Q2 2020 Earnings Call
To undo Ninesix 03697.
Thank you all place you in any of your music old until they've begun.
Thank you too.
Good day, ladies and gentlemen, welcome to the E plus earnings results Conference call. As a reminder, this conference is being recorded I would like to introduce your host for today's conference Mr. Kley Parkhurst SPP, Sir you may begin.
Thank you for joining us today on the call as Mark Marron, CEO , and President Elaine Marion Chief Financial Officer, and Erica Stoecker General account.
He wants 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 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 Exchange Commission, including our Form 10-K for the year ended March 31st 20, United team and our Form 10-Q for the quarter ended September .
Thirtyth 2019, when filed the company undertakes no responsibility to update any these forward looking statements in light of new information or future events.
In addition, during the call we may make reference to non-GAAP financial measures and we have included a GAAP financial reconciliation in our earnings release, which is posted on the Investor information section of our website at Www Dot plus dot com.
I'd like to turn the call over to Mark Marron Mark.
Thank you Glenn Thank you everyone for participating in today's call to discuss our second quarter results.
Performance in the second quarter was strong as we achieved double digit growth across key metrics benefiting from solid demand from our customers and execution by our sales engineering and support teams. This performance came on the heels of a strong Q1 and demonstrates that our strategy of focusing on the higher growth IP solutions areas.
We have identified and prioritized is compelling.
We believe that our quarterly and year to date results support the investments we've made in people technology and service offerings to drive long term growth, which Alain will go over in more detail in her remarks, our marketplace is dynamic and fast pace any plus has been committed to staying ahead of the curve. This means anticipating.
And preparing for industry shifts like the migration from one off transactions to subscription sales and increasing customer needs for lifecycle services today plus has the capabilities to provide our customers with end to end solutions from assessments through long term support along with flexible consumption and financing model.
Yes.
This positioning has enabled the plus to grow our gross profit show strong gross margin growth and build share with existing and new customers.
It also clearly shows the advantage we have by leveraging both our technology and finance segments to create full solutions with creative and flexible payment options. This allows us to provide clients with the solutions they need to run their business today, while finding creative ways to reduce their overall spend.
In the second quarter adjusted gross billings increased 19.2%, primarily driven by organic growth and reflecting our ability to deliver a complex solutions around our key focus areas of cloud security and digital infrastructure to our Midmarket and enterprise clients net sales growth of 19.3 per.
He said and a favorable business mix drove a 20.5% increase in gross profit dollars over last year and our gross margin was 25% an increase of 20 basis points key component of this strong performance is our services business, which increased by 35% for the second consecutive quarter.
As you know we have made significant investments to build out our offerings in professional manage and staffing services by adding headcount with engineering and technical sales backgrounds, who can advise clients on the most effective IP strategies, and then design implement and optimize those solutions to enable that strategy.
Additionally, the recent acquisitions, we have completed brought on capabilities that have complemented our existing offerings. This strengthened our ability to up sell across our customer set to drive incremental growth.
Cornerstone of our corporate strategy.
At the same time sales of enhance maintenance and managed services, which represent annuity like revenues increased considerably in the second quarter and first half of this year, providing us with revenues at our additive to gross profit and enhance the quality and predictability of our revenues over time, our broad served.
This is capabilities remain a key differentiator free plus.
Other key area of focus is sales of security products and services on a trailing 12 month basis security increased 17.5% year on year and today accounts for over one fifth or adjusted gross billings are up 110 basis points from the prior year. We expect this to continue to be in it.
Certain growth driver free plus as corporate spend in this area continues to increase we continue to see customers in our market space struggled with ransomware and disruptive security events, a customer was recently hit with multiple families of malware after providing a full security health check we entered into a long term service engagement.
That will help them government, which devices end users can access system resources Im pleased to report that we're also able to convert strong second quarter sales and growth gross profit performance into significant year on year growth in operating income and earnings per share.
Our operating income increased by 15.5% after absorbing increased variable compensation expenses and acquisition related costs, and GAAP EPS and non-GAAP EPS were up 13.5%, an 18.3% respectively. In the second quarter, why we'll continue to build out of.
Additional solutions and service offerings organically through investments in people and technology. We also expanded inorganically through the acquisition of ABS technology.
Aligned with our broader acquisition strategy, the ABS transaction increases our market share in the state local and education vertical, which traditionally has been a strong market free plus and it strengthens our positioning in the mid Atlantic region.
We will continue to supplement existing growth with acquisitions that expand our footprint, our solutions portfolio and our customer base.
To sum up this was a solid quarter free plus in addition, a strong financial performance. We're pleased to note that plus which just named Cisco's global transformation and innovation partner the year as well as its us partner every year.
We appreciate this tremendous recognition of plus for our commitment to innovation and achieving positive outcomes for clients. In addition E plus one for complimentary awards recognizing excellence across this specific regional and vertical us market I will now I'll turn the call over to our CFO Elaine Marion for it.
Don't review of our second quarter results Alain.
Thank you Mark and thank you everyone for joining US today, we're very pleased with our fiscal 2022nd quarter results net sales were 411.6 million an increase of 19.3% from the prior year second quarter net sales in the technology segment increased 18.8% year over year two three has.
Third 97.7 million, reflecting a 16.9% growth in products now and 35.1% increase in service revenue the increase in sales derived from customers in the technology led health care and Telecom media and entertainment industry. The increase in services revenue was across the board.
Sure in professional services managed services and staff augmentation revenue from the financing segment of $13.8 million increased 34.8% year over year, mainly due to gains from several large transaction.
Results from our financing segment tend to be uneven from period to period looking at our end markets in the technology segment on a trailing 12 month basis technology and sled continued to be our largest customer end market accounting for 22, and 17%, respectively, followed by Telecom media and entertainment with 16% and health.
Karen financial services accounting for 15, and 14% respectively. The remaining 16% were distributed among several other client time adjusted gross billings in the technology segment of $579.1 million increased 19.2% compared to 485.9 million in the same period a year ago.
Mainly driven by strong demand from larger customers as well as some contribution from our recent acquisition slate and ABS technology. The adjustment from adjusted gross billings to net sales of 31.3% and the second quarter fiscal 2000, 2020 basis point increase from a year ago quarter reflect.
Higher proportion of sales of third party subscription based software and maintenance.
Selling any gross profit increased 20.5% to 103 million from 85.5 million in the prior year consolidated gross margin of 25% expanded 20 basis points versus last year gross profit for the technology segment increased 19% to $91.6 million, while gross margin with too.
23% inline with last year's third quarter service gross margin was 38.3% down 150 basis points year to year due to a larger proportion of services from staff augmentation.
In the financing segment gross profit increased 34.1% to 11.5 million, primarily due to an increase in transactional gains.
Consolidated operating expenses increased 22.5% to 274.7 million, reflecting increases in salary variable compensation and health care costs. We also had higher DNA, primarily due to the slate and ABS technology acquisition. It's also worth noting that in the second quarter are.
DNA includes an accelerated final expense of contingent consideration of 1.1 million from a prior acquisition, our consolidated head count at quarter end with 1629, compared to 1255 and a year ago quarter.
Most of the addition came from slate and ABS technology, which brought on 336 employees.
Consolidated operating income increased 15.5% to 28.4 million, our consolidated net income amounted to $20.1 million or $1.51 per diluted share compared to $18 million or a $1.33 per diluted share. These metric increased 11.6% and 13.5.
5%, respectively year over year.
Our effective tax rate for the quarter with 29.1% compared to 27.7% in the year ago quarter in the second half of fiscal 2020, we expect our tax rate to be approximately 29% adjusted EBITDA increased 18.5% year over year to 35.4 million and our adjusted EBITDA margin was 8.6.
Percent compared to 8.7% in the second quarter fiscal 2019.
non-GAAP diluted earnings per share were $1.81 up 18.3% from the second quarter fiscal 2019, our diluted shares outstanding totaled 13.4 million down 1.7% from year ago quarter, I will now turn to our consolidated year to date results net sales for the first six months of fiscal.
2020 increased 13% to $792.9 million.
Net sales in the technology segment increased 12.4% to $766.3 million and adjusted gross billings increased 16.5% $1.1 billion.
Consolidated gross profit amounted to 195.7 million, reflecting a 17.7% increase.
Our consolidated gross margin expanded by 100 basis points to 24.7% and our technology segment gross margin increased by 60 basis points to 22.6% net income grew 9% to 36.3 million diluted earnings per share were $2.71, 10.6%.
Head of last year, adjusted EBITDA increased 15.8% to 64 million and non-GAAP diluted earnings per share increased 16% to $3 in 2006 that moving to the balance sheet. We ended the quarter with cash and cash equivalents of 55.8 million compared to 79.8 million at March 30, Onest 29.
Team the decrease in cash and cash equivalents was due to share repurchases at 13.7 million an acquisition inventory levels increased 13.3% to 57.2 million compared to the end of fiscal 2019, as we've said before our inventory levels vary depending on specific customer projects underway.
Our cash conversion cycle of the ended the quarter was 23 days compared to 25 days in the year ago quarter, and 24 days in the first quarter fiscal 2020 as for capital allocation. We will continue to take a balanced approach between acquisition financing portfolio investments share repurchases and investment in our business.
As to drive growth. Thank you for your time today, and I will turn the call back over to Mark.
Thanks away our year to date results physician plus for continued growth in fiscal 2020, we continue to see strong demand for our differentiated solutions across our expanding roster middle market and enterprise customers. Thanks to our ongoing investments in talent and technology, we were able to customized solutions.
That are enabling our customers to meet their business needs, whether this means driving their cloud strategies implementing their cyber security programs or supporting their digital business initiatives or a combination of all three at the same time, we're staffed to provide the lifecycle of their services requirements from advisory and Consultive to staffing.
And all the way to managing their IP infrastructure.
These lifecycle services resonate, especially well with our middle market customers, who are able to outsource a large portion of their IC requirements to E plus our positioning with both enterprise and Midmarket customers gives us confidence in our long term outlook and our ability to continue to up sell existing customers and gain new ones in.
In addition, we will continue to look for ways to expand our reach and footprint, both organically and through acquisitions that enhance and expand the solutions and services, we provide and grow our customer base operator, we'd now like to open the call for questions.
Thank you at this time, if he would like to ask a question. Please press star one on your telephone.
Again saw the star one on your telephone to ask a question. Your first question comes from Maggie Nolan from William Blair. Your line is open. Please go ahead.
Hi, Mark Allin names.
Im wondering if you can give us a little more granularity on strengths in the quarter with their new logo additions to existing customers. A particular vertical strength I am just something to help us understand what drove that.
Okay, Hey, Maggie how are you at so first off it was a strong quarter free plus across a lot of different areas.
As noted on our in the press release and on the call.
Both our adjusted gross billings, our net sales our gross profit in operating income will increase nicely.
The areas that I think affected that services was up again, 35% this quarter similar to Q1.
Had another strong quarter with our financing team and we're continue to find ways to leverage the capabilities in the relationships between our financing teams and technology teams to drive incremental revenue.
We saw a nice growth there were nice metrics across all of our top five verticals.
Not only for the quarter, but year to date as well as the trailing 12 months, we've seen growth and those top five verticals.
We also saw a nice uptick with some of our enterprise customers based on some of the land and expand.
Program that we've talked about previously.
So is it fair to characterize it as more broad based and so does that mean there was.
Generally positive environment this quarter as there is something that what's driving the more broad based positive environment.
Yes, I think there are few things one I'm wondering if it was a positive market for US enterprise, we saw a nice uptick in our enterprise, but I will note.
From a 100 employees all the way up the enterprise customers. We saw growth. We had one segment that was actually down, but I never worry about the segments quarter quarters, not a trend.
But we sourcing Mike nice growth with our enterprise customers, but also across our mid market as well in certain areas, but the keeping magnitude as the verticals across both telecom technology finance healthcare and fled we saw growth year over year.
First half as well and then the trailing 12 months. So we're seeing that across all verticals right now.
And then in terms of the type of revenue were seeing your.
Would you characterize lot of this is kind of those one off transactions or subscription revenue and kind of how can we think about the sustainability of.
The projects that were hitting this quarter.
Okay. So that's a that's a tough on overall megi as we always talk about we've got the gross to net factor. This was kind of the first quarter that it seem to flatten out a little and I don't know if thats a trend yet.
We're still seeing a lot of subscription deals. So our I think we noted the security.
Trailing 12 months were up 110 basis points. So a lot of that is subscription related. This also some other solutions, we sell edassist subscription related.
But we did see failure one of the first times or a long time that the gross to net actually kind of flattened out. So I don't know if that's a trend yet or just was a quarterly thing.
We did have a strong services quarter, again, which was up 35% year over year. So there were more than a few things that kind of affected that.
Okay. Thanks, Mark and then a land can you help us understand how much in the quarter.
Both Rev growth.
Gross billings growth was inorganic that's all for me thanks, guys.
About 75% was organic.
In adjusted gross billing.
We are strong quarter baggy for organic and what we're seeing is with some of the acquisitions.
We're picking up some nice customers that were going to be able to go back and it's a sale too as well as some really nice service offerings that we're going to be able leverage over time, but as Alain noted about three quarters of our adjusted gross billings was organic which was a nice quarter for us.
Great Congratulations guys.
Alright, Thanks, Maggie will soon.
Your next question comes from Greg Burns from Sidoti and company. Your line is open. Please go ahead.
Yes, so I just wanted to touch again on on that dynamic between revenue and adjusted gross billings.
More recently, we've seen adjusted gross billings outpacing revenue. So did you did you see a shifting the mix we were had.
Higher percentage of product sales as opposed to maybe.
Maintenance and software type sales.
Was there a shift in mix this quarter that drove that dynamic.
Yes, I will become the shift in mix. It was it was a 20 basis point difference quarter over quarter, but on a six month basis. We are still up were at 32% with reclassed versus last year at 29.6, So I think at the quarter over quarter comparison, like Mark said that.
Flattened out for us.
But the mix didn't really change in terms of what was what's recognize growth in wants recognizing that.
Okay.
Okay and you.
Some really nice.
Leverage operating leverage this quarter.
How should we think about.
This going forward.
The current level of Opex kind of a good good.
Run rate.
Just how should we think about.
The amount of leverage to expect going forward. Thanks.
Yes, Hey, Greg Good good question I think yes. This quarter is probably a good metric that thing I just want to note realize the variable comp.
So there are GP, if you look at our gross profit was up 25%. So thats. The every obviously the variable in the variable comp for.
For your Opex models, but I do believe this is a good quarter, we've made some significant investments that.
We're starting to see some benefits in in our operating income if you look at.
Over trailing 12 months versus this quarter trailing 12 months or operating incomes up about 7%. This quarter was up 15.5% or with some onetime are now fees as well. So I would have been a little bit higher so we're starting to see some some nice movement there.
Okay. So I mean, I'm, assuming you're to continue to invest but do you expect.
Two.
For revenue to outpace.
The incremental.
Operating expense growth.
That's that's a tough one Greg here, here's here's the easiest thing we will continue to invest because we're seeing where we believe we're grabbing some market share. So we built out the solutions and services that are allows our customers need whether it be in the cloud or security or digital space and then all the services that go with it so we're.
To be opportunistic both in terms of organic hires as well as M&A. So I think you will still continue to see that what I'm trying to say to you as you know we we're our gross margins are probably some of the highest in the industry. So it's going to be tough to continue to drive that now driving our service numbers up will help drive that blended margin up.
But overall.
Opex is probably where we're at is probably a good starting point.
Okay, and then right.
If you you with what you did with Slade, maybe PBS in the mid Atlantic region.
Are there other.
Yeah, I refuse where maybe you don't have.
One other geographies around town, where you don't have a footprint yet.
You are looking to expand things.
Okay. Yeah. Good good question, Greg. So if you know you plus we pretty much on both coasts covered pretty tightly I would think the great lakes area would be one we've got a presence in in India in Chicago in Minneapolis, I think we can probably build out that Ohio, Michigan.
Area I think the south of the southeast I think we can do a little bit more to build that out we've got a presence in texas as well, but probably could build that out a little bit those would be the ones off the top my head. We've also got some opportunities as we talked about on other calls about some.
Global expansion, but that's going to be done, we're really going to do that methodically and really cut to analyze where it makes the most sense, where we can build some size and scale to make size and scale to make a difference.
Okay. Thank you.
All right Greg will say.
Your next question comes from Matt Sheerin from Stifel. Your line is open. Please go ahead.
Yes, Hello. This is our current swartz on for Matt Sharon Good afternoon.
Just a question another follow up question on on the recent acquisitions looking at.
Yes technology in particular, hoping you can maybe shed some more light on.
What the contribution might be in coming quarters.
Any any sort of.
Insight, we can get gain on opex impact for the for the coming quarters as well.
Yes, I think easiest thing I can tell yet evident we think is a really good acquisition for us it rounds out our capabilities in what I would call that Southern Virginia Territory, you know was admitted Atlantic.
But it was a tuck under acquisitions, so I wouldn't I wouldn't expect anything.
Big to start now over time.
What you will see hopefully is that as the ABS team understands all the different types of offerings at plus has we'll be able to add that to their portfolio that they can go back to their customer base.
But normally it takes a couple of quarters for the acquisitions that kind of get up to speed and then understand it all the different offerings. We have and then kind of build from there, but it was kind of it was that more of a tuck under acquisition the build out some capabilities and pick up some really good state local and education as well as healthcare customers as well as a really good thing we're pretty excited about what we picked up with.
The steam.
Understood.
And then shifting gears, a little bit just sort of looking at.
We continue to here.
News about deal timing issues, and some feel real large deal push outs.
I'm wondering if that's anything you have has been seeing whether that's been affecting the deal the timing of.
Deals closing or any other color you could offer on just general customer sentiment.
Yes Haven haven't seen any of that to be honest in what is the come out the right way based on the quarter, we had a pretty solid quarter, where where adjusted gross billings as well as net sales were both up over 19% and GP over 20.5%. So didn't see deals being pushed out now some of the bigger deals obviously take time, but that's that's been the case for.
For for a long period of time here already plus so not seeing anything where customers are moving slower yet we're pushing things out just yet.
Great. Thank you very much.
Alright, Thanks, we'll see you soon.
Again, if you would like to ask a question. Please press star one on your telephone.
Our next question comes from Brent not blocked from Berenberg capital markets. Your line is open. Please go ahead.
Hi, guys. Thanks for taking my question, maybe just one for it weighing on that tax guidance. You gave is there any particular reason why that it's effective tax rate looks to be increasing a bit year over year.
Yeah, I'm on a year over year basis year to date basis. There were some benefits that we received in the prior year for stock vesting counteracting that is an increase in some permanent differences that we're seeing that were actually expecting the tax rate to be about 29% for the remainder of the year.
And then maybe just Directionally for 2020 do you see that kind of falling in the same general area.
Yeah, I would say, it's probably going to be in that general area.
Okay and that's it for me thanks, guys.
Okay, Hey take care.
[noise] no further questions at this time I'd like to turn the call back.
CEO and president.
Okay. Thank you everybody. Thanks for joining the call today. We appreciate your spending the time with US as we stated we thought it was a solid quarter in first half free plus and we believe we'll continue to outpace the overall IP spend market based on some of the.
Execution on our strategy with that I hope all of you enjoy your Thanksgiving and I wish you the best for the holiday season as well thanks for joining us today take care.
Oh.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.