Q1 2024 ePlus inc Earnings Call
Good day, everyone and welcome to the post earnings release Conference call. At this time all participants are in a listen only mode and later, we will take your questions I would now like to hand, the call over to Mr. Kley Parkhurst. Please go ahead.
Thank you for joining us today on the call is Mark Marron, CEO and President Darren <unk>, COO and President of <unk>, plus technology, Elaine Marion CFO , and Erica Stoecker General counsel.
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 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.
The reports on Form 10-Q and in other documents that we may file with the SEC.
Any forward looking statement speaks only as of the date of which the statement is made 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 in our earnings release, which is posted on the Investor information section of our website at Www Dot E plus dot com.
I'd like to turn the call over to Mark Marron Mark.
Clay and thank you everyone for participating in today's call to discuss our first quarter fiscal 2024 results I will start with some key takeaways E plus delivered strong results in the first quarter, marking a great start to our fiscal year double digit sales growth was driven by solid execution, our land and expand strategy.
Supply chain improvements and contributions from acquisitions, our team performed at a high level executing consistently across all end markets.
Our net sales growth of 25% along with our scalable operating platform and disciplined cost management drove significant operating leverage adjusted EBITDA rose, 41% and diluted EPS improved 51% compared to the same period last year.
The strength of our performance again highlighted how our strategic positioning and focus on serving faster growing solution areas enables us to generate growth well in excess of the overall market for it spending and.
In today's environment, where enterprises and organizations are prioritizing investments that optimize cost and security. We have continued to meet our customers' needs with the suite of products and services that deliver value rapidly inefficiently.
During the first quarter, we continued to see an easing in supply chain constraints with the improved product availability, we were able to complete a number of previously delayed customer projects benefiting overall sales growth based on our conversations with our partners. We anticipate continued improvement in product availability and lead times over the.
Under of the year.
As you know acquisitions represent a fundamental component of our growth strategy and our first quarter results benefited from the contributions of our network solutions group and future Com, who we acquired in July of 2022.
On a combined basis. These acquisitions contributed approximately one third of our net sales growth in the first quarter.
Our technology business sales increased 26% with demand improving across all end markets and across most product categories. We continue to get operating leverage in our technology business segment as evidenced by our operating income being up almost 50% versus last year.
We had experienced a broadening of customer demand trends in the first quarter across all customer size segments led by strength in the mid market segment.
Mid market, which we defined as organizations with 500 to 10000 employees is primarily focused on adopting cost optimized cloud based architectures as well as enhancing cloud security to accommodate remote and hybrid work mid.
Mid market customers are particularly well suited to partner with E plus as they are key areas of need align with our strengths in areas such as workplace transformation cyber security and technology modernization.
Our customers are continuing to evaluate AI technologies, and we see it as an emerging growth driver. Many of our partners have incorporated AI into their core offerings to simplify and optimize operations as well as provide faster detection response remediation on the security front.
We empower customers with cutting edge AI optimize infrastructure solutions through strategic partnerships with industry leaders such as Nvidia.
Our AI services are designed to help customers adopt the latest technologies, while increasing their speed to market.
Our customers utilize our expertise to manage the complexity of designing deploying supporting and managing AI.
This can include building out an AI strategy plan identifying priority projects, providing resources to help structure and implement AI projects and then ensure proper governance and policies are applied and monitored.
We believe with the expansion of data overall and the benefits of AI being embedded in hardware and networking platforms will continue to provide monetization opportunities for infrastructure related to networking security cloud and collaboration.
Working was the standout performer this quarter as gross billings increased 67%.
The growth drivers included solid organic growth, reflecting demand for networking solutions that facilitate collaboration and enable workplace transformation as well as improved product availability that allowed us to complete certain customer projects and the contribution from recent acquisitions.
Security product gross billings increased 24% year over year on a trailing 12 month basis and is approximately 21% of total gross billings.
We believe that cyber security remains a priority for organizations of all sizes and we remain focused on providing the products and services that enable our customers to mitigate risk.
Our services revenues improved by 7% as a slight decline in professional services was more than offset by robust revenue growth in managed services, we saw particularly strong demand for our enhanced maintenance support and <unk> services.
These and other managed services offer significant value to customers, who face complex challenges in terms of managing cyber security risk keeping pace with technological change and recruiting and retaining talent.
We continue to build out our annuity managed services with proprietary new offerings that expand our capabilities in our focus markets such as E plus cloud managed services storage as a service and E plus lifecycle services support.
Several months ago, we introduced E plus automated virtual assistant for collaboration spaces. This innovative solution utilizes robotic automation processes in conjunction with E plus managed services to enhance the user experience in video enabled meeting rooms and Workspaces.
By building out our portfolio of unique offerings, we are differentiating E plus against our competition, while strengthening our value proposition.
Managed services revenues increased 23, 2% over last year and has generated a CAGR of 24, 1% over the last five years to put this in perspective annuity quality services have almost doubled over the last three years.
Moving to our finance segments results for the quarter were consistent with our expectation given last year's first quarter produced outsize transactional gains from specific financing deals, creating a tough compare quarter over quarter. As a reminder, the financing business provides flexibility for our customers and is a competitive differentiator.
<unk> as compared to our technology market peers.
Earlier I noted the positive contributions from our recent acquisitions as we look forward acquisitions will remain an important element in our growth strategy and the strength of our balance sheet affords us the flexibility to pursue additional value accretive transactions. Our M&A pipeline remains active and we are currently evaluating.
Alrighty of targets that can further extend our capabilities and supplement our organic growth.
I'd like to thank all our E plus teammates for their efforts this quarter to drive our strong financial results innovation as well as numerous customer success stories.
I will now turn the call over to Elaine to discuss our financial results in more detail. After <unk> remarks, I will provide our financial outlook for fiscal 2020 for Alain.
Thank you Mark and good afternoon, everyone. I am pleased to report on our strong start to fiscal year 2024, reflecting the success of our growth strategy as well as the contribution from our recent acquisitions.
Broad based strength across key end markets and revenue from acquisitions led to a consolidated net sales increase of 25, 3% to $574 2 million.
These factors are also evident in our technology business net sales, which grew 26% to $565 7 million beginning with this quarter. We have introduced three operating segments, which comprise our technology business product professional services and managed services or products.
<unk> segment includes sales of third party products, including software and services.
Our professional service segment contains our project related services staff augmentation consulting engagements and project management services. Our managed services segment comprises various services offerings, such as our infrastructure and cloud managed services managed security and service desk.
Going forward, we will reference these new business segments collectively as our technology business.
In our product segment revenues increased by 29, 2% to $498 2 million led by sales of networking products.
In the managed services segment revenue grew 23, 2% to $32 million from sustained growth and enhanced maintenance support and security operations Center services.
And our professional services segment revenue declined four 3% to $35 6 million year over year, primarily due to reduced demand for staff augmentation services.
Our strategy of focusing on faster growing areas boosted by acquisition contribution and easing supply chains led to technology business gross billings growing by 17, 6% to $842 million year over year. As a reminder, gross billings to note. The total dollar value of customer purchases of goods and service.
Including shipping charges during the period net of customer returns and credit memos and sales and other taxes.
Within our technology business, our two largest markets continue to be telecom media and entertainment and technology, representing 26% and 19% respectively of our technology business net sales on a trailing 12 month basis sled healthcare and financial services accounted for 16%, 14% and nine <unk>.
<unk>, respectively with the remaining 16% from other end markets and our financing segment lower post contract earnings and transactional gains in the first quarter of fiscal 2024 led to financing segment revenue of $8 5 million a decline from $9 6 million in the last years first quarter, which resulted in lower gross.
<unk> of $6 4 million compared to $7 9 million.
As we have mentioned results in our financing segment can vary widely due to the transactional nature of the business are.
Our consolidated gross profit increased 25, 3% to $142 3 million with a consolidated gross margin of 24, 8% in line with that of the prior year.
Within our technology business gross profit increased 28, 6% to $135 9 million and gross margin expanded by 50 basis points to 24% driven by higher margins across all three technologies segment.
Due to a more profitable mix product gross margin expanded 80 basis points to 22, 4% and professional service gross margin expanded 90 basis points to 41, 4%.
Benefiting from our increased scale managed services gross margin improved 210 basis points to 37%.
SG&A expenses increased 17, 6% year over year, reflecting the addition of team members from network solutions group organic hires and higher variable compensation expense still lower than gross profit, which increased 25, 3%.
At quarter end, our head count increased to 853 from <unk> hundred 37 in the prior year quarter, mainly reflecting additions of customer facing employees.
Through continual operational discipline operating income grew 39, 6% to $46 3 million. The effective tax rate was 27, 2% in the first quarter of fiscal 2024 compared to 28% in the year ago quarter.
Fiscal 2024 first quarter consolidated net earnings were $33 8 million or $1 27 per diluted share both up 51, 5% and 51, 2% respectively from the year ago quarter.
non-GAAP diluted earnings per share were $1 41, a 42, 4% increase from the year ago period.
Adjusted EBITDA was $53 9 million or 47% ahead of the comparable quarter in fiscal 2023.
We ended the quarter with cash and cash equivalents of $101 6 million compared to $103 1 million at the end of fiscal 2023.
Over the past three years operating cash flow has been impacted by the growth in inventories, which partly reflects supply chain constraints.
With supply chain is now improving we expect inventory to remain flat or decrease reducing our working capital needs and enhancing operating cash flows.
First quarter inventories remained flat relative to the level at the close of fiscal 2023 <unk>.
Inventory turns improved to 32 days versus 38 days in the preceding quarter.
Our cash conversion cycle was 48 days compared to 44 days in the year ago quarter, but significantly improved from the 59 days at the end of March 2023.
Finally, I want to thank our E plus team for solid execution in the first quarter and they are persistent efforts to drive growth.
With that I will turn the call back over to Mark Mark.
Elaine E plus is off to a strong start this year benefiting from our diversified base of customers and our strategic focus on serving faster growing end markets in an environment, where our customers are prioritizing more rapid payback on their it investments E plus remains well positioned for continued growth we are leveraging our <unk>.
<unk> capabilities across the technology stack to deliver effective solutions that enable our customers to optimize costs enhanced security and focus on their core business operations. As a result, we remain confident in our ability to deliver sales growth in fiscal 2024 that exceeds the projected growth in the it spending market.
We are therefore, initiating fiscal 2024 net sales guidance of $2 billion to $3 billion two to three $3 billion we.
<unk> adjusted EBITDA to be between $200 million to $215 million, representing an adjusted EBITDA margin of 9% to nine 2% our guidance assumes in part a continued gradual easing in supply chain constraints that enables us to complete previously delayed customer projects in <unk>.
<unk> remains focused on building long term shareholder value through the execution of our growth strategy and efficient allocation of capital I want to thank the E plus team for their dedication, which is again evident in our strong performance operator, please open the call for questions.
Thank you, Sir and everyone. We will now take your questions first step is Jesse Wilson William Blair.
Hi, Good afternoon. This is jesse on for Maggie Congrats on the results.
Thanks for taking our question so I.
I guess first.
Nice to see you initiate full year guidance, but just to dig in it seems like.
A bit of a range in terms of the calculated growth at the upper and lower end can you talk about some of them. Some of the assumptions you've made what kind of gets you to the upper end versus the lower end.
Sure So hey, Jesse it's Mark here, So a couple of different things. So let me start off with one.
Why are we why we're providing guidance now so we had actually planned on providing guidance a.
A few years back and then Covid hit so we kind of pulled back as we've talked to folks like yourself and other investors. They thought it would be helpful. If we provide guidance.
We have really good visibility into our pipeline and backlog and we thought this would help with some of the modeling because there was some pretty.
Pretty big differences between the different analysts in terms of our growth both top line to bottom line. So we're just trying to provide a little more granularity as it relates to the numbers both from a I'll call. It net sales and adjusted EBITDA, what we saw in Q1.
We actually had a really nice quarter, but there are few things that happened in the quarter. One we saw some supply chain easing. So we saw some deals specifically in the networking space that were pulled forward.
We also had about a third of our net sales was from acquisitions I will point out in subsequent quarters, one of the acquisitions will fall offer.
In Europe projections already.
We also had some large land and expand deals that affected the quarter. So there was some pull forward. There was some acquisition related which is about a third of the net sales and then supply chain easing as we looked at the metrics. It was about a seven to rough numbers. This is approximately 7% to 11%.
Growth over last year on the top line and we were very comfortable looking at our pipeline and backlog on where that put us, especially after the first quarter.
We'll point out Q2 is a tough compare for us for a lot of different reasons.
Mainly in our finance.
Segment, we had a really solid quarter last year, especially in the operating income space. So I think that it'll be tough to.
For us to match as we go into this quarter and it's normally Q2 is normally a solid quarter, but with that tough compare and some of the pull forward, we thought it might be a little bit tighter in Q2, but that's the high level on the thought process as it relates and we thought the margin percentage, 9% to nine two on the adjusted EBITDA was in line with.
The expectations.
Just on some investments we plan on making as we continue forward throughout the year.
Got it that's all really helpful.
Then a couple of follow up questions.
Because you hit on both in in your first answer. So you are seeing some of those land and expand deals ramp up.
Are you thinking about that on a multiyear basis or kind of over a few quarters.
It seems like that might be the case and then my second follow up.
Go ahead, Jesse sorry.
Yes, My second follow up was on the acquisition. So did you just acquired some very talented salesperson that are winning new business or worse and recently acquired customers spending more that's it for me. Okay. So so good good question so on the land and expand its a strategy we have.
<unk> had for a while and it's where we work with the I'll say more on the enterprise side, but it's also on the mid market side that will work with customers. We will try to get a foothold in the account and then from there we try to expand the sell everything that we have so.
Sometimes we will get a big pop or hit in the quarter based on our big opportunity normally the margins a little bit tighter on those deals and then we try to expand it with our value added solutions and services and that can go across multiple quarters or multiple years as we as we try to expand it.
So thats not something Thats just the.
In a quarter or two it could be multiple years that we see the benefit on that strategy Alright, and the second question was around acquisition acquisitions. So on the acquisitions, we'd like to think we acquired really good people and talented salespeople.
We think it's a great two of them are both really good acquisitions for us future Com, which we acquired in July of 2022.
Mainly in the security space and gave us some additional customers and access in the Texas region.
And then network service services systems group.
As in the service provider space and they had a really nice quarter. Most acquisitions normally struggled in the first quarter, Jesse and they actually had a nice quarter and I think that was due to some of the network.
Supply chain that open up as well as some things that they close but I would expect that to slow down a little bit as we move forward, but a nice jump to Q1.
Okay. That's really helpful. Thank you guys.
Okay. Thanks Jessy.
Up next we'll take a question from Greg Burns Sidoti.
Good afternoon.
Can you just delve into where you are.
Pipeline and backlog stands now because it sounded like you did deliver on some of those backlog projects.
This quarter, but the inventory didn't really go down too much. So how much is left there too.
That I guess would still be in process.
Yeah, So hey, Greg So what I was talking about is both in our CRM systems as well as looking at our open orders and backlog. We can have very good visibility as it relates to our backlog slash open orders they are probably down about $60 million sequentially.
So that's where we saw some of the runoff into the quarter. There was also some what I'll say lead times that improved on the networking side that help our networking numbers were up about 67%. So there was there was some pull forward in my opinion that.
I don't know if we'll see as much as we move throughout the year, but that's kind of the high level on the quarter there.
Okay and then.
It seems like demand is broadening.
You had broad based demand across product and customer segments.
But are you seeing any signs of caution any any indications that companies are pulling back or are they just re prioritizing and where you are.
<unk> products and services are is where the moneys flowing can you just give us a sense of maybe year.
Your outlook for the market.
So it's interesting Greg so a couple of different things there. One we do believe we will continue to pace. The it spend market for sure. We've done that and believe we will continue to do it we are seeing some longer deal cycles.
There's the economic uncertainty there is some there's been some.
Nice sized lay offs from some of the tech vendors out there and you see some of the.
Projections from some of our public peers in terms of what they are projecting in terms of declining revenue. So never want to say we are.
Immune to it but.
But we are resilient if you will as it relates to our business. The other thing is we don't really play in the commodity space. We made a decision a long time ago in the PC laptop space to get out of that business.
We still do it for some of our bigger customers.
But we didn't see some of the headwinds I think that some of the other sort of in that space and then the other thing is on our customer size segment every customer size segment was up what was really nice was our mid market was up which I believe is.
Those customers have real need for the types of solutions that we're providing so we feel good about our guidance we feel good about the quarter.
But not overly.
Not jumping up and down yet in terms of where.
The economy can go in the second half.
Yeah.
Okay.
And then lastly, why did you split out professional and managed services into their own.
On segments is there like an expectation for a difference in terms of growth rates or.
Margins like why provide that extra granularity now.
What Greg it's to help with some of the modeling we've talked about our managed services slash annuity quality revenues for years.
We thought it made sense as we decided to give guidance to breakout services as well I would think what I'd call a transactional services your professional services and staffing overtime Youll start to see an uptick some of that is held back by supply chain.
Overall, so that's one thing and as it relates to our managed services. We saw that this quarter. It was up 23% year over year and as I think I mentioned, the the CAGR over the last five years is 24%. So it's a it's a very visible.
Revenue stream and it's a profitable revenue stream, but I would expect our transactional professional services over time to pick up as well.
Okay. Thank you.
Thanks, Greg we'll see you soon.
And we'll take the next question is from Matthew Sheerin Stifel.
Yes. Thank you good afternoon, Mark and everyone.
And I also echo.
Others comments about appreciating the disclosure.
The outlook and guidance as well as the breakdown of some of your revenue stream. So I appreciate that.
But just relative to your guidance for the year.
Mark as you said it looks like you are.
Forward guidance, it looks to be conservative because youre up 25% year on year, you're guiding up 10% in first quarter. So.
So that would imply the second second half is going to be flat to down also in December I know youre going to be facing tough comps because you had a very very strong.
Our record year last year. So I'm just wondering are you just.
Is that just conservative because maybe you don't have visibility into the full year or.
Some of the comments you made earlier about.
About reasons, maybe to be more conservative just trying to get.
A feel for how you think about the the rest of the year and also the.
The September quarter, you're typically up sequentially, but I'm wondering if with all of the pull ins that you talked about whether that's going to be more flattish or down sequentially. Thank you.
So that was a lot in there Matt So a couple of different things. One is I think I called out we are starting to see some of the tough comps on the finance piece. So we had a really big quarter I believe it was $12 2 million and operating income in Q2, so thats going to be really tough to replicate so that's the first thing as it relates to.
Q2, you are right Q3 is normally our strongest quarter Q2 is normally a solid quarter, but I do believe we had some pull forward or pull forward in this quarter, we saw some things that popped in that at.
At the end of the quarter that popped into the quarter that we werent expecting so I think thats part of what maybe is throwing you off a little bit because the quarter was so big the other thing is yes, we are a little reserved as it relates to our guidance, but we feel very good about the guidance based on what we're hearing in the market from our competitors and from others that.
Are down.
Single to double digits. So we're just trying to make sure that we put something else Thats fair based on our pipeline based on our backlog based on everything that we're seeing the other thing I will highlight it is up 7% to 11% over last year in this market, which I don't think youre seeing in most most of the company's debt.
Have announced results.
And quite honestly that's ballpark.
$150 million to $250 million in terms of guidance above what we did last year. So I think it's a somewhat aggressive but realistic target so not that undercut.
Under cutting it.
Don't know if that gave you everything you need there Matt.
I have some follow ups.
Just regarding your.
Your backlog is it still elevated it sounds like it was down.
Was it down $60 million quarter on quarter and is it still elevated and how much relative to your normal backlog.
Yes, it's still elevated to our normal backlog Matt.
Quite honestly, it's almost pre COVID-19 almost double our normal in terms of open orders, but it's down sequentially $60 million.
Okay.
Okay, and then on the EBITDA guidance, the margin guidance, 9% to $9 two.
Basically flat year over year, but youre going to be up significantly year on year.
<unk> in Q1.
So I'm wondering.
Is that because you expect maybe some opex going up.
Why not continue to see that leverage play through the year.
Yes, I think Theres two things, Matt one we.
We acquired.
The network service groups. So we only saw two months of the of the Opex in this quarter. So I'd expect that to be up a little as we move forward and yes. We believe we can continue to grab market share. So we are going to invest.
Across our practices, adding more customer facing head count for example, if you think about some of the stuff going on with artificial intelligence. It's an area that right now I believe is in the early innings.
It's not a big revenue generator for us, but we believe it could be a growth driver. So we will look to invest in areas in that space over time by providing advisory services around helping customers understand the risk and the government and things that they have to understand understanding how to take advantage of some of the AI.
Embedded solutions from our partners that are out there. So yes, we do plan on making some additional investments in head count, but it's also some additional expense that's not in there as it relates to.
The network services group, which we acquired in May.
Okay. That's super helpful and just last question for me.
Just regarding the <unk>.
<unk> trends and I know in recent quarters, you and everyone has been I've been able to pass along the vendor price increases are you starting to see that level off at all or any any pricing pressure as the component availability becomes better.
No Matt haven't seen anything we've been able to pass it on and haven't seen there are certain deals where youll have some pressures from competitors that will go in aggressively with.
With discounts, but as it relates to any pricing pressures, we have been able to pass that on.
We had a strong quarter related to our product sales, which I think Elaine mentioned was up 29%. So.
Didn't see much that changed in that space.
Okay, Great alright, thanks again.
No problem.
And everyone. At this time there are no further questions I'll hand things back to our speakers for any additional or closing remarks.
Okay. Thanks, Lisa Hey, so if I could close it was a really nice start to our fiscal year was a solid quarter and I want to congratulate and thank the <unk> team for everything they did to produce the results that we did and with that I'd like to thank everybody for joining us for this call and look forward to our next earnings call take care and be safe.
Once again, everyone that does conclude today's conference. Thank you for your participation you may now disconnect.
Please wait the conference will begin shortly.
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