Q1 2021 ePlus inc Earnings Call

Good day, ladies and gentlemen, welcome to the E plus 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. Kley Parkhurst SPP, Sir you may begin.

Thank you for joining us today on the call as Mark Marron, CEO and president.

Helane Marion CFO during regular <unk>, CEO, and president I'd be plus technology, and Erica Stoecker 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 detailing 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 2020, and our form 10-Q for the period ending June Thirtyth 2020 when filed.

The company undertakes no responsibility to update any these forward looking statement in light of new information or future events.

Addition, during the call we may make reference to non-GAAP financial measures.

Included a gap financial reconciliation and our earnings release, which is posted on the Investor information section of our website at Www Dot you plus dot com and.

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

Thank you clay and thank you everyone for participating in today's call to discuss our fiscal 2021 first quarter results you plus performed well in a dynamic business environment. Our solutions portfolio is positioned to support our customers' needs in critical areas, including cloud collaboration software data Center and security.

Our strategy to bolster our recurring an annuity type revenues has continued to gain market share and provides a more consistent baseline of revenue and profitability free plus we focused on mid sized the enterprise customers with good credit quality and we believe we have minimal exposure to the most at risk industry verticals like retail hospitality.

And travel we believe our 30 plus years are providing leasing through our financing segment has provided us with risk management knowledge and experience to successfully navigate through economic downturns.

We have remained fully operational during the pandemic shifting much of our business to accommodate work from home mandates and take it appropriate precautions for health and safety of all of our employees.

I want to commend the entire you plus team for pulling together in showing tremendous dedication to our company and its values. As a result, we were able to expeditiously serve our customers and effectively support their critical I T needs.

A key measure of our success in the quarter was 6.4% increasing gross profit and a strong consolidated gross margin of 27.8% driven by a very favorable business mix in the quarter, including a larger component of third party maintenance services and subscription sales services revenue increased 4.4.

<unk> percent, while we do not expect this quarter's uncharacteristically high margin level to be replicated in future quarters. It is consistent with our history of achieving industry, leading gross margins as compared to our peers.

Taking a closer look at first quarter results, while technology segment net sales declined 7.4% to 341.2 million our adjusted gross billings held stable at 546 million.

This conversion rate several hundred basis points higher than usual was based on a significant increase in demand for third party maintenance software assurance and subscriptions in the first quarter.

Turning to our financing business revenue grew 8% over last year, reflecting the benefit of post contract earnings as we extended the term of some lease agreements. We think our financing activities will continue increasing importance as leasing is a great alternative which facilitates customer's ability to upgrade and secure their ITM for sure.

Sure while minimizing upfront cash requirements. There was no question that cobot 19 has been challenging to s., our customers and our business partners. However, it is also solidified relationships with many of our customers by showcasing our ability to nimbly execute complex projects in a timely manner.

Many customers are trying to improve remote workforce enablement with collaboration capabilities, while providing secure remote access for their data being accessed from home summer dealing with data center capacity issues due to the influx of remote workers are also looking for ways to contain costs, while looking to leverage the full benefits of the cloud.

In some cases, they have no budget allocated for the solutions they need now due to the pandemic.

Let me give you a few examples of how we plus has assisted our customers navigate this new environment.

One customers current infrastructure could not support the look workload generated by their employees working from home they had to improve their network capacity and upgrade their security posture is in protocols needed for the move to remote work.

This was an unbudgeted expense that needed to be done in a timely fashion, we were able to leverage the power of our two business segments by providing the technology and services they needed along with the flexible installment purchase agreement provided by our finance team. This solve the customers budget constraints and they were able to get the technology they needed.

To address their critical business needs.

Another customer had multiple disparate systems running in parallel and wanted to consolidate all communications platforms under a single solution, but lets go had been in their plans Kobin 19 created additional challenges that required accelerating their timeline they want it to leverage the resiliency and flexibility of the cloud balmain.

Gaining control and accessibility of an on premise solution and choose a multiyear commitment to a cloud based collaboration solution.

This solution allowed their team to manage this cloud based solution remotely and not be onsite, while providing their users access to an enterprise level collaboration platform from home.

In summary, these solutions provided an enhanced user experience better network capacity insecurity and allowed all employees to seamlessly work across the company.

Also we are helping our customers do more with fewer internal resources, given the value proposition of our outsourced offerings like staffing and managed services, which can often be more cost effective.

This is a win win allowing us to save our customers significant cost during periods of economic uncertainty, while yielding incremental gross margins free plus.

It also positions us as part of our customers teams, giving us visibility on emerging needs and the ability to sell additional services.

Security continues to be an important offering and long term growth driver accounting for nearly 20% of our adjusted gross billings, we continue to see strong demand for our security solutions and this offering remains a key differentiator for you plus at a time when it is increasingly in overall and importance.

Finally, we will continue to use our strong balance sheet to seek strategic acquisitions and make organic investments to build out our geographic footprint and solution offerings. We think this challenging economic environment may present opportunities that we are well positioned to execute given our historical experience of successfully.

Sessions.

I will now turn the call over to our CFO, Elaine Marion who will provide a detailed review of our first quarter results Alain.

Thank you Mark and thank you everyone for joining us today, starting with our overall financial performance in the first quarter fiscal 2021 consolidated net sales amounted to 355 million, 6.9% below the 381.4 million reported in last year's first quarter, mainly due to.

An increase in sales of third party maintenance services and software subscriptions, which are recorded on a net basis.

For our technology segment revenue was 341.2 million compared to 368.5 million in last year's first quarter. The 7.4% decline was primarily due to an increase in sales recorded on a net basis service revenues increased 4.4%.

47.8 million due to an increased demand for managed services.

Adjusted gross billings amounted to 546.4 million modestly lower than last years 548.4 million.

The adjusted gross billings to net sales adjustment was 37.5% compared to 32.8% in the first quarter of 2020 for the same reason net sales decreased.

Our financing segment revenue of 13.8 million increased 7.6%, mainly due to an increase in post contract earnings from term extensions of certainly schedules.

As a reminder results for this business can be uneven and difficult to predict.

Consolidated gross profit increased 6.4% to 98.6 million from 92.6 million.

We reported a consolidated gross margin of 27.8%, which widened 350 basis points from last year's first quarter and with a high point in our history driven by growth margin improvements in both segments.

Gross profit for the technology segment increased 6.1% to 86.8 million and gross margin of 25.4% increased 320 basis points.

Technology product margin increased 350 basis points to 23.5% primarily due to an increase in sales of third party maintenance services and subscription licenses, which are recorded net.

Services margins increased 20 basis points to 37.6% primarily due to our managed services the financing segments gross profit increased 8.2% slightly ahead of revenue growth.

Operating expenses increased 5.3% to 73.6 million, mainly due to an increase in salaries and benefits, reflecting higher variable compensation tied to gross profit growth and higher replacement costs from turnover offsetting these increases were lower healthcare expenses travel.

I meant and professional fees.

Our total head count at the end of June 2020 amounted to 1536, essentially flat with last year.

As a result of the improved gross profit operating income increased 9.8% to 25 million compared to 22.8 million last year, our effective tax rate for the quarter increased to 30.8% higher than last year, 28.7%, primarily due to an adjusts.

It's meant to the federal benefit from state taxes.

For the year, we expect our tax rate to be approximately 29%.

Our consolidated net earnings amounted to 17.4 million or $1.30 per diluted share compared to 16.2 million last year or $1.20 per diluted share, a 7.2% and 8.3% increase respectively.

Non-GAAP diluted earnings per share increased 4.9% to $1.51 per diluted share compared to $1.44 per diluted share year over year, our diluted share count totaled 13.4 million for the quarter compared to 13.5 million for the first quarter of fiscal 2020.

Now looking at our end markets in our technology segment technology, and Telecom media and entertainment continue to be our two largest customer end markets on a trailing 12 month basis accounted for 21, and 19% of technology segment net sales, respectively, sled healthcare and financial.

Services accounted for 16, 15, and 13% respectively with the remaining 16% coming from a variety of other client tight.

Our balance sheet continues to be strong with shareholders' equity of more than 500 million. We ended the quarter with cash and cash equivalents of 144.4 million up 58 million from the end of March primarily due to a decrease in working capital needs in our technology segment and an increase in nonrecourse debt. We also have a.

Proximately 185 million in our financing portfolio, a portion of which may be monetized by funding transactions with third party financial institutions.

Inventory levels increased to 93.3 million as we've discussed in the past our inventory levels varied depending on specific customer projects underway, our cash conversion cycle at the end of the first quarter was 30 days up from 24 days in the year ago quarter, but down from 37 days in the March period.

The change from last quarter was primarily due to the decline in our days sales outstanding offset by an increase in days inventory outstanding.

As for capital allocation, we continue to monitor the effect of cobot 19 on our business and use of cash. However, we will continue to evaluate opportunities for investments, including organically in our solutions to align with customer demand acquisitions and share repurchases.

We believe cobot 19 had a small downward effect on demand and the first quarter fiscal year 2021.

This pandemic is unprecedented we are uncertain as to how it will affect demand in fiscal 2021.

As you are aware, we focused 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.

Most of our employees are working from home, except certain roles, which have continued to be in our configuration centers and onsite at certain customer locations and those who have voluntarily returned to our recently reopened headquarters.

I am proud of what our employees have accomplished since the pandemic began and we'd like to thank them for all their dedication and resilience. In addition, thanks to our vendor partners, who have continued to work diligently in assisting us with supporting our customers.

I'll now turn the call back over to Mark Mark.

Thanks, Helane, our fiscal 2021 first quarter results demonstrate the relevance of our key focus and the important role that plus plays in supporting customers as they navigate a rapidly changing business landscape.

We effectively managed through a difficult business environment in the first quarter and are prepared to meet the challenges ahead. Thanks to our large and diversified customer base, which has limited exposure to those industries hardest hit by the pandemic, our strong financial position and most importantly, the collaborative culture that defines the plus all of this.

WPZ us confidence in our long term growth potential operator, I would now like to open the call for questions.

Ladies and gentlemen in order to ask your question you will need to press Star and then the number one on your telephone keypad.

Please standby will be compiled accumulate roster.

Our first question is from making Nolan with William Blair. Your line is open.

Hey, Mark airline, it's Ted on per Maggie.

Can you talk about the demand environment for products and services the quarter progressed into into July and August here as well has the demand.

For products trough, you think thing and is it reasonable to expect.

Continuation of growth services kind at the same level, we saw during the first quarter.

So first of all affected how are you until Maggie we said congrats on the birth of her daughter, Okay. Yeah, well do all right. So a couple of different things I think when we talked about last quarter. We had talked about that April was kind of inline. So I'll talk about this quarter and then I'll try to give you a little bit going into this quarter.

Meeting July through September quarter for Us. So April was kinda line with expectations overall, a quarter kind of wound up that we thought the way it would we had a little bit of slowdown at the end of the quarter.

Some of the project slowed down.

Couldn't get on site, what some of the services. So even though we had growth of 4.4% on our services overall there were some opportunities that we couldn't get on site.

The demand that we saw there was a little different than I won't say different than normal. We're in the right focus areas. So everything was really around workforce enablement remote workforce enablement that includes collaboration communication.

Lot of companies Didnt have datacenter capacity believer in enough rollover remote users that they were dealing with.

Lot of companies were looking at security solutions in terms of kind of secure access.

As people are trying to access data from their home and a lot of folks were moving quickly to the cloud so for the quarter was kind of inline with expectations a little slow.

Going into the ended the quarter.

It would be for Q1.

For Q2, it's kinda along the same line site I can only speak to July it was gone in line of where we expected.

We still have good visibility into our pipeline overall.

Services is a little challenging for a couple different reasons, one getting on site some of the schools not being able to get on site for example.

Staffing some of the folks have slowed down a little bit on staffing, but with that said we've seen pickups in other areas on services with our consultative services and customers looking at our annuity services, so that would be it at a high level.

Okay, Great Thats really helpful.

Can you talk about the higher education in the state and local market exposure, there and just kind of way to saying from a budget standpoint, just given everything that's going on within those end markets.

Not a problem. So if I look at the different verticals, but I'll start with Steve state and local and education, So state and local was actually flat for us.

For the quarter, our K 12 was actually down and Thats really we don't playing the commodity space Ted in the K through 12, so a lot of the chromebooks laptops, that's not really our space. So it's more the I'll call. It the higher margin infrastructure play so that was down a little bit, but higher Ed was up so net net or overall sled state local and education.

Was up year over year.

I think the one that's kind of I won't say obvious healthcare was down for us and I think thats due to a lot of things that I think everybody would realize as it relates to what they were dealing with overall in terms of.

You know just dealing with the patients no elective surgeries.

Quite honestly, we were just trying to do anything we could help or.

Healthcare customers kind of get through this pandemic anyway, we could but slight was up overall.

For us year over year and state and local was flat K 12 was down higher Ed was up.

Great wanted to ask about the mix of the services mix in particular, I note and other margins.

Quarter can you talk about just kind of mix a staffing and professional services in this type of environment. I know you had been seeing a little bit of the trend towards staffing.

An increase in any of that as percentage of revenue.

Have we kind of hit the from a from a mix standpoint.

Mix of staffing within the services.

No I don't think we've hit the peak Ted I think what you have going on right. Now is a lot of folks are trying to double down in terms of focusing on what they need to enable their remote workers to do whatever their job is so they are investing in.

Like I said, the communication and collaboration tools security datacenter in network capacity tools.

Trying to leverage the cloud a lot of customers are trying to leverage our financing capability. So as they've had some projects that are unexpected budgets trying to get some short term relief.

As it relates to services.

We don't break it out by the individual pieces as I think you know, but I can tell you.

The consultative side of our services is really picking up as we're providing solutions that customers need whether datacenter and cloud related security and risk related.

Staffing is down a little bit, but I believe as we move forward I think as customers as cobot hopefully.

Starts to lessen and that's what I'm, hoping for in the future even though it's very uncertain. I think you may see a pickup in staffing as that comes back and there is a little pressure on our professional services mainly for the reason that I mentioned earlier about being able to get on site.

Very good and just if I could slip into last question here what was the organic growth this quarter. Thank you.

Yes.

You know I do know off the top you had I know it was it was primarily organic yeah. There was little contribution from the acquisition Hey go.

Thank you.

Alright take care Ted.

Our next question is from a Greg Burns with Sidoti and company. Your line is open.

Afternoon.

Hey, Greg Greg will follow up in the last questions I wanted to get maybe your view on kind of the sustainability as the current trends. So I would assume there was an initial rush to kind of set.

Business is up to support remote working.

Other things so I just wanted to see if maybe you felt like.

Yes. This initial Hirsch and then maybe we see a full all four maybe this is just accelerating longer term trends. So it's more sustainable but what's your view on.

On that and how the market is kind of reacting in the current environment.

Great. That's a tough on only for one reason with all the uncertainty with Covance, none of us have a crystal ball. Unfortunately, so I think the.

The longer the spikes in kids staying out of school I think it's going to be tougher and tougher to predict but if I were to go with some of the industry experts what they're talking about you would expect cloud spend to be up by a decent amount you'd expect security spend to be up by a decent amount I think a lot of customer have kind of.

Multiple multiple kind of collaboration and communication systems in place that they're probably going to want to convert into one kind of solution. So I think there'll be opportunities for us there.

And I think there'll be consultative opportunities for us to help customers.

You know, whether it's with datacenter capacity issues, whether its cloud cost optimization I think you'll see a lot of folks as they've rapidly gone to the cloud Theres two things that I think will happen is one I think the spend at some point is going to they're going to get the bill and have a little sticker shock and too I think moving that quickly there may be some security.

Risks that they're taking that they're going to have to address.

Okay.

Okay, and then in terms of the.

Gross margin I know, it's going to be driven heavily by mix and like you mentioned this is a record quarter, but how should we be.

We think about is going forward has it stepped up to another.

Here are another level structurally going forward or should we model somewhere in between kind of where it was and where it was.

Marketing and where it was this quarter or how should we think about.

Maybe the mix of the business in the gross margin going forward.

Yes, a couple of things one did we say record quarter I don't remember that Greg. So maybe you did but I'm not sure we did okay.

When I look at at this one will be really tough to replicate theres a couple of things that went into it we had a very high gross to net so there were a lot of customers that.

We're renewing maintenance for an incremental year just from a budget perspective, we also had a big uptick in subscription sales, which are taken on a net basis.

We also had an uptick in our services margins I think it was 20 basis points. So I think those three contributed to it but this is significantly higher.

You know than our traditional norm and I don't believe this is something thats the new norm now with that said, we're pretty excited about where our margins has been going as we've talked about in prior calls so overtime, if our services or annuity services and consultative continue to build I would expect it to trend up over time.

But this is not the norm. This is more an exception based on what happened this quarter.

Okay. Then lastly, just looking at the the financing business I know you always mentioned that its can be lumpy and virgins transactional based but it seems to be pretty consistently.

Over the last year, and a half or so kind of entities these levels.

These transactions have continued so are you has the.

Are you investing more in the business why why.

Hasnt grown structurally this again like kind of a new normal for this business where.

Maybe operating at a higher level than where it has been historically and thats sustainable and then in terms of the the incremental that you've taken on the non recourse and I think actually recourse debt was up last quarter is that tied to kind of rolling your book of leasing business was that related to thank you.

Okay outlet you want to do what type of course in non recourse, but just look at a high level.

We've made investments in our leasing over the years, we believe we've got a pretty good team that's done a really nice job, but what's not going to change Greg it's going to be lumpy theirs.

Many large deals or transactions that come in quarter over quarter year over year. Some happens some don't.

I think that that will continue.

The other thing that comes into play now when you get into a tight credit market like we're in some of the funding from banks and things along those lines and also Theres credit things that we have to think through with deals that maybe in the past we would it took let's say in the retail space that now may not take so theres a lot of variables that go into that but I would I don't think wherever.

On a path just yet with our financing team, where it's stable it's going to be lumpy as we continue and I think quite honestly, we've got a tough compare in Q2 compared to last year with our leasing numbers or finance numbers.

Yeah and granted to address the nonrecourse debt, it's really related to the increase in the portfolio. So it's it's going to its correlates to that in terms of the non recourse increase that is related to the wells Fargo facility, We had 35 million outstanding on that.

Line as of actually has a 331, new we carried at through 630, Weve sense repaid that but it was outstanding as of 630.

Okay, great. Thank you.

Sure. Thanks, Greg.

Our next question is from occurred Swartz, Kurt if you could also provide the company name your line is open.

Hi, This is current swartz from Stifel on on for Matt Sharon Today, how are you all.

Hey, good occurred.

So I'm, hoping you can maybe provide a little bit more color on some of the opex dynamics during the quarter on and whether there are any kobin related costs included in those numbers as well as on how we should start to think about the current opex levels on us.

We're looking basis.

Okay. So a couple different things one I think opex.

It's probably had a good run rate in terms of this past quarter for we're from a modeling perspective, a couple of different things happen in the quarter.

One we had higher GP. So the variable in terms of commission was higher as it relates to the GP. We've made some investments in higher end, what I'd call solutions and services talent that I think increased our salaries as well, even though head count effectively was flat.

A few things as it relates to our utilization rates with services that fell in SDMA versus Cogs.

Trying to think of what else from a salaries and benefits anything else, probably yeah, nothing else from the salaries and benefits, but did to address the cobot question as it relates to costs.

We had immaterial costs related to cover that we did buy some additional equipment for folks that were at home, but it was pretty immaterial.

You know some pp costs things like that but but nothing material that that you would notice in the quarter.

Kurt one other quick thing just the overall, we had lower travel and entertainment as well so that that kind of affected the quarter and if you look at it sequentially.

What was night about nice about our number sequentially. Our GP. Our gross profit was up about 6.7 million and our SDMA overall was down about half a million. So in terms of trending that was a nice trend, but I would think this quarter is a nice one of the model off.

Understood. Thank you and then I guess.

Sort of sticking with the Covance theme, where there any supply constraints to speak of during the quarter or any other supply chain issues that you had just sort of navigate.

No nothing nothing much there are few things shipping at the end that kind of affected our numbers, but I wouldn't say, it's anything material some of the cycles, where a little bit longer.

But nothing that I would call dramatic or material Kurt.

Got it.

Then I guess just just overall is maybe as you're looking at fiscal year, 21, or or I guess, maybe the next 12 months.

Have you I guess, maybe internally on discussed any sort of assumptions for I keep spending over over the next 12 months or or how you're exactly looking at the spending environment currently on a forward basis.

No you know occurred it that's a hard one look as as covert continues the uncertainty makes it tougher I think everybody to kind of project and predict what's going to happen.

We kind of track things by customer by vertical by different functional area. If you think about the different verticals. The nice thing there is where we're not exposed in some of the harder hit regions like retail and oil and gas and hospitality, but also even if you think about some of the verticals that were up year over year or trailing 12.

Once it's not just those verticals, it's the customers that they are selling to that we have to kind of factor in so it gets very tough the kind of predict where things are going to go I will tell you we feel pretty good about this quarter. It was a solid quarter and contributions from both of our.

Segments, we like to all the profitability metrics in terms of GP gross margin operating income EPS were all very positive for us, but predicting going the rest of the year in the future be really tough with what's going on in the market.

Understood and then maybe one more if I could you touched on in a little bit during the during the prepared remarks, but the inventories levels were a bit elevated in the quarter and I know you said that sort of fluctuate based on based on projects and the pipeline and whatnot. So if you can maybe provide any.

Additional color there that'd be helpful.

Yeah, the inventory I had increased to 93 million at the end of the quarter about 40 40 million or so and it was really related to.

Many different customers there were a couple of larger customers that had multiple projects underway that we're working on.

But that should get relieved here over the next couple of quarters.

Understood. Thank you so much you're welcome taker.

And ladies and gentlemen, and star one thank you for your question.

And ladies and gentlemen, this does conclude our Q in a period I'll now turn things back over to Mark Marron for any closing remarks.

Okay. Thank you everyone for taking the time to listen to our call. Today, we look forward to seeing you on Investor Road shows in the future hopefully I should say and then if not speak to that next Q2 quarterly earnings take care and be safe.

This concludes todays conference call. Thank you for your participation and you may now disconnect.

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