ePlus Q2 2024 Earnings Call Transcript

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November 7, 2023

There are 7 speakers on the call.

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. Clay Parkhurst, SVP.

Operator

You may begin.

Speaker 1

Thank you for joining us today. On the call is Mark Marron, CEO and President Darren Raguel, COO and President of Eplus Technology Elaine Marion, CFO and Erica Stoker, 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 And other documents that we filed with the SEC, including the Form 8 ks we filed on October 6, 2023, recasting certain disclosures on our most recent annual report. Any forward looking statement speaks only as of the date of which the statement is made and the company undertakes no responsibility to update any of these We have included the GAAP financial reconciliation in our earnings release, which is posted on the Investor Information section of our website at www.eplus.com.

Speaker 1

I'd now like to turn the call over to Mark Marron. Mark?

Speaker 2

Thank you, Clay, and thank you everyone for participating in today's Call to discuss our Q2 fiscal 2024 results. I will start with some key takeaways. Eplus generated solid results in our 2nd quarter with consolidated net sales up 19%. This was driven by strong sales growth of 21% In our technology business, which included 9% revenue growth in our services businesses, diluted earnings per share advanced 14%, Slightly lower than sales growth due to a shift in product mix, a decline in finance segment earnings given uneven deal flow and a tough compare year over year, As well as increased operating expenses, which included investments in our key growth initiatives. Our 2nd quarter performance benefited from Continued market share gains and improved product availability that enabled us to deliver on orders from prior periods.

Speaker 2

Gross billings improved for the 3rd consecutive quarter, totaling approximately $856,000,000 representing a 7.4% gain over the same Our demonstrated ability to drive sales and earnings growth even in an uncertain economic environment underscores the strength of our strategic plan, Our expertise across the broad technology stack and diversification across customer types and end markets. Through our comprehensive portfolio of innovative solutions and service offerings, ePlus enables successful and Cost effective outcomes that align with our customers' IT objectives. I was particularly pleased with our sales growth as we experienced increases across nearly all market Networking represented our best performing category as net sales grew approximately 62% year over year. This strong growth reflected 3 main factors. 1, a contribution from our recently acquired Network Solutions Group 2, a continued improvement in product availability that enabled us to deliver on prior customer orders and 3, organic customer demand.

Speaker 2

The prevalence of hybrid work, distributed computing and the emergence of AI are driving growth for advanced networking architectures, And we are capturing share in this space through our innovative solutions and partnerships with leading OEMs. Continued Customer investment in network modernization solutions is also contributing to our growth in this space. This includes building out AI enabled of our technology leadership in this space. For example, we were recently recognized as reimagined Work Partner of the Year for the Americas from Cisco. This award recognizes partners who are excelling at hybrid work, customer experience, leading innovation and empowering collaboration with WebEx.

Speaker 2

We were also recognized for the release of our proprietary Eplus collaboration solution called Automated Virtual Assistant or AVA. EplusAva is an in house developed managed service that leverages automation and artificial intelligence to provide automated testing and reporting Security was 18.5 percent of our technology gross billings in the trailing 12 months. Security net sales increased 7% in the quarter. Customers look to Eplus to better mitigate the risk sophistication of cyber threats and want us to provide comprehensive risk management solutions. In October, we announced our holistic program called Compromise Nothing.

Speaker 2

This comprehensive program includes strategic assessment and advisory services And our managed service offerings. Our extensive capabilities distinguish Eplus in the security solutions market and provide attractive opportunities for us to build and expand relationships with both existing and new customers. Our services segments performed well with net revenue increasing 9 on expanding our solutions and capabilities in managed services, which offer the advantage of recurring and predictable monthly revenue streams. We continue to see our customers shift their IT spend towards SaaS based solutions given upfront cost advantages, Ease of scalability and simplified maintenance requirements. The continued growth of our SaaS offerings such as storage as a service Enaiva remains a key growth driver for Eplus within our managed services business along with our other annuity services And helps with visibility and predictability of future revenue streams and profitability.

Speaker 2

Strong double digit growth in managed service revenue, Coupled with greater operating efficiency drove a significant improvement in the profitability of this business with gross margins increasing 4 60 basis points. Professional services revenue edged higher as growth in project services revenue was largely offset by a decrease in staff augmentation. This performance is consistent with customer IT spending trends, which currently tend to favor shorter term projects That generate relatively fast return on investments. Additionally, we believe the growing adoption of automation and AI will drive More demand for cloud storage and analytics. To meet these needs, we are leveraging our capabilities in cloud and consulting Our financing segment delivered a solid quarter consistent with our expectation even as results declined on a year over year basis.

Speaker 2

As I noted in last quarter's call, because this business benefited last year from specific financing deals, We anticipated that quarterly comparisons this year would prove challenging and create a tough compare. While quarterly or even yearly results in this segment can be variable, Our financing business provides flexibility for our customers while delivering strong profitability. We remain committed to investing in our team With a particular emphasis on sales, professional services and technical support personnel, we have continued to build out our solution and service offerings around managed Additionally, we've invested in the construction of our new state of the art customer innovation center, which will enable us to showcase our breadth of innovative offerings and expand our warehouse and logistics capabilities. These investments, higher acquisition related depreciation and amortization expense and lower financing segment operating income, Moderated second quarter growth and consolidated operating income. Despite a tough economic environment, we are pleased that consolidated quarterly net earnings increased 14.7 percent to $32,700,000 And in our Technology Business segment, operating income increased 12 point 5 percent to $35,900,000 and adjusted EBITDA increased 17.1 percent to 45,500,000 I'd like to express my thanks to the entire Eplus team for delivering another quarter of solid financial performance.

Speaker 2

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?

Speaker 3

Thank you, Mark, and good afternoon, everyone. I will provide additional details about our financial performance in the Q2 of fiscal 2024. Consolidated net sales increased 19 percent to $587,600,000 Technology Business net sales grew 21.3 percent $571,900,000 aided by the fulfillment of open orders and the NSG acquisition. Service revenue increased 9%, reflecting continued strong growth in managed services, partially offset by modest growth in professional services. Sales remained broad based across our customer verticals.

Speaker 3

On a trailing 12 month basis, our 2 largest verticals were Telecom, Media and Entertainment And Technology, representing 25% and 18% of our Technology business net sales respectively. SLED Healthcare and Financial Services accounted for 16%, 13% and 10% of our technology business net sales respectively, With the remaining 18% divided among other end markets, our financing business segment faced a particularly challenging comparison this quarter And as such, revenue declined to $15,700,000 from the prior year period, primarily due to lower proceeds from sales of equipment, Lower transactional gains and lower month to month rents. Consolidated gross profit increased 8.3% to 144,400,000 Representing a consolidated gross margin of 24.6% compared with gross margin in the same quarter last year of 27%. The decrease in gross margin from the same period last year primarily was the result of product mix and lower financing business segment earnings. Within our Technology business, gross profit increased 12.4 percent to 130,700,000 Technology business gross margin was 22.9% compared to 24.7% in the year ago quarter.

Speaker 3

This decrease was mainly due to our lower proportion of 3rd party maintenance and services sales, which are recorded on a net basis. Services gross margin increased significantly with managed services gross margin improving 460 basis points to 31.1% And professional services gross margin expanding 270 basis points to 41.3%. The improvement in services profitability primarily reflected enhanced operating efficiency driven in part by increased scale of our Managed Services segment. Operating expenses increased 11.6% year over year to $99,500,000 reflecting higher salaries and benefits Due to additional headcount, depreciation and amortization expense from the NSG acquisition and increased spend on travel and entertainment and marketing. We ended the September quarter with headcount of 1877, an increase of 148 employees, of which 118 were customer facing.

Speaker 3

It should be noted that we on boarded 83 employees with the acquisition of NSG. Technology Business operating income rose 12.5 percent to $35,900,000 while Financing Business segment operating income declined 26 0.4% to $9,000,000 On a consolidated basis, operating income grew 1.7% to $44,900,000 Earnings before tax increased 11.8 percent to $45,000,000 as the foreign currency losses from last year did not replicate in the current quarter. The effective tax rate was 27.4 percent in the Q2 of fiscal 2024 compared to 29.3% in the year ago quarter. Consolidated net earnings was $32,700,000 or $1.22 per diluted share, reflecting increases of 14.7% And 14% respectively from the year ago quarter. Non GAAP diluted earnings per share were 1.40 up 8.5% year over year.

Speaker 3

Our diluted share count at the end of the quarter was 26,700,000 unchanged From the Q2 of fiscal 2023, adjusted EBITDA in the Technology business rose 17.1%, but declined 26.2 percent in the financing business segment. As a result, consolidated adjusted EBITDA improved 6 point 5% to $53,600,000 That brings me to our year to date review. Consolidated net sales grew 22 percent to $1,160,000,000 for 1st 6 months of fiscal 2024, primarily driven by 23.6 percent net sales growth in the Technology Business. Technology Business gross billings increased 12.2 percent to $1,700,000,000 Consolidated gross Profit increased 16.1 percent to $286,600,000 Consolidated gross margin was 24.7% compared to 25.9 percent a year ago, primarily due to the mix in the product segment. Consolidated net earnings were 66 $500,000 or $2.49 per diluted share compared to $50,800,000 or $1.91 per diluted share.

Speaker 3

Adjusted EBITDA rose 21.3 percent to $107,400,000 and non GAAP diluted earnings per share Expanded by 23.2 percent to $2.81 Shifting to the balance sheet, Cash and cash equivalents were $82,500,000 at the end of the 2nd quarter compared to $103,100,000 at the end of fiscal 2023. As supply chain pressures continued to ease and product availability improved, we were able to deliver on prior customer orders and related services. As a result, inventories declined to $222,100,000 from $243,300,000 at the end of March 2023. Inventory turns continued to improve to 29 days compared to 32 days in the preceding quarter 38 days at the end of fiscal 2023. Our cash conversion cycle was 51 days compared to 52 days in the year ago quarter 59 days at the end of fiscal 2023.

Speaker 3

Given this improvement, year to date operating cash flows were $10,300,000 compared to $119,700,000 of cash used in the same period last Cheer. While we expect our customers to be more conservative with their IT spending in the second half of fiscal twenty twenty four, as Mark mentioned, Eplus remains well positioned given our strategic focus on higher growth end markets. As always, I want to thank our talented Eplus employees For continuing to drive our solid financial performance. With that, I will turn the call back over to Mark. Mark?

Speaker 2

Thank you, Elaine. Through the first half of our fiscal year, Eplus has delivered strong financial performance. Our results highlight the continued success of our growth strategy The advantages of our diversification and comprehensive capabilities. As we enter the second half of our fiscal year, we are beginning to see sales cycle timelines Extend as customers prioritize cost optimization initiatives and reallocate spending accordingly. In this environment, we anticipate customers will focus on projects that deliver relatively fast return on investments, while continuing to deploy solutions that enhance Eplus has successfully navigated through similar period of economic uncertainty in the past, And we remain confident in our outlook given our market positioning and focus on key growth verticals.

Speaker 2

As a result, we net sales of approximately $2,230,000,000 to $2,330,000,000 and adjusted EBITDA of $200,000,000 to 2 $1,000,000 representing a margin of 9% to 9.2%. Our guidance assumes in part A continued easing in supply chain constraints that enable 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 the efficient allocation of capital. Operator, please open the call for questions. Thank you.

Operator

Your first question comes from Maggie Nolan with William Blair. Please go ahead.

Speaker 4

Hi, thank you. I was hoping you could give us a little color on the mix within revenue of SMBs versus large enterprises and any different spending trends or expectations that you have across the

Speaker 2

Sure. Hey, Maggie, how are you? So as I think you know, we really don't focus on the S and SMB. So we're mainly a mid market Enterprise play, many of the solutions that we're rolling out across cloud, security, networking, collaboration and now AI Kind of fit in that mid market, which is our sweet spot. With that said, from 500 employees and above, We were actually up and our enterprise sales were up, I want to say for the quarter, net sales were up like 7% or 8%.

Speaker 2

So we actually had a really nice quarter related to our customer size segments. Our top five verticals were also up, both in net sales and gross billings. So nice execution by the sales team across the different customer size segments and verticals. That gets what you needed, Becky?

Speaker 4

Yes, it did. And then when we think about the Full year guidance. What does your visibility into the guidance look like right now? When you initially built the guidance, did you expect Such a strong first half of the year as well as some of the commentary that you gave on kind of weaker IT budgets in the back half of the year or has that changed over the course of the year since you set guidance?

Speaker 2

Yes, there's a couple So we're still very comfortable with our guidance. And if you think about it, our guidance as it relates to a compare to last year on net sales is We're actually up 8% to 13%, depending on where we fall within that range. So that's a very strong uptick as Compared to the market overall and as compared to our peers, a couple of things went into it. Yes, we did expect a stronger first half. A couple of things to kind of call out at a very high level.

Speaker 2

One is Q3 this year sorry, last year for Teck It's going to be a really tough compare for us. So we were our net sales were up over 28% last year in our Q3. So it's kind of a tough Compare, if you will. And we are starting to see some sales cycles extend and customers watching spend from a cost optimization. So there's a few things there that I know to factor in to our thought process, but still feel good with the guidance that we're given and did expect the first half to be a little bit higher.

Speaker 4

Got it. Thank you for the update and nice quarter.

Speaker 2

All right. Thanks, Maggie.

Operator

Your next question comes from Greg Burns with Sidoti and Company. Please go ahead.

Speaker 5

Good afternoon. When we look at the technology segment sales, how much of that was organic versus inorganic?

Speaker 2

Yes, approximately 25%, a little over that was acquisition related. The other 74 Sent Greg or so was organic. What you saw there Greg in our numbers just high level, You saw some supply chain easing specifically in the networking space. Networking was up big, I think was up 62%, if I remember correctly. Collaboration was up nicely as well.

Speaker 2

So some of our workspace transformation, some of the things going on in networking We're starting to roll out nicely and the team did a nice job of executing there, but it was roughly 3 quarters organic, a quarter acquisition related.

Speaker 5

Okay. To that idea of the supply chain easing, how much of the networking Or product revenue as a whole was from you drawing down your backlog versus net new business?

Speaker 2

Yes. Hey, Greg, that's hard. The only thing that I can tie it to, our inventory levels were down about $22,000,000 but there was an awful lot of new deals both Booked and invoiced in the quarter and it's a really tough one to figure out what was back lot what was open orders versus net new effectively.

Speaker 5

Okay. Thanks. And then I guess just lastly, can you I know you drew down the inventory and We're able to deliver on some of that backlog, but how does that backlog look, I guess, relative to maybe historic levels? Is it still elevated? And maybe can you give us a sense of your pipeline?

Speaker 2

Pipeline is within where we would think it would be for this quarter. The one thing I would tell you, Greg, that I got to highlight again, Last year in Q3, we had a really strong tech quarter. Our net sales were up 28 over 28%. The adjusted gross billings were up almost 30% in that quarter. So it's kind of a tough compare there.

Speaker 2

But with that said, as compared to traditional Q3 quarter's pipeline backlog, all the things that we're tracking is in play. The only caveat I put on that is we are Seeing some deals that are taking a little bit longer, as customers try to figure out what they want to spend from a priority standpoint, And they're trying to do some cost optimization across some of their cloud and security plays. Is that a question? Yes.

Speaker 5

Is that a question? Anything too. Some of

Speaker 2

it's ratable too, Greg, which affects that.

Speaker 5

Okay. And the sales cycles, is that getting longer across Customer segments or is it mainly in like the large enterprise like

Speaker 2

the Mainly enterprise, but higher mid market, but it varies by Greg, you'd be surprised with customers in terms of sometimes how long it takes to turn things around through their legal, through their So it varies by customers, but normally the enterprise, the bigger deals are normally the ones that take a little bit longer.

Speaker 5

Okay. Thank you.

Speaker 2

No problem.

Operator

Our next question comes from Matt Sheerin with Stifel. Please go ahead.

Speaker 6

Yes, thanks. I just wanted to follow-up on Greg's question regarding backlog. Could you tell us what the backlog levels look like now versus 60 days or a quarter ago and versus traditional or historic levels?

Speaker 2

So sorry. Hey, Matt, I missed that. What was the question regarding

Speaker 6

the backlog? Yes, regarding the backlog. What is Backlog, Greg had asked that question, but I'm not sure we got an answer. Because you've been talking for a few quarters about very elevated backlog Because of the component shortage, it looks like the supply is coming nicely and you're shipping to backlog. So A potential concern would be that backlog gets worked off and what happens to growth after that.

Speaker 6

So I'm just hoping to get some

Speaker 2

Yes, I got you. Yes, open orders are down, but they're still higher than traditional levels, if you will. So they did trend down. Backlog is actually up. Pipeline is actually in line with what we're expecting for the quarter.

Speaker 2

So besides the tough compare, We wouldn't see anything that would dramatically affect the numbers, if you will, whether it's related to open orders backlog and or pipeline just yet. With that said, the caveat is, Matt, as we mentioned previously, is their timelines are extending with some of the customers, so it gets tougher and tougher

Speaker 6

Okay, fair enough. And I know you're reiterating your revenue forecast For the year, as we think about the next couple of quarters, it looks like in terms of seasonality, you typically have sequential growth in the December quarter and then down in the March I'm wondering if that's how we should think about modeling or things different just because of the backlog And the way things are trending, so is that should we think about that seasonality playing out again?

Speaker 2

Yes, very much so, Matt. But once again, if I could just highlight, the tech quarter last year was from a Hair was extreme where gross billings adjusted gross billings were up almost 30%. So that would be the only caveat, but I think what you said is very fair and very realistic.

Speaker 6

Okay. All right. Thank you. And then and just lastly, you talked about growth from that acquisition. How does the acquisition pipeline look like in terms of your M and A?

Speaker 3

M and A pipeline is really strong.

Speaker 2

There's a It's really strong. There's a lot of opportunities out there, but like anything that we've got to continue to vet them out. Some of the pricing Multiples are coming down a little bit, which is a positive. But in terms of that, there's still plenty of opportunity, both from a territory, A services perspective as well as what I'd call product type services and or solutions, but still have to work through the process

Operator

Seeing no further questions, I will now turn the call back To Mark Marron for any closing remarks.

Speaker 2

Okay. Thank you. Everybody, thank you for joining us for our Q2 call. And if I could, I'd like to wish everybody a happy Thanksgiving and a healthy and happy holiday season. And we'll talk to you in the February timeframe.

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Key Takeaways

  • Eplus reported consolidated net sales up 19% and diluted EPS up 14% in 2Q FY2024, driven by strong 21% technology business growth despite a tougher product mix and higher operating expenses.
  • Technology networking sales surged 62% year-over-year, fueled by the acquisition of Network Solutions Group, improved product availability, and rising demand from hybrid work, distributed computing, and AI initiatives.
  • Services revenue rose 9% on expanding managed services and SaaS offerings like Storage as a Service, driving 460 basis points of gross margin improvement and more predictable recurring revenue streams.
  • Security net sales grew 7%, and Eplus launched its “Compromise Nothing” program to deliver holistic risk assessment, advisory, and managed security services to address escalating cyber threats.
  • For fiscal 2024, the company reaffirmed its guidance of $2.23–$2.33 billion in net sales and $200–$210 million in adjusted EBITDA (9.0–9.2% margin), expecting further supply chain easing to support order fulfillment.
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Earnings Conference Call
ePlus Q2 2024
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