Kleyton Parkhurst - Senior Vice President, Corporate Development Mark Marron - Chief Executive Officer and President Elaine Marion - Chief Financial Officer.

Margaret Nolan - William Blair & Company Alvin Park - Stifel, Nicolaus & Company.

Good day, ladies and gentlemen. Welcome to the ePlus Earnings Results Conference Call. As a reminder, that 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, and thank you for joining us today. On the call is Mark Marron, Chief Executive Officer 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, 2018, and our Form 10-Q for the quarter ended September 30, 2018, 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've included a GAAP financial reconciliation in our earnings release, which is posted on the investor information section of our website at www.eplus.com. I'd now like to turn the call over to Mark Marron.

Mark?.

Thanks Kley. And thank you all for participating in today's call to discuss our second quarter results 2019 results. This was another quarter of strong gross margin performance for ePlus demonstrating the positive impact of our focus on services, emerging technology and the impact of beneficial changes in our business mix.

Our consolidated gross margin of 24.8% was up 120 basis points among the highest in the industry, and reflective of our continued transformation at higher valued solutions.

And our gross margin in the technology segment was up a 160 basis points in the quarter due to several factors, namely growth and our higher margin services business lines, a portion of which is annuity based, a shift in mix to higher margin products and an increase in the portion of our revenue recognized on a net basis.

Importantly, these positive results were achieved on lower revenues due to several factors that we signaled last quarter. Primarily this year's revenue comparison reflected a large competitively bid project, which we've discussed previously.

While most of the project was delivered in last year's first half, it's important to note that looking forward to our third quarter comparisons, there was some delivery in last year's third quarter as well.

As we discussed for several quarters, our business model is changing as a result of our larger portion of sales recognized on a net basis, and the effect of ratably recognized revenues, which is overall very favorable to our gross profit and will over the long term lessen quarterly volatility, but does add to the pressure on top-line comparisons.

Given these marketplace changes and in our business is solution oriented and not focused on commodity products, we have pointed to gross profit as an important metric for investors to use to track progress at ePlus.

This quarter is a good example of this trend as our technology segment year-on-year gross profit increased slightly to $77 million, an all-time high despite revenues declining 6.7%. Sequentially, gross profit increase by almost 5.7% against the 3.5% decrease in revenues.

I'll focus on transforming our business to meet the high demand areas of cloud, security and digital infrastructure. Areas with faster growth and general IT spending continues to help us gain share with existing mid market and enterprise clients and expand our customer base.

We will continue to drive collaboration between our cloud, security and digital infrastructure practices to expand the value we provide to them. This includes leading with our consultative and advisory services and then providing managed services to create value and impact for our customers.

Our security practice continues to move beyond point solution sales to provide business outcome bundles. Examples of these bundles include helping to stop disruptive cyber threats, finding ways to reduce the attack service and securing multi-cloud workloads.

Recently we provided a cloud usage and risk workshop that led to a multi-million dollar deal with the healthcare customer. We provided a risk assessment and gap analysis that helped the customer understand what data was critical, and where it resided.

This led to additional opportunities around managed security incident and event management and a next-gen firewall replacement. These types of solutions and deals have helped to increase our sales of security products and services by 9.1% for the trailing 12-months ending September 30th and represented nearly 19% of our adjusted gross Billings.

As cyber attacks make headlines every day, demand for enhanced security products, software and services will continue to grow, and ePlus is positioned to help our customers with these mission-critical, time-sensitive needs.

Additionally, our customers increasingly require project lifecycle solutions from strategic planning through deployment and ongoing support. A good example of how ePlus is succeeding in delivering these services to an enterprise customer is our recent project for an international automotive manufacturer.

This engagement allowed ePlus to provide an upfront assessment, design and implementation services, product sales, as well as create long-term follow-on revenue including enhancement and support managed out-tasking and provisioning full-time staffing resources to help with support and management of their IT environments.

This is a prime example of how our business has transitioned to a more services led, comprehensive customer engagement model.

Also ePlus industry-leading gross margins are closely tied to our investments in highly qualified customer facing technical and sales professionals that have enabled us to develop a more profitable business mix and evolve into an IT solutions and services company.

In the second quarter, we saw the continued expansion of our enhanced maintenance and managed services portfolio, which are recognized ratably for carry higher margins and give us improved visibility, and the ability to build annuity quality revenue streams.

We continue to realign resources to ensure that our engineering and sales talent is fully utilized, and that their capabilities are closely tied to customer demand dynamics. This has involved rationalizing and realigning certain areas and building out others.

While the new professionals require some time to ramp, the staff that we brought onboard enhances our competitive positioning and gives you further insight into the growth potential we see for our business.

As you know, we have added our capabilities in our high-growth areas like with acquisitions like OneCloud and IDS that have expanded and enhanced our cloud capabilities and offerings. ePlus has the ability to invest in newer technologies solutions and services that our customers need to succeed in today's market.

By leveraging our strong balance sheet and financial resources, we continue to seek acquisitions that will add to our service offerings and geographic footprint. With that overview, I will now turn the call over to our CFO, Elaine Marion to review our second quarter and year-to-date fiscal 2019 results.

Elaine?.

Thank you, Mark. And thanks to everyone for joining our call. I am pleased with our ability to continually improve gross margin by remaining focused on a more profitable business mix, as well as capitalizing on the industry shift towards as a service or subscription models which we generally recognize on a net basis.

We are also seeing the benefit of expansion of ePlus enhanced maintenance support for top tier vendors. The changing industry landscape can create pressure on our top-line growth, but over time annuity services will provide additional visibility and revenue stability.

Our net sales in the second quarter of fiscal 2019 were $345 million, down 7.1% year-over-year reflecting the impact of a large project that we partially delivered to a major enterprise customer in the year ago quarter, and a larger proportion of sales recognized on a net basis.

The decline in revenue coupled with lower post contract earnings due to early terminations of several large leases last year in our financing business led to a 2.4% year-over-year gross profit decrease to $85.5 million.

Despite the decline, we still reported 120 basis point gross margin expansions to 24.8% mainly driven by business mix and our technology segments. Operating expenses increased 3.7% to $60.9 million primarily due to higher salaries and benefits despite a year-over-year headcount decrease of 2.1% to 1,255 employees.

The increase was primarily due to the inclusion of IDS for the full quarter of fiscal 2019 compared to less than one month a year ago. Sequentially, our headcount increased modestly from 1,249 at the end of the first quarter as we continue to opportunistically hire while at the same time rationalize our overall headcounts.

As a result of lower gross profit and higher operating expenses year-over-year, our operating income of $24.6 million declined 14.8% year-over-year. Adjusted EBITDA was down 10.3% year-over-year and amounted to $29.9 million due to the same reasons I just mentioned. While our adjusted EBITDA margin declined 30 basis points to 8.7%.

Our net earnings increased by 4.5% to $18 million while fully diluted earnings per share were $1.33, up 8.1% from last year's a $1.23 due to the benefit of a lower effective tax rate of 27.7% compared to 40% in the year ago quarter.

Adjusted to reflect this tax benefit and excluding acquisition related expenses, other income on a tax adjusted basis and share based compensation during the quarter non-GAAP diluted EPS were a $1.53, down 8.9% year-over-year.

Our weighted average diluted share account was 13.6 million for the September quarter, down from the prior year second quarter share count of 14 million due to share repurchases. Note that sequentially our tax rate went up from 25.7% to 27.7%, and we expect our tax rate to be between 28% and 29% in the remaining quarters of fiscal 2019.

Now let me give you more color on our technology segment performance which accounted for 97% of revenue this quarter.

Net sales amounted to $334.8, 6.7% below last year second quarter due to the impact of a large project that we partially delivered to a major enterprise customer in last year's second quarter, and a larger proportion of sales recorded on a net basis.

While the majority of the revenues on this project were recognized in the first half of last year, there was some contribution in the third quarter and a small tail in the fourth quarter.

In terms of the customer mix in the technology segment, technology and SLED continue to be our largest end markets on a trailing 12-month basis accounting for 23% and 17% of the technology segment net sales respectively. Telecom media and entertainment represented approximately 13% of net sales and healthcare 15%.

The remainder includes financial services at 15% and 17% from several other client types. Adjusted gross billings amounted to $485.9 million compared to $504.5 million in the same period a year ago, reflecting a 3.7% decrease due to the large delivery last year I mentioned.

The adjustment from adjusted gross billings to net sales was $151.1 million or 31.1% compared to $145.8 million or 28.9% in the year ago quarter, reflecting the increase in sales of third party maintenance, subscription and SaaS software and services.

Despite these year-over-year declines, our technology segment gross profit increased slightly to $77 million. While our gross margin expanded by a 160 basis points year-over-year to 23%, we benefited from a more profitable mix of products and services and increased sales of professional managed and consultative services.

Technology segment operating expenses of $57.9 million increased 4% from the prior year second quarter. This was primarily due to higher salaries and benefits which were up $1.6 million or 3.7%/ This increase reflects higher personnel costs due to the inclusion of IDS for a full quarter as I mentioned earlier.

As of September 30th, 2018, we had 1,213 in our technology segment, a 1.6% decrease compared with 1,233 at the quarter end last year. Sequentially, however, our headcount increased from 1,206 in the first quarter.

Our technology segment operating income amounted to $19.1 million compared to $21.2 million in the year ago quarter, primarily due to higher operating expenses. Adjusted EBITDA was down 5.2% to $24.3 million. Now let me share more details about the financing segment performance.

We reported net sales of $10.3 million representing a 19% decline from $12.7 million in the year ago quarter as a result of lower post contract revenues. Just a reminder that our last year benefited from higher post contract earnings due to early terminations of several large leases.

Financing gross profit in the second quarter of fiscal 2019 declined 20.3% year-over-year to $8.5 million given the gain last year related to the terminations. Operating expenses were down 1.9% to $3.1 million due to lower variable compensation as a result of a decrease in gross profit.

Operating income amounted to $5.5 million, down 27.8%, adjusted EBITDA was $5.6 million compared to $7.7 million in the year ago quarter. I will now turn to our consolidated year-to-date results. Net sales for the first six months of fiscal 2019 decreased 5.8%to $701.6 million. Net sales in our technology segment decreased 5.5% to $681.6 million.

Adjusted gross billings decreased by 2.4% to $968.2 million, while consolidated gross profit was up slightly to $166.2 million. Our consolidated gross margin expanded by a 150 basis points to 23.7%, and our technology segment gross margin increased by 170 basis points to 22%.

Net earnings grew 8.6% to $33.3 million or 11.9% to $2.45 per diluted share, while adjusted EBITDA decreased 4.3% to $55.3 million. Non-GAAP diluted earnings per share decreased 2.4% to $2.81. Moving to the balance sheet. We ended the quarter with cash and cash equivalents of $75.6 million as compared to $118.2 million at March 31st, 2018.

The decrease was primarily due to additional working capital needs from our technology segment. Inventory levels increased $16.8 million to $56.6 million from fiscal year end. Our inventory levels vary and are dependent upon customer specific projects.

Our cash conversion cycle increased to 25 days up from 22 days in the first quarter of fiscal 2019, and up from 23 days a year ago. Going forward, our capital allocation strategy remains the same. Investing in our business and making acquisitions that expand our capabilities in cloud, security and digital infrastructure and share repurchases.

Thank you for your time today. I will now turn the call back to Mark.

Mark?.

Thanks Elaine.

Heading into the second half of this fiscal year, we continue to see favorable market conditions in our targeted solution areas, and solid demand for solutions and service offerings that enable clients to evaluate and implement cloud strategies, digitally transform user experiences that drive customer and employee engagement, and keep their businesses secure.

Within this environment, we will continue to focus on anticipating customer needs and remaining a trusted vendor agnostic solutions provider.

Internally, we will continue to emphasize increasing our gross profit dollars and maintaining and expanding gross margin, while making sure that we have the talent and resources to deliver superior results to our customers. Operator, I would now like to open the call for questions..

[Operator Instructions] Our first question comes from Maggie Nolan of William Blair. Your line is now open..

Hi, guys, good afternoon. I wanted to ask how much of the decrease in sales year-over-year is related to that large project roll off. And if possible can you quantify that for last quarter as well..

Okay. So on the large project, Maggie, it was --as you know, was a tough comparing for us, and it was a big portion of the drop-off that happened in this quarter..

Larger portion than the mix change presumably..

Than in the mix, sorry I'm not sure what you're asking there..

It had a larger impact on the decline in the quarter than any changes in the amount of revenue that was being recognized on a net basis..

On a -- so here if I were trying to back into that Maggie, there's a couple different things. So if that large project was not in this quarter year-over-year, our adjusted gross billings would actually be up.

The other thing that comes into play in this quarter as well that affected some of the sales is as you know we had a large early termination on the lead side that affected both the net sales, as well as the operating income on that side.

So we kind of had a kind of a double whammy if you will from a compare standpoint on both our resale and our technology business. What is still continuing a trend in a very positive way for us is our GP on our technology side was actually up even on these decrease net sales.

And a lot of that's due to some of the transition that we've talked about over time where we're driving more in the solution oriented and in the services space, but also kind of factors in to some of this is some of the services or we're driving our annuity based or ratable.

So although they are great in terms of visibility; they're great in terms of profitability, the effect it has in the quarter is actually very small. So there are a few things that affected the quarter.

With all of that said, when we look at our gross margins, we're almost at 25% on the gross margins, which is I believe it's the highest in our industry. So we believe we're building the model in the right areas that we want to focus on.

We believe that the solution we're selling such as security which is almost now fifth of our overall adjusted gross billings is actually working. What we came up this quarter was just a real tough compare on both our technology side and leasing side..

Understood and then I'm hoping you can provide an update just a comments on the tariffs how that's affecting the business? How you plan to respond to any incremental cost just?.

Just a pretty simple, Maggie, so far we've been passing those on to our customers really haven't seen anything, haven't had a lot of issues with our customers. So I don't --I wouldn't say it's something that they are embracing but I guess it's something that's expected.

And then I think we're kind of waiting like everybody to see what happens as we get closer to January, which could affect the quarter in a positive or negative fashion based on how people look at it..

Right and did you see any pull forward in sales from customers as a response to the tariffs?.

No. So far I haven't heard anything in the reviews, Maggie, where folks are pulling it forward. I do believe in December when I guess they talk about the second tariff or a second shoe should drop that in January.

You may have more people that consider pulling things forward potentially, but I think we've got to get a little bit closer and see what actually happens over the next month or so..

Our next question comes from Alvin Park of Stifel. Your line is now open..

Hi, Mark. Hi, Elaine. It's Alvin Park on behalf of Matt.

I just following up I know the Q3 and Q4 will have some tough comps because of the last enterprise roll off that still had some sales in Q3 and Q4 prior year, just talk about the magnitude of the headwinds of revenues -- headwinds you'll see in the second half of the year as well as incremental headwinds you might see because of a greater mix shift of sales in your net versus gross?.

Net versus gross, okay. So there are a couple different things in that one, Alvin. In terms of the large project roll-off, a lot of that was in the first half. There is some in the third quarter and a very small amount in the fourth quarter. So I believe in Q3 and Q4 we won't see the compares that we've seen in this quarter and the prior quarter.

So that's a positive, if you will, as it relates to year-over-year from a net sales perspective. On the mix, if you will, in terms of some of the things that we're seeing there. I think you'll continue to see us build on our some of the solutions and margins that were actually selling to our customers. That'll be a positive thing.

What's hard to tell for example we're building out our enhanced maintenance support, and it's actually our clients are responding very well to it. Traditionally, those margins are a lot better than just a traditional maintenance renewal resale. The good news -- that's the good news. The bad news is that stuff that's recognized over a period of time.

You've seen in this quarter, our adjusted billing -- gross to net, sorry, was actually it was a delta of about 210 basis points I think it was. So I think you'll continue to see some of that as we go forward as we build out these programs with our customers..

And regarding that gross to net Delta when do you think this transition is going to equalize and be stable rather than having continuous sales headwinds, but of course gross profit expansion going forward.

But when do you think you'll be hitting a plateau and equalization in this type of sales with transition?.

You know what's hard, I don't know if I'm worried about a plateau, Alvin, to be honest. As we mentioned, I think on the last call and previous calls, gross profit and gross margins are better metrics that kind of judge us on.

So over the long term, a lot of these gross to net help you gross margins, but also the EMS programs that are recognized ratably, As I'd mentioned, the margins are normally a lot better. The problem is they're normally over multiple years.

So it's almost kind of that model where your net sales slowed down a little bit; your GP even slows down a little bit because it's over a longer period of time. But over time you're building up your annuity base in both your revenues, as well as your profits. And it starts to turn in a positive way.

Also, if I look at it, quite honestly with our quarter, on the technology side even though our sales were down fairly significantly due to that large project. Our GP was actually up slightly. So that I believe is due to some of the, both the solutions that we're selling and some of the services that are both consultative as well as annuity.

The other thing I think that may have affected our sales not so much as, I think a lot of our peer's kind of sell client device PC refresh. And we really don't play in that side of the sale. So we've really didn't see an uptick there, but those would be some of the bigger things right now..

I see. And lastly, in terms of the Server 2000 made Microsoft end of last coming in January 2020.

Do you think you could see potential tailwind and sales associated with that? Because I know you don't play in the client devices because for the Windows 7, Windows 10 upgrade but do you see a potential catalyst of sales associated with that?.

Potentially. So right now I think it might be a little bit early, but potentially there could be plays there..

And this does conclude our question-and-answer session. I would now like to turn the call back over to Mark Marron for any closing remarks..

Thank you, Soniya. And thank you everyone for joining us today. We appreciate that you took the time. I would like to wish everybody a healthy and happy holiday season since we will be in more likelihood speaking to you again until the January time frame, January February timeframe. Enjoy the holidays and thanks for spending the time with us today.

Take care..

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