Q4 2020 Earnings Call
And gentlemen, thank you for standing by and welcome to the E plus Inc. Q4 fiscal year 2020, <unk> earnings release Conference call. At this time all participants are in listen only mode. After the speakers presentation. There will be a question and answer session to ask a question during the session, we'll need to press star one on your tell us.
Please be advised to today's conference is being recorded if you require any further assistance. Please press star zero I would now like the hand the conference over to your Speaker today Kley Parkhurst Senior Vice President. Thank you. Please go ahead.
Thank you for joining us today on the call as Mark Marron, CEO and President Elaine Marion CFO.
In regular well COO and present to be plus technology, and Erica Stoecker General counsel.
I want to take them I would remind you that the statements. We make yourself to know that are not historical facts, maybe 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 on the earnings release, we issued this afternoon.
And our periodic filings with Securities Exchange Commission, including our form 10-K for the year ended March 31st 2020, when filed the company undertakes no responsibility to update and any of these forward looking statements I might have new information or future events.
In addition, during the call we may make reference to non-GAAP financial measures and we've included a gap for natural reconciliation and our earnings release, where people saw the investor information section of our website at Www Dot Itos Dot com.
I'd now like turn call over to Mark learn Mark.
Thank you clay and thank you everyone for participating in today's call to discuss our fourth quarter and full year fiscal 2020 results.
I'd like to start by thanking all the plus associates for their perseverance and dedication and serving our customers and supporting each other during these unusual one stressful times, we came together as a team by adapting and adjusting to this new market proving not only that our business model is sound, but that we have adorable when resilient culture.
Our teams also did a great job pivoting and customizing our solutions to meet evolving customer requirements, enabling remote workforces with leading edge collaboration networking cloud and security solutions.
The fourth quarter with revenue growth of 13% Mark the successful completion of a strong year free plus.
Slide 19 had a modest impact on a revenue.
Some non critical orders were delayed or deferred by customer choice, where supply chain constraints, but were partially offset by additional spend on investments required to support their remote workforce transition and related I T projects.
In the fourth quarter or gross margin was 25.1%, reflecting a favorable mix and the positive contribution from our financing business.
Operating income increased 23.6% to 17.9 million and adjusted EBITDA was up 20% to 23.5 million Alain will provide more details in her remarks.
For fiscal 2020, net sales were up 16%.
And our gross margin increased 50 basis points to 24.6%. This translated into a 19.8% increase in operating income and an 18.9% increase in adjusted EBITDA.
We ended the year with a strong balance sheet, which provides the resources to execute on opportunistic initiatives to support our growth strategy.
Our digital infrastructure security cloud networking solutions were in high demand for customers as they shifted to the cobot 19 environment and we'll continue to be relevant as enterprises transition to the new normal.
Operating in this new environment brings many challenges we will continue to adjust air solutions to meet customer and market place demands.
For example, supporting a hybrid workforce increases and changes the security posture and cost structure for many of our customers with more data exchanged over home networks and personal devices and in the public cloud.
Our recently announced public cloud managed services solutions addresses head on the most critical issues of cloud cost optimization cloud security monitoring and cloud data protection faced for customers in this new environment.
Our consultative offerings and the security area continue to be in high demand sales of our security products and services increased 15% in fiscal 2020 and represented roughly 19% of our adjusted gross billings.
To give you. An example of how we were able to help our customers adjust to the new work from home environment.
We were retained by a long term large financial industry customer. This shift 40000 employees to work from home status in a short period by leveraging cloud and VDI technologies. It enables remote workers to access business applications be able to provision new users and any location and maintain business continuity.
We continue to build out our service offerings that are in most demand, including managed services helped us cloud and other hosted offerings, which fulfilled client needs while building out our annuity quality revenue base.
In the fourth quarter, our services revenue increased approximately 9% our investments in people and infrastructure have enabled us to provide clients with end to end solutions and this is a key element of our strategic growth plan that is more relevant today than it's ever been.
Our financing segment had a strong year with net sales, increasing 35% to 58.3 million.
We can provide financing alternatives to support our clients with flexible in creative structures, which allows them to require critical I T assets, even in an error of reduced I T budgets and capital spending constraints, we stand ready to support our customers while achieving good returns on our capital as we've mentioned in the past our fine.
Dancing segment results can be uneven and we closed several large transactions in the past year.
Capabilities remain a significant competitive differentiator in the market.
The pandemics effect on the overall economy and <unk> spending is uncertain future I T spending will be determined in part by how quickly the country reopens and the pace of economic recovery or Conversely, the length of an economic downturn.
We have minimal exposure to some of the hardest hit industries, such as small business retail travel and hospitality and we have some customers who may actually benefit from the pandemic and sectors, such as technology Communications video gaming and health care.
We do expect some headwinds as our customers determine their IP spending plans in the post cobot 19 environment, but we're confident that our focus on the right solution sets and customer segments, along with our dedicated staff will enable us to weather the storm and remain a key partner to our customers.
I will now turn the call over to our CFO, Elaine Marion who will provide a detailed review of our quarter results Alain.
Thank you Mark first let's talk about the quarter.
The March quarter consolidated net sales increased 12.6% to 366.5 million compared to 325.4 million reported in the fourth quarter fiscal 2019. This positive year over year comparison was driven by strong performance from both our technology and financing segments.
Adjusted gross billings were up 8.8% to 514.1 million compared to 472.4 million in the same period, a year ago benefiting from organic growth and acquisitions.
The adjusted gross billings to net sales adjustment was 31.3% in the fourth quarter of 2020 compared to 33.7 person in the year ago quarter, reflecting a lower proportion of third party software subscription and maintenance sales.
Our technology revenue increased 12.8% to 353.3 million from 313.2 million in the fourth quarter fiscal 2019 due to higher sales from our customers in the telecom media and entertainment industry service revenue grew 8.6% primarily from an increase.
And our managed services our financing segment revenue grew 7.8% to 13.2 million compared to 12.3 million in the fourth quarter of fiscal 2019 due to higher transaction gains from several large transactions in the quarter.
Revenue from our financing segment tends to fluctuate due to transaction gains and post contract earnings.
Our consolidated gross profit increased 13% and our consolidated gross margin expanded 10 basis points to 25.1%, reflecting higher product margin in our technology segment and strong gross profit growth in our financing segment. However, due to a slight reduction in services margins gross.
Margin in the technology segment declined 20 basis points to 22.5%.
Operating expenses for the quarter were 73.9 million, representing a 10.7% increase mainly driven by 11.3% higher SGN a.
This year over year change is mainly attributed to an increase in salaries and benefits due to the acquisitions of slate in January 2019, and ABS technology in August 2019, as well as an increase in variable compensation.
Total head count at the end of March 2020 amounted to 1500 79 compared to 1500 37, primarily due to the ABS acquisition.
Operating income for the quarter was up 23.6% to 17.9 million from 14.5 million in the comparable quarter last year as a result of higher revenue improved gross margin and operating leverage.
Our consolidated net earnings were 13.2 million or 99 cents per diluted share compared to 15.1 million or $1.12 per diluted share last year.
Last years net earnings included other income of 5.6 million, primarily from a bankruptcy distribution.
Non-GAAP diluted earnings per share increased 20.4% to $1.24 hour diluted share count was 13.4 million compared to 13.5 million at the end of fiscal 2019.
Now I'll summarize our financial results for the full fiscal year 2020, we reported 15.7% consolidated revenue growth to 1.59 billion from 1.37 billion in fiscal 2019.
Technology segment net sales increased 15.1% to 1.53 billion and net sales in our financing segment increased 35% to 58.3 million due to higher transactional gains.
Adjusted gross billings for the full year were 2.2 billion up 16.1% from 1.92 billion in fiscal 2019.
Looking at the end markets and our technology segment for fiscal 2020 technology, and Telecom media and entertainment, where the largest markets, representing 21 and 19% of segment net sales respectively.
Flood and health care accounted for 16, and 15% respectively financial services represented 13% of technology sales. The remaining 16% is attributed to smaller client types.
Gross profit for fiscal 2020 was up 18.4% and amounted to 391.2 million gross profit in the technology segment increased 15.6% to 340.6 million and gross profit in the financing segment increased by 41.6% to fit.
2.6 million.
Consolidated gross margin was 24.6% representing a 50 basis point expansion from fiscal 2019 technology gross margin expanded 10 basis points to 22.3%.
Other income decreased to 700000 from 6.7 million in the prior year due to a distribution in a bankruptcy case during fiscal year 2019, our tax rate for fiscal 2020 was in line with our expectation at 28% compared to 26.7% a year ago.
Net earnings in 2020 increased 9.3% to 69.1 million.
And fully diluted earnings per share were $5 in 15 cents up 10.8% from $4.65.
Non-GAAP earnings per diluted share increased 19.7% to $6 in 13 cents.
We have maintained a strong balance sheet and ended the year with cash and cash equivalents of 86.2 million. We recently increased the credit limit on our credit facility for the technology segment to 275 million, which can be flexed up to 350 million at our option on an as needed basis.
For working capital or strategic opportunities.
In addition, we have approximately 107 million invested in our financing portfolio, a portion of which may be monetized by funding transactions with third party financial institutions.
Our net inventory was flat year over year deferred revenue increased 17.4% to 55.5 million primarily due to growth in our managed services offerings.
Our cash conversion cycle at the end of the quarter was 37 days up from 27 in the year ago quarter and up from 26 days in the third quarter of fiscal 2020, primarily due to an increase in sales to customers with regular payment terms of 60 days or longer.
We believe cobot 19 had a minimal downward effect on our sales in our fourth quarter fiscal 2020.
This pandemic is unprecedented we are uncertain as to how it will affect demand in fiscal 2021.
As you are aware, we focus on innovative solutions for medium and large commercial businesses as well as state local and higher education customers and we'll continue to monitor and adjust for the pandemics impact on our business.
I'd like to thank my colleagues for their dedication and resilience. During this crisis and also our vendor partners for their efforts and assisting us with supporting our customers.
Thank you for your time today I will now turn the call back over to Mark Mark.
Thanks, Helane fiscal 2020 was a successful year on many fronts free plus including growth market share gains and continued execution of our long term strategy. While many of the same demand drivers such as digital transformation cloud and security are expected to continued in the long term in the near term we remain cautious about the.
Let me end demand environment in summary, we believe we're well positioned and remain confident that we can adjust and adapt to the challenges in the cobot 19 year and beyond.
Operator, I would now like to open the call for questions.
Thank you at this time I would like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad. If you would like to remove yourself from the Q you May press the pound key. Thank you. Your first question comes from Nike Nolan from William Blair. Your line is open.
Thank you hi, good afternoon.
Hey, Maggie talk us.
Hi.
I'm, hoping you can talk us through some of the dynamics that you saw in both.
Products and services during the quarter, maybe kind of breaking it up to the first half a first couple of months of the quarter versus that final month of March and how they may have deferred.
Sure No no problem Maggie so.
First of all if overall it was a solid quarter as Alain mentioned, a little bit earlier, we had a slight impact.
Towards the ended the quarter last few weeks when cobot 19 really took place as it relates to our solutions the things that we've been talking about for years in terms of security.
In terms of digital infrastructure cloud data center, we're still strong through that period, one scope in 19 hit and it became clear that everybody had to work from home we were adjusting pretty quickly with work from home solutions as it relates to.
VDI.
As it relates to collaboration tools cloud security and we also saw a lot of customers really starting to take advantage of digital transformation.
To be clear, though in the quarter. It was a short time period. So I'd say of the 12 weeks in the quarter first nine to 10 were running as always in the last few weeks there were some adjustments with trying to get customers up to speed with their work from home solutions, taking advantage of the cloud and trying to help them with their digital footprint as it relates to service.
As we had a fairly strong services quarter overall against the tough compare.
We saw or that are.
What I'd call or annuity services managed services were strong both in terms of from a Rev Rec as well as from an <unk> from a a billing standpoint.
And then on a security perspective for the year, we were up 15% on security. So I don't know if that answered everything you were looking for.
Well definitely helps and then how have you seen.
That progress on key kind of gotten into April and May here.
So so far as it relates to April we did we saw a minimal impact in April.
You know so our business kind of held in April but want to be clear Maggie. It's only one month I mean, there's two still way too much uncertainty in our business.
And really kind of can't predict the future and I think you know as well as I do a lot of the analyst or some of the bigger Oems some of our peers are talking about.
Declining in the and this quarter and beyond so I think.
For the quarter April held up well and some of that's due to I believe some of the pipeline establish as well as some of the Covance spend that customers and then we're going to have to see as we move throughout this quarter and throughout the year, where things take us.
Okay understood and then as you think about maybe a a less less certain environment going forward.
Can you talk a little bit about the ability to kind of manage expenses in response to that.
Yes, well I don't know if you want to jump in.
Yes, So hey, Megi I think like anything in terms of how we normally do it if at a very high level.
Theres kind of three parts to our business, it's our solutions that we're developing for our customers that they need so.
We believe the good thing is we've been in the right solution areas for our customers with cloud security and digital and they really fit now with a lot of the technologies that customers are looking to optimize their workforce through the cloud.
Looking for collaboration tools, they still need security. So we feel good there second from a go to market, we feel like we're kinda position in the right verticals.
I haven't been hit as hard as some of the other verticals and in our go to market in terms of the accounts that we have in the mid market in the enterprise markets. So we don't have a lot of S. In SMB if you will.
Customers and then the directly to your question, Yes, we're we're managing Opex.
You know as tightly as tightly can be and watching it as we move throughout the quarter and I don't Elaine if you want to add anything that was perfect. Okay.
Okay Maggie.
Yeah. That's that's great second set in one more on priorities in terms of capital allocation you did just announced a stock repurchase program yesterday on so an update on kind of your priorities there would be helpful. Thanks.
Okay.
Maggie first thing is keeping our employees. So we actually if you think back to the fiscal crisis I think we did a good job back then of keeping our employees in place we kind of weathered the storm for lack of saying at any other way and where we're right now we're doing the same thing and hoping that will continue and believe that will continue. So that's kind of the first thing from a capital perspective SEC.
And as our strategy hasn't changed in terms of expanding our footprint as well as our solution. So both from an organic and M&A perspective, we're going to continue to look at that I want to be clear, though I think the M&A market has changed a little bit I do believe there'll be consolidation.
But also I think there's going to be some time between.
The companies that are being acquired of where their numbers are now and where they might be in the future, but it's still something we're going to consider and as a lean alluded to when she had spoke a little bit earlier, you know in terms of our balance sheet and some other things that gives us that capabilities and then the buyback just gives us the flexibility we need in that space, if we need it.
Thank you very much.
All right Maggie take care.
Your next question is from much Sharon from Stifel. Your line is open.
Yes, Thank you and good afternoon.
Mark I'll I'll ask another question just regarding what you're seeing.
Some other resellers and distributors have talked about your double digit declines in bookings in the month of April.
Some also talking into May.
Good could you give us any color in terms of any any metrics.
Yes that you can.
In terms of what you're seeing it sounds like April was was relatively normal and then also just on the larger I T. Private projects I mean, I guess is a co vid.
Catch up in those kind of investments, but are you seeing.
Customers just put on hold those those those longer term I T projects in there just reassessing their strategies for their budget. So yes, so bad I can't I can't talk to the peers I mean, I kind of I know their business, but obviously not as well as they do.
For April it was somewhat normal for US now we believe some of that was the work from home the cobot solutions and things like that where it really is starting to get harder predict is as this continues on Matt.
It gets tougher and tougher to predict where companies are going to be both from a financial standpoint, whether they're letting their employees go and things like that so thats, where it gets a little bit tougher I can tell you we didnt see the decline maybe for a couple different reasons.
We're not big in the retail hospitality airlines kind of verticals. So I don't think we we may have felt to squeeze that they may have felt there.
Don't play in the asked the small and SMB. So there is we had minimal impact.
Also as I think you know over the years, we really don't play in the PC laptop kindness space. If you will we we kind of moved away from that now that's not to say we didn't provided for some of our bigger customers through this.
Through this crisis.
That's not kind of our focus areas. So.
To answer your question directly April kind of held in line.
Still a lot of uncertainty thats really going to be dictated by the customers in terms of budget available constraints they might be under under in the near term as well as resources that are available as we all know.
I think it's almost 40 million people that are become unemployed and the last month or so so it's a it's a tough when it kinda predict the future.
Yes.
For sure.
In lean on the revenue growth for fiscal <unk> 25, 15.7%.
Could you give us a ballpark of what that organic number was because I know there was some acquisitions that you did some are some I've anniversaries already some haven't.
But could you give us.
Pro forma number.
Yes, sure the for the year, the organic was about 67%.
Acquisition, 67% of the growth.
The growth correctly.
Correct.
Okay, Okay, and then on the operating margin I notice that the technology operating margin number was the lowest.
I think in six years or so.
And I know gross margin was sort of flattish so that might have played a role and also your expenses because I know you're hiring.
Lot of specialty sales and technical folks.
And most of your incremental operating profit came from some leasing business. So as we look forward and given that the mix of business is slanted more toward service.
When we you can we get back to that 5% plus number at some point and how do we get there is out of volume game or is that it makes game.
Well, Matt I think it's a mixed game, but I just want to make sure one thing in Q4, our TEP Tech operating income was actually up 25.6%.
So I'm not I'm not sure in terms of I don't I don't have the numbers in front of me. So I don't want to just make it up but when we look at our businesses, they're always going to be what's what's nice is we we have the strength of the two business units and that played out both in the quarter ending the year. So our financing team had a very strong quarter in year.
Some of that to point out so to be clear is sort of large transactions that will probably be tough to replicate.
But on our tech in terms of our operating income as it relates to tech it was up 25.6% for Q4.
Got it but for the for the fiscal year. It was the Marge operating margin was down correct.
Uh huh.
Do you know we don't have lightly.
20 base, yes, it was down.
Okay, Yes.
I'll present on 15% revenue growth that I guess that was my point.
But when given you've given your mix of business.
Yeah. You also have to take into account that there was increased acquisition related expenses in the year to pulling that down.
You know that had an effect on the operating margin.
Okay.
Okay and.
And then just on the leasing business, which has been strong in a very big contributor to our profitability.
In this environment is this sort of post kogas environment and maybe when customers are.
Obviously.
Protecting their own balance sheets and caps a capex could you see or would you expect to see more an acceleration towards the leasing model.
Is that could that be a positive catalyst for that business or not.
A couple of different things, Matt could it be a catalyst, yes, where companies are looking for opex versus capex models, if they're looking for.
Innovative financing with deferred payments and things along those lines. If they don't have budget due to this new norm and they need ITC to to get ahead in their business sure there could be some things there but in this in this new economy or new world, we have to see how it plays out the other thing I do want to point out, though that's important is.
You've got to watch the credit markets right for one and two is last year was a really nice year for a finance team that had some large transactions that will be tough to replicate that would be the big picture message if I had from our financing perspective.
Got it okay, alright, thanks, a lot mark.
All right. So you Matt thanks.
Again, if you would like to ask a question. Please press Star then the number one on your telephone keypad. Our next question comes from Greg Burns from Sidoti and company. Your line is open.
Good afternoon.
To follow up on the financing segment.
Talking about the complexion of.
Please book and maybe you feel the need to increase any reserves or bad debt reserves.
Right now.
Given the uncertainty.
Yeah sure we did increase some reserves in the quarter. They were mostly technology related related to industries, the grand arrests such as.
You know some travel and also some retail related accounts are our investment. We are our portfolio is really made up of mostly investment grade credit.
And we did a pretty thorough evaluation of those credits and a at March 30, Onest, who felt pretty comfortable with where we were with our reserve status on those obviously will be.
Keeping an eye on the portfolio. We also did some risk mitigation in terms of funding some transactions.
To tip to relieve our portfolio.
And also generate some cash during the quarter.
Okay, great. Thanks.
Get back to your expense management.
No.
The mix.
Your cost structure variable versus fixed.
And what kind of.
Metal margins.
Revenues Downs.
Yes, a couple of different things there Greg So first related to this quarter you saw a little bit of uptick some of that was due to acquisition head count if you will.
Also with our GP being up the variable was up.
What I think you can expect going forward I think this quarter is probably a good.
Good quarter to model off from a from an M&A perspective.
Second is I think you'll start to see as this work from home.
I don't know if I call it phenomenon.
But what's going on is there's probably some things from a facility standpoint, and other things from a GSK perspective that we'll be looking at travel and entertainment and things along those lines.
So there's a whole host the things that we're looking at across the bigger bucket expenses within SSG and eight a managed to it where it gets a little bit tougher as we actually believe we're in a pretty good spot both financially the solution sets, we have and the customer base. So we believe there's an opportunity for us to continue to go out and grab market share if we do it smartly from an.
Expense standpoint.
Okay. Thanks.
You mentioned that the service margins were down a little bit that a mix.
What was driving that.
Yeah, It's just a mix issue nothing more worried about we've seen some pickup.
With our staffing business and things along those lines, that's a little bit lower margin than some of our what I'd call professional services Consultative services, that's going to trend depending on the quarter, depending on what we sell so nothing.
Nothing of a major concern at this point.
Okay and then.
Finally on the.
The technology segment.
The difference between adjusted revenue and adjusted gross billings.
Shifting mix there of what where the demand is can you just talked about maybe what.
What do you see in terms of demand versus for products versus some of these more ratable services.
Demand.
Demand wise.
It was a proportion change in the in in the quarter. So we had done.
More or less maintenance as a proportion of the total adjusted gross billings in the quarter, but for the year, we kind of leveled out a little bit you know it was 30, 31.3% was the reclass versus 30.7% in the previous year. There was a large delta this quarter.
About 240 basis point Delta, which is really attributable to mix in that particular quarters, but it is leveling out for us in terms of the the different portion that we're selling.
Product to third party maintenance sales, but the maintenance is still continuing to increase so were so good business for us.
And soft somehow software and subscription so.
Anything else Gregor.
Oh, that's all thanks.
Okay, we have any other questions or I don't think so all right with that I want to thank everybody for attending and hearing about our Q4 and a year to date and I just wish everybody to be safe and healthy take care and we'll talk to you next quarter.
Have a good holiday take care.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.
[music].
<unk>.
[music].