ePlus inc.
Q3 2021 Earnings Call Transcript

Published: 3 Feb 2021

[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.

[Kley Parkhurst:]

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, 2020, and our Form 10-Q for the period ended December 31, 2021 filed. The Company undertakes no responsibility to update any of these forward-looking statements in light of new information or future events.

[Mark Marron:]

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 remain steady. Our highest 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 benefited 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 an 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 continue 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.

[Elaine Marion:]

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 services 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 to 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 $29.03 compared to 30% 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 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, health care and financial services followed accounting for 15%, 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% 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 the reduction in revenues recorded as net and also a larger proportion of sales to enterprise customers, which tend to be more competitive.

[Mark Marron:]

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. Also, in November, we celebrated our 30th 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 questions.

[Operator:]

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

[Brett Knoblauch:]

Just a couple of questions from me, I guess, regarding the acquisition. Will the acquired billings, the $85 million to $100 million, have a similar gross to net adjustment as, I guess, the core business? And then will it be accretive in -- for fiscal year 2022?

[Mark Marron:]

Brett, it's Mark. So, two things there, will it be accretive in 2022? Yes, it will. And in terms of metrics, in terms of gross to net, it's in the same range of the metrics that ePlus is going on.

[Brett Knoblauch:]

Okay. Perfect. And then maybe just looking forward a bit, I think you guys are pretty cautious on the Q2 call. Would you say a similar level of cautiousness now or some of that's been alleviated?

[Mark Marron:]

No. Brett, I think same cautiousness. So look, here's what's hard when you think about what's going on in the world overall. One, it's really hard to predict at this point. So there's a lot of uncertainty around COVID. The stimulus, whether it's going to get out and where it's going to get out and who it's going to help. If you think about all the things that are going on in the market overall, there's a lot of challenging things. We feel good about where we are. So, I don't mislead you that we'll adapt and adjust to what's going on in the market. We like the strength of our two BUs, our two business units, which kind of showed up again this quarter. What's nice about what we have going on at ePlus, we've got both the technology and finance segment. So, our finance group had a tough compare to last year and our technology business unit picked them up. Same could be said on the opposite in previous quarters, but I still think it's tough to call what's going on in the market overall, all right.

[Brett Knoblauch:]

No. Perfect. Completely understand it. And maybe, Elaine, with the headcount reductions over the last year, 7% is pretty significant. Would you see that process is mostly completed or do you think there's more resource realigning to go?

[Elaine Marion:]

I would say that we are mostly complete with that. We do plan to hire customer-facing positions in the future, and we'll do that consistent with business growth.

[Mark Marron:]

Hey, Brett, if I could add one thing, we're always going to continue to realign our resources based on what's going on in the market. So based on what our customers are looking for, whatever challenges they have, whether it's work-from-home, returning to work, cloud-related, security-related, we're going to continually adjust and realign. And we're going to invest in the areas that are the most margin book, if you will, but also what our customers are expecting from ePlus.

[Operator:]

Your next question comes from the line of Kurt Swartz from Stifel. Your line is open.

[Kurt Swartz:]

Hoping maybe, first, you could talk a little bit about OpEx trends, maybe on a dollar or a percent of sales basis. You discussed some of the drivers of the lower OpEx in recent quarters, but just wondering how you're viewing that is trending near-term versus longer-term as the economy sort of assumingly normalizes, as you've discussed?

[Mark Marron:]

Yes. That's a good question, Kurt. So first off, a couple of different things. One, as Elaine kind of noted, we are going to continue to invest in what we'd call customer-facing headcount to address where we think the market is going and some of the market shares we think we can gain. What we've seen with OpEx so far is, due to some of the headcount realignment, we've got some savings. We've got some savings with our facilities as well. So as we kind of adjust to this new kind of hybrid model work from home, ultimately, some portion of return to work, we think there'll be some facility costs as we go forward. Haven't really seen them yet because they're obviously due to the terms on when our leases end based on those facilities. Travel and entertainment has been down significantly. Post-COVID, I would expect that to pick up some, but I don't think it will ever get to the historical levels that we had. So, I think we'll see some new model of how we support our customers in our go-to market, but we do expect to hire in terms of supporting our customers and grabbing market share. So did that address what you're looking for, Kurt?

[Kurt Swartz:]

Yes, understood. And then, I guess, maybe just on the growth side, I'm hoping maybe you could discuss the outlook from perhaps like a seasonal perspective and, I guess, along with that, you talked about inventory still being up reflecting projects underway. So just wondering what sort of visibility you may have into the cadence and length of those projects and how that should sort of impact revenue on a go-forward basis?

[Mark Marron:]

Well, a couple of different things there, Kurt that you touched on. So when I look at the market overall, there are some interesting things going on. I think there are some customers that are struggling as it relates to COVID, specifically, let's say, like in the health care vertical. So, there's some things we're trying to do to adjust there to leverage our leasing and help those customers out. I do think, overall, when you look at the market, I think in the enterprise space, there seems to be more cash, where people have the ability to spend. And we saw that in our numbers, where we had some higher enterprise spend in 1,000 employees and above. So I'd call really kind of your mid-market to enterprise accounts where you saw some upticks. So, I think the visibility is good. I think the sales cycle in some of the smaller customers is a little bit longer. And I think that will stay in place until we get some resolution on COVID.

[Kurt Swartz:]

Understood. And then I guess, you touched on this a little bit, but if you can maybe just sort of double click on any trends you're seeing, specifically from a product perspective, what the drivers were in the quarter? What might have been a little bit weaker than expected? And then maybe specifically, if you could talk about PC-related sales, that had been a tailwind in previous quarters, but it is generally not a tailwind for ePlus. So any color as to whether those sales continued would be helpful.

[Mark Marron:]

Yes. So I'll start with you first. The commodity play, as you know, we've talked about numerous times, we're really not in that space. Now with that said, we did have a large customer that we've been with for years that we fulfilled that kind of affected our gross margins. So we had a few things on the margin side. The enterprise deals that Elaine had touched on earlier, a large kind of commodity sale and then the gross to net being a little bit lower. As it relates to the things that we're seeing in the market, security is obviously top of mind with every customer out there. So if you look at our security, it was 23% of our adjusted gross billings this quarter versus last year, it was a little over 20%. And so, we see a lot of customers that are really looking for help with incident response plans, the multifactor authentication, so really want to understand who the user is and where they are and things along those lines, cloud security, and then services. What's kind of nice -- what happened with our business, where we have the solutions and services across many areas, in services, a lot of our customers we couldn't get on site. Now some seem more open now to us doing or I'll call transactional professional services remotely. We've had some staffing that's gone down because we can't get on site, but our annuity quality revenues with our managed services has continued to build, which is nice -- our services is really nice business, which picked up our gross margins overall, where our products took a little bit of a drop. So I'd say security services obviously, the move to the cloud and then some of the work-from-home around collaboration and things along those lines.

[Kurt Swartz:]

Understood. And then, I guess, maybe just a quick follow-up to that. On the sort of commodity-related sales, do you have any visibility as to whether those would continue into future quarters or does it look like that demand has sort of been fulfilled at this point?

[Mark Marron:]

Right now, it looks like the demand has been filled, but we want to be careful, Kurt. That can change at any time, if a customer comes back and says they need something in that commodity space, and if it's one of our bigger customers, we're going to fulfill it. Nothing in the, I'll call it, in the backlog significantly. We do have a little bit from one of the deals that rolled into this quarter. So there will be some, but not a significant amount.

[Operator:]

And there are no further questions at this time. I will turn the call over to Mark Marron for some closing remarks.

[Mark Marron:]

All right. Thanks, Rob. Thanks, everybody, for joining us today. We appreciate your confidence and your following, and we look forward to speaking to you after our Q4 and end of fiscal year. Take care and be safe.

[Operator:]

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