ePlus inc

NASDAQ:PLUS

Earnings Call Transcript 2022-Q1

[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 now like to introduce your host for today's conference, Mr. Kley Parkhurst, Senior Vice President. Sir, you may begin.

[Kley Parkhurst, executive]

Thank you for joining us today. On the call is Mark Marron, CEO and President; Elaine Marion, CFO; Darren Raiguel, COO and President of ePlus Technology; and Erica Stoecker, General Counsel. I want to take a moment to remind you that the statements we make this afternoon that are not historical facts may be deemed to be forward-looking statements and are based on management's current plans, estimates and projections. Actual and anticipated future results may vary materially due to certain risks and uncertainties detailed in the earnings release we issued this afternoon and our periodic filings with the Securities and Exchange Commission, including our Form 10-K for the year ended March 31, 2021, and our Form 10-Q for the quarter ended June 30, 2021, 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 certain non-GAAP financial measures, and we've included a GAAP financial reconciliation in our earnings release, which is posted on the Investor Information section of our website at www.eplus.com. I'd now like to turn the call over to Mark Marron. Mark?

[Mark Marron, executive]

Thank you, Kley, and thank you, everyone, for participating in today's call to discuss our results for the first quarter of fiscal 2022. We had a great start to our fiscal year as net sales and adjusted gross billings growth underscore a robust customer demand for our technology and finance solutions. More importantly, this quarter continued to show the scalability and efficiency of our operating model as strong top line growth fueled healthy operating income and net earnings growth. Our first quarter consolidated net sales increased 17.4% from the prior year period, with operating income growing 29.8% and net earnings growing 35.5%.

In addition, adjusted gross billings rose 15.9% year-over-year to $633 million. These results reflect demand for our solutions, a substantial rebound in the IT markets and our continued focus on expense management and investments that enhance our operating efficiency. Our strong first quarter financial performance benefited from balanced revenue growth for product sales and services. In our Technology segment, sales were up 17.3%, driven in part by strong growth in the enterprise market and additional land and expand contract wins with high-volume customers.

Although our Technology segment gross margins decreased from last year due to product and customer mix, along with a lower gross to net adjustment, our overall results highlight the positive operating leverage in our model as segment operating income was up 43.9%. Services revenue grew 16.3% in the first quarter with gross margins of 39%, up 140 basis points from last year's first quarter. During the first quarter, we experienced solid growth in both professional and managed services, driven in part by continued strong demand for secure and flexible hybrid work models to accommodate remote workforces.

This increased growth in the remote workforce is positive for ePlus, accelerating customer cloud adoption and the provision of cloud services. We had several key cloud and security-related contract wins during the quarter, underscoring market demand for our capabilities in these areas. One innovative example of this is where we work with the healthcare provider who leverage our cloud-hosted infrastructure to use a solution that analyzes and detects if a digital medical image of a mole is cancerous.

We also saw a solid uptick in annuity service bookings in Q1 versus last year and continue to add to our annuity quality revenues. In addition, the recurring annuity type revenue generated by our services business will enhance both the predictability and visibility of our revenue stream. Security remains a critical area of customer focus and investment. Our consultative approach to designing and implementing comprehensive security solutions help safeguard our customer data and mitigate ever-present security risk. Security represents 20.8% of our trailing 12-month adjusted gross billings and almost $500 million on a stand-alone basis, reflecting its significance within the total solutions approach we bring to customers. The pandemic has shifted applications and users beyond their traditional environments.

We continue to innovate, invest and help our customers go beyond their traditional cybersecurity methodologies to optimize environments and introduce new technologies that are purpose-built for securing the remote workforce and applications deployed across multiple clouds. As the global economy moves beyond 2020 and into a post-pandemic environment, businesses are quickly adapting to the new normal, a process that involves reassessing previously implemented remote workforce solutions and network infrastructure to ensure that current IT systems and technology road maps can adapt with agility to both present and future IT challenges.

To help our customers succeed in this new environment, ePlus developed an innovative suite of services and solutions called Navigate the Next. Our solutions specifically address and help solve the 3 most pressing IT challenges now faced by our customers. First, as employees return to the office, even on a part-time basis, their health and safety remain a paramount concern. Through our partnerships with leading technology vendors, our innovative return to the workplace solutions assist enterprises in monitoring physical distancing and providing safe working conditions. Second, enterprises and organizations seek more efficient management of current IT project expenses, coupled with the longer-term strategy for funding future technology products. Our expense management offering solved these needs through cloud cost optimization services, carrier expense management and strategic financing programs. And third, as remote and hybrid work has become commonplace, businesses now more than ever require a robust and scalable platform to maintain business continuity with the dispersed workforce.

To address this challenge, we developed an approach based on a hybrid cloud virtual desktop infrastructure that offers significant cost performance and security advantages over existing solutions. We've been pleased by the positive market response to our Navigate the Next suite of solutions, which represents just one example of how our investments in technology and resources enable ePlus to stay at the forefront of dynamic market trends and further strengthen our position as a trusted partner to our more than 3,500 customers.

Turning now to our financing segment. Net sales grew 18% in the first quarter compared to the prior year period primarily due to increased sales of off-lease equipment. Although the financing segment's results can be lumpy from quarter-to-quarter due to the timing and size of transactions, this business provides a unique point of differentiation for ePlus, as our lease and financing options offer our customers flexibility in managing their IT budgets.

With an acceleration in IT spend that's expected this year, our financing segment is seeing strong interest from a variety of customers. From a capital allocation standpoint, the strength of our balance sheet enables us to pursue strategic acquisitions and fund organic growth initiatives. As we move forward, we will continue to identify and evaluate potential acquisition candidates that not only broaden our geographic presence, but also enhance our capabilities and participation in high-growth markets. Looking ahead to the balance of our fiscal year, we are encouraged by the fundamental health of our markets and the strength of customer demand for our services and solutions.

With the global economy reopening and IT spending accelerating, the outlook for ePlus remains positive, particularly in our areas of focus of security, data center, cloud and digital infrastructure. As I noted last quarter, disruptions in the electronic supply chain continued to close component shortages. And while this did not materially affect our first quarter results, we recognized the potential for some revenue headwinds as we move through our fiscal year. In addition, the emerging COVID variants and the possibility of a delayed return to work and/or government mandates could adversely affect our future performance.

We remain well positioned for continued growth in fiscal 2022, supported by the strength and breadth of our customer relationships, our strategic partnerships with leading vendors across the IT ecosystem and our comprehensive portfolio of transformative technology solutions. I will now turn the call over to Elaine Marion, our CFO, to walk you through our financial results in more detail. Elaine?

[Elaine Marion, executive]

Thank you, Mark, and thank you, everyone, for joining us today. We are pleased with our strong fiscal 2022 first quarter performance. Our consolidated net sales for the first quarter were $416.6 million, a 17.4% increase from the $355 million reported in last year's first quarter.

In our Technology segment, revenue was up 17.3% to $400.4 million compared to $341.2 million in the last year's first quarter, reflecting robust growth in both product revenue and service revenue up 17.5% and 16.3%, respectively. We are also very pleased with the continued sequential increase in service revenue over the past 5 quarters, resulting from our ongoing efforts to emphasize our managed services.

Our robust top line performance underscores strong demand for our diverse portfolio of solutions that are well aligned with customer needs. Adjusted gross billings increased 15.9% to $633 million from $546.4 million, benefiting mainly from organic growth, which constituted approximately 80% of the growth, coupled with contribution from the [ SMP ] acquisition we completed on December 31, 2020.

The adjusted gross billings to net sales adjustment was 36.8% compared to 37.5% in the last year's first quarter. This continues to trend higher relative to 33.3% on a trailing 12-month basis. Our financing segment was up 18% to $16.3 million, mainly due to increased sales of off-lease equipment, of $5.1 million, up from $3.9 million last year. The results from our financing segment tend to be uneven from period to period.

Our consolidated gross profit increased 7.1% to $105.5 million from $98.6 million, while consolidated gross margin was 25.3% compared to 27.8% last year. Technology segment gross profit increased 9.9% to $95.4 million while the gross margin of 23.8% declined 160 basis points, mainly as a result of lower product margins due to competitive pressure from enterprise customers and a lower proportion of sales of third-party maintenance and software subscriptions in the first quarter.

Services margins expanded 140 basis points to 39% due to growth in our service offerings. The financing segment's gross profit decreased 14% due to higher sales of off-lease equipment, which yielded lower margins. Consolidated operating expenses decreased 0.7% to $73.1 million, consistent with last year and the prior sequential quarter.

Our total headcount at the end of June 2021 was 1,547, an increase of 0.7% compared to 1,536 in the year ago first quarter and 0.8% below last quarter's level. Operating income increased 29.8% to $32.5 million. Our effective tax rate for the quarter decreased to 27.8% from 30.8% last year. For the year, we expect our tax rate to be between 28% and 30%.

Our consolidated net earnings of $23.5 million or $1.75 per diluted share were up 35.5% and 34.6%, respectively, from $17.4 million or $1.30 per diluted share in the last year's first quarter. Non-GAAP diluted earnings per share increased 29.8% to $1.96 per diluted share compared to $1.51 per diluted share year-over-year. Adjusted EBITDA was up 24.6% to $38.3 million. Our diluted share count totaled [ 13.44 million ] compared to [ 13.39 million ] in the prior year quarter.

Now looking at our end markets in our Technology segment on a trailing 12-month basis, telecom, media and entertainment and technology continue to be our largest markets, representing 27% and 16% of segment net sales, respectively. SLED, Healthcare and Financial Services followed accounting for 15%, 13% and 12%, respectively, with the remaining 17% distributed among several other customer types.

Moving to the balance sheet. We ended the quarter with $93.8 million in cash and cash equivalents compared to $129.6 million at the end of March. As a reminder, we have approximately $161 million in our financing portfolio, and a portion of that could be monetized if the need for additional capital arises.

Inventory levels increased sequentially 11.1% to $77.8 million. Inventory levels vary with ongoing customer projects. Our cash conversion cycle at the end of the first quarter was 32 days, up from 30 days in the year ago quarter, but down from 37 days in the March period. We continue to actively monitor the effects of COVID-19, the vaccine rollout and the spread of the new variants on our business and footprint. We also remain committed to seeking new investments either organically or through acquisitions to advance our positioning.

We began fiscal 2022 with strong fiscal quarter results, which bolster our outlook given solid demand and positive trends in the market for our solutions and services. In addition, we closed several outsized transactions in our financing business in July 2021, which we estimate will contribute $0.32 to $0.37 per diluted share in our second quarter. Against this favorable backdrop, we continue to monitor the potential negative impact from product shortages in our industry.

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

[Mark Marron, executive]

Thanks, Elaine. We were off to a great start in fiscal 2022, and I'd like to thank the entire ePlus team for their continued dedication and hard work in achieving our positive first quarter results. We continue to execute well on our growth strategy, and as the global economy continues to reopen, we see numerous opportunities to expand our participation in higher growth areas. As always, we will continue to work closely with our customers to be their partner of choice for delivering comprehensive life cycle IT solutions.

In summary, the fundamental outlook for ePlus remains strong, and I am excited about our opportunities this year and beyond. Operator, I'd now like to open the call for questions.

[Operator]

[Operator Instructions] Your first question comes from Maggie Nolan with William Blair.

[Margaret Nolan, analyst]

I'm wondering, going forward for the next couple of quarters, how are you balancing your expectations, just given the increased product sales you saw, but also expected shortages and supply chain issues you noted?

[Mark Marron, executive]

Really, really good question, Maggie. So if -- first, if you look at the quarter, we feel pretty good about the quarter overall. Metrics were up across all of the key areas from top to bottom. We've also seen that our open orders were up significantly almost 32% over last year. Backlog in our services was up. So all the kind of key metrics we look at are all very good. As it relates to the shortage, this past quarter, it was still in play, and we saw a minimal effect. It did affect our quarter where some things were pushed out due to lead times. I give credit to our teams. Darren, our CEO; and Elaine, our CFO, did a great job with their teams, making sure that we work closely with the customers and the vendors on getting the products out to the customers or solutions that our customers needed. There's still some uncertainty around the lead times and a lot of the experts are saying it's going out to next year. But right now, we feel pretty good about where we are in the quarter so far the pipeline and some of the metrics overall, but there's always that uncertainty as it relates to some of the shortages that are beyond our control.

[Margaret Nolan, analyst]

Okay. And then on the financing offering, can you give us an update -- just the latest update on credit quality of the customers, how you're assessing risk, particularly for those receivables that are notifying to third parties?

[Elaine Marion, executive]

Yes, sure. This is Elaine. We are continuing in our standard process of evaluating our lessees. We've been doing it for years and have a pretty robust process in place to evaluate the credit quality of our lessees. Our exposure is actually down this quarter from the previous quarter. So it's really basically related to transactional sales that occurred within the quarter. So there's really no change, Maggie, in how we approach the credit quality process in our customer base.

[Operator]

And your next question comes from Matt Sheerin with Stifel.

[Matthew Sheerin, analyst]

My first question just is regarding that leasing -- those leasing transactions that you said is an incremental 32% to 37%. How should we think about that? Is that just a gross profit drop through in that business, so you're going to get an incremental, whatever, a few million dollars?

[Mark Marron, executive]

Yes, that's a fair way. And Matt, a couple of things, as we discussed, it wasn't percent. It was actually cents. So I don't know if you -- if I missed what you said there -- actually -- okay. So as we always kind of talk about with our finance business, it's a lumpy business. As you know, mainly a lot of that stuff is transaction gains. So that's kind of net of [ all ] cost, except taxes, right? What happened is we had several large deals that happened in this quarter that we thought were material and we're going to [ put it out -- ] so in July in Q2. So -- but yes, from what you'd asked is exactly how it's going to play out.

[Matthew Sheerin, analyst]

Okay. Great. And then on the commentary about the gross margin in tech segment down, you talked about -- you did talk about a little bit of pricing pressure at the customer level. If you could expand on that. And then as we look to the September quarter, I know you've got -- you tend to have better gross margin because there's more warranty third-party maintenance contracts with your largest vendor. So should we expect gross margins to improve quarter-on-quarter?

[Mark Marron, executive]

All right. So that was a lot there, Matt. So I'll try to touch on the quarter, what happened this quarter. So there were a couple of things that affected our gross margins. One, the gross-to-net was lower, so which lowered the margins, our product margins were a little bit lower than normal. Nothing outside crazy normal, if you will. But a lot of it was due to some of the stuff that we've talked about with our land and expand. We did some land-and-expand type deals that are traditionally a little bit lower margin. And then over time, we try to show value to those customers. We also saw our enterprise business grow substantially.

So as a percentage of net sales, a 1,000 employees and above customers, actually grew 28%. So traditionally, those enterprise margins are a little tighter. Offsetting that, we saw our service margins actually increased by 140 basis points, so -- which is attributed to a lot of our annuity services revenues that we've talked about that as we continue to build those annuity, we would expect both the services revenue as well as the margins to continue to grow.

I think the second part of your question is the gross to net, normally with July due to fiscal year-end, do we expect it to be up, that's a tough one right now, Matt, to kind of give you an exact answer. I would expect it to be up some versus last year for sure. I can't give you an exact percentage a month into it just yet until we kind of start calculating all the numbers. But I think it's safe to say that the gross to net will be higher than last year, which would have a positive effect on the gross margins. I just don't know how much. And I'm not sure it's going to be dramatically -- a dramatic uptick.

[Matthew Sheerin, analyst]

Got it. And then -- and just in terms of the upside that you saw last quarter and the momentum you have going and -- what do you attribute that to? Your -- customers finally as they get back to the office, they're seeing more pent-up demand projects that have to be done? What do you account for that big uptick that you saw?

[Mark Marron, executive]

A few things there. One is demand for our solutions, Matt. So we are seeing a lot of customers need what we're providing across a lot of different things in terms of return to the workforce, cost management, long-term kind of funding for projects that they may be put on hold, some of the remote and hybrid solutions that we're seeing customers kind of build up. I also think there's a little bit of a rebound in the IT market. So from that end, we saw that. And then we saw continued growth across our 4 key areas. So data center and cloud, networking, security and collaboration all grew in the quarter and trailing 12 months. And security was -- I think it was up 19% year-over-year for the quarter, and it's 20.8% of our trailing 12 months. It's almost a $500 million business.

So I guess the key thing is diverse customer base, selling the solutions that our customers need, growth in each of our solution areas would be the roundabout answer on that.

[Matthew Sheerin, analyst]

Okay. And just my last question, just regarding -- it sounds like your headcount has been flattish, yet you're seeing good growth. And I remember last year, on the services side, where you're actually -- [ your employees add your ] customer base, I know that was down. So are you adding back to your headcount? And are you having any issues finding people, given the labor shortages that we're hearing about?

[Mark Marron, executive]

Yes. So a couple of things there, Matt. Yes, we're going to continue to invest in headcount because we believe we can continue to expand our reach and our solutions. So we will continue to look for headcount. Is it a little bit tougher in the market from both a recruiting and retention standpoint. Yes, it's a fairly competitive market. And people being able to work remotely has kind of put an interesting dynamic. We do have an internal recruiting team, though, that does a really nice job finding the resources we need, both on the sales and services side. So all good news there.

On the services side, though, just to add to it, Matt, that's pretty interesting. So one, our services were up 16.3% this quarter year-over-year. That's attributable a lot -- PS getting on site is still a little bit tight as we had talked about. But what's interesting now is staffing has start to pick up where our customers are looking for and the hiring market is a little tighter.

They're looking for us to kind of help them get up to speed as they return to work. We're also seeing customers that need help with what we call our On-Demand Jumpstart program, where if you think about a lot of customers who have been working from home are now getting back into the office, so a lot of their technology has been sitting idle. So we kind of go in and do -- identify, test, remediate that technology, both with local resources and our call centers. So we're starting to see some pickups in staffing and that on-demand services. And our annuity services, our total contract value in Q1 year-over-year was actually up 80%. So a lot of the services business we've been saying we've been trying to build out is actually moving in the right direction, even in these times.

[Operator]

[Operator Instructions] Your next question comes from Greg Burns with Sidoti.

[Gregory Burns, analyst]

Just following up on the last question in terms of headcount and investing in more customer-facing resources. The leverage has been really strong the last few quarters. Maybe some of that is [ conservatism related to ] pandemic, but obviously, demand is picking up here. So how should we think about operating leverage, operating margin targets going forward?

[Mark Marron, executive]

Okay. So Greg, you were breaking up a little bit there. But what I think you asked is what should we expect with operating leverage as we go forward. So what I think we've done a nice job of, overall, some of the operating leverage we've got is due to the pandemic, obviously, with travel and entertainment and things along those lines that are down.

I think we've done a really nice job of keeping all the ePlus employees realigning towards the areas that we believe are key that our customers need in this new environment.

So driving up our net sales and our AGV, if you will, while maintaining headcount. With that said, I would expect that we'll continue to hire both sales and services as we continue because I do think we've got a real good chance to grab some additional market share as we go forward. So I would think the OpEx as it stands this past quarter is probably a good metric overall to manage to, if you will. I would think, over time, our headcount should trend up a little bit as we continue to build out certain areas because I think we can continue to grow in some of our focus areas.

[Gregory Burns, analyst]

Okay. And then -- in terms of the -- has there been any change in the conversations you're having with your customers, given the little resurgence we're seeing in COVID? Or are they starting to get more cautious in terms of their outlook?

[Mark Marron, executive]

No, I haven't heard it yet. I mean, we just got the news, I think, today with the mandate for the masks, again, coming back in. I think everybody's been accustomed to doing a lot of the virtual remote kind of calls, if you will. I've done many, many in terms of calls myself on video with customers, and they seem very open to it, and they've adapted fairly well to it as we walk through our solutions or trying to help them with what they need.

So I don't think we'll see much of a change than what we've seen over the past year, to be honest, Greg, I think the big thing that a lot of customers are trying to figure out is the lead times on some of the supply chain stuff. So I think they all need solutions where they're looking to upgrade the solutions or maybe jump-start some of the stuff that they wanted to do, but didn't do in the last year and they're trying to figure out what is the right solution and then what's the lead time in order to get that in.

[Operator]

There are no further questions at this time. I will now hand the call back to the company.

[Mark Marron, executive]

Okay. The company says thank you. If I could, thank everybody for attending today. We appreciate it and look forward to seeing you or hear from you on the next quarterly earnings call. Take care and be safe. Thank you.

[Operator]

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