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spk05: Good day, ladies and gentlemen. 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, Mr. Clay Parkhurst, SVP.
spk03: Sir, you may begin.
spk04: Thank you for joining us today. On the call is Mark Maron, CEO and President, Elaine Marion, CFO, Darren Ragwell, COO and President of E-Plus Technology, and Erica Stoker, 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 detailing 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 31st, 2021, and subsequently filed quarterly reports, including our Form 10-Q for the quarter ended December 31st, 2021, 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've included the GAAP financial reconciliation and earnings release which is posted on the investor information section of our website at www.eplus.com. And now I'd like to turn the call over to Mark Merritt. Mark?
spk02: Thank you, Clay, and thank you, everyone, for participating in today's call to discuss our results for the third quarter of fiscal 2022. ePlus delivered strong financial results in our third quarter. Our performance highlights resilient IT spend in the marketplace, and the successful execution of our growth strategy to capture share in our focused end markets, including the mid-market, enterprise, and public sector. Notably, customer demand was broad-based in the third quarter, with growth across all customer size segments and nearly all end markets. Our higher-than-market growth rates, despite continuing supply chain challenges, demonstrate that our strategy to drive consultative, advisory and management services, security, and hybrid cloud solutions is delivering what our customers demand today. We are confident that Eplus remains well positioned for the future with a strong balance sheet, deep engineering expertise, and unique value-added financing alternatives. Our adjusted gross billings increased 16.5% year-over-year to $685 million in the third quarter, and on a year-to-date basis increased by more than 14% to nearly $2 billion. Net sales in the quarter grew by 15.7% year-over-year to $495 million, and year-to-date sales increased 12.6% to $1.37 billion. Given strong top-line growth and the positive operating leverage inherent in our business model, earnings per share again significantly outpaced sales growth. In the third quarter, diluted earnings per share increased 21%. and non-GAAP earnings per share improved nearly 24% from the prior year period. I'd like to highlight a few areas that continue to contribute to our strong gross margins and profitability. Our services revenue was up 20% for both the quarter and year-to-date, reflecting not only increased project-based professional services, but a continuing increase in managed services annuity-type bookings, which creates value-added and sticky customer relationships strengthening the ties we have with our customers, as well as driving more predictable future revenue and gross profit profiles. Along with revenue growth, our services business is generating higher gross margins, achieving 39.4% in the third quarter and 39% year-to-date, which is 120 basis point improvement. As our service revenue scales and increases as a percentage of our total revenue, We expect a continued favorable impact on our consolidated margins, providing incremental and sustainable benefits to our profitability and earnings. Security continues to be a key contributor to our business, accounting for approximately 20% of adjusted gross billings on a trailing 12-month basis. Customers are dealing with new regulations, ransomware concerns and post-incident response, cybersecurity insurance requirements, and staffing shortages. We've built programs to help organizations develop and manage proper implementation of their security programs, which may be as simple as providing a gap analysis along with a deliverable roadmap to more extensive solutions that provide full-time CISO resources with key deliverables associated with each functional area. We continue to see growing customer demand for our consultative and advisory services, which in turn has helped increase our gross margin from services. The continued solid performance of our financing segment underscores its value add as operating income of 8.9 million increased nearly 39% year-over-year in the third quarter. On a year-to-date basis, our financing segment has generated operating income of more than 30 million, which includes an outsized benefit from several large transactions in our second quarter. In today's dynamic IT market, our customers seek to architect solid technology foundations that are both flexible and scalable. As legacy applications and business processes increasingly move to modernize their data centers or move to a hybrid cloud environment, we're able to support our customers' more adaptable business models through our integrated approach that is tailored to meet their specific networking and information security requirements. This past December, for example, we launched a new streamlined, complex, multifaceted network implementations. At the same time, our financing segment provides unique differentiation from a competitive standpoint. As IT initiatives grow in scope and complexity, our financing capabilities offer customers additional flexibility as they might manage tighter capital IT budgets and spending plans. As we enter our fiscal fourth quarter, we are encouraged by continued favorable market fundamentals and are reflected in the strength of our open orders and in our growing services backlog. We continue to focus on making the right investments, including acquisitions, strategic hires, or investments in technology and partnerships, to ensure that our services and solutions support our customers' future technology roadmaps and needs. And while we have a robust balance sheet and proven integration expertise, which gives us the ability to acquire the right targets, we will continue to be disciplined in our approach to acquisitions. As we have discussed on prior calls, supply chain constraints remain an ongoing challenge and are likely to remain a headwind throughout this calendar year. We continue to work in close partnership with our vendors and customers to navigate these issues, which in some cases require us to hold ordered inventory in advance of large customer deployments. This dynamic, coupled with continued strong customer demand, supply chain constraints ease, and customer projects are completed. In summary, I'm very pleased with our financial and operational performance in the third quarter and on a year-to-date basis. We continue to execute at a high level, delivering strong revenue and earnings growth while investing in our capabilities to strengthen our competitive position and deliver innovative and cost-effective solutions for our customers. I will now turn the call over to Elaine Marion, our CFO, to walk through our financial results in more detail. Elaine?
spk00: Good afternoon, everyone, and thank you, Mark. I am happy to share more insight about our strong financial performance in the third quarter of fiscal 2022, where we delivered double-digit top-line and net earnings growth. The strong demand for ePlus's products and services that Mark discussed is evident in our third quarter fiscal year 2022 consolidated net sales growth of 15.7% to $494.8 million. Performance was strong across the board in both our technology and financing segments. Our business strategy and continued focus on our growth area supported the technology segment's net sales increase of 14.8% to $477 million, compared to $415.6 million in last year's third quarter. Product and service revenues increased 14% and 20%, respectively, evidencing market share gains. We're particularly pleased with our continued streak of service revenue growth. This was our sixth consecutive quarter of strong performance driven by a broad demand for our managed and professional service offerings. These same trends supported the adjusted growth billings increase of 16.5%, $685 million compared to $587.8 million in the third quarter of fiscal 2021. The adjusted gross billings to net sales adjustment was 30.4% compared to 29.3% in the last year's third quarter, as we had very strong growth in this quarter for sales of third-party maintenance, staff, and subscriptions. revenue increased 48.4% to $17.9 million, reflecting higher post-contract sales from several early buyouts of assets under lease. Fiscal year 2022 third quarter consolidated gross profit amounted to $117.1 million, up 19.3% from $98.2 million year-on-year. Consolidated gross margin widened 70 basis in the year-ago quarter. Technology segment gross profit was $104.5 million, up 18.3% year-over-year, and gross margin expanded 60 basis points to 21.9%, primarily reflecting expanding margins for products and services. Service margins widened 70 basis points to 39.4% due to increased volume for professional services that yield higher margins. The financing segment's gross profit was $12.6 million, reflecting a 28.5% increase. Increased salaries and variable compensation were the main drivers of the 17.6% increase in SG&A to $76.9 million and the similar growth in operating expenses. Our total headcount at the end of December 2021 was $1,554, flat sequentially, and a 2% decrease compared to $1,586. a year ago in the third quarter, which included 102 employees added from the S&P acquisition on December 31, 2020. Our strong top-line growth and operating leverage led to 23.3% growth in operating income to $36.1 million. Our effective tax rates that have an adjustment to the prior year's tax return related to foreign taxes. For the full year, we expect our tax rate to be between 28 and 29%. For the same reasons I just mentioned, consolidated net earnings of $26.4 million, or $0.98 per diluted share, represented increases of 22.1% and 21%, respectively, from $21.6 million, or $0.81 per diluted share, in the last year's third quarter. Non-GAAP diluted earnings per share increased 23.6% to $1.10, compared to 89 cents in the year-ago quarter. As a reminder, EPS and the diluted share count of $26.9 million reflect the two-for-one stocks list that took effect on December 31, 2021. Also, adjusted EBITDA increased 21.5% to $41.8 million for the quarter. Moving to our consolidated results for the nine months ended December 31, 2021, net sales increased 12.6% to $1.37 billion. Net sales in the technology segment were up 11.7% to $1.31 billion. Year-to-date adjusted gross billings increased 14.2% to $1.98 billion. Consolidated gross profit increased 16.9% to $345.6 million. Consolidated gross margin expanded 90 basis points to 25.2%, and our technology segment gross margin increased 90 basis points to 23.2%, reflecting the effective execution of our growth strategy. This, combined with the operating leverage inherent in our business model, led to an increase in year-to-date net earnings and earnings per share of 38.3% and 37.7% respectively. to $81.4 million, or $3.03 per diluted share. Adjusted EBITDA increased 32% to $130.3 million, and non-GAAP diluted earnings per share increased 36.3% to $3.38 over the nine-month period. As for the end markets, on a trailing 12-month basis, telecom, media, and entertainment continues to be our largest end market, accounting for 29% of net sales. followed by healthcare, SLED, technology, and financial services, which represented 16%, 15%, 15%, and 9% respectively. The remaining 16% is distributed among several other customer types. million in cash and cash equivalents compared to 129.6 million at the end of March 2021. This lower level was due to share repurchases totaling 9.5 million and increased working capital needs to support strong demand for our products and services in the technology segment, particularly as it related to inventory, which more than doubled to 147.7 million when compared to the end of fiscal 2021. This is due to an increase in committed ongoing customer projects, coupled with some impact from the continued supply chain constraints. I want to remind you that we have approximately $188 million in our financing portfolio, and a portion of that could be funded with third parties for additional liquidity to fuel our growth. In addition, we recently expanded our Wells Fargo credit facility to $375 million. Our cash conversion cycle at the end of the third quarter was 47 days, up from 24 days in the year-ago quarter and 35 days in the prior sequential quarter. This sharp increase is mainly due to increase in inventory and an increase in sales to customers with greater than 60-day terms. To sum up, our strong performance year-to-date gives us confidence in our ability to continue to grow our business gain market share, and to deliver value to our shareholders. I would like to extend my thanks to the entire Eplus team for their unwavering perseverance and performance. With that, I will now turn the call back over to Mark. Mark?
spk02: Thank you, Elaine. Before we open the call to questions, I'd like to take a moment to thank our global team for their continued strong execution. Despite the challenges of the rapid to support our customers' key business initiatives while delivering solid operating metrics. We believe we are well positioned and have the flexibility and expertise to meet our customers' ever-evolving needs. I'd like to open the call to questions. Operator?
spk05: At this time, I would like to remind everyone, in order to ask a question, press star followed by the number 1 on your telephone keypad. If you would like to withdraw your question, again, press star 1. Your first question comes from the line of Maggie Nolan with William Blair. Your line is open.
spk01: Hi, thank you. Nice performance. Thanks, Maggie. Mark, I'm hoping you could maybe give us a little bit more detail on the backlog and where it stands. I think you had records. levels last quarter? What does it look like, you know, as you're looking out from here and any kind of color on maybe products versus services within that as well would be helpful.
spk02: Yeah, so Maggie, our open orders continue to grow. In fact, they're up about 106% over last year. Our services backlog is up as well pretty significantly. And our pipeline of opportunities for Q4 and beyond are both visible and strong at this point. So as it relates to, I'll call it backlog, open orders, visibility into the pipeline, we're seeing pretty strong demand across all customer sets right now.
spk01: Okay, thanks, Mark. And then on the services gross margin, Elaine, I think you alluded to maybe that was a little bit of mix within services. But there does seem to be kind of a pattern of a couple quarters here of pretty strong gross margin in services. So is that mixed shift becoming a bit of a trend, or are there any trends in pricing that we should be taking note of?
spk00: Yeah, I mean, this quarter it was really related to an increase in project-related services, and those come with a higher margin. Compared to last year where we had COVID, we couldn't get on site as much, so I think project services wasn't quite as high as it was this year. In terms of trending, our service is just growing as a percentage of our total net sales. And project-based staff augmentation as well as managed services, they are all up across the board.
spk02: I think, Maggie, if I could add to Elaine's piece, what we're seeing in the market is a lot of companies are short on staffing. So what we're seeing is they have need for both staffing resources, on-demand resources to go out and installs routers and switches and things along those lines. We also see with everything going on with Log4j and all the other types of security threats that are out there that they're looking for security services. So we've seen some nice upticks across the board on services. And as Elaine kind of alluded to, if you look at our services, what's nice is it's up 20% for the quarter, but it's up 19.9% for the year. And the gross margins are actually increasing. So that's a nice mix for us right now.
spk01: Thank you for taking my question.
spk03: Thanks, Maggie.
spk05: Your next question comes from the line of Greg Burns with Sid Odeon Company. Your line is open.
spk07: In regards to the rise in working capital, the rise in inventory, what's the timing on the complexion of the projects tied to that? When do you expect them to be delivered and do you At what point do you start to think that the working capital starts to decline going forward?
spk02: Hey, Greg, as it relates to the inventory, I think this is going to go on for a little bit. I think with the supply chain issues that are in place, I think you're going to see them through the end of the year, of this calendar year, based on everything we're seeing and hearing. So I think that's going to continue for a period of time. We're lucky enough, it really didn't affect us in the quarter too much as it relates to some of the supply chain things. similar to previous quarters as it relates to the supply chain. So I think this will continue for the near future and then over time it'll start to wind down as we move forward related to inventory.
spk07: Okay, thanks. And then in terms of labor availability, are you seeing any issues there in terms of being able to hire as well as maybe the cost of labor going up? How do you feel about that going forward?
spk02: Yeah, you know, I think it's a competitive market, to be honest, Greg. We've been lucky, you know, from an attrition standpoint, it's up a little bit compared to previous years. I think it is a competitive market both for new hires as well as people that potentially leave. And with labor costs being up, you know, I do think it's a little more expensive with replacements on, I'll say, either terms or new hires. So it is a little bit challenging at this point.
spk07: Okay. And then I guess with that in mind, how do you feel about continuing to be able to drive operating leverage to the business? I mean, is it going to be more of a, I know historically, you know, you're investing in forward-facing kind of sales and technological headcount. And, you know, more recently we've started to see some leverage in the business. So going forward, you know, how do you feel about balancing that in this current environment?
spk02: Yeah, I think a couple of things there, Greg, that you touched on. One, we are going to continue to invest. We think we're in a pretty good spot with the solutions and services we have. So it's really about getting more feet on the street to touch more customers. So we think we'll continue to invest in headcount. So that'll drive up some of the, I'll call it the S and SG&A, if you will, from an OPEX perspective. But if you look at this year, we've been able to drive our operating income, consolidated income is like 36% year over year. And actually, the operating income margin is up, I think it's like 140 basis points. So I think we have some room within that model still to get operating leverage and continue to grow both top line, manage through some of the, I'll say, salary increases, for lack of calling it anything else, to still have a nice bottom line from an operating perspective.
spk07: Great. Thank you.
spk02: Thanks, Greg. We'll see you.
spk05: Your next question is from the line of Matt Sheeran with Stiefel. Your line is open.
spk06: Yes, thank you. A couple questions for me. Mark, just to start, you talked about the strength and the strong demand in the quarter. Were you able to meet all of that demand, or did you have product constraints that pushed out orders? Were there revenue left on the table, in other words, that you missed?
spk02: Well, we try not to leave revenue on the table, Matt, but there's definitely things. Look, with the supply chain, it's an interesting dynamic. I think demand is obviously outpacing supply. I think there's obviously constraints. Lead times are changing and extending all the time, Matt, but we've been lucky enough. The team has done a really nice job of working with both our vendor partners and our customers on setting expectations. So I think there may be some that leaks over from Q3 into Q4 and then Q4 to Q1, but I don't think it's anything material or it hasn't been material at this point. And I'm not expecting it to be material in Q4 at this point.
spk06: Okay. And are you seeing price increases and just passing that along? Is that inflation contributing to your revenue growth?
spk02: Not yet, but it could. With the price increases, it could potentially as we go forward. We have been able to pass it on at this point, but a lot of the pricing changes have just come into play recently. So there were some things in place honoring old pricing, and some of the new pricing just came into play January 1st, so just starting in this quarter. So haven't seen it where it would affect revenues yet, but as each of the vendors increase their pricing and if we're able to pass it on, you should see some uptick there.
spk06: Okay, and I appreciate that you don't give forward guidance and haven't given outlook for the March quarter, but typically you're down seasonally. Last year you were down double digits sequentially. Is that sort of the expectations of more seasonal demand trends because of the product constraints or anything different than that?
spk02: Yeah, no, I think seasonality still comes into play, Matt. It always does every year for us in, you know, the March quarter versus the December calendar year end. So I think seasonality is in play. I also think on our group side, our financing side, we have a tough compare for Q4 to last year. I think there was some sales of off-lease equipment and a few other things that jumped up that number last year. So we got a little tough compare there. Those would be the two things. But once again, as I mentioned earlier, you know, the pipeline, the backlog, and all the other things that we're seeing are still strong.
spk06: Okay. Thanks for that. And just, Elaine, I have just a modeling question regarding OPEX. You talked about an acquisition contributing to OPEX or SG&A. Could you give us an idea of what we should expect for the March quarter?
spk00: Yeah, I think if you follow what this quarter looks like, it should be running in the same lines, except variable comp will obviously vacillate based on the gross profit in the quarter.
spk06: Okay, so flattish, give or take? Yep. Okay, that's it for me. Thanks a lot.
spk02: All right, Matt. See you. Take care, Matt.
spk05: There are no further questions at this time. I will turn the call back over to Mr. Mark Barron, CEO.
spk02: All right. Thank you, everyone. Thanks for joining us today. We look forward to everybody being safe and sound during some of the storms that are coming through the U.S. and abroad, if you will. And then we'll speak to you at the end of Q4 for both our Q4 and year-end results. Take care.
spk05: Ladies and gentlemen, thank you for your participation. This concludes today's conference call. You may now disconnect.
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