Q2 2022 ePlus inc Earnings Call
Good day, ladies and gentlemen, welcome to the East Coast 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 is Mark Marron CEO and president.
Lane Marion CFO.
Darrin regular all C O O and president of U plus technology.
Erica Stoecker General counsel.
To take a moment to remind you that the statements we make this afternoon.
Or are not historical facts may be deemed to be forward looking statements.
Just on management's current plans estimates and projections.
Actual 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 and Exchange Commission.
Included in our Form 10-K for the year ended March 31, 2021, and subsequent filed quarterly reports, including our Form 10-Q for the quarter ended September 32021 when filed.
Undertakes no responsibility to update any of these forward looking statements in light of new information or future events.
In addition, during the call we may make reference to non-GAAP financial measures and have included a GAAP financial reconciliation in our earnings release, which was posted on the Investor information section of our website.
Www Dot E plus dot com.
I'd now like to turn the call over to Mark Marron Mark. Thank.
Thank you clay and thank you everyone for participating in today's call to discuss our results for the second quarter of fiscal 2022, you plus delivered impressive financial results in the second quarter, highlighting the strength of our business model and the continued success of our strategy to drive growth client demand for our innovative serve.
Mrs and solutions across the technology stack continues to grow as businesses and organizations increasingly rely on our breadth of capabilities and expertise to enable their digital transformation and modernization initiatives in this evolving and dynamic environment. We believe E plus is gaining market share as our.
Agile model, coupled with our focus on high growth areas, which includes cloud security and digital infrastructure allow us to pivot and fulfill complex customer needs in both a timely and cost effective manner. In addition, overall fundamentals within the market remained healthy as enterprises and organizations can.
To invest in it infrastructure to drive revenue enhanced business analytics safeguarding through data and increase automation.
Our second quarter adjusted gross billings increased 10, 5% from the prior year period to $664 1 million with security solutions accounting for approximately 20% of our adjusted gross billings on a trailing 12 months basis consolidated net sales increased five eight.
<unk> from last year's second quarter to 458 billion with broad based growth in products services and financing.
Significant improvements in profitability again highlighted our disciplined cost structure and the operating leverage in our business model as revenue scales.
As a result second quarter operating income rose more than 55% year over year, while earnings climbed more than 58% from the prior quarter to $2 34 per diluted share.
Looking more closely at our second quarter performance technology net sales increased 4% from the same period last year driven by growth in both products and services with services, increasing a robust 23, 1% on a year over year basis.
The continued strong growth in our service revenue was a direct reflection of the investments we have made in our people and in our capabilities to meet the evolving needs of our customers as organizations at all levels increasingly recognize the benefits of outsourcing a wide range of services.
Looking to partner with the managed service provider with end to end expertise across the technology stack.
For example, we continue to experience strong demand for flexible and secure environments to accommodate hybrid workforces for re plus this trend offers multiple growth opportunities as we not only provide the products and knowhow that enable comprehensive infrastructure cloud and security solutions, but we also provide.
Clients with strategic consulting and advisory services that align with their long term technology business Roadmaps.
It is this full suite of capabilities and expertise that helps set us apart for many of our competitors and also creates a long term relationship with our customers as we become an essential partner and helping them achieve their short and long term objectives at the same time, our positioning and strategy of making investments to enhance our.
Our capabilities and expand our solutions and services portfolio has allowed us to achieve and maintain our industry leading margins.
Two examples of this our continued investment in our cloud and networking capabilities with Amazon Web services as well as our recently announced artificial intelligence bundle for health care organizations regarding AWS E plus achieved AWS network competency status.
Our capability to help our customers secure alert securely connect to AWS from public or private clouds.
The launch of our artificial intelligent bundle for health care organizations enables our health care customers to confidently design implement and begin using artificial intelligence and very practical ways, providing data driven insight to help them solve a variety of problems unique to health care environments.
Another bright spot for <unk> plus in the second quarter was the continued growth of our higher margin annuity quality revenue, which grew solidly in the second quarter, both on a sequential basis and compared to the same period last year driven by rising demand as a recurring annuity type revenue generated by our service business continues to grow.
We believe it will enhance both the predictability and visibility of our revenue stream.
As we expected and called out in our Q1 earnings call. Our financing segment generated exceptional results in the second quarter, resulting primarily from several large contracts as a result financing segment net sales increased approximately 58% year over year to $21 7 million and segment.
EBITDA increased nearly 94% year over year to $14 1 million.
Although results in our financing segment can vary from quarter to quarter due to the timing and size of transaction. This business provides a unique point of differentiation for <unk> plus as our financing options offer our customers flexibility in managing their it budgets as.
As we have.
Please note that this business can be lumpy and we would not expect to replicate what we achieved in the second quarter and any near term succeeding quarters.
Supported by the strength of our balance sheet and recently expanded credit facility, we remain active in identifying and evaluating potential acquisition candidates that will further expand our capabilities and broaden our geographic presence.
While the M&A market remains healthy our disciplined acquisition strategy ensures that we only pursue the most promising opportunities.
As we enter the second half of our fiscal year, our backlog open orders and deferred revenue underscore our confidence in our strategy. We continue to experience solid demand for our services and solutions across a variety of end markets as our customers accelerate spending to address the evolving it landscape, including our <unk>.
High growth focus areas of cloud security digital infrastructure and collaboration.
At the same time, we can we continue to closely monitor and adjust to the bottlenecks in the supply chain that May act as a headwind going forward to date <unk> has managed the situation effectively drawing on our extensive channel partner relationships and our own internal flexibility to minimize the potential impact on our customers.
<unk>.
Reflecting confidence in our growth strategy and market positioning I am pleased to announce a two for one stock split of <unk> plus shares for shareholders of record at the close of business on November 29 2021.
I will now turn the call over to Elaine Marion our CFO to walk you through our financial results in more detail Alain.
Thank you Mark and thank you everyone for joining US today, we are pleased with our strong fiscal 2022 second quarter performance. Our consolidated net sales for the second quarter were 458 million or five 8% increase from the $433 1 million reported in last year's second quarter.
And our technology segment net sales increased 4% to $436 3 million compared to $419 4 million in the last year's second quarter. Adjusted gross billings increased 10, 5% to $664 1 million from $601 1 million.
The adjusted gross billings to net sales adjustment was 34, 3% compared to 32% in the last years second quarter due to an increase in the proportion of sales recognized on a net basis.
Product and service revenues increased one, 5% and 23, 1% respectively service revenue benefited from a broad based increase in demand for both managed services and professional services, which includes project based services as well as staff augmentation.
This marks the sixth quarter in a row of sequential improvement in our services revenue.
Financing segment revenue was up 58, 3% to $21 7 million, primarily due to higher transactional gains from several large transactions, we announced with last quarter's results and the increases in portfolio and post contract revenues.
As Mark noted results from our financing segment tend to be uneven from period to period.
Consolidated gross profit increased 24, 3% to $123 million from $99 million in the last year's second quarter consolidated gross margin increased 400 basis points to 26, 9% compared to 22, 9% last year technology segment gross profit.
<unk>, 25% to $105 1 million and gross margin increased 330 basis points to 24, 1%, mainly due to higher project product margins and increased sales of third party maintenance and software subscriptions recognized on a net basis.
Service margins increased 160 basis points to 38, 6% due to increased revenues and improved margins from all service category.
The financing segment gross profit increased 52, 4%, mainly due to large transactional gains.
Consolidated operating expenses were up 11, 7% to $78 7 million due to an increase in salaries and variable compensation and G&A expenses. Our total head count at the end of September was 1554, an increase of three 8% compared to 1497 in the year ago.
Second quarter, and a modest increase sequentially.
All of this came together to yield operating income growth of 55, 5% to $44 3 million or.
Our effective tax rate for the quarter decreased to 28, 6% from 38% last year.
For the full year, we expect our tax rate to be between 28% and 30%.
Our consolidated net earnings of $31 4 million or $2 34 per diluted share increased 58, 3% and 58, 1% respectively.
$19 8 million or $1 48 per diluted share in last year's second quarter non-GAAP diluted earnings per share were up 54, 2% to $2 59 per diluted share compared to $1 68 per diluted share year over year.
Adjusted EBITDA increased 49, 6% to $50 2 million, our diluted share count totaled $13 4 million the same as in the year ago quarter.
Looking at our customer end markets in the technology segment on a trailing 12 month basis Telecom media and entertainment continues to be our largest end market accounting for 28% of net sales followed by sled healthcare technology and financial services, which represented 15, 15, 14 and 11%.
<unk> respectively.
The remaining 17% is distributed among several other customer types.
Now, let's turn to our consolidated year to date results net sales for the first six months of fiscal 2022 increased 11% to 874.7 million net sales in the technology segment increased 10% to $836 7 million and adjusted gross billings increased 13.
Percent to $1 3 billion.
Consolidated gross profit was $228 5 million up 15, 7% consolidated gross margin was up 100 basis points to 26, 1% and our technology segment gross margin increased 110 basis points to 24%.
Net earnings were $54 9 million or $4.09 per diluted share up 47, 6% and 47, 1% respectively.
Adjusted EBITDA increased 37, 6% to $88 5 million and non-GAAP diluted earnings per share increased 42, 6% to $4 55 per diluted share.
Moving to the balance sheet, we ended the quarter with $57 million in cash and cash equivalents compared to $129 6 million at the end of March reflecting increased working capital needs in the technology segment as well as share repurchases inventory levels were up 92, 3% to $134 five.
While this is a significant increase I want to remind you that our inventory levels vary based on ongoing customer projects. We currently have some large projects in inventory that we expect to complete over the next several quarters.
In our financing portfolio, we have approximately 165 million that we could monetize if the need arises by funding with third party financial the financial institutions.
We also recently expanded our credit lines by $100 million to $375 million, providing additional financial flexibility and funding to pursue E pluses growth strategy or.
Our cash conversion cycle at the end of the second quarter was 35 days up from 21 days in the year ago quarter, and 32 days in the prior sequential quarter.
As Mark mentioned, we are pleased to report that <unk> Board of directors has approved a two for one stock split of the company's common shares this.
<unk> will be in the form of a 100% stock dividend to shareholders of record at the close of business on November 29, 2021, and will be payable on December 13th 2021.
In closing I am pleased with our strong results for the quarter. Looking ahead, we remain focused on our strategic initiatives, including expanding our offerings in market share both organically and through acquisition I will now turn the call back over to Mark Mark.
Thank you Elaine on behalf of Elaine Darren and myself and the entire <unk> management team.
Like to take a moment to express our gratitude and appreciation for the continued efforts of our global E plus team, who have performed admirably in serving our customers, while adapting to changing and often challenging market dynamics through their dedication and pursuit of excellence. He plus has grown stronger and more resilient as an organization.
With enhanced capabilities that position us for continued growth and success in the years ahead and.
In conclusion, this was a solid quarter and first half for <unk> plus we believe we will continue to see operating leverage in our model based on the strength of our two business segments, operator, let's now open for questions.
If you have a question at this time please press the star and then the number one key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.
Our first question is from Maggie Nolan with William Blair. Your line is open.
Hey, Mark and Elaine This is Ted on for Maggie Thanks for thanks for taking our question.
Start how do the results compare to your expectations in the quarter and could you maybe quantify the impact that the supply chain challenges.
<unk> shortages.
Chad on the AGP in the quarter.
Okay, Hey, Ted how are you first go up so.
For the quarter was in line with our expectations.
As you know with the supply chain, it's a little different is it's fairly fluid. If you will as it relates to the split supply chain. So let me let me give you some feel on the supply chain and then I'll touch on the quarter. So first off I actually believe demand is outpacing supply overall.
The lead times are changing.
Pretty much every day.
And being extended I think it's actually a credit to the E plus teams in terms of how they work with our customers our vendors in order to get product out in the times that our customers needed. It. So I think they performed very well in.
In the quarter.
I'll tell you our open orders sequentially were up 25% and currently they are the highest.
They've ever been for us. So we are seeing the effect of a very strong demand some supply chain I don't I don't think it affected our quarter too much from a revenue recognition standpoint.
It gives us good some good visibility and predictability into the future with what we have in the open orders and then related to the quarter.
I'd say, we we performed like we thought maybe a little bit ahead, we've called out that we were going to have a strong quarter for our financing team and they did.
But also on the technology side, we saw strong growth in our services our services margins.
Our adjusted gross billings to be in double digits. So I think the teams performed very well.
Challenging environments.
Great that's helpful color.
And then maybe just as a follow up to that I guess, how is the state of the supply chain impacting the demand for your financing services.
So you're seeing more like sales and lease equipment or other types of financing transactions, just given what youre seeing in the supply chain environment.
Yes.
To be honest, we don't see too much effect there as it relates to the supply chain. The only thing I think that could affect our financing potentially could be inflation and if interest rates go up so that would be the one effect on our business.
Potentially that could happen as we go forward.
But as it relates to I'll call it supply chain with our finance business no different than in other quarters or what we're dealing with our technology segment and trying to get product out the door.
Alright, great. Thanks for taking our questions.
Third we will see you soon.
And our next question is from Matt Sheerin with Stifel. Your line is open.
Yeah. Thanks, Scott good afternoon, everyone.
Uh huh.
Mark I wanted to ask you.
More commentary in terms of the outlook and it sounds like you talked about open orders and backlog you first could you explain what the differences in that is it sounds like Youre record open orders or backlog also had records in.
That inventory that you're building.
Is that.
Are you seeing customers that order like further out.
Just to be.
Just to be safe.
To get their supply and is that sort of helping your visibility over the next couple of quarters, Yes, Thats. What it is Matt what we think is happening for a couple of different reasons I think customers, we haven't seen any slowdown from the customers and their need for technology. In fact, I think the demand is actually picked up a little bit.
And the investments that they're making in technology. So I think customers are making decisions to get their orders in early knowing that the lead times are going to be more than what we currently we currently deal with.
So from that and I do think there is there are the thing I'd like to point out though.
It doesn't turn into revenue right now so just to be clear those are orders that are placed that until they're shipped we can't recognize the revenue. So it hasnt affected this quarter may affect subsequent quarters. If you will the other thing to also kind of keep in mind. If you will is some of those orders are ratable, which doesn't turn into revenue right away. So it.
Depends on the order, but the the visibility in terms of the orders that have been booked.
Is the highest we've seen since I've been here.
Okay, Great and you talked about.
The growth in services, but also cloud.
And off Prem and I'm wondering are you seeing an acceleration there because.
The product constraints and maybe some customers don't want to wait and they are more inclined to move certain workloads off Prem.
Earlier than previous because of that.
Yeah, a little bit bad, but I don't think anything significant yet I still think a lot of customers are looking at their existing data centers and trying to figure out how to modernize their data center footprint first in terms of the investments that they've made then theyre looking to extend stuff to the cloud so whatever whether it's an application or a particular function that they want to extend to the cloud.
And then they're looking for us to kind of help them accelerate and optimize the.
Cloud deployments that they have in place. So I think it's a little bit of everything.
Some has gone to the cloud potentially due to the supply, but I wouldn't say it's significant at this point at least 40 plus.
Okay.
Give us an idea of where the product shortages for you or maybe.
The worst.
And where your customers are waiting the longest.
I think some of it is probably in the networking.
<unk>, maybe some of the storage and a couple of other places small on the storage.
We have as you know little commodity play E plus so theres a little delays they are for some of our bigger customers, but nothing significant but those would be the areas for us that will probably touch it on.
Okay, and just lastly in terms of cost inputs I know your SG&A was up.
Finding that you need to be more competitive in order to attract.
And then also in terms of unit pricing, we know that pricing is going up Oems who are passing those costs along.
Having success doing the same thing just passing them along to customers.
Yes, good question, Matt So as it relates to the I'll call it inflation across both.
OEM pricing and.
Recruiting talent I think we're feeling that like everybody else as it relates to the Oems.
We've been able to pass on the pricing that the price increases onto the customers. So I would say had little to no effect on us as it relates to our margins as it relates to talent in terms of looking for.
Talent that we want to recruit for specific roles I think its.
It's affecting us a little bit in terms of what you have to pay for that talent now the good news.
Over the past year. We've added 57 heads that are mainly in the sales and services side. So we're continuing to invest.
Even in this environment around building out some of the solutions and services, but yes, I think were affected.
On the.
Salaries I'll call. It if you will or compensation for employees, a little bit like everybody else, but on the pricing we're fine.
Okay, alright, thanks, so much.
We'll see you soon.
Again, if we have a question at this time. Please press the Star then the number one.
Chad Stone telephone. Our next question is from Greg Burns with Sidoti Your line is open.
Good afternoon.
With the.
The <unk> bundle for healthcare organizations that you rolled out does that another some segment of the market like security that you think you can invest in and grow.
An area of investment you are looking at going forward and is it just.
Applicable health care's or other industry verticals, where do you think that.
That might have demand.
Yeah, Hey, Greg how are you. So look we're seeing pretty good growth in our health care both year over year in the trailing 12 months now some of it I think is pent up demand.
Due to Covid, so where organizations, we're really just focused on patients and not doing anything else.
So this is a specific <unk> to our health care organizations.
Organizations, we have a kind of a dedicated healthcare team we have a former CIO of a health care organization that kind of helped create this bundle that's a combination of hardware software and services.
Really it's just.
Leveraging the data that each of these health care organizations have in order to kind of solve problems real real health care problems. So one we think it's a good fit for that particular vertical and I do believe over time, we potentially could expand that to other verticals that may make sense.
Okay.
And just one more on the open orders in backlog is there any way you could quantify how much.
Holiday season take care and be safe.
Thank you for centers. This concludes today's conference. Thank you for your participation and have a wonderful day you may all disconnect.
[music].