ePlus inc. (NASDAQ:PLUS) Q1 2024 Earnings Call Transcript

ePlus inc. (NASDAQ:PLUS) Q1 2024 Earnings Call Transcript August 7, 2023

Operator: Good day, everyone, and welcome to the ePlus Earnings Release Conference Call. At this time, all participants are in a listen-only mode and later we will take your questions. I would now like to hand the call over to Mr. Kley Parkhurst. Please go ahead.

Kley Parkhurst: Thank you for joining us today. On the call is Mark Marron, CEO and President; Darren Raiguel, COO and President of ePlus Technology; Elaine Marion, CFO; 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 in our periodic filings with the Securities and Exchange Commission, including our most recent annual report on Form 10-K, quarterly reports on Form 10-Q and in other documents that we may file with the SEC.

Any forward-looking statement speaks only as of the date on which the statement is made and the Company undertakes no responsibility to update any of these forward-looking statements in light of new information, future events or otherwise. In addition, we will be using certain non-GAAP measures during the call. 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 like to turn the call over to Mark Marron. Mark?

Mark Marron: Thank you, Kley. And thank you, everyone, for participating in today’s call to discuss our first quarter fiscal 2024 results. I will start with some key takeaways. ePlus delivered strong results in the first quarter, marking a great start to our fiscal year. Double-digit sales growth was driven by solid execution, our land and expand strategy, supply chain improvements and contributions from acquisitions, our team performed at a high level, executing consistently across all end markets. Our net sales growth of 25%, along with our scalable operating platform and disciplined cost management drove significant operating leverage. Adjusted EBITDA rose 41% and diluted EPS improved 51% compared to the same period last year.

The strength of our performance again highlighted how our strategic positioning and focus on serving faster-growing solution areas enables us to generate growth well in excess of the overall market for IT spending. In today’s environment, where enterprises and organizations are prioritizing investments that optimize cost and security, we have continued to meet our customers’ needs with the suite of products and services that deliver value rapidly and efficiently. During the first quarter, we continue to see an easing in supply chain constraints. With the improved product availability, we were able to complete a number of previously delayed customer projects benefiting overall sales growth. Based on our conversations with our partners, we anticipate continued improvement in product availability and lead times over the remainder of the year.

As you know, acquisitions represent the fundamental component of our growth strategy, and our first quarter results benefited from the contributions of our Network Solutions Group and Future Com, who we acquired in July of 2022. On a combined basis, these acquisitions contributed approximately 1/3 of our net sales growth in the first quarter. Our technology business sales increased 26% with demand improving across all end markets and across most product categories. We continue to get operating leverage in our technology business segment as evidenced by our operating income being up almost 50% versus last year. We experienced a broadening of customer demand trends in the first quarter across all customer size segments, led by strength in the mid-market segment.

The mid-market, which we define as organizations with 500 to 10,000 employees is primarily focused on adopting cost-optimized cloud-based architectures as well as enhancing cloud security to accommodate remote and hybrid work. Mid-market customers are particularly well suited to partner with ePlus as their key areas of need align with our strengths in areas such as workplace transformation, cybersecurity and technology modernization. Our customers are continuing to evaluate AI technologies, and we see it as an emerging growth driver. Many of our partners have incorporated AI into their core offerings to simplify and optimize operations as well as provide faster detection, response remediation on the security front. We empower customers with cutting-edge AI optimized infrastructure solutions through strategic partnerships with industry leaders such as NVIDIA.

Our AI services are designed to help customers adopt the latest technologies while increasing their speed to market. Our customers utilize our expertise to manage the complexity of designing, deploying, supporting and managing AI. This can include building out an AI strategy plan, identifying priority projects, providing resources to help structure and implement AI projects and then ensure proper governance and policies are applied and monitored. We believe with the expansion of data overall and the benefits of AI being embedded in hardware and networking platforms will continue to provide modernization opportunities for infrastructure related to networking, security, cloud and collaboration. Networking was the standout performer this quarter as gross billings increased 67%.

The growth drivers included solid organic growth, reflecting demand for networking solutions that facilitate collaboration and enable workplace transformation as well as improved product availability that allowed us to complete certain customer projects and the contribution from recent acquisitions. Security product gross billings increased 24% year-over-year on a trailing 12-month basis and is approximately 21% of total gross billings. We believe that cybersecurity remains an IT priority for organizations of all sizes, and we remain focused on providing the products and services that enable our customers to mitigate risk. Our services revenues improved by 7% as a slight decline in professional services was more than offset by robust revenue growth in Managed Services.

We saw a particularly strong demand for our enhanced maintenance support and SOC services. These and other managed services offer significant value to customers who face complex challenges in terms of managing cybersecurity risk, keeping pace with technological change and recruiting and retaining IT talent. We continue to build out our annuity managed services with proprietary new offerings that expands our capabilities in our focused markets such as ePlus cloud managed services, storage-as-a-service, and ePlus life cycle services support. Several months ago, we introduced ePlus automated virtual assistant for collaboration spaces. This innovative solution utilizes robotic automation processes in conjunction with ePlus managed services to enhance the user experience in video-enabled meeting rooms and workspaces.

By building out our portfolio of unique offerings, we are differentiating ePlus against our competition while strengthening our value proposition. Managed Services revenues increased 23.2% over last year and has generated a CAGR of 24.1% over the last five years. To put this in perspective, annuity quality services have almost doubled over the last three years. Moving to our finance segments. Results for the quarter were consistent with our expectation given last year’s first quarter produced outsized transactional gains from specific financing deals, creating a tough compare quarter-over-quarter. As a reminder, the financing business provides flexibility for our customers and is a competitive differentiator as compared to our technology market peers.

Earlier, I noted the positive contributions from our recent acquisitions. As we look forward, acquisitions will remain an important element in our growth strategy and the strength of our balance sheet affords us the flexibility to pursue additional value-accretive transactions. Our M&A pipeline remains active, and we are currently evaluating a variety of targets that can further extend our capabilities and supplement our organic growth. I’d like to thank all our ePlus teammates for their efforts this quarter to drive our strong financial results, innovation as well as numerous customer success stories. I will now turn the call over to Elaine to discuss our financial results in more detail. After Elaine’s remarks, I will provide our financial outlook for fiscal 2024.

Elaine?

Elaine Marion: Thank you, Mark, and good afternoon, everyone. I am pleased to report on our strong start to fiscal year 2024, reflecting the success of our growth strategy as well as the contribution from our recent acquisitions. Broad-based strength across key end markets and revenue from acquisitions led to a consolidated net sales increase of 25.3% to $574.2 million — these factors are also evident in our technology business net sales, which grew 26% to 565.7 million. Beginning with this quarter, we have introduced three operating segments, which comprise our technology business, product, professional services and managed services. Our product segment includes sales of third-party products, including software and services.

Our professional service segment contains our project-related services staff augmentation, consulting engagements and project management services. Our Managed Services segment comprises various services offerings, such as our infrastructure and cloud managed services managed security and service desk. Going forward, we will reference these new business segments collectively as our technology business. In our Products segment, revenues increased by 29.2% to $498.2 million, led by sales of networking products in the Managed Services segment, revenue grew 23.2% to $32 million from sustained growth and enhanced maintenance support and security operation center services. In our Professional Services segment, revenue declined 4.3% to $35.6 million year-over-year, primarily due to reduced demand for staff augmentation services.

Our strategy of focusing on faster-growing areas boosted by acquisition contribution and easing supply chains led to technology business gross billings growing by 17.6% and to $842 million year-over-year. As a reminder, gross billings denote the total dollar value of customer purchases of goods and services, including shipping charges during the period, net of customer returns and credit memos and sales and other taxes. Within our technology business, our two largest markets continue to be telecom, media and entertainment, and technology, representing 26% and 19%, respectively, of our technology business net sales on a trailing 12-month basis. SLED, Health care and financial services accounted for 16%, 14% and 9%, respectively, with the remaining 16% from other end markets.

In our financing segment, lower post-contract earnings and transactional gains in the first quarter of fiscal 2024 led to financing segment revenue of $8.5 million, a decline from $9.6 million in the last year’s first quarter, which resulted in lower gross profit of $6.4 million compared to $7.9 million. As we have mentioned, results in our financing segment can vary widely due to the transactional nature of the business. Our consolidated gross profit increased 25.3% to $142.3 million, with a consolidated gross margin of 24.8%, in line with that of the prior year. Within our Technology business, gross profit increased 28.6% to $135.9 million, and gross margin expanded by 50 basis points to 24% and driven by higher margins across all three technology segments.

Due to a more profitable mix, product gross margin expanded 80 basis points to 22.4% and professional service gross margin expanded 90 basis points to 41.4%. Benefiting from our increased scale, managed services gross margin improved 210 basis points to 30.7%. SG&A expenses increased 17.6% year-over-year, reflecting the addition of team members from Network Solutions Group, organic hires and higher variable compensation expense, still lower than gross profit, which increased 25.3%. At quarter end, our head count increased to 1,853 from 1,637 in the prior year quarter mainly reflecting additions of customer-facing employees. Through continual operational discipline, operating income grew 39.6% to $46.3 million. The effective tax rate was 27.2% in the first quarter of fiscal 2024 compared to 28% in the year-ago quarter.

Fiscal 2024 1st quarter consolidated net earnings were $33.8 million or $1.27 per diluted share, both up 51.5% and 51.2%, respectively, from the year ago quarter. Non-GAAP diluted earnings per share were $1.41, a 42.4% increase from the year ago period. Adjusted EBITDA was $53.9 million or 40.7% ahead of the comparable quarter in fiscal 2023. We ended the quarter with cash and cash equivalents of $101.6 million compared to $103.1 million at the end of fiscal 2023. Over the past three years, operating cash flow has been impacted by the growth in inventories, which partly reflects supply chain constraints. With supply chains now improving, we expect inventory to remain flat or decrease reducing our working capital needs and enhancing operating cash flows.

First quarter inventories remained flat relative to the level at the close of fiscal 2023. Inventory turns improved to 32 days versus 38 days in the preceding quarter. Our cash conversion cycle was 48 days compared to 44 days in the year ago quarter but significantly improved from the 59 days at the end of March 2023. Finally, I want to thank our ePlus team for solid execution in the first quarter and their persistent efforts to drive growth. With that, I will turn the call back over to Mark. Mark?

Mark Marron: Thank you, Elaine. ePlus is off to a strong start this year, benefiting from our diversified base of customers and our strategic focus on serving faster-growing end markets. In an environment where our customers are prioritizing more rapid payback on their IT investments, ePlus remains well positioned for continued growth. We are leveraging our extensive capabilities across the technology stack to deliver effective solutions that enable our customers to optimize costs, enhance security and focus on their core business operations. As a result, we remain confident in our ability to deliver sales growth in fiscal 2024 that exceeds the projected growth in the IT spending market. We are, therefore, initiating fiscal 2024 net sales guidance of $2.23 billion to $2.33 billion.

We expect adjusted EBITDA to be between $200 million to $215 million, representing an adjusted EBITDA margin of to 9.2%. Our guidance assumes in part, a continued gradual leasing and supply chain constraints that enables us to complete previously delayed customer projects. In closing, ePlus remains focused on building long-term shareholder value through the execution of our growth strategy and efficient allocation of capital. I want to thank the ePlus team for their dedication, which is again evident in our strong performance. Operator, please open the call for questions.

See also 10 Undervalued Canadian Stocks To Invest In and 12 Undervalued European Stocks to Buy.

Q&A Session

Operator: Thank you, sir. And everyone, we will now take your questions. First up is Jesse Wilson, William Blair.

Jesse Wilson: This is Jesse on for Maggie. Congrats on the results and I guess, first, it’s nice to see you initiate full year guidance, but just to dig in, it seems like a bit of a range in terms of the calculated growth at the upper and lower end. Can you talk about some of the assumptions you’ve made, what kind of gets you to upper end versus the lower end?

Mark Marron: Sure. So Jesse, it’s Mark here. So a couple of different things. So let me start off with one why we’re providing guidance now. So we had actually planned on providing guidance a few years back and then COVID hit. So we kind of pulled back. As we’ve talked to folks like yourself and other investors, they thought it would be helpful if we provide guidance. We have really good visibility into our pipeline and backlog, and we thought this would help with some of the modeling because there was some pretty big differences between the different analysts in terms of our growth, both top line and bottom line. So we’re just trying to provide a little more granularity. As it relates to the numbers, both from a, I’ll call it, net sales and adjusted EBITDA.

What we saw in Q1, we actually had a really nice quarter, but there are a few things that happened in the quarter. One, we saw some supply chain easing. So we source some deals specifically in the networking space that were pulled forward. We also had about 1/3 of our net sales was from acquisitions. I will point out in subsequent quarters. One of the acquisitions will fall off and are in your projections already. We also had some large land and expand deals that affected the quarter. So, there was some pull forward. There were some acquisition related, which is about 1/3 of the net sales and then supply chain easing. As we looked at the metrics, it was about seven to rough numbers. This is approximate 7% to 11% growth over last year on the top line.

And we were very comfortable looking at our pipeline and backlog on where that put us, especially after the first quarter. I will point out Q2 is a tough compare for us for a lot of different reasons. Mainly in our finance segment, we had a really solid quarter last year, especially in the operating income space. So I think that will be tough to for us to match as we go into this quarter. And it’s normally — Q2 is normally a solid quarter, but with that tough compare and some of the pull forward, we thought it might be a little bit tighter in Q2. But that’s the high level on the thought process as it relates. And we thought the margin percentage 9% to 9.2% on the adjusted EBITDA was in line with expectations based on some investments we plan on making as we continue forward throughout the year.

Jesse Wilson: Got it. That’s all really helpful. And then a couple of follow-up questions just because you hit on both in your first answer. So you are seeing some of those land and expand deals ramp up. Are you thinking about that on a multiyear basis? Or kind of over a few quarters, which seems like that might be the case. And then my second follow-up…

Mark Marron: Go ahead, Jesse. Sorry.

Jesse Wilson: Yes. My second follow-up was on the acquisition. So did you just acquire some very talented sales persons that are winning new business? Or were some recently acquired customers spending more? That’s it for me.