Q4 2021 ePlus inc Earnings Call
Okay.
Good day, ladies and gentlemen, welcome to the E plus the earnings results Conference call. As a reminder of 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 is Mark Marron CEO and president.
Elaine Marion CFO, Darren <unk> C O M and presently the plus 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 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.
The detail on the earnings release, we issued this afternoon and are pre other filings with the Securities Exchange Commission, including our form 10-K for.
For the year end of March 31, 2021 when filed.
The company undertakes no responsibility to update of any of these forward looking statements in light of new information or future events. In addition, during the call we may make reference to certain non-GAAP financial measures.
And we've included the GAAP financial reconciliation of the earnings release, which was posted on the Investor information section of our website at Www Dot E plus dot com and net.
Like to turn the call over to Mark Marron Mark.
Thank you clay and thank you everyone for participating in today's call to discuss our fourth quarter and fiscal 2021 results.
Fiscal 2021 was a very successful and productive year for <unk>, plus as we advanced our growth strategy and broadening our capabilities, while increasing our margins earnings and adjusted EBITDA I'm, especially pleased with the gains we saw in our gross profit and gross margin, which demonstrate that our strategy of delivering high value solutions and services.
<unk> is working and resonating with our customers.
I'm extremely proud of the entire E plus team, which moved quickly to solve the challenges our customers face as they transition to remote and hybrid work environment.
Requiring advanced collaboration networking cloud and security solutions, our successful execution in this environment speaks to our continued strategic focus on these areas and to the commitment and dedication of our people we supported our clients with innovative solutions and what was 1 of the most difficult operating environments in recent memory.
Although net sales were down slightly in the fourth quarter, we achieved significant growth in our profitability as fourth quarter gross profit increased 6.6% and gross margin expanded by 270 basis points to 27, 8% the highest showing in our history.
The solid gross profit and margin performance helped drive 31, 9% year over year of growth in our fourth quarter operating income on a consolidated basis, our tech segment performed especially well with the 49, 3% increase in operating income.
We also achieved the achieved the $25.7 increase in fourth quarter, adjusted EBITDA of $229.6 million.
Software subscription sales have become an increasingly significant component of our revenue and profit streams for our customers' software subscriptions provides several advantages, including real time updates and technical support for <unk> plus the trend towards subscription sales provides greater revenue visibility and predictability and strengthens.
Of our margin profile over the long term.
Services was another bright spot that helped drive our financial performance in the fourth quarter and in fiscal 2021 services revenue increased from 12, 2% in fiscal 2020 to 12, 9% of net revenues in fiscal 2021 and in the fourth quarter grew 8.2%.
The continued growth in our higher margin services business as a direct result of the investments we have made over the years in our people and of our offerings, including cloud security digital infrastructure and collaboration.
As well as our successful successful efforts to strengthen our customer partnerships and provide the critical technology solutions and services that enable our customers to navigate the evolving it landscape.
In addition to the margin improvement from the growth in our services business. We also benefited from our efforts to efficiently manage our cost of.
Operating expenses declined 2.9% year over year in fiscal 2021, driven by lower discretionary spend on travel entertainment and marketing costs due to COVID-19, and a focused effort on realigning our work force and reduced reducing facility costs.
I'd like to highlight 3 areas on which of our investments helped drive our financial performance both in the fourth quarter and in fiscal 2021, and where we continue to see robust customer demand.
First security solutions are especially relevant for our customers now is digital transformation extends the data center to the cloud and heightened the need for greater cloud security and cost optimization plans.
The meet this need we have continued to expand our capabilities and services and security and data protection.
As a result security accounted for 28% of our adjusted gross billings for the year up from 19, 3% of adjusted gross billings in the prior year period.
As we enter fiscal 2022 security is closing in on nearly half of $1 billion in adjusted gross billings.
We are seeing continued solid growth in our services, which provide recurring annuity type revenue, while the pandemic limited our ability to provide conventional onsite services, we work closely with our customers to expand provisioning of the remote services as I noted in last quarter's call remote managed services will remain of long term growth driver for.
For our business, even in a post pandemic environment as our website security and support solutions enable reliable and secure hybrid work environments for our customers. Finally, our financing business continued to perform well generating 57% year over year net sales growth in the fourth quarter and 3.6% growth.
For the full fiscal year, well results may be somewhat uneven on a quarterly basis. The long term outlook for this business continues to be strong.
Financing provides the plus with the key point of differentiation relative to our competitors as our flexible financing options enable our customers to pursue their technology investments in ways that fit their it budgets and capital spending plans.
Technology collaboration is as vital as ever and I am proud of what we accomplished last year to highlight..1 example, you plus work closely with Cisco and Rowan University, because the design and implement of cloud cool cloud based call Center solution.
The solution for managing the administration of early vaccine distribution at medical school included the ability to accommodate anticipated coal volume scheduling tracking and appointment setting.
Turning now to our capital allocation plans are strong balance sheets provides us the opportunity to execute execute on strong M&A opportunities as well as invest in organic solutions that can further enhance our growth and our technology solutions offerings. Most recently, we acquired system management planning strengthening of our Geo.
Graphic presence in upstate New York and in the northeast and adding to our capabilities in cloud data Center AI and collaboration.
Supported by a healthy market for M&A, we see additional opportunities for strategic bolt on acquisitions in fiscal 2022.
As we look forward to fiscal 2022, we are confident that the investments we have made in our targeted high growth markets position us well for continued growth.
I am encouraged by our order backlog, which points to solid demand for our technology solutions, including software and annuity services across a broad range of markets increase.
The increasing customer focus on data center monetization journey to the cloud security and collaboration particularly in today's remote work environment are key market trends that we expect to help driver of growth in the coming year.
As the economy continues to recover and our customers returned to a more normalized work environment. We believe the pace of spending will gain momentum in part, reflecting the resumption of the investments delayed during the pandemic.
Additionally, we expect continued healthy growth in our annuity quality services offerings.
In the near term component shortages in the electronic supply chain are likely to act as a headwind that we believe could delay some revenue.
However, we are confident we can navigate through this challenge as we have in the past and will continue to provide value added solutions support and services to our customers.
I will now turn the call over to our CFO Elaine Marion to provide details on our fourth quarter and full year 2021 results.
Thank you Mark and thank you everyone for joining us today.
Starting with our quarterly results of fourth quarter consolidated net sales declined 3.8% to $352.6 million compared to $366.5 million reported in the fourth quarter of fiscal 2020 and.
In the technology segment net sales declined 6.1% of $331.8 million due to the decrease in product revenue of 8.4%.
Meanwhile, services revenues were strong again, increasing 8.2% to $52.9 million as we benefited from our focus on managed services.
In addition, adjusted gross billings increased 2.8% to $528.6 million compared to $514.1 million in the same period, a year ago, which benefited from our acquisition of S. M. P. On December 31.2020.
The adjusted gross billings to net sales adjustment was 37, 2% in the fourth quarter of 2021 compared to 31, 3% in the year ago quarter due to a larger proportion of revenue recognized on the net basis in particular, the sale of a large maintenance transaction.
Our financing segment revenue grew 57, 4% to $20.8 million compared to $13.2 million in the last year's fourth quarter due to sales of off lease equipment of $8.2 million during the quarter up from 700000 last year.
As I have mentioned in the past results from our financing segment can be uneven from period to period.
We're very pleased with our consolidated net gross profit growth of 6.6% to $97.9 million compared to $91.8 million last year and consolidated gross margin expansion of 270 basis points to 27, 8% our technology segment gross profit increased 5 point.
3% to $83.9 million product margin increased 260 basis points of 22, 6% due to higher sales of third party maintenance and software subscriptions recorded on a net basis.
Services margin increased 60 basis points due to an increase in revenue and gross margin from managed services.
Consolidated operating expenses for $74.3 million, representing 25% increase from $73.9 million a year ago operating expenses. This quarter included a full quarter from the S&P acquisition.
Excluding the impact of the S&P, we saw a decrease in SG&A expenses, driven by lower salaries and benefits and.
And travel expenses offset by higher variable compensation.
Our total head count at the end of March 'twenty, 'twenty, 1 with 560 compared to 579 in the prior year.
Operating income for the quarter was up 31, 9% of $23.6 million the.
By having a higher effective tax rate of 32, 6% compared to 24, 9% in the year ago quarter. Our consolidated net earnings of $15.6 million or of $1.16 per diluted share were up 17, 4% and 17, 2% respectively from $13.2 million.
Dollars or <unk> 99 per diluted share in the last year's fourth quarter.
Non-GAAP diluted earnings per share were $1.41, an increase of 13, 7% adjusted EBITDA was up 25, 7% of $29.6 million our diluted share count at the end of the fiscal 2021 was even with last year at $13.4 million.
Now moving to our financial results for the full year of fiscal 2021 consolidated net sales declined 1.3% to $1.5.7 billion from $1.5 9 billion in fiscal 2020.
Technology segment net sales declined 1.4% to 151 billion our financing segment net sales increased 3.6% to $64 million due to higher sales of off lease the equipment and other revenue importantly, adjusted gross billings for the year were 2.2 dollars 6 billion up 1.
1.6% from 2.23 billion in fiscal 2020.
Looking at the end markets in our technology segment for fiscal 2021 Telecom media and entertainment and technology continue to be our largest markets, representing 25 and 17% of segment net sales respectively.
<unk> health care and financial services, followed accounting for 16%, 13% of 13%, respectively. The remaining 16% of rise for a variety of other customers.
Consolidated gross profit was up 6% of $393.6 million gross profit in the technology segment increased 1.7% to $346.2 million and gross profit in the financing segment declined 6.5% to $47.3 million.
Consolidated gross margin widened by 50 basis points to 25, 1% from fiscal 2020 technology gross margin expanded 70 basis points to 23 per cent.
Operating expenses decreased 2.9% the $287.2 million, primarily due to decreases in travel marketing acquisition related expenses and health care costs.
Consolidated operating income increased 11, 6% to $106.3 million, our effective tax rate for fiscal 2021, with 34% compared to 28% of year ago.
Our net earnings in fiscal 2021 were $74.4 million or $5.54 per diluted share an increase of 7.7% and 7.6% respectively for fiscal year 2022, we expect our effective tax rate to be between 29% and 30%.
Our balance sheet remains strong as we ended the year with cash and cash equivalents of $129.6 million, an increase of 52% primarily due to changes in working capital for the technology segment.
As a reminder, we also have approximately $120 million in our financing portfolio that may be monetized should we have the need for additional capital.
Inventory levels increased 39, 2% to $70 million from the year ago quarter, However, sequentially inventory decreased 13, 9%.
Our inventory reflects ongoing customer project, our cash conversion cycle was 37 days flat from the year ago quarter and up sequentially from 24 days as more was billed to customers with greater than 90 day term.
We continue to monitor the effects of COVID-19 on our business as the vaccine rolled out across our footprint, we constantly seek new opportunities for our business through organic investments and acquisition, our resilient business model performed well over the last year as we quickly pivoted to service our customers under difficult circumstances.
Chances we.
We are confident in our ability to continue to deliver for our customers, while gaining market share as we emerge from this pandemic.
As I reflect on this unique fiscal year I want to thank all our employees for their extraordinary perseverance and efforts despite the difficult circumstances COVID-19 cast upon us.
I will now turn the call back over to Mark Mark.
Thanks, Helane so to sum up fiscal 2021 was a very successful year for E plus as we executed well in a very dynamic and challenging environment. We remain positive on our outlook for fiscal 2020 to backfire, increasing order backlog and our continued focus on the solutions or divest of diverse customer base needs in the air.
Areas of cloud security digital transformation and collaboration.
Additionally, our strong balance sheet allows us to make opportunistic acquisitions and investments to adjusted dynamic market conditions.
We will continue to work hard to support our sled midmarket and enterprise customers with customized solutions and services to smoothly enable their transition back to the traditional office environment for their implementation of flexible hybrid work models.
Operator, I would now like to open the call for questions.
If you would like to ask a question at this time. Please press Star then the number 1 on your telephone keypad again to ask the question. It is star then the number 1.
For just a moment to compile the Q&A roster.
Your first question is from the line.
Of Maggie Nolan with William Blair.
Hi, Mark Hi, Elaine.
<unk>.
I wanted to ask about the access to customer sites.
Can you give us an update on on what you saw there in the fourth quarter and then if theres been any change kind of actually moving to April and May here.
So far no change Maggie not of lot of access to customer sites a lot of it's based on the different states and the requirements and regulations within those states.
We've seen where customers are pretty comfortable with us providing solution services consulting remotely.
We are seeing things start to pick up where people are starting to go back in a kind of a hybrid work environment will book.
Do you expect that to continue for the next few months before you see more people in the offices that we can actually visit on a regular basis I will say this though.
Out of our team and the way they've kind of adjusted with the work from home and in terms of how they're going to market in terms of the touching supporting and servicing our customers.
Okay. Thanks, and then Mark what are you seeing in the way of inflation and the pricing environment, particularly as the component shortages continue.
Maggie I think that'll start to pick up so as the shortages potentially become a little more prevalent I think you may see some things there we haven't seen much yet where we're in constant contact with the Oems.
Talking to them about any changes or things that you're seeing related to inflation slash pricing increases haven't seen much yet, but we'd expect we might see a little bit of that in the future.
Okay, and then last 1 for me the <unk>.
Services business that performed well.
Can you talk a little bit about the underlying momentum in that segment both outside of the impact of the acquisition of S&P and when you think about the synergies that that acquisition could create thank you. Okay. Yes. So thats a couple of different things of their Maggie. So good question look on services, we feel really good about our services, we've talked about it for a while this quarter we were up.
8.2% year over year, and our gross margins were up 60 basis points. So a lot of what we've talked about in prior calls our what I'd call managed services or annuity revenues have picked up nicely and continue to pick up so as we've had a little bit of of flattish I'll call of transactional services Youre <unk>.
Federal services staffing, we've been able to grow our services based on work that we've done in prior quarters. Prior years, that's now ratable revenue falling into the into this quarter and then subsequent quarters.
Overall, though we are starting to see some pickup in what I'd call. The transactional services both from a professional services, but also more importantly from a staffing we're starting to see more and more customers look to start to fill the head count with staffing and I think it's a fairly tight market right now so where we're seeing some positive signs in the staffing side of.
For our services business as well.
<unk>, we think is of Great addition, and the not only in the collaboration space also in the data center space. So theres. Some things there that we're going to be able to try to leverage across the rest of the E plus over time.
The cover everything magnet.
Yes, thanks for the time, Okay speak to you soon take care of Maggie.
Your next question is from the line of Greg Burns with the side duty.
Good afternoon.
In terms of the the.
<unk> shortages and how that might be impacting revenue is there any way you could.
Maybe quantify that and.
What's your view on the duration is that going to be something that's with you for a couple of quarters or do you see that being.
More of a near term problem, yes.
It's Greg that's a hard 1 to predict so first of all of hope you're doing well 1 of its a little hard to predict because you hear some of the folks like Gardner. They think it may go into 2022, most of what we're hearing from the Oems is maybe a quarter or 2 is kind of what the expectation is but I think this is 1 that a lot of people are scrambling and trying to figure out.
The the 1 thing for us it could impact deliveries, but I don't think it's going to impact of our orders.
So we of the I noted on the.
My earlier comments, our open orders are up significantly year over year. So a lot of the things that we're selling.
Is out there and just has to get delivered as well as our deferred revenue being up nicely as well. So we're seeing a lot of things that are positive for the future. The 1 headwind is not really knowing for sure with the shortage how much it could affect us as we move into the next quarter and beyond.
Okay.
And then.
Revenue was the.
A bit lighter on the technology side.
A little bit lighter than I think consensus was looking for can you just talk about that.
Well the whether it was some of this like Covid related commodity type of projects may be rolling off and now were.
We're in this kind of a waiting period, where we're waiting for companies to reopen and start spending more broadly.
And then.
Yeah, maybe just hand in hand, with the backlog growth, but could you quantify.
How much of the backlog is up year over year, and if youre looking forward conversations.
Or are the conversations with your customers now changing to your kind of more.
Broader it spending rather than keep the lights on Covid spending yes. Good. Good question. So yes, I think it's more about it modernization of what we're hearing from a lot of our customers as they kind of as we kind of come out of this pandemic and the vaccination is kind of take hold so a couple of different things you touched on there on the net sales being down I Wouldnt I didn't.
Consider that a bad thing if you look at it overall of our <unk> adjusted gross billings was up 2.8%.
We had a large gross to net Greg it was almost 600 basis points higher.
This quarter versus the same quarter last year, and it's mainly a factor of what we're selling a lot of the software subscription ratable type things that our customers are looking for so if we didn't have the big gross to net delta at 600 basis points, let's.
Let's say if it was flat year over year, our net sales probably would have been up around 5%. So we.
We look at it more on our orders are up meaning our billings.
Is up and then we look at the profitability side, which with gross profit up 6.6% and just as importantly, operating income up 31, 9%. We're more focused on the profitability than the net sales because I think over time customers are are moving to more of these as a service software of ratable models and Thats.
Can affect net sales, but hopefully in a positive way.
To your question as it relates to kind of backlog I would call. It open order backlog is actually up about 70% year over year. So that's a real positive for E plus as we move forward the.
Only headwind on that is what I kind of mentioned the Maggie of little bit earlier might be some of the.
Of the shortages.
Well that would be the only thing there.
Okay, and then lastly on the the gross margin.
The record gross margin really strong this quarter, so kind of like.
Those of large maintenance project.
The contribution from the financing segment, but how should we think about that going forward I mean, I'm, assuming the mix won't be as.
The favorable how should we think about the gross margin on a more normalized basis, yeah on a normalized basis I look at what we put up for the year, what we put on an annualized gross margin would probably be a good metric Greg.
This quarter, if you look at it the large gross to net affected it.
What was nice both of our product and services margins were up as well so a lot of the value added solutions.
Solutions and services, we're selling are resounding with customers in this market. So it helped drive up the margins as well, but this was an outlier in terms of.
Gross margin so I think the the.
The annual that we put up for the year is probably a good metric to start with.
Alright, great. Thank you.
But Greg So you soon.
Yeah.
Your next question is from the line of Matt Sheerin with Stifel.
Yes. Thank you good afternoon.
A question Mark with regarding on.
On the gross margin.
The return to kind of more normal levels is that just because of the product mix, where you you're expecting a higher percentage of of.
Hardware on Prem hardware.
Just because of the trends in the bookings you're seeing yes, I wouldn't say it for.
First of all of Hey, Matt I wouldn't say based on the on Prem. So let me explain this quarter and then I'll kind of tell you where I think things may be going is first of all of this was a large gross to net it was 37, 2% versus 31, 3% almost 600 basis points. So.
Of that had a big effect in driving the margin of prior to the 27, 8% what was nice on top of that both of our product as well as our service margins were up so a lot of the products and salute more solutions that we're selling with the services that it encompasses as well as our annuity services are starting to help drive our margins up.
This was an outlier for a quarter, though that's why as I was explaining the Greg I think it's more in line with what we've done for the year is probably a better metric as it relates to gross margin.
Related to your on Prem, Yes, we are seeing a lot of things have folks as they we work in this hybrid work environment that there's things that you have to do with the other infrastructure data center of monetization even journey to the cloud. So I think theres a lot of things in there that should contribute positively to both our services of margins overall over time.
Okay and could you maybe be more specific in terms of the product areas and the strength of weakness.
Networking.
Versus storage servers et cetera.
Any areas of pointing out.
Well a couple of different things I think.
If I were to think about it security, obviously with everything going on that happened with colonial pipeline and solar winds in the executive board of water from President bite and I think youre going to see.
Some additional hardening if you will of <unk>.
<unk>.
The infrastructure and the access that they allow and all of the data protection. So I think there is a good.
A very strong chance that youll continue to see an uptick in security and I'm talking broadly in the market not just the E plus as.
As it relates to networks, the I think youll see some things with networks at <unk> and other things move in the play as.
As people try to do more with the from a digital infrastructure I think youll see a pickup I believe there's a play for storage for years and years to come and the reason being is there is there is an unlimited amount of data both structured and unstructured out there.
So those would be the players as well as cloud obviously is.
The big driver with what folks are trying to do is they try to make choices on where to put their workloads and.
How to consume the cloud and all of those other things. So those would be the areas I'd expect to see some uptick I think of lot of the collaboration slash communication I think will continue as well, but I think you had a I won't say a mad rush, but you had a rush with COVID-19 for a lot of people to upgrade their systems and I think that will continue over time as well.
Okay all right.
Thanks for that and just in terms of the end market, but I know you've got fairly diversification here, you've got the telecom financial services slide healthcare.
Any specific thoughts on those end markets.
And you may be surprising to the upside or of the ones.
Yes so.
Here's a couple of different things there Matt so.
Healthcare was down which we kind of expect with what went on with Covid So with Pope.
The of hospitals and healthcare organizations focused on people as compared to some of the other things that they normally do.
Teck was down for us and that's just a few customers, but that kind of goes up and back and forth. What was nice leg was up both in the quarter as well as the year for US a lot of it was in the state and local so that's based on a lot of the contracts and relationships. We have built up over the years. So if I looked at it it's not anything that surprised us and it is.
And of the normal the.
Top 5 verticals of our top 5 verticals.
With the tech being down and telecom being up but the other is kind of being in line with what we've normally seen and then we saw a lot of our what I would call mid market for higher end employees as a percentage of of AGP.
Absolute dollars I should say is actually up so we the.
Solutions, we're selling is resounding with that mid to the enterprise market those would be the things related to verticals and kind of customer size. If you will.
So it sounds like you're seeing some pick up in the mid markets and finally after a few quarters, yeah, we're starting to see it in and not when I say mid market net 500 employees and above and that will vary. So I'm very clear that will vary quarter quarter to quarter of sequential basis, but yeah, we're starting to see some things that.
We are picking up in that 500 employees and above if you will.
And then hopefully that will continue and in the below 500, we sort of little bit of a slowdown.
With the at least through this year and I'm, hoping that will start to pick up in time as well.
Okay, Great. That's very helpful. Thanks, a lot Mark alright, thanks, Matt we appreciate it.
There are no further questions at this time I'd like to turn it back over to the speakers for any closing remarks.
Okay. Thank you hey, thanks, everybody for joining us we feel good about the quarter, we feel good about how our teams adjusted in the in this COVID-19 world and feel like we're well positioned as we come out of it and just wanted to thank you for attending today and look forward to seeing you on the next call. Thank you.
That does conclude today's conference. Thank you for participating you may now disconnect.