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spk02: Today, 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. Sir, you may begin.
spk01: Thank you for joining us today. On the call is Mark Maron, CEO and President, Darren Reguil, COO and President of E-Plus Technology, Elaine Marion, CFO, 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. Detailed on 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 through the file with the SEC. Any forward-looking statement speaks only as of the date of which the statement is made, and the company undertakes no responsibility to update any of these forward-looking statements in light of new information, future events, or otherwise. In addition, we'll be using certain non-GAAP measures during the call. We've included a GAAP financial reconciliation and earnings release, which is posted on the investor information section of our website at www.epos.com. And I'd like to turn the call over to Mark Merritt. Mark?
spk05: Thank you, Clay, and thank you, everyone, for participating in today's call to discuss our results for the third quarter of fiscal 2023. This was a strong financial and operational quarter for E+. We continue to successfully execute on our growth strategy to deliver IT solutions focused on digital transformation, hybrid workforce plans, security, and cloud. With broad-based growth across all customer size segments and vertical markets, we believe we are gaining market share aided by the breadth of our solutions across the technology stack. The strength of our third quarter results also reflected fulfillment of several enterprise customers' large projects due in part to some relief in the supply chain. The investments we have made in our teams and in our capabilities are driving growth and delivering value to our customers. Consolidated net sales increased 26%, and our adjusted gross billings increased 29.7%, with particularly strong growth in our technology segment. We are continuing to generate operating leverage driven by strong top-line growth and balanced SG&A management, which has supported our expanded solution offerings. Our net earnings increased 35.1% to $35.7 million, and diluted EPS increased 36.7%, both above our revenue growth rate as our focus on operational efficiency continues. As our customers continue to invest in upgrading their IT systems to accommodate remote and hybrid work, Eplus is well positioned to provide integrated and flexible workplace transformational systems. Our offerings include multi-vendor architecture support, vendor lifecycle management, and on-premises data center infrastructure provided in an as-a-service model such as our storage as-a-service solution. With our customers transitioning more of these processes and workloads to the cloud, they increasingly look to ePlus to develop more strategic security roadmaps and build more sophisticated and more comprehensive security solutions to protect these new virtual workplace environments. As a result, our security business has grown to more than 22% of our adjusted gross billings over the trailing 12 months as compared to almost 20% last year. Our services revenues comprised of professional and managed services increased 7.9% in the quarter and more than 9% fiscal year to date. While we don't expect services growth rates to be aligned with top line revenue, As a significant portion are from recurring managed services recognized ratably over the term of the contract, our expanded service capabilities are fundamental to providing comprehensive solutions for our customers. Service margins, while down year over year, have stabilized sequentially. We continue to see some pressure in services margins due to project delays and services mix, supply chain constraints, and some larger land and expand deals at lower margins. Managed services are a key driver of financial growth and a differentiated value-added solution for customers. These offerings generate higher margin annuity quality revenue and create sticky long-term relationships with customers who value the reduced IT complexity and cost savings that we deliver. Our managed services business also serves to broaden our available market opportunity as we leverage our capabilities to provide specialized IT expertise in adjacent areas such as cloud and security advisory services. Moving on to our financing segment, third quarter sales were 11.7 million compared to 17.9 million in the same period last year, primarily due to lower proceeds from sales of leased equipment. As we have frequently noted, our financing segment produces variable results quarter to quarter due to the timing of large transactions. That said, its unique offerings remain an important competitive differentiator, providing our customers with flexibility in how they acquire and optimize their IT investments. As we look ahead to 2023, global IT spending is expected to grow at a low single-digit rate this calendar year, according to Gartner, reflecting an uncertain economic outlook. Despite the potential for an economic slowdown this year, we believe that spending in our areas of focus, including security, cloud and networking, remains a necessity for many organizations as they support a hybrid workforce and execute on their digital transformation plans. At the same time, the tight labor market for tech workers continues to drive corporate spending on outsourced IT services. Our ability to hire and retain skilled professionals in this tight labor market is a competitive differentiator and a valued service to our customers. We continue to monitor the market and will make adjustments as necessary to optimize solutions delivery and staffing levels. In closing, I'm very pleased with our financial results and the progress we have made in broadening our capabilities and strengthening our position to capture future growth opportunities. As a reminder, our fiscal third quarter is seasonally strong as it marks the end of the budget year for many of our customers. Backed by the strength of our balance sheet, we continue to have the financial flexibility to pursue attractive acquisition opportunities that expand our geographic footprint and are aligned with our growth strategy. I will now turn the call over to Elaine Marion to provide details on our third quarter financial results.
spk07: Elaine?
spk08: Thank you, Mark, and good afternoon, everyone. Our third quarter fiscal 2023 results reflected solid execution by the Eplus team and the continued success of our strategy focused on capturing opportunities in high growth and markets. Third quarter consolidated net sales increased 26% year-over-year to 623.5 million. Technology segment net sales rose 28.3% to 611.8 million. driven by 31% growth in product revenue and 7.9% growth in services revenue. Adjusted gross billings were $888.6 million, up 29.7% compared to $685 million in the year-ago quarter. The adjusted gross billings net sales adjustment increased to 31.2% compared to 30.4% in the third quarter of fiscal 2022. Our end market mix on a trailing 12-month basis remained consistent with previous periods. Our two largest markets, telecom, media, and entertainment, and technology, represented 28 and 18 percent of technology segment net sales, respectively. Healthcare, SLED, and financial services accounted for 14, 13, and 9 percent, respectively, with the remaining 18 percent from other end markets. As Mark mentioned, due to a decline in proceeds from leased equipment sales year to year, our financing segment revenue totaled $11.7 million compared to $17.9 million in last year's third quarter. Consolidated gross profit increased 18.1% to $138.4 million, and gross margin was 22.2% compared to 23.7% in the previous year's quarter. Within our technology segment, gross profit increased by 22.4% to $127.9 million. Technology segment gross margin was 20.9% compared to 21.9% in the year-ago quarter. The decrease in gross margin was due to increased costs for managed services as well as several large competitively priced project-related contracts that blended down our services margin. Product gross margin of 19.2% was stable compared to 19.3% in the last year's third quarter. Financing segment gross profit declined 16.7% to $10.5 million, mainly due to decreased sales of leased equipment, partially offset by higher transactional gains. Third quarter SG&A increased 12.8% year-over-year as we continue to strategically invest in our team to better serve our customers' growing IT needs. At quarter end, our headcount totaled 1,745 compared to 1,554 in the prior year quarter. The year-over-year change includes 158 customer-facing employees, 101 of whom are professional services and technical support staff members. Increased third quarter SG&A spend also reflected higher variable compensation tied to our improved gross profit performance, as well as higher travel expenses from more frequent in-person client meetings. Interest expense was up year over year due to higher interest rates and increased borrowing on our credit facility. Overall, operating expense growth was well below our consolidated net sales growth resulting in an operating income increase of 28.7% to $46.5 million. The effective tax rate was 27.7% in the third quarter of fiscal 2023, compared to 26.4% in the year-ago quarter. Consolidated net earnings in the third quarter of fiscal 2023, inclusive of other income, which includes foreign currency transaction gains and proceeds from a class action claim, were 35.7 million or $1.34 per diluted share compared to 26.4 million or 98 cents per diluted share in the year-ago quarter. Non-GAAP diluted earnings per share were $1.38 compared to $1.10 in the third quarter of fiscal 2022. Our diluted share count at the end of the quarter totaled 26.6 million compared to 26.9 million in the third quarter of fiscal 2022. Adjusted EBITDA was 53.3 million, 27.6% ahead of the comparable quarter in fiscal 2022. Summarizing our year-to-date performance, net sales in the first nine months of fiscal 2023 increased by 15% to 1.576 billion, mainly attributable to technology segment net sales growth of 16.6% to 1.532 billion. Adjusted gross billings were up 18.9%, again, reaching another milestone of $2.36 billion. Year-to-date consolidated gross profit amounted to $385.2 million, 11.4% ahead of the year-ago period. The consolidated gross margin was 24.4% compared to 25.2% a year ago. with technology segment gross margin of 22.8% compared to 23.2% reported for the first nine months of fiscal 2022. Net earnings increased by 6.3% to 86.5 million, or $3.24 per diluted share. Adjusted EBITDA was up 9% to 141.9 million, and non-GAAP diluted earnings per share increased 8.3% year-over-year to $3.66 per diluted share. Our balance sheet remains strong with cash and cash equivalents of $99.4 million at December 31, 2022, compared to $155.4 million at the end of fiscal 2022. The decrease in cash and cash equivalents reflected the effect of share repurchases on a year-to-date basis, as well as increased working capital needs due to strong demand for our products and services. While inventory increased 57.9% to $244.8 million from fiscal 2022 year end, we reduced inventory by $30 million sequentially compared to the fiscal second quarter. Shifts in our inventory levels primarily explain the changes in our cash conversion cycle, which increased to 51 days in the third quarter of fiscal 2023 compared to 48 days in the quarter ended March 31, 2022, while improving sequentially by three days. On balance, we are pleased with our third quarter financial results and believe we are well positioned in the market in spite of current economic uncertainty. With that, I will now turn the call back to Mark. Mark?
spk05: To recap, this was a strong quarter for Eplus with broad-based demand across all of our customer size segments and vertical end markets. By targeting faster-growing end markets with a comprehensive suite of integrated solutions, we continue to bolster our competitive position and capture incremental market share. Supported by our strong balance sheet, extensive industry partnerships, and talented team, Eplus remains well positioned for continued long-term growth, and we remain cautiously optimistic despite the uncertain economic environment. Operator, I'd now like to open the call for questions.
spk02: At this time, if you'd like to ask a question, simply press star, then the number one on your telephone keypad. Our first question will come from the line of Maggie Nolan with William Blair. Please go ahead.
spk09: Hi, thank you. You mentioned the fulfillment for projects for several large enterprise customers in the quarter. Can you give us a little more detail on what types of projects or solutions these were and an idea of maybe the magnitude of that or how we might expect that to impact financial results sequentially?
spk05: Sure. Hey, Maggie, how are you? So a couple different things there, if I could. I'll touch on why the quarter was up so nicely overall and then try to work in the deals. So first off, we had a really strong tech quarter, both from top line to bottom line. All our customer size segments and verticals were up nicely. Security continues to grow. Some of the focus we put on the mid and enterprise counts grew nicely for us in this quarter. And that's where we're talking about land and expand. We had a few really nice deals in the security, in the data center cloud, and in the services space with nice-sized deals with decent margins. Now, with that said, some of the things that also added to this quarter that were positives, we saw some easing of the supply chain. So we did see some movement in the supply chain, and I think – You may have noticed our open orders are down 5% sequentially, and that's by design trying to bring that in line. It's still above historical levels. Our inventory was down 30 million sequentially by design trying to get product out the door. The land and expand deals, as you talked about, and then just some year-end budget. But some of the land and expand are with some of your big mid to enterprise customers across, as I said, data center cloud security and service opportunities.
spk09: That's great. And any thoughts about how we should consider the impact of that sequentially or on a year-over-year basis for next year?
spk05: Okay, yeah. Hey, in terms of Q4, if I had to look at it, Q4 is traditionally one of our smaller quarters. Q2, Q3 are our bigger quarters. We still have a lot of the supply chain, and it's fluctuating by vendor and by solution area, Maggie, so it's literally moving in and out as we go forward. If I looked at Q4, sequentially, you know, would be down. Finance is going to be a really tough compare for us. We had some early buyouts last year, so I think finance will be a tough compare. And then the, you know, if I look at the supply chain, I don't know if we'll get as much relief as we did with some of the focus we put on this quarter.
spk09: Just to follow up on that last comment with respect to supply chain constraints, How might that affect the results when you're considering performance for the next fiscal year, fiscal 2024?
spk05: You know, that's a tough variable, as you know, Maggie, that I think everybody's kind of struggling with. These times are moving, the lead times are moving in and out by vendor. There are some that are starting to loosen up. We saw networking actually loosen up. So we actually had a nice quarter with, in the networking section of our business. I do expect that this will continue for a couple quarters. One of the things that's, I guess, a benefit for us as it relates to supply chain, we're not really in the laptop PC business, so some of the decline that some of the folks are seeing in that space, we're not going to be affected by. But for the fiscal year, I think we'll still have the supply chain issues that we've been dealing with over the last year or so.
spk07: Okay. Thanks, Mark. Thanks, Maggie. We'll see you soon.
spk02: Your next question will come from the line of Matt Sheeran with Stiebel. Please go ahead.
spk03: Yes, thank you. Good afternoon, everyone. Just a follow-up question regarding the strength that you had in the quarter, you know, a lot higher than consensus. And I think higher than, although you didn't give guidance, certainly higher than you had indicated on the last call. Sounds like demand was good. Sounds like supply opened up. But was there some pull-in where orders that you, because of a loosening supply in your own inventory, were you able to fulfill backlog faster than expected and, in other words, pulled some sales into this quarter or the December quarter?
spk05: Yeah, Matt, I think there's probably a little pull-through. I wouldn't say significant, though. So if you look at it, as I touched on the back, you know, the open orders are down 5% sequentially. So there's some there. The inventory is down by 30 million. We put a very focused effort on getting equipment out the door as soon as we get it. So there's definitely some potential pull through, not dramatic though, to be honest. So I think we benefited that in the quarter due to some supply chain things that we saw came in a little quicker than we thought. And also some of the land and expand deals also, you know, help with some of the growth that you saw. I don't know if I called it out on my piece, but, you know, our tech neck sales were up almost 28, you know, in change percent. So we saw a really nice quarter in tech across all verticals and customer sizes. And we like to think that's by design.
spk03: And these land and expand deals, so we're talking about, what, multimillion-dollar orders that you were able to fill perhaps at a discount or at least fulfill the orders more efficiently than competitors, and then you were giving up some price there because your gross margin was down pretty significantly quarter on quarter.
spk05: Yeah. So, Matt, I can't comment on the competitors, you know, since I'm not watching their business. But I tell you, yes, these are large multimillion-dollar deals. As we've always said, we're really focused on the mid to enterprise. We don't play in the small to medium, in the small size segment of customer base, if you will. So these are larger deals that require a lot of work up front, advisory services that then lead to these multimillion dollar deals that traditionally the margins are a little tighter because it's competitive up front. So the margins are a little bit down. The other thing that contributed to our gross margins being down, our service margins were down a little bit. So those are the two pieces that affected the gross margins.
spk03: Okay. And you said that the open orders were down sequentially. Was your backlog down? And how does that compare your backlog to sort of normal levels? I know it's been well above normal levels.
spk05: Yeah, backlog was actually up, Matt.
spk03: Your backlog is up, okay. What are the product constraint areas that you're still seeing? Because we're hearing from some distributors and suppliers that networking demands, I mean, orders and supply seems to be improving, but you're not seeing that across the board?
spk05: Yeah, we're not seeing it across the board. The networking has got the longest lead times, and it's improving some, but that's probably the biggest piece from a I'll say supply chain and lead time standpoint, Matt.
spk03: Okay. Okay. Thank you.
spk07: All right, Matt. Talk to you soon.
spk02: Again, for any questions, please press star one. Your next question will come from the line of Greg Burns with Sedodian Company. Please go ahead.
spk06: Good afternoon. So just to start off with some of the strength you saw in the quarter. So I guess the – The upside, I guess, relative to consensus or maybe your internal expectations, was mainly driven by demand. It was more weighted towards just market demand as opposed to dipping into your open orders.
spk05: Well, no, Greg, I'd actually say it's a combination of the two. So when I looked at the quarter, once again, if you – I'll just go by customer size segments and the mid to enterprise. We actually grew very nicely, and that's by design with some of our account planning and some of the things that we're trying to do there. I think I mentioned it to Matt or Maggie as well as our tech segment had a very strong quarter where the net sales for tech were actually up 28.3% overall. So I think it was by design on some of that, but there was also some supply chain easing you know, with, you know, the open orders going down 5%. And in terms of the inventory going down 30 million. So there was a real focus internally to try to get the product out as soon as we got it in, get it out the door. So it was a little bit of supply chain easing plus a nice quarter by the team.
spk06: Okay. Is it like one for one, the 30 million decline of inventory that, that turns into revenue or how should we think about kind of the magnitude of what's left on the balance sheet in terms of open orders, in terms of revenue potential.
spk05: Yeah, yeah. Yeah, on the inventory, it'd be a one-to-one on the inventory, but on the overall sales, that's a small percentage, as you can imagine, Greg, with our numbers. So, yeah, it's a one-to-one on the inventory for sure.
spk06: Okay. And then the OPEX level this quarter, is that a good way to model going forward, or is there any other – puts and takes, why it might increase or decrease from here?
spk05: Yeah, I think there's a couple things there. I think the overall level is good on the OPEX. I think there'll obviously be some movement based on a, you know, smaller quarter in terms of revenue and GP, you know, based on Q3 being our largest quarter to date so far. So that'll be the variable from an OPEX. It'll be in that range overall, you know, less that difference, if you will, Greg. but realize we are watching it pretty closely. So we're watching the market and with all the economic uncertainties, if you think about all the different tech layoffs, we're watching very closely and we're going to adjust accordingly. Actually, I look at the tech layoffs as potentially an opportunity for us. Sounds a little bit crazy with everything going on, but I think with the solutions and skill sets we have, we might be able to pick up some of that some of those opportunities. Uh, but when you look at Gartner, you know, projecting 2.4% IT spend and stuff like that, we're, we're watching it and managing it very closely in terms of the OPEX. It actually, overall, our OPEX has a percentage of, uh, uh, GP and AGB actually went in the right direction this quarter for sure, Greg.
spk06: Okay. And then to, to your point about those tech layoffs, we are seeing some more cautious commentary, um, in the industry. Are you seeing anything in terms of maybe customer decision cycles, sales cycles extending, or anything that you see that would maybe give you some more caution going forward?
spk05: Yeah, there's definitely some caution and pause, Greg. I mean, as you know, there's always challenges and opportunities in this kind of market. But I do see some budget tightening. Some of the sales cycles getting a little bit longer, especially with some of the bigger customers. So there's definitely some of that going on as the economic uncertainties kind of stay out there. So, yeah, the sales cycle is longer for sure.
spk06: Okay. And then lastly, you launched a new service, storage as a service, a pure storage. Can you just talk about, you know, how that works? You know, are you just reselling it? Are you actually providing the service? And when you launch something like that, is it, market driven? Is it something that your customers have been asking you to do or is it just something that new that you see as an opportunity?
spk04: What I'll say is we've been selling Pure as a service, which is their offering for years now. What we saw for our customers is they were looking for a more customized approach that we know their environment, we know the other components of their data center and their cloud play. So this E-plus storage as a service is powered by Cure currently, and we're looking at other storage vendors as potential, where we're providing additional services, taking calls, engaging our managed services centers to provide additional value-add, helping the customers with sizing, future investments, and consumption over time, as opposed to having to buy it all up front. So it's a It's a really nice play where we saw customers demanding it, and the team is really excited about the customers that are reaching out now with that recent announcement.
spk07: So more to come. Okay, great. Sounds good. Thanks. All right. Thanks, Greg.
spk02: We have no further questions at this time. I'll turn the conference back over to management for any concluding remarks.
spk05: All right. Thanks, Regina. And thanks, everybody, for joining us for our Q3 2023 presentation. conference call. We look forward to speaking with you in Q4. Thanks and have a good day.
spk02: Ladies and gentlemen, that does conclude today's meeting. Thank you all for joining.
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