PLUS
#Thank you, [Tyria], and thank you, everyone, for joining us today.
With me today are <UNK> <UNK>, Chairman, President and CEO of ePlus, <UNK> <UNK>, our Chief Operating Officer and President of ePlus Technology, <UNK> <UNK>, 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 and uncertainties detailed 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 31, 2015, and our 10-Q for the quarter ended September 30, 2015, when filed.
The Company undertakes no new 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 posted the GAAP financial reconciliation on our website at www.eplus.com.
I'd now like to turn the call over to <UNK> <UNK>.
<UNK>.
Thank you, <UNK>.
As a result, for the second quarter and first half of fiscal 2016 demonstrate the success of our go-to-market strategy.
We are growing our customers count and expanding geographically, tapping into strong customer demand for our services-led advanced IT solutions.
We are steadily taking market share and are well positioned for continued success.
Results for the first half of fiscal 2016 included net sales growth of 6.4% and gross margin on products and services of 19.7%, which is a 70 basis point expansion from the first half of fiscal 2015.
Revenue growth translated well into the bottom line, with earnings per diluted share increasing 21.8% as compared to non-GAAP diluted earnings per share in the first half of fiscal year 2015.
Looking specifically at the results for the second quarter, we posted double-digit revenue growth and positive operating leverage.
Net sales grew 13% to $336 million, and non-GAAP gross sales of products and services grew approximately 10%.
Fully diluted earnings per share grew from $1.63 to $2.15.
This acceleration in revenue performance has several components.
First, we are continuing to sell wider and deeper into our existing client base, capturing wallet share.
Second, we are adding new logos through focused demand generation activities.
And third, we benefited from increased demand in the technology and healthcare sectors and a strong close from Cisco's year-end in July.
We posted double-digit growth in key metrics, including gross profit, adjusted EBITDA, and earnings per diluted share in second quarter.
While we maintain strong margins, we believe we are well positioned to continue to grow revenue at a higher rate than the overall IT market, and we will continue to make the necessary investments in customer-facing headcount, such as salespeople and engineers, and invest in emerging technologies to service our customers and meet their complex IT requirements.
With that, I will turn the call over to <UNK> for a more detailed discussion of the business.
Thank you, <UNK>.
As <UNK> said, the second quarter and first half of fiscal 2016 was a period of continued focus and execution on our corporate objectives of expanding our customer base, investing in customer-facing sales and engineering personnel, capturing emerging technology trends, and increasing services penetration.
Our ability to provide the advanced IT solutions our diverse customer base demands helped us deliver positive results across the critical metrics of revenue, adjusted EBITDA, operating income, and diluted earnings per share.
We've spoken in the past of our strategy to outgrow the overall IT market and expand our gross margin by focusing on some of the highest growth areas of the industries, specifically security, converged and hyper-converged infrastructure, cloud, and mobility.
This quarter's 13% revenue growth demonstrates that we are successfully creating and capturing these opportunities with existing, as well as new customers.
Crucial to our growth is our ability to execute on our go-to-market strategies by going wider and deeper with our clients.
We've successfully developed an effective cross-disciplined sales and engineering teams, which focus on business development for specific technologies or ePlus Solutions within our customer base.
These themes are being supported by our subject matter experts that help sell and create solutions in the security, services, software, and financing areas.
We are continuing to better utilize internal and external analytics to create focused demand generation activities within our more than 3,000 customers nationwide, and we're highly focused on adding new customers, as well, with targeted marketing campaigns focused on specific geographies, verticals, and solution areas.
We've shown in the past that we can capture demand in the faster growing segments of the market, and we're confident in our ability to continue growing our client base.
Today's customer is dealing with more IT complexity than ever before, and the range of vendor options continues to grow.
Our focus on a comprehensive lifecycle services approach utilizing our plan, build, support, and optimize model provides business outcomes and measurable value rather than siloed IT solutions, and is proving to resonate with new as well as existing customers and partners.
It's important to stress the role of our services business, both professional engineering services as well as annuity services, such as managed services and staffing, in this growth.
We've invested heavily in building up the services business in recent years, including expanding headcount and increasing our managed service centers from one to three to provide redundant 24-hour nationwide coverage.
We have built teams that focus on emerging technologies and bringing these solutions to market that leverage our overall lifecycle services model.
This helps our customers from the assessment and design phases all the way through to optimizing their IT environments.
In fiscal 2015, gross profit from our services business grew 14.8% from the prior year, and we comfortably exceeded that figure in the first half of fiscal 2016.
In addition, our service business can act as the tip of the spear, establishing our expertise with clients and positioning us for future wins that integrate both products and services.
In a recent analysis of our managed services client base, we found that the typical client increases their IT spending with ePlus by more than 20% within 12 months of their first managed service engagement, with a significant expansion in gross margin.
I'm going to close by touching on security.
This is one of the best examples of an area where clients are under increasing pressure to upgrade their capabilities and have a wide array of IT options.
We identified this trend several years ago, built up our security capabilities, and have reaped the benefit in recent quarters.
In the second quarter of fiscal 2016, security product services and solutions represented approximately 15.5% of non-GAAP gross sales of products and services, up from 15.2% in the first quarter.
And we believe there's still room for future growth as we continue to invest in the security space and make it part of every solution we sell.
A good example is, is a healthcare win we had recently.
The driver for this project was a security audit that highlighted some vulnerabilities, followed by minor security breach.
These factors made security the top priority for the organization.
Management adjusted their IT budget to reflect this and engaged ePlus to provide a comprehensive security plan.
By utilizing our Plan, Build, Support and Optimize, or PBS approach, and our project management office, our first priority was to identify and remedy critical security gaps.
From there, we implemented an upgrade to their perimeter security, and we are now currently building out the remainder of the plan to provide a comprehensive and integrated security stack that will allow them to operate their IT infrastructure in a secure and regulatory compliant manner.
This modular service strategy approach offers customers pervasive threat defense from the edge throughout the interior of their network, while providing the visibility and analytics needed to maintain a secure environment.
In summary, we believe we have both the expertise and scale to meet our clients' needs and add value to their businesses and outpace the market.
We have identified the key areas of growth, the clients with the greatest demand for our solutions, and the right people and methods to reach them.
So, we believe we're well positioned to continue our track record of outgrowing the overall IT market.
I'll now turn the call over to <UNK> for a closer look at our financials.
Thank you, <UNK>, and good afternoon, everyone.
Results for the second quarter of fiscal 2016 showed strong year-over-year comparisons in key metrics such as operating income, adjusted EBITDA, and earnings per diluted share.
Our results were driven by our scale service-led business model, and our gross margins.
Net sales for the quarter increased 13% to $336.3 million due to demand for our complex IT solutions across our customer base.
As <UNK> mentioned, technology segment sales received some additional momentum from customers in the technology in healthcare sectors.
Non-GAAP gross sales of products and services rose 9.9% to $431.1 million.
Consolidated gross profit for the quarter was up 12.5% to $71.9 million.
Consolidated gross margin and gross margin on products and services were both flat when compared to a year ago at 21.4% and 19.4%, respectively.
Recently we began reporting adjusted EBITDA, a metric we believe gives insight into the operating performance of our business.
We calculate this metric by taking net earnings and adding back any interest expense, depreciation, amortization for assets used internally, and the provision for income taxes, and subtracting other income.
We consider the interest on notes payable from our financing segment, as well as depreciation on assets financed as operating leases, to be operating expenses.
As such, they are not included in the amounts added back to net earnings in the adjusted EBITDA calculation.
Adjusted EBITDA and operating income for the second quarter both grew significantly faster than revenue as we maintained a relatively flat cost structure in our technology segment.
Adjusted EBITDA rose 30.3% to $27.9 million, while operating income was up 31.2% to $26.7 million.
Net earnings for the quarter totaled $15.7 million, or $2.15 per diluted share for the second quarter of fiscal 2016, representing growth of 31.9% year-on-year.
Now moving to our individual segment results, revenues in our technology segment, which accounts for 97% of net sales, grew 13% to $326 million.
Our non-GAAP gross sales of products and services increased 9.9% to $431.1 million.
We saw a lower proportion of sales derived from third-party maintenance and software assurance contracts when compared to a year earlier.
These transactions are recorded on a net basis.
In terms of the breakdown of our revenue by end markets, we maintained a balanced group of clients.
For the trailing 12 months, SLED was our largest end market with 23% of the total, followed by technology with 21%.
Telecom, media and entertainment represented 17% of the total, while financial services and healthcare each had 10%.
This balanced client base is an important part of our strategy, and we see room for growth in all sectors.
Gross profit in the technology segment increased 12.4% to $64.8 million.
Operating expenses increased 5.3% from a year ago, well below the rate of revenue growth.
The key factor in this was limited growth in salaries and benefits, which accounts for more than three-quarters of the technology segment operating expenses.
Going forward, we expect this expense category to align more closely with our trailing 12 month metrics.
G&A expenses were higher at $7.3 million, largely due to the amortization of intangible assets as a result of the acquisition of evolved technology in 2014.
Technology segment earnings rose 28.5% to $22.6 million.
Moving into the financing segment we saw revenues rise [to] 13.2% to $10.3 million from $9.1 million in the second quarter of fiscal 2015.
As you know, results from the financing segment tend to be uneven.
In this quarter, the increase in revenue was the result of higher transactional gains.
Operating expenses declined 12.7% to $3.1 million due to a higher reserve credit losses in the year-ago quarter.
Segment earnings totaled $4 million versus $2.7 million a year ago.
Now, I will briefly address our consolidated year-to date-results.
Net sales were up 6.4% to $606.2 million compared to $569.8 million a year ago.
Non-GAAP gross sales of product and services were up 6.4% to $763.4 million.
The strong sales performance was driven by our technology segment, which was up 6.5% to $587.5 million for the first half of fiscal 2016.
Consolidated gross profit for the first six months of fiscal 2016 increased 8.9% to $131.1 million compared to $120.4 million in the same period last year.
Consolidated gross margin was 21.6%, up from 21.1% in the first half of fiscal 2015, while gross margin on products and services was 19.7%, an increase of 70 basis points.
Adjusted EBITDA rose 19.3% to $44.1 million, up from $37 million in the first half of fiscal 2015.
Operating income rose 19% to $41.7 million, up from $35.1 million in the first half of fiscal 2015.
We had earnings per diluted share of $3.35, up 17.1% from $2.86 a year ago.
Excluding the gain resulting from the retirement of a liability in the first half of fiscal 2015, earnings per diluted share increased 21.8%.
Turning now to the balance sheet, we ended the quarter with a cash position of $62.8 million compared to $76.2 million at the end of March.
This reduced cash position was the result of working capital needs and the investment in our financing portfolio.
While we saw an increase in the account receivable during the quarter, our cash conversion cycle in the technology segment remained consistent with last year at 12 days.
As a result, we feel our balance sheet is very strong, with a cash position to support both organic and accretive acquisitions.
I'll now turn the call over to <UNK> for closing remarks.
Thanks, <UNK>.
In closing, I would like to reiterate that we believe our long-term strategy is proving successful, as evidenced by our strong performance in the first half of fiscal 2016.
The technology landscape continues to evolve and clients rely on a trusted partner to help them determine, identify, and implement the best IT solutions, both for today and for the future.
The solid performance of our business, particularly in focus areas like services and security, highlight our competitive advantages.
Again this quarter, we received several recognition awards from key partners, including Cisco and Palo Alto Networks, among others, as we continued to strengthen our relationships with established and emerging vendors.
Additionally, our balance sheet remains strong, providing financial flexibility to take advantage of opportunities to build our business.
We continue to evaluate strategic acquisitions to expand our business.
We also seek to invest in new sales and engineering resources and expanded our human capital to better serve our clients.
With that, Operator, please open the call to questions.
Thanks, Al.
So, I'll try to take a shot at that, Al.
I don't have anything off the top of my head that I can give you exact percentages.
But, as the market continues to evolve and move to more of a subscription model, a consumption model as a service model, we're moving the solutions that we deliver to our customers to accommodate what they're looking for.
I think if you look at our ---+ if you're looking at our gross margins, we feel like we had a really good quarter for our gross margins.
We feel that our gross margins are probably the highest in the industry.
And if you noted what <UNK> and <UNK> had talked about, our gross margins were 21.14% for the quarter, which is some of the highest in the industry.
And then, in terms of when we look at the gross margins as well, they were affected a little bit by a lower portion of gross sales that were classified as net.
So, that's kind of the pieces that I think would tie back to what you asked there.
Did that give what you were looking for, Al.
So, no, I think on that you'd have to really look at our historical results for the operating margins.
We're going to continue to invest in what I call customer-facing sales and services headcount to address what I call the four Ss that we're trying to tackle with our customer - services, security, software, and solutions.
So, I think, going forward, with investing in net headcount, you'd have to look more at the historical trends as it relates to operating margins.
Thank you.
Thanks.
Well, there's a couple of different things, as you know, <UNK>.
Cisco was about 50% of our revenue for this quarter.
What's nice about Cisco is they go across a lot of different areas, meaning compute, security, data center, and all the services that go with it.
So, as that kind of continues to evolve with some of the converged infrastructure plays that are out there with FlexPod and Vblock and so forth, I think you'll continue to see that grow.
We're also actively working with Cisco on building out our software capabilities.
So, they're a big part of our strategy.
They're about 50% of our revenue, and I think you'll continue to see that in the future based on historical trends.
Yes, <UNK>.
If you saw, we had 30 basis point bump from Q2 versus Q1, and it's a total of our gross product [of] services, product and services.
It's one of the key focus areas.
We believe it's a hot market.
And with some of the regulatory and compliance issues that are out there for our customers, we think it's a big market that we can continue to grow in and outpace the market.
Sure.
I think from what we're seeing and what we're hearing from our customers, that the market is stable, there's a nice demand for services and security in the market.
In this quarter, we had a nice uptick in some verticals, such as technology, that made a difference in our numbers for this quarter.
And I think cloud is kind of the cooler, more flexible option, if you will, as it continues to involve.
So, the hyper-converged and plays like that I think will continue to evolve, as well.
And as it relates to storage, I think a lot of customers are taking a look at both the legacy players in terms of what they have in the flash space, as well as some of the emerging technologies, and trying to make those decisions as they move forward.
Sure.
In terms of our total accounts receivable, we have a near investment-grade portfolio of accounts receivable.
I talked earlier about our cash conversion cycle this quarter was comparable to the same quarter last year at a 12-day cash conversion cycle, which is pretty good in the industry.
In terms of the dollar amount, this particular quarter was a little bit back-ended in terms of the amount that we invoiced.
So, I'm not expecting ---+ there's no issues in our AR.
We're very pleased with the progress that we're making in the collections process in the AR.
Thanks, <UNK>.
Well, a couple different things, <UNK>.
So, as it relates to the revenue side, we agree with you.
We feel we had a very good quarter, and we're happy with the results.
The sales and services team did a really nice job of executing on our overall plans as an organization, and we believe we'll continue to outpace the market as it relates to where the industry's going from an industry average standpoint.
There were a couple of things that I think always happened in this quarter.
You've got [Cisco's] fiscal year-end, which was in July.
And has been noted a little bit earlier with <UNK>, in terms of the percentage of our business with Cisco, you have SLED, and then you had a few other verticals, if you will, that contributed to our numbers for this quarter.
So, net-net, we're happy with the results.
The team really executed well for the quarter, and we believe we'll continue to outpace the market as we move forward.
So in terms of ---+ as you know, <UNK>, from our numerous meetings, we don't give forward-looking statements as it relates to that.
So, I think, you're going to have to take a look at the historicals, and that's probably the best way for you to take a look at it.
<UNK>, I think as I said in my comments, I think you really should look at our historical norms in order to look at the forward looking ---+ at the quarters to come in terms of our SG&A percentage and OpEx percentages, going forward.
Well, in terms of the headcount, it's pretty simple.
It's what we'd called customer-facing, both sales and services.
So, on the sale side, it'd be in the security space, and folks that can sell services as well as software.
And on the services side, it's continuing to add both presales, additional MS, managed services headcount, and things along those lines as we go forward.
So, if I could fence it in for you a little bit, <UNK>, if you kind of think about the four Ss in terms of services, security, software, and solutions, those would be the areas that we're going to continue to invest in headcount to provide the solutions that our customers are looking for.
As it relates to the SG&A, I think as <UNK> alluded, I think the easiest way is for you to look at the historicals.
And as our variable comp, just so you understand, we just have standard comp plans where our reps are paid on gross profit.
So, if that helps ---+ I don't know if that helps around your variable piece.
Well, there's couple of things.
As it relates to e-rate, you apply for e-rate.
You're then accepted, and then, over time, you have to kind of pull that through to fruition.
So, e-rate was a small part of that, if you will, but it was a part of it.
Our SLED business in the higher education space, we're starting to see lot more opportunities as it relates to security and some other areas that's we're starting to see come to fruition based on the security plans that we built in the SLED space.
As it relates to verticals, that we had a big uptick in our technology vertical compared to prior years, but ---+ and one other thing.
We're ---+ continue to build out healthcare plans with a lot of the major vendors, and that includes some of the providers like Meditech and Epic.
So, we're starting to see that come to fruition as it relates to healthcare.
So, those would be the main ones.
And quite honestly, our top five verticals are the same five verticals every time, so technology, telecom, SLED, healthcare, and finance.
Well we don't do it for the quarter.
As you know, we only do that on an annual basis.
So, at the end of last ---+ fiscal 2015, we did not have any customers that were 10% of our revenues.
No problem, <UNK>.
We'll see you soon.
Hey, <UNK>.
Hi, <UNK>.
Yes, I think ---+ hey, <UNK>, a lot of that has to do with how we're going to market and what we're trying to sell.
So, part of our overall plans is getting a little tighter in our execution around how we're covering the accounts not only from a rep standpoint, but also from a marketing and social media and things along those lines.
We also have more granular plans in terms of how we're trying to uncover net new accounts and how we expand those into bigger existing accounts, over time.
So, those are some of the things that you're seeing.
As we noted, we've got over 3,000 customers now that we can go back to and sell across a lot of different areas that's helping us both from a revenue standpoint, as well as from a GP standpoint, gross profit standpoint.
All right, <UNK>.
Just in case our competitors are listening, I won't talk about our pipeline or forecast.
But, what I can tell you on the security side, it's pretty simple, is it's all about kind of keeping the bad guys out in terms of securing the perimeter.
It's keeping ---+ once they're in, if they are in, is keeping the data secure from a secure data-data center standpoint.
But, more importantly, it start with our security services, which is a combination of assessments and security health check.
So, what happened with this customer was it was a security health check that we did for the customer and found that they had some unease on an audit that was done.
And then from there, we were able to go in and kind of create .
here's where the security gaps were.
We solved that with the perimeter solution that we did.
And then, on top of it, we then proposed our security stack, which was really more of a combination not only just on the end point, but also the analytics and intelligence they needed to kind of run their business, going forward.
I think the other thing to note from a security that I wanted to go back to, I wanted to mention that I forgot one <UNK> has asked, as well, is what we're seeing in the security space.
If you look at Cisco's acquisition of Lancope, right, there's a vendor that we're working with as it relates to Sourcefire.
They're now expanding their capability into the networking analytics space, which is what we know very well from a networking standpoint.
So, we're able to go back and sell security in that space back to our existing customers.
The other thing that's probably important to note, we were just recently named Palo Alto's Growth Partner of the Year, as well.
So, we're putting a lot of focus on the key vendors in each of those spaces, and then manning our sales and services teams with the tools they need to go in and sit with our customers, understand what their needs and issues are, and then build solutions to address it.
And that's what happened with that customer.
No problem.
Thanks.
Thank you.
We'd like to thank you for joining us today, and we look forward to speaking with you again on the next quarter.
