PLUS
#Thank you, Andrew, and thank you everyone for joining us today.
With me are <UNK> <UNK>, Chairman, President and CEO of ePlus; <UNK> <UNK>, 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 on 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 December 31, 2015 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 make reference to non-GAAP financial measures and we have posted a GAAP financial reconciliation on the Shareholder Information section of our website at www.ePlus.com.
I would now like to turn the call over to <UNK> <UNK>.
<UNK>.
Thank you, <UNK>, and thank you everyone for joining our fiscal Q3 earnings call this afternoon.
We continued to execute well in the third quarter across important key metrics, consistent with our long-term growth strategy and we have continued to make the appropriate investments during the year to ensure we are meeting our customers' demands for security, services and advanced technology solutions.
In the quarter we achieved mid single-digit growth and non-GAAP gross sales of product and services of 4.4%, $394 million and slightly improved gross margins.
We believe our consistent focus on delivering comprehensive lifecycle solutions continues to have relevance for our customers and differentiates ePlus from the competition.
In addition, we recorded a record percentage of non-GAAP gross sales of products and services in the security stack, up 300 basis points to 16.2% as compared to 13.2% for the nine-month period.
Security remains top of mind for our customers and touches many of the solutions we sell.
During the quarter, net sales declined 2.5% from last year's comparative quarter.
Net sales declined relative to non-GAAP gross sales for two reasons.
First, we experienced an increase in adjustments of gross to net as the relative percentage of third-party software insurance, maintenance and services we sold increased as a percentage of the whole.
As we discussed in prior conference calls, we view this as a positive development as it shows we are capturing ongoing revenues from our customers.
Second, we experienced a spike in shipments in transit of about $7 million more than normal.
This means there was $7 million of sales we couldn't recognize in the quarter.
These are related to late in the quarter customer orders which were not delivered to our customers by the end of the quarter.
The $7 million figure is the amount in excess of our last four quarters average.
We have continued to make investments to ensure that ePlus meets marketplace opportunities and is well-positioned for long-term success.
Notably, our Technology segment had 1,006 employees as of December 31, 2015, an increase of 79 or 8.5% from 927 as of December 31, 2014.
We continue to invest in people to gain territory, coverage, new perspectives and new skill sets to provide new technologies and solutions to our current and new customers.
As a result of our investments in people, acquisition expenses, lower gross profit dollars due to some of the pricing pressures on a few large customer orders and some other costs which <UNK> will discuss later on the call, our diluted EPS for the quarter declined to $1.40 versus non-GAAP diluted EPS of $1.64 a year ago.
While we aren't satisfied with the bottom-line results for the quarter, we don't see any long-term adverse trends in the industry or our model.
Customer demand remains strong and we remain well-positioned in the relevant emerging technologies.
We keep a close line on cost and investments to optimize financial results.
We have a long-term strategy that we are successfully executing and we believe our year-to-date metrics which <UNK> will discuss in more detail, are a better measurement of our success.
Late in the quarter, we acquired IGX, a Northeast and UK-based security solutions provider with a great set of customers and employees.
It is our first international presence which creates exciting new opportunities for ePlus.
Like all of our acquisitions, the IGX US operations were integrated into our platform to gain maximum synergies.
One of the key strengths of our management team and operations is our experience and expertise in identifying, acquiring and integrating acquisitions.
We are excited about IGX, our growth initiatives and the potential for future acquisitions.
We remain confident in our model and ability to capture market share.
We will continue to make the right investments for the long-term benefit of all our shareholders.
Now I will turn the call over to <UNK> <UNK> for his prepared remarks.
<UNK>.
Thank you, <UNK>.
As <UNK> said, ePlus continues to execute against its long-term strategy of providing the solutions and services our customers need to succeed in today's market.
Our base of more than 3,000 customers is facing an ever more complex set of IT challenges and opportunities that require upfront consultative services to help develop and design solutions that provide the right business outcomes.
To help address this concern, we have continued to expand our solutions, go-to-market and emerging technologies teams to provide solutions, services and support needed to optimize their IT environments.
Part of our strategy has been to expand our footprint and overall technical capabilities through organic growth and acquisitions.
During the past year, we had an 8.5% increase in overall headcount with the majority of these being customer facing sales and engineering headcount.
Our client facing teams now comprise more than 750 people which has helped us to continue to maintain growth rates above those of the overall IT market in the highest growth areas of technology, namely security, mobility, cloud and hyper converged infrastructure.
As we have discussed previously, there is a lag between revenue production and expense as it can take at least months for new salespeople to become earnings positive and several months for engineers to become fully engaged and productive.
Therefore we have to balance new employee investments to meet demand and grow our solution set which is our long-term strategy against the short-term costs.
For example, last month we just added hybrid IT monitoring as an additional service for our customers.
This new capability provides automated detection and tracking across multiple technology silos allowing our clients to innovate without concern for cloud sprawl or a loss of visibility.
This is a natural fit for our suite of cloud-based managed services and will provide additional annuity style revenue for ePlus.
Overall we continue to expand our customer count and feel that we are focused on the right customers where we can grow wallet share.
In the quarter, we have closed several large competitive deals where we see long-term growth opportunity but where initial orders had somewhat lower gross margin.
We will continue to do this when we believe the potential returns warrant the short-term investment.
Our financial results year to date show the success of our growth strategy.
We have grown our non-GAAP gross revenue on products and services by 5.7% while gross margins on products and services grew by 50 basis points to 19.7%.
As <UNK> mentioned, we faced several factors in the third quarter in terms of both revenue timing and expenses which impacted our earnings for this quarter.
This has not impacted our confidence in the outlook for our business though.
Customer demand remains strong and we believe that our solution set including security is among the best in the business.
Also during the quarter, we continue to execute on our plan to build out our footprint and enhance our security capabilities with our acquisition of IGX.
IGX was a successful reseller of security products and services with operations in Metro New York, New England and the UK.
This acquisition provides the opportunity for the IGX sales team to upsell and cross-sell to their customers the solutions and services that ePlus currently sells such as managed services, financing and our key vendors in compute, storage and networking such as Cisco, NetApp, Pure, EMC and many others.
This acquisition also expands our presence in the UK and allows us to better support some of our larger global enterprise customers.
But I must note that it will take some time and investment to bring ePlus solutions and vendor credentials to overseas markets.
In conclusion, we remain positive on the outlook for our business.
The demand for complex multivendor IT solutions continues to grow.
We will continue to build and improve our infrastructure and expertise to meet this demand and we believe that we will continue to post growth rates ahead of the overall IT market.
I will now turn the call over to <UNK> for a closer look at our financials.
Thank you, <UNK>, and good afternoon, everyone.
As you heard from <UNK> and <UNK>, third-quarter sales were affected by several factors.
Net sales for the quarter declined 2.5% to $298.6 million.
Conversely, non-GAAP gross sales reached $393.9 million, 4.4% ahead of the similar period last year.
At the end of the quarter, we had shipments in transit to our customers that were higher than the average of the last four quarters.
While we always have had shipments in transit at the end of every quarter, the variation from the norm was approximately $7 million more than the average.
This means we had approximately $7 million of net sales which were not recorded in the quarter and are expected to be recorded in our fourth quarter.
Considering this factor, net sales this quarter would have been about flat year on year.
Turning back to non-GAAP gross sales of product and services which grew 4.4% in the quarter, we had a greater proportion of sales of third-party maintenance, software assurance and services this quarter at 27% as compared to last year at 22% of non-GAAP gross sales of product and services.
These transactions we record 100% of the gross profit on the transaction as net sales.
Consolidated gross margin and gross margin of sales of product and services were both up from a year earlier at 21.5% and 19.6% respectively while consolidated gross profit declined 2.1% to $64.1 million, tracking the net sales results.
Adjusted EBITDA and operating income both increased from the third quarter of fiscal 2015 to $19 million and $17.6 million respectively, primarily as a result of headcount additions and acquisition-related expenses which I will discuss in more detail when I review the segment results in a moment.
Diluted EPS is $1.40 per diluted share, below the $1.64 in non-GAAP EPS reported in last year's third quarter.
You may recall that last year's quarter included a one-time gain equal to $0.49 per share which is excluded from non-GAAP EPS I just mentioned.
Now moving on to our results by segment.
Net sales in our Technology segment fell by 2.8% to $289.4 million.
Non-GAAP gross sales of product and services increased 4.4% to $393.9 million.
Gross margin on product and services was up 20 basis points to 19.6% but gross profit decreased 2.9% to $57.9 million on lower net sales by 2.8%.
Several large product sales to enterprise customers in the quarter that <UNK> spoke about earlier were heavily competed but as he mentioned, strategically aligned with our objectives of driving broader and deeper relationships over time.
The short-term impact however pressured gross margin and therefore gross profit in the third quarter.
Operating expenses in the Technology segment increased 3.8% to $43.2 million.
The largest increase was in salaries and benefits line item which increased 4.6% as a result of additional 79 people, 80 of whom are customer facing and 48 of whom came from the IGX acquisition.
Additionally we incurred professional fees related to the acquisition of about $300,000.
Also included in operating expenses is $680,000 in amortization of acquisition-related intangible assets of which $175,000 related to the IGX acquisition.
Amortization of acquisition-related intangibles in our fiscal fourth quarter is expected to be approximately $1 million.
Technology segment earnings were $14.7 million compared with $18 million a year earlier.
Moving to the Financing segment, net sales in our Financing segment were up 10.2% to $9.3 million as a result of higher post contract earnings.
Operating expenses for the segment declined 1.5% from the previous year due to lower debt and lower interest rates.
Operating income increased 16.8% to $3 million.
Net earnings for the Financing segment decreased to $3 million from $8.7 million last year.
In the year ago quarter, net earnings included $6.2 million in other income resulting from a claim and a class-action lawsuit.
Looking at our year-to-date consolidated results, net sales were up $3.3 million to $904.8 million.
Non-GAAP gross sales of Product and Services were up 5.7% to $1.2 billion and Technology segment net sales were up 3.2% to $876.9 million.
Consolidated gross profit for the first nine months of fiscal 2016 increased 5% to $195.1 million, consolidated gross margin was 21.6, up 40 basis points.
Gross margin on the sale of Product and Services expanded 50 basis points to 19.7%.
Adjusted EBITDA grew 7.4% to $63.1 million and operating income increased 6.7% to $59.4 million from $55.6 million.
Our diluted EPS per share for the nine months ended December 31, 2015 was $4.74, up from non-GAAP EPS of $4.38 which excludes other income of $7.6 million resulting from a gain on a retirement of a liability and a gain from a claim in a class-action lawsuit.
Turning now to the balance sheet, we ended the third quarter with a cash position of $66.6 million, an increase from the $62.8 million at the end of the second quarter despite the use of funds for the acquisition of IGX of $16.6 million.
The cash conversion cycle for our Technology segment was 20 days as compared to 18 days a year ago.
Our balance sheet remains healthy with a strong cash position of $4.1 million of recourse debt and stockholders' equity of more than $315 million.
This gives us the flexibility to support organic growth and strategic acquisitions in the quarters ahead.
I will now turn the call back over to <UNK> for closing remarks.
Thanks, <UNK>.
In closing, I would like to reiterate that our solid year-to-date results are evidence that our long-term strategy is grounded and working.
We expect to continue to benefit from the significant investments we have made by adding sales and engineering headcount and in expanding our leading edge technologies including security, mobility, hybrid converged infrastructure and cloud-based solutions.
We are also better positioned than ever to increase wallet share among our existing customers with an expanded geographic footprint now that IGX is on board.
Finally, we ended the quarter with approximately $67 million of cash and nominal recourse long-term corporate debt and we will continue to evaluate the best way to increase shareholder value using the solid cash flow of the business.
Our returns on capital remain among the best in the industry.
Operator, we would like to open the room to questions.
Thank you.
We actually don't see any softness in the overall market for us and our customers.
There are some headwinds with margins in certain cases but we think that the market is pretty good and we are continuing to take market share from our customers.
Well, in terms of ---+ hey, <UNK>, it's <UNK>.
How are you.
So ---+ how's everything.
So, in terms of the margins and some of the things that we did, we had a few clients that we made a strategic decision that we were going to take down at lower margins and basically expand the margins over time.
So kind of a land and grab if you will and then expand over time.
In terms of the verticals, it is still the same top five verticals.
We saw a little pressure in the telecom space but Technology was up to offset it.
And then if I were looking at the quarter overall from an outlook standpoint, look, if it ---+ I don't think anybody here is satisfied with the quarter but if you look at the trend, the gross sales were up both for the quarter and for the year.
If you look at how it affected some of our ---+ I will call it GP, you had the large shipment in transit, the land and grab on some of the deals.
And that those are some of the things that affected our GP if you will.
But the thing that I would tell you it is not really pricing pressure, <UNK>; it is more us making a conscientious decision to grab some strategic accounts that have a large IT spend that we think we can land and expand over time.
Okay.
As it relates to the competition, I don't think we are seeing ---+ we are not an apples-to-apples compare.
But if you look at our gross sales for the quarter, they were up 4.4%.
For the year to date, they were up 5.7%.
I don't think we are seeing any competitive pressures.
Touching on something that <UNK> said, if you look at some of the things going on in the storage market, although it is getting competitive with some of the legacy vendors with the emerging technologies, we actually see it as an opportunity for us to grab additional market share and mind share over time but nothing that we would see from the competitors that would show.
In terms of the overall margins or services.
Oh, growth of the services.
Yes.
Right now, the growth is up year-over-year versus the 14.8%.
So we feel very good about where our services solutions are going as well as our revenue gross margins and GP in that space.
No problem.
Take care, <UNK>.
<UNK>, as it relates to Dell and EMC, we haven't seen any slowdown but obviously what is going to happen there is the Dell EMC teams need to figure out what the product roadmap is once they kind of merge and integrate.
They need to figure out their go-to-market strategies.
They good news is ---+ and this is from when I used to work on the vendor side and used to run a channel at a large vendor years ago ---+ is you normally go to the partners that have the capability in what you would call the compute storage networking space, so the multivendor space which they play in if you will or compete against.
And I think we are pretty well positioned to kind of take some additional market leveraging our relationships with EMC and Dell as well as our expertise in that space.
Yes, I would agree, <UNK>.
This one is a little bit tougher to kind of give you a real quick easy answer on.
But I think if you look at our year-to-date trends and what we have done historically that is probably more in line, it is a steady trend that you can track and I think that is what we would expect and we'd continue to outpace the IT market.
We believe we will continue to outpace the IT market.
Those would be the bigger pieces.
If you look at our gross product and services growth if you will as well, the areas that we are invested in are high growth areas.
So when you talk about the cloud, when you talk about security, when you talk about the services, both managed services, professional services, staffing, I think we are very well-positioned to continue to grab market and continue to grow our gross margins and GP over time.
Okay.
So I will take the IGX in terms of what we believe we are getting out of IGX and how we will continue to leverage it.
And then I don't know if <UNK> or <UNK> wants to jump in on the other piece.
But here's the easiest thing on the IGX.
What it gives to us, it expands our presence in New York and New England, so New York Metro and New England.
They've got some great security expertise and resources that we can now leverage across that region and get additional sales from a securities perspective based on their capabilities.
But just as importantly, they've got some really nice customer ---+ they've got a nice customer base that we can actually go back in and sell all the things that we sell at ePlus such as managed services.
We have financing capabilities, dealing with compute storage and networking with Cisco, NetApp, EMC, Pure and all the different players there.
So there is a real nice opportunity for us to go back and we really picked up some real talented and good people to add to the ePlus portfolio.
Yes.
In terms of the margin profile, they had a very similar margin profile to us so I would expect that to continue and file in very nicely with our model.
Yes, that is correct.
It is <UNK> here.
We haven't added 100 people, it was actually about 8.5% which I believe was around 80 people year-over-year and some of those were the IGX team as well.
So I think the easy thing to say is we will continue to invest in headcount, we will be opportunistic when we can see if we can bring on some talented folks but you are probably looking at about the 4% to 5% range if I had to put a range on it.
You know, here is what I would tell you there.
I think you've got to ---+ like I had mentioned earlier, is you've got to look at the year-to-date trends and in that space short term and that is probably where we are about.
So we will continue to outpace the IT market.
But in terms of IGX if you look at them just from a ---+ if you look at our press release if you wanted to model it, it was about $51 million.
So just to kind of give you a feel on the top line.
Right.
That is what we would expect in the short term, in the short term in the quarters and we would expect that to grow over time as we added our core competencies to that acquisition as we have done with other acquisitions in the past.
Sure.
No, it was purely a timing aspect within the quarter.
There is nothing that I can point to that would tell you that this would or would not occur in the quarter.
It was purely a timing issue.
Yes.
Sure.
Take care, <UNK>.
We would like to thank you ---+ thank our shareholders for their support and confidence and thank you for your time and interest today.
We look forward to speaking with you again next quarter.
Thank you.
