Kley Parkhurst – Senior Vice President Mark Marron – Chief Executive Officer Elaine Marion – Chief Financial Officer.

Matt Ramsay – Canaccord Genuity Maggie Nolan – William Blair Matt Sheerin – Stifel Matthew Galinko – Sidoti & Company.

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. Kley Parkhurst, Senior Vice President. Sir, you may begin..

Thank you for joining us today. On the call is Mark Marron, CEO and President; Elaine Marion, 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, 2016, and our 10-Q for the quarter ended September 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 non-GAAP financial measures and 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 Mark Marron.

Mark?.

Thanks, Kley, and thanks everyone for taking time to join our call this afternoon. I’m pleased to report that ePlus generated solid financial results in our second quarter and first half of fiscal year 2017, which ended September 30, 2016.

We reported strong quarterly revenue of $371.5 million and six-month revenue of $670 million, both of which are 10.5% increases over last year’s results.

Our revenue growth is attributable to our keen focus on providing the solutions our customers need to compete in today’s market along with the professional and managed services they need to optimize and secure their environments. Growth in our adjusted gross billings of products and services again outpaced the growth we saw in net sales.

Our adjusted gross billings of products and services expanded 13% for the quarter and almost 16% for the first half of fiscal year 2017. Growth in our adjusted gross billings of products and services is a great metric to reflect our overall sales growth in our technology business.

Our revenue increase was pretty consistent among our end-user markets and we are pleased with our execution overall. On a consolidated basis, gross profit increased by nearly 14% to $81.9 million as a result of both increased revenue and a 70 basis point increase in gross margin to 22.1%.

Improvement in gross margin, already one of the highest among our peer groups, is a testament to our ability to deliver complex solutions and services our customers need to thrive in the current technology environment.

We continue to focus on and drive services, especially managed and annuity services to create long-term customer relationships and provide the reporting and oversight our customers need to leverage their IT environments to enhance their businesses.

For the periods ending September 30, 2016, our GAAP earnings per share for the quarter increased 12.6% to $2.42 and our first half GAAP earnings per share increased 16.7% to $3.91. We reported non-GAAP EPS of $2.47 and $4.00, which were 12.8% and 16.3% increases respectively for the quarter and six-month periods.

Our ability to provide solutions to Fortune 500 companies, which are some of the most demanding customers in the world, is further proof we believe that we have the right strategy, delivery capabilities and financial capacity to drive business and gain new customers in this sophisticated customer set.

Understanding our customers’ IT environment and providing the business outcomes they are looking to achieve is paramount to growing our customer base and expanding our presence within existing accounts.

We strive to provide them the best technology solutions for their needs today, while constantly developing new offerings based on the most advanced technologies in the market.

We are particularly focused on new offerings to meet the rapidly changing demand for public, private and hybrid cloud solutions to provide the efficiencies, cost savings and security our customers need to compete in today’s market.

For example, we recently announced our Cloud Aggregated Service offering, which is ideal for customers implementing a cloud first strategy or seeking to simplify their IT deployments and mitigate risk.

These services target key cloud focus areas, including strategic assessments, cloud infrastructure, service provider connectivity, colocation and interconnection as well as cloud collaboration. Many IT departments are focused on improving customer experiences by leveraging the power of the cloud.

For example, we’re looking to consume the wide area networks, or WANs as a service similar to telecom services. A customer recently selected a unified communications platform to enable the use of certain technologies and applications, but more bandwidth was required at the branch level.

The customer selected ePlus Intelligent Branch solution to create a robust network that could support their critical applications. This solution helps them increase their network bandwidth and reduce complexity amongst multiple business locations, while improving application performance and reducing their overall cost.

We also coupled it with ePlus professional and managed services to minimize risk at critical locations. While revenue and margins have continued to grow, we also continue to invest in our business to facilitate growth. Success in the business tomorrow requires us to invest in the business today.

Our long-term strategy on this front has been to steadily increase our customer-facing headcount while anticipating what will be the best of breed technology solutions of the future and investing in them today.

We’re also keenly focused on making the right strategic acquisitions to grow geographically and gain technology expertise and customer-facing sales and services personnel to expand our customer base. Our results are the product of the hard work of the combined ePlus team.

While we are pleased with our financial performance this quarter, we continue to operate in a very competitive market with customers that are looking for the best value for their technology investment dollar and where new disruptive technologies can rapidly cause changes in the pace of our customer’s buying patterns.

Every new quarter presents us with the same challenges. By focusing on our customers and providing them with the most in-demand technology solutions for their business needs, we believe we can continue to grow our market share over the long term. With that, I’ll hand it over to Elaine to discuss our financial results for the quarter in more detail.

Elaine?.

Thank you, Mark, and thank you everyone for joining the call. As Mark mentioned, we continued to execute against our growth strategy in the second quarter and through the first half of fiscal 2017. Once again this year, we are on track to grow faster than the broader IT market.

In the second quarter of fiscal 2017, our consolidated revenues grew by 10.5% year-on-year to $371.5 million. Gross profit increased by nearly 14% to $81.9 million, which provided us with the 70 basis point increase in gross margin to 22.1%.

The improvement in gross profit and gross margin was driven by our strategies to shift towards higher margin products and services and by an increased mix of products and services, which were accounted for on a net basis. Our operating expenses increased 18.7% to $53.7 million, representing 14.5% of net sales.

The majority of this increase reflects increased variable compensation, as a result of the growth in gross profit as well as additional employees. Our headcount grew by nearly 10% to 1,096 from 997 a year ago.

The personnel additions include 95 sales and engineering positions due to internal growth and the acquisition of IGX in December 2015 with the remaining additions being administrative hires. Our G&A expenses were $7.6 million or 2% of net sales; this is in line with or slightly below levels in recent years.

Professional fees were $1.7 million or 0.5% of net sales, in line with fiscal 2016. I’ll cover our expenses in more detail during the technology segment results section of the call. Operating income was $28.2 million or 5.8% higher than last year.

During the current quarter, we received $380,000 related to the dynamic random access memory class action lawsuit, which was included within other income on our consolidated statement of operations. As a result, earnings before tax increased to $28.6 million, which is 7.2% higher than last year.

Diluted earnings per share for the quarter were $2.42, up 12.6% from $2.15 in the second quarter of fiscal 2016. Our diluted shares outstanding totaled $6.9 million for the quarter compared with $7.3 million from the second quarter last year.

Adjusted EBITDA increased 7.4% to $29.9 million, while our adjusted EBITDA margin decreased slightly to 8.1%, mainly the result of the increase in variable compensation expense. Non-GAAP diluted earnings per share increased 12.8% to $2.47 for the second quarter of fiscal 2017.

This non-GAAP metric excludes acquisition-related amortization expenses, other income and the related effects on income taxes. I’ll now turn to our quarterly results from our technology segment, which accounted for approximately 98% of our net sales.

Net sales in our technology segment grew 11.3% to $362.7 million, while adjusted gross billings of products and services grew 13% to $487.3 million. The increases were due to higher customer demand for ePlus’ IT solutions offerings as well as revenues from the IGX acquisition.

Adjusted gross billings are sales of products and services adjusted to exclude the costs incurred in the sale of applicable third-party software assurance, maintenance and services.

Our gross margin on products and services expanded by 80 basis points to 20.2% in the second quarter, this expansion of margin was due to the strategy of shifting towards products with higher margin and increase in gross profit from services and the increase in third-party maintenance and services I mentioned earlier.

Operating expenses in the technology segment increased 18.7% to $50 million compared to $42.1 million last year. The single largest driving factor of this was the increase in salaries and benefits, which was up 20% to $40.2 million. Headcount in our technology segment grew by 10.8% to 1,047 from 945 in September of last year.

As I discussed earlier, we also saw an increase in variable compensation, which was the result of higher gross profit. In the second quarter, we reported a $600,000 increase in G&A expenses; $400,000 of which was related to software license and maintenance expenses.

Adjusted EBITDA for the technology segment increased by roughly 10% to $26.2 million for the second quarter, driven by gross profit, but partially offset by increased operating expenses. Our results by customer end market were little changed and continue to show diversity.

On a trailing 12-month basis, the technology and flood markets were our largest, accounting for 23% and 22% of total net sales respectively. Next with telecom, media and entertainment which accounted for 15% of total sales with the rest of the sales mix split between financial services, healthcare and other. Moving to our financing segment.

Revenues were $8.7 million, down mainly as a result of lower portfolio earnings. However, gross profit in the segment increased 3.8% to $7.4 million as a result of lower direct lease costs, which declined approximately 58% from the same quarter in the prior year.

This sharp decline in direct lease cost was driven by lower depreciation expense related to our operating lease investment. Operating expenses increased $571,000, primarily due to an increase in our reserve for credit losses necessitated by portfolio growth.

Adjusted EBITDA was down 7.5% to $3.7 million as a result of the higher operating expenses I just mentioned. I will now turn to our consolidated year-to-date results. Net sales for the first six months of fiscal 2017 increased 10.5% to $670 million.

This strong sales growth was driven by strong performance in our technology segment where net sales increased by 11.4% to $654.2 million. Adjusted gross billings of product and services increased by 15.9% to $884.8 million, while consolidated gross profit increased 14.2% to $149.6 million.

Our consolidated gross margin expanded by 70 basis points to 22.3%, while gross margin on products and services grew by 80 basis points to 20.5%. Net earnings grew 12.1% to $27.4 million and adjusted EBITDA also increased 11.4% to $49.2 million.

Our first half of fiscal 2017 earnings per diluted share increased 16.7% to $3.91 while non-GAAP diluted earnings per share increased 16.3% to $4.00. Before I turn to the balance sheet, I want to briefly examine results on a trailing 12-month basis as our results can vary quarter-to-quarter.

We feel that looking at our results in this way provides a clear picture of ePlus’ financial profile. On a trailing 12 months basis, net sales rose 7.5% to $1.3 billion, gross profit rose 9.9% to $280.6 million with consolidated gross margin of 22.1%. OpEx rose 12.9% to $200.9 million with salaries and benefits rising 13.1% to $160.4 million.

Operating income for the trailing 12 months was $79.7 million, an increase of 3% from $77.4 million a year ago. Turning now to our balance sheet, we ended the quarter and first half of fiscal 2017 with cash and cash equivalents of $48 million compared with $94.8 million as of March 31, 2016.

The decrease is primarily the result of investments in our financing portfolio, working capital required for the growth in our technology segment and increase in committed inventory to $80.5 million and the repurchase of 328,481 shares under our share repurchase plan.

Our cash conversion cycle for the quarter was within trends of prior periods at 16 days.

For the second half of the year, we remain focused on executing our long-term strategy of geographic expansion, both organically and through acquisitions, expanding our services and solutions portfolio and investing in current and emerging technologies to capture future customer IT spend. I’ll now turn the call back over to Mark for closing remarks.

Thank you, everyone.

Mark?.

Thanks, Elaine. In closing, I want to reiterate that we remain focused on our long-term strategy to service customers and grow our business both organically and through selective M&A.

Our disciplined approach to the business has allowed our balance sheet to continually strengthen over time, while our returns on invested capital remain ahead of our competitors. I’d like to thank our employees for their continued hard work and our customers and vendors for their continued support.

We look forward to providing you another update next quarter. Thank you..

[Operator Instructions] Our first question come is from Matt Ramsay of Canaccord Genuity. Your line is open..

Thank you very much. Good afternoon. Mark, congratulations, it’s the first full quarter as CEO, really strong results. I guess I have a few questions, and the first being obviously 16% growth in the non-GAAP sales metric in the first half of the year seems to me well ahead of what enterprise IT spending trends have been.

So maybe you could kind of walk us through – obviously your business is doing well, but maybe you can walk us through some of the – how you see the industry growing on an organic basis and how we should think about – Elaine mentioned the trailing 12-month sort of, maybe high-single digits growth versus that much larger number in the first half of this year, so just how we should think about the growth overall going forward? Thank you..

Okay. Hey Matt, first of, thanks for the congratulations. A couple of things here. One, we are happy with our results so far through the – first, both for this quarter as well as for the first half.

We believe that we’re executing pretty well on our strategy and our plans as Elaine had mentioned in her closing, really focusing on building out our organic growth with our existing as well as net new accounts, focusing on strategic and accretive M&A and really building out our services and solution offerings that our customers need in today’s market.

As it relates to this quarter, if you look at our revenue growth, there are a couple of things that happened.

One, we do believe we are taking market share, we do have a land and expand strategy, which we’ve discussed on previous call, and this is where we are looking at some of the larger medium to enterprise accounts, working with them on specific projects and then looking to expand the services and the products and the solutions that we sell to them.

As it relates to the quarter, we also had a couple of things that affected our revenues positively. It was Cisco’s year-end in July, also the SLED year-end gave us a nice uptick there. So overall, we feel good about our plans. We do worry about the market a little bit. It’s a little unpredictable.

We’ve got something going on next week called an election that we’re not sure how that’s going to play out, and what that may mean to the market. But we are cautiously optimistic and believe we will continue to outpace the IT spending market..

And just one little more for you, if I could. When I speak to the heads of the enterprise business at Intel for example, they talk about for the breadth of their server business, roughly a 50/50 split now between cloud-based sales for them and on-prem sales to the enterprise.

Obviously in your sort of enterprise focused business, that mix would be different, but any kind of way to ballpark how you’re seeing trends of sales into either private cloud or off-prem cloud for your enterprise customers versus that they are still doing on-prem?.

Yes, a couple of different things there, Matt. It’s hard to give you percentages. I don’t want to just make up anything as it relates to that. One of the things that I mentioned earlier is we’re building out our Cloud Aggregated Services.

Now that’s more for the public play, but we do have what we call cloud readiness assessment that basically sit down with the client, understand their existing environment and then help them analyze what they want to do with their workloads and what applications they want to put out in the public cloud, as well as keep on-prem if you will.

So it’s – I don’t have any percentages for you, but I can tell you in both the mid as well as the enterprise market, we’re seeing nice traction with customers looking for us to help with, hey, there is a lot of choices out there, what should we be considering? Second is, you get a lot of data that goes back and forth from your private cloud, if you will, to the public cloud, and the security issues that go with that.

You’ve got insider threats that they have to worry about. And then they are all trying to get the cost savings that they’re looking for. So we’ve created these assessments in consultative services to help customers kind of make those decisions on what they want to move to the cloud and what they want to keep on-prem..

Elaine, just a couple of little questions.

I guess one, could you maybe talk about the increase in the inventory and the specific reasons and composition to that? And second, you mentioned in your prepared script, salaries and benefits expenses, obviously headcount is up but also you mentioned tied to gross profit, maybe you can talk about how some of those variable comp components are incentivized within the salesforce.

That’ll be helpful. Thank you..

Sure. The inventory rise, it’s important to note that it is committed inventory to grouping customers and it’s related to configuration that we’re performing over time and there was an increase obviously in the need for working capital over the quarter. We do serve large customers that have large rollout within any given quarter.

And I would expect that inventory to rollout off the balance sheet over the coming next quarter or two. In terms of the variable comp, when we have such a large increase in gross profit for the quarter, there are some incentives that we put in place, accelerators and things of that nature that were hit last quarter.

So that is the explanation really for the increase in comp as it relates to gross profit..

Hey Matt, if I could just add one quick thing. What’s nice about this, the incentives that Elaine put in place is around some of the key focus areas that we’ve been trying to drive, so this is by design.

The other thing is, our commission rates are within our normal range and a lot of the incremental commission had to do with the incremental GP or gross profit growth of 14%. So it’s a positive and still within our commission ranges..

Thank you very much, guys. Good afternoon..

All right, Matt. See you soon..

Thank you..

Thanks. Your next question is from Anil Doradla of William Blair. Your line is open..

Hey, guys. This is Maggie Nolan in for Anil. Congrats on the good results. I was wondering, since we’re nearing that one-year mark, how the integration of IGX is going. I’m wondering if you feel like those employees are fully ramped up and contributing to the topline perhaps driving some of the success this quarter.

I did notice that their salaries and benefits is back, and a little bit more normal range for you all. So it seems like maybe they are driving a little more revenue. And any other color you could give on the integration of the acquisition will be appreciated..

So far, we’re very happy with the integration of the IGX team in terms of the expertise that they brought across from a security perspective, some of the vendor relationships that they had that were a little bit stronger than we had at ePlus.

The other thing that we’re seeing is, as it relates to the UK or the international part of IGX is, we’re now building out our vendor relationships that they did not have that we have at ePlus, so they’re leveraging some of our US capabilities and relationships to buildup incremental products and services that they can sell.

We’re also seeing that we’ve got some real nice synergies, where we can support customers across the Atlantic, meaning some of our bigger US customers that are looking for international deliveries and then vice versa, where some of the UK customers are looking – and may have a US presence and we’re building plans to go after that.

So net-net, we are happy with the integration so far and feel good where we are..

And then kind of going along with that theme, how is the acquisition pipeline looking for you all and is that geographic footprint expansion that you talked about still kind of the main driver there?.

Yes. Well, a couple of different things. One, there is no lacking of potential opportunities in the market from an M&A perspective. We still have a fairly – what we believe a fairly disciplined approach looking at M&A.

Currently the three we’ve kind of talked about over time or four really is getting the right – finding somebody that gives us an incremental territory coverage, maybe has a technical expertise that we may not have or we might be able to leverage across the rest of ePlus. We also look at the accounts that they have and then the people.

And then at a really, I guess at a 20,000 foot view, we think we’ve done a fairly nice job of what I call tuck-under acquisitions.

We’re also focusing on some of our key areas, whether it be security services like opportunities or emerging technologies, maybe somebody that has some type of expertise in a technology that’s emerging over the next two to three years..

And if I could just squeeze in one more, since you brought it up, how are the emerging technologies progressing? I think a couple of quarters ago, you did give us security as a percentage of revenue. Have you seen that increase and any color in that area would be great? Thanks guys..

No problem Maggie. Yes, security is one of our key focus areas.

And over the trailing 12 months, I believe we’re up about 15% or so, right Elaine? We continue to invest in headcount, both from a, what I call a consultative services or security experts as well as sales headcount to sell our security portfolio and we’re expanding our vendor relationships in the security space.

So we’re bullish on the security market as well as opportunity.

Is that what you needed, Maggie?.

That’s great. Thanks, congrats again..

Okay. Thanks, we see you soon..

Thanks. Your next question is from Matt Sheerin of Stifel. Your line is open..

Yes. Thanks, good afternoon. Just a couple of questions for me. As – just off the last question concerning security and then also your services business, how much of that business now is annuity business where you’ve got contractual agreements with customers. So you’ve got a pipeline and a backlog of that revenue that’s streaming in..

It’s Mark here. One, we don’t break that out. What I can tell you is, we are selling the full suite of security solutions that are out in the market. So from the, I’ll call it securing the parameter to securing data as well as all the different types of cloud solutions. As you know, some of those are as-a-service or subscription-based, if you will.

So we’re selling across the full gamut of security, both products, services and solutions, but we don’t break that out. We do feel pretty good about the expertise in our go-to-market plans around security. We feel like we’re gaining market share.

I mentioned on Maggie’s question the trailing 12 months we’re up 15% and we’re going to continue to focus on that area..

Okay. And then you’ve been growing the business on a net basis double digits three quarters in a row now with some big quarter-to-quarter swings. And it looks like there is some seasonal trends here, particularly with the September quarter as you talked about the heavy SLED exposure and then the Cisco exposure with their fiscal close.

In the last couple of years, your December quarter was down sequentially.

I know you don’t give guidance, but any sort of visibility that you can give us in terms of what you’re seeing at near-term with the business, whether it would be on a sequential basis or year-over-year trends?.

Okay. Let’s see. Matt, here is what I can tell you. As we all know at year-end, you have a lot of year-end flush that comes into play. And when I say that, meaning customers that have money within their budgets that they need to spend by the end of the year.

Second is, we are going to continue to invest in our customer-facing headcount and building out our solutions and services capabilities. So we’re going to continue and invest in those areas to try to touch more customers and grow our market share. And we do believe we’re taking market share, some market share away from our competitors.

The hard part is, if you look at some of the analysts that are out there, they are talking about flat-to-down in terms of IT spending. As I mentioned earlier, the overall macro in terms of the market is kind of unpredictable. It’s a little bit of a challenging market to kind of forecast what’s going to happen with the election.

So there’s just a few things, but we are going to continue to scale the business and invest in people and offerings. And right now we feel very good about the quarter, the first half and our execution so far..

And do you plan and do you have a number in mind in terms of expansion of your headcount between now and the end of the year?.

Matt, that’s not something that we publicly disclosed, but if you look at the past year, year-over-year, we’re up approximately 99 heads; of which, the majority of those are customer-facing..

Okay.

And then have you added any significant vendor lines in the last quarter or see any big shift in your vendor exposure as a percentage of revenue?.

No, nothing, nothing in terms of any major shifts as it relates to our top vendors Matt. Nothing in terms of some of the emerging technologies have some really nice technologies and plans that they’re building with us. But it’s more on the early stages of what we’re trying to do with them.

So nothing that I’d say would be game changing as it relates to our vendors and what we’re doing with them..

Okay.

And the Cisco exposure, is that something you just give on an annual basis or could you give me as a quarterly number?.

It’s 50% for the quarter and it’s the same as it was in the prior period quarter – prior year quarter..

That’s okay. Okay, thank you..

Well. All right, Matt. We see you soon..

Thanks. Your next question is from Matthew Galinko of Sidoti & Company. Your line is open..

Just one quick question for you. Mark, you mentioned disruptive technologies maybe changing customer purchasing patterns. I was wondering that sounded a little new in terms of your prior commentary or compared to your prior commentary. So I was wondering if there is anything stood out this quarter..

No. Nothing really that stood out. When I talk about some of the technologies, it’s some of the newer technologies or solutions that we’re building for our customers. I think storage, you still have people trying to make that decision as it relates to flash and the all flash arrays and what’s there.

But nothing earth-shattering as it relates to new solutions or technologies that are making a dramatic difference either way. We continue to see a couple of different things though.

One, we’re trying to leverage our data center capabilities as it relates to the cloud, so we found that our expertise in the old kind of compute storage and networking has played well in our cloud offerings and services.

As I mentioned earlier, we’re continuing to invest in the security space, both in headcount and expanding the security vendor relationships and then we’re building out our services capabilities across those areas. So those are the bigger focus areas and nothing that’s dramatically different if you will..

Thank you. At this time, I see no other questions in queue. I’ll turn it back to management for any closing remarks..

Okay. Thank you, Vincent. And if I could thank everybody for taking the time to join us for the earnings call and I would like to wish everybody a happy and healthy holiday season. Thank you and we’ll see on the next quarterly call. Take care..

Ladies and gentlemen, thank you for your participation in today’s conference. This now concludes the program, you may now disconnect..