Conference Call Discussing Earnings for First Quarter 2025 Results

Safe Harbor Statement

This transcript of the earnings call that occurred on August [6], 2024, contains certain statements that are, or may be deemed to be, "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or "Exchange Act," and are made in reliance upon the protections provided by such acts for forward-looking statements. Such statements are not based on historical fact, but are based upon numerous assumptions about future conditions that may not occur. Forward-looking statements are generally identifiable by use of forward-looking words such as "may," "should," "intend," "estimate," "will," "potential," "could," "believe," "expect," "anticipate," "project," and other similar expressions. Readers are cautioned not to place undue reliance on any forward-looking statements made by us or on our behalf. Forward-looking statements are made based upon information that is currently available or management's current expectations and beliefs concerning future developments and their potential effects upon us, and such statements speak only as of the date of the earnings call, and are subject to certain risks and uncertainties. We do not undertake any obligation to publicly update or correct any forward-looking statements to reflect events or circumstances that subsequently occur, or of which we hereafter become aware. Actual events, transactions and results may materially differ from the anticipated events, transactions or results described in such statements. Our ability to consummate such transactions and achieve such events or results is subject to certain risks and uncertainties. Such risks and uncertainties include, but are not limited to, the matters set forth below:

• exposure to fluctuations in foreign currency rates, interest rates, and inflation, including as a result of national and international political instability fostering uncertainty and volatility in the global economy, which may cause increases in our costs and our ability to increase prices to our customers, negative impacts to the arrangements that have pricing commitments over the term of an agreement which may result in adverse changes in our gross profit;
• significant adverse changes in, reductions in, or loss of one or more of our large volume customers or vendors;
• reliance on third-parties to perform some of our service obligations to our customers, and the reliance on a small number of key vendors in our supply chain with whom we do not have long-term supply agreements, guaranteed price agreements, or assurance of stock availability;
• our ability to remain secure during a cybersecurity attack, including both disruptions in our or our vendors' or other third party's Information Technology ("IT") systems and data and audio communication networks;
• our ability to secure our own and our customers' electronic and other confidential information, while maintaining compliance with evolving data privacy and regulatory laws and regulations;
• ongoing remote work trends, and the increase in cybersecurity attacks that have occurred while employees work remotely and our ability to adequately train our personnel to prevent a cyber event;
• the possibility of a reduction of vendor incentives provided to us;
• our dependence on key personnel and our ability to hire, train, and retain qualified personnel by recruiting and retaining highly skilled, competent personnel, and vendor certifications;
• our ability to manage a diverse product set of solutions, including artificial intelligence ("AI") products, in highly competitive markets with a number of key vendors;
• changes in the IT industry and/or rapid changes in product offerings, including the proliferation of the cloud, infrastructure as a service, software as a service, platform as a service and AI;
• supply chain issues, including a shortage of IT products, may increase our costs or cause a delay in fulfilling customer orders, or increase our need for working capital, or delay completing professional services, or purchasing IT products or services needed to support our internal infrastructure or operations, resulting in an adverse impact on our financial results;
• our inability to identify acquisition candidates, or perform sufficient due diligence prior to completing an acquisition, or failure to integrate a completed acquisition may affect our earnings;
• our ability to raise capital, maintain or increase as needed our lines of credit with vendors or floor planning facility, or obtain debt for our financing transactions or the effect of those changes on our common stock price; and
• our ability to implement comprehensive plans for the integration of sales forces, cost containment, asset rationalization, systems integration and other key strategies.

We cannot be certain that our business strategy will be successful or that we will successfully address these and other challenges, risks and uncertainties. For a further list and description of various risks, relevant factors and uncertainties that could cause future results or events to differ materially from those expressed or implied in our forward-looking statements, see the Item 1A, "Risk Factors" and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" sections in our Annual Report on Form 10-K for the fiscal year ended March 31, 2024 as well as other reports that we file with the SEC.

This document may also contain non-GAAP financial information. Management uses this information in its internal analysis of results and believes that this information may be informative to investors in gauging the quality of our financial performance, identifying trends in our results and providing meaningful period-to-period comparisons. For a reconciliation of non-GAAP measures presented in this document, see our earnings press release issued August [6], 2024, a copy of which is posted on our website at www.eplus.com/investors.

August 6, 2024 - FY25Q1

Prepared Remarks

Operator

Good day, ladies and gentlemen. Welcome to the ePlus 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. Kleyton Parkhurst. Sir, you may begin.

Kley Parkhurst, SVP

Thank you for joining us today. On the call is Mark Marron, CEO & President; Darren Raiguel, COO & President of ePlus Technology, Elaine Marion, CFO, 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 & Exchange Commission including our most recent Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and in other documents that we 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 will be using certain non-GAAP measures during the call. We have included a GAAP financial reconciliation in our earnings release, which is posted on the Investor Information section of our website at www.eplus.com.

I'd now like to turn the call over to Mark Marron. Mark?

Mark Marron, CEO, President

Thank you Kley and good afternoon, everyone. Thank you for joining us to discuss our Fiscal Year 2025 first quarter results. I will recap our first quarter highlights and provide an update on our business, then Elaine will discuss our financial results in more detail. I will conclude our prepared remarks with a discussion of our outlook. After that we'll open the call to your questions.

We continue to execute on our strategic initiatives around AI, Cloud, Security and the related advisory and annuity services. Coming into the quarter, we had a tough compare to last year which resulted in a net sales decline of 5.2% for the first quarter fiscal year 2025 compared to last year. Last year's quarter had 25% net sales growth, including a nearly 30% increase in product sales in our technology business. Our gross billings and gross margins held essentially flat when compared to the prior year's quarter. We believe our gross billings are stabilizing now that supply chains are normalizing. A portion of the net sales decline this quarter reflects an increase in the netting of sales from gross to net, partially offset by increases in professional and managed services revenues.

We believe our product revenues are down due to some customers implementing technology orders that were previously supply chain constrained over the last year. Both quarters were affected by the supply chain - last year by an abrupt easing of the supply chain, and this quarter, as customers digested their prior purchases. Despite these timing differences, we believe we are focused on necessary IT areas which make us more resilient reflected in our annual guidance.

Our services revenues sustained solid growth with our overall services revenues up 15.8%. Managed services continued to build and were up 28% year over year. We also continued to see strong growth in our managed services bookings, which were up approximately 70% year over year. This bodes well for ePlus as these are recurring revenue streams that give us predictability and more consistent profitability in future years.

Security was an area of strength for us which continues to be over 20% of our gross billings in the trailing twelve months and up over 9% quarter over quarter.

Our finance segment performed well with revenue up 6.4% due to an increase in our portfolio earnings resulting in a 24.3% increase in adjusted EBITDA for this segment.

We continue to see strong customer interest for our AI Ignite program and discovery assessments. We have also rolled out a new storage as a service offering and an Azure recover program. We believe these will continue to support the rapidly evolving needs of our customer base both now and into the future.

Many of our customers are in the formative phase of their AI journeys, contemplating how best to leverage AI. In many cases, customers do not have well defined use cases, have too many data silos, a lack of data cleanliness, and immature or non-existent AI policies. We believe we are well positioned to help our customers capitalize on this opportunity through our AI Ignite program. We are seeing interest across various verticals which presents a significant opportunity for us within our customer base and for net new customers.

As a certified Nvidia DGX Managed services partner, we have had some wins with our AI support services in managing AI optimized infrastructure stacks.

In the quarter, we experienced higher SG&A expenses primarily relating to headcount from both organic hires to support our new solution areas, and the Peak acquisition. We will continue to invest in customer-facing personnel in sales and engineering professionals with skills in the highest-demand areas such as AI, Security and services. In the quarter, we had some lag between the higher costs of these onboarded personnel and revenue generation. Although first quarter of 2025 experienced some revenue headwinds, on a sequential basis, we were disciplined with our SG&A costs. Sequentially, this discipline and gross margin expansion of 120 basis points contributed to our operating income which increased more than 20% and operating margin was up 130 bps. Over time, we believe we will continue to benefit from operating leverage as we move forward with the investments we have made.

Turning to our balance sheet, with supply chain easing we have been able to deliver many delayed projects which resulted in accelerating our cash conversion cycle and a cash balance of $350 million. With this capital, we have the funds to execute on strategic initiatives, judiciously invest in headcount, and support our share repurchase program. During the quarter, we re-purchased 162,319 shares. This most recent share repurchase program further demonstrates our commitment to returning value to shareholders and our confidence in our long-term growth potential. We will continue to evaluate opportunities to repurchase shares based on investment opportunities to drive growth, our financial position, and market conditions.

On the growth front, we continue to identify both near-term and long-term organic and inorganic opportunities and we have a healthy pipeline. Our balance sheet provides financial flexibility to support future growth initiatives.

The underlying strategic focus of our business is solid and we believe we are well positioned to drive top-line sales and profitable growth.

I will now turn the call over to Elaine to discuss our financial results in more detail.

Elaine Marion, CFO

Thank you, Mark, and thank you, everyone, for joining us today.

I will provide additional details about our financial performance in the first quarter of fiscal 2025.

First quarter consolidated net sales totaled $544.5 million, down from $574.2 million in last year's first quarter, due to lower product sales in the technology business. As Mark noted, we faced a difficult year-over-year comparison, as net sales were up 25% in the first quarter of fiscal 2024 due to easing supply chains, which allowed us to complete several previously delayed customer projects.

Product revenue decreased 8.2% year-over-year, primarily due to lower sales of cloud and networking products. The inventory flush in last year's first quarter primarily benefited from a 71.9% increase in sales of networking products.

Our Services business posted another quarter of double-digit top-line growth, with net sales up 15.8% to $78.2 million, as ongoing demand for EMS, Cloud, and Service Desk services drove 28% net sales growth in Managed Services. We also saw continued growth in Professional Services, with net sales rising 4.8% year-over-year primarily due to an increase in staff augmentation services.

Sales within our technology business were broad-based. Our two largest verticals are telecom, media, and entertainment and technology, representing 24% and 19%, respectively, of our technology business net sales on a trailing 12-month basis. SLED, healthcare, and financial services accounted for 15%, 12%, and 11%, respectively, with the remaining 19% divided among other end markets.

Moving to our financing segment, net sales totaled $9.0 million, a 6.4% increase from $8.5 million in the prior year, primarily due to higher portfolio earnings.

Although consolidated gross profit declined to $134.5 million from $142.3 million in last year's first quarter, gross margin declined only 10 basis points to 24.7%. The gross margin decline was primarily due to a 90-basis point decline in product margin in the technology business, which was the result of a shift in customer mix.

Partially offsetting this decline in gross margin was a 70-basis point expansion in Managed Services gross margin. Our Managed Services offerings continue to benefit from scale as we expand our offerings. Professional Services gross margin rose 10 basis points to 41.5%.

Sequentially, while net sales were down 1.8%, gross profit increased 3.2% mainly driven by an increase in product gross margin to 21.5% versus 19.3% in the prior quarter.

Consolidated operating expenses grew 3.2% year-over-year, primarily due to higher salaries and benefits from additional headcount. At the end of the quarter, our headcount was 1,907, up 54 from a year ago, including 29 employees from the PEAK acquisition in January 2024. We remain focused on driving efficiencies across the business through disciplined expense management. These efforts yielded positive results in the quarter as operating expenses declined 2.3% sequentially mainly driven by lower variable compensation and G&A.

First quarter operating income was $35.5 million and earnings before taxes were $37.5 million, down from $46.3 million and $46.5 million, respectively, in the prior year, due to lower gross profit in the technology business and a year-over-year increase in operating expenses.

During the quarter, we had other income of $2.1 million primarily driven by an increase in interest income of $2.6 million. The effective tax rate remained unchanged from last year's first quarter, at 27.2%.

Moving to the bottom line, consolidated net earnings amounted to $27.3 million, or $1.02 per diluted share in the first quarter, down from $33.8 million, or $1.27 per diluted share reported in the year-ago period. Non-GAAP diluted earnings per share were $1.13 versus $1.41 in the prior year. Our diluted share count at the end of the quarter was 26.8 million, modestly above the 26.6 million a year ago. On a sequential basis, both consolidated net earnings and diluted earnings per share increased 24.4%.

Consolidated adjusted EBITDA totaled $43.1 million, compared to $53.9 million in the first quarter of fiscal 2024.

Shifting to our balance sheet. We ended the quarter with cash and cash equivalents of $350 million up from $253 million at March 31, 2024. The increase was primarily due to improvements in working capital.

The significant growth in our cash position was aided by a 36% sequential decline in inventories, as supply chains have continued to normalize. We ended the quarter with $89.1 million in inventory, which is a 3-year low. Further, inventory turns continued to improve, totaling 14 days, down from 23 days in the prior sequential quarter, and 32 days in the prior year. Our cash conversion cycle was 37 days, compared to 48 days in the prior year.

During the quarter, we repurchased 162,319 shares costing $11.9 million; 109,869 shares were from our share repurchase program announced in May 2024.

Overall, we remain focused on investing in organic growth, seeking out accretive acquisitions to expand our geographic footprint and service offerings, and returning value to shareholders through share repurchases.

With that, I will turn the call back over to Mark. Mark?

Mark Marron, CEO, President

Thank you, Elaine.

With our diverse portfolio and focus on providing the strategic IT solutions in demand by our customers, we are well positioned in the marketplace.

For the year, we expect positive comparisons for sales and earnings and are reiterating our full year financial outlook. Specifically, we are maintaining our fiscal 2025 guidance for net sales growth over the prior fiscal year of between 3% and 6% and adjusted EBITDA range of $200 million to $215 million.

While we continue to review and prioritize our capital needs, we remain committed to making the required investments in our company to position us for long-term success. In addition to providing value to our shareholders through share repurchase programs, our strong balance sheet allows us to continue to invest in our business while maintaining flexibility to take advantage of attractive and accretive opportunities.

Operator, let's open the line for questions.

Question and Answer

Operator

At this time if you'd like to ask a question simply press * followed by the number 1 on your telephone keypad. Our first question will come from the line of Maggie Nolan with William Blair. Please go ahead.

Maggie Nolan, William Blair

Hi thank you. So, I wanted to ask about the upcoming fiscal second quarter. Obviously, you have another tough year- over-year compare in the fiscal second quarter. But what can you share with us about how it's progressed so far, how you're thinking about it on a sequential basis and your confidence in that building in the second quarter to help you get to that full year guidance you laid out?

Mark Marron, CEO, President

Hey Maggie, it's Mark. Great question. So right now, Q2 is in line with the expectations. Let me frame it a little bit too based on Q1 because Q2 is similar to Q1 in terms of being a tough compare. So, in Q1, net sales, as you know, was up 25%. Our product sales were up almost 30%. Our networking product sales were up over 70% -- that's for Q1. Now Q2, we have a similar compare where our net sales were up about 19%. But preliminary through the first 1.5 months of the quarter, pipeline back line, it's in line with expectations. We still believe in our guidance strongly that we're in line, but the first half we're challenged just based on the IT environment and the tough compare that we have through the first half.

Maggie Nolan, William Blair

Okay, thanks Mark and then you mentioned expecting to benefit from operating leverage over time, maybe to you or Elaine, how do you expect that to manifest over the next year or so?

Mark Marron, CEO, President

Well, a couple of different things. We already saw some of that, Maggie. If you look at our quarter sequentially from Q4 to Q1, our operating income actually jumped 20%. Now what's happening in the OpEx base is some of the stuff that we've talked about over previous quarters. We're now in the process. We think we'll start to get more operating leverage. We're more opportunistic and measured hires, if you will. A lot of those take time. New hires take time to ramp up.

Our investments in AI and services is more expense than revenue at this piece? And when I say that more the AI side, not so much the services side. The thing that we're excited that we think will start to get additional OpEx is last year -- last fiscal year, as you know, we added 300 customers. So, as we've added new sales reps and service personnel and we're building out our solution offerings going back into those new customers, we would expect that to drive our revenues up. We'd expect our OpEx to stay in line, and therefore, we'd get the operating leverage.

Maggie Nolan, William Blair

Okay, thanks Mark. And one quick housekeeping, if you have it, the organic growth in the quarter and embedded in the full year guide.

Mark Marron, CEO, President

I don't have it. Do you know what the top?

Elaine Marion, CFO

Yes, the material amount of the change in year-over-year was from the organic business.

Mark Marron, CEO, President

That cover it, Maggie?

Maggie Nolan, William Blair

Sorry, did you say material or immaterial, Elaine, I didn't quite hear you.

Elaine Marion, CFO

The majority of the change from quarter-over-quarter was from the organic business.

Maggie Nolan, William Blair

Okay, thank you all.

Mark Marron, CEO, President

Thank care, Maggie.

Operator

Our next question will come from the line of Greg Burns with Sidoti & Company. Please go ahead.

Greg Burns, Sidoti

Thanks, in regards to the customer product backlog that you mentioned may be impacting some sales this quarter. Where do you think the channel is or the customer base is in terms of digesting that backlog? Do you feel like it's been worked through and you get back to a more normal cadence of order flow going forward?

Mark Marron, CEO, President

Yes. I think it's already normalized, Greg. When we look at our gross billings. By the way, in this quarter, even though our net sales were down 5.2%, our gross billings were down just 1%, so essentially flat on a -- as we've talked about, I don't want to overkill it on a tough compare last year for this quarter. So, we do think that our gross billings have started to normalize. The supply chain has stabilized. So, I think we're more in a more normal run rate where we'll start to see the seasonality that we normally do in Q2 and Q3, and then we'll see where it goes from there.

Greg Burns, Sidoti

Okay. And then is there anything you could share in terms of your AI business, whether it be growth pipeline opportunity, anything quantitative or qualitatively, you could add to give us a little bit better understanding of the opportunity there for you?

Mark Marron, CEO, President

Yes, sure. Hey Greg, the other thing just if I can go back to it, I'm not sure if you were talking about some of the consumption of the technology that we talked about with customers in previous. So, I think a lot of that has happened. And we really see it. If you look at our services numbers, we were up 15.8% in our services overall, which means that, that technology is being consumed and we're implementing it with our PS, our professional services and advisory services. So, I'm not sure if the first part when I answered if it answered your question, but that should do it.

As it relates to AI -- so here's the thing with AI. It's really interesting. There's not a customer we have that won't give us a meeting or listen to us as it relates to our AI Ignite program. So, everybody is looking at the same thing all customers. They have data silos on-prem in the cloud, so they got all these disparate data silos. They've got data security and privacy concerns there's no AI governance, at least in a lot of customers that are more in the, let's say, formative or curious stage, if you will. Their infrastructure is not ready, especially in the power and cooling space. There's a skills gap. And then there is an identification of use cases. That's probably the biggest thing that we're seeing with our customers. Now we've rolled out a bunch of envisioning sessions, data strategy sessions, workshops, Microsoft 365 Copilot readiness, and we're starting to see some real interest and pipeline build in that space. And that's why what I had mentioned earlier to Maggie, we've made the investment in the programs and the tools and the training for our team and head count and what have you, it's more expense than revenue, but that is really starting to build. Now here's the other reason we're excited about AI. If you think about AI, it goes across everything that ePlus does over the years from compute, networking, storage, all the things that go into that is things that we've done for years, so -- as well as security as well, which is probably one of the bigger pieces that people are trying to figure.

So, it's early innings. We're getting a lot of interest in meetings with customers. We've done some nice services work with our customers. We, the pipeline is building, and then we'll see as we move through the quarters how that really turns into revenue.

Greg Burns, Sidoti

Okay. Great. And then lastly, just any negatives or benefits from the CrowdStrike issue?

Mark Marron, CEO, President

No negatives, to be honest, Greg. We did have a benefit. We had one customer that had some real problems with CrowdStrike that we got involved with early, and they were able to open up pretty much on time. And after that, they extended their service agreement with us for three years. So, we did see some benefit, but I don't want to overplay it. It was not too much in terms of, I'd say, revenue benefit more, I'd say customer set with how we helped our customers, then I could point to revenue. That's the only deal I've at least been notified that came out of some of the work that we did around CrowdStrike for our customers.

Greg Burns, Sidoti

Ok great thank you.

Mark Marron, CEO, President

Alright, thanks Greg.

Operator

Again, for any questions, press * 1 and your next question will come from the line of Matt Sheerin with Stifel.

Matt Sheerin, Stifel

Yes, hey good afternoon everyone. I wanted to go back to Maggie's question about the outlook for Q2. You said in line with expectations in seasonal, but I'm not sure exactly what that meant because you talked about the backlog being down, is seasonal sort of flattish sequentially because, obviously, the last three years, there have been a lot of seasonality in your business with backlog. And so, are we to assume that this is going to be down year- over-year again and that growth that you're guiding to 3% to 6% is all going to come in the back half?

Mark Marron, CEO, President

Yes. I'd say, Matt, that's a fair statement. I think it will be in the back half. Once again, just to remind you, right if you look at it, first quarter, we were up 25%. Second quarter, we were 19%. So those are some pretty tough compares. But we do feel positive about our strategy and our growth plans. I'd say it'd be more second half back ended, if you will. Q2 is still a positive quarter just if we were flat based on what we did last year but that's probably a safe way to say it.

Matt Sheerin, Stifel

A positive quarter, meaning, I'm not sure what that meant?

Mark Marron, CEO, President

I mean, in line with last year.

Matt Sheerin, Stifel

Oh okay. So flat year-over-year. Got it. Okay. So that means you're going to be five but -- Okay. Got it. Understood. And then in terms of cost, you talked about adding resources to professional resources, et cetera, but then you said that you think that you're going to get leverage on OpEx as volumes return. So, what's the right, is this the right number to use around the low 90s in terms of OpEx over the next few quarters? Or is it different?

Mark Marron, CEO, President

I would say, yes, Matt. That's probably a fair assumption in terms of from a run rate but realize what you've got some variables in that based on GP and commission and things like that but if I were looking at, I'll call it,the S in SG&A salaries, I think that would stay within line with where it is. I think what I'm also alluding to is Q4 to Q1, our operating income jumped 20%. Now that's just a quarter, so it's not a trend yet. But there are some things that we've done both from an expense standpoint and also from a training standpoint that we'd expect to get some improvements from our account executives and service reps as well as some expense savings that we've made. So, I'd expect operating leverage throughout the year. It's not going to jump, as you know, from quarter-to-quarter, but will grow throughout the year and into the following year.

Matt Sheerin, Stifel

Okay, thank you.

Mark Marron, CEO, President

No problem. Anything else, Matt, or?

Matt Sheerin, Stifel

No, that's it. Thanks.

Mark Marron, CEO, President

Okay. All right.

Operator

And that will conclude our question-and-answer session. I will now turn the call back over to Mark Marron for any closing remarks.

Mark Marron, CEO, President

Okay. Thank you. I just want to thank everybody for joining us for our first quarter earnings call and wish you a happy and safe day and a long holiday for the Labor Day weekend even though I'm jumping the gun a little bit there. Take care and have a good day.

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