ePlus Q4 2024 Earnings Call Transcript

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May 22, 2024

Key Takeaways

  • Product and Service Growth: In Q4, technology product sales rose 12.2% and service revenue increased 14.8%, led by a 22% surge in managed services.
  • Earnings Decline: Consolidated net income fell to $22.0 M ($0.82 per share) from $32.9 M ($1.23) year-over-year, driven by lower product margins and higher operating expenses.
  • Recurring Revenue Expansion: Annuity service backlog jumped approximately 50%, providing a growing base of predictable, recurring revenue streams.
  • Strong Liquidity and Capital Return: Eplus ended the year with $253 M in cash and approved a new share repurchase program for up to 1.25 M shares to enhance shareholder returns.
  • 2025 Guidance: The company forecasts fiscal 2025 net sales growth of 3–6% and adjusted EBITDA of $200–215 M, with gross margins expected to normalize.
AI Generated. May Contain Errors.
Earnings Conference Call
ePlus Q4 2024
00:00 / 00:00

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 like to introduce your host for today's conference, Mr. Clay Parkhurst, General Counsel.

Operator

Sir, 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 Eric Costoker, 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 most recent annual report on 10 ks, quarterly reports on Form 10 Q and other documents that we may file with the SEC. 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 forward looking statements in light of new information, future events or otherwise.

Speaker 1

In addition, we will be using certain non GAAP measures during the call. This includes the 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 over the call to Mark Marron. Mark?

Speaker 2

Thank you, Clay, and good afternoon, everyone. Thank you for joining us today to discuss our fiscal Q4 and full year 2024 results. In the 4th quarter, our top line and gross billings and operating income were below our expectations, we had a strong year overall and are pleased with how the business has performed in a challenging demand environment. We ended the year with over $250,000,000 in cash on hand, which provides us with the resources to continue to make strategic acquisitions, invest in customer facing personnel and expand our solutions and services, especially in the fast growing areas such as AI, cloud, networking and security. During the Q4, product sales in our technology business increased 12.2%.

Speaker 2

We had a particularly strong quarter in networking product sales, partially driven by deliveries of equipment and inventory. Additionally, we continue to see positive results from our land and expand strategy, winning significant business from new and existing enterprise customers in the quarter. While this impacted our margins in the quarter, we are capturing market share and growing our customer base, which positions us well for long term growth. In our services business, revenue increased 14.8% in the quarter and 10.4% for the full year, led by managed services, which increased 22% for both the quarter year. In additions, margins improved across both professional and managed services.

Speaker 2

Our focus on services as part of our long term strategy to meet customers' needs in a fast changing and increasingly complex IT marketplace is enhancing our relationships with both customers and our partners. Managed services plays an increasingly important role both for our customers operationally as well as for ePlus building a solid recurring revenue base, which creates consistent profitability and predictability. With that in mind, we expanded our storage as a service and enhanced maintenance service offerings, which have been important new business drivers for us. We are pleased that our annuity service backlog is up approximately 50% and giving us line of sight to future annuity service revenue streams. Our financing segment performed well in the quarter.

Speaker 2

Our finance offerings enable our customers to have flexible payment options and provide a value added service to our vendor partners as well. During the Q4, financing segment revenue increased 15.5% driven by transactional gains and portfolio earnings, partially offset by a decline in month to month rents. For the year, despite revenues declining 5.8% against a tough compare in the prior year, adjusted EBITDA remained flat. Consolidated net income declined in the quarter, primarily due to lower product margins from a higher percentage of sales to enterprise customers and product mix. In addition, we experienced higher operating expenses primarily as a result of higher headcount as we continue to invest in customer facing sales and engineers, engineering personnel to meet demand for fast growing areas such as AI and increased acquisition related amortization expenses.

Speaker 2

Our headcount was up 146 employees with most customer facing as we continue to invest for growth. It is important to note that our customer base grew by over 300 customers this year. Our incremental investments position us well to cross sell and up sell into our accounts as we roll out new solutions such as our AI Ignite program, which is focused on helping customers in their AI journey. We believe investments are necessary to continue our positive revenue momentum, capture additional market share and expand our solution set to meet customer demand. While it remains a challenging economic environment with margins lower than expected for the quarter and operating expenses up, we will continue to manage our core structure and attain operating leverage over time.

Speaker 2

Looking forward, we expect gross margins to return to more normalized levels in fiscal year 2025. As it relates to AI, we are seeing strong interest in our AI Ignite program, which helps customers in the formative stages of their AI engagements. With envisioning sessions and workshops, we offer a consultative approach to identify use cases around business outcomes, end user productivity or IT efficiency that customers can measure. AI Ignite helps the customer understand its data ecosystem with an open dialogue around AI governance and cross functional involvement with business and IT leaders. We believe that AI has lengthened some decisions as customers evaluate the benefit of AI versus cost.

Speaker 2

It is early innings for many in their AI journey, but it will be a growth driver for Eplus as it fits in our wheelhouse of infrastructure, security, network modernization and the services required to implement these solutions. A balanced approach to capital allocation, which includes investing for growth and acquisitions and a focus on improving shareholder returns. Our balance sheet and cash generation remains strong. In fact, at year end, our cash is over a 250,000,000 dollars which gives us flexibility with our M and A plans along with our growth initiatives. Eplus Board also approved a new share buyback plan of up to 1,250,000 shares.

Speaker 2

Although Q4 was not what we expected, we believe we are well positioned with our strategy and had a solid year overall as evidenced by our net sales being up 7.6% and gross profit being up 6.4% for the year. I do want to take this time to thank our teammates for their efforts this year and I'm proud of the work they have done in a tough environment. I will now turn the call over to Elaine to discuss our financial results in more detail. Elaine?

Speaker 3

Thank you, Mark, and good afternoon, everyone. I will provide additional details about our financial performance in the Q4 of fiscal 2024 and will review our full year fiscal 2024 results. Consolidated net sales increased 12.7 percent year over year to $554,500,000 primarily driven by a 12.6% increase in the technology business, which reported net sales of $544,100,000 for the quarter. The increase in technology business net sales was a result of double digit growth in both product and service revenue. Product revenue grew 12.2 percent to $465,200,000 due to strong demand for networking equipment and cloud products, while service revenue increased 14.8 percent to $78,900,000 reflecting healthy renewal activity and growth from managed service customers.

Speaker 3

Within our technology business, our 2 largest verticals continue to be telecom, media and entertainment and technology representing 25% 17%, respectively, of our technology business net sales on a trailing 12 month basis. SLED Healthcare and Financial Services accounted for 15%, 13% and 11%, respectively, with the remaining 19% divided among other end markets. Net sales in our financing segment were $10,400,000 up 15.5 percent from $9,000,000 in the prior year due to higher transactional gains and portfolio earnings. Consolidated gross profit was $130,300,000 with gross margin of 23.5 percent compared to gross profit of $132,300,000 and gross margin of 26 0.9 percent in the last year's Q4. Volume from our enterprise customers increased significantly and there was less gross margin contribution from netted down revenues in the quarter, both of which changed the mix and resulted in lower margins, so we view much of this decline as quarter specific.

Speaker 3

The product margin decline was partially offset by the services business, which saw a 2 70 basis point improvement in gross margin to 40.6%. Managed services gross margin grew 30 basis points to 30.5%, driven by revenue growth and scale, while professional services gross margin expanded 580 basis points to 50%, attributable to a shift in mix towards higher margin project and consulting services. Consolidated operating expenses grew 12.7 percent to $101,300,000 primarily due to increases in salaries and benefits from additional headcount as well as increases in acquisition related amortization expenses. Our total headcount at the end of March 2024 was 1900, up 146 from a year ago, including 83 employees from Network Solutions Group acquired in May 2023 and 29 employees from Peak Resources acquired in January 2024. Although 5 of the total additions were in customer facing roles.

Speaker 3

On a consolidated basis, operating income declined from $42,400,000 to $29,000,000 Earnings before taxes were $31,200,000 down from $42,300,000 reported in last year's Q4. The decrease was primarily related to lower gross profit from product sales and higher expenses from investments in headcount and acquisition related expenses. During the quarter, we had other income of 2,200,000 dollars including interest income of $1,600,000 and foreign currency transaction gains of $400,000 compared to foreign currency transaction losses of $200,000 in the prior year quarter. The effective tax rate was 29.5% in the Q4 of fiscal 2024 compared to 22.4% in the year ago quarter. The lower than average tax rate last year was due to lower than forecasted non deductible expenses, increased benefits from foreign sales along with lower state taxes.

Speaker 3

Consolidated net earnings were $22,000,000 or $0.82 per diluted share. This compares to net earnings of $32,900,000 or $1.23 per diluted share last year. Non GAAP diluted earnings per share were $0.93 compared to $1.36 in the year ago period. Our diluted share count at the end of the quarter was 26 point 8,000,000 compared to 26,700,000 a year ago. Consolidated adjusted EBITDA decreased to $36,800,000 compared to $48,700,000 in the prior year, primarily due to a 26 0.8 percent adjusted EBITDA decline in the Technology business for the reasons I mentioned.

Speaker 3

Turning to our full year results, Eplus reported fiscal 2024 net sales of $2,230,000,000 reflecting a 7.6% year over year increase, aided by 8% revenue growth in the technology business to $2,180,000,000 and a 10.4% growth in service revenue to 290 $2,100,000 Our financing segment net sales were $49,400,000 compared to $52,500,000 in the prior year. Gross billings in our technology business totaled $3,300,000,000 5.8 percent ahead of fiscal 2023. Consolidated gross profit for the full year grew 6.4% and amounted to $550,800,000 Consolidated gross margin was 24.8 percent, slightly below the 25% reported in fiscal year 2023 due to the product mix in the technology business. Gross profit in the technology business grew 7.2% to $508,500,000 while gross profit in the financing segment was $42,300,000 below the $43,000,000 reported in the previous year. Consolidated operating income was $158,300,000 compared to $166,200,000 as we continued to invest in our customer facing sales force and engineering talent throughout the year, resulting in an 11.7% increase in operating expenses.

Speaker 3

Our effective tax rate for fiscal 2024 was 28.1% compared to 26.8% for fiscal 2023. Net earnings were $115,800,000 or $4.33 per diluted share compared to 119,400,000 dollars or $4.48 per diluted share respectively. Non GAAP diluted earnings per share was $4.92 compared to $5.02 in the prior year. Adjusted EBITDA was $190,400,000 in line with prior year. Our balance sheet remains strong as our cash and cash equivalents totaled $253,000,000 at the end of fiscal 2024, which is a high for Eplus and which compares favorably to $103,100,000 at the end of the prior year.

Speaker 3

This increase was primarily due to improvements in working capital. Inventories were $139,700,000 at the end of fiscal 2024. Consistent with recent quarters, we have continued to see improvements in supply chains and product availability, leading to a $78,000,000 sequential decrease in inventories. Compared to the end of fiscal 2023, inventories were down $103,600,000 and we believe have now normalized. Inventory turns improved to 23 days compared to 27 days in the prior quarter and 38 days at the end of fiscal 2023.

Speaker 3

Our cash conversion cycle was 46 days compared to 59 days in the year ago quarter, reflecting supply chain easing and normalization. As a result, operating cash flow for the full year was $248,400,000 compared to $15,400,000 of cash used last year. Stockholders' equity was $901,800,000 compared with $782,300,000 at the end of fiscal 2023. Given our strong cash flow and cash balance, we are pleased to announce that our Board approved a new $1,250,000 share repurchase authorization to begin on May 28, 2024. This replaces our prior authorization, which is set to expire next week.

Speaker 3

Our strategy of focusing on high growth areas continues to bear fruit as evidenced by growth ahead of our peers in a challenging overall demand environment. Mark will provide our guidance for fiscal 2025, but I want to note, we would expect to see a lesser impact on margins in fiscal 2025 than we saw in the Q4 given some quarter specific enterprise sales growth resulting in lower margin product sales mix. With that, I will turn the call back over to Mark. Mark?

Speaker 2

Thank you, Elaine. Despite a challenging industry wide demand environment, we are pleased with the solid performance we delivered in 2024. We believe Eplus can continue its momentum in fiscal year 2025 as we are very focused on providing the strategic IT solutions most in demand by our customers. Eplus is initiating fiscal year 2025 guidance for net sales growth over the prior fiscal year of between 3% 6% and adjusted EBITDA in the range of $200,000,000 to $215,000,000 We are focused on driving shareholder value via growth both organic and through acquisition. We are continually enhancing and broadening our product and service offerings to capture market share, align to market transitions as well as broaden our relationship with existing customers.

Speaker 2

And we will continue to seek out expansion opportunities and investments that enhance our positioning in 2025 and beyond. In summary, we are pleased with the progress on our strategic priorities as we continue to successfully expand the business and make important foundational investments to drive growth. Operator, let's open the line for questions. Thank you.

Operator

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

Speaker 4

Hi, Mark. Hi, Elaine.

Speaker 2

Hey, Maggie. How are you?

Speaker 4

Good. Thanks. Last quarter you referenced some push outs from fiscal 3Q into fiscal 4Q that impacted revenue. Did those materialize in the quarter? And when you exclude those, how did the Q4 compare to your expectations going into the quarter?

Speaker 2

Okay. Hey, good question, Maggie. So it's actually a tale of 2 quarters. So if you think about last quarter in Q3, we had a volume issue, but we had strong margins. So our margins were 4 10 basis points in Q3.

Speaker 2

In Q4, it was the opposite. We had strong volume where our sales were up 12.7% and gross billings were up 13.8%. So that's some of those deals that moved over. So it's really a timing issue between the quarters and that's mainly due to a couple of different things. One, some of the size of the deals that we're dealing with now with some of our enterprise customers and some of the enterprise flush that's kind of tough to predict when we get it out based on the customers' expectations and when they're ready for the product.

Speaker 2

So it's really kind of a tale of 2 quarters, if you will. Overall, when we looked at the quarter, it's kind of what we expected on net sales. Gross margins were a little lower, mainly due to some of our land and expand strategy where we're in some of these larger accounts at lower margin and then try to build it back up over time, but that's how it played out.

Speaker 4

Got it. Thank you. And then so you mentioned the margins, obviously there's variations between last two quarters of the year. And you said in your prepared remarks an expectation that there would be kind of more normalized levels in fiscal 2025. Can you talk through some of the factors that give you confidence in that more normalized level commentary?

Speaker 2

Yes, sure Maggie. So if you look at it for this quarter, it was mainly our product margins that were down significantly due to some of the larger enterprise deals. Overall, our service margins were up 270 basis points. We also had a gross to net was down 130 basis points. So that's what kind of affected the margins for the quarter.

Speaker 2

If you look at it for the year, our consolidated gross margins are actually flat, so in that 25% range. So we expect that to normalize. So as the inventory has subsided, if you will, we think we're going to get to more normalized or historical levels, if you will, with our gross margins, mainly in that 24% to 26% range. And then if you use the 25%, which we've done as an average, which by the way I think is industry leading in our space, That's kind of where we think it is with the potential slight uptick as we move through the year and see more services driven.

Speaker 4

Got it. Thanks, Mark.

Speaker 2

Thanks, Maggie. See you soon.

Operator

Your next question comes from the line of Matt Sheerin with Stifel. Please go ahead.

Speaker 5

Yes. Thank you.

Speaker 2

A couple of questions for me.

Speaker 5

Mark, in terms of the revenue outlook for fiscal 'twenty five of roughly 4% top line growth, I know you just came off of a year with some very strong quarters and some weaker quarters, so really not a lot of seasonality. And I know that the March quarter was also better than seasonal. So how should we think about how the cadence of the year plays out in terms of seasonality and how you get to that 4% number?

Speaker 2

Yes, Matt. I think it's going to be more, as you said, from a seasonality. So Q2 and Q3 will be bigger just like the historical levels. So I think that's how it's going to play out. So it will be a little bit back ended if you will, but that's kind of how we expect it to play out this year.

Speaker 5

So would you expect June then to be like down sequentially after the strong March quarter with those one off big volume deals that you talked about?

Speaker 2

I would expect it to be in the similar range, Matt. And then I'd expect Q2, which is normally our strongest quarter due to both the state and local business, Cisco's fiscal year end and a few other things and then Q3 with year end. And then Q4 would traditionally trend down. This year has been different in terms of just when you look at it with

Speaker 3

which is interesting because they're they normally take a

Speaker 2

little bit longer, which is interesting because they normally take a little bit longer. Originally, they're a little bit margin tighter, but then over time, you kind of expand those margins. So, I think you'll see some more normalized revenue and expenses as we move forward.

Speaker 5

Okay. And when you talk about land and expand, you're really talking about pricing aggressively to win basically get a seat at the table, if you will, right? And then you grow the business. Is that what and so you're competitive against other competitors? Is that what the strategy has been?

Speaker 2

Yes, that's it, Matt, exactly. In fact, and that's mainly in the kind of high end high mid market and the enterprise space. What was interesting this year, our customer base actually grew by 300 customers. So from that end, we're going to continue to be aggressive, try to get into more, I'll say, enterprise like accounts and then over time, go back with our full solution set of products and services and try to grow those margins. And we've done that for years.

Speaker 2

So we've been fairly successful if you look at our history with our margins. So that would be the intent. This past quarter was a little bit of an aberration, if you will, as it relates to margins.

Speaker 5

Got it. Okay. And then your EBITDA guidance for next year implies just modest growth from where you were and below the run rate that you're at except for last quarter. And but you're also telling us that gross margins will get back to normal. Is that because there's more expenses, more on the operating expense side as you're growing out some of these capabilities?

Speaker 2

Yes, very much so, Matt. So as it relates to adjusted EBITDA, it's actually going to be up 5% to 13% is what we're saying with our guidance. And then OpEx, we've made a decision based on our strategy and growth initiatives, We've made some investments, I'll say in the services space because our services have continued to grow and our backlog is growing. We've made some investments as we build out our AI capabilities, which we're hoping over time we'll start to monetize, but it's early innings there. And then we've made some investments on the sales side, both from a leadership and from enterprise sales standpoint to go forward.

Speaker 2

So based on the 300 new customers and what we believe in where we fit in the market, we think that will pay off over time and we'll start to get that operating leverage you'd hope to get.

Speaker 5

What's how many active customers do you have? What's that 300? What is that as a percentage?

Speaker 2

It's about 4,600, a little over 4,600 now.

Speaker 5

Okay. Okay, great. And just lastly, the inventory work down, which was very impressive and your cash flow was strong. Does that mean that your backlog is pretty much all worked down at this point? Like there's no elevated backlog and now it's just kind of really visibility is really what the customer demand is looking like?

Speaker 2

Yes. I would say this is probably the new normal on the inventory. There's still some there Matt, that due to lead times and a few other things that are still in play. But I think this is kind of the new normal going forward and it'd be almost business as usual. The one that's interesting that's really in play here is AI.

Speaker 2

There's a lot of interest from customers. I actually believe it's delayed some decisions from our customers as they try to analyze and decide what they want to do with AI, try to figure out the infrastructure that they need in place to run these AI models, if you will. I think it's actually delayed some decisions. But yes, I think as it relates to inventory and then the other thing you kind of touched on it, which we're kind of we're feeling good because it gives us a lot of flexibility. Our cash is over $250,000,000 or over $250,000,000 So from that end, it gives us flexibility from an M and A.

Speaker 2

We increased our stock buyback. So there's some things that we might be able to do as we move throughout the year.

Speaker 5

Okay. And just lastly, just since you brought up AI, that AI Ignite program that you're talking about, is that really more just sort of in the consultative phase where or are you actually converting processes and actually doing AI implementations for customers or is that just still in the early stages?

Speaker 2

Early stages, Matt. What's interesting, we actually did an envisioning session with our team for us internally and it was eye opening, if you will, with customers are going to have to think through. So as we walk them through these envisioning sessions and workshops and data strategy sessions, what we're seeing is a lot of people have to figure out they've got data all over the place. They've got to put it into a repository or a data lake. They have to make sure that they have good governance in place.

Speaker 2

And then they really the big thing that came out of our meeting is they have to decide what use case, meaning where can they monetize it best because there's so many we came out with 7 different areas we think we could use AI for internally at Eplus. So it's early innings. You're not seeing any of the infrastructure sales per se just yet, but it's starting to build.

Speaker 5

Okay. All right. Thanks so much.

Speaker 2

No problem. Take care, Matt.

Operator

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

Speaker 6

Good afternoon. The 300 customers this year, how does that compare to other years? How many customers do you typically add in the year?

Speaker 2

I don't know the number, Greg, but it's high. I know when we saw it, I was pleasantly surprised when we went through and did the analysis year over year. If I had to guess in the 150 range, it's almost double what we normally did, but I truly don't have the numbers at hand right now.

Speaker 6

Okay. And some of the larger networking OEMs like Cisco have talked about this bottleneck of product that's sitting at customers waiting to get deployed, it's impacted their order patterns. It seems like you've been relatively unscathed like compared to maybe what some of the other vendors the vendors have been talking about. Can you just discuss why that is? Why you think you've been able to outperform the market so significantly?

Speaker 6

Maybe your view going forward on that dynamic in the market kind of getting cleaned up?

Speaker 2

Yes, great question, Greg, and a hard one, quite honestly. I think some of it's due to backlog. 2nd is, quite honestly, I think it's an interesting market. If you think about the HP acquisition of Juniper and how that's going to kind of throw that influx a little bit with some of the solutions they have versus Cisco. But we've our background traditionally, as you know, Cisco has traditionally been almost 50% of our business.

Speaker 2

This past quarter, I think it was like 39%. So we work pretty closely with Cisco. And if you think about AI, a lot of what's going to have to happen with those models is network modernization, so that the pipes are wide enough for people to do all the analysis they need to do with AI. So I think we've stayed ahead of that and we've stayed close with Cisco on the other network vendors. And the team has done a really nice job of getting that getting in front of customers with the solutions and services we could provide.

Speaker 2

And some of it was just due to the backlog that we had in inventory. Okay. Thank you. Anything else, Greg?

Speaker 6

No, that's all.

Speaker 2

Okay. All right. I don't believe there's any more questions. So from that end, I want to thank everybody for taking the time to listen in today and we look forward to seeing you or hearing from you at our quarter 1 quarterly earnings call. Thank you and take care.

Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

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