ePlus Inc. (NASDAQ:PLUS) Q1 2017 Earnings Conference Call August 2, 2016 4:30 PM ET
Kleyton Parkhurst - SVP & Assistant Secretary
Phillip Norton - Chairman, CEO & President
Mark Marron - COO & President, ePlus Technology, Inc.
Elaine Marion - CFO
Erica Stoecker - General Counsel
Matt Ramsay - Canaccord Genuity Inc.
Anil Doradla - William Blair & Company
Matthew Sheerin - Stifel Nicolaus
Good day, ladies and gentlemen and welcome to the ePlus First Quarter Fiscal Year 2017 Earnings Results. At this time all participants are in a listen-only mode Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Kley Parkhurst, SVP. Please go ahead.
Thank you operator and thank you for joining us today. On the call are Phil Norton, Chairman, President and CEO of ePlus; Mark Marron, Chief Operating Officer; Elaine Marion, Chief Financial Officer; and Erica Stoecker, General Counsel.
Let me take a moment to remind you that the statements made this afternoon 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 audience 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, 2016, and our 10-Q for the quarter and year-ended June 30, 2016, when filed.
The company undertakes no responsibility to update any of these forward-looking statements in light of new information or future events. In addition, during the call we may make reference to certain non-GAAP financial measures. So we have posted the GAAP financial reconciliation on the Shareholder Information section of our website at www.eplus.com.
I'd now like to turn the call over to Phil Norton. Phil?
Thank you, Kley. And you thank you everyone for joining us fiscal 2016-2016 earnings call this afternoon. As released announced, Martin has position of President and CEO of ePlus effective Monday August 1. Mart joined ePlus 11 years ago and he quickly distinguished himself through both his leadership and business capabilities. ePlus would not be there where it is today without Mart's contribution to the business over the last 11 years and my new as Executive Chairman I will continue to work with Mart and our leadership team to ensure a smooth transition and to help ePLus on its current successful trajectory.
We are pleased that ePlus has started fiscal '17 results both on the top and the bottom lines. We are particularly pleased with the strong gross margins we posted in Q1 and more evidence of that our solutions are resonating with our customers. We believe ePlus continuously take share in the market place given our trailing 12 month top line growth 8.1%. Above the overall IT environment remains dynamic and challenging. We remain focused on serving our customers and providing them the most value possible through innovative technology solutions to solve their business requirements.
Now on a personal note, I would like to thank our employees, customers, partners and investors for their support for the last 23 years during my tenure as President and CEO of ePlus. Together we have seen the company grow from $43 million and revenue to $1.2 billion and become one of the largest providers of advance technology solutions in the industry.
I would now the turn the call over to Mark for more detail discussion of the quarter end of the industry.
Thank you Philip, good afternoon everyone and thanks for joining us in today's conference call.
First of all, I would like to thank Philip for his leadership and vision over the last 23 years. He has built a company that has a strong culture, a company that has foundation on excellence based on what is best for our customers and our employees. I worked with Philip for many years and I will continue to work with him in the future on strategic initiatives and trying a smooth transition. It is an honour and a privilege to be a CEO of ePlus.
We built a unique approach around providing customers with complex, multi-vendor IT solutions. The case with these solutions is clear. Every company is using technology to drive their business outcomes but they are dealing with technology that is constantly changing whether it's the cloud, new approached enterprise storage about the security threats.
Ours services led engineering centric business model has helped us become a trusted IT partner for many customers. WE will continue to leverage the expertise we have in-house in ePlus and utilize our scale and vendor relationships to provide solutions to some of the most advance enterprises around the world. Our financial results for the first quarter of 2017 shall bring growth in net sales and at the adjusted gross buildings level.
Our consolidated revenue group by 10.6% to $298.5 million and our adjusted gross billing of products and services grew 19.6% to $397.5 million. It's important to stress that these figures benefited from certain quarter specific factors including seasonal spending in the state, local and education space.
Our growth margins on products and service expanded again this quarter reaching 20.8%, there is an increase of points. And we also realise increase in our operating margin and adjusted even margin which both grew at a faster rate than revenue. Earnings per diluted share was a $1.15 compared with $1.21 in a year ago quarter. While a Non-GAAP diluted EPS was a $1.54 up from a $1.25. To sum up we had a solid quarter from a financial perspective.
In this industry it is important to continually invest in people, system and solutions to support future growth. In recent years we have invested in our customer facing personnel building up both our capacity and our expertise so we can better serve our customers. This opens up new doors in ePlus in terms of the solutions we can provide and has allowed us to build out our client base in amidst enterprise base. This includes some of the largest organizations which kind of have a more advanced IT needs with our predictable budgets for IT spending.
One thing I would like to highlight further is our focus on building out our business on transformation group. We have assembled this team over the last 12 months using internal and external resources for a simple goal. To continue ePlus strategic record of staying ahead of major IT trends and anticipating our customers IT needs. We have assembled subject matter experts on key topics including security, hyper converged architecture and cloud computing, responsible for understanding where the industry is moving and what would be the most pursuing matters for CIOs and CTOs in the long-term.
By leveraging our life cycle services business transformation group is able to identify important needs for our customers today as well as lay out long term roadmaps for the customers IP strategy. In conclusion, we have a positive start for fiscal 2017 with robust financial performance. Looking at the broader industry there is no denying that in the IT industry remains [indiscernible] the expectation for IT spending in the calendar 2016 is still 1% to 2% which is down from calendar 2015.
Role from challenges in the storage market as the industry adapts a greater use of flash storage and move away from spinning desk. Based on the current outlook, we still believe we will grow faster than the overall market this fiscal year.
I now the turn the call over to Elaine for a closer look at our financials.
Thank you, Mark. And welcome all who have joined our call today. As Mark highlighted our first quarter 2017 results show our ability to execute on our strategy, something that grow our fiscal 2016 performance and has continued in the Fiscal 2017. In the year where industry growth expectations are minimal, we are on track to hit our goal of outpacing the broader IT market. In the first quarter of fiscal 2017 our consolidated revenue grew by 10.6% to $298.5 million.
Growth profit increased 14.4% to $67.7 million which yielded a consolidated growth margin of 22.7% an increase of 80 basis points. This increase in gross profit and expansion in margin driven by higher product margin and the continuing shift in our sales towards products and services that are accounted for a net basis, something I would discuss in more detail later in this call.
Total operating expenses were $15.2 million or approximately 16.8% of total revenue. The largest portion has always with salaries and benefits which was $39.8 million or 13.3% of net sales. This is above the average range of recent years of 11.6% to 12.4% due impart by the IG acquisitions as well as higher taxes incurred during the first half of the calendar year. SG&A expenses were $6.5 million or 2.2% of net sales, largely above the level of recent years. Professional fees were $1.8 million or 0.6% of net sales in line with fiscal 2015 and fiscal 2016. I will go into more detail in expenses when we discuss results from the technology segment.
Our consolidated tax rate for the quarter was 39% compared with a tax rate of 41.5% for last year. This lower tax rate was due to a tax benefit of $400,000 associated with the adoption of the new stock compensation accounting standard. We would expect to end the fiscal year with a tax rate comparable to our fiscal 2016 year. Diluted earnings per share for the quarter were a $1.50 up 24% from a $1.21 in the first quarter in the fiscal 2016. Diluted shares outstanding for the quarter was $7.1 million compared to $7.3 million in the year ago quarter.
Adjusted EBITDA increased 18.4% to $19.3 million as increased gross profit more than offset higher operating expenses. Our adjusted EBITDA margin expanded 50 basis points to 6.5% compared to 6% from the year ago. We recently began reporting new metric non-GAPP diluted earnings per share in order to give the market a clear understanding of performance and operations. These non-GAPP earnings excludes acquisition-related and motivation expenses and other incomes. In addition, this quarter we are also excluding other comparison purposes the impact of the tax benefits of $400,000 or $0.06 per share which is related adoption of new share based compensation accounting standards. Our first quarter of fiscal 2017 non-GAPP diluted earnings per share increased to 1.54% from a $1.25 last year.
I'll now turn to the quarterly result technology segment which accounted approximately 98% of our total sales. Net sales in the technology segment were 11.5% to $291.5 million while our adjusted growth billings of products and services grew 19.6% to $397.5 million. Reflecting an increased demand for IT solution offering. Adjusted growth billing for sales of products and services adjusted to exclude the cost incurred in the sale of applicable third-party software assurance, maintenance and services.
Gross margin on the products and services rose to 20.8% to 20% in the first quarter of 2016. This 80 basis point increase is attributable to the higher product margin and greater proportions of the sales of third-party services and software which are recognised on a net basis.
Operating expenses in the technology segment increased 15.3% compared to last year primarily driven by salaries and benefits which rose 13.8% to $37.5 million in the quarter. Head count in the technology segment increased 10.8% to a 1048 employees, about half of which came from the acquisition IGX last year. We also offer higher variable compensation tied to our gross profit growth. We reported a $900,000 increase in G&A expenses which included small FX loss associated with devaluation of British pounds during the quarter related to IGX.
Adjusted EBITDA for the technology segment increased 15.2% to $16.4 million with higher growth profit again of the impact of higher operating expenses. Turning now to our results by end markets, we remain diverse supplied by industry. On a trailing 12 month basis the technology in state, local and education market were largest each accounting to 22% of total net sales. Net sales for telecom, media and entertainment which accounted 14% well the rest of the net sale split between financial services healthcare and other.
Turning to our financing segment; financing revenue were $7 million compared to $8.4 million, primarily as a result of lower portfolio earnings. Direct lead cost fell by 67.1% to a lower appreciation expense from operating reasons. Operating expenses in this segment also declined by 3.3% mainly due to lower interest expenses tied to lower debt and lower interest rates. Adjusted EBITDA increased 40.2% to $2.9 million compared to $2 million in the same quarter last year, the fiscal result of the lower operating expenses are adjusted.
Before I turn to balance sheet I want to briefly examine results on a trailing 12 month basis as we fill that full year results provide a clear picture of ePlus's financial profile as our results can vary quarter-to-quarter. On a trailing 12 month basis, net revenue rose 8.1% to $1.2 billion. Gross profits rose 9.4% to $270.6 million with consolidate growth margin of 21.9%. OpEx rose 9.2% to $192.4 million with salaries and expenses rising 9.6% to $153.9 million. Earnings before tax for the trailing 12 months was $78.2 million, an increase of 1.3% from $77.2 million a year ago which included non-operating income of $6.2 million from a claim and class action law suit.
Now looking at our balance sheet we ended our quarter with cash and cash equivalents of $78.8 million. This is down from the previous quarter of primarily as a result of the repurchase of 226,792 shares of common-stock under the board authorised plan. ePlus remains a financially disciplined company with a robust balance sheet that provides us with the opportunity to grow organically and through creative acquisition. In conclusion we executed well on our strategy and continue to see positive results in operations. We posted a solid start to the fiscal year and remain confident in our long-term strategy of geographic expansion both organically and through acquisition. Expanding our services and solutions offering and making sure we invest in current and emerging technologies to capture future customer IT spends.
I will now turn the call back to Mark for closing remarks.
Thanks, Elaine. In closing, I would like to reiterate that ePlus remains committed to the same strategy today as it has always driven our success. To anticipate the trends in the IT industry, identify the highest growth areas and provide our customers with superior solutions. By following our strategy we have been able to grow faster than the market while increasing our margins overtime. We have a solid balance sheet to fund our organic and inorganic growth and we are confident we will create further value in our business.
I will now open the floor for questions.
Thank you. [Operator Instructions] Our first call is from Matt Ramsay from Canaccord Genuity.
Thank you very much and good afternoon everyone. First of all Phil, congratulations on your new role, and obviously Mark, well deserved and congratulations on the quarter. Looking forward to working with you Mark.
And I think my biggest question is when I dig into the coming days is the progression of gross margins in both of the business segment, I wonder if you could talk a little bit more about that and I guess being ability of it and how can we think about I mean it is 20.5 or bit better is that a sustainable products and services growth margin going forward obviously going to lose financial a little but so thank you.
Okay, thanks Matt. Couple of different things, one for gross margins this quarter, lot of things came together one of the biggest being the gross connect was a bigger percentage than it normally is so that effected our gross margins. As I think from prior roles I learnt strategy is to find continue ways to have margin expansion by increasing our services and the solutions that we sell better more margin reach. With that said though there are few things that come into play such as our landing expand a program that we talked about in less earning with a prior goal to that where we talked about bringing some of the enterprise customers in the US and in the world. And they are normally based on the project or product base and we will go in and win those deals and then looking to expand our margins over time so you know we were very happy with our 80 basis point growth both consolidated and in our product and services level and lot of them came from our gross connect at a very big percentage.
Got it. And I guess just to be more specific, is this a level we should think about being sustainable and you could just talk about a little of obviously that gross to net ratio but and any other big moving parts that could drive this up or down on a quarterly basis I guess the big question is sustainability of these new levels.
Well, I do believe there is some upside but like I mentioned the gross connect was a bigger percentage so that will change the mix from quarter to quarter we are being brought in by vendors and customers and bigger deals where we start with smaller margins and then overtime will look to bring up the blended margins by putting more services and multi-vendor and complex solutions that the customers are looking for. The overall answer would be yes we are going to look to continue expand those margins. This quarter was a little bit outside normal relates to our gross connects.
Got it. Our last talk was about the same questions on margins but the finance aspect is a lot smaller but last couple of quarters the margins have been materially higher than we have seen historically and we can talk about that in a little bit more detail and I guess the same question on sustainability on that in the margin level. Thank you.
Sure in the financing segment, we think that important contributor to for downright to our operating income but it also helps us on the technology side being able to finance equipment when there is not cash availability on the customer perspective. You know it's going continue probably along the same line in the longer terms in terms of the contribution to operating income as well as the percentage of revenue the technology segments since really outpacing in terms of revenue growth.
Got it. Thank you very much.
Thank you. Now the next question is from Anil Doradla from William Blair.
Congrats from my side for the good results and Mark extending my congratulations to you too and Phil for building this great company. SO I have a couple of questions. So Mark you talked about gaining shares, obviously you had some nice growth here. Can you share some color you know as to why you believe it's more market share gainer because the reason why this is that some of the end markets that you guys deal in with like security, emerging technologies. Fast growth areas so was it largely driven by you guys just being the fast growth areas or are you seeing some material share gains from your competitors so any color on that would be great.
Thanks for your comments Anil, one we do believe we are in the right spaces that are hard in the market as it relates to security and all the different types of converge and hyper-converged solutions that our customers are looking at. As we talked about in prior calls we looked at our service offerings from everything from assessments all the way through to our what we call our optimized services, managed services and staffing and things on those lines. Believe based on where we have invested both in resources and offerings that has helped one, allow us to bring on that new clients go wider and deeper with existing clients. As it relates to some of the verticals we also source upside in state and education, mainly in the higher red, K-2 and K-12 space. We are updated in our technology, healthcare and finance as well. So I guess the overall answer would be we believe we have invested in the right area, we have put the resources in place to be able to provide those services to our customers and we are focused on some of the verticals where we think we might be potentially be upside by putting the focus on verticals.
Great. Also you talked about the gross and net levels being high that what has impacted your gross margin. Mark when you deep a little bit deeper into it can you help us understand what leverage you have in terms of you know coming back to the previous question what was asked was you know what leverage can you pull to perhaps growth is it just adding more sales people, is it adding more strategic accounts where you bring these park as aspect it's a combination of these things. But can you help us understand and how much control do you have on maintaining these gross at net levels.
So here may be this will help Anil, one the gross is about gross profit if you actual dollars probably three years ago we build up what we call is our renewal team and this is team that works with our key vendors and their renewals in terms of making sure that the customers are happy and supported form a maintenance support, fixes, firm support and things on those lines. In addition to that probably around a year or so ago we build what we call an enhance maintain services which is not only we get that support from the vendor we provide level one support for those customers. So what we are saying is we are getting our renewal rates are increasing as a percentage because we are providing what we more value to the customer from a support standpoint. It's also important to note, it's a key driver for us, the reason being is if a customer or a supporter -- maintenance support and doing renewals you have a really good chance of doing it in an upgrading additional technology, if lose that renewal go back in and sell products.
So in a nutshell, it's basically providing higher levels of technical support to me, that's what it boils down to?
Not in total so some cases yes we have the enhance maintenance services that I talked about but in some cases its team that is just focused on doing renewals with our customers. Key things to note, years ago we made this decision that that was an important part of what I call an business if you will, an important part of our strategy of say locking down clients so we have the ability to go back in and go wider and deeper with technology so we made that decision to invest in resources that time to go focus on renewals on top vendors and then overtime we found is we could provide additional support or services that our customers are looking for.
Another example of that would be products and services which we on, this is where we will do the proactive monitoring and management of the environment. So if you think about it we and you get your standard calling and things on those lines to get your enhance maintenance services where you can find this higher level of supports and kind of specially like multi-vendor kind of solutions standpoint where we really standout and on top of this we could do this proactive monitoring and management of our environments so we can proactively push if there is any issues within the environment.
Thank you. And our next question comes from Matthew Sheerin from Stifel. Your question please.
Thanks and good afternoon everyone. I just had a couple of questions. I appreciate that I understand that you dot give forward guidance and but if you look at the last year in your September quarter, you had a very, very substantial growth of 20% plus and I notice seasonal slings typically in your September quarter the accounts are going to be very tough particularly on client so can you give us any colors sort of expectations and seasonality here and what you are seeing vs what you saw last year?
First of all, how are you Matt? As you notice, it's a tough compare to last year from quarter perspective. We still believe we can continually outpace the market and believe that pretty strongly. But there are something out in the market that are some headwinds what we are doing. Some of this storage markets that fragmented but we are actually fairly well positioned in that space based on the relationships and the abilities that we have with both your spinning desks as well as both existing and emerging vendors. We got GDPs down, got our projects I think 1% to 2% on IT growth spheres so there is a few things out in the market that have cause for concern. With that said, we are going to continue for strategy for expanding our footprint looking to become the cloud solution provider choice for our customers, become a security go to partner for our customers and will continue to expand and enhance our services clients in our capabilities.
I understand. You know that's fair. Like you just said last year that the accounts look pretty tough year and then in terms of your expenses going forward, SG&A; it sounds like you're continuing to invest in skillsets and people. So what should we be thinking about SG&A here?
I think it would kind of continue along the lines, you may see some benefits you know with the coming quarters as it relates over for the next 12 months. But we are going to continue to invest in what we call customer facing headcount match so both from a sales and services we believe that we have built a strong nucleus that we can kind of add on additional resources and grab more market share from some of our smaller competitors and also little bit more from an account coverage and working with vendors to kind of bring on that new both new and enterprise customers so we will continue to invest in key focus areas and what we call customer facing employees.
Okay. And on the storage could you give us a sense of what percentage of your storage products or your sales are legacy vs flash emerging technology.
We don't really break it out Matt, what I can really tell you is that for the year over year we were very comfortable with both our legacy as well as emerging vendors that there are enough opportunities and program in place for us to continue to grow with them.
Okay. And in your comment on strengthening our street local and education, particularly in education K-12 where there was a little bit of a low for couple of three quarters, I think tied to some funding issues with the E-rate, what are you seeing in that market?
In terms of E-rate, let me do this Matt, if you don't mind. One of the thing on the storage I think a lot of people, not this but even though you have flash in early efficiencies and cost savings things liked that vs some of the legacies you are spinning disk if you will, if you look at the world we live in, when you think about IOT and all the things that kind of go in to that, that is growing faster clip so that is really more opportunities. The other things that we think set us apart is we have the ability to kind of pull together these converged infrastructure, hyper-converged infrastructure which is a combination of compute storage and networking and that's where we can think we can continue to grow both with the storage vendors and other vendors alike while we are adding in our services.
We are seeing some uptick and higher rate in K-12 on the E-rate side, it's actually down a little but I believe it's down naturally but I don't have that for a fact but I have to check that I am pretty sure overall national E-rate is spending down. I thought I remember seeing very time like 15 or 20% on a national level not meaning with ePlus just overall. SO we have seen our fair share of words and also what we have taken down with E-rate but it's down a little bit year over year.
Okay. And just lastly for me, this is going on for your biggest customer; could you tell us what percentage of revenue that represented?
It's right on 49% to 50% -- it's still a net area.
So no change, okay. Thanks very much and congrats on the promotion and the management changes.
Okay, thanks Matt. We'll talk to you soon.
Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back over to Mark Marron for any further remarks.
Thank you, everyone for joining us today. And we look forward to staying in touch in future quarters. Have a nice day. Take care.
Thank you, ladies and gentlemen for participation in today's conference. This does conclude the program. You may now disconnect. Good day.
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