Q3 2020 Earnings Call
Like to introduce your host for today's conference Mr. Kley Parkhurst SVP, Sir you may begin.
Thank you for joining us today on the call as Mark Marron, CEO and President there and radically World Chief Operating Officer, Elaine Marion Chief Financial Officer, and Erica Stoecker General Counsel.
Want to take a moment to remind you that the statements. We make this afternoon that are not historical facts, maybe 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 details on 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 29 team and our form 10-Q for the quarter ended December 31st.
2019, one file the company undertakes no responsibility to update today. These forward looking statements in light of new information core future events.
In addition, during the call we may make reference to non-GAAP financial measures. We've included the gap financial reconciliation our earnings release, which is posted on the Investor information section of our website at Www Dot he plus dot com.
I'd like to turn the call over to Mark Mark.
Thank you clay and thank you everyone for participating in today's call to discuss our third quarter. We're pleased to report solid fiscal 2023rd quarter results, which built upon a strong first half and position us for a year of significant growth.
Several important takeaways from our year to date results first we are successfully executing on our strategy of investing into higher growth areas of cloud security and digital infrastructure, adding customer facing headcount upselling, our products and services and executing strategic acquisitions to expand their customer base and.
Solution offerings.
Second our balanced approach of organic and acquisition growth is enabling u. plus to gain market share and build a base of annuity quality revenue. There provides a growing source are predictable business.
Lastly, our third quarter and year to date results highlight that our portfolio approach or forefront technology solutions supported by a broad range of additional services and financing options resonates well with or expanding base of Midmarket and enterprise customers.
The third quarter, we posted a 24% increase in net sales and our gross profit grew 25% due to improved gross margin, while operating income increased 31%.
Now would you product sales were up 20% year on year and services increased an impressive 43%. Both of these areas showed acceleration from the pace of growth in the first half of the year.
Our financing segment is benefiting from synergies with our technology segment demand from our vendor financing programs and federal I T spending transaction sizes in the federal marketplace or large inflows are difficult to project, but we believe federal I.T. spending offers future opportunities free plus.
Let me speak more on or 24% sales growth in the third quarter, which compared favorably with a 13% that we reported for the first half of this fiscal year.
We had several successful wins, where our land and expand initiative, where we are aggressively pursue business with new customers or broaden our reach within existing customers with the intention to sell other technologies and services at higher margins.
Also we saw considerable pickup in our service offering sales in the third quarter, particularly in staff augmentation, which can increase customer stickiness and as a high demand solution in today's job market.
Therefore fermentation service margins are generally higher than our product margins, but tend to yield lower margins than our professional and managed services.
From a strategic standpoint, however, staff augmentation can be a gateway to expanding customer wallet share.
Security products and services grew 15% year on year on a trailing 12 month basis and represented roughly one fifth of our adjusted gross billings security continues to offer a solid runway for growth three plus.
He plus retains its industry, leading margin profile in the third quarter, expanding gross margin to 24.2% 20 basis points ahead of the same period last year.
We continue to invest in the people solutions and acquisitions needed to serve our customers needs today, and then if future.
Our investments to date have paid off in sales growth and industry, leading margins and we're committed to staying ahead of the curve.
Some examples of this include providing cloud assessments that uncovered challenges our customers space in the current I T infrastructure identifying areas of potential cost savings and efficiency gains and creating strategies to help our customers meet current and future business needs.
These often result in structured multi year contracts to help customers offset large capital expenses up front and realize the full benefit of hybrid cloud solutions to meet their growing needs.
Other examples include helping customers streamline their operations and minimize the number of outsource providers by providing a complete lifecycle program for IP infrastructure management.
And finding ways to make it easier for our customers to acquire needed technology, such as providing automated ordering and processes for preselected equipment bundles or utilizing a finance structure that can provide capital and budgetary benefits to the customer.
Turning to the ABS acquisition, which closed in late August the business as integrated well into our portfolio expanding our mid Atlantic footprint, while adding to our service offerings and boosting our managed service capabilities in particular.
The combination is brought additional selling opportunities in both the ABS and he plus client base and we were in the early stages of capitalizing on these and converting them to revenue.
One example of this is a large transaction in the educational space from an ABS customer that we were recently awarded that leveraged our financing capabilities to help them procure the technology they needed now while meeting budgetary constraints.
In summary, the third quarter was a period of strong execution and market share gains free plus.
Ill now turn the call over to our CFO, Elaine Marion who will walk you through a detailed review of our third quarter results Alain.
Thank you Mark and thank you everyone for joining US today, let me share some more details of our strong financial performance in the third quarter fiscal 2020.
Net sales increased 24.1 person to 429 million from the prior fiscal years third quarter, driven by strong performance and market share growth from both segments.
Net sales in the technology segment increased 22.7% year over year to 410.6 million, reflecting 20.3% and 43.2% growth in product sales and service revenue respectively.
Similar to the second quarter fiscal 2020, the increase in services revenue was across the board in professional services managed services and staff augmentation.
While the slate and ABS acquisitions were the primary contributors to service growth for the technology segment overall organic was the primary growth driver generating roughly 65% of the increase in adjusted gross billing.
Financing segment revenue of 18.4 million was up 67.7% year over year, mainly due to higher transactional gains primarily from large government related business.
Please keep in mind that results from our financing segment tend to be uneven from period to period and may be driven by large transaction.
Looking at our end markets and the technology segment on a trailing 12 month basis, our largest customer vertical continues to be technology accounting for 22% with flood and telecom media and entertainment each accounting for 17%.
Care and financial services accounted for 15% and 14% respectively. While the remaining 15% was distributed among several other client type.
Adjusted gross billings in the technology segment of 586.3 million increased 22.5% compared to 478.4 million in the same period, a year ago, mainly driven by strong demand from larger customers new wins from existing customers as well as contributions from the ACA.
Positions of slate, an ABS technology.
The adjustment to adjusted gross billings to net sales was 30% flat year over year end declined sequentially.
Consolidated gross profit was up 25.1% and amounted to 103.7 million compared to 82.9 million in the prior fiscal year third quarter.
Salivated gross margin expanded 20 basis points to 24.2% year over year gross profit for the technology segment increased 18.4% to 87.6 million and gross margin was 21.3% compared to 22.1% in the year ago quarter.
Technology product margin narrowed 70 basis points to 19.2% due to competitive pricing for existing customers in an effort to expand our sales positioning as well as additional sales to large customers.
Services gross margin was 36.4% compared to 40.7 person in the third quarter fiscal 2019 due to a larger proportion of staff augmentation and enhance managed services that yield lower margins.
And the financing segment gross profit increased 80.5% to 16.1 million, primarily due to the increase in transactional gains.
Our consolidated headcount at the ended the third quarter was 1600 into compared to 1200, and 65 and a year ago quarter.
The addition of slate and maybe as technology added an additional 301 employees as of December 30, Onest 2019.
Consolidated operating expenses increased 23.1% to 77.4 million, reflecting increases in headcount as well as salaries and benefits variable compensation and health care costs.
Salaries and benefits rose, primarily due to slate and <unk> acquisition and higher variable compensation resulted from the increase in gross profit.
We're very pleased with our consolidated operating income increase of 31.2% to 26.3 million consolidated net income and diluted earnings per share were up 31.5 person and 32.7%, respectively to 19.6 million or $1.46 per diluted share.
Our effective tax rate for the quarter was 28.3% consistent with the prior year third quarter.
In the fourth quarter fiscal 2020, we expect our tax rate to be approximately 28.5%.
Adjusted EBITDA increased 24.7% year over year to 31.9 million.
While our adjusted EBITDA margin was 7.4% flat when compared to third quarter fiscal 2019.
Non-GAAP earnings were $1.64 per diluted share up 27.1 person from the third quarter fiscal 2019.
Our diluted shares outstanding totaled 13.38 million compared to 13.54 million in the year ago quarter due to share repurchases.
I will now turn to our consolidated year to date results net sales for the first nine month of fiscal 2020 increased 16.7% to 1.22 billion.
Net sales and the technology segment were up 15.8% to 1.18 billion and adjusted gross billings increased 18.5% to 1.71 billion.
Validated gross profit amounted to 299.4 million, reflecting a 20.2% increase.
Consolidated gross margin expanded by 70 basis points to 24.5% and our technology segment gross margin increased 20 basis points to 22.2% <unk> earnings grew 16% to 55.8 million diluted earnings per share were $4 in 16 cents, 17.5% ahead.
Of last year.
Adjusted EBITDA increased 18.6% to 95.8 million and non-GAAP diluted earnings per share increased 19.3% to $4 an 89 cents.
Moving to the balance sheet, we ended the quarter with cash and cash equivalents of 59.6 million compared to 79.8 million at March 30, Onest 2019. The decrease is attributable to the ABS acquisition in August 2019 investments in our financing portfolio and share repurchases.
Inventory levels increased 20.9% to 61.1 million compared to the into fiscal 2019.
As a reminder, our inventory levels vary depending on specific customer projects underway.
Our cash conversion cycle at the end of the quarter was 26 days similar to the year ago quarter and up from 23 days in the second quarter fiscal 2020.
In terms of capital allocation, we strategically balance making investments in our business through acquisitions and financing portfolio investments to drive growth as well as share repurchases. Thank you for your time today I will now turn the call back to Mark. Thanks, Helane, our year to date results have set the stage for fiscal 2020 to be a year of can.
Hi, good growth for E. Plus we are proven our ability to capture demand from our base of Midmarket and enterprise customers for complex solutions that optimize and protect their IP initiatives and we continue to explore opportunities to complement our our organic growth with acquisitions that would expand our technology capabilities and geographic reach.
Operator, I would now like to open the call for questions.
To ask a question you will need to press star one on your telephone to withdraw your question press the pound or hash key please standby will be compiled acumen a roster.
Your first question comes from the line of making Nolan from William Blair.
Hi, John quarter.
It's interesting given the nature of the land and expand the Goldman said that you commented market. You saw success. This quarter can you give us a little more detail on what type of work. This is.
And maybe that longevity of these types of engagement.
So hey, Maggie first off Mark here. Thanks for the question and on the land and expand a that's something as you know we've been doing for years, we've been fairly successful both in terms of bringing on net new customers.
Indoor working within existing customers to get into new divisions.
Normally the way it works as across all the different solution sets that we sell everything from our cloud security digital infrastructure offerings as well as staffing and services. So it really varies based on the customer what it normally does in the beginning the margins are a little bit lower and then over time, we tried to show the value within the customer of all the different types of.
Of ways, we might be able to help them. So landed expanded normally drive up or sales.
Originally and potentially affect our gross margins a little bit in the beginning and then over time, they come back to levels that threat.
So needs a engagement that affected this quarter, where these with.
New customers our existing customer.
Both.
And how roughly how many were there and to the margin profiles vary across those given that it was both new and existing customers.
Yeah. It varies the margin profile of Barry to give you a feel at a very high level, our top 20 customers as well as our what I'll call other customers.
Both grew at significant rates with the land and expand we had a few large customers that are grew nicely on net sales with a little bit lower margins than we're used to and then we'd expect overtime that kind of grow that give you a little more color maybe on sales overall in terms of our overall adjusted gross billings two thirds was organic and a third was.
From M&A just to maybe fill in the picture if you will.
Thank you and then as you see services continue to increase as a percentage of the business and.
You know the mix, obviously is changing how much has annuity revenue changed at the mix of total revenue over the last couple of years.
Annuities, a nice piece for us Maggie continues to grow in terms of total contract value edmar or.
And as we move through the process with this if we run our business right or margin should continue to increase in the annuity space, what you're seeing what some of our service margins right now we've actually.
Increased or staffing revenues as it relates to services, which the margins are a little bit smaller than our traditional annuity and professional services, what's nice about it it's kind of the foot in the door sometimes into customers that we then go back and try to sell everything else that we have but annuities growing nicely year quarter over quarter year over year.
Thank you and then last one for me just your updated thoughts on the macro environment Pops around what demand looks like and supply chain.
Terrific. Thank you.
So far in terms of overall demand haven't seen any slowdown in terms of demand in terms of our forecast for the quarter and looking out another quarter still have not a have not changed from prior quarters.
A lot of things going on obviously, an election year that you never know what's going to happen and then the corona virus to two pieces to it if if maybe you're touching on that somewhat.
One in terms of actual revenue, we have little to no exposure as it relates to Asia Pac.
We're tracking it from a supply chain logistics with or different vendor partners. It's a little early.
Everybody knows they've kind of push some things out in China. So we're going to track that closely and see if it potentially could affect things over time, but so far nothing there for it so I should say, it's too early Maggie.
Thanks Mark.
Okay, well see assume Maggie.
Your next question comes from the line of Matt Sheerin from Stifel.
Yes, Hi. This is just kurtz works on for Matt Sheerin. Thank you for taking my questions.
Hey, Kurt so.
So just starting off touching on the operating margin profile I'm wondering how how we should perhaps think about that going forward.
It seems as though the gross margin has been steadily improving but opex has been growing as a percentage of sales over the past few quarters. So I'm wondering if that first of all reflect sort of continued investments in the business overall or whether that's more related to the acquisitions and also one we should perhaps be expire.
Shifting to see some leverage kick in and drive operating margins higher.
Yes. Good question. So it's actually two things it's the acquisitions.
And some of the acquisition related costs at this point and also the investments that we're making so where we've been fairly clear occurred over the you know the prior years is we believe the we have the ability to grab market share based on our capabilities in some of the focus areas that we have so we're going to continue to invest I'm not only in customer for.
Facing head count meeting sales and services that can support our existing customers, but also reach out and touch new customers.
And we're also investing in some of the newer technologies that are coming out. So it is affecting our opex margins are currently we watch it closely and overtime, we would expect to get operating leverage.
Understood and and then just following up on your commentary on the demand outlook, particularly Lee for 2020, as you know weve been coming off a very strong PC refresh cycle in 2019, I know, that's not really area, you, particularly play too much and.
But as we sort of move into 2020, I guess part of the expectation is that maybe some of that spending may shift into areas such as software and security. So I'm I'm wondering how you think.
Plus is positioned sort of moving into the year end, whether what do you stand to potentially benefit from some of these spending shift.
Yeah, Hey, Kurt I think we're really well positioned so you hit on something that that is true in terms of the PC refresh windows 10, we didn't really play in that Doug I'll call. It a commodity play maybe a little bit more than that but we didn't get the uptick in sales because we rarely if ever played in that space.
We've stayed in the cloud security digital infrastructure.
Do we think we're position in the software and security I very much our security was up.
15% trailing 12 months for it from an adjusted gross billings standpoint, and our software subscription licenses were up significantly I want to say, 57% I'd have to double check that but it's in that range.
So I think we're well positioned with where we think the market's going and where we're investing in resources and new technologies.
Great. Thank you very much that's all for me.
Okay, Curt take care of we'll see you soon.
Your next question comes from the line of Greg Burns from Sidoti and company.
Good afternoon, I just wanted to.
Touch on some of the larger land and expand deals that you had mentioned was there any one or two deals in particular.
That.
That landed in the quarter or was it just kind of more broad based.
Number of larger type products projects that closed in the quarter I just wanted to kind of get a feel for as we look forward or we're going to be coming up against tough comps because of any one large particular deal this quarter or was it just kind of a broad based.
Demand that you saw in the quarter.
Yeah, Hey, Greg Good question. So two things one it was across multiple customers. If you will but there was some pull forward deals probably to the tune of about 15 or 20 million that would probably be tough to replicate not so much from the land and expand but more year end I'll call. It budget flush if you will.
So across multiple customers, probably 15 to 20 million that was kind of a pull through or pull forward. If you want to call. It from a year end budgets or that would be about it from this and.
Okay that is that pull forward something.
See every year or was that kind of unusual for this quarter.
I think that was a little a little unusual for the quarter you always see pull forward and every I'll call a calendar year end, but this was a little outside the norm in terms of this customer in size. So I would say, it's a it's not the norm as it relates to that the other thing is related to our numbers overall, maybe a little bit different than land and expand.
We also had a real solid quarter in terms of some large deals with our finance group. So there were two things that kind of came into play there not so much to the land that expand on finance, but just also plays in.
Okay and that I.
I guess leads to my next question that those large transaction games on that side of the business you have visibility into.
I mean, it's difficult to model I guess when when these.
A large transaction deals in the finance inside of business will close or any kind of.
Color or.
Commentary you could give us a in terms of do you have a pipeline of these potential transactions. It is come when they come like how should we think about modeling that side of the business.
Yes, I do it's a tough one Greg we've we've talked about it throughout the years in the quarters.
Our leasing or financing business is a lumpy business always was always will be a these deals are bigger deals are hard to forecast only because of their size, how often they come up all the different variables that go into selling them. So when we get them, we kinda Pat ourselves on the back when we don't we're worried about the compare what I'd tell you is there a tough.
The forecast in the predict they're not easy to replicate.
This was a real solid quarter for our finance team in terms of some of these transactions, but it is a lumpy business, that's tough to forecast or predict.
Okay. Thanks.
See you soon.
So I got one more.
Okay, No sorry, not Russian you off what is what [laughter].
The last two quarters.
Revenue and adjusted gross billings have grown roughly.
In line with each other I think.
Prior to this you saw adjusted gross billings growing at a faster paced in revenue.
Go over that dynamic what why that is why they're growing in line.
Closely in line now is there have been the shift in the mix of what you're selling in the quarters.
Well, yes in terms of you know it comes down to a maintenance renewals and subscriptions, which we talk about which is the gross to net effect, what we're saying as the gross to net is now closer in line year over year. Prior quarters. There was a big a delta between the gross to net year over year, which would affect the net.
Sales and bring it down if you will.
Okay. Thank you yeah.
As a reminder to ask a question press Star One. Your next question comes from the line a friend Elfa.
From Berenberg capital your line is open.
Hi, guys. Thanks for taking my question Hope all is well I breath grant.
Personally kinda on the I guess following up on the other question talk about spending shift from.
The product related spend to the upgrade cycle. This year to maybe software security spend next year would that cause the delta in the gross to net to widen next year, if you're anticipating more maybe software security Stan.
Potentially yes, a lot of the software vendors or move into subscription models, which would be on that basis, so potentially that could affect net sales depending on the vendor and what they're selling or what we're selling of their product sure.
Okay, and then I'm just looking at the segment breakdown that you guys had a really strong I.
I guess on trailing 12 month basis in the Telecom media and entertainment is there anything maybe worth flagging that.
No. We're actually we felt good so for the quarter four or five top verticals were up to fit for article was kind of flat just down a little bit. So it was somewhat flat.
But when we look at our top five verticals a year to date through the first nine months and trailing 12 months there were all up nicely. So.
Where we're seeing nice progress and nice opportunities in the pipeline across all verticals so far.
Or I should say top five.
Okay, and then just one more I guess when you're doing I'm trying to compete for new business I guess, how important is factored into the financing capabilities. You guys have play like what do you think you would see similar growth in that product sales. If you didn't have the financing capability or is that really.
What drives new business wins.
You know that's a good question I I think it's complementary I don't think it would affect it per se, meaning we've got two separate sales teams, but weve.
Compensated them or put come plans in place to get them. The work together on deals. We have had some deals for example at year end, where folks don't have budget that we're able to leverage our financing or you know I'd call. It payment options for customers to make deals happen. So it definitely helps but I wouldn't say, it's the it would be the be all end all if you will.
Perfect. Thanks, guys.
All right take care, we'll see you soon okay.
Yes, you too.
And there are no further questions at this time I will turn the call back over to Mark Marron CEO and president.
Alright. Thank you Hey, just want to thank everybody for participating in today's call. We look forward to senior in the upcoming investor meetings and the speaking on next quarter's call. Thanks for taking the time and have a great day take care.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.
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