Q3 2023 ePlus inc Earnings Call
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Good day, ladies and gentlemen, welcome to the E plus earnings results Conference call. As a reminder, this conference call is being recorded.
I'd 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 Darren <unk>, COO and President of <unk> technology, Elaine Marion CFO , 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 detailed in the earnings release, we issued this afternoon and our periodic filings with the Securities and Exchange Commission, including our most recent annual report on Form 10-K quarterly reports on Form 10-Q and in other documents, we file with the SEC.
Any forward looking statements speaks only as of the days of which the statement is made and the company undertakes no responsibility to.
Date any of these forward looking statements in light of new information.
Future events or otherwise.
In addition, we will be using certain non-GAAP measures. During the call. We have included a GAAP financial reconciliation in our earnings release, which are posted on the Investor information section of our website at Www Dot <unk> Dot com.
I'd now 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 results for the third quarter of fiscal 2023.
This was a strong financial and operational quarter for <unk>, plus we continue to successfully execute on our growth strategy to deliver it solutions focused on digital transformation hybrid workforce plans security and cloud.
With broad based growth across all customer size segments and vertical markets. We believe we are gaining market share aided by the breadth of our solutions across the technology stack the strength of our third quarter results also reflected fulfillment of several enterprise customers large projects due in part to some relief in the supply chain.
The investments we have made in our teams and their capabilities are driving growth and delivering value to our customers consolidated net sales increased 26% and our adjusted gross billings increased 29, 7% with particularly strong growth in our technology segment, we are continuing.
<unk> to generate operating leverage driven by strong top line growth and balanced SG&A management, which has supported our expanded solution offerings. Our net earnings increased 35, 1% to $35 7 million and diluted EPS increased 36, 7% both above our revenue growth.
Right as our focus on operational efficiency continues.
As our customers continue to invest in upgrading their it systems to accommodate remote and hybrid work. He plus is well positioned to provide integrated and flexible workplace transformational systems. Our offerings include multi vendor architecture support vendor lifecycle management and on premises data center infrastructure.
<unk> provided and then as a service model such as our storage as a service solution.
With our customers transitioning more of these processes and workloads to the cloud they increasingly look to eplex to develop more strategic security roadmaps and build more sophisticated and more comprehensive security solutions to protect these new virtual workplace environments.
As a result, our security business has grown to more than 22% of our adjusted gross billings over the trailing 12 months as compared to almost 20% last year.
Our services revenues comprise comprised of professional and managed services increased seven 9% in the quarter and more than 9% fiscal year to date, while we don't expect services growth rates to be aligned with top line revenue as a significant portion of our from recurring managed services recognized ratably.
Over the term of the contract our expanded service capabilities are fundamental to providing comprehensive solutions for our customers.
Service margins, while down year over year have stabilized sequentially. We continue to see some pressure pressure in services margins due to project delays and services mix supply chain constraints, and some larger land and expand deals at lower margins.
Managed services are a key driver of financial growth and a differentiated value added solutions for customers.
These offerings generate higher margin annuity quality revenue and create sticky long term relationships with customers who value the reduced complexity and cost savings that we deliver our managed services business also serves to broaden our available market opportunity as we leverage our capabilities to provide spare.
<unk> expertise in adjacent areas, such as cloud and security Advisory services.
Moving on to our financing segment third quarter sales were $11 7 million compared to $17 9 million in the same period last year, primarily due to lower proceeds from sales of leased equipment.
As we have frequently noted our financing segment produces variable results quarter to quarter due to the timing of large transactions that said its unique offerings remain an important competitive differentiator, providing our customers with flexibility in how they acquire and optimize their it investments.
As we look ahead to 2023 global it spending is expected to grow at a low single digit rate. This calendar year. According to Gartner, reflecting an uncertain economic outlook despite the potential for an.
Economic slowdown this year, we believe that spending in our areas of focus including security cloud and networking remains a necessity for many organizations as they support a hybrid workforce and execute on their digital transformation plans at the same time the tight labor market for Tech workers continues to drive corporate spending on to outsource.
It services, our ability to hire and retain skilled professionals in this tight labor market is a competitive differentiator and a valued service to our customers. We continue to monitor the market and we'll make adjustments as necessary to optimize solutions delivery and staffing levels.
In closing I'm very pleased with our financial results and the progress we have made in broadening broadening our capabilities and strengthening our position to capture future growth opportunities as a reminder, our fiscal third quarter as seasonally strong as it marks the end of the budget year for many of our customers backed by the strength of <unk>.
LNG, we continue to have the financial flexibility to pursue attractive acquisition opportunities that expand our geographic footprint and are aligned with our growth strategy.
I will now turn the call over to Elaine Marion to provide details on our third quarter financial results Elaine.
Thank you Mark and good afternoon, everyone.
Our third quarter fiscal 2023 results reflected solid execution by the <unk> team and the continued success of our strategy focused on capturing opportunities in high growth end markets.
Third quarter consolidated net sales increased 26% year over year to $623 5 million.
Technology segment net sales rose 28, 3% to $611 8 million driven by 31% growth in product revenue and seven 9% growth in services revenue adjusted gross billings were $888 6 million up 29, 7%.
Compared to $685 million in the year ago quarter.
The adjusted gross billings to net sales adjustment increased to 31, 2% compared to 34% in the third quarter of fiscal 2022.
Our end market mix on a trailing 12 month basis remained consistent with previous periods, our two largest markets Telecom media and entertainment and technology represented 28, and 18% of technology segment net sales respectively.
Health care sled and financial services accounted for 14, 13, and 9% respectively with the remaining 18% from other end markets.
As Mark mentioned due to a decline in proceeds from leased equipment sales year to year, our financing segment revenue totaled $11 7 million compared to $17 9 million in last year's third quarter.
Consolidated gross profit increased 18, 1% to $138 4 million and gross margin was 22, 2% compared to 23, 7% in the previous year's quarter within our technology segment gross profit increased by 22, 4% to 127.
$9 million technology segment gross margin was 29% compared to 21, 9% in the year ago quarter. The decrease in gross margin was due to increased costs for managed services as well as several large competitively priced project related contracts that blended down our services margin.
Product gross margin of 19, 2% was stable compared to 19, 3% in the last year's third quarter.
Financing segment gross profit declined 16, 7% to $10 5 million, mainly due to decreased sales of leased equipment, partially offset by higher transactional gains.
Third quarter SG&A increased 12, 8% year over year as we continue to strategically invest in our team to better serve our customers' growing needs at quarter end, our head count totaled 745 compared to 554 in the prior year quarter.
The year over year change includes a 158 customer facing employees 101 of whom are professional services and technical support staff members.
Increased third quarter SG&A spend also reflected higher variable compensation tied to our improved gross profit performance as well as higher travel expenses from more frequent in person client meetings.
Interest expense was up year over year due to higher interest rates and increased borrowing on our credit facility overall operating expense growth was well below our consolidated net sales growth, resulting in an operating income increase of 28, 7% to $46 5 million the.
<unk> tax rate was 27, 7% in the third quarter of fiscal 2023 compared to 26, 4% in the year ago quarter.
Consolidated net earnings in the third quarter of fiscal 2023 inclusive of other income which includes foreign currency transaction gains and proceeds from a class action claim were 35 7 million or $1 34 per diluted share compared to $26 4 million or <unk> 98 per diluted share in the year ago.
Quarter.
non-GAAP diluted earnings per share were $1 38, compared to $1 10 in the third quarter of fiscal 2022.
Our diluted share count at the end of the quarter totaled $26 6 million compared to $26 9 million in the third quarter of fiscal 2022.
Adjusted EBITDA was $53 3 million.
27, 6% ahead of the comparable quarter in fiscal 2022.
Summarizing our year to date performance net sales in the first nine months of fiscal 2023 increased by 15% to $1 $5 76 billion, mainly attributable to technology segment net sales growth of 16, 6% to 153 2 billion adjusted growth.
Things were up 18, 9% again, reaching another milestone of $2 $3 6 billion.
Year to date consolidated gross profit amounted to $385 2 million 11, 4% ahead of the year ago period the.
The consolidated gross margin was 24, 4% compared to 25, 2% a year ago with technology segment gross margin of 22, 8% compared to 23, 2% reported for the first nine months of fiscal 2022.
Net earnings increased by six 3% to $86 5 million or $3 24 per diluted share adjusted EBITDA was up 9% to $141 9 million and non-GAAP diluted earnings per share increased eight 3% year over year to $3 <unk>.
<unk> <unk> per diluted share.
Our balance sheet remains strong with cash and cash equivalents of $99 4 million at December 31, 2022, compared to $155 4 million at the end of fiscal 2022.
The decrease in cash and cash equivalents reflected the effect of share repurchases on a year to date basis as well as increased working capital needs due to due to strong demand for our products and services, while inventory increased 57, 9% to $244 8 million from fiscal 2022 year end we.
We reduced inventory by $30 million sequentially compared to the fiscal second quarter shift.
The shifts in our inventory levels, primarily explain the changes in our cash conversion cycle, which increased to 51 days in the third quarter of fiscal 2023 compared to 48 days in the quarter ended March 31, 2022, while improving sequentially by three days.
On balance we are pleased with our third quarter financial results and believe we are well positioned in the market. In spite of current economic uncertainty with that I will now turn the call back to Marc Marc.
To recap this was a strong quarter for Ya plus with broad based demand across all of our customer size segments and vertical end markets by targeting faster growing end markets with a comprehensive suite of integrated solutions, we continue to bolster our competitive position and capture incremental market share supported by our strong balance.
Ln's sheet extensive industry partnerships and talented team at <unk> remains well positioned for continued long term growth and we remain cautiously optimistic despite the uncertain economic environment.
Operator, I'd now like to open the call for questions.
At this time, if you'd like to ask a question simply press Star then the number one on your telephone keypad. Our first question will come from the line of Maggie Nolan with William Blair. Please go ahead.
Hi, Thank you.
You mentioned the fulfillment.
For projects for several large enterprise customers in the quarter can you give us a little more detail on what types of projects or solutions. These were and an idea of maybe the magnitude of that or how we might expect that to impact financial results sequentially.
Sure Hey, Maggie how are you. So a couple of different things there if I could I'll touch on why the quarter was up so nicely overall and then try to work in the deals. So first of all if we had really strong tech quarter, both from top line to bottom line.
All of our customer size segments and verticals were up nicely security continues to grow some of the focus we put on the mid and enterprise accounts.
<unk> grew nicely for us in this quarter and Thats, where were talking about land and expand we had a few really nice deals in the security and the data center cloud and in the services space with nice size deals with decent margins now with that said some of the things that also added to this quarter that were positives.
We saw some easing of the supply chain. So we did see some movement in our supply chain and I think you.
You may have noticed our open orders are down 5% sequentially and thats by design trying to bring that.
In line, it's still above historical levels, our inventory was down $30 million sequentially by design trying to get product out the door to land and expand deals as you talked about and then just some year end budget, but.
Some of the land and expand or with some of your big mid to enterprise customers across as I said datacenter cloud security and service opportunities.
That's great and any thoughts about how we should consider the impact of that sequentially or on a year over year basis for next year.
Okay, Yes.
In terms of Q4, if I had to look at it Q4 is traditionally one of our smaller quarters Q2, Q3 are bigger quarters.
We still have a lot of the supply chain and it's fluctuating by vendor and by solution area. Maggie So it's literally moving in and out as we go forward if I looked at Q4.
<unk>.
Sequentially.
It would be down.
Finance is going to be a really tough compare for us we had some early buyouts last year. So I think finance will be a tough compare.
And then the if I look at the supply chain.
I don't know if we'll get as much relief as we did with some of the focus we put on this quarter.
Just to follow up on that last comment with respect to supply chain constraints.
How might that affect the results. When you are considering performance for the next fiscal year fiscal 2024.
That's a tough variable.
As you know Maggie that I think everybody is kind of struggling with these times are moving the lead times are moving in and out by vendor. There are some that are starting to loosen up we saw networking actually loosen up so we actually had a nice quarter with in the networking section.
Section of our business.
I do expect that this will continue for a couple of quarters.
One other things Thats, I guess, a benefit for us as it relates to supply chain. We're.
We're not really in the laptop PC business. So some of the decline that some of the folks are seeing that space, we're not going to be affected by but for the fiscal year. I think we will still have the supply chain issues that we've been dealing with over the last year or so.
Okay. Thanks, Mark Thanks.
Thanks, Maggie we'll see you soon.
Your next question will come from the line of Matt Sheerin with Stifel. Please go ahead.
Yes. Thank you good afternoon, everyone.
Just a follow up question regarding the strength that you had in the quarter.
A lot higher than consensus and I think higher than <unk>.
You didn't give guidance is certainly higher than you had.
Indicated on the last call it.
It sounds like demand was good it sounds like.
Supply opened up.
Was there some pull in where orders because of loosening supply in your own inventory, who you are able to fulfill backlog faster than expected in other words pulled some sales into this quarter or the December quarter.
Yes, Matt I think there's probably a little pull through pull through I wouldn't say significant though so if you look at it as I touched on the back the open orders were down 5% sequentially.
So there is there is some there the inventories down by $30 million, we put a very focused effort on getting equipment out the door as soon as we get it. So there is definitely some potential pull through not dramatic though to be honest. So I think we benefited that in the quarter.
Due to some supply chain things that we saw it came in a little quicker than we thought.
And also some of the land and expand deals also.
Help with some of the growth that you saw I don't know if I called it out on my piece, but our tech net net sales were up almost 2008 and change percent. So we saw a really nice quarter in tech across all verticals and customer sizes, and we'd like to think Thats by design.
And these land and expand deals so we're talking about multimillion dollar.
Orders that you were able to fill perhaps.
At a discount or at least.
So Phil.
Or is it more.
More efficiently than competitors and then you were giving up some some price there because your gross margin was down pretty significantly quarter on quarter.
Yes, so Matt.
I can't comment on the competitors since I'm not watching their business, what I would tell you.
Yes. These are large multimillion dollar deals.
As we've always said, we're really focused on the mid to enterprise, we don't play in the small to medium and smaller sized segment of customer base. If you will so these are larger deals.
That require a lot of work upfront advisory services that then lead to these multimillion dollar deals that traditionally the margins are a little tighter because it's competitive upfront. So the margins are a little bit down the other thing that contributed to our gross margins being down our service margins were down a little bit. So that's those are the two pieces that affected the gross margins.
Okay, and you said that the open orders were down sequentially.
What is your backlog down and how how does that compare to your backlog. There is sort of normal levels I know has been a well above normal levels.
<unk> backlog was actually up Matt.
Your backlog is up okay.
Some of the pilot what are the product constrained areas that youre still seeing because we're hearing from.
Some distributors and suppliers that networking demands I mean orders.
And supply seems to be improving but youre not seeing that across the board.
Yes, we're not seeing it across the board the networking has got the longest lead times and its improving some but thats probably the biggest piece from a I'll say supply chain and lead time standpoint, Matt.
Okay. Okay. Thank you.
Hey, Matt and talk to you soon.
Annually.
Again for any questions. Please press star one your next question will come from the line of Greg Burns with Sidoti <unk> Company. Please go ahead.
Good afternoon.
So just to.
Start off with some of the strength you saw in the quarter. So I guess.
The <unk>.
The upside relative to consensus or maybe your internal expectations was <unk>.
Driven by demand and what is more weighted towards just market demand as opposed to.
Dipping into your open orders.
Well, Greg I would actually say, it's a combination of the two so when I looked at the quarter. Once again, if you all just go by customer size segments in the mid to enterprise, we actually grew very nicely and that's by design with some of our account planning and some of the things that we're trying to do there.
I think I mentioned it on to matter Maggie as well as our Tech segment had a very strong quarter, where the net sales for <unk> were actually up 28, 3% overall, so I think it was by design on some of that but there was also some supply chain easing with.
The open orders going down 5% and in terms of the inventory going down $30 million. So there was a real focus internally to try to get the product out as soon as we got it and get it out the door. So it was a little bit of supply chain using plus a nice quarter by the team.
Okay is it like one for 1% to $30 million decline in <unk>.
Inventory.
That turns into revenue or how should we think about kind of the magnitude of what's left on the balance sheet in terms of.
Open orders in terms of revenue potential.
Yes on the inventory would be at one to one on the inventory, but on the overall sales that's a small percentage as you can imagine Greg with our numbers. So yes, it's a one to one on the inventory for sure.
Okay.
And then the the Opex level this quarter or is that is that a good way to model going forward or is there any other puts and takes why it might increase or decrease from here.
Yes, I think Theres a couple of things there I think the overall level is good on the Opex I think there'll obviously be some movement based on a.
Smaller quarter in terms of revenue and GP based on Q3 being our largest quarter to date. So far so that'll be the variable from an opex it'll be in that range overall less less that difference if you will Greg.
But realize we are watching it pretty closely so we're watching the market and.
With all the economic uncertainties, if you think about all the different tech layoffs.
We're watching we're watching very closely and we're going to adjust accordingly actually I look at the tech layoffs as potentially an opportunity for us it sounds a little bit crazy with everything going on but I think with with the solutions and skill sets. We have we might be able to pick up some of that.
Some of those opportunities, but when you look at Gartner.
<unk> and two 4% it spend and stuff like that we're watching it and managing it very closely in terms of the opex. It actually overall, our opex as a percentage of the.
GP, an HEB actually went in the right direction this quarter for sure Greg.
Okay, and then to your point about the tech layoffs, we are seeing some more cautious commentary.
And the industry are you seeing anything in terms of maybe.
Customer decision cycles sales cycles, extending or anything.
That you see that would maybe give you some more caution going forward.
Yes, there is definitely some caution employers Greg I mean, as you know, there's always challenges and opportunities in this kind of market.
But I do see some budget tightening some are the sales cycles get sales cycles, getting a little bit longer, especially with some of the bigger customers. So there is definitely some of that going on as far as the economic uncertainties kind of stay out there. So yes, the sales cycles are longer for sure.
Okay and then.
Lastly, you launched a new service storage as a service.
Pure storage can you just talk about how that works.
Are you just reselling it are you actually providing the service.
And when you when you launch something like that is it market driven like have you been is it something that you.
Your customers have been asking you to do or is it just something net new that you see as an opportunity.
Great Darren.
What I'll say is we've been selling pure as a service which is their offering for years now and what we saw for our customers that they were looking for a more customized approach that we know their environment. We know the other components of their data center on their cloud play.
This E plus storage as a services powered by pure currently and we're looking at all of the storage vendors as potential where we're providing additional services taking calls engaging our managed services centers to provide additional value add helping the customers with sizing and future investments and consumption over time as opposed to having to buy it all upfront so that really.
A nice play where we saw customers demanding it and it seems really excited about.
The customers that are reaching out now with that recent announcements.
Good morning, Bob Yes, Okay great.
Sounds good thanks.
Alright, Thanks, Greg.
And we have no further questions at this time I will turn the conference back over to management for any concluding remarks, alright, thanks, Regina and thanks, everybody for joining us for our Q3 2023 <unk>.
Conference call, we look forward to speaking with you in Q4, thanks and have a good day.
Ladies and gentlemen that does conclude today's meeting. Thank you all for joining you may now disconnect.
Please wait the conference will begin shortly.
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