ePlus Inc. (NASDAQ:PLUS) Q4 2020 Earnings Conference Call May 21, 2020 4:30 PM ET Company Participants Kley Parkhurst - SVP Mark Marron - President and CEO Elaine Marion - CFO Conference Call Participants Maggie Nolan - William Blair Matt Sheerin - Stifel Greg Burns - Sidoti & Company Operator Ladies and gentlemen, thank you for standing by and welcome to the ePlus, Inc. Q4 Fiscal Year 2020 Earnings Results Conference Call [Operator Instructions]. I would now like to hand the conference over to your speaker ...

Financial Data and Key Metrics Changes - Net sales increased by 24.1% to $429 million compared to the prior fiscal year's third quarter, driven by strong performance and market share growth from both segments [14] - Gross profit grew by 25.1% to $103.7 million, with a consolidated gross margin expanding by 20 basis points to 24.2% year-over-year [19] - Operating income increased by 31.2% to $26.3 million, while net income and diluted earnings per share rose by 31.5% and 32.7% respectively [22] Business Line Data and Key Metrics Changes - Technology segment net sales increased by 22.7% year-over-year to $410.6 million, with product sales up by 20.3% and service revenue up by 43.2% [15] - Financing segment revenue rose by 67.7% year-over-year to $18.4 million, primarily due to higher transactional gains from large government-related business [16] - Adjusted gross billings in the technology segment increased by 22.5% to $586.3 million, driven by strong demand from larger customers and contributions from acquisitions [18] Market Data and Key Metrics Changes - The largest customer vertical remains technology, accounting for 22%, followed by SLED and telecom, media and entertainment at 17% each [17] - Security products and services grew by 15% year-on-year on a trailing 12-month basis, representing roughly one-fifth of adjusted gross billings [9] Company Strategy and Development Direction - The company is focusing on investing in higher growth areas such as cloud, security, and digital infrastructure, while also executing strategic acquisitions to expand its customer base [5] - A balanced approach of organic and acquisition growth is enabling the company to gain market share and build a base of annuity quality revenue [5] - The company aims to capture demand from mid-market and enterprise customers for complex solutions that optimize and protect their IT initiatives [28] Management's Comments on Operating Environment and Future Outlook - Management has not seen any slowdown in overall demand and maintains a positive forecast for the upcoming quarter [40] - The company is tracking supply chain logistics closely due to potential impacts from the coronavirus, but currently reports little to no exposure [40] - Management remains optimistic about the growth of annuity revenue and expects margins to improve as the business evolves [38] Other Important Information - The company ended the quarter with cash and cash equivalents of $59.6 million, a decrease from $79.8 million at the end of the previous fiscal year [25] - Consolidated headcount increased to 1,602, reflecting the addition of employees from recent acquisitions [21] Q&A Session Summary Question: Nature of land and expand engagements - Management indicated that land and expand initiatives involve both new and existing customers, with initial lower margins expected to improve over time [31][33] Question: Changes in annuity revenue as a mix of total revenue - Annuity revenue continues to grow, with management noting that staffing revenues have increased, which may have lower margins initially but serve as a gateway to sell additional services [38] Question: Updated thoughts on the macro environment - Management has not observed any slowdown in demand and is monitoring supply chain impacts from the coronavirus, reporting no significant exposure at this time [40] Question: Operating margin profile and future expectations - Management acknowledged that operating expenses are increasing due to acquisitions and investments, but expects to achieve operating leverage over time [48] Question: Positioning for software and security spending shifts - Management believes the company is well-positioned to benefit from shifts in spending towards software and security, with significant growth reported in these areas [50] Question: Visibility into large financing transactions - Management noted that the financing business is inherently lumpy and difficult to forecast, but recent quarters have shown solid performance [59] Question: Dynamics of revenue and adjusted gross billings growth - Management explained that the closer alignment between revenue and adjusted gross billings is due to a reduction in the delta between gross and net sales [64]

Financial Data and Key Metrics Changes - Net sales for Q2 2020 were $411.6 million, a 19.3% increase from the prior year [10] - Consolidated gross profit increased by 20.5% to $103 million, with a gross margin of 25%, up 20 basis points year-over-year [13] - Operating income rose by 15.5% to $28.4 million, with GAAP EPS and non-GAAP EPS increasing by 13.5% and 18.3%, respectively [8][14] Business Line Data and Key Metrics Changes - Technology segment net sales increased by 18.8% to $397.7 million, driven by a 35.1% increase in service revenue [10] - Services business grew by 35% for the second consecutive quarter, contributing significantly to overall growth [6] - Financing segment revenue increased by 34.8% year-over-year to $13.8 million, mainly due to gains from large transactions [10] Market Data and Key Metrics Changes - Technology and SLED markets accounted for 22% and 17% of customer end markets, respectively, with Telecom, Media & Entertainment at 16% [11] - Adjusted gross billings in the technology segment increased by 19.2% to $579.1 million, reflecting strong demand from larger customers [11] Company Strategy and Development Direction - The company focuses on higher growth IT solutions, including cloud, security, and digital infrastructure [4] - ePlus aims to provide end-to-end solutions and flexible consumption models, enhancing customer engagement and revenue predictability [5] - The acquisition of ABS Technology is part of a broader strategy to expand market share in the state, local, and education verticals [8] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in continued growth due to strong demand for differentiated solutions across various customer segments [18] - The company anticipates ongoing investments in talent and technology to meet customer needs and drive long-term growth [18] - Management noted that the current operating environment remains positive, with no significant delays in deal closures reported [43] Other Important Information - ePlus was recognized as Cisco's global transformation and innovation partner of the year, highlighting its commitment to innovation [9] - The company ended the quarter with cash and cash equivalents of $55.8 million, down from $79.8 million at the end of the previous fiscal year [16] Q&A Session Summary Question: Can you provide more granularity on the strengths in the quarter? - Management noted strong performance across various areas, with services up 35% and growth in enterprise customers [21] Question: Was the positive environment broad-based? - Yes, growth was observed across multiple verticals, including telecom, finance, healthcare, and SLED [22] Question: How much of the revenue growth was inorganic? - Approximately 75% of adjusted gross billings growth was organic [26] Question: What is the outlook for operating expenses? - Current operating expenses are seen as a good run rate, with expectations for continued investment in growth [32] Question: Are there any regions where ePlus lacks a footprint? - Potential expansion opportunities exist in the Great Lakes area and the Southeast [37] Question: What is the expected contribution from ABS Technology? - ABS Technology is viewed as a good acquisition, expected to enhance capabilities over time [41] Question: Is there any impact from deal timing issues? - No significant deal push-outs have been observed, with a solid quarter reported [43] Question: What is the reason for the increase in the effective tax rate? - The increase is attributed to benefits received in the prior year and some permanent differences [47]

Financial Data and Key Metrics Changes - Adjusted gross billings increased by 13.7% year-over-year, while gross profit grew by 14.8% [7][20] - Consolidated gross margin expanded by 170 basis points to 24.3%, supported by both technology and financing segments [7][23] - Net sales reached $381.4 million, up 7% from the prior year, with net sales in the technology segment increasing by 6.2% [20][25] - Consolidated net earnings amounted to $16.2 million or $1.20 per diluted share, reflecting a 6% increase [25][26] Business Line Data and Key Metrics Changes - Technology segment net sales increased by 6.2%, driven by higher product sales and a 35.8% increase in services sales [20] - Adjusted gross billings in the technology segment amounted to $548.4 million, a 13.7% increase compared to the previous year [22] - Services revenue was up 35.8% year-over-year, indicating strong demand for professional, managed, and staffing services [14] Market Data and Key Metrics Changes - Technology and SLED markets accounted for 21% and 17% of technology segment net sales, respectively [21] - Security products and services grew by 54.9% year-over-year, now representing over 21% of total adjusted gross billings [10][11] Company Strategy and Development Direction - The company focuses on high-growth areas such as security, cloud, and digital infrastructure, aiming to provide end-to-end solutions [10][18] - The company is committed to building scalable, leverageable business lines like managed services to improve operating leverage [16] - Strategic acquisitions are being evaluated to enhance product and service offerings [18][29] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the demand environment, noting strong customer interest in security and cloud solutions [35][45] - The company anticipates continued growth in recurring revenues and a strong services backlog [30] - Management indicated that tariffs have not affected business operations, maintaining a stable outlook [45] Other Important Information - The company ended the quarter with cash and cash equivalents of $35.6 million, with inventory levels increasing by 15.3% [27] - The effective tax rate increased to 28.7% compared to 25.7% in the previous year [26] Q&A Session Summary Question: Subscription and annuity revenue consistency - Management noted that software subscriptions were up about 112% year-over-year, indicating a positive trend [33] Question: Demand environment compared to expectations - Management confirmed that the demand environment remains strong and consistent with expectations [35] Question: Large project pipeline - No large projects were reported this quarter, but management continues to pursue opportunities with enterprise customers [36] Question: SLAIT acquisition contribution - Organic growth accounted for about two-thirds, while SLAIT contributed one-third to the growth for the quarter [37] Question: Hardware demand and priorities - Demand for security products remains strong, with a noted increase in networking and services [41] Question: SG&A spending forecast - Management indicated that the current quarter's SG&A is a good run rate moving forward [64] Question: Services growth expectations - Services growth may not be sequentially consistent, but annuity services are expected to grow over time [65]

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