Conference Call Discussing Earnings for Third Quarter 2021 Results

Safe Harbor Statement

This transcript of the earnings call that occurred on February 3, 2021, 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, an increase in tariffs or adverse changes to trade agreements, exposure to fluctuations in foreign currency rates, interest rates, and downward pressure on prices;

· the duration and impact of the COVID-19 pandemic and the efficacy of vaccine roll-outs, 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, import and export regulations, and trade agreements);

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

· 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:

· uncertainty regarding the phase out of LIBOR may negatively affect our operating results;

· 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;

· 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;

· 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;

· 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’ 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;

· significant changes in accounting standards 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; 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, 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 February 3, 2021, a copy of which is posted on our website at www.eplus.com/investors.

February 3, 2021 – FY21Q3

Prepared Remarks

Operator

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 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 ended December 31, 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. Mark?

Mark Marron, CEO, President

Thank you Kley and thanks everyone for joining for today’s call to discuss our fiscal 2021 third quarter results.

Our third quarter financial performance speaks to the strength and resilience of our diversified business model, and the success we are seeing from our longer-term strategic focus on Cloud, Security, Collaboration and related service offerings – all areas that have increased in importance and relevance in today’s business environment. Our financing segment continues to provide a unique differentiator in the market and is helping to drive technology sales.

Let me give you some key takeaways from our third quarter results.

First, our business continues to perform well in a challenging business environment. Net sales and adjusted gross billings remained steady. Our higher margin services business grew 3.3% and with lower operating expense levels, we were able to report third quarter net earnings growth of 10.7%.

Next, our revenue performance benefitted from several factors. We have a broadly diversified customer base, and in the third quarter, we saw specific areas of strength coming from our large enterprise and upper mid-market customers. Within our key areas of focus, Security increased to over 23% of our third quarter adjusted gross billings, up from just over 20% last year. While Security has been a long-time priority area for ePlus, it has been in even greater demand during this period of hybrid work models. And we expect this trend to continue.

Similarly, demand for our services – especially annuity-quality managed services – continued to grow. This is even more impressive, given the COVID challenges of limited on-site customer access for our professional services and staffing. Our customers are taking advantage of our remote managed services, and we have the capabilities to provide security services and support solutions to create reliable hybrid work environments. Post-pandemic, work from home options are expected to be more prevalent than they were a year ago, and with that, we expect this trend to become a longer-term growth driver.

Third, we continue to grow our footprint and service offerings via selective acquisitions. In late December, we acquired Systems Management Planning, which expanded our geographic footprint in Upstate New York and the Northeast and is expected to add between $85 million and $100 million in annual adjusted gross billings. SMP builds on our collaboration expertise, staffing solutions and our remote management capabilities while adding to our growing base of enterprise and SLED customers. We continue to evaluate synergistic acquisitions like SMP to broaden our geographic footprint and add offerings and high-quality professional staff.

Finally, third quarter results highlight the benefit of ePlus’ diversified business model in our Technology and Financing segments. The positive performance of our technology segment more than offset the impact of a difficult quarter over quarter comparison in our financing segment. And the market’s trend towards XaaS and alternative payment structures is really playing to our strengths in the financing business, as we have long offered unique customer payment alternatives that are becoming even more appealing in today’s business environment.

Now, let me speak more specifically about our third quarter results.

In Technology, there were several bright spots worth highlighting. First, our Services business continues to grow both year over year and sequentially, in part because customers have become more comfortable with our ability to provide professional services remotely. These projects tend to be higher margin and enable us to achieve higher staff utilization.

Turning to our Financing segment, revenue declined 34.5% as compared to a very strong comparative quarter the prior year, which had 67.7% revenue growth due to several large transactions. We have long noted that our financing segment generates lumpy financial results, and we remain positive about the financing business. In today’s business and technology environment, financing options are especially relevant, and we continue to build synergies between our two segments. Financing gives customers the ability to purchase or upgrade technology even with constrained budgets or cash flow, and our ability to provide flexible financing options can facilitate our technology business and is a competitive differentiator in the market.

Third quarter operating expenses were 11% lower than the similar period last year. While some of this expense reduction is directly attributable to COVID-19 such as reduced travel and entertainment, we have also realized some systemic savings which should continue post-pandemic, from lower facilities costs and a realignment of our workforce. We also believe that travel and entertainment expenses will continue to be lower as we utilize virtual options, and we should benefit from ongoing opportunities to optimize our facilities expense. We will continue to add customer facing sales and engineering talent as demand levels increase to ensure that we have the capabilities in house to capture new business and execute effectively on complex projects. That said, we will work to closely align increased headcount with long term revenue opportunities to maintain operating leverage over time.

Elaine will now provide more detail on our third-quarter and nine-month financial results.

Elaine?

Elaine Marion, CFO

Thank you, Mark, and thank you, everyone, for joining us today. We continue to be pleased with our performance, especially given the backdrop of the COVID environment.

Our consolidated net sales for the third quarter were $427.6 million, a decline of 0.3% mainly due to a tough comparison from the strong performance in our financing segment the prior year. In the Technology segment, net sales increased 1.2% year-over-year to $415.6 million, with product and service revenues increasing 0.9% and 3.3%, respectively. Our service revenues have continued to show improvement for the third quarter in a row due to our continued emphasis on managed services including enhanced maintenance support.

Adjusted gross billings increased 0.3% to $587.8 million from $586.3 million in the year ago quarter, showing stability despite the continued challenging COVID business environment. The adjustment from adjusted gross billings to net sales was 29.3%, compared to 30.0% last year due to a larger proportion of hardware sales than software, maintenance, and third-party services, which are recorded on a net basis.

Financing segment revenue decreased 34.5% to $12.0 million, which was expected as we had a tough comparison from the prior year which contained several large transactional gains. Results from our financing segment tend to be uneven from period to period.

COVID-19 continues to impact our customer base, particularly in the lower mid-market customer category and the SLED and healthcare verticals. That said, we are fortunate to have a diversified base of customer end markets. Telecom, media and entertainment and technology continue to be our two largest customer end markets, accounting for 23% and 18% of net sales on a trailing 12-month basis, respectively. State, local, and education, healthcare, and financial services followed, accounting for 16%, 14% and 13%, respectively. The remaining 16% was distributed among several other customer types.

Consolidated gross profit decreased 5.3% to $98.2 million from $103.7 million in the prior year quarter. Consolidated gross margin of 23.0% was down 120 basis points from 24.2% last year. Gross profit for the technology segment increased 0.9% to $88.3 million. Product margin was 18.8%, a decrease of 40 basis points, due to a reduction in revenues recorded as net and also a larger proportion of sales to enterprise customers, which tend to be more competitive. Service margin increased 230 basis points to 38.7%, as we saw increased demand for managed services and higher managed services margins.

In the financing segment, gross profit decreased 39.1% to $9.8 million, which was due to the decrease in net sales as we had several large transactional gains in the prior year.

Consolidated operating expenses decreased 11.0% to $68.9 million due to prudent cost management and COVID-19 restrictions, as we continue to benefit from lower travel and entertainment and advertising and marketing expenses.

Our consolidated headcount at the end of December 2020 was 1,586. Excluding 102 employees from the System Management Planning acquisition on December 31, 2020 our headcount declined 7.4% compared to 1,602 last year, and a decline of 0.9% from the prior sequential quarter.

Consolidated operating income increased 11.4% to $29.3 million. Our effective tax rate for the quarter was 28.1% compared to 28.3% in the year ago quarter.

Our consolidated net earnings were $21.6 million, or $1.62 per diluted share, up 10.7% and 11.0% from $19.6 million, or $1.46 per diluted share, respectively, last year.

Non-GAAP diluted earnings per share were $1.79, an increase of 9.1% from $1.64 last year. Adjusted EBITDA increased 8.0% to $34.4 million. Our diluted shares outstanding totaled 13.4 million, the same as the year ago quarter.

Now let’s look at our consolidated year-to-date results. Net sales for the first nine months of fiscal 2021 decreased 0.5% to $1.22 billion. Net sales in the Technology segment were relatively even at $1.18 billion while adjusted gross billings increased 1.3% to $1.74 billion. Consolidated gross profit amounted to $295.7 million, a 1.2% decrease primarily attributed to the tough compare in our financing segment. Our consolidated gross margin was down 20 basis points to 24.3% and our technology segment gross margin increased 10 basis points to 22.3%. Net earnings grew 5.4% to $58.8 million. Diluted earnings per share were $4.39, up 5.5% ahead of last year. Adjusted EBITDA increased 3.0% to $98.7 million and non-GAAP diluted earnings per share increased 1.6% to $4.97.

Now shifting to the balance sheet, we ended the quarter with cash and cash equivalents of $86.5 million, flat with March 31, 2020. As a reminder, we also have $146 million in our financing portfolio that we could largely monetize by funding with third-party financial institutions. Inventory levels increased 61.7% to $81.3 million, reflecting projects underway. Our inventory levels vary as we work through existing projects and initiate new customer projects. Our cash conversion cycle at the end of the quarter was 24 days, a decrease of 2 days compared to the year ago quarter and an increase of 3 days sequentially.

On December 31, 2020, we acquired certain assets and liabilities of System Management Planning. Our preliminary consideration transferred was $27.1 million and we incurred approximately $233 thousand in acquisition related expenses during the third quarter. We expect the contribution from SMP to be between $85.0 and $100.0 million in adjusted gross billings over the next twelve months.

While we continue to consider the effect of COVID-19 and the uncertainty surrounding its duration on our near-term business trends and our investment considerations, acquisitions and organic investment initiatives remain high on our list of capital allocation priorities.

We certainly could not have achieved our year-to-date successes without the exceptional efforts and support of our employees whose talents and dedication have enabled us to seamlessly serve our large and diversified customer base. I’d like to extend my thanks to all ePlus employees for their efforts.

I will now turn the call back to Mark. Mark?

Mark Marron, CEO, President

Thanks Elaine.

To sum up, we believe ePlus is well positioned to drive additional revenue growth and market share gains. We have made significant investments in technology and talent, have prioritized high growth markets like cloud, collaboration, security and services and are serving a diverse and expanding customer base. Our staff of highly skilled professionals, long standing vendor relationships, and strong balance sheet are key competitive differentiators. These attributes support our ability to continue to perform well in challenging business environments and to benefit from improving business conditions.

In November, we celebrated our 30^th anniversary with our employees, customers, and vendors and reflected on our success, growth, and market position. I would like to thank our employees, many of whom are working from home, while others are in our configuration centers, on site at customer locations or voluntarily have returned to our headquarters. Their dedication and perseverance throughout the last several quarters, and our partnerships with customers and vendors have enabled ePlus to remain operational and effective throughout these challenging times.

Operator, let’s now open the line for question.

Operator

Thank you. [Operator Instructions] And your first question comes from the line of Brett Knoblauch from Berenberg. Your line is open.