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, SVP. 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, 2017, and our Form 10-Q for the quarter ended September 30, 2017, 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 the non-GAAP financial measures, and we have posted a GAAP financial reconciliation on the shareholder information section of our website at www.eplus.com. .

Reclassifications of prior period amounts related to numbers of shares and per share amounts have been made to conform to the current period presentation due to the March 31, 2017 stock split. .

The effect of the stock split was recognized retroactively in the stockholders equity and in all share data. The financial statements include the effect of the stock split on the per share amounts and weighted average common shares outstanding for each of the 3-month periods ending September 30, 2017 and 2016. .

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

Mark?.

Thanks, Kley, and thank you for participating in today's call to discuss our second quarter 2018 results. .

This was a quarter of solid performance across key profitability metrics. Consolidated gross profit grew 6.9% to $87.6 million and gross margin increased 150 basis points to 23.6%. .

Following the strong 23% sales growth that we achieved in the first quarter of this year, our second quarter sales were flat as compared to the year-ago period,.

in part because the current quarter reflected a higher proportion of sales that were reported on a net basis, while adjusted gross billings of products and services increased 3.3% for the quarter. .

We continue to benefit from our investments in the high-growth areas of security, cloud, and digital infrastructure. We are pleased to report that security products and services represented 17.5% of adjusted gross billings in the second quarter. .

And this metric increased 170 basis points year-on-year and 40 basis points sequentially. In the first half of 2018, adjusted gross billings of security products and services grew 30%, compared to the first half of 2017, as security continues to be top of mind for our customers.

Another high point of the quarter and last 6 months is our progress in growing services as measured by revenue growth, expanded offerings and human capital. .

Our OneCloud acquisition completed in May, significantly expanded our cloud service and trainings offerings by moving us to the forefront of IT automation and orchestration, DevOps, OpenStack and other related technologies.

We're continuing to train and expand our sales and engineering teams in these new disciplines and utilizing OneCloud's highly trained technology consultants, architects, developers and trainers to deliver the ePlus OneCloud value proposition to our customers. .

We believe that OneCloud's unique skill sets will also help increase sales of traditional ePlus products and services, as we continue to drive the penetration of their services to our over 3,200 enterprise and mid-market customers. .

We continue to view consultative and annuity services as a key differentiator and a long-term growth driver for ePlus. An example of how we're leveraging OneCloud's capability is how we're able to help a global enterprise customer move from on-prem to cloud with a Microsoft Office 365 migration for a significant number of e-mail accounts.

We leverage resources from our OneCloud team in both the U.S. and India and local ePlus resources to give us the scalability and ability to provide around-the-clock work for this project at an effective price.

We're selling both a software subscription and services, while creating a methodology and tool set to facilitate the migration, which can be replicated for other customers.

We're also seeing the benefits of our enhanced maintenance services program, which is the service that combines our leading managed service capabilities with vendor assurance programs.

This program provides our customers with transparency, efficiency and higher service levels to ensure their IT investments are protected without lapses in coverage or downtime.

It results in higher margins, albeit over time, than traditional third-party maintenance sales, expands our managed service platform to reduce marginal cost and gives us better visibility into the customer's IT state and strategy so we can properly leverage resources to drive cross-sell and upsell opportunities. .

A recent example of this was a health care client that was looking for a higher service level and standard maintenance.

We provided a bundled services offering that added real-time monitoring and 24/7 call center support, alerting them to a problem before they encounter it and helping it -- helping to provide faster resolution and thus better patient outcomes. .

For ePlus, it also locked the client into a 3-year deal at higher margins. In mid-September, we again executed on our M&A strategy of expanding professional services, managed services and geographic reach with the acquisition of Integrated Data Storage or IDS.

This transaction expands our Midwest presence with a strong customer base, engineers and salesforce, and also bolsters our managed service offerings with new to ePlus cloud hosting services, disaster recovery and backup as a service.

Over time, we see significant opportunities to scale these annuity service offerings into our broader customer base and also, as is typical for acquisitions, bring our broader line card of traditional products and services to their customers to drive revenue growth. .

ePlus investments in highly-credentialed engineering and sales and marketing personnel have been a critical element in enabling us to support our customers to every phase of the IT life cycle. .

In fact, just yesterday, we announced that ePlus received Cisco's Global Award for Lifecycle Management Partner of the year. This award highlights the services which ePlus brings to help ensure customers realize the value of their technology investments over the entire life cycle of their purchase, activation and adoption.

The award also reinforces the investments that ePlus has made to assist our customers across our life cycle practices including software, security, cloud and digital infrastructure. .

While we remain focused on holding the line on cost, it's worth emphasizing that roughly 85% of the 17% increase in headcount this second quarter is client facing, which is a necessary investment for our future success and we believe positions us well for future growth. .

We are scaling our human capital to meet the growth requirements of the marketplace in terms of geographic coverage as well as broadening our portfolio to meet the demand for emerging and cloud technologies. .

On our financing segment, net sales increased 38% this quarter due in part to early terminations of financing agreements. Our financing business tends to be somewhat lumpy and post-contract earnings can create sizable revenue bumps relating to specific transactions. We're pleased with our first half revenue performance.

Sales increased 10.2% year-on-year, significantly outpacing overall IT spending growth and demonstrating strong demand for ePlus solutions across our enterprise and mid-market customer base. .

We plan to continue to supplement organic growth with acquisitions that increase our service offerings and solutions, expand our geographic reach and allow us to cross-sell our services to acquired customers and acquired services to our existing customers. .

Our strong balance sheet provides substantial capital for strategic transactions and our scaling culture positions ePlus as an excellent platform for acquisition growth. .

To some up, this was a good quarter for ePlus with positive results achieved on key profitability metrics and continued progress made in expanding our solution portfolio.

First half momentum, together with the demand we are seeing from our customers around emerging and rapidly growing solutions supports our confidence in ePlus positioning moving into the second half of our fiscal year. I will now ask Elaine to review our second quarter 2018 financial results in more detail.

Elaine?.

Thank you, Mark, and thank you, everyone, for joining the call. We are pleased with the gross margin and gross profit improvement we experienced in the second quarter. .

Our year-to-date results, double-digit growth across the board, showed the benefits of our investments in high-growth areas and position us to grow ahead of the overall IT spending for fiscal year 2018. .

Let's start with our consolidated quarterly overview. .

In the second quarter of fiscal 2018, our consolidated revenues were essentially flat at $370.8 million when compared to last year's second quarter growth in net sales of 10.5%. .

Our adjusted gross billings of products and services grew 3.3%. This quarter, the adjustment from adjusted gross billings to net sales of product and services was 29% as compared to the prior year of 26%, reflecting a higher proportion of sales of third-party software assurance, maintenance and services. .

We've built a team which specializes in these services and find that customers value, the transparency and efficiency we bring to the process of making sure their technology investments continue to be covered without lapse by manufacturer support agreements. .

Gross profit was up 6.9% to $87.6 million, and our gross margin widened 150 basis points year-over-year to 23.6%. .

The improvement in gross margin was driven by an increased mix of products and services, which are accounted for in the net basis, as well as higher service revenues. Our operating expenses increased 9.3% to $58.7 million. The majority of this increase reflects higher salaries and benefits due to increase in personnel. .

Our total headcount grew by 17% to 1,282 from 1,096 a year ago with the majority from acquisitions and primarily for customer-facing positions, including 162 sales and engineering personnel. The increase in salaries and benefits was also attributable to higher health care costs. .

Operating income of $28.8 million increased 2.2% year-over-year. Net earnings increased $17.2 million, 2.7% higher than last year. Adjusted EBITDA increased 3.4% to $31 million and our adjusted EBITDA margin increased 20 basis points to 8.3%. .

Diluted earnings per share for the quarter were $1.23, up 1.7% from $1.21 in the comparable quarter of 2017. .

Non-GAAP diluted earnings per share increased 3.3% to $1.27 for the second quarter of fiscal 2018. This Non-GAAP metric excludes acquisition-related amortization expenses, other income and expense and the related effects on income taxes and the tax benefit associated with the vesting of share-based compensation during the quarter. .

Our diluted shares outstanding totaled 14 million for the quarter compared with 13.9 million in the second quarter of last year after adjusting for the 2-for-1 stock split on March 31, 2017. .

I'd now like to discuss the quarterly results from our technology segment, which accounted for roughly 9% of our net sales. Technology adjusted gross billings of product and services grew 3.3% to $503.6 million, while net sales in our technology segment declined 1% to $358.8 million. .

Our net sales were impacted this quarter by a higher proportion of sales of third-party software assurance, maintenance and services, which are presented on a net basis as we continue to focus on this area.

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

On a trailing 12-month basis, the technology and SLED markets were our largest, accounting for 24% and 18% of technology net sales, respectively. .

Next was telecom, media and entertainment, which accounted for 15% of net sales, followed by financial services at 14% and health care at 12%. The remaining 17% was from several other customer types. .

We continue to have a diversified customer base by industry, size and geography. .

Our gross margin on sales of product and services expanded by 100 basis points to 21.2% in the second quarter. .

The margin expansion was related to a shift in product mix, as we sold more third-party maintenance and services, which are presented on a net basis and an increase in service revenues.

Operating expenses in the technology segment increased 11.2% to $55.6 million compared to $50 million last year, which related to an increase of $2.8 million in salaries and benefits due to an increase of 186 professionals or 17.8%, of which 50 related to the acquisition of IDS in September 2017, 57 related to the acquisition of OneCloud Consulting in May, 2017, and 48 related to the acquisition of Consolidated Communications IT Services business in December 2016.

.

In addition, general and administrative expenses increased $2 million, primarily due to increases in marketing expense and expenses related to the acquisitions. Operating income and adjusted EBITDA for the technology segment decreased 13.4% and 10.9%, respectively, due to higher operating expenses. .

Moving to our financing segment. Revenues were $12 million, up $3.3 million or 37.7%.

This top line growth was mainly attributable to an increase in post contract earnings of $3.4 million due to early terminations of certain financing agreements as well as an increase in revenue from consumption structured agreements, offset somewhat by lower transactional gains. .

While the early terminations benefited our second quarter results, they will eliminate the potential for future earnings related to the equipment originally financed. .

As I have mentioned in the past, revenues from our financing segment fluctuate, often due to customer-specific events. As a result, financing gross profits increased 44.5% to $10.7 million. .

Operating expenses decreased by $595,000 or 16.1%, mainly due to changes in reserves for credit losses. .

Operating income and adjusted EBITDA more than doubled to $7.6 million, reflecting the high-margin revenue and, to a lesser extent, the lower operating expenses. .

I will now turn to our consolidated year-to-date results. .

Net sales for the first 6 months of fiscal 2018 increased 10.2% to $738 million. This strong sales growth was driven by robust performance in our technology segment, where net sales increased 9.6% to $716.9 million. .

Adjusted gross billings of products and services increased 11.4% to $985.3 million, while consolidated gross profit increased 10.4% to $165.2 million. .

Our consolidated gross margin expanded by 10 basis points to 22.4%, while gross margin on products and services decreased 30 basis points to 20.2%. .

Net earnings grew 11.7% to $30.6 million and adjusted EBITDA increased 8.8% to $53.5 million. Our first half of fiscal 2018 earnings per diluted share increased 12.3% to $2.19, while non-GAAP diluted earnings per share increased 8.5% to $2.17. .

Turning now to our balance sheet. We ended the quarter and first half of fiscal 2018 with cash and cash equivalents of $60.2 million, compared with $109.8 million as of March 31, 2017. The decrease was primarily due to cash used to acquire OneCloud consulting and IDS.

Our inventory and deferred revenue decreased from March 31, as a large competitively bid project was partially delivered in the first half. Our cash conversion cycle for the quarter was at 23 days, down from 26 days for the first quarter of 2018 and up from 16 days a year ago.

Despite the year-over-year increase, we're moving in the right direction sequentially. .

Our cash position remains strong and can be used to fund acquisitions, hiring of additional personnel and share repurchases. We constantly evaluate all of these opportunities. .

For the second half of 2018, we remain focused on developing IT solutions for new and existing customers with an emphasis on cloud, security and digital infrastructure. .

We remain confident that we are well positioned to outpace the low-single-digit overall IT market growth for the foreseeable future. .

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

Mark?.

Thanks, Elaine. We are pleased with the year-to-date net sales growth of 10.2% and gross margin of 22.4%.

We believe that as we continue to move towards being a higher-end IT provider, focusing on products and the consultative and annuity services our customers need around security, cloud and digital infrastructure positions us well to profitably capture market share in the faster growing segments of the IT market.

We have an established and growing base of over 3,200 enterprise and mid-market customers across multiple industry, who rely on us to deliver the outcomes they need to achieve their business goals. .

Operator, I would now like to open the call for questions. .

[Operator Instructions] Our first question comes from Anil Doradla with William Blair. .

So Mark, on the technology sales front, you know the flattish revenues, you did provide a little bit of color, but just revisiting it again, is it fair to say some of those revenues were pulled in the previous quarter? Is that what really happened? Or was there something else?.

Yes, well, so there's a couple of things that I think happened in terms of sales. One, we had a very large gross to net adjustment that Elaine noted on the call. As we've talked about in all of our calls, we also have our land and expand program, where we did have a large project that wound down, if you will.

But the thing that we always talk about, it's cyclical, it's opportunistic, it's lumpy in nature but we do believe we will have other opportunities as we go forward. So I would take a look at our numbers on the first half or trailing 12 months to get a better feel of where we think we are. .

And going forward, this netting effect on some of these revenues, is that -- is this going to be something that we'll see more often? Or is this something more like a seasonal one-off thing now and then?.

Well, I don't know if I can call it a seasonal one-off thing. We've seen it for a while in terms of the gross to net. Now some of this is by design, Anil. So we've got teams that focus on doing these types of renewals with our customers.

But more importantly, upgrading them to some of our enhanced maintenance service programs as well as managed service programs. So what happens in a lot of cases with these customers, we lock them in for 3 years and then we have a recurring revenue and increased margins as we go forward as well. So it depends on the customer and depends on the deal. .

Mark, I wasn't sure whether you guys talked about the contribution of security applications in your revenue? Did you point that out?.

Yes, we did, Anil. We actually -- if I look at the quarter, if I were going to give you snapshot. One of the strong points was our security. In terms of our security, adjusted gross billings for security products and services was 17.5%.

That's up 170 basis points year-on-year, and we're actually up 30% for the first half of this year versus last year in security. .

And Elaine, on the financing revenues, I mean, nice bump there. Again, we always see these perturbations and movements on this front.

But again, can you again remind us what your strategy is on this financing revenue component line? Is this something that you guys are emphasizing? Or the pop that we just saw, is this one-off quarter? We should not be expecting -- this is not a new norm, any color on that front?.

Sure, Anil. The financing segment this quarter benefited from some early termination of leases. So essentially, we're -- we negotiated the back end of the residual value disposition of certain leases that early terminated in the quarter. So we're eliminating the potential for that profitability down the road at the end of the term.

But it did get negotiated in this particular quarter per the customer's request. .

Going forward, can we see more of these? Or this is, again, a one-off thing?.

Well, we always have fluctuating earnings in this particular segment, whether it's related to transactional gains where we would sell the lease stream or whether it's related to some sort of event that occurs at the termination of the lease, whether it's a buyout, could be an early buyout, or an early termination.

So those are really customer specific, and term specific relating to the financing transaction, in particular. .

Our next question comes from Matt Sheerin with Stifel. .

Just a couple of questions from me. On the revenue growth and then, maybe on the gross billings.

What was the organic number if you exclude the acquisitions that you've done in the last year?.

Do you know what they are?.

For the first half, it's roughly 50% organic and 50% acquisition. .

Here you go. .

In terms of growth, okay.

And in the quarter? For the quarter, do you have the number?.

Yes, I don't have the quarterly number, Matt. .

Okay. And then I'm just looking, I mean, you talked about the netted down effect impacting the revenue growth. But if you look at the gross profit dollars in the technology segment, they were up just 3% year-over-year. And that looks like the lowest number in terms of percentage growth in gross profit dollars in several quarters.

And I'm just trying to figure out how much of that is a function of seasonality or perhaps that one big program that's winding down and having a negative impact on that. .

Well, let me try and take a shot at it Matt, I'll touch on a couple of different things and then maybe it'll will answer what you're looking for. So if we look at the quarter, I don't think we're satisfied with our quarter. But we really executed well on a lot of the probability metrics.

So our gross margins were up 150 basis points, our gross profit was up 6.9%. We had a strong quarter for our security as well as services, which I noted earlier on the -- for Anil. And we kind of executed on a lot of our M&A plans in terms of really building out our solutions and portfolio. The gross to net had a big effect.

This was one of our larger gross to net. So that definitely had a factor on the net to sale, our sales. The other thing I'd ask you to just kind of keep in mind a little bit is remember in Q1, we had a 23% growth in Q1. So when we look at the first half, we're actually very pleased with where we are through the first half.

So we've got a double-digit growth in net sales as well as net earnings. And then when I look at it, we've continued to invest in headcount. So Elaine noted we've added a 186 heads, of which 85% are in the customer-facing sales and services. So to give you a feel, in March of this fiscal year -- I'm sorry, March of 2017, we had 400 systems engineers.

As of the end of September, we've got 467 SEs. So we continue to kind of invest in the engineering talent we need to be competitive in today's market. .

Yes, Matt, just to add to that, we -- our gross margin on product and services increased from 21.2% to 20 -- to 21.2% from 20.2%. That's 100 basis points. So the GP growth was 3.1% on basically flat sales. So I would say that we executed pretty well in driving more profitability this quarter in the tech segment, in particular. .

Okay. And that 10% customer that you had in the last fiscal year, you talked about the winding down of that program.

Is that pretty much complete at this point?.

I would say that project is towards the end for sure. But that's a customer that we continue to work with on multiple projects. So as it relates to the big project we've mentioned in prior quarters, yes, it's towards the end of that project life cycle, Matt. .

Okay. And I appreciate that you don't give a forward guidance. But if you look at the last 3 or 4 years typically in the December quarter, your technology segment is down in the 10% plus range sequentially, and I know that it's seasonal. And obviously, the business is changing somewhat. You've got acquisitions, et cetera.

Anything you can help us there in terms of directionally in December quarter?.

Yes, let me -- maybe a few things and I'll see if I could give it -- where -- it's always tough with the forward-looking, Matt. So in terms of customer demand, in terms of pipelines, in terms of forecast there, nothing has changed in terms of downward trends or anything like that. We're continuing to expand some of our offerings and capabilities.

I talked about a few deals in my earlier notes, if you will, and those were opportunities that a year or 2 ago we wouldn't have had. So there are new income streams for us as we go forward. The other thing that I'd highlight that we didn't talk about in the release or during our notes that we went through.

If you look at our number sequentially, so at a -- on a consolidated basis, if you look at our operating income sequentially from Q1 to Q2, our operating income was actually up $7.5 million. So that may give you a feel of some of the things that are happening within the business. .

From Q1 to Q2?.

Yes, sequentially. .

I'm not sure what that has to do with the December quarter. .

Well, it gives you a trend from Q1 to Q2 is what I was trying to give you, since I can't give you -- we don't give forward guidance on December. So here's what I'd always tell you about this quarter. There's always a lot of the year-end spend. That's always out there, that come in. Those deals are tough to forecast and predict.

But what I was trying to tell you earlier is the customer demand is still there, the pipeline is there and our management team is very confident, comfortable in their forecast. .

Okay.

You are going to have tough comps, so obviously, all for that one program, that's rolling off right?.

Well, you always have tough comps. But what I'd mentioned to Anil is, I would always look at it, whether you at our first half or you look at our trailing 12 months, that gives you a true feel of what's happening within our business. You're always going to have large deals or opportunities that kind of come in and out. We're opportunistic.

They're cyclical. A lot of times we'll -- like we talk about with the land and expand, we'll get the foot in the door and then grow the profitability over time. And so they yield great opportunities and they normally pop in from time to time. So it's tough to kind of give you an exact answer there. .

Okay. And the SG&A percentage was up and the OpEx was up for reasons you stated in terms of the investments. And as we think about the December quarter, is that sort of a flattish number to think about? I know a part of that OpEx cost is variable expenses tied to the sales and commissions.

But I would imagine, it will be a flat at best, right?.

In terms of the SG&A, we did have some specific expenses, obviously related to the acquisitions this quarter as well as some specific expenses related to the quarter itself, which are marketing expenses and some contingent consideration adjustments that will replicate in the following quarter. We're not unpleased with the SG&A.

We added, like Mark said, 186 heads year-over-year. We picked up several new offices with the OneCloud acquisition as well as the IDS acquisition. So those expenses will roll through as well. .

Okay. And just following up the earlier question on the financing segment, which is very lumpy and without that extra $3 million or so incremental revenue from that -- or the gross profit from that acquisition year, the results would have been down year-over-year. So definitely helped you.

Do you have any -- in terms of the events that happened last quarter, did you have any visibility going into the quarter that, that would play out like that?.

Well, I think we -- we were having conversations with our customers but in terms of an early termination, that's something that's brought about by the client. So whether it occurs or doesn't occur and they contact us 6 months in advance or 3 months in advance, sometimes we do and sometimes we do not have visibility to that. .

Thank you for participating in today's question-and-answer session. I would now like to turn the call back over to Mr. Mark Marron for any closing remarks. .

Okay. Thanks, operator. So if I could first off, I'd like to wish everyone a happy and healthy holiday season. We look forward to speaking with you come February. And I want to thank you for joining us on today's call. Have a great day. .

Ladies and gentlemen, thank you for participating in today's conference. That does conclude the program. You may all disconnect, and have a wonderful day..