million in the quarter. And what was the second part of the question? I missed it.

Maggie Nolan, William Blair

Your updated thoughts on credit risk?

Elaine Marion, CFO

Oh, our portfolio hasn't changed. Our customer base has not changed. So, we – there is no change in our methodology from a credit perspective. It was just a matter of the change in reserves on a quarter-over-quarter basis.

Maggie Nolan, William Blair

Okay. Great. And then on the services gross margin, that's been running a little bit lower than what you've done in the last several years. So, can you talk through some of the puts and takes that we should consider on services margins for the remainder of the year?

Mark Marron, CEO, President

Yeah. Hey, Maggie, it's Mark. How are you? I think we're fine on services margins, I think what you're seeing is some of the trends going on in the market related to supply chain, some of the increases in compensation to some of our employees and third parties. I don't see it as a major trend that will continue long-term. I think you'll start to see them trend back up over coming quarters.

Maggie Nolan, William Blair

Okay. Great. Thanks, Mark. And then last one from me, can you just be a little bit more explicit about how Future Com has enhanced your security solutions and maybe what incremental offerings they've brought to ePlus?

Mark Marron, CEO, President

Yeah. What's nice, Maggie, is they've got some great cloud security offerings, network monitoring offerings. From what we're seeing short-term through our due diligence, some really strong security resources both on the sales and on the services side and the upside that we didn't really talk about, it gives us additional size and scale in the Texas and touching regions that we think we can leverage with our existing Texas team. So, builds out our security portfolio, builds out some of the solutions that we sell in that space. And I think there'll be some really nice synergies between our existing ePlus team and the Future Com team.

Maggie Nolan, William Blair

Very good. Thank you both.

Mark Marron, CEO, President

All right, Maggie, thanks. We'll see you soon.


Your next question comes from the line of Greg Burns with Sidoti & Company. Your line is open.

Greg Burns, Sidoti

Afternoon. Just following up on Future Com. How much – what was their trailing 12 month revenues?

Mark Marron, CEO, President

Hey, Greg, we didn't disclose it. So, here's what I tell you, similar to what I would just mention to Maggie. Being their security company predominantly, a lot of that is security, software subscriptions, third-party maintenance. So, a lot of it is netted down from a gross to net perspective. What they give us is some new solutions that we can take to market and some new talent that we can leverage in the – I'll call it the TOLA region, if you will, in the kind of the South-Central region.

Greg Burns, Sidoti

Okay. And the continued growth in your head count, what are you seeing that gives you confidence to continue to expand the way you are? There's been a lot of headlines from some of the major tech companies, pulling back on spending. I mean, you're hiring, so I just wanted to get your sense of the overall market and kind of in relation to those types of headlines and what you're seeing?

Mark Marron, CEO, President

Yeah. Hey, Greg, good question. What we're seeing is we believe we can actually grab some market share. So, if you look at two different points, if you will, last fiscal, our sales were up 16%, this quarter, our net sales were up 10%. But on the tech side, they were actually up 12.1% of net sales. That's all organic. So, we believe that if we continue to add resources, mainly in the services side, so I think Elaine, as she had mentioned of the head count that we added just short of 90% of it was customer-facing and the majority of that was in the services space. So, our services this quarter grew 13.5% and we continue to see customers looking to leverage both our annuity services and our consultative services, specifically in the security and the cloud space and that's where we're looking to add both sales and technical talent. And by the way, both our security, which I think I noted, was a little over 22% of our adjusted gross billings this quarter and our data center/cloud/hybrid cloud, we saw some really nice growth in that space as well.

Greg Burns, Sidoti

Okay. Great. Thank you.

Mark Marron, CEO, President

All right. Thanks, Greg.


[Operator Instructions] There are no further questions at this time. I will now turn the call back over to the presenters.

Mark Marron, CEO, President

All right. Thank you. Thanks, everyone, for joining us today on our Q1 earnings call. We look forward to speaking to you on the Q2 earnings call. Take care and have a good day. Thanks, operator.


Thank you. This concludes today's conference call. You may now disconnect.

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