Q4 2023 ePlus inc. Earnings Call
Speaker 3: Good day ladies and gentlemen and welcome to the E Plus earnings results conference call. As a reminder this conference is being recorded and I would like to introduce your host for today's conference Mr. Clay Parker's SVP. Sir you may begin.
Speaker 4: Thank you for joining us today. On the call is Mark Maron, CEO and President, Elaine Marion, CFO , and Erica Stoker, General Counsel.
Speaker 4: I want 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.
Speaker 4: Actual and anticipated future results may vary materially due to certain risks and uncertainties detailed on the earnings release we issued this afternoon and our periodic filings with the Securities and Change Commission.
Speaker 4: including our most recent annual report on Form 10-K , quarterly reports on Form 10-Q , and then any other documents that we may file with the FCC.
Speaker 4: Any forward-looking statement speaks only as of the date of which the statement is made.
Speaker 4: And the company undertakes no responsibility to update 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 and Earnings Release, which is posted on the investor information section of our website at www.eplus.com.
Speaker 5: Thank you, Clay, and thank you everyone for participating in today's call to discuss our fourth quarter and fiscal 2023 results. We are very pleased with our fourth quarter and year-end results. For fiscal 2023, net sales increased 13.5% to $2.1 billion.
Speaker 5: Net income increased 13% and diluted earnings per share grew 14%.
Speaker 5: We achieved this solid growth even as we made significant investments in our team to enhance our capabilities and capture future growth opportunities despite challenges in the IT supply chain.
Speaker 5: Our gross billings grew to $3.1 billion, a nearly 20% increase over the prior year. These financial achievements underscore the continued success of our growth strategy, innovation, and execution, where we capture incremental market share by focusing on opportunities in higher value and higher growth solution areas such as workplace transformation and economic growth.
Speaker 5: net earnings growth of 35.5% and diluted earnings per share growth of nearly 35.2% as compared to the fourth quarter of fiscal 2022.
Speaker 5: Looking at our financial results in more detail, technology segment product net sales rose at a double digit rate for both the fourth quarter and for our fiscal 2023. These gains were driven primarily by networking and security solutions that enable workplace transformation. While the technology to support remote and hybrid work models has been...
Speaker 5: reduce cybersecurity risks, and enhance network performance.
Speaker 5: Services net sales increased approximately 12% in the fourth quarter and 10% for the full year.
Speaker 5: Managed services represented a source of particular strength as customers increasingly opt to outsource their day-to-day IT requirements.
Speaker 5: By outsourcing these functions to E+, organizations enhance their ability to drive better operational decisions, mitigate risk, and improve efficiency.
Speaker 5: Within managed services, we had a strong year both of bookings and also brought to market a number of new innovative solutions.
Speaker 5: Managed services create desirable, annuity-like revenue streams while also differentiating us from our peers and providing high value and customer satisfaction. We continue to build out our managed service capabilities that provide the support and outcomes our customers need. This includes providing improved IT lifecycle visibility through our...
Speaker 5: their IT environments.
Speaker 5: Through our expanded managed service capabilities, we have built a solid base of recurring revenue.
Speaker 5: This revenue stream not only contributes greater predictability to our financial performance, but also provides an opportunity to build and strengthen long-term relationships with our customers.
Speaker 5: Security remains a key growth driver of our overall business. As enterprises and organizations have shifted their operations towards the cloud, heightened cybersecurity risks have fueled demand for our comprehensive suite of security solutions.
Speaker 5: Over the past 12 months, our security product gross billings increased 36.5% and accounted for 22.3% of our product gross billings.
Speaker 5: We continue to maintain a positive outlook for our security business as our customized solutions are aligned with our customers' lifecycle needs, from strategic design to ongoing maintenance and support. As you'll recall, our financing segment generated exceptional results in fiscal 2022, largely due to certain outsized transactions, some of which were customer-driven.
Speaker 5: and were not expected to recur this fiscal year. As we've stated over time, our financing business is a differentiator as compared to our technology peers, but has lumpy operating results because of the transactional nature of the business. Over the years, strategic acquisitions have played an important role to drive our strategy and growth. Through our disciplined M&A process, we look for companies with solid financials,
Speaker 5: in the telecom market by providing our enhanced array of products and services that we believe will drive improved performance, reliability, and security for customers.
Speaker 5: Throughout fiscal year 2023, E Plus brought to market a number of internally developed and cost-effective solutions that were well received by our customers.
Speaker 5: For example, Eplus Storage as a service, powered by Pure Storage, and Ava, an automated virtual assistant for collaboration. Additionally, we announced several cloud managed services powered by top vendors such as Microsoft, VMware, and AWS.
Speaker 5: We were pleased to be named the first North American Cisco partner to be qualified in the Cisco partner lifecycle services support. We then brought to market our own branded solution, the Eplus lifecycle services support, which centralizes and streamlines a customer's technical support experience.
Speaker 5: by providing first call multi-product, multi-vendor architecture support for Cisco and adjacent technologies.
Speaker 5: In addition, we were named Cisco US Partner of the Year and Cisco Global US Marketing Partner of the Year.
Speaker 5: We were also recognized by many other vendors across multiple areas such as Pure Storage Customer Advocate of the Year, Palo Alto's Americas Social Impact Partner, along with Nutanix Americas and Global Reseller Partner of the Year. Looking forward, we believe we are well positioned in the IT market to provide solutions which are...
Speaker 5: and improve efficiencies.
Speaker 5: With the proliferation of cyber threats, we anticipate that the strengthening of corporate cybersecurity programs is also likely to remain an IT priority. In this environment, we will continue to work closely with our customers, providing cost-effective and timely solutions that will enable them to address immediate needs.
Speaker 5: and help advance their longer-term IT objectives. I would like to commend the entire E-Plus team for their dedication and consistent execution in a challenging environment. Even as we face persistent supply chain constraints throughout the year, our team was able to deliver the products and innovative solutions that met our more than 4300 customers' needs.
Speaker 5: I will now turn the call over to our CFO , Elaine Marion, to provide details on our fourth quarter and full fiscal year 2023 results. Elaine? Allison?
Speaker 6: Thank you, Mark, and good afternoon, everyone. I am pleased to report a strong finish to Fiscal Year 2023. In the fourth quarter of Fiscal 2023, we continue to benefit from our strategic focus on providing higher value and higher growth technology solutions. Internet sales were up 9% year over year.
Speaker 6: to $492.2 million, and technology segment net sales increased 15.2% to $483.2 million, driven by 15.9% growth in product revenue and 11.5% growth in services revenue.
Speaker 6: Gross Billings, a new operational metric that reflects the total dollar value of customer purchases of goods and services, including shipping charges during the period, net of customer returns and credit memos, sales, and other taxes, totaled $733.1 million, including a 17.6% increase from the year-ago quarter.
Speaker 6: Due to fewer sales of leased equipment, our financing segment revenue totaled $9 million below the exceptional $32.1 million reported in last year's fourth quarter. As previously noted, we did not expect last year's performance to be replicable.
Speaker 6: Consolidated gross profit increased 14.7% to 132.3 million and gross margin of 26.9% expanded 140 basis points year-over-year. Within our technology segment gross profit increased by 20.9%
Speaker 6: to 124.7 million, and our technology segment gross margin showed 120 basis point improvement to 25.8%, driven by higher margins on both product and services.
Speaker 6: More specifically, product gross margin expanded 100 basis points to 23.8% due to changes in mix and services gross margin expanded 260 basis points to 37.9% due to an increase in gross profit from both professional and managed services.
Speaker 6: Financing Segment Gross Profit amounted to $7.6 million compared to $12.2 million in the year-ago quarter due to lower profit from sales of leased equipment that was expected as last year's fourth quarter benefited from early lease buyouts that did not recur this year.
Speaker 6: To meet our customers' needs for the past several quarters, we have invested in customer-facing personnel that led to higher salaries and benefits, driving fourth-quarter SG&A up 10.9% year-over-year. At quarter-end, our headcount totaled 1,754 compared to 1,577 in the prior year quarter.
Speaker 6: Interest expense was up year over year due to higher interest rates and increased borrowing on our credit facility.
Speaker 6: We managed expenses efficiently, leading to operating income improvement of 23% year-over-year to $42.4 million.
Speaker 6: The effective tax rate was 22.4% in the fourth quarter of fiscal 2023, compared to 29.6% in the year-ago quarter due to lower than forecasted non-deductible expenses, increased benefits from foreign sales, along with favorable state return to provision adjustments.
Speaker 6: Fourth quarter consolidated net earnings for $32.9 million or $23 per diluted share compared to $24.2 million or $91 cents per diluted share in the year ago quarter.
Speaker 6: Non-gap diluted earnings per share were $1.36, a 34.7% increase from the year ago quarter. Adjusted EBITDA was 48.7 million, 22.4% ahead of the comparable quarter in fiscal 2022.
Speaker 6: That brings me to our full fiscal year review. The April 2023 net sales of $2.07 billion reflected a 13.5% year-over-year increase.
Speaker 6: Technology segment net sales grew 16.3% to $2.02 billion, with service revenue growth of 9.9% to $264.4 million. And our financing segment net sales were $52.5 million compared to $88 million in the prior year.
Speaker 6: Our gross billings amounted to $3.1 billion, 19.8% ahead of fiscal 2022. Our two largest end markets, Telecom Media and Entertainment, and Technology, represented 26 and 20% of Technology Segment net sales respectively.
Health care, sled, and financial services accounted for 14%, 14%, and 8% respectively, with the remaining 18% from other end markets.
Fiscal 2023 consolidated gross profit was $517.5 million, up 12.3% from 2022.
Gross profit in the technology segment grew 16.3% to $474.5 million, and gross profit in the financing segment was $43 million compared to $52.8 million in the previous year.
The consolidated gross margin was 25% compared to 25.3% in fiscal 2022. Technology gross margin remained constant at 23.6%.
We are pleased with consolidated operating income growth of 12.8% to $166.2 million, even with operating expenses up 12% to $351.4 million, demonstrating the favorable operating leverage in our business model.
Our effective tax rate for fiscal 2023 was 26.8% compared to 28.1% a year ago.
Operating leverage also helped drive strong earnings growth, as we saw net earnings of $119.4 million.
were $4.48 per diluted share, representing increases of 13% and 14% respectively. Non-GAP EPS grew 14.4% to $5.02.
In terms of our balance sheet, cash and cash equivalents at the end of Fiscal 2023 remain at healthy levels totaling $103.1 million.
The decrease from $155.4 million at the end of fiscal 2022 is mainly attributable to share repurchases, the purchase of futurecom, and increased working capital needs.
Together with the expanded Wells Fargo credit facility of $500 million, we have ample liquidity and financial flexibility.
Inventories were up 56.9%, ending the year at $243.3 million and sequentially flat with our third quarter.
Similar to prior periods, this variance is driven by ongoing customer projects not yet completed, partly due to continued supply chain constraints and large customer projects.
Our cash conversion cycle was 59 days compared to 50 days in the year ago quarter, also primarily the result of higher inventory levels that we have been experiencing the past several quarters.
Overall, 2023 was a good year for E+, and we are very proud of our team for delivering such strong results.
With that, I will turn the call back over to Mark. Mark?
Thank you, Elaine. In closing, we are pleased with our strong fourth quarter results that concluded another successful year for E+. Our growth strategy is working, enabling us to capture, share, and hire growth resilient market segments, where we provide the complex and innovative solutions our customers require to meet their IT objectives.
We have continued to add to our capabilities, both through investments in our team and through targeted acquisitions that help build long-term value for shareholders.
Operator, please open the line for questions.
Thank you. If you would like to ask a question on the phone lines today, that is star one on your telephone keypad. And as a reminder to remove yourself from the queue, it is star one again.
We'll take our first question from Maggie Nolan with William Blair.
Hey, good afternoon. This is Jesse Wilson on for Maggie Nolan. Congrats on a really nice quarter here.
Mark, I wanted to circle back to your comments about the faster return. So how is the company positioned to deliver on these types of projects and how big of a role do you think the supply chain will play in delivering this work?
Sorry, Jesse, when you're saying faster return, what portion are you
I think you were talking about clients prioritizing projects that deliver faster returns for them. Oh, okay. Yeah, I got it. So here's what we saw this quarter. The supply chain did ease a little bit. So specifically in the networking space, we saw a nice uptick and a little bit of...
think that the solutions that we have in play, some of our services and other things will play well in this type of environment.
Okay. And then on margins, what kind of helped you get back to the high 30s level in services? How sustainable is it? And can you just kind of talk about Q4 versus the rest of the year?
Yeah, so what we saw in the services side, some of the uptick had to do with, we had a strong quarter with our managed services revenues, which are nice margins for us. We also saw, based on the supply chain, we were able to see some of our professional services open up, which are our strongest margins that we saw in the last year.
back in the queue. Congrats again.
All right, Jesse, thanks.
We'll take our next question from Greg Burns with Cidoti. afternoon um could you just talk about you know current demand trends order
relative to maybe what you're able to still generate based on the backlog of business. So, current demand versus leaning on the backlog and what your view is going forward into fiscal 24 given some of the macro headwinds that we're seeing.
We'll get to start there, I guess. Thanks. Yeah, that's fine, Greg. So I'm not sure what you're talking about, macro headwinds. I'm assuming supply chain price increases, interest rates rising, inflation, staffing shortages, and tech layoffs, right? So, but nothing we have to fight through. Here's what I tell you. Our open orders are still strong.
They're down year over year but still significantly higher than our normal in terms of our back orders. Our backlog is still very solid on both product and services and our pipeline is strong. So we do see some easing on the supply chain as well that I think will help. But as you know, we're going to see some easing on the supply chain as well. So we're going to see some easing on the supply chain as well.
In this market, customers, you know, when interest rates rise, sometimes it reduces their purchasing power. We are seeing some longer sales cycles, so although we're cautiously optimistic, we do have some concern that it may impact some customers' willingness to spend as we move forward.
Okay, and then...
So, with that in mind, how do you look at investment for next year? Obviously, you added a lot of headcount this year. Do you intend to slow that down next year?
And, you know, maybe – I don't know, try and grow off the investments you made this year in terms of headcount or you're going to continue to add.
Yeah, hey Greg, it's a good question. Right now we do have open recs, so we do plan on continuing to hire, but with that said, like anything, not just in the economy we're in, but every quarter and every year, we watch it very closely based on our operating metrics. And we'll make the adjustments that we need to make in terms of whether adding headcount or building out new solutions, but...
Based on this year, we saw a nice uptick in both our revenues and our operating income margins were up by a decent amount as well. So we're going to continue to invest in headcount and build out the solutions, but be mindful that we will watch it very closely if things start to adjust or things go south from where they are.
Would that be organic or inorganic?
Yeah, well, one, it would be organic. Two, I think we're in the beginning stages here. So we work with partners like NVIDIA and HP and a few others related to that. And a lot of it is really just about automating and optimizing processes and things along those lines. I would think two of the biggest technology trends that are out there really are AI and automation going forward.
We'll take our next question from Matt
Yes, thank you and good afternoon, everyone. This question on the strength of the gross margin that you saw in the quarter, Mark, it was up significantly from last quarter. You talked about product mix being one factor. Could you talk about...
exactly what we're talking about here in terms of product mix and what are your expectations for gross margin as we get into next quarter? Yeah, so hey, Matt, how are you first off? So our margins were up for two reasons. One, our product margins were up year over year in the quarter.
Also, as Jesse noted earlier, our service margins were up nicely in this quarter. So that's where the big uptick happened in our gross margins overall.
But specifically in terms of the product mix, is it because you did like in the December quarter more like high volume servers and you know there's a different mix of business with the price increases? I'm just trying to figure out. And as we get into the next quarter to.
are you expecting margins to be at these high levels, which would indicate up year over year?
Yeah, so a couple things here, Matt. So first off, look, the services being up is two things. One is, as we talk about, we continue to build our managed services, annuity quality revenues, which are a nice margin business for us, which helps enhance our margins on the services side. I think I mentioned earlier, our professional services were up as well, which are nice high-margin business for us.
which helped there. And then I think networking was up significantly, which had nice margin for us as well. So those would be the areas that I think had some effect on the margins overall. And going forward we'd expect the margins to be in line, but as you know, it goes across, it changes from quarter to quarter based on
significant growth in fiscal 23 from technology and from media and really no growth in healthcare and a couple of other markets.
Could you tell me what drove that and then also what's your outlook for fiscal 24 for those markets?
Yeah, so a couple things there, Matt. So if you look at our technology segment, our operating income was actually up 43.8% in this quarter and 28.5% for the year. So we had a very solid year across the board with our technology segment in terms of the solutions we were selling.
to the customer base and buy verticals. So here's a couple things at a very high level. So first off, our top five verticals were up for the quarter and for the year, both on net sales and gross billings. And specifically, Sled and Technology drove that. What I don't worry about is a vertical being up or down in a quarter, unless it's significant, you're going to have that based on a couple deals or maybe what's going on in the market.
What was another thing that was interesting that was really good by the team in terms of the execution, our customer size segments were all up both for the quarter and for the year, both from a net sales and from a gross billing standpoint. So what that means in my mind is the team is doing a really nice job from a go-to-market of selling into all our customer size segments from the mid-market.
perspective.
So when I look at it from a year overall in execution, I think the team did a really nice job by customer set, by type, meaning solution set, and also by vertical.
Hopefully, that covered what you were looking for there. Yeah, yeah. If I can just press a little bit in terms of the outlook, I mean, there's concern that a lot of your suppliers, the hardware OEMs have talked about particularly enterprise level customers really digesting the spending that's been going on and pushing things out. It doesn't sound like…
You've got that backlog, you've got that inventory that you're waiting to fill orders. So it doesn't sound like you're seeing any significant push outs or anything from customers. We're seeing delays in the sales cycle. So I think I mentioned it earlier. So we worry about could we be impacted, Matt.
the team did a really nice job executing
Okay, great. And just lastly, on that acquisition that you just did, could you tell us what the expected revenue contribution on an annual basis would be?
Hey, Matt, we don't disclose that. They had about 88 employees, just to give you a feel for size, and it's immaterial in terms of to our overall numbers. What we think is they've got a solid customer base.
They're in the servers provider space and they've got some master specialization accreditations from Cisco that we think we can leverage across the rest of E plus in the servers provider space. And also we think what E plus brings to them with security and finance.
collaboration and all the other solutions we have, we're going to be able to go back into their customer base and upsell and cross-sell. So we're kind of excited. We think it's a talented team and we'll make a difference for E Plus as we go forward.
and all the other solutions we have, we're going to be able to go back into their customer base and upsell and cross-sell. So we're kind of excited. We think it's a talented team and we'll make a difference for E-Plus as we go forward. Got it. Okay. All right.Carular dess
All right, take care, Matt. And that does conclude the question-and-answer session. I would like to turn the call back over to Mark Marin for additional or closing remarks. Okay, thanks operator. Thanks everybody for joining us today. I wish everybody a happy and long Memorial Day weekend to enjoy with your family and friends, and we look forward to speaking with you on the next call. Take care.
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