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Conference Call Discussing Earnings for First Quarter 2021 Results

Safe Harbor Statement

This transcript of the earnings call that occurred on August 5, 2020, 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, interest rates, and downward pressure on prices;
  • the duration and impact of the COVID-19 pandemic, which could materially adversely affect our financial condition and results of operations and has resulted in governmental authorities imposing numerous unprecedented measures to try to contain the virus that have impacted and may further impact our workforce and operations, the operations of our customers, and those of our respective vendors, suppliers, and partners;
  • domestic and international economic regulations uncertainty (e.g. tariffs and trade agreements);
  • significant adverse changes in, reductions in, or loss of our largest volume customer or one or more of our large volume customers or vendors;
  • exposure to changes in, interpretation of, or enforcement trends in legislation and regulatory matters;
  • 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;
  • ·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;
  • ·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;
  • 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;
  • ·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;
  • 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;
  • 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 or our vendors’ 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; 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 our Form 10-K for the year ended March 31, 2020 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 5, 2020, a copy of which is posted on our website at www.eplus.com/investors.

 

August 5, 2020 – FY21Q1

Prepared Remarks

Operator

Good day, ladies and gentleman. 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, SVP. Sir, you may begin.

 

Kley Parkhurst, SVP

Thank you for joining us today.  On the call is Mark Marron, CEO, 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 & Exchange Commission including our form 10-K for the year ended March 31, 2020, and our form 10-Q for the period ending June 30, 2020, 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 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, CEO, President. Mark?

 

Mark Marron, CEO, President

Thank you Kley and thank you everyone for participating in today’s call to discuss our fiscal 2021 first quarter results.

ePlus performed well in a dynamic business environment.  Our solutions portfolio is positioned to support our customers’ needs in critical areas including cloud, collaboration software, data center, and security.  Our strategy to bolster recurring and annuity-type revenues has continued to gain market share, and provides a more consistent baseline of revenue and profitability for ePlus.  We’ve focused on mid-size to enterprise customers with good credit quality, and we believe we have minimal exposure to the most at-risk industry verticals like retail, hospitality, and travel.  We believe our 30+ years of providing leasing through our financing segment has provided us with risk management knowledge and experience to successfully navigate through economic downturns.  

We have remained fully operational during the pandemic, shifting much of our business to accommodate work from home mandates and taking appropriate precautions for the health and safety of all of our employees.  I want to commend the entire ePlus team for pulling together and showing tremendous dedication to our company and its values. As a result, we were able to expeditiously serve our customers and effectively support their critical IT needs.

A key measure of our success in the quarter was a 6.4% increase in gross profit, and a strong consolidated gross margin of 27.8% driven by a very favorable business mix in the quarter, including a larger component of third-party maintenance services and subscriptions sales.  Services revenue increased 4.4%.  While we do not expect this quarter’s uncharacteristically high margin level to be replicated in future quarters, it is consistent with our history of achieving   industry-leading gross margins as compared to our peers.

Taking a closer look at first quarter results, while technology segment net sales declined 7.4% to $341.2 million, our adjusted gross billings held stable at $546 million.  This conversion rate – several hundred basis points higher than usual -- was based on a significant increase in demand for third-party maintenance, software assurance, and subscriptions in the first quarter.

Turning to our Financing business, revenue grew 8% over last year, reflecting the benefit of post-contract earnings, as we extended the term of some lease agreements.  We think our financing activities will continue to increase in importance as leasing is a great alternative which facilitates customers’ ability to upgrade and secure their IT infrastructure while minimizing upfront cash requirements.

There is no question that COVID-19 has been challenging to us, our customers, and our business partners.  However, it has also solidified relationships with many of our customers by showcasing our ability to nimbly execute complex projects in a timely manner.    

Many customers are trying to improve remote work force enablement with collaboration capabilities while providing secure remote access for their data being accessed from home.  Some are dealing with data center capacity issues due to the influx of remote workers.  They are also looking for ways to contain costs while looking to leverage the full benefits of the Cloud.  In some cases, they have no budget allocated for the solutions they need now due to the pandemic.

Let me give you a few examples of how ePlus has assisted our customers navigate this new environment.  One customer’s current infrastructure could not support the workload generated by their employees working from home.  They had to improve their network capacity and upgrade their security postures and protocols needed for the move to remote work.   This was an unbudgeted expense that needed to be done in a timely fashion.  We were able to leverage the power of our two business segments by providing the technology and services they needed along with a flexible installment purchase agreement provided by our Finance team.  This solved the customers budget constraint and they were able to get the technology they needed to address critical business needs.

Another customer had multiple disparate systems running in parallel and wanted to consolidate all communications platforms under a single solution.  While this goal had been in their plans, , COVID-19 created additional challenges that required accelerating their timeline.  They wanted to leverage the resiliency and flexibility of the Cloud while maintaining control and accessibility of an on-premise solution, and choose a multi-year commitment to a cloud-based collaboration solution.  This solution allowed their IT team to manage this cloud-based solution remotely and not to be on-site, while providing their users access to an enterprise level voice/collaboration platform from home. 

In summary, these solutions provided an enhanced user experience, better network capacity and security, and allowed all employees to seamlessly work across the company.

Also, we are helping our customers do more with fewer internal resources, given the value proposition of our outsourced offerings like staffing and managed services, which can often be more cost effective.   This is a win-win, allowing us to save our customers significant cost during periods of economic uncertainty, while yielding incremental gross margins for ePlus. It also positions us as part of our customers’ teams, giving us visibility on emerging needs and the ability to sell additional services.

Security continues to be an important offering and long-term growth driver, accounting for nearly 20% of our adjusted gross billings. We continue to see strong demand for our security solutions, and this offering remains a key differentiator for ePlus at a time when it is increasing in overall importance.   

Finally, we will continue to use our strong balance sheet to seek strategic acquisitions and make organic investments to build out our geographic footprint and solutions offerings. We think this challenging economic environment may present opportunities that we are well positioned to execute given our historical experience of successfully integrating acquisitions.

 I will now turn the call over to our CFO, Elaine Marion, CFO, who will provide a detailed review of our first quarter results.

Elaine?

 

Elaine D. Marion, CFO

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

Starting with our overall financial performance in the first quarter of fiscal 2021, consolidated net sales amounted to $355.0 million, 6.9% below the $381.4 million reported in last year’s first quarter, mainly due to an increase in sales of third party maintenance, services and software subscriptions, which are recorded on a net basis.  

For our Technology segment, revenue was $341.2 million compared to $368.5 million in last year’s first quarter. The 7.4% decline was primarily due to an increase in sales recorded on a net basis. Service revenues increased 4.4% to $47.8 million, due to increased demand for managed services. Adjusted gross billings amounted to $546.4 million, modestly lower than last year’s $548.4 million. The adjusted gross billings to net sales adjustment was 37.5% compared to 32.8% in the first quarter of 2020 for the same reason net sales decreased.

Our Financing segment revenue of $13.8 million increased 7.6% mainly due to an increase in post contract earnings from term extensions of certain lease schedules. As a reminder, results for this business can be uneven and difficult to predict. 

Consolidated gross profit increased 6.4% to $98.6 million from $92.6 million. We reported a consolidated gross margin of 27.8%, which widened 350 basis points from last year’s first quarter and was a high point in our history, driven by gross margin improvement in both segments. Gross profit for the Technology segment increased 6.1% to $86.8 million and gross margin of 25.4% increased 320 basis-points. Technology product margin increased 350 basis points to 23.5% primarily due to an increase in sales of third-party maintenance, services and subscription licenses which are recorded net.   Services margins increased 20 basis points to 37.6% primarily due to our managed services. The Financing segment’s gross profit increased 8.2%, slightly ahead of revenue growth. 

Operating expenses increased 5.3% to $73.6 million, mainly due to an increase in salaries and benefits reflecting higher variable compensation tied to gross profit growth, and higher replacement costs from turnover.   Offsetting those increases were lower healthcare expenses, travel and entertainment and professional fees. Our total headcount at the end of June 2020 amounted to 1,536, essentially flat with last year.

As a result of the improved gross profit, operating income increased 9.8% to $25.0 million compared to $22.8 million last year. Our effective tax rate for the quarter increased to 30.8%, higher than last year’s 28.7% primarily due to an adjustment to the federal benefit from state taxes.  For the year, we expect our tax rate to be approximately 29%. 

Our consolidated net earnings amounted to $17.4 million, or $1.30 per diluted share compared to $16.2 million last year, or $1.20 per diluted share, a 7.2% and 8.3% increase, respectively.  Non-GAAP diluted earnings per share increased 4.9% to $1.51 per diluted share, compared to $1.44 per diluted share year-over-year. Our diluted share count totaled 13.4 million for the quarter, compared to 13.5 million for the first quarter of fiscal 2020.

Now looking at our end markets in our Technology segment, Technology and Telecom, Media & Entertainment continue to be our two largest customer end-markets, on a trailing twelve-month basis, accounting for 21% and 19% of Technology segment net sales, respectively. SLED, Healthcare and Financial Services accounted for 16%, 15%, and 13% respectively, with the remaining 16% from a variety of other client types.

Our balance sheet continues to be strong with shareholder’s equity of more than $500 million.  We ended the quarter with cash and cash equivalents of $144.4 million, up $58 million from the end of March primarily due to a decrease in working capital needs in our technology segment and an increase in non-recourse debt.  We also have approximately $185 million in our financing portfolio, a portion of which may be monetized by funding transactions with third party financial institutions.  Inventory levels increased to $93.3 million. As we have discussed in the past, our inventory levels vary depending on specific customer projects underway. Our cash conversion cycle at the end of the first quarter was 30 days, up from the 24 days in the year ago quarter but down from 37 days in the March period.  The change from last quarter was primarily due to a decline in our days sales outstanding offset by an increase in days inventory outstanding.

As for capital allocation, we continue to monitor the effect of COVID-19 on our business and use of cash, however we will also continue to evaluate opportunities for investments including organically, in our solutions to align with customer demand, acquisitions, and share repurchases.

We believe COVID-19 had a small downward effect on demand in the first quarter of fiscal year 2021.  As this pandemic is unprecedented, we are uncertain as to how it will affect demand in fiscal 2021.  As you are aware, we focus on innovative solutions for medium and large commercial business as well as state, local and higher education customers and will continue to monitor and adjust for the pandemic’s impact on our business.  Most of our employees are working from home except certain roles which have continued to be in our configuration centers and onsite at certain customer locations, and those who have voluntarily returned to our recently reopened headquarters.  I am proud of what our employees have accomplished since the pandemic began and would like to thank them all for their dedication and resilience.  In addition, thanks to our vendor partners who have continued to work diligently in assisting us with supporting our customers.

I will now turn the call back to Mark.

 

Mark Marron, CEO, President

Thanks Elaine.

Our fiscal 2021 first quarter results demonstrate the relevance of our key areas of focus and the important role that ePlus plays in supporting customers as they navigate a rapidly-changing business landscape.  

We effectively managed through a difficult business environment in the first quarter and are prepared to meet the challenges ahead, thanks to our large and diversified customer base, which has limited exposure to those industries hardest-hit by the pandemic, our strong financial position, and most importantly, the collaborative culture that defines ePlus. All of this gives us confidence in our long term growth potential.

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

 

Operator

Ladies and gentlemen, in order to ask a question, you'll need to please press star, and then the number one on your telephone keypad. Please stand by while we compile the Q&A roster.

Our first question is from Maggie Nolan with William Blair. Your line is open.

 

Ted Starck-King, William Blair

Hi, Mark, hi, Elaine. It’s Ted on for Maggie. Can you talk about the demand environment for products and services as the quarter progressed into July and August here as well? Has the demand for products troughed do you think? And is it reasonable to expect continuation of growth for the services kind of at the same level we saw during the first quarter?

 

Mark Marron, CEO, President

So first off, hi, Ted. How are you? And tell Maggie we said congrats on the birth of her daughter, okay?

 

Ted Starck-King, William Blair

Yes, will do.

 

Mark Marron, CEO, President

All right. So a couple of different things. I think when we talked about last quarter, we had talked about that April was kind of in line. So I'll talk about this quarter and then I'll try to give you a little bit going into this quarter, meaning July through September quarter for us.

April was kind of aligned with expectations. Overall, the quarter kind of wound up that we thought the way it would. We had a little bit of slowdown at the end of the quarter. Some of the projects slowed down, couldn't get onsite with some of the services. So even though we had growth of 4.4% on our services overall, there were some opportunities that we couldn't get onsite. The demand that we saw was a little different than—I won't say different than normal, we are in the right focus area.

Everything was really around workforce enablement, remote workforce enablement. That includes collaboration, communication; lot of companies didn't have data center capacity, believe it or not, for all of remote users that they were dealing with. A lot of companies were looking at security solutions in terms of kind of secure access as people were trying to access data from their home, and a lot of folks were moving quickly to the cloud. So the quarter was kind of in line with expectations, a little slow going into the end of the quarter, than it would be for Q1.

For Q2, it's kind of along the same line. I can only speak to July. It was kind of in line of where we expected. We still have good visibility into our pipeline overall. Services is a little challenging for a couple of different reasons, one, getting on site, some of the schools not being able to get on site for example, staffing, some of the folks have slowed down a little bit on staffing. But with that said, we've seen pickups in other areas on services with our consultative services and customers looking at our annuity services, but that would be it at a high level.

 

Ted Starck-King, William Blair

Okay, great. That's really helpful. Can you talk about the higher education and the state and local market exposure there and just kind of what you're seeing from a budget standpoint, just given everything that's going on within those end markets?

 

Mark Marron, CEO, President

Yes, not a problem. So, if I look at the different verticals. But I'll start with state and local and education. So state and local was actually flat for us for the quarter. Our K-12 was actually down, and that's really—we don't play in the commodity space, Ted, in the K-12. So a lot of the Chromebooks, laptops, that's not really our space. So it's more of the—I'll call it the higher margin infrastructure play. So that was down a little bit, but higher ed was up. So net-net, our overall SLED state, local and education, was up year-over-year.

I think the one that's kind of I won't say obvious, healthcare was down for us. I think that's due to a lot of things that I think everybody would realize as it relates to what they were dealing with overall in terms of just dealing with the patients, no elective surgeries. Quite honestly, we were just trying to do anything we could help our healthcare customers kind of get through this pandemic anyway we could.

But SLED was up overall for us year-over-year and state and local was flat, K-12 was down, higher ed was up.

 

Ted Starck-King, William Blair

Great. Wanted to ask about the mix of—the services mix in particular, I know, the margin picked up this quarter. Can you talk about just kind of the mix of staffing and professional services in this type of environment? I know you had been seeing a little bit of a trend toward staffing and increasingly that as a percentage of revenue. Have we kind of hit from a mix standpoint the peak mix of staffing within the services?

 

Mark Marron, CEO, President

No, I don't think we've hit the peak, Ted. I think what you have going on right now is a lot of folks are trying to double down in terms of focusing on what they need to enable their remote workers to do whatever their job is. So they are investing in, like I said, the communication and collaboration tools, security, datacenter, and network capacity tools, trying to leverage the cloud.

A lot of customers are trying to leverage our financing capabilities, so as they've had some projects that are unexpected budgets, trying to get some short-term relief. As it relates to services, we don't break it out by the individual pieces, as I think you know. But I can tell you the consultative side of our services is really picking up as we are providing solutions that customers need, whether datacenter and cloud related security and risk-related.

Staffing is down a little bit, but I believe as we move forward, I think as COVID hopefully starts to lessen, and that's what I'm hoping for in the future even though it's very uncertain, I think you may see a pickup in staffing as that comes back. There is a little pressure on our professional services, mainly for the reason that I mentioned earlier about being able to get on site.

 

Ted Starck-King, William Blair

Very good. Just if I could squeeze in a last question here, what was the organic growth this quarter? Thank you.

 

Mark Marron, CEO, President

Do you know off the top of your head, I don't?

 

Elaine Marion, CFO

It was primarily organic, yes. There was little contribution from the acquisition.

 

Mark Marron, CEO, President

There you go.

 

Ted Starck-King, William Blair

Thank you.

 

Mark Marron, CEO, President

All right. Take care. Ted.

 

Operator

Our next question is from Greg Burns with Sidoti & Company. Your line is open.

 

Greg Burns, Sidoti & Company, LLC

Good afternoon.

 

Mark Marron, CEO, President

Hi, Greg.

 

Elaine Marion, CFO

Hi, Greg.

 

Greg Burns, Sidoti & Company, LLC

A follow-up on the last question. I wanted to get maybe your view on kind of the sustainability of the current trend. So I would assume there was an initial rush to kind of set businesses up to support remote working and other things. I just wanted to see if maybe you felt like you had this initial push and then maybe we see a fall-off or maybe this is just accelerating longer-term trends, so it's more sustainable. But what's your view on that, how the market is kind of reacting in the environment?

 

Mark Marron, CEO, President

Yes, Greg, that's a tough one only for one reason, with all the uncertainty with COVID, none of us have a crystal ball unfortunately. So I think the longer it spikes and kids staying out of school, I think it's going to be tougher and tougher to predict. But if I were to go with some of the industry experts what they're talking about, you would expect cloud spend to be up by a decent amount, you'd expect security spend to be up by a decent amount. I think a lot of customers have kind of multiple collaboration and communication systems in place that they're probably going to want to convert into one kind of solution.

I think there'll be opportunities for us there. I think there'll be consultative opportunities for us to help customers whether it's with data center capacity issues, whether it's cloud cost optimization, I think you'll see a lot of folks as they’ve rapidly gone for the cloud, there are two things that I think will happen is, one, I think to spend at some point is going to—they're going to get the bill and have a little sticker shock. Two, I think moving that quickly, there may be some security risk that they're taking, that they're going to have to address.

 

Greg Burns, Sidoti & Company, LLC

Okay, and then, in terms of the gross margin, I know it's going to be driven heavily by mix and like you mentioned, this is a record quarter. But how should we think about just going forward? Has it stepped up to another kind of tier or another level structurally going forward, or should we model somewhere in between kind of where it was historically and where it was this quarter, or how should we think about maybe the mix of the business and the gross margin going forward?

 

Mark Marron, CEO, President

Yes, couple of things. One, did we say record quarter? I don't remember that, Greg. So maybe you did, but I'm not sure we did, okay. When I look at it this one will be really tough to replicate. There is a couple of things that went into it. We had a very high gross to net. So there were a lot of customers that were renewing maintenance for an incremental year just from a budget perspective. We also had a big uptick in subscription sales, which were taken on a net basis. We also had an uptick in our services margins. I think it was 20 basis points.

I think those three contributed to it, but this is significantly higher than our traditional norm. I don't believe this is something that's the new norm. Now with that said, we're pretty excited about where our margins has been going as we talked about on prior calls. So over time, if our services, our annuity services and consultative continue to build, I would expect it to trend up over time. But this is not the norm. This is more an exception based on what happened this quarter.

 

Greg Burns, Sidoti & Company, LLC

Okay, then lastly, just looking at the financing business, I know you always mention that it's going to be lumpy and very transactional based. But it seems to have improved pretty consistently over the last year-and-a-half or so, kind of at these levels and these transactions have continued. So are you investing more in the business, like why has it grown structurally, and this is again like kind of a new normal for this business where it's may be operating at a higher level than where it has been historically and that's sustainable.

Then in terms of the incremental debt you've taken on, the non-recourse and I think actually recourse debt was up last quarter. Is that tied to kind of growing your book of leasing business, what is that related to? Thank you.

 

Mark Marron, CEO, President

Okay. I'll let—you want to deal with the question on recourse.

 

Elaine Marion, CFO

I'll do that.

 

Mark Marron, CEO, President

But just look at a high level, we've made investments in our leasing over the years. We believe we've got a pretty good team that's done a really nice job. But what's not going to change, Greg, it's going to be lumpy. There is many large deals or transactions that come in quarter-over-quarter, year-over-year, some happen, some don't. So I think that will continue.

The other thing that comes into play now, when you get into a tight credit market like we are in, some of the funding from banks and things along those lines. Also there is credit things that we have to think through with deals that maybe in the past, we would have took, let's say, in the retail space that now may not take. So there is a lot of variables that go into that. But I don't think we're ever on a path just yet with our financing team where it's stable. It's going to be lumpy as we continue.

I think, quite honestly, we've got a tough compare in Q2 compared to last year with our leasing numbers or finance numbers.

 

Elaine Marion, CFO

Greg, to address the non-recourse debt, it's really related to the increase in the portfolio. So it correlates to that. In terms of the non-recourse increase, that is related to the Wells Fargo facility. We had $35 million outstanding on that line as of March 31 and we carried it through June 30. We have since repaid that, but it was outstanding as of June 30.

 

Greg Burns, Sidoti & Company, LLC

Okay, great. Thank you.

 

Elaine Marion, CFO

Sure.

 

Mark Marron, CEO, President

Thanks, Greg.

 

Operator

Our next question is from Kurt Swartz, Stifel. Kurt, if you could also provide your company name. Your line is open.

 

Kurt Swartz, Stifel

Yes, this is Kurt Swartz from Stifel. I'm on for Matt Sheerin today. How are you all?

 

Mark Marron, CEO, President

Hi, Kurt.

 

Elaine Marion, CFO

Hi, Kurt.

 

Kurt Swartz, Stifel

I'm hoping you can maybe provide a little bit more color on some of the OpEx dynamics during the quarter, and whether there are any COVID-related costs included in those numbers, as well as how we should sort of think about the current OpEx levels on a forward-looking basis?

 

Mark Marron, CEO, President

Okay. So a couple of different things. One, I think OpEx, it's probably had a good run rate in terms of this past quarter if you're working from a modeling perspective. A couple of different things happened in the quarter. One, we had higher GP, so the variable in terms of commission was higher as it relates to the GP. We had made some investments in higher end, what I'd call, solutions and services talent that I think increased our salaries as well even though headcount effectively was flat. There were a few things as it relates to our utilization rates with services that fell in SG&A versus COGS. Trying to think of what else from a salaries and benefits. Anything else?

 

Elaine Marion, CFO

Probably, yes, nothing else from the salaries and benefits, but to address the COVID question, as it relates to costs, we had immaterial costs related to COVID. We did buy some additional equipment for folks that were at home. But it was pretty immaterial, some PPE costs, things like that, but nothing material that you would notice in the quarter.

 

Mark Marron, CEO, President

Yes, Kurt, one other quick thing, just overall, we had lower travel and entertainment as well. So that kind of affected the quarter. If you look at it sequentially, what was nice about our number sequentially our GP, our gross profit was up about $6.7 million and our SG&A overall was down about $0.5 million. So in terms of trending, that was a nice trend. But I would think this quarter it is a nice one to model off.

 

Kurt Swartz, Stifel

Understood. Thank you. Then I guess sort of sticking with the COVID theme, were there any supply constraints to speak of during the quarter or any other supply chain issues that you had to sort of navigate?

 

Mark Marron, CEO, President

No, nothing much. There were few things shipping at the end that kind of affected our numbers, but I wouldn't say it's anything material. Some of the cycles were a little bit longer, but nothing that I would call dramatic or material, Kurt.

 

Kurt Swartz, Stifel

Got it. And then, I guess, just overall as maybe as you're looking at fiscal year '21 or I guess maybe in the next 12 months, have you, I guess maybe internally discussed any sort of assumptions for IT spending over the next 12 months or how you're exactly looking at the spending environment currently on a forward basis?

 

Mark Marron, CEO, President

No, Kurt, that's a hard one. Look, as COVID continues the uncertainty makes it tougher I think for everybody to kind of project and predict what's going to happen. We kind of track things by customer, by vertical, by different functional area. If you think about the different verticals, the nice thing there is we're not exposed in some of the hardest hit regions like retail, and oil and gas and hospitality. But also even if you think about some of the verticals that were up year-over-year or trailing 12 months, it's not just those verticals, it's the customers that they are selling to that we have to kind of factor in. So it gets very tough to kind of predict where things are going to go.

I will tell you, we feel pretty good about this quarter. It was a solid quarter in contributions from both of our segments. We liked all the profitability metrics in terms of GP, gross margin, operating income, EPS were all very positive for us. But predicting going the rest of the year in the future be really tough with what's going on in the market.

 

Kurt Swartz, Stifel

Understood, and then maybe one more, if I could. You touched on it a little bit during the prepared remarks, but the inventories levels were a bit elevated in the quarter, and I know you said that sort of fluctuates based on projects in the pipeline and what not. So if you could maybe provide any additional color there, that'd be helpful.

 

Elaine Marion, CFO

Yes, the inventory had increased to $93 million at the end of the quarter, about $40 million or so, and it was really related to many different customers. There were a couple of larger customers that had multiple projects under way that we're working on, but that should get relieved here over the next couple of quarters.

 

Kurt Swartz, Stifel

Understood. Thank you so much.

 

Elaine Marion, CFO

You're welcome.

 

Mark Marron, CEO, President

Take care, Kurt.

 

Operator

Again, ladies and gentlemen, that's star, one to give your question.

Ladies and gentlemen, this does conclude our Q&A period. I'll now turn things back over to Mark Marron, CEO, President for any closing remarks.

 

Mark Marron, CEO, President

Okay. Thank you, everyone, for taking the time to listen to our call today. We look forward to seeing you on Investor roadshows in the future, hopefully I should say. Then if not, speak to you at next Q2 quarterly earnings.

Take care and be safe.

 

Operator

This concludes today's conference call. Thank you for participating and you may now disconnect.




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