Q3 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 SVP, Sir you may begin.
Thank you for joining us today on the call and as Mark Marron, CEO and President Elaine Marion CFO Darin Rag your old COO and president of the POS technology, and Erica Stoecker General Counsel I wanted 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.
And are based on management's current plans estimates and projections ex.
We will 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 31, 2020, and our form 10-Q for the period ended December 31, two and.
And in 'twenty one filed.
The company undertakes no responsibility to update.
And any of these forward looking statements in light of new information or future events and.
In addition, during the call we may make reference to non-GAAP financial measures and we've included the GAAP financial reconciliation of our earnings release, which is posted on the industrial information section of our website at Www Dot E plus dot com and now I'd like to turn the call over to Mark Marron Mark.
Thank you clay and thanks, everyone for joining for today's call to discuss our fiscal 2021 third quarter results, our third quarter financial performance speaks to the strength and resilience of our diversified business model and the success. We are seeing from our longer term strategic focus on cloud security collaboration.
And related service offerings, all areas that have increased and importance and relevance in today's business environment. Our financing segment continues to provide a unique differentiator in the market and is helping to drive technology sales.
Let me give you some key takeaways from our third quarter results.
First our business continues to perform well and a challenging business environment net sales and adjusted gross billings remained steady our highest margin services business grew three 3% and with lower operating expense level, we were able to reported third quarter net earnings growth of 10, 7%.
Next our revenue performance benefited from several factors, we have a broadly diversified customer base and in the third quarter, we sort of specific areas of strength coming from our large enterprise and upper mid market customers within our key areas of focus security increased over 23% of our third quarter adjusted gross billings.
Up from just over 20% last year.
While security has been a longtime priority area for a plus it has been and even greater demand. During this period of hybrid work models and we expect this trend to continue.
Similarly demand for our services, especially annuity quality managed services continue to grow.
This is even more impressive impressive given the COVID-19 challenges of limited onsite customer access for our professional services and staffing our customers are taking advantage of a remote managed services and we of the capabilities to provide security services and support solutions to create reliable hybrid work environments post pandemic.
Work from home options are expected to be more prevalent than they were a year ago and with that we expect this trend to become a longer term growth driver.
Third we continue to grow our footprint and service offerings be of selective active acquisitions in late December we acquired systems management planning, which expanded our geographic footprint and upstate New York and the northeast and is expected to add between $85 million and $100 million and annual adjusted gross billings S&P builds on our.
Operations expertise staffing solutions, and our remote management capabilities, while adding to our growing base of enterprise and sled customers. We continue to evaluate synergistic acquisitions like S&P to broaden our geographic footprint and add offerings and high quality professional staff.
Finally third quarter results highlight the benefit of E plus diversified business model and our technology and financing segments. The positive performance of our technology segment more than offset the impact of a difficult quarter over quarter comparison, and our financing segment and the market trend towards ex as a service and.
Alternative payment structures is really playing to our strengths and the financing business as we have long orford unique customer payment alternatives that are becoming even more appealing and today's business environment.
Now, let me speak more specifically about our third quarter results.
And technology there were several bright spots worth highlighting first our services business continues to grow both year over year and sequentially in part because customers have become more comfortable with our ability to provide professional services remotely. These projects tend to be higher margin and enable us to achieve higher staff utilization.
Turning to our financing segment revenue declined 34, 5% as compared to a very strong comparative quarter of the prior year, which had 67, 7% revenue growth due to several large transactions. We have long noted that our financing segment generates lumpy financial results and we remain positive about the fine.
Dancing business in today's business and technology environment financing options are and especially relevant and we continue to build synergies between our two segments financing gives customers the ability to purchase or upgrade technology, even with constrained budgets of our cash flow and our ability to provide flexible financing options can facilitate.
Of our technology business and is a competitive differentiator and the market.
Third quarter operating expenses were 11% lower and then the similar period last year, while some of this expense reduction is directly attributable attributable to COVID-19, such as reduced travel and entertainment. We have also realized some systemic savings, which should continue post pandemic from lower facilities cost.
And of realignment of our work force. We also believe that travel and entertainment expenses will continue to be lower as we utilize virtual options and we should benefit from ongoing opportunities to optimize our facilities expense. We will continue to add customer facing sales and engineering talent as demand levels increase to ensure that we have the.
<unk> and house to capture new business and execute effectively on complex projects.
And that said, we will work to closely align increased head count with long term revenue opportunities to maintain operating leverage over time of.
Alain will now provide more detail on our third quarter and nine month financial results Elaine.
Thank you Mark and thank you everyone for joining US today, we continue to be pleased with our performance, especially given the backdrop of the Covid environment. Our consolidated net sales for the third quarter were 427 6 million of decline of <unk>, 3%, mainly due to a tough comparison from the strong performance and our.
Financing segment, the prior year and.
And the technology segment net sales increased one 2% year over year to $415 6 million with product and services revenues, increasing 9% and three 3% respectively. Our service revenues have continued to show improvement for the third quarter and a row due to our continued emphasis on man.
Net services, including enhanced maintenance support.
Adjusted gross billings increased 3% of $587 8 million from $596 3 million and the year ago quarter, showing stability. Despite the continued challenging COVID-19 business environment.
The adjustment from adjusted gross billings to net sales of 29, 3% compared to 30% last year due to a larger proportion of hardware sales and the software maintenance and third party services, which are recorded on a net basis.
<unk> segment revenue decreased 34, 5% of $12 million, which was expected as we had a tough comparison from the prior year, which contained several large transactional gain results from our financing segment tend to be uneven from period to period kind.
The 19 continues to impact our customer base, particularly and the lower mid market customer category and the sled and healthcare vertical that said, we are fortunate to have a diversified base of customer and market Telecom media and entertainment and technology continue to be our two largest customer and market accounting for.
23% and 18% of net sales in the trailing 12 month basis, respectively.
<unk> local and education health care and financial services, followed accounting for 16, and 14 and 13% respectively. The remaining 16% with distributed among several other customer type.
Consolidated gross profit decreased five 3% to $98 2 million from $103 7 million and the prior year quarter consolidated gross margin of 23% was down 120 basis points from 24, 2% last year gross profit for the technology segment increase.
<unk>, 9% to $88 3 million per.
Product margin was 18, 8% of decrease of 40 basis points due to the reduction in revenues reported as net and also a larger proportion of sales to enterprise customers, which tend to be more competitive.
Service margin increased 230 basis points to 38, 7% as we saw an increase in demand from managed services and higher managed services margins.
And the financing segment gross profit decreased 39, 1% to $9 8 million, which was due to the decrease of net sales as we had several large transactional gains and the prior year.
Consolidated operating expenses decreased 11% to $68 9 million due to prudent cost management and COVID-19 restrictions as we continue to benefit from lower travel and entertainment and advertising and marketing expenses are.
Our consolidated head count at the end of December 2020 was 586 exclude.
Excluding of 102 employees from the system management planning acquisition on December 31, 2020, our head count declined seven 4% compared to 16 102 last year and the decline of <unk>, 9% from the prior sequential quarter.
Consolidated operating income increased 11, 4% to $29 3 million, our effective tax rate for the quarter was 28, 1% compared to 28, 3% and a year ago quarter.
Our consolidated net earnings was $21 6 million or $1 62 per diluted share of 10, 7% and 11% from $19 6 million or $1 46 per diluted share respectively last year.
Non-GAAP diluted earnings per share were $1 79, and increase of nine 1% from $1 64 last year adjusted EBITDA increased 8% to $34 4 million our diluted shares outstanding totaled $13 4 million the same as the year ago quarter.
Now, let's look at our consolidated year to date results net sales for the first nine months of fiscal 2021 decreased <unk>, 5% of 122 billion net sales and the technology segment were relatively even at 118 billion, while adjusted gross billings increased one 3% to $1 seven and 4 billion.
Consolidated gross profit amounted to $295 7 million of one 2% decrease primarily attributed to the tough compare and our financing segment.
Our consolidated gross margin was down 20 basis points to 24, 3% and our technology segment gross margin increased 10 basis points to 22, 3%.
Net earnings grew five 4% to $58 8 million diluted earnings per share were $4 39 up five 5% ahead of last year and.
Adjusted EBITDA increased 3% to $98 7 million and non-GAAP diluted earnings per share increased one 6% of $4 and 97 of them.
Now shifting to the balance sheet, we ended the quarter with cash and cash equivalents of $86 5 million flat with March 31 2020.
And as a reminder, we also have $146 million and our financing portfolio that we could largely monetize by funding with third party financial institution and.
Inventory levels increased 61, 7% to $81 3 million, reflecting projects underway.
And our inventory levels vary as we work through existing projects and initiate new customer projects.
Our cash conversion cycle at the end of the quarter with 24 days, a decrease of two days compared to the year ago quarter, and an increase of three days sequentially.
On December 31, 2020, we acquired certain assets and liability of the system management planning our preliminary consideration transferred was $27 1 billion and we incurred approximately 233000 and acquisition related expenses during the third quarter, we expect the contribution from S&P to be between.
<unk> 85, and $100 million and adjusted gross billings over the next 12 months.
While we continue to consider the effect of COVID-19, and the uncertainty surrounding its duration on our near term business trends and our investment considerations acquisitions and organic investment initiatives remain high on our list of capital allocation priorities.
We certainly could not have achieved our year to date successes without the exceptional efforts and support of our employees, whose talents and dedication have enabled us to seamlessly serve our large and diverse customer base.
I'd like to extend my thanks to all of <unk> plus employees for their efforts.
I'll now turn the call back to Mark Mark.
Thanks, Helane to sum up we believe E plus is well positioned to drive additional revenue growth and market share gains, we've made significant investments and technology and talent have prioritized high growth markets like cloud collaboration and security and services and are serving a diverse and expanding customer base.
The staff of highly skilled professionals long standing vendor relationships and strong balance sheet are key competitive differentiators.
These attributes support our ability to continue to perform well and challenging business environments and the benefit from improving business conditions.
Also in November we celebrated our 30 <unk> anniversary with our employees customers and vendors and reflected on our success growth and market position I would like to thank our employees many of whom are working from home while others are in our configuration centers on site at customer locations or voluntarily have returned to our headquarters.
Their dedication and perseverance throughout the last several quarters and our partnerships with customers and vendors have enabled the plus to remain operational and effective throughout these challenging times operator, let's now open the line for questions.
Thank you in order to ask a question you will need to press star one and your telephone to withdraw your question press the pound key.
Please standby, while we compile the Q&A roster.
And your first question comes from the line of Brett Knoblauch from Bear and Burke. Your line is open.
Hi, guys hope all is well.
Just a couple of questions from me I guess regarding the acquisition.
The acquired billings of 85 to 100 million and have a similar gross to net adjustment and I guess, the core business and then well it would be accretive and for.
Fiscal year, 'twenty and 'twenty two.
Hey, Brian its Mark how are you.
So two things there will it be accretive in 2022, yes, it will and in terms of metrics in terms of gross to net it's and the same range of the metrics that are E plus is going home.
Okay, Perfect and then maybe just looking.
Looking forward a bit.
I think you guys are pretty cautious on the Q2 call would you say similar level of.
Cautiousness now or some of that's been alleviated.
No Hey, Brad I think the same same cautiousness, so look here's the here's what's hard when you think about what's going on and the world overall, the one it's really hard to predict at this point. So there's a lot of uncertainty around COVID-19.
The stimulus, whether it's going to get out and where it's going to get out and who is going to help. If you think about all of the things that are going on and the market overall.
A lot of challenging things, we feel good about where we are so I don't mislead you that we will adapt and adjust to what's going on and the market.
We like the strength of our to be use our two business units, which kind of showed up again this quarter whats nice about what we have going on at <unk>, plus we've got both the technology and finance segments. So.
The our finance group had a tough compare to last year and our technology.
Business unit picked them up same could be said on the opposite in the previous quarters, but I still think it's tough to call what's going on and the model for the overall alright.
No perfect completely understand it and then maybe the lane with the the head count reductions over and over the last year seven and pretty significant would you say that process is mostly completed or do you think theres more.
Resource realigning to go.
I would say that we are mostly complete with that we we do plan to hire customer facing positions and the future.
And we'll do that and consistent with business growth.
Alright. Thanks.
Hey, Brett if I could add one thing we're always going to continue to realign our resources based on what's going on and the markets.
Based on what our customers are looking for whatever challenge of this they have whether it's work from home returning to work cloud related security related we're going to continually adjust and realign and we're going to invest and the areas that are the most margin book if you will but also what our customers are expecting from E plus.
Alright, perfect. Thanks, Mark.
And from take care of Brett, we'll see you soon okay.
Your next question comes from the line of Kurt Swartz from Stifel. Your line is open.
Hi, good afternoon.
And thank you for taking the questions.
And maybe first you could talk a little bit about opex trends, maybe on a dollar or a percentage of sales basis, you discussed some of the drivers of.
Of the lower Opex and recent quarters, but just wondering how that how you're viewing that is trending near term versus longer term as the economy sort of assuming way normalizes as you've discussed.
Yeah, It's a good question Kurt so.
First of all off of couple of different things one is of lean kind of noted.
We are going to continue to invest and what we'd call customer facing headcount to address.
Where we think the market is going and some of the market share as we think we can gain.
What we've seen with Opex. So far is due to some of the head count realignment. We've got some savings we've got some savings with our facilities as well so as we kind of adjust to this new kind of a hybrid model work from home ultimately some portion of return to work, we think there'll be some facility costs as we go forward I haven't really seen them yet because they are obviously due to the.
Terms on when or leases and based on those facilities.
Travel and entertainment has been down significantly you know post Covid I would expect that to pick up some but I don't think of will ever get to the historical levels that we had so I think we'll see some new model of how we support our customers and our go to market, but we do expect the higher in terms of supporting our customers and grabbing market share.
So that's the address what you were looking for care.
Yes understood and.
And then I guess, maybe just on the growth.
Side I'm, hoping maybe you could discuss the outlook from a perhaps like a seasonal perspective.
And I guess, along with that you and you talked about inventories still being up with reflecting projects underway.
So I'm just wondering what sort of visibility you may have ins of the cadence and length of those projects and how that should sort of impacts revenue on a go forward basis.
Well a couple of couple of different things there Curt that you touched on and so when I look at the market overall and there are some interesting things going on and I think there are some customers that are struggling as it relates to COVID-19, specifically, let's say like and the health care vertical.
So there are some things we're trying to do to adjust the air to leverage our leasing and help help those customers out of.
I do think overall when you look at the market I think and the enterprise space, there seems to be more cash where.
People have the ability to spend and we saw that and our numbers, where we had some higher enterprise spending of 1000 employees and above so I'd call. It really kind of your your mid mid market to enterprise accounts, where you sort of some upticks.
So I think the the visibility is good I think the sales cycle and some of the smaller customers is a little bit longer and I think that will stay in place until we.
We get some resolution on Covid.
Understood.
And then I guess you touched on this a little bit.
But if you could maybe just sort of double click on any trends youre seeing specifically from a product perspective, and what the drivers were in the quarter, what might've been a little bit weaker than I expected and then maybe specifically if you could talk about PC.
Related sales that had been a tailwind in previous quarters, but is generally not a tailwind and 40, plus so any color as to whether those sales continued would be helpful.
Yeah. So I'll start with your first day of commodity play as you know we've talked about numerous times, we're really not net space now with that said, we did have a large customer that we've been with for years that we fulfill that kind of.
Our gross margin. So we had a few things on the margin side, the enterprise deals that of lean and touched on earlier.
The large kind of commodity sales and then the gross to net being a little bit lower.
As it relates to the things that we're seeing and the market security is obviously top of mind with every customer out there. So if you look at our security it was 23% of our adjusted gross billings this quarter versus last year. It was a little over 20%. So we see a lot of customers that are really looking for help with incident response plans the.
The authentication and so really want to understand who the user is and where they are and things along those lines cloud security and.
And then services.
And what's kind of nice.
And what happened with our business, where we have the solutions and services across many areas in service is a lot of our customers. We couldnt get on site now some seem more open now to us doing or I'll call transactional professional services remotely.
We've had some staffing that's gone down because we can't get on site, but our annuity quality revenues with our managed services has continued to build which is our services is really nice business, which picked up our gross margins overall and where our products took a little bit of of dropped so I'd say security services, obviously the move to the cloud.
And then some of the work from home around collaboration and things along those lines.
Understood and thank you and then I guess, maybe just a quick follow up to that on the sort of commodity related sales do you have any visibility as to whether those would continue into future quarters or does it look like that demand is sort of and.
And fulfilled at this point.
Right now it looks like the demand has been filled but want to be careful curt that can change at any time, if a customer comes back and says they need something and that commodity space and if it's one of our bigger customers, we're going to fulfill it nothing.
Nothing so you know and the I'll call it and the backlog significantly we do have a little bit.
From one of the deals that rolled into this quarter. So there will be some but not not a significant amount.
Understood and thank you very much.
Okay take care of Curt, we'll see you soon.
And again, if you'd like to ask a question its star one and your telephone.
And there are no further questions at this time I will turn the call over to Mark Marron for some closing remarks.
Alright, Thanks, Rob Hey, Thanks, everybody for joining us today, we appreciate your confidence and your following and we look forward to speaking to you. After our Q4 and end of fiscal year take care and be safe.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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