Q1 2020 Earnings Call
Good day, ladies and gentlemen, and welcome to the E plus earnings results Conference call. As a reminder, this conference call is being recorded.
I would like to introduce your host for today's conference call Mr. Kley Parkhurst SVP, Sir you may begin.
Thank you for joining us today on the call is Mark Marron, CEO and President Elaine Marion Chief Financial Officer, 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 uncertainties.
Detail in the earnings release, we issued this afternoon and our periodic filings with the Securities and Exchange Commission, including our Form 10-K for the year ended March 30, Onest 2019, and our Form 10-Q for the quarter ended June Thirtyth 2019 when filed.
The company undertakes no responsibility to update any of these forward looking statements in light of new information or future events.
In addition, during the call we may make reference to non-GAAP financial measures and we have included a GAAP financial reconciliation in our earnings release, which is posted on the Investor information section of our web site.
At Www Dot plus 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 first quarter results.
Our first quarter results demonstrate strong demand for our technology products solutions and services and we're off to a strong start in our fiscal 2020.
In the quarter adjusted gross billings were up 13.7% year over year and gross profit grew an impressive 14.8%.
Consolidated gross margin was up 170 basis points to 24.3%.
Remaining at an industry, leading level supported by both our technology and financing segments.
We continue to view gross profit growth as an important measurement of our performance and we think this is a good indicator for investors to benchmark our progress.
The percentage of our sales that we recognized on a net basis increased again this quarter reflective of our success in selling third party maintenance services and software subscriptions and as I have mentioned in previous calls, although the evolving business model towards subscription and ratable services initially pressures topline comparisons and operating expense ratios. It is additive to gross profit and adjusted enhanced the quality and predictability of our earnings overtime.
As the industry continues to evolve towards a model where revenues are being recognized over time or on a net basis. We are well positioned to capture these annuity type revenues with specialized go to market and operational teams also we have built data analytics capabilities to ensure that we are both capturing new opportunities as well as meeting customer needs.
What is not changing as our focus on high growth areas of security cloud and digital infrastructure within these broad focus areas. Our end to end solutions lead with Consultative and advisory work and continue with optimized services such as managed services, enabling us to be a full service provider to our customers and grow with them from a valuation and analysis to implementation and support we continued to see strong demand for our security solutions in the first quarter as adjusted gross billings for security products and services grew 54.9% year over year.
Security accounted for over 21% of our total adjusted gross billings on a trailing 12 month basis, which was a new high for us up significantly from 18.4% in the same period a year ago.
Given the critical need for protecting infrastructure against cyber threats, we expect security to be a growing contributor for us and we continue to be a thought leader and evolve our solution set in this area.
In security, we continue to see opportunities to help our customers in the cozby, our cloud access security broker space by helping them deal with the challenges of visibility and control in their SaaS environments.
Also we continue to assist customers recover from ransomware outbreaks by providing business recovery services to help mitigate malware along with providing high touch services with our security consultants.
This gives us the opportunity for remediation technology and consulting to bring business is back on line and help bolster defenses to prevent future attacks.
Also we recently launched vulnerability management as a service to identify prioritize and remediate cyber security weaknesses in real time. This solution was like most of our evolving solutions in response to customer needs and demands and we will continue to develop solutions to support customers and help them stay ahead of threats.
Our services revenue was up 35.8% year over year.
Customers look for us for expertise in providing professional manage and staffing services and we continue to look at service lines and acquisitions that can add to our portfolio of offerings for our customers, while enhancing our overall margin profile.
Each of these services keeps us close to our customers providing substantial opportunities to provide further consultative services and to cross sell and up sell additional services and products.
Our operating income was up 11.2% during the quarter, even as we continue to be highly focused on making the right investments to remain a leader to our customers, while optimizing our cost infrastructure.
Also we are developing annuity services in a transaction portfolio that we will have significant benefits over the long term.
We are especially committed to building scalable leverageable business lines like managed services that can add incremental revenue with low marginal cost, thereby improving our operating leverage.
While our head count is up at 23% year to year. The bulk of the additional head count came from the slate acquisition, where a significant number of new employees were in their staffing services.
On a same sequential basis, our head count was flat.
What is less obvious from looking at our total headcount is that our customer facing headcount was up 29% year to year.
The additional sales and technical personnel is an important differentiator for you plus in the marketplace.
In closing our first quarter results demonstrate strong demand for our technology products solutions and services from our diversified set of middle market Enterprise state local and education customers.
Customers are continuing to digitize their businesses create and utilize multi cloud infrastructure upgrade their collaboration platforms and network and invest in security.
We believe we're very well positioned with the right mix of professional and managed services and the right product mix to meet customer demand and anticipate market trends. Additionally, we will continue to evaluate strategic acquisitions with more than adequate resources and a great integration platform and experienced team.
With that I will turn the call over to our CFO , Elaine Marion who will review our first quarter results Alain.
Thank you Mark and thank you everyone for joining us today.
Starting with our overall financial performance in the first quarter of fiscal 2020, net sales were $381.4 million up 7% from the prior year.
Net sales in the technology segment increased 6.2% year over year, driven by higher product sales and a 35.8% increase in sales of services.
Also contributing to the topline growth was our financing segment, where net sales increased 32.8% to 12.8 million.
Looking at our end markets and our technology segment on a trailing 12 month basis technology and sled continue to be our largest customer end markets accounting for 21, and 17% of technology segment net sales respectively.
Financial services and healthcare each accounted for 15% Telecom media entertainment represent approximately 14% of net sales and the remaining 18% from several other client tight.
Adjusted gross billings in the technology segment amounted to $548.4 million, a 13.7% increase compared to 482.3 million in the same period, a year ago, reflecting strong demand as well as a higher gross to net adjustment between billings and sales.
Additionally, security grew 54.9% supporting this strong performance.
The agenda mint from adjusted gross billings to net sales represented 32.8% in the first quarter of fiscal 2020, a 470 basis point increase from the year ago quarter, reflecting a higher proportion of sales of third party subscription based software and maintenance.
Consolidated gross profit increased 14.8% to $92.6 million from $80.7 million.
Our consolidated gross margin expanded 170 basis points to 24.3% for the quarter gross profit for the technology segment increased 12.4% to $81.8 million, while growth margin expanded by 120 basis points to 22.2% due to a favorable mix of products and services.
Service gross margin declined to 37.4%.
The decline was related to a larger proportion of staffing services and enhancement maintenance support which yield lower margins than professional services.
These services are accretive to our overall margin and offer more consistent revenue stream.
And the financing segment gross profit increased 36.7% to $10.8 million.
Primarily due to an increase in transactional gain.
Operating expenses increased 16% to 69.9 million, mainly due to an increase in salaries variable compensation health care costs and additional costs associated with the acquisition and the operation of slate.
This acquisition was the primary contributor to the 23.1% or 289 year over year increase in head count to 1538 employees as it added 246 employees.
Consolidated operating income increased 11.2% to $22.8 million adjusted EBITDA increased 12.6% year over year to $28.6 million and our adjusted EBITDA margin of 7.5% expanded by 40 basis points from the same period last year.
Our consolidated net earnings amounted to $16.2 million or $1.20 per diluted share compared to $15.3 million or $1.12 per diluted share, a 6% and 7.1% increase respectively.
In the first quarter of fiscal 2020, we had a higher effective tax rate of 28.7% compared to 25.7% in the year ago quarter due to a tax benefit related to stock vesting in the previous year's quarter.
non-GAAP diluted EPS were $1.44 up 12.5% year to year, our diluted shares outstanding totaled $13.5 million for the quarter compared to 13.6 million at the end of the first quarter of fiscal 2019, as we repurchased approximately 180 88000 shares.
Moving to the balance sheet, we ended the quarter with cash and cash equivalents of 35.6 million the decrease in cash and cash equivalents from the end of last quarter was due to increases in working capital in the technology segment investments in the financing portfolio and share repurchases.
Inventory levels increased 15.3% to $58.2 million from the year ago quarter, as we've said before our inventory levels vary depending on specific customer projects underway.
We are pleased with the progress in our cash conversion cycle, which stood at 24 days at the end of the first quarter. Although this was up from 22 days in the year ago quarter.
We were on the right path sequentially down from 27 days for the fourth quarter of fiscal 2019.
On April Onest 2019, we adopted the lease accounting standard as the lessee, we recorded an increase to assets and liabilities of $12.3 million, which related to our real estate leases as a less or among other changes. We are now classifying cash flows related to our financing receivables within operating activities.
The majority of which were previously presented as investing activities.
More information regarding the impact of adopting this standard will be included in our Form 10-Q .
Going forward, our capital allocation strategy remains the same to make acquisition repurchase shares and continue to invest in our business to support growth.
We will also focus on balancing investments in future growth initiatives and managing our costs. Thank you for your time today I will now turn the call back over to Mark.
Thanks, Elaine we were pleased with our first quarter performance, our business outlook remains positive with strong customer demand.
In addition to the growth in recurring revenues, our services backlog remains strong which should benefit our gross profit profile.
The plus is serving a roster of over 3400 enterprise and middle market customers, giving us tremendous opportunities to cross sell our increasingly broad suite of products and services.
Our strong balance sheet provides us the resources to maintain a balanced capital allocation strategy that includes investment in in organic initiatives share repurchases and acquisitions and we continue to evaluate acquisition candidates with the right geographic profile that can enhance that can enhance our product and service offerings.
Operator, I would now like to open the call for questions.
Ladies and gentlemen, if you have a question or comment at this time. Please press. The Star then the one key on your Touchtone telephone. If your question has been answered you remove yourself from the queue. Please press the pound key.
Our first question comes from Maggie Nolan with William Blair.
Hi, Mark Hi, Len Todd on for Maggie are you guys doing.
Hey, Ted how are you.
Doing well.
So I wanted to ask about the.
Some of the subscription and annuity revenue that you've seen this quarter.
Do you feel like Thats reached a point, where it's become less of a headwind.
I know Mark you mentioned that it provides our consistency in the revenue stream. So is this the type of quarter that you feel that you expect to be able to deliver more consistently going forward.
As it relates to software subscription so one thing Ted so for the quarter, our software subscriptions third party software subscriptions were actually up about 112% year over year.
So we've actually built the software practice that actually works with our customers around enterprise agreements and things like that so I would expect that to continue at least for the near future.
And then over time, we'll evaluate the CFO will level off.
Gotcha.
And so then based on based on our conversations with customers. What's your sense for how the demand environment. Today compares to your expectations going into year has your outlook changed offer products and services.
No it hasn't changed had still feel good about both our pipeline our backlog what we're hearing from our customers the things that they are looking to.
Purchase to protect themselves both from a security moving to the cloud digitizing their business. So.
Demand and what we're seeing from an IP spend still hasn't changed.
Very good.
And then couple more questions here, if I can real quick so I wanted to ask about the large projects. What are you seeing in terms of large project pipeline.
Well, we didn't we didn't see any large projects as it relates to this quarter. So if you're talking about our land and expand.
I Didnt have any big land and expand projects this quarter that affected our numbers if you will.
As we talked about that on previous calls we are always looking for opportunities with some of the bigger enterprise customers that were now based on our size and scale and relationships with other customers were being brought into more and more enterprise like accounts.
So we'll continue to pursue those and leverage our land and expand and then over time try to sell more within that within that customer base.
Definitely and last question here, if I can so I wanted to dig in a little bit on the slate the acquisition how much how much growth did they contribute to services revenue this quarter and how much today provide to your products revenue this quarter.
Thanks.
Overall, the organic growth was about two thirds and slate was about a third Ted for growth for the quarter in adjusted gross billings and adjusted gross billings. Thank you.
All right. Thank you.
All right Ted Hey, we'll see you soon okay.
Yep.
Our next question comes from Matt Sheerin with Stifel.
Yes. Thank you good morning, everyone. Good afternoon, sorry.
So question.
Yes.
Just a question regarding the hardware growth that you're seeing mark.
We're in an environment, where we're hearing from certain Oems seeing enterprise push outs, particularly weakness in storage and servers I know you sell out of those products. In addition to networking products could you talk about.
Where the demand is right now and what priorities on the hardware side you are seeing from customers.
Okay. So on the storage and servers as kind of up and down but I think the demand still up a little bit that we're seeing on our end.
If I look at the uptick Matt security is a big uptick.
I think it was noted earlier our security was up almost 55% I think it was 40 or 54.9% year over year, which is now about 21% of our adjusted gross billings for the trailing 12 months.
We are seeing some networking our netcom spend if you will overall so those would be the areas. We're seeing the upticks along with some of the services that we're providing to our customers. So.
As as Weve noted in prior calls we play we've made a lot of investment in our cloud our security.
Our services practices and we're starting to see the for which some of the fruition of that come through.
Yes, and you talk to.
Previous question about.
The fact that you're not seeing any like very big enterprise deals is that a timing issue are you also seeing.
Large deals can get pushed out for whatever reason customers being more cautious yes, sorry, Matt just some clarity on that one we didnt have any land and expand large projects.
If you remember we had talked about a large project.
Over the last year or two that kind of had a little bit of a hangover for us on a compare we're seeing many enterprise deals both from a hardware as well as from a software perspective, but none where the land and expand portion that we had talked about.
We are seeing some nice growth in our enterprise space, though and I think thats part as we as we build out our solutions that enterprise and mid mid market customers look for.
In the cloud and security and digital space I think hopefully that will continue for us as we go forward.
Hi, I guess my question was whether you're seeing any hesitancy from customers in terms of pulling the trigger on projects because of the macro environment tariffs et cetera.
Yes, no we haven't seen anything Matt in fact tariffs have been affected our business either positively or negatively. So we haven't had any deals pull forward or be pushed out.
So I'd say that the at a macro level it hasn't changed for us with some of the announcements over the last few days I mean, we'll have to see how that kind of plays out over coming weeks, but havent heard anything so far from customers.
In Q1, or so far from our teams as it relates to Q2 as we move through our second quarter here.
Okay, and just going back to the the numbers you gave around security solutions.
And I think 21% and.
Of of Billings and then also.
Services number could you give that services number again and break that down to the various components of the services that you do.
Yes, so Matt as you know, we don't break it down but if you look at our services a couple of different things at the end of March at the end of our Q4, we had talked about our services, we had a CAGR of 24% over the prior three years.
This quarter, what we had talked about was our growth was almost 35% year over year for our services. So we feel really good a lot of things that we've talked about in terms of investing in building out our consultative capability service capabilities building out our managed or annuity services capabilities, our enhanced maintenance services capabilities is actually working as well as building out our staffing capabilities. So in fact, we were we were I'll say pleasantly surprised our staffing numbers were up nicely, which actually affected our services margins a little because it's a little bit lower margins than our professional services and consulting.
Services, but it was a it was a positive year on year in terms of our service revenues and our services GP overall.
Okay fair enough and just trying to figure out what percentage of your services are selling third party services and warranties versus your own.
[laughter] feet on the street feet on the Street, where you actually working with customers directly as opposed to selling third party warranties and services in annuities.
Yes, Hey, Matt what when were talking about our revenues in terms of our services revenues I think we said it was 12%.
Of our net sales for this quarter, that's all our services. So thats not third party maintenance, where you get into the third party maintenance lets say Cisco smart net and stuff like that is when we talk the gross to net.
Which our gross to net was up roughly 470 basis points. So thats. The third party maintenance along with subscription sales that falls in that gross to net bucket.
Does that fall in the software bucket, then what bug if it's not in services, whereas it met Matt Leinart, that's in our products sales of products line on our income statement.
Bottom line on the income statement is solely services that we provide directly to our clients.
Okay fair enough clarifying on that thank you.
No problem, so you map.
Our next question comes from Greg Burns with Sidoti.
Yes.
When we look at the expansion of the gross margin year over year.
What what percentage of that was driven.
By the.
The change in gross to net versus maybe the growth in services.
Yes, the majority of the increase in the gross margin is from the gross to net but also contributing to the increase in gross profit from our services. This obviously smaller component tire of the entire that sales line.
So if the majority of it was the net sales component yes.
Also contributing with our financing segment, though they had a large increase in gross profit as well from a year over year basis.
Okay. Thanks.
When we look at.
Yes, some of the growth areas you've been investing in.
Certainly securities showing nice growth, but you also talk about cloud and digital infrastructure.
Your practices your cloud and digital infrastructure practices.
How do they compare in relation to your security practice, maybe from a maturity perspective, I'm just trying to get a feel for whether there is room for improvement and other areas of growth, where you can invest more in kind of maybe see the type of growth you are seeing insecurity and some other areas of the market.
Yes, So hey, we just breakout right now we're just Greg just breaking out the security, but when you think about cloud, it's effectively a datacenter business, which is what we grew up on as a plus so we are a data center company, providing full year compute your storage or networking and it's just the continued play on that so all the things that are coming out around digitization of networks and software defined and mobility and everything that goes with it fits within our sweet spot. So thats all all things that we've kind of grown up with and we continue to enhance and expand as we move forward.
Okay. So I guess the.
In terms of.
Yes, more growth areas of the market I mean, do you still see proceeds security kind of.
Leading in terms of growth in terms of the services you are selling or are there other areas that you see maybe potentially being comparable to or additive.
In a similar fashion that's securities Vin.
Well the reason, we always break out security Greg is one thing no matter, if you think about it even.
If you put applications out in the cloud and you have some that are on Prem you still need security from a.
Both from a visibility standpoint or from a protection standpoint. So when we say we are building out our cloud security and digital infrastructures. Those three are really tied together in many many different ways in terms of what we sell both from a product integrated product.
As well as the services that we provide.
So its really cloud security and digital infrastructure is where we're seeing where we're focusing our sales and services teams, where we're making investments in training and headcount and where we are building out solutions and services that our customers needs in those spaces.
Okay, and then just lastly in terms of services and what's included in that.
The line item I just wanted to understand is some of the consultative services, they're not necessarily.
Recurring I would say so as it did.
Building off of this first quarter kind of growing from here how to look at it or was there anything in this quarter that was particularly strong where.
Maybe it might might not repeat.
Your next quarter.
No I don't think there's anything in terms of that might not repeat so it's a lot of.
So if I were to step through it the consultative is where were working with the customers helping them for example.
Cloud usage in risk workshops, where we will sit with a customer will actually help them understand where their applications reside.
What's the security that they have to put in place and then help them build a roadmap of what they have to do both internally and externally to protect their data, which is a combination of products and services. So those types of things I would expect to continue not only in the cloud, but also in the security space and digital space as it relates to PS Thats just the function of the products that we sell from an installation and implementation and I would expect that to continue and then as it relates to annuity services, what we've kind of talked about overtime whats great about annuity services for both good and bad is.
If you book a deal of annuity services. You then have that ratable revenue and GP for 36 months or 60 months, depending on how long. The term is so as you build up that backlog in billings that revenue and GP should grow over time the headcount. The piece that we have is you have the little bit of a headwind upfront as you've got to put all the expense in upfront in terms of head count in tools and processes and things along those lines that affect your numbers short term.
Okay. Thank you.
All right, Greg we'll see you soon.
All right bye.
Our next question comes from Britain that block.
Brandenburg capital.
Hi, guys. Thanks for taking my question.
Couple ones for me.
So which is on late how how's that performing relative to your expectations now that we're a few months.
Yes, Hey, so sorry, Brett we didnt hear the beginning but I think the question was around slate and how they are performing so.
What we feel really good about the slate acquisition a good group of people, that's a real cultural fit strong management team.
You know really perform up to expectation so far for us and we're starting to see some real nice synergies.
Across what we bring to the table as the plus even though theyre. There now, we plus and whats fleet brings to the table whether with their help desk services.
Governance risk and compliance type services in the security space staffing and a few other things so right now very very pleased with the slate acquisition.
Okay and speaking of synergies how should we be looking at.
S.J. going forward and I think this is the.
Sixth or seventh quarter, where we saw year over year increase and does your M&A spend is that something we should kind of.
Forecast going forward.
Yes look if I look at it now I would think this quarter is a good run rate for SDMA for us and that that precludes if anything exceptional happens or anything along those lines. The other thing that I just can't predict.
At this point if GP gross profit is up significantly then the the variable comp would be up but I think this quarter is a good run rate to.
If you go off of.
Okay. Thank you and then perspective.
And then just one more on services.
How should we think about that sequentially should that.
See this sequential increases or incremental increases sequentially.
No I don't think so services.
I'd have to look at the numbers. So I don't want to just make it up but I I don't think you'll see sequential growth each quarter now we would expect with annuity over time, we'll start to see consistent growth there.
But we've seen our services kind of go up and down based on the quarter, meaning whether it's the end of year.
We get a bump from an acquisition like sleet or things along those lines that could it could affect that.
And then how much of that 35% securities growth was.
Driven by fleet being included.
How much of the well know that 35, the third that I talked about so two thirds was organic growth and a third was slate for adjusted gross billings.
And then but yes, if you narrow that down to like the actual services segment, how much of that services growth year over year growth was contributable or actually I would say a nice a nice portion in terms of their staffing and a few other businesses that they built up was a nice portion of the services.
Okay. Thank you.
All right all right Hey, we'll see you soon okay, yes, great.
All right take care.
And I'm not showing any further questions I'd like to turn the call back over to our host.
All right. Thank you. Thank you everyone for joining US today, we were pleased with our performance for the quarter and look forward to seeing you are hearing from you at next quarter's call take care have a good day.
Ladies and gentlemen. This concludes today's presentation you may now disconnect and have a wonderful day.