ePlus(US:PLUS)2024-05-22 22:03Part I Business Overview ePlus inc. operates through two main businesses: a technology business providing IT solutions (products, professional, and managed services) and a financing business for IT assets, with the technology segment accounting for 98% of net sales and 84% of operating income in fiscal 2024 - ePlus operates through Technology and Financing segments, with the Technology business driving 98% of net sales and 84% of operating income in FY20241624 Technology Business Revenue by Customer End Market (FY 2024) | End Market | Percentage of Revenue | | :--- | :--- | | Telecom, Media & Entertainment | 25% | | Technology | 17% | | SLED (State, Local Gov & Education) | 15% | | Healthcare | 13% | | Financial Services | 11% | - Sales to Verizon Communications Inc. accounted for 19% of net sales in FY2024, 22% in FY2023, and 24% in FY202222 - Strategic partnerships are maintained with leading technology vendors such as AWS, Cisco, Dell EMC, Microsoft, NVIDIA, and Palo Alto Networks18 Offerings and Solutions ePlus provides a comprehensive suite of IT solutions, including hardware and software products, managed services like proactive monitoring and SOC, professional services such as consulting and project management, and financing options for IT equipment - The Technology business provides products including hardware and software, managed services such as proactive monitoring and SOC, and professional services like consulting and project management373943 - The Financing business specializes in sales-type and operating leases, loans, consumption-based financing, and IT equipment asset management4041 Competitive Strengths and Growth Strategy ePlus's competitive strengths include a diverse customer base, deep technical expertise, and a proven acquisition track record, with its growth strategy focusing on comprehensive IT partnerships, geographic expansion, talent management, and operational efficiency - The company serves a diverse base of 4,600 customers and boasts deep technical expertise with over 850 employees holding 7,000+ certifications4547 - ePlus has a strong history of growth through acquisitions, successfully integrating nearly 30 companies since 19975152 - Consistent financial growth is evidenced by an 8.8% CAGR in net sales and 8.9% CAGR in consolidated gross profit from FY2020 to FY202454 - Key growth strategies involve deepening customer relationships, expanding geographic presence, strategic hiring and acquisitions, and enhancing operational efficiency via technology investments56606162 Human Capital As of March 31, 2024, ePlus employed 1,900 people, primarily in sales/marketing and professional services, emphasizing diversity, corporate social responsibility through programs like GRIT, and employee development via training and an Employee Stock Purchase Plan Employee Headcount by Function | Functional Area | As of March 31, 2024 | As of March 31, 2023 | | :--- | :--- | :--- | | Sales and marketing | 719 | 644 | | Professional services | 816 | 750 | | Administration | 359 | 354 | | Executive management | 6 | 6 | | Total | 1,900 | 1,754 | - The company fosters corporate social responsibility through its GRIT program, which has introduced over 300 middle school girls to technology careers78 - ePlus invests in workforce development through professional development, education support, and an Employee Stock Purchase Plan (ESPP) to attract and retain talent618081 Risk Factors The company faces risks including significant dependence on key customers and vendors (e.g., Cisco, Verizon), intense competition, cybersecurity threats, potential reductions in vendor incentives, supply chain disruptions, and challenges in talent acquisition and retention, alongside broader economic and technological shifts - The technology business is highly dependent on key vendors, with Cisco Systems products accounting for approximately 44% of net sales in FY2024, and 17% of accounts receivable concentrated with Verizon Communications Inc.8596 - The business faces cybersecurity threats, including ransomware and data breaches, with potential for liability, reputational harm, and business disruption if confidential information is not protected or data privacy laws are not met99100103 - The highly competitive IT solutions market poses risks from larger competitors, direct vendor sales, and the shift to cloud and 'as-a-service' models impacting traditional business9092155 - Operational and economic risks include supply chain disruptions, inflation, rising interest rates, challenges in talent acquisition and retention, and potential adverse effects from failed acquisitions or reduced vendor incentives110117131135 Cybersecurity ePlus maintains a comprehensive cybersecurity program led by a dedicated information security team under the CIO, integrated with Enterprise Risk Management, and overseen by the Board of Directors, with no material incidents reported as of the report date - An enterprise-wide cybersecurity strategy is managed by a dedicated information security team, led by the Senior Director of Information Security who reports to the CIO179 - Cybersecurity processes are integrated with the Enterprise Risk Management (ERM) program, incorporating routine testing, third-party penetration testing, and industry framework alignment180181 - The Board of Directors provides ultimate oversight of cybersecurity risk, receiving regular reports on strategy, threats, and program assessments182 - As of the report date, no cybersecurity threats or incidents have materially affected the company's business, operations, or financial condition183 Part II Market for Common Equity and Related Matters ePlus common stock trades on NASDAQ under "PLUS", and the company has not paid cash dividends in fiscal 2024 or 2023, instead retaining earnings for operations and a share repurchase program authorized for up to 1,000,000 shares - The company did not pay cash dividends in FY2024 and FY2023, retaining earnings for operations and share repurchases191 - A share repurchase program authorized on March 22, 2023, allows for the buyback of up to 1,000,000 shares, with 956,028 shares remaining available as of March 31, 2024193194 Management's Discussion and Analysis (MD&A) ePlus reported a 7.6% increase in FY2024 net sales to $2.23 billion, driven by technology business growth, despite a 4.8% decline in operating income to $158.3 million due to rising expenses, and a 3.0% decrease in net earnings to $115.8 million, while generating $248.4 million in operating cash flow Consolidated Financial Highlights (FY 2024 vs. FY 2023) | Metric | FY 2024 | FY 2023 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $2,225.3 M | $2,067.7 M | +7.6% | | Gross Profit | $550.8 M | $517.5 M | +6.4% | | Operating Income | $158.3 M | $166.2 M | -4.8% | | Net Earnings | $115.8 M | $119.4 M | -3.0% | | Diluted EPS | $4.33 | $4.48 | -3.3% | | Adjusted EBITDA | $190.4 M | $190.6 M | -0.1% | - Net sales growth was primarily driven by an 8.0% increase in the technology business, despite a 5.8% decline in the financing business212226241 - Operating expenses increased 11.7% to $392.5 million, mainly due to higher salaries and benefits from an 8.3% increase in headcount to 1,900 employees214 Segment Results of Operations The Technology business's net sales grew 8.0% to $2.18 billion in FY24, driven by strong managed services and product sales, though operating income declined 5.4% to $132.6 million; the Financing business experienced a 5.8% drop in net sales to $49.4 million, leading to a 1.4% decline in operating income to $25.7 million Technology Business Segments Performance (FY 2024 vs. FY 2023) | Metric | FY 2024 | FY 2023 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | | | | | Product | $1,883.8 M | $1,750.8 M | +7.6% | | Professional Services | $154.5 M | $151.8 M | +1.8% | | Managed Services | $137.5 M | $112.7 M | +22.1% | | Total Net Sales | $2,175.9 M | $2,015.2 M | +8.0% | | Total Gross Profit | $508.5 M | $474.5 M | +7.2% | | Operating Income | $132.6 M | $140.1 M | -5.4% | - Technology business growth was driven by financial services (+55.9%) and SLED (+13.4%) end markets, with networking sales increasing 25.1%226 Financing Business Segment Performance (FY 2024 vs. FY 2023) | Metric | FY 2024 | FY 2023 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $49.4 M | $52.5 M | -5.8% | | Gross Profit | $42.3 M | $43.0 M | -1.7% | | Operating Income | $25.7 M | $26.1 M | -1.4% | - The financing segment's sales decline was primarily due to a 39.4% decrease in post-contract earnings, including proceeds from off-lease equipment sales and month-to-month rents241 Liquidity and Capital Resources The company's liquidity significantly improved in FY2024, with net cash provided by operating activities reaching $248.4 million, driven by better working capital management and a reduced cash conversion cycle, while investing activities included $62.0 million for acquisitions and financing activities used $36.6 million Cash Flow Summary (in millions) | Cash Flow Activity | FY 2024 | FY 2023 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $248.4 | $(15.4) | | Net cash used in investing activities | $(62.0) | $(18.9) | | Net cash used in financing activities | $(36.6) | $(21.0) | - The technology business's cash conversion cycle improved from 59 to 46 days, driven by decreases in Days Sales Outstanding (DSO) and Days Inventory Outstanding (DIO)260264 - The company uses a $500 million credit facility with Wells Fargo for technology business operations, with an outstanding floor plan balance of $105.1 million as of March 31, 2024273278 - Investing activities included $54.2 million for business acquisitions, specifically NSG and Peak266 Critical Accounting Estimates Management identifies critical accounting estimates requiring significant judgment, including revenue recognition (gross vs. net), residual values for leased assets, goodwill impairment testing, vendor consideration, allowance for credit losses, and accounting for income taxes and business combinations - Revenue recognition requires significant judgment in identifying performance obligations and determining gross versus net recognition, particularly for third-party software and services sales289292 - Goodwill is tested for impairment annually or upon triggering events, involving fair value estimation of reporting units using discounted cash flow and market approaches with significant assumptions299301302 - The allowance for credit losses is estimated based on internal credit ratings, historical data, and current economic conditions for accounts and financing receivables306 - Business combinations require significant estimation of fair values for acquired assets and liabilities, such as customer relationships, often with valuation specialist assistance311 Financial Statements and Supplementary Data Deloitte & Touche LLP issued an unqualified opinion on the consolidated financial statements for FY2024, highlighting two critical audit matters: revenue recognition (gross vs. net) and transfers of financial assets (sale vs. secured borrowing assessment) - Deloitte & Touche LLP, the independent auditor, issued an unqualified opinion on both the consolidated financial statements and the effectiveness of internal control over financial reporting351352 - Two Critical Audit Matters (CAMs) were identified: Revenue Recognition (Gross vs. Net) due to subjectivity in determining combined performance obligations for third-party software and support, and Transfers of Financial Assets due to subjectivity in assessing legal isolation for sale versus secured borrowing accounting356359 Controls and Procedures As of March 31, 2024, the CEO and CFO concluded that the company's disclosure controls and procedures were effective, and management's assessment, affirmed by the independent auditor, found internal control over financial reporting to be effective, with no material changes reported during the fourth quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of March 31, 2024319 - Management assessed and confirmed the effectiveness of internal control over financial reporting as of March 31, 2024, based on the COSO framework, a conclusion affirmed by an unqualified auditor opinion324325 - No material changes to internal control over financial reporting occurred during the quarter ended March 31, 2024325 Part IV Exhibits and Financial Statement Schedules This section provides a comprehensive list of all exhibits filed with the Form 10-K, including corporate governance documents, material contracts, employment agreements, incentive plans, credit agreements, and certifications by key officers - This section provides a comprehensive list of all exhibits filed as part of the annual report, as required by the SEC339 - Key exhibits include executive officer employment agreements, long-term incentive and stock purchase plan details, and the First Amended and Restated Credit Agreement with Wells Fargo341342