Q3 2024 ePlus Inc Earnings Call
Good day, ladies and gentlemen, welcome to the E plus earnings results Conference call. As a reminder, this conference call is being recorded.
To introduce your host for today's conference Ms. Erica Stoecker General Counsel Ma'am you may begin.
Thank you for joining us today on the call is Mark Marron, CEO and President Darren <unk>, Chief operating officer, and President of <unk> technology, and Elaine Marion Chief Financial Officer, 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 quarterly reports on Form 10-Q, and in other documents that we file with the SEC, including the form 8-K, we filed on October six 2023, recasting certain disclosures in our most recent annual report any forward looking statement speaks only as of the date of which the statement is made and the company owned.
It takes 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.
Plus dot com I.
I'd now like to turn the call over to Mark Marron Mark.
Thank you Erica and thank you everyone for participating in today's call to discuss our third quarter fiscal 2024 results. Our year to date performance has been solid with net sales growth of 6% outpacing the industry and our peers customers adoption of digital transformation technologies security solutions.
It infrastructure to support our AI remained strong.
Order to quarter topline performance has been more variable than in prior years, mostly due to supply chain fluctuations, which affected both customer behavior as well as our ability to ship equipment.
Over the past few years large enterprise customers ordered equipment well in advance of expected need in order to safeguard their mission critical projects. As a result, we built a backlog of booked orders and as the supply chain in the east we were able to ship this backlog of equipment, helping to drive strong 22% sales growth in the first.
Half of the fiscal year.
Following that wave of shipments we saw some customers pause new orders in Q3 as they deployed these delivered products.
As a result in our third quarter net sales were down 18%, but it is important to note that our gross profit held more stable and was down only three 3%.
A contributing factor to the gross profit was our service revenues, which were up 10, 7% as we deployed projects for our customers and our services gross profit increased 21% year over year, driven by double digit gross profit gains in both professional and managed services.
Overall, our services gross margin was up 340 basis points and we had another strong quarter with our managed services revenue up 22%.
Given the mission critical nature of managed services. We provide this business is characterized by recurring and predictable revenue streams. This revenue not only enhances our financial visibility, but also offers new opportunities for growth as we provide existing customers with additional managed service offerings that address their evolving need.
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The services growth noted above along with solid product margins and strong contribution from our financing segment helped our consolidated gross margin increased by 410 basis points. It's also important to note that our year to date consolidated gross profit increased 9% on an increase of 6% in net sales.
Yes.
Net income declined 23, 6% for the quarter and increased eight 4% year to date.
Net earnings were affected by lower product sales higher acquisition related amortization expenses and higher personnel cost we continue to invest strategically in building out our AI sales and consultative resources, AI optimized solutions and lab capabilities, which underscores our confidence in our growth prospects.
<unk>.
While sales cycles have lengthened somewhat we do not view this quarter sales decline as a trend in our annual guidance remains unchanged. It is worth noting again that we faced a tough compare with gross billings up almost 30% last year in this quarter.
We believe fundamental demand parameters remain intact and considered the variability in our quarterly sales this year as primarily a timing issue on when and how deals fell between quarters.
We expect sales growth in our fourth quarter, enabling us to achieve the lower end of our guidance range.
While still early in its evolution generative AI represents a promising long term growth opportunity for both our product and services business, we have deep credentials in the AI World and AI isn't a new solution set free plus we have been strategizing building engineering expertise and aligning with top vendors for <unk>.
<unk>.
In March of 2018, we were named elite level as a deep learning partner for Nvidia.
We're also in early distribution partner for Aerie, the AI ready infrastructure, architected by pure storage, and Nvidia, which recognized our vision and integration capabilities.
We are excited about the possibilities for AI and we recently announced our AI ignite program that will help customers explore adopt and optimize AI.
It will help show what is possible with their data and applications ensure their business and strategy is aligned and helped drive scale efficiencies and cost savings.
Our AI capabilities, including consulting managed services and training enable our customers to implement complex AI architectures that are cost effective scalable and secure.
We continue to work closely with our partners to develop innovative AI optimized infrastructure for our customers that can include working on voice recognition projects autonomous driving initiatives scanning physical images to provide a better patient experience or just help customers embark on their artificial intelligence and.
Machine learning plans.
Our financing segment reported solid third quarter results fueled primarily by high transactional gains and portfolio earnings.
During the quarter, we executed on several large contracts, resulting in strong year on year volume growth accompanied by even higher growth in the third quarter segment adjusted EBITDA.
Financing remains an important competitive differentiator for E plus offering flexibility for our customers, particularly in more challenging economic periods.
Acquisitions remain a key element of our growth strategy, and we continuously evaluate potential opportunities that would enhance our offerings strengthened our capabilities and expand our geographical presence.
We were also pleased to complete the acquisition of peak resources on January 26th peak.
<unk> as a solution provider in Denver, and the mountain West with enterprise customers and a corporate culture that parallels our own.
This is another example of a geographic strategic acquisition that provides a platform for us to build out the mountain West region.
We believe we can deploy our broader solutions portfolio to their customer base, which should help drive incremental growth in the future.
Our strong balance sheet, including third quarter, ending cash of 142 million the highest level in the past seven quarters provides us with the flexibility to opportunistically pursue acquisitions that both align with our strategic objectives and are financially accretive.
I would like to thank the <unk> team for their continued dedication and a challenging operating environment 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 2024.
Thank you Mark and good afternoon, everyone I will provide additional details about our financial performance in the third quarter of fiscal 2024.
Consolidated net sales amounted to $509 1 million compared to $623 5 million in the prior year quarter technology business net sales were $494 2 million down from $611 8 million reported in last year's third quarter.
The decline was due to lower product sales as improved product availability in the first half of the fiscal year enabled clients to complete previously delayed projects service revenue grew 10, 7% to $74 7 million led by double digit growth in managed services.
Within our technology business sales were broad based across customer verticals.
On a trailing 12 month basis, our two largest verticals continued to be telecom media and entertainment and technology, representing 24% and 17% of our technology business net sales respectively sled.
Sled healthcare and financial services accounted for 16, 13, and 10% of our technology business net sales respectively with the remaining 20% divided among other end markets.
Net sales in our financing segment were $14 9 million up from $11 7 million in the prior year due to higher transactional gains in portfolio earnings.
Although consolidated gross profit decreased three 3% year to year to $133 8 million consolidated gross margin expanded by 410 basis points to 26, 3%.
All three of our technology segments contributed to the improvement in gross margin with product gross margin, gaining 270 basis points to 21, 9%, mainly due to a larger proportion of third party maintenance and services sold in the current quarter, which are recorded on a net basis.
Managed services gross margin showed a 330 basis point improvement to 31, 8% due to scaled growth in these services while professional services gross margin grew by 420 basis points to 43, 3% benefiting from a shift in mix to higher margin services.
Consolidated operating expenses of $95 8 million increased four 2% year over year, reflecting the increases in salary and benefits from additional head count as well as increases in acquisition related depreciation and amortization expenses. Our total head count at the end of December 2023.
<unk> thousand 897 up 152 from a year ago, partially due to the acquisition of network solutions Group completed in April 2023, which added 83 employees.
Of the 152 additional employees 133 were in customer facing roles on a consolidated basis operating income declined from $46 $5 million to $38 million earnings before taxes were $38 4 million down from $49 4 million reported in last year's third.
Quarter.
The decrease was due to lower sales as well as the benefit in last year's third quarter from foreign currency gains and a class action payment, which together totaled $2 8 million.
The effective tax rate was 29% in the third quarter of fiscal 2024 compared to 27, 7% in the year ago quarter consolidated net earnings were $27 3 million or $1 two per diluted share compared to net earnings of $35 7 million or $1 34 per diluted share last year respective.
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non-GAAP diluted earnings per share were $1 18, compared to $1 38 in the year ago period.
Our diluted share count at the end of the quarter with $26 7 million unchanged from the third quarter of fiscal 2023 <unk>.
Consolidated adjusted EBITDA decreased to $46 2 million versus $53 3 million in the prior year due primarily to a 23, 3% adjusted EBITDA decline in the technology business.
Moving to our consolidated results for the nine months ended December 31, 2023, net sales grew 6% to $1 67 billion led by six 5% net sales growth in the technology business.
Gross billings in the technology business for $2 5 billion, an improvement of three 4% versus the prior year period.
Consolidated gross profit rose nine 2% to $424 million and consolidated gross margin expanded 80 basis points to 25, 2% due to improved margins for both product and services consolidated net earnings were $93 8 million or $3 52 per diluted share.
Representing increases of eight four and eight 6% respectively. Adjusted EBITDA grew eight 2% to $153 6 million and non-GAAP diluted earnings per share expanded by 9% to $3 99.
Turning to the balance sheet, we ended the third quarter with cash and cash equivalents of $142 2 million the highest in two years as compared to $103 1 million at the end of fiscal 2023.
Conversely inventories declined to $218 million from $243 3 million at the end of March 2023, representing the lowest level in nearly two years, we've seen supply chain pressures continue to ease enabling us to fulfill prior customer orders and complete related service.
<unk>, which should support further inventory reduction over time.
Other inventory turns continued to improve to 27 days compared to 29 days in the preceding quarter and 38 days at the end of fiscal 2023, stockholders' equity increased 12, 2% to $877 8 million from the end of fiscal 2023.
Our cash conversion cycle was 54 days compared to 51 days in the year ago quarter, and 59 days at the end of fiscal 2023, given this improvement year to date operating cash flows were $143 5 million compared to $147 million of cash used in the same period last year.
While we expect our customers to be more conservative with their spending and the remainder of fiscal 2024 as Mark mentioned <unk> remains well positioned in the market given our strategic focus on higher growth end markets and we remain confident in achieving the low end of our guidance range.
I want to thank our talented E plus employees for continuing to drive our solid financial performance for the first nine months of fiscal 2024.
With that I will turn the call back to Marc Marc Thank.
Thank you Elaine driven barrier to our strategy targeting higher growth market segments like cloud networking collaboration and security <unk> generated strong financial performance through the first nine months of our fiscal year, specifically fiscal year to date consolidated net sales are up 6% adjusted EBITDA is up eight.
Percent and diluted earnings per share has increased 9% despite ongoing economic uncertainty and the associated impact on it spending.
Looking forward, we expect our fourth quarter results will improve sequentially from the third quarter as customer sentiment is positive as a result, we maintained our 2024 financial guidance with an expectation that we will achieve the lower end of the range driven by a reacceleration of growth in our technology business and.
<unk> positive momentum in services.
Even as the overall it spending environment remains challenging we remain confident in the strength of our marketing position and in our growth strategy.
With our many industry partners E plus offers innovative scalable solutions that cost effectively address our customers' needs today and for the future. We remain committed to driving profitable growth and building long term value for our shareholders.
Operator, let's now open the call for questions. Thank you.
At this time, we would like to welcome your questions to ask a question Press Star then the number one on your telephone keypad.
I would like to withdraw your question Press Star one again.
And our first question comes from the line of Maggie Nolan with William Blair.
Please go ahead.
Hi, Thank you.
Mark you mentioned part of this quarter performance was influenced by timing of deals have you seen some of those deals closed so far in January or how are you feeling about the ability to close those in the coming months.
Yes, Hey, Maggie how are you. So yes, we've seen activity pick up in Q4.
We've already seen some of those deals close and just to give you a quick recap on the quarter. Maggie So first of all if it was a volume issue.
Our net sales was down 18, 4%, but our gross profit was only down three 3% and a lot of that had to do with our strong margins are services uptick.
We had a pause with our enterprise customers, but we also saw an uptick in our project services. So there was kind of the offset there and then we had a nice finance quarter as well, but really what we're seeing Maggie is what it came down to is timing issues between the quarters. So if you think about it with the supply chain easing we were up 22.
2% in the first half what we saw was the pause with some of the some of our bigger enterprise customers plus if you remember we kind of pointed out we had a tough compare this quarter were adjusted gross billings I'm sorry, our gross billings were up almost 30%.
Last year in this quarter, but with all of that we expect growth to be back to a little bit normal ranges in Q4, and deliver a solid fiscal year and hit the low end of our guidance range.
That's really helpful. Mark and then one other piece of that with you had talked about.
Maybe there was some lengthening sales cycles and maybe that's.
Some of the enterprise commentary that you were getting but you felt like that wasn't necessarily indicative of a trend yet can you elaborate on why that may not be a trend and what you're seeing out there in the market.
Yes, Maggie it's funny, what we soaring in the calendar year and the end of our Q3.
It was not a normal year end budget flush that we see.
But since the fourth quarter beginning of January January has picked up we've seen orders pipeline.
All pick up nicely. So some of the enterprise deals have actually some of the deals that moved pushed from Q3 into Q4 are closed and some of the timelines people seem to whether its a budgeting issue or not have started to move forward a little bit quicker in terms of their sales cycle still not back to I'll call. It pre coat.
With levels, if you will as it relates to the sales cycle, but definitely improved from Q3.
Thank you.
Hey, Maggie one other thing too just to point out it's an interesting time with the supply chain. So.
What we believed had been at least with US is we had a lot of customers that we're deploying technology.
That we delivered in the first half, especially in this Q3 so it's.
It really is a timing issue between the quarters with the supply chain deploying that technology and then customers.
Starting to invest whether it's in security or AI or things along those lines.
Okay. That's helpful. Thank you. Thanks.
Thanks Maggie.
And your next question comes from the line of Matt Sheerin with Stifel. Your line is open.
Yes. Thank you Mark I just wanted to follow up on Maggie's question regarding your outlook I'm looking at my.
In my model here and.
Going back seven years <unk> been down sequentially every march quarter.
And it does sound like you didn't see the seasonal trends that you typically expect so I guess the question other than that <unk> seen some pick up here in January is there a backlog or any other sort.
Sort of tangible evidence that you can point to this this rebound here.
Yeah, Hey, Matt Good question. So what we've seen is some of the deals that we just discussed with Maggie that pushed from Q3 into Q4, the demand parameters have really not changed at as it relates and I got to admit that this is a little bit different than our normal seasonal Q3 to Q4 and a lot of this is.
Timing the other thing I'd ask you to kind of keep in mind as you go through your models. If you look at the first half our net sales were up 22% I think it was in the first half and our net sales year to date are up 6% and our gross profit is up 9%. So it's in line with what we were thinking for the quarter a lot of.
It just came down to timing issues and a lot of its supply chain related and customers pushing deals out from Q3 to Q4 for whatever reasons.
Got it.
It didn't seem that supply chain would be an issue right because everyone is saying that the products are readily available.
Cisco has talked about that.
Your networking sales were down 24% year over year.
So I'm trying to figure out is it supply chain or just customers being more cautious.
Hey, Matt two things if you think about it what I'm, saying I'm on the supply chain is that a lot of customers in our first half we were up 22% and some of our bigger customers, we're actually installing implementing deploying that technology as compared to buying new technology. So some of those bigger customers as you know.
Had the wherewithal and the capabilities to order in advance. So that's what we're seeing in the quarter and then if you look at it for the year, we're still up 6% on the net sales and 9% on our gross profit so.
The other factor that comes into play is if you look at our services. They were up 10, 7% and our project services were up nicely both from a revenue and from a gross margin standpoint, so some of that ties to what I'm talking about with the projects being deployed is as compared to buying new technology. The second part.
That is what I had said to Maggie a little bit earlier is that some of these deals some of these enterprise deals or customers pushed into Q4, and we've seen an early pickup and we don't think the demand parameters are changing both in terms of our pipeline our backlog and what we're hearing from our sales teams related to their forecast for Q4.
Got it.
Okay and could you remind me the revenue contribution from the in this quarter from the acquisition that you just completed.
Does that have much of an impact it was a matter. It was immaterial to net sales, maybe 3% to 4% tops of net sales. So it was immaterial for the quarter.
But for the March quarter.
Alright.
Could you just.
You just closed the acquisition right. So you can have.
<unk> revenue also yes, sorry, that's immaterial too Matt.
A small acquisition roughly $35 36 employees, what it does for US It gives us a platform for the mountain West and they've got skill sets in the kind of data center cloud security space that we can we can build upon and then bring all the other things that <unk> brings to the table. So we think it's a nice platform to build.
But it's immaterial for Q4.
Okay fair enough and just relative to your EBITDA guidance for the year at the low end that would imply that your EBITDA or operating margin.
For the March quarter would be operating profit would be down year over year. Despite.
Revenue growth because your revenue growth is going to be up double digits year over year.
So whats beneath that what's happening there.
And why is that down.
If you look at it Matt it's probably some of the things that we talk about we're investing for the future. So we believe we're a growth company. So.
We didn't touch on AI, yet, but we've made some big investments as it relates to resources AI optimized solutions, we built out.
Lab customer innovation centers so.
Alain touched on our head count was up I think it was 152 employees I'd say about 130 to 135 were customer facing so.
You'll see our salaries and benefits still up based on the investments, we're making there and then over time.
Think youll start to see operating leverage, but we still believe we will be in the range on the adjusted EBITDA and the net sales on the low end that we talked about.
Okay very good thank you very much.
Thanks, Matt.
Okay.
And your final question comes from the line of Greg Burns with Sidoti.
Greg Your line is now open.
Afternoon, sorry to kind of follow up on the.
The product sales in the I guess, a little bit of a bottleneck you saw this quarter Cisco.
Okay implied that maybe there was a couple of quarter like it was going to be longer duration here to work through some of this.
Bottleneck, a product thats been shipped but it seems like you feel.
That you are going to rebound pretty quickly in the next quarter can.
Can you just help us understand what gives you confidence there I know you touched on a little bit, but Cisco in particular seem to think that it was going to be a little bit of a longer.
Headwind for them to work through this.
Product product that's out in the market.
Hey, Greg how are you. So a couple of different things. So I don't think we have the I'll say supply chain issues that Cisco has now obviously, it's a portion of what we do but we've seen our open orders continue to go down on a regular basis.
Overall, so I think some of it is open orders are getting closer I won't say they were at pre COVID-19 levels.
But there are a little more I don't know if normalize but at more natural levels that we think so we've got a good handle on our open orders slash backlog.
The supply chain easing really eased up a lot for us I can't speak to Cisco, but for us in the first half if you think about it being up 22%.
I think there were too many companies out there up 22% in the first half on net sales. So you had that supply chain easing and then the other thing for the quarter as we've seen the activity pickup we've got the forecast from our sales team and the demand parameters really havent change for us.
We feel we're in the right value added areas.
Cloud Security network modernization AI and all the services were predicting so that would be the reason behind it.
Okay, and then with <unk>.
I practice.
Ignite is that mainly a services opportunity like a professional service opportunity is there hardware associated with that and do you feel like.
You have the.
Capabilities in house to grow that business or is that something that you need to.
Maybe Ed.
Inorganic.
Inorganic expertise to grow that part of your business.
Yes, So hey, Greg a couple of different things there one is in the early innings. If you think about it but I think it is going to change how companies operate as they go forward in the future. The other thing that kind of fits right in our wheelhouse. So if you think about converged infrastructure hyper converged.
Optimized infrastructure is the same thing in terms of compute networking storage and all the things that kind of plays to our strengths. So a lot of that we have resources, but we have invested in additional resources and I had mentioned the lab.
<unk> and the customer innovation center.
But it's not just a services play so it's actually the services as the first part of it where we help them kind of explore adopt an optimized AI and that means are they ready for AI envisioning workshops really it's about the data.
It's kind of a data strategy first is you've got all this data that's expanding exponentially. If you will so then you've got to think through governance and risk once you've decided on your AI strategy. Then it gets into what I'd call. The AI optimized infrastructure, which is the hardware play and to be honest Greg.
It's a big play where it's a big opportunity in the market. So I think I'm, saying, what anybody else would say related to AI. It's early innings, but it's both the services and a product play for us and a product play kind of fits with our heritage and our history and what we're good at.
All right perfect. Thank you.
Okay.
Alright, Greg Thank you.
Everybody. Thank you for joining us today for our quarterly earnings report. We appreciate that you took the time and have a good night take care.
Ladies and gentlemen that concludes today's call. Thank you all for joining you may now disconnect.
Please wait the conference will begin shortly.
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