Q2 2023 ePlus inc Earnings Call

Uncertainty over the past several months the outlook for it spending is solid across most market segments. While <unk> is not recession proof our business is recession resilient supported by our financial strength and the nature of the mission critical technology, we sell and support.

We continue to experience broad based demand across end markets and customer size segments underscoring our ability to address our customers' critical needs for managing cyber security risks to enabling digital transformation.

These positive demand trends are reflected in our high level of open orders that were up 42% over last year as well as our backlog all of which support our confidence in the outlook for the second half of our fiscal year.

Our favorable view is balanced against the challenges we continue to see in the supply chain. We're limited product availability has led to extended customer project implementation timelines.

Our inventory level, which are up over 100% from last year reflect these supply chain constraints as well as a developing trend towards larger more complex customer project that cannot be fully deployed until all the necessary equipment are procured.

In closing I would like to commend the entire E plus team for their dedication to providing the highest level of service to our customers. Every day, we are successfully executing on our strategy generating solid sales and adjusted growth billings growth in our focus markets, while maximizing our long term opportunity through continued investment.

In our employees and in our capabilities.

I'll now turn the call over to Elaine Marion our CFO to provide details on our second quarter financial results Elaine.

Thank you Mark and good afternoon, everyone I will review our financial performance in the second quarter of fiscal 2023 and year to date net sales were up seven 8% year over year totaling $493 7 million in the second quarter as Mark mentioned, we saw an expansion across the majority.

Of our end markets and customer segments, demonstrating that we are focusing on the right growth areas net sales in the technology segment increased eight 1% to 471 5 million to be more specific product and service revenues increased eight 2% and seven 1% year over year to 406 three.

And $65 $2 million respectively.

We were pleased with the growth in adjusted gross billings of 15, 3% amounting to $765 8 million compared to $664 1 million reported in the year ago quarter.

The adjusted gross billings to net sales adjustment increased 413 basis points to 38, 4% compared to 34, 3% in the second quarter of fiscal 2022 as.

As we look deeper into our end market sales in our technology segment on a trailing 12 month basis, we see similar trends to the prior quarter with Telecom media and entertainment and technology, our largest markets, representing 29 and 16% of segment net sales respectively.

Healthcare sled and financial services accounted for 14, 13, and 9% respectively with the remaining 19% representing other customer types.

As of September 32022, our customers totaled approximately 4200 I just want to note that we now calculate our customer count as discrete customers, who have purchased over the past 24 months rather than the prior 12 months used in previous communications did a linkedin customer buying cycles and supply chain.

Delays.

Our financing segment revenue was $22 2 million compared to $21 7 million in last year's second quarter. As a result of higher proceeds from sales of leased equipment offsetting lower portfolio earnings and transactional gains as.

As we move to our consolidated gross profit, we reported eight 4% growth to $133 3 million in the second quarter compared to $123 million reported last year.

<unk> gross margin increased 10 basis points to 27% gross profit in the technology segment was up 10, 7% to $116 3 million.

Technology segment gross margin increased 60 basis points to 24, 7% as higher product margins more than offset lower service margins.

Product gross margin expanded 150 basis points to 23, 2% as we benefited from higher a higher proportion of sales of third party maintenance subscriptions and services, which are recorded on a net basis.

While our service margin was 33, 6% compared to 38, 6% in the second quarter of fiscal 2022 as Mark mentioned this was primarily due to higher third party costs related to our professional services and several large project related contracts that were competitively priced which.

Linda down our service margins as well as an increase from managed services costs.

Gross profit in the financing segment totaled $17 million compared to $17 9 million reported in the second quarter of fiscal 2022.

As a reminder, last year's quarter had several large transaction gains which did not replicate however, this year's quarter contained several early lease buyouts, which partially offset the lower transaction gains compared to last year.

Early lease buyouts are customer driven events that pull forward future earnings from the underlying leases.

During the quarter, we saw increases in salaries and benefits our investments in personnel are evident in the head count increase to $17 29 at the end of September 2022, which includes 25 employees from the July 2022 acquisition of future com compared to $15 54.

In the prior year.

The quarter over quarter increase contains 48 sales related role and 100 professional services and technical support personnel as we experienced an increase in demand for our services.

As you think about these investments please keep in mind there is some lag between the upfront costs and the revenue generation.

In addition, we saw increases in variable compensation tied to our gross profit performance and had higher travel expenses related to the resumption of customer and in person meetings.

We also reported an increase in interest expense related to our higher borrowing on our credit facility and a change in reserves due to an increase in exposure across our receivables our reserve calculation methodology did not change all of these factors together drove an increase in consolidated operating expense of $13 three.

3% year over year to $89 2 million.

Although we made significant investments in personnel operating income for the quarter was $44 1 million essentially flat compared to the exceptionally strong level of $44 3 million reported in the second quarter of 2022, which benefited from several outside transactions in our financing segment.

The effective tax rate was 29, 3% compared to 28, 6% in the year ago quarter.

Including foreign currency translation losses from U S dollar denominated loans with our subsidiaries in the United Kingdom that totaled $3 9 million consolidated net earnings in the second quarter of fiscal 2023 were $28 5 million or $1 seven per diluted share compared to 31.

$4 million or $1 17 per diluted share in the last year's second quarter.

non-GAAP diluted earnings per share were $1 29, compared to $1 30 in the year ago quarter.

Last year's EPS as adjusted to reflect the stock split in December 2021.

Our diluted share count at the end of the quarter was $26 6 million compared to $26 9 million in the second quarter of fiscal 2020 to adjust.

Adjusted EBITDA was $50 3 million slightly ahead of $50 $2 million in the comparable quarter in fiscal 2022.

Just briefly recap our financial performance year to date net sales for the first six months of fiscal 2023 increased eight 8% to $952 1 million driven by net sales growth of 10% in the technology segment to $923 million.

Adjusted gross billings were up 13, 2%, reaching 1.4 dollars 7 billion consolidated gross profit increased 8% to $246 8 million.

Consolidated gross margin was 25, 9% compared to 26, 1% a year ago. However, our technology segment gross margin increased 10 basis points to 24, 1% net.

Net earnings totaled $50 8 million or $1 91 per diluted share compared to $54 9 million or $2 <unk> per diluted share respectively. Adjusted for the stock split effected in December 2021.

Adjusted EBITDA was up 2% to $88 6 million and non-GAAP diluted earnings per share was flat year over year at $2 28 per diluted share.

Our healthy balance sheet enables us to execute our strategy effectively cash and cash equivalents were $99 5 million at September 32022 on Tuesday, we announced the expansion of our credit facility agents by Wells Fargo Bank from 375 million to 420.

$5 million the expanded credit line will help facilitate and support our growth strategy.

And we are grateful for the long term support of Wells Fargo and the participant banks.

We continue to experience supply chain challenges and have ongoing delays to deliver completed orders and corresponding services, which resulted in inventory increasing 77, 3% to $274 9 million at the September quarter and compared to the end of fiscal 2022.

As a reminder, our inventory is primarily related to committed orders by our customers. This variation also explains the increase in our cash conversion cycle to 54 days compared to 35 days in the year ago quarter.

However, we expect our cash conversion cycle to improve our supply chain constraints ease.

Despite the near term economic uncertainty, we believe that our strategic focus on the right technologies positions <unk> well for the future with that I will now turn the call back to Marc Marc.

Thank you Elaine to recap you plus recorded a solid quarter in both business segments with strong levels of open orders backlog and inventory, we are well positioned to have a solid second half despite heightened economic uncertainty and.

In light of escalating cyber threats L flexible and evolving security solutions are proving more critical to customers than ever.

Supply chain constraints continue to be a challenge variously affecting revenue margins and operating expenses and many of our solution areas for both product and services, we continue to monitor and adjust to fill our customers' critical it needs.

<unk>, we are well positioned to capture future growth, while defending against recessionary risks, given our strong balance sheet excellent vendor and customer relationships and our talented and dedicated workforce.

Operator, I would now like to turn the call over for questions.

At this time I would like to inform everyone. If you would like to ask a question. Please press Star then the number one on your telephone keypad.

We'll pause for just a moment to compile the Q&A roster.

Okay.

Your first question comes from the line of Matt Sheerin with Stifel.

Yes. Thank you.

Hello, everyone.

Just first question just on the strength of the gross profit.

In the technology segment, I think you called out.

Higher hardware product sales because of the third party warranty.

Sales in the seasonality of that business is that right.

Yes, Matt our gross to net was I think up just about 400 basis points. So on our gross margins. There's a couple of things one the gross to net affected the margins in a positive way our product margins were actually up two <unk> based on some of the more mission critical technology that we sold where we took a little bit of a hit was on our <unk>.

Services margins and that really had to do with product that will release with some of the supply chain. So it's really just a timing thing and then the other thing I'd.

Just highlight if you look at it the tech GM.

<unk> was up 60 basis points and I believe were some of the highest in the industry, where we wound up on a consolidated basis at 27% on gross margins.

Yes, no no I understand what I was getting at is how sustainable is that and how much of that is seasonal I mean last year in the September quarter Europe .

400 basis points or so so that seems like a seasonally stronger quarter in other words I mean.

Should we be modeling.

These levels or is there a seasonal decline in the December quarter.

Because of a change of some of the products.

Like the third party warranties.

And now I got you, Matt so sorry about that so yes, it's more seasonal so a lot of this has to do in this quarter, where we get the uptick is due to cisco's fiscal year end, whereas there is a lot of third party maintenance and software that goes from a gross to net perspective. So this is traditionally a higher quarter than the other three quarters within the plus.

Okay.

And on the expense side, it sounds like Youre, making.

Some prudent investments in.

Various resources, particularly on the <unk>.

Technical side.

So how should we think about that going forward in terms of opex.

Creasing.

How should we think about that yes. That's fair. So let me give you a little detail mountain and maybe I'll try to help you fencing and a little bit so from a opex standpoint, there's a couple of different things. The big investment is in head count what we're seeing based on some of the market share that we're grabbing specifically in the services.

<unk> services, specifically security and cloud, we're adding head count in that space for example.

We hired a bunch of junior associates in the security space that we've trained over the last five to six weeks that we are then going to have be customer facing so we're kind of making those investments investments, where you see the opex up a little bit this quarter. It kind of takes time not only for the security folks I had mentioned, but others to get productive.

The other thing we saw was our annuity bookings were up I think it was 36% year over year in terms of our annuity bookings.

We had a few large service desk deals that we actually had to hire additional talent to meet the SL lays with those.

With those services. So those are some of the things that built up our opex from an investment standpoint, we do think that the revenue will catch up to the expense over time.

If I were modeling at a very high level.

I would say this is probably a decent model in terms of from an opex going forward, we're going to we're going to diligently manage the business and add hires as needed.

So stable from here.

That's fair yes.

Okay, and just lastly.

On the inventory build in the <unk>.

Constraints it.

It looks like you had some upside in the quarter. So it looks like you may have benefited from some improving supply or perhaps the inventory build that's been going on.

But are you encouraged at all in terms of things opening up.

At all in is that going to limit perhaps upside in the December quarter, where in previous years, you have been up mid to high single digit sequentially.

Yes, so Matt a couple of things there. One this is still very fluid as you know so we're hearing different things from the Oems in terms of timing.

When things will be getting out so it's still very fluid. So it's not an easy answer on this one what I would tell you to look at our open orders were up 42% over last year for one second I think Liam touched on at our inventory was up a 100% I think it's up 77% since March alone.

What we're seeing is we are grabbing market share our adjusted gross billings continue to grow both in the quarter as well as they have and then some of this is a timing to get out the door, but it's positive in the long run but its not.

A simple easy answers since we don't control when some of these things are going to get out.

Okay. Okay. Thanks, a lot mark.

Hey, Matt we will see you soon.

Your next question comes from the line of Maggie Nolan with William Blair.

Hi, This is jesse on for Maggie.

Thanks for taking our questions I wanted to start off with.

Revisiting product margins. So can you talk about some of the puts and takes there are you able to achieve higher pricing or those mission critical products you mentioned in.

What are your expectations going forward.

Yes.

Jesse Thanks, So so two things that affected one which I talked about was the gross to net so having more third party.

Software SaaS plays that are recognized on a net <unk> ratable basis, depending on the technology and the term.

On the product side, yes, we've seen a little bit of an uptick on the product margins based on the technology we sell.

I will remind you if you think about it we kind of sell more value selling services mission critical technology, we don't play in the PC device space as much as some of the others.

Do sell in that space for some of our bigger customers, but it's not a big focus. So traditionally we would see our product margins be a little bit higher based on selling storage security and some of the other technologies that.

Get a higher gross margin.

And then a quick follow up to that are you are you able to achieve better pricing.

Customers seek these solutions more quickly than wood.

Would you expect that to changes.

<unk> eases.

Well I don't know if it would be more quickly Jesse I think its more along the lines of if we go in in here I'll take a step back for Ya.

We've kind of made our mantra is customer first services led results driven and what that means is we're leading with our consultative and advisory services in the hopes that we're helping our customers understand what security posture. They have to put in place what security you have to do.

From a ransomware or a risk mitigation and things along those lines. So normally if you do that upfront work and you show the value.

Potentially you should be able to get increased margin based on the value that you're seeing both from a product and from a services perspective.

Don't know if its a timing thing there is there may be some customers that are buying from us that have a very tight timeframe and they're worried about supply chain and they're not worried about cost, but I don't think thats. The driver on the gross margin for us that much.

Okay. That's helpful.

And then les.

I had one last question so.

Net head count additions seems strong in the quarter, even when you exclude the impact from future comp. So how are you thinking about the cadence throughout the rest of the year and implications for the business.

Yes. Good question, Jesse so of the roughly 175 heads.

Approximately 25% to 30 was future com.

The other 145, most of those were customer facing and I'd say the majority in the services space and when I say that both the <unk>.

The service desk annuity players that I talked about that we had to add head count to meet certain SLA is for customers.

And also in pre sales and delivery for cloud and our security practices. So we'll continue.

<unk> to monitor and manage that so we'll manage the business tightly and add to head count as we need it as we see the net sales in HEB adjust upwards, if you will.

Understood. Thank you.

Alright, Thanks Jessy.

So Maggie we said Hello.

Once again, if you would like to ask a question. Please press Star then the number one on your telephone keypad.

Okay.

At this time there are no further questions I would like to turn the call back over to Mr. Martin <unk> for closing remarks.

Okay. Thank you just wanted to say thank you for everybody for joining us today for our Q2.

Call earnings call I wish everybody, a happy and healthy holiday season for Thanksgiving and every other holiday season, that's out there between now on our next earnings call take care and thanks for joining.

This concludes today's conference you may now disconnect.

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