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Conference Call Discussing Earnings For Third Quarter 2020 Results

Safe Harbor Statement


This transcript of the earnings call that occurred on February 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;

•       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 the Form 10-K for the year ended March 31, 2019, 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, 2020, a copy of which is posted on our website at www.eplus.com/investors.





















February 5, 2020 – FY20Q3


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, SVP. Sir, you may begin.


Kleyton L. Parkhurst, SVP


Thank you for joining us today on the call as Mark Marron, CEO and President; Darren Raiguel, Chief Operating Officer, 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 on 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, 2019, and our Form 10-Q for the quarter ended December 31, 2019, 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 the GAAP financial reconciliation on 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 third quarter.


We're pleased to report solid Fiscal 2020 third-quarter results, which built upon a strong first half and position us for a year of significant growth. There are several important takeaways from our year-to-date results. First, we are successfully executing on our strategy of investing in the higher growth areas of Cloud, security and digital infrastructure, adding customer-facing headcount, up-selling our products and services, and executing strategic acquisitions to expand our customer base and in solution offerings.


Second, a balanced approach of organic and acquisition growth is enabling ePlus to gain market share and build a base of annuity quality revenue that provides a growing source of predictable business. Lastly, our third quarter and year-to-date results highlight that our portfolio approach of offering technology solutions supported by a broad range of additional services and financing options resonates well with our expanding base of mid-market and enterprise customers.


In the third quarter, we posted a 24% increase in net sales and our gross profit grew 25% due to improved gross margin, while operating income increased 31%. Technology product sales were up 20% year-on-year, and services increased an impressive 43%. Both of these areas showed acceleration from the pace of growth in the first half of the year. Our financing segment is benefiting from synergies with our technology segment, demand from our vendor financing programs, and federal IT spending. Transaction sizes in the federal marketplace are large and flows are difficult to project, but we believe federal IT spending offers future opportunities for ePlus.


Let me speak more on our 24% sales growth in the third quarter, which compared favorably with the 13% that we reported for the first half of this fiscal year. We had several successful wins via our land and expand initiative, where we aggressively pursue business with new customers or broaden our reach within existing customers with the intention to sell other technologies and services at higher margins.


Also, we saw a considerable pickup in our service offerings sales in the third quarter, particularly in staff augmentation, which can increase customer stickiness and is a high demand solution in today's job market. Staff augmentation service margins are generally higher than our product margins but tend to yield lower margins than our professional and managed services.


From a strategic standpoint, however, staff augmentation can be a gateway to expanding customer wallet share. Security products and services grew 15% year-on-year on a trailing 12-month basis and represented roughly one-fifth of our adjusted gross billings. Security continues to offer a solid runway for growth for ePlus. ePlus retained its industry-leading margin profile in the third quarter, expanding gross margin to 24.2%, 20 basis points ahead of the same period last year. We continue to invest in the people, solutions, and acquisitions needed to serve our customers’ needs today and in the future.


Our investments to date have paid off in sales growth and industry-leading margins, and we’re committed to staying ahead of the curve. Some examples of this include providing Cloud assessments that uncover challenges our customers face in the current IT infrastructure, identifying areas of potential cost savings and efficiency gains, and creating strategies to help our customers meet current and future business needs. These often result in structured multi-year contracts to help customers offset large capital expenses upfront and realize the full benefit of hybrid Cloud solutions to meet their growing needs. Other examples include helping customers streamline their operations and minimize the number of outsourced providers by providing a complete life cycle program for IT infrastructure management, and finding ways to make it easier for our customers to acquire needed technology, such as providing automated ordering and processes for pre-selected equipment bundles or utilizing a finance structure that can provide capital and budgetary benefits to the customer.


Turning to the ABS acquisition, which closed in late August, the business has integrated well into our portfolio, expanding our Mid-Atlantic footprint while adding to our service offerings and boosting our managed service capabilities in particular. The combination has brought additional selling opportunities in both the ABS and ePlus client base, and we're in the early stages of capitalizing on these and converting them to revenue. One example of this is a large transaction in the educational space from an ABS customer that we were recently awarded that leveraged our financing capabilities to help them procure the technology they needed now while meeting budgetary constraints.


In summary, the third quarter was a period of strong execution and market share gains for ePlus. I will now turn the call over to our CFO, Elaine Marion, who will walk you through a detailed review of our third quarter results. Elaine?


Elaine D. Marion, CFO


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


Let me share some more details of our strong financial performance in the third quarter of Fiscal 2020. Net sales increased 24.1% to $429 million from the prior fiscal year's third quarter driven by strong performance and market share growth from both segments. Net sales in the technology segment increased 22.7% year-over-year to $410.6 million, reflecting 20.3% and 43.2% growth in product sales and service revenue respectively.


Similar to the second quarter of Fiscal 2020, the increase in services revenue was across the board in professional services, managed services, and staff augmentation. While the SLAIT and ABS acquisitions were the primary contributors to service growth for the technology segment overall, organic was the primary growth driver generating roughly 65% of the increase in adjusted gross billings. Financing segment revenue of $18.4 million was up 67.7% year-over-year, mainly due to higher transactional gains, primarily from large government-related business. Please keep in mind that results from our financing segment tend to be uneven from period-to-period and may be driven by large transactions.


Looking at our end markets in the technology segment on a trailing 12-month basis, our largest customer vertical continues to be technology, accounting for 22%, with SLED and Telecom, media and entertainment each accounting for 17%. Healthcare and financial services accounted for 15% and 14% respectively, while the remaining 15% was distributed among several other client types.


Adjusted gross billings in the technology segment of $586.3 million increased 22.5% compared to $478.4 million in the same period a year ago, mainly driven by strong demand from larger customers, new wins from existing customers, as well as contributions from the acquisitions of SLAIT and ABS Technology.


The adjustment to adjusted gross billings to net sales was 30%, flat year-over-year and declined sequentially. Consolidated gross profit was up 25.1% and amounted to $103.7 million compared to $82.9 million in the prior fiscal year third quarter. Consolidated gross margin expanded 20 basis points to 24.2% year-over-year. Gross profit for the technology segment increased 18.4% to $87.6 million and gross margin was 21.3% compared to 22.1% in the year-ago quarter. Technology product margins narrowed 70 basis points to 19.2% due to competitive pricing for existing customers in an effort to expand our sales positioning, as well as additional sales to large customers. Services gross margin was 36.4% compared to 40.7% in the third quarter of Fiscal 2019 due to a larger proportion of staff augmentation and enhanced managed services that yield lower margins. In the financing segment, gross profit increased 80.5% to $16.1 million, primarily due to the increase in transactional gains.

Our consolidated head count at the end of the third quarter was 1,602 compared to 1,265 in the year-ago quarter. The addition of SLAIT and ABS Technology added an additional 301 employees as of December 31, 2019. Consolidated operating expenses increased 23.1% to $77.4 million, reflecting increases in headcount as well as salaries and benefits, variable compensation, and healthcare costs. Salaries and benefits rose primarily due to SLAIT and ABS acquisitions, and higher variable compensation resulted from the increase in gross profit.


We're very pleased with our consolidated operating income increase of 31.2% to $26.3 million. Consolidated net income and diluted earnings per share were up 31.5% and 32.7% respectively to $19.6 million or a $1.46 per diluted share. Our effective tax rate for the quarter was 28.3%, consistent with the prior year third quarter. In the fourth quarter of Fiscal 2020, we expect our tax rate to be approximately 28.5%. Adjusted EBITDA increased 24.7% year-over-year to $31.9 million. While our Adjusted EBITDA margin was 7.4% flat, when compared to the third quarter of Fiscal 2019. Non-GAAP earnings were a $1.64 per diluted share, up 27.1% from the third quarter of Fiscal 2019. Our diluted shares outstanding totaled $13.38 million compared to $13.54 million in the year-ago quarter due to share repurchases.


I will now turn to our consolidated year-to-date results. Net sales for the first nine months of Fiscal 2020 increased 16.7% to $1.22 billion. Net sales in the technology segment were up 15.8% to $1.18 billion, and adjusted gross billings increased 18.5% to $1.71 billion. Consolidated gross profit amounted to $299.4 million, reflecting a 20.2% increase. Our consolidated gross margin expanded by 70 basis points to 24.5%, and our technology segment gross margin increased 20 basis points to 22.2%. Net earnings grew 16% to $55.8 million. Diluted earnings per share were $4.16, 17.5% ahead of last year. Adjusted EBITDA increased 18.6% to $95.8 million, and non-GAAP diluted earnings per share increased 19.3% to $4.89.


Moving to the balance sheet, we ended the quarter with cash and cash equivalents of $59.6 million compared to $79.8 million at March 31, 2019. The decrease is attributable to the ABS acquisition in August 2019, investments in our financing portfolio, and share repurchases. Inventory levels increased 20.9% to $61.1 million compared to the end of Fiscal 2019.


As a reminder, our inventory levels vary depending on specific customer projects underway. Our cash conversion cycle at the end of the quarter was 26 days, similar to the year-ago quarter and up from 23 days in the second quarter of Fiscal 2020. In terms of capital allocation, we strategically balance making investments in our business through acquisitions and financing portfolio investments to drive growth as well as share repurchases.


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


Mark Marron, CEO, President


Thanks, Elaine.


Our year-to-date results have set the stage for Fiscal 2020 to be a year of considerable growth for ePlus. We have proven our ability to capture demand from our base of mid-market and enterprise customers for complex solutions that optimize and protect their IT initiatives. We continue to explore opportunities to complement our organic growth with acquisitions that would expand our technology capabilities and geographic reach.


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




To ask a question, you will need to press star, one on your telephone. To withdraw your question, press the pound or hash key. Please stand by while we compile the Q&A roster.


Your first question comes from the line of Maggie Nolan from William Blair.


Maggie Nolan, William Blair


                  Hi. Strong quarter. I was interested in the nature of the land and expand engagements that you commented, Mark, that you saw success this quarter. Can you give us a little more detail on what type of work this is and maybe the longevity of these types of engagements?



Mark Marron, CEO, President


Hey, Maggie. First of all, Mark here. Thanks for the question. On the land and expand, that's something, as you know, we've been doing for years. We've been fairly successful both in terms of bringing on net new customers, and we're working within existing customers to get into new divisions. Normally, the way it works is across all the different solutions sets that we sell, everything from our Cloud Security, digital infrastructure offerings, as well as staffing and services. So, it really varies based on the customer. What it normally does in the beginning, the margins are a little bit lower and then overtime we try to show the value within the customer of all the different types of ways we might be able to help them. So, land and expand will normally drive up our sales originally and potentially affect our gross margins a little bit in the beginning and then over time, they come back to the levels that they're at.


Maggie Nolan, William Blair             


These engagements that affected this quarter, were these with new customers or existing customers?


Mark Marron, CEO, President




Maggie Nolan, William Blair


                  Roughly, how many were there, and did the margin profile vary across those, given that it was both new and existing customers?


Mark Marron, CEO, President


Yes. It varies. The margin profile will vary. To give you a feel, at a very high level, our top 20 customers as well as our, what I'll call other customers, both grew at significant rates. With the land and expand, we had a few large customers that grew nicely on net sales with a little bit lower margins than we're used to, and then we'd expect overtime to grow that. To give you a little more color, maybe on sales overall, in terms of our overall adjusted gross billings, two-thirds was organic and a third was from M&A. Just maybe fill in the picture, if you will.


Maggie Nolan, William Blair             


Thank you. Then, as you see services continue to increase as a percentage of the business, and the mix obviously is changing, how much has annuity revenue changed as a mix of total revenue over the last couple of years?


Mark Marron, CEO, President


Annuity is a nice piece for us, Maggie. It continues to grow in terms of total contract value, MRR, and as we move through the process with this, if we run our business right, our margin should continue to increase in the annuity space. What you're seeing with some of our service margins right now, we've actually increased our staffing revenues as it relates to services, which the margins are a little bit smaller than our traditional annuity and professional services. What's nice about it, it's the foot-in-the-door sometimes into customers that we then go back and try to sell everything else that we have. But annuities are growing nicely, quarter-over-quarter, year-over-year.


Maggie Nolan, William Blair             


Thank you. Then last one for me, just your updated thoughts on the macro environment costs around what demand looks like, the supply chain, all those types of things. Thank you.


Mark Marron, CEO, President


                  Okay. So far, in terms of overall demand, haven't seen any slowdown in terms of demand. In terms of our forecast for the quarter and looking at another quarter, still have not changed from prior quarters. A lot of things going on, obviously, in an election year that you never know what's going to happen. Then, the Coronavirus, two pieces to it, if maybe you're touching on that somewhat. One in terms of actual revenue, we have little to no exposure as it relates to Asia-Pac. We're tracking it from a supply chain logistics with our different vendor partners. It's a little early. As everybody knows, they've pushed some things out in China, so we're going to track that closely and see if it potentially could affect things over time. But so far, nothing there. I should say it's too early, Maggie.


Maggie Nolan, William Blair


                  Thanks, Mark.


Mark Marron, CEO, President


                  Okay. We'll see you soon, Maggie.




Your next question comes from the line of Matt Sheerin from Stifel.


Kurt Swartz, Stifel


Hi, this is Kurt Swartz on for Matt Sheerin. Thank you for taking my questions.


Mark Marron, CEO, President


Hey, Kurt.


Kurt Swartz, Stifel


Just starting off touching on the operating margin profile, I am wondering how we should perhaps think about that going forward, it seems as though the gross margin has been steadily improving, but op ex has been growing as a percentage of sales over the past few quarters. I am wondering if that, first of all, reflects continued investments in the business overall, or whether that's more related to the acquisitions and also when we should perhaps be expecting to see some leverage kick in and drive operating margins higher?


Mark Marron, CEO, President


Yes, good question. So, it's actually two things, it's the acquisitions and some of the acquisition-related costs at this point, and also the investments that we're making. We've been fairly clear, Kurt, over the prior-years is, we believe we have the ability to grab market share based on our capabilities in some of the focus areas that we have. So, we're going to continue to invest not only in customer-facing headcount, meaning sales and services that can support our existing customers, but also reach out and touch new customers. We're also investing in some of the newer technologies that are coming out. So, it is affecting our op ex margins currently. We watch it closely and overtime, we would expect to get operating leverage.


Kurt Swartz, Stifel


                  Understood. Then just following up on your commentary on the demand outlook, particularly for 2020. As you know, we've been coming off of very strong PC refresh like on 2019, and I know that's not really an area you particularly play too much in, but as we move into 2020, I guess part of the expectation is that maybe some of that spending may shift into areas such software and security. So, I'm wondering how you think ePlus has positioned moving into the year and whether you stand to potentially benefit from some of these spending shifts?


Mark Marron, CEO, President


                  Yes. Kurt, I think we're really well-positioned. You hit on something that is true. In terms of the PC refresh Windows 10, we didn't really play on that. I'll call it a commodity play, maybe a little bit more than that, but we didn't get the uptick in sales because we rarely if ever played in that space. We've stayed in the Cloud Security Digital infrastructure. Do we think we're positioned in the software and security? Yes, very much. Our security was up 15%, trailing 12-months from an adjusted gross billings standpoint and our software subscription licenses were up significantly. I want to say 57%. I'd have to double check that but it's in that range. So, I think we're well-positioned with where we think the market's going and where we're investing in resources and new technologies.


Kurt Swartz, Stifel


Great. Thank you very much. That's all from me.


Mark Marron, CEO, President


Okay, Kurt. Take care. We'll see you soon.




Your next question comes from the line of Greg Burns from Sidoti & Company


Greg Burns, Sidoti & Company, LLC


                  Good afternoon. I just wanted to touch on some of the larger land and expand deals that you mentioned. Was there any one or two deals, in particular, that landed in the quarter, or was it just kind of a more broad-based number of larger type projects that closed in the quarter? I just wanted to get a feel for, as we look forward, are we going to be coming up against tough comps because of any one large particular deal this quarter, or was it just kind of a broad-based demand that you saw in the quarter.


Mark Marron, CEO, President


                  Hey, Greg. Good question. Two things. One, it was across multiple customers, if you will. But there were some pull-forward deals, probably to the tune of about $15 million or $20 million. That would probably be tough to replicate, not so much from the land and expand but more year end, I'll call it budget flush, if you will. So, across multiple customers, probably $15 million to $20 million. That was kind of a pull-through or pull-forward, if you want to call it, from year-end budgets. That would be about it from this end.


Greg Burns, Sidoti & Company, LLC


Is that pull-forward something you see every year, or was that unusual for this quarter?


Mark Marron, CEO, President


                  I think that was a little unusual for the quarter. You always see pull-forward in every, I'll call it, calendar year-end but this was a little outside the norm in terms of this customer in size. I would say it's not the norm as it relates to that. The other thing is related to our numbers overall. Maybe a little bit different than land and expand. We also had a real solid quarter in terms of some large deals with our finance group. So, there were two things that came into play there. Not so much to the land and expand on finance but just also plays in.


Greg Burns, Sidoti & Company, LLC


That, I guess, leads to my next question. Those large transaction deals on the financing side of the business, do you have visibility into─it's difficult to model, I guess, when these large transaction deals on the financing side of the business will close. Is there any kind of color or commentary you can give us in terms of do you have a pipeline of these potential transactions or it is come when they come? How should we think about modeling that side of the business?


Mark Marron, CEO, President


Yes. That's a tough one, Greg. We've talked about it throughout the years in the quarters. Our leasing or financing business is a lumpy business, always was, always will be. These deals, bigger deals, are hard to forecast only because of their size. How often they come up, all the different variables that go into selling them. So, when we get them, we kind of pat ourselves on the back. When we don't, we're worried about the compare. What I'd tell you is, they're tough to forecast and to predict. They're not easy to replicate. This was a real solid quarter for our finance team in terms of some of these transactions, but it is a lumpy business that's tough to forecast or predict.


Greg Burns, Sidoti & Company, LLC


Okay. Thanks.


Mark Marron, CEO, President


Alright, see you soon.


Greg Burns, Sidoti & Company, LLC


Sorry,        I got one more.


Mark Marron, CEO, President


Sorry, not rushing you up.


Greg Burns, Sidoti & Company, LLC


The last two quarters, revenue and adjusted gross billings have grown roughly in line with each other. I think, prior to this, you saw adjusted gross billings growing at a faster pace than revenue. Can you just go over that dynamic? Why that is? Why they are growing in line, more closely in line now? Has there been a shift in the mix of what you're selling in the quarters? What is the dynamic there?


Mark Marron, CEO, President


                  Yes. It comes down to maintenance renewals and subscriptions, which we talk about, which is the gross-to-net effect. What we're seeing is the gross-to-net is now closer in line year-over-year. Prior quarters, there was a bigger delta between the gross-to-net year-over-year, which would affect the net sales and bring it down, if you will.


Greg Burns, Sidoti & Company, LLC


Okay. Thank you.




As a reminder, to ask a question, press star, one.


Your next question comes from the line of Brett Knoblauch from Berenberg Capital. Your line is open.


Brett Knoblauch, Berenberg Capital Markets


                  Hi, guys. Thanks for taking my question. Hope all is well.


Mark Marron, CEO, President


Hey, Brett.






Brett Knoblauch, Berenberg Capital Markets                


First one on the, I guess, following up on the other question talked about spending shift from maybe product-related spend through the upgrade cycle this year to maybe software security spend next year. Would that cause the delta in the gross-to-net to widen next year, if you're anticipating more maybe software and security spend.


Mark Marron, CEO, President


Potentially, yes. A lot of the software vendors are moving to subscription models, which would be on a net basis. So, potentially that could affect net sales depending on the vendor, and what they're selling, or what we're selling of their products. Sure.


Brett Knoblauch, Berenberg Capital Markets                


Okay. Then just looking at the segment breakdown, it looks like you guys had a really strong, I guess, on a trailing 12-month basis in the Telecom, media, and entertainment, is there anything maybe worth flagging in that?


Mark Marron, CEO, President


No, actually we felt good. For the quarter, four of our five top verticals were up. The fifth vertical was kind of flat, just down a little bit. So, it was somewhat flat. But when we look at our top five verticals year-to-date through the first nine months and trailing 12-months, there were all up nicely. We're seeing nice progress and nice opportunities in the pipeline across all the verticals so far, or I should say top-five.


Brett Knoblauch, Berenberg Capital Markets                


Then just one more. I guess when you're going out and trying to compete for new business, how important of a factor is the financing capabilities you guys have play? Would you think you would see similar growth in the product sales if you didn't have the financing capability, or is that really what drives new business wins?


Mark Marron, CEO, President


That's a good question. I think it's complementary. I don't think it would affect it per se. Meaning we've got two separate sales teams, but we've compensated them, we've put comp plans in place to get them to work together on deals. We have had some deals, for example, at year-end, where folks don't have budget that we're able to leverage our financing, or I'd call it payment options, for customers to make deals happen. So, it definitely helps, but I wouldn't say it would be the be-all end-all, if you will.


Brett Knoblauch, Berenberg Capital Markets                


Perfect. Thanks, guys.


Mark Marron, CEO, President


All right. Take care. We'll see you soon, okay?


Brett Knoblauch, Berenberg Capital Markets                


Yes, you too.




There are no further questions at this time. I will turn the call back over to Mark Marron, CEO and President.




Mark Marron, CEO, President


All right, thank you. Hey, just want to thank everybody for participating in today's call. We look forward to seeing you in the upcoming investor meetings and speaking on next quarter's call. Thanks for taking the time and have a great day. Take care.




Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.


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