Mark Marron - CEO Elaine Marion - CFO Erica Stoecker - General Counsel Kley Parkhurst - SVP & Assistant Secretary.

Anil Doradla - William Blair Matt Sheerin - Stifel Matthew Galinko - Sidoti.

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 with me is Mark Marron, CEO and President; Elaine Marion, Chief Financial Officer; and Erica Stoecker, our 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 December 31, 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 thank you for joining us on our call this afternoon to discuss our third quarter and nine month financial results for our fiscal year 2017. We are pleased to report that this was another solid quarter for ePlus.

We succeeded in posting strong year-over-year revenue growth specifically our consolidated net sales increased 9.4% and our technology net sales increased 10%.

Our strong performance resulted from a combination of our organic and acquisition initiatives, both of which benefitted from our ability to provide transformational solutions that enable positive business outcomes for our customers. Third quarter net earnings increased 22.6% and our adjusted EBITDA increased 22.3%.

This growth resulted from gross margin expansion and cost discipline. Both consolidated gross margin and gross margin on sales of products and services expanded by a 110 basis points benefitting from improved product mix of higher margin products and services as well as greater traction with emerging vendors who tend to have higher margin products.

The track record we have achieved in gross margin expansion in the third quarter and first nine months of this year has given us the ability to produce EPS growth that exceeded revenue growth by a factor of three.

This was accomplished while absorbing the cost of additional customer facing headcount and the expenses related to our latest acquisition of Consolidated IT services.

In addition to delivering robust financial results, we have continued to make investments in our business to ensure we are best positioned for future market opportunities and to be a relevant partner for our customers to deliver the IT driven business outcomes they require.

Approximately 90% of the headcount growth in this year's third quarter represented engineering and marketing personal. Our ability to both attract and retain high quality talent has yielded positive results for us and our clients. Thanks to our recruit, retain and development program.

As our organic growth strategy has been developed around building market share by offering complex solutions that differentiate ePlus and rolling out new programs and services to help our client need today's IT challenges.

Our third quarter and nine months results underscore how ePlus is positioning in the high growth areas of security, cloud and digital infrastructure has resonated with our client base. Some of these solutions involve providing consultative or advisory services around the cloud.

For example, one of our not-for-profit clients that wanted the benefits of a public cloud like system that was actually a private cloud in your datacenter. First, we offered an envisioning session that used [indiscernible] to help our client understand the optimal cloud strategy and roadmap.

This involved an overall architectural design developing migration and performance metrics, total cost of ownership cloud modeling and cloud security and risk health checks. Ultimately, a full solution for the client and a margin enhancing project for us. We have continued to expand our security programs and services as well.

For example, our cyber security strategy workshops help our customers identify and isolate their security issues, prioritize them based on specific needs and developed a roadmap for security improvement. We have also recently introduced our ePlus cyber security management program.

This program provide security as a service that is a subscription service that continually accesses a client's security posture, offers a proactive catalogue of services and accommodates the new realities of the cloud and mobility by developing a stronger security management framework to better contain and forecast risk.

This supports our clients drive to incorporate security as a culture throughout their enterprises. Year-to-date our sales of security product and services increased at a double-digit rate and accounted for 16.7% of the company's adjusted gross billings of products and services up from 16.2% in the similar period last year.

As you know acquisitions are an important component of our strategic plan and enabled us to effectively expand our footprint by brining on companies that can strengthen our technical knowledge, broaden our customer base and geographical reach and give us the ability to provide meaningful cross sell opportunities.

In December, we acquired the IT Services division of Consolidated Communications, giving us a strong branch in the 16th largest metropolitan area in the U.S. expanding our footprint in the upper Midwest and adding new managed service clients.

Similar to all of our recent acquisition our Minneapolis branch was integrated into the ePlus infrastructure the day after closing. Meaning that new business was conducted using ePlus systems and processes.

Immediate prior and for several weeks after closing we have ePlus employees on site doing the on-job training and acquisition swap teams in all of our operating areas like purchasing, credit, accounting, engineering and sales to support our new employees and customers to make the transition as seamless and as painless as possible.

Given that acquisitions are a key focus of our strategic growth plan we believe that our acquisition integration methodology is a key competitive factor. Another example of this would be our acquisition of IGX in 2015.

IGX has provided us with the deeper domain expertise and advanced security solutions, opened the Connecticut market for us, broadened our customer base in Boston and New York and gave us a gateway to the UK and the rest of Europe through their London subsidiary.

This acquisition has allowed us to support our existing global customers in Europe and also provides support and services to IGXs European customers in the U.S. In summary, we continue to execute on our strategic growth plans and we believe we are well positioned to capture future market opportunities. We are pleased with our year-to-date results.

As we announced our Board of Directors declared a 2 for 1 stock split, the first stock split in our history and a continuation of our focus on creating shareholder value. With that I would like to ask our CFO, Elaine Marion to review our Q3 and nine months financials.

Elaine?.

Thank you, Mark, and thank you everyone for joining our call. I am pleased to report that in the third quarter and first nine months of fiscal 2017 we delivered strong financial results.

Third quarter year-over-year comparisons were especially strong given that we are comparing against what was a relatively soft quarter for us in the similar period last year. However, as Mark mentioned we executed very well in both this year's third quarter and nine months and have seen increased demand for our IT solutions offerings.

While the latest industry forecast estimate worldwide IT spend growth approximately 2.7% in calendar year 2017. We believe our strategy to invest in developing solution, grow our managed and professional services capabilities, and acquire customers organically and through accretive acquisitions, positions us to outpace the broader IT market.

In the third quarter of fiscal 2017 our consolidated revenue grew by 9.4% year-over-year to 326.7 million. Gross profit increased 15.2% to $73.8 million, which yielded a 110 basis points increase in gross margin to 22.6%.

This improvement in gross profit and gross margin was the result of a shift in our product revenue mix as we increased sales of higher margin products. Our operating expenses increased 13% to $52.5 million, representing 16% of net sales.

The majority of this increase was driven by the increase in variable compensation as a result of increased gross profit as well as an increase in headcount. Our headcount grew by nearly 10% from 1,164 from 1,060 last year.

The acquisition of the IT services business at Consolidated Communications added 48 employees of the 104 total new personnel 95 were sales and engineering professionals, with the rest administrative hires.

For the third quarter our G&A expenses totaled $6.4 million or 2% of net sales, this is in line with our historical average despite its expenses associated with closing and integrating and acquisitions. Professional fees were $1.4 million less than 0.5% of net sales, and significantly lower than in fiscal 2016.

I’ll discus our expenses in more detail when I get to the technology segment results section of the call. Operating income was $21.3 million, an increase of 20.8% from $17.6 million last year. This was driven by the increase in gross profit I mentioned before.

Diluted earnings per share for the quarter were $1.81, up 29.3% from $1.40 in the third quarter of fiscal 2016. Our diluted shares outstanding totaled $7 million for the quarter compared with $7.3 million from the third quarter last year.

Adjusted EBITDA increased 22.3% to $23.2 million, while our adjusted EBITDA margin improved 70 basis points to 7.1%. Non-GAAP diluted earnings per share increased 30.8% to $1.91 from a $1.46 in the third quarter of fiscal 2016.

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

Net sales in the technology segment grew 10% to $318.3 million, while adjusted gross billings of products and services grew 9.8% to $432.4 million.

The increases were due to higher demand for our solutions specifically in the telecom, media and entertainment markets, as well as an increased contribution from IGX which was acquired in the third quarter of fiscal 2016.

Adjusted gross billings are 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 products and services expanded by 110 basis points to 20.7% in the third quarter, this margin expansion was the result of a shift in our sales mix towards higher margin product and an increase in gross profit from services.

Operating expenses in the technology segment increased by 15% to $49.7 million compared to $43.2 million in the third quarter of last year. The largest contributor to this increase was salaries and benefits, which increased 14.6% or $5.1 million to $40.2 million.

This was due to the increase in headcount and the increase in variable compensation as a result of higher gross profit. In the third quarter of fiscal 2017, we reported an increase of $1.2 million in the general and administrative expenses; $400,000 of which was related to increases in software license and maintenance expense.

Adjusted EBITDA for the technology segment increased 17.5% to $18.8 million in the third quarter, mainly the result of increased gross profit. In the third quarter, we maintain our diversified portfolio of customers by end markets.

On the trailing 12-month basis, the technology and flood markets were our largest, accounting for 22% and 21% of total net sales respectively. Next with telecom, media and entertainment which accounted for 16% with the rest of the sales mix split between financial services, healthcare and other. Moving now to our financing segment.

Revenues were $8.4 million, mainly the result of lower portfolio earnings. However, our gross profit for the third quarter increased 16.3% to $7.2 million as a result of lower direct lease costs, which were down nearly 63% from last year.

This significant decline in direct lease cost was driven by lower depreciation expense resulting from our operating lease investment. Operating expenses declined 13.4% to 2.8 million due to lower salaries and benefits as well as a reduction in our reserves for credit losses.

Adjusted EBITDA for the financing segment was up significantly 48.4% to 4.4 million as a result of the increased gross profit and double digit decline in operating expenses. I will now turn to our consolidated year-to-date results. Net sales for the first nine months of fiscal 2017 increased 10.1% to $996.6 million, from $904.8 million.

The double-digit sales growth was led by strong performance in our technology segment where net sales increased by 10.9% to $972.5 million. Adjusted gross billings of product and services increased 13.8% to $1.3 billion, while consolidated gross profit increased 14.5% to $223.4 million.

Our consolidated gross margin expanded by 80 basis points to 22.4%, gross margin on products and services also grew by 80 basis points to 20.5%. Net earnings grew 15.2% to $40.1 million and adjusted EBITDA increased 14.7% to $72.4 million.

Our first nine months of fiscal 2017 earnings per diluted share increased by 20.5% to $5.71 while non-GAAP diluted earnings per share increased 20.7% to $5.90. Turning now to our balance sheet, we ended the third quarter with cash and cash equivalent of $69.7 million compared with $94.8 million as of March 31, 2016.

This decrease was primarily the result of investments in our financing portfolio, and increase in working capital required for the growth in our technology segment and increase in committed inventory to $111.1 million and the purchase of 328,481 shares bought under our share repurchase plan.

As of December 31, 2016, our cash conversion cycle was 27 days. This increase led the result of an increase in committed inventory I mentioned previously. Differed revenue also increased 40 million due to payments received for the inventory I mentioned above.

Both the increase in inventory and differed revenue was related to large projects for a high credit quality customer. We expect the majority of this inventory to ship over the next two quarters.

We also announced today that our Board of Directors has declared a 2 for 1 split of our common stock in the form of a 100% stock dividend payable on March 31st, 2017 to shareholders of record at the close of business on February 16th, 2017. All share and per share amounts discussed on this call are prior to the stock split.

For the remainder of the year we are committed to executing on our long-term strategy of investing in headcount to develop our IT solution, growing our managed and professionals services, penetrating further into the Fortune 500 customer base and capturing additional IT spend, identifying and targeting emerging technology trend and maintaining a robust balance sheet that provides us with the financial flexibility to capitalize on strategic acquisitions.

I'll now turn the call back to Mark for closing comments. Thank you everyone.

Mark?.

Thanks Elaine. To sum up Q3 was a strong quarter for us across the range of key metrics and we believe has set the stage where continued progress as we close out fiscal 2017 on March 31st and enter fiscal 2018.

We believe our revenue growth reflected market share gains resulting from investments that have positioned ePlus to take advantage of high growth business opportunities and services that are less commoditized and more value add.

This has enhanced our gross margin profile and given us the flexibility to build internal engineering expertise that will support future growth. You can expect us to continue to organically build out our footprint in security, cloud and digital infrastructure and to take advantage of expansion opportunities through an active acquisitions strategy.

Operator I will now like to open the call to questions. .

[Operator Instructions] Our first question comes from the line of Anil Doradla with William Blair. Your line is now open..

Couple of questions, so Mark as you exit calendar 2016 get into 2017 how would you -- what is your crystal ball say in terms of the demand environment?.

I always love your crystal ball question. So it's a couple of different things in your list. If you look at our quarter and year-to-date, we're pretty pleased with our results both top line and bottom line. There are some things that we're seeing, that there is opportunities in security and cloud.

Some of our service plays that seem to be resounding with our customers. The only thing that I temper is, one, if you think about it, there is a little uncertainty from a political standpoint to see how things kind of rollout.

We have seen some security vendors that have a little bit of saturation in their products, but then there is services opportunities there. And then we always worry about overall as if you look at some of the analysts out there, in terms of IT spend projections being in the low single digits, I think Elaine has mentioned in like the 2.7%.

So that just gives us a little pause, just to make sure what goes on and from a seasonality standpoint for us Q4 is normally one of our slower quarters. So those are the things that we're looking at right now..

Great. You talked about 16% coming from security. You also talked about security-as-a-service right.

So can you help us understand kind of the puts and takes as you build-up the security-as-a--service platform? Is this is a platform that's in place, do you have proprietary tools? This would be more servicing the customer in terms of kind of material -- more like many hours, right? So help us understand, can you -- how the margin profile is going to look like and how is it going to shake-out in the next couple of years?.

Okay, so couple of different things there, Anil. So first off in terms of our security, we had some nice growth year-to-date in terms of some of the things that we've talked about in prior calls with trying to become the security go-to partner for our customers.

A couple of things we've done is, one, we've created what we call a cyber workshop, and basically what that does is really sit with the customer for a day, it's a round table at the customers site.

We try to identify and isolate some of the security risks that they might have, and then kind of build the roadmap of the things that they need to put in place. And that's around everything from user privileges, data lost prevention and things like that.

On top of that what we've added is this manage effectively security service and what it is there is it's always assessing the client's security posture, so give them a fell for where they are. There is a proactive catalogue of services that they can pull from.

It accommodates some of the new realities that we have in the cloud and the mobility space, and then really it's building a framework to kind of contain risk, if you will. So it's been fairly well received both internally and externally, but we'll see how it goes. Now with that said, as we talked about another call.

We believe we've been able to increase our gross margins overtime based on some of the services offering and capabilities that we're building and we would hope overtime this could positively affect them..

So mark how do you price this? Is it the number of people on hourly rate or is it on a transactional basis?.

It’s a little bit more than that, Anil. Maybe that’s a one-off question if you wouldn't mind that I can reach back out to you and walk you through it. It’s a little bit more involved than that..

Thank you. [Operator Instructions] And our next question comes from the line of Matt Sheerin of Stifel. Your line is now open..

Just a few questions.

Just on that 16% number for your security and services as a percentage of revenue what was it a year ago?.

It was, I believe 16.2% versus 16.7%, Matt..

The percentage is of adjusted growth billing of product and services, not net sales..

But on a like-for-like basis it would be even a bigger delta or gap?.

In terms of dollars, yes. Percentage of larger dollars, yes..

Yes, okay. And then just -- was that change the biggest driver of the increasing gross margin or there are other services beyond or things like a third-party warranty or I guess that's perhaps in your services segment. What are the other drivers of your gross margin? You did talk about emerging products soft -- storage, et cetera.

where you do get better margins from the vendor there? Was that part of it, what are the other drivers of the margin growth?.

A couple of different things. One is coming from some of the solutions and services that we're focused on. So more of the, I'll call it value add solutions versus commodity play. And that’s something that’s been going on. So I am clear, not just for this quarter, but over the past few years.

The other thing is we have talked about was the emerging vendors, so there are some emerging vendors in some key technology areas that we've been working with and the margins have been fairly attractive there.

The other thing that’s affected our margins positively as you know is we've continued to focus on maintenance renewals and providing level one support to our customers. So that’s also with the net to gross calculation that Elaine has talked about in prior calls, has helped out gross margins as well.

It's more than a few things we believe that’s kind of helped those margins up..

So what would you characterize than the total services business and not just security, but if you roll it all up as a percentage of your gross profit?.

As you know we don’t give guidance on breaking that out. But as we've talked about it in prior calls we are continuing to invest in building out our services capabilities, our resources, our offerings.

So the security service that we had talked about earlier is just one of the things that we are continuing to roll out in our services or managed services space. That's the cybersecurity program that Anil had asked about.

We've got -- we're rolling out additional plans around what we call Enhanced Maintenance Support 2.0 and then we are going to continue to expand on our offerings across some of our other key vendors for example, Palo Alto and a few others..

Okay, and you've expanded your gross margin year-over-year for several quarters in a row now and given the mix shift, do you expect to continue that streak?.

I wish I could go back to Anil's crystal ball question, Matt, for that one. Here is what you have, you've got a few things. We believe we're in a pretty good spot, meaning based on our size and scale we're been brought into opportunities both by vendors as well as customer referrals. We're expanding our sale teams.

Now with that, we've talked in prior calls about our land and expand.

So some of the bigger larger enterprise customers, we've got plans in place and we're now able to play in some of those spaces with those customers based on our capabilities, but traditionally the margins are a little bit lighter in that space to start with, and then you try to move them up overtime.

So it's kind of tough to give you a real feel, where I will tell you, we feel pretty good about what we've done with the gross margins both for the quarter and the year-to-date. But there is a few large deals that can swing that either way at any given time in a quarter..

Okay, and just skipping around here on the year-over-year revenue growth of 9.4%. Could you tell me what their organic number is, if you back out, I know what you had [ph] not even a month of that consolidated revenue. But I know you also did an acquisition a year-ago in the December quarter of Q4.

So Elaine, what's the organic growth number?.

So it's about 50% is organic, 50% acquisition related..

Okay, so it's like, call it 5% or so organic growth, okay..

Exactly..

Okay. And then just in terms of looking at that consolidated number, that acquisition of that company up in the upper-Midwest.

What was, in terms of going forward, the revenue run rate expectations there?.

Yes, the press release had $55 million for calendar '15, was their run rate prior to our acquiring them..

Okay, and you only captured probably a third of that on a quarterly basis of course, in the December quarter, right?.

Yes, that's 25 days, we had them for about 25 days in the quarter..

Okay, I think that's it. Well, actually another question. Just in terms of Mark, you talked about emerging vendors, you talked about security.

Are there product [indiscernible] or product areas where you are looking to expand your offerings whether it be talking to other vendors or looking at acquisitions that would get you there?.

Well, in terms of the areas Matt, we starting to see a lot more in the analytic space. So if you look at some of the acquisitions that are going on Cisco with originally Lancope and then just recently with -- now I'm just drawing a blank on them -- AppDynamics.

I think HP just acquired a small startup that's in the security analytics space, kind of doing the machine learning, if you will.

So I believe there will be an opportunity for us to kind of expand our business a little bit more in the analytics space which in turn should, if you think about it, drive hardware in terms of compute, storage, networking, potentially higher storage software margins and potentially services..

And just lastly for me on Cisco, what was the percentage of revenue there?.

It was 45% for the quarter..

Thank you. And our next question comes from the line of Matthew Galinko with Sidoti. Your line is now open..

I guess you talked a bit more about your acquisition strategy today than I think you have in the past, so I'm wondering if you are seeing an opportunity to become more active on the M&A front or am I reading into that wrong? And is that a function of just you're scaling up at this point or are you seeing attractive valuations out there where smaller vendors are less able to compete and you have an opportunity to roll them up more aggressively?.

You want to handle that one Kley?.

Matt, its Kley. Thank you for the question. We are seeing a little bit of doubt [ph], there is a lot of activity in the market right now. I anticipate that private owners with anticipated lower tax rates this year will probably bring their companies to market earlier then they might have thought to previously.

Also our people are having good growth and now is a good time to sell and we are also staffing up internally, with more of a M&A swap team approach, trying to take the advantage of the opportunities in the market..

Do you feel that today you're capacity constrained at all in terms of integrating non-traditional deals or are you well positioned?.

No, I think we've done by 22 deals since '96 and I think we have a pretty well-oiled machine to take them down. And as Mark mentioned, we have a formula now where we really turn the standard looking acquisition into an ePlus branch almost overnight. And they're totally integrated.

So the integration question really is not even a question for ePlus, like it is for some others..

And maybe last one, maybe just an update view, if you can update us on your view of the UK and European market, given you've had IGX for about a year now?.

Nothing in terms of Brexit or anything affecting business over there. We have seen some progress with our IGX acquisition, meaning both pipeline and revenue growing, specifically over in the UK and Europe.

It's still somewhat small compared to our overall revenues, but what we're starting to see is the synergies from some of our bigger customers in the U.S. that are now leveraging our UK capabilities and presence across not just the UK, but also across Europe. And then also there are some European customer that we are now actively engaging in the U.S.

The other thing I can state is, we're going to try to build up our UK and European capabilities similar to what we have in the U.S.

We've made some investment in some of our key vendors specifically Cisco and a couple other where we're adding additional headcount to be able to support the demand in that market as well as while comes across the Atlantic..

Are you finding that your gross strategies and vendor relationships that you've had in the U.S.

are applicable by enlarge in the European market?.

Yes, Matt I haven’t seen anything that would suggest otherwise..

Excellent, alright. Thanks guys..

Thank you. And we have a follow-up question from the line of Anil Doradla with William Blair. Your line is now open..

Just the couple of clarifications. So obviously, you guys are focusing a lot on the Fortune 500 customers.

Can you give us a sense of how many logos you have currently and on the average how many do you add a quarter -- in a quarter?.

Anil, one thing we do is, we only talk about the customer adds at the end of our fiscal year. So we were over, I think it was over 3,100 customers at that time. To be clear, enterprise is just one of our place, we focus in what I'd call mid to the enterprise space, and we have what we call account executives throughout the U.S.

and over in the UK and Europe that are responsible for accounts in both of those spaces and building relationships and providing the solutions that those customers look for.

What we've seen is as we've continued to scale both in the size and capabilities, we're able to play in some of those bigger accounts a lot more than we traditionally would have, let's say years ago..

And I'm not sure Elaine whether you talked about headcount addition? What was the number of people you added?.

On a year-over-year basis it was the 104 and about 95 or so were sales and engineering focused..

Very good. Thanks a lot guys and congrats once again..

Thank you. And I'm showing no further questions at this time. I would now like to turn the call back over to Mr. Mark Marron for closing remarks..

Thank you. And everybody as we noted we're pleased with our Q3 and year-to-date results. We're going to continue to invest in customer facing headcount to touch more clients as we move forward.

We're going to look to enhance and expand our capabilities in terms -- from a service as well as solutions standpoint, and look for the right opportunities to expand our footprint with acquisitions.

With that said I'd like to thank everybody for participating in today's call and we look forward to seeing you at upcoming Investor meetings and conferences. Thanks operator and have a good day everybody..

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a great day..