ePlus inc (PLUS) 2015 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the ePlus Inc. fourth-quarter and fiscal year ended 2015 earnings conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Kley Parkhurst, Senior Vice President. Sir, you may begin.

Thank you Abigail and thank you everyone for joining us today. With me today our Phil Norton, Chairman, President and CEO of ePlus; Mark Marron, our Chief Operating Officer and President of ePlus Technology; Elaine Marion, our 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 own Form 10-K for the year ended March 31, 2014 and our 10-K for the year ended March 31, 2015 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 a GAAP financial reconciliation on our website at www.eplus.com.

Now I would like to turn the call over to Phil Norton. Phil?

Thank you, Kley. Good afternoon everyone. We are pleased with our fiscal year and fourth-quarter results.

For the year we reported fully diluted earnings per share of $6.19, a 42% improvement over $4.37 in the prior year. On a non-GAAP basis, fully diluted EPS was $5.59, a 28% increase over the prior year.

For the quarter we recorded diluted EPS of $1.22 as compared to $1.08 last year. Elaine will go into greater detail on these in just a moment.

For the quarter non-GAAP gross sales of products and services increased 4.9%. We feel this is a strong metric given our revenue headwinds being experienced in the industry. Historically we have been very adept at anticipating technology market transitions and shifting our focus and investments to be well-positioned to capture new opportunities generated by change.

Over the past several quarters we have focused on increasing services and changing the customer engagement model to a total lifecycle model led by an assessment-based consultive approach through managed services and staffing. We believe this shift is taking place across the industry and is a key factor to the success in today's IT marketplace.

In the new IT paradigm with converged and hyper-converged infrastructure, cloud and software-defined architectures we are focused on working both with traditional Tier 1 IT vendors such as Cisco, NetApp, HP and EMC and as importantly with emerging technology vendors. It is noteworthy that we were Cisco's partner of the year for the Americas and also NetApp FlexPod partner of the year, HP storage growth partner of the year and EMC's breakout partner of the year.

We are focused on being the partner of choice for these vendors as well as for emerging vendors in this space. Our diverse and highly respected consulting and engineering teams have deep experience across a broad range of requisite technologies which gives us an advantage over many of our competitors.

During the quarter operating income increased 8% and gross margin on sales of products and services improved 120 basis points to 20%, among the highest of our peer group. The increase in revenue combined with improved margins during the quarter demonstrates that ePlus continues to be well-positioned with the most important vendors and solutions in the industry.

To maintain our competitive advantage we continue to make ongoing investments in engineering and services capabilities. For example in today's security market with an ever increasing number of threats and changing threat vectors security remains a top priority for customers of all sizes and industries. We have continued to develop specialized teams on both the engineering and sales side and we have divided our approach into two primary areas: secure perimeter and secure data, with consultative and professional services teams that are leading experts in each.

As a master certified security partner we remain one of Cisco's leading security partners and we are also working with many other vendors such as Palo Alto and FireEye. As you may know the average enterprise has many different security products installed and to ensure the customer is fully protected it takes both the ability to handle a broad range of products and solutions as well as deep expertise in each to secure the environment. We believe we are one of the best-positioned integrators in the country to fulfill this mission.

On the finance side of our business we are beginning to see the results of optimizing the compensation structure and processes to really create synergies between our two operating segments which results in incremental sales, cross-selling opportunities and both helps when customers as well as deeper penetration within existing customers. The other positive trend is that consumption-based computing or paying for IT when utilized is becoming more and more desirable for customers as it mirrors some of the benefits of public cloud without the final financial and security risk. And we are perfectly positioned to take advantage of this opportunity.

We believe in the middle market and enterprise customers we serve. We have an advantage over our competitors.

In fiscal 2015 our financing segment produced 11% growth in operating income representing a 28% operating margin. We believe it is noteworthy that the financial accomplishments of fiscal 2015 were achieved while we were continuing to build out our capabilities throughout headcount additions, geographic expansion and completion of an acquisition. We had 936 employees in our technology segment at the end of fiscal 2015, up 6.5% year on year, although 90% of this new headcount is customer-facing.

In terms of expanding our national reach we opened new offices in New England and upstate New York and our acquisition of Evolve last August significantly expanded our presence in California and Western states, gave us a stronger foothold in the SLED market and in that geography and expanded our solutions expertise in data center security and networking. We also believe the Evolve team will be able to leverage the size, scale, capabilities, and our relationships with key vendors that ePlus has to grow their business. We are well-positioned to execute strategic acquisitions with a strong balance sheet and proven capabilities and execution and integration.

Today's opportunity to acquire larger regional players to expand our geographic footprint, add sales and engineering personnel and gain customers continues to be a key corporate objective and there are many opportunities in the market. We are also evaluating smaller niche players to supplement our emerging technology practice and to bring our full suite to their customers.

I would now like to turn over the call to Mark Marron to tell you more about our most recent business activities and what we are seeing and hearing from clients and vendors. Mark?

Thank you, Phil, and good afternoon everyone. We believe ePlus' financial success in the fourth quarter and for the year is the result of our ability to monetize the number of IT trends in the marketplace. Specifically CIOs are being charged with achieving more with their existing IT budgets, the complexity of IT challenges and the range of vendor options available continue to grow and IT departments are increasingly prioritizing the value and flexibility of bundled solutions.

We believe ePlus is meeting these objectives with offerings that include managed services, staffing, integration services of multivendor solutions and flexibility with standard and customized financing solutions to meet today's IT needs across areas such as cloud, big data, security and a host of others. Effectively customers are looking at companies like ePlus to deliver business outcomes, not just a siloed IT solution.

In this evolving environment we have created a strategic direction and focus on business outcomes in a few ways. First, we have created teams that are responsible for evaluating emerging technologies and how these new technologies will fit within our existing focus areas. These teams are responsible for creating go-to-market and awareness programs around these solutions.

Second, we have continued to refine and build out our PBSO plan that helps our customers in the plan, build, support and optimize phases. PBSO is a major value to our customer in that it helps CIOs identify what options are available to them in a number of ways. First, with a comprehensive set of assessments and health checks that help them understand their current environments and what they need to consider as they select new solutions; second, the ability to integrate multivendor complex solutions; and third, the ability to support and optimize these solutions through professional services capabilities, managed services, staffing and overall lifecycle management services which includes financing options and the ability to track and manage these assets.

Our fourth-quarter and fiscal year performance reflected the success of this strategy specifically in the following areas. Our focus on margin enhancement through expanding our service offerings and focusing on higher-margin solutions; our focus on the fastest-growing segments of the IT market including hyper-converged infrastructure, cloud, security, storage, data analytics and many more; and then our drive to cover new markets and geographies to both increase what we sell to existing customers as well as expand our customer base.

In the fourth quarter of fiscal year 2015 we had several wins that demonstrate how the strategy is driving ePlus marketshare gains. One in particular I'd like to highlight is a regional hospital in the Southeast. This hospital had recently been acquired, creating a host of new IT challenges.

At the same time several IT personnel had left but had not been replaced due to the pending acquisition. ePlus worked with the hospital to design and implement a managed services solution that covers important aspects of their IT infrastructure including everything from networking, firewall, service and more. We're providing staff augmentation services in addition to the managed services as well as enhanced maintenance services which includes first- and second-level maintenance calls for Cisco and NetApp.

Our new EMS offerings allow us to provide an added level of support to both existing and new customers. Additionally to match its budgetary requirements the hospital wanted to pay over a number of years. As a result we provided financing for the transaction as well.

From the client's perspective they now have a trusted partner managing their IT needs and they have a financing contract that was tailored to provide flexibility to meet their requirements. From our perspective we have a $3 million win, we're an integral part of their IT support infrastructure and can potentially expand our business with this customer after proving our value through the transition period of the acquisition.

Another example shows our strong position in the IT security market. This was for a major university in the Northeast who has been a long-standing existing customer of ePlus. This university was actively seeking to upgrade its security infrastructure and it turned to ePlus to provide the product, integration and services around the selection, design and implementation of the solution.

The result was a $4 million-plus opportunity or deal for ePlus and we have already added one six-figure deal in the first quarter of our new fiscal year. This customer has a multimillion dollar security budget and we believe that as a trusted security consultant we are well-positioned to capture additional security-related business moving forward.

Phil mentioned our acquisition of Evolve and how that expanded our presence in contracts on the West Coast. The SLED market, state local and education is our largest market by revenue.

I also want to highlight that we had a positive year in fiscal 2015 both in terms of revenue and contract awards. In February we announced that we had won several new PEPPM awards in Pennsylvania and California, drawing out our core focus areas such as network infrastructure, data center and security. We remain optimistic that we will see continued growth in this important segment which today represents about 20% of our business.

In terms of our evaluating both Tier 1 and emerging vendors we have continued to invest in people, processes and training in order to gain the requisite vendor certifications to deliver the most demanded solutions by our customers. To meet these demands we are continuing to invest in customer-facing headcount.

In fiscal year 2015 our headcount increased by 6.5% and the majority of those new employees were customer-facing engineering and sales resources. As Phil mentioned earlier about some of the awards we have won we believe this is a validation of our efforts to work with existing and emerging vendors.

Just to reiterate what Phil said some of the awards include Cisco partner of the year in the US, EMC breakthrough partner of the year, HP top storage growth partner of the year, NetApp FlexPod partner of the year. Also as part of our plans to continue to evaluate emerging technologies and vendors we achieved a few certifications this year.

Notably the certification of application-centric infrastructure authorized technology provider from Cisco. This allows us to sell, deploy and support Cisco application-centric infrastructure products and solutions at a time of increased focus on opportunities for converged and hyper-converged infrastructure.

Secondly, we recently announced that we have been named a platinum pro partner by Veeam's Software, the highest level in the Veeam ProPartner program in the United States. This designation allows us to provide Veeam products focused on data center solutions. We believe certain certifications like these keep ePlus well-positioned with ACI and other new technologies and vendors for the future.

The common themes running through all of these examples is that ePlus has a market leading level of expertise and that we can provide the full range of products and services that CIOs look for in the current IT environment with the flexibility and support they are looking for from a partner. Based on these factors we believe that we will continue to gain marketshare.

I will now turn the call over to Elaine who will provide a closer look at our numbers for the fourth quarter and the full-year. Elaine?

Thank you Mark. As Phil mentioned earlier results in the fourth-quarter fiscal 2015 showed positive year-on-year comparisons driven largely by margin expansion.

Net sales grew 2.8% in the quarter while consolidated gross margin for the quarter was 22%, up 100 basis points from a year-ago quarter. One of the main factors in this margin expansion was an increasing proportion of revenue from the sale of third-party maintenance contracts which are reported on a net basis. In addition we continue to optimize our product mix to prioritize higher-margin sales including those associated with advanced technology solutions and services.

This consolidated gross margin expansion more than offset an increase in operating expenses. Starting this quarter we are reporting adjusted EBITDA, a metric we use to evaluate operating performance of our business. We define adjusted EBITDA as net earnings calculated in accordance with GAAP while the adjustments for interest expense, depreciation and amortization, provision for income taxes and other income.

Certain operating expenses from our financing segment are excluded from adjusted EBITDA. We consider the interest on debt from the financing segment as well as depreciation of assets under lease to be operating expenses.

Adjusted EBITDA grew 10.5% in the fourth quarter to reach $16.3 million. Net earnings were $8.9 million or $1.22 per diluted share, up from $8.2 million or $1.03 per diluted share in the fourth quarter of fiscal 2014. Diluted shares outstanding was 7.3 million from 7.9 million a year earlier.

Turning now to the results of our two segments starting with technology, technology net sales grew 2.8% to $258.9 million in the fourth quarter, up from $251.9 million a year earlier while non-GAAP gross sales of products and services grew at 4.9%. Non-GAAP gross sales of products and services include revenues from third-party maintenance contracts prior to the reclassification of net sales. As you know, we have a team focused on these margin rich maintenance contract renewals to assist our customers with the complexities of this difficult renewal process.

Gross margin on the sale of products and services was 20% compared with 18.8% in the fourth quarter of 2014. As with consolidated gross margin figure, this expansion is largely due to the sales of third-party maintenance contracts which are recorded on a net basis and higher margin from our product sales.

Operating expenses increased to $40.2 million from $36.7 million a year earlier, primarily from higher variable compensation related to an increase in gross profit as well as additional personnel. G&A expenses also rose to $6.1 million which included non-cash expenses from our acquisition of Evolve Technology in August 2014. Technology segment earnings were $12.9 million, up slightly from $12.8 million a year earlier.

In the financing segment we saw positive year-on-year comparisons. Net sales grew 4.5% to $8.4 million with higher transactional gains compared to the year-ago period. Direct lease costs fell slightly to $2.7 million leading to double-digit growth in gross profit.

G&A expenses also fell reflecting lower reserves for credit losses in the current quarter. Together these factors led to the strong growth in the segment earnings which totaled $2.2 million compared to $1.2 million a year earlier.

Moving now to full-year results, our fiscal year 2015 performance is in line with the long-term strategy that Phil and Mark touched on, growth higher than that of the overall IT market led by our focus on integrating complex IT solutions which combine product professional services and managed services. Consolidated net sales rose 8.1% to $1.14 billion led by our technology segment which accounted for approximately 97% of net sales. This growth in technology revenue more than offset a slight decrease in financing revenue.

Consolidated gross margin for the full-year was 20.4%, a 90 basis point increase from fiscal 2014. The main factor in this expansion was the increase in proportional sales coming from third-party maintenance though we did see a shift in product mix towards higher margin products.

Operating income rose 17.7%, more than double our net sales growth to $70.7 million. Operating margin increased 50 basis points to 6.2% while net earnings were $45.8 million inclusive of non-operating income from a gain on a retirement of a liability and the Company's claim in a class-action lawsuit.

Excluding these two items, non-GAAP net earnings were $41.4 million or $5.59 per diluted share compared with $35.3 million or $4.37 per diluted share a year earlier. Diluted shares outstanding were 7.4 million compare to 8 million a year earlier.

Turning to the annual results for the two segments, technology segment net sales rose 8.5% while non-GAAP gross sales of products and services revenue grew 12.5% to $1.44 billion. Again these include revenues from the sale of third-party maintenance contracts prior to the reclassification to net sales.

By sector we remain well diversified in terms of net sales with telecom, technology, media and entertainment and SLED, each accounting for 18% or more of our total sales while financial services and healthcare were both 10%. This diversification is an important part of our strategy and we see opportunities for growth in each sector.

Gross margin on the sale of products and services was 19.4% for the full-year as compared to 18.3% in the prior year. The 110 basis point expansion is primarily due to an increase in the proportion of sales to third-party maintenance recognized on a net basis and a shift in the product mix to higher-margin products.

Operating expenses were up for the year reaching $159.8 million from $142.2 million in fiscal 2014, approximately 48% of the increase in salaries and benefits related to higher variable compensation as gross profits increased. The remaining increase was due to additional personnel as headcount in the technology segment rose to 936 employees at year-end from 879 at the end of the prior year.

The other factor in operating expenses was the acquisition of Evolve which resulted in higher amortization of intangible assets. Segment earnings rose 18.8% for the full-year reaching $61 million, up from $51.3 million in fiscal 2014.

Turning to the financing business, revenue was modestly lower in the year reflecting lower transactional gains. Direct lead costs and operating expenses both fell leading to a growth of 11% in operating income. In the second and third quarters of fiscal 2015 we booked two non-operating incomes in the financing business that I mentioned earlier, the gain on a retirement of a liability and a payment received related to the Company's claim in a class-action lawsuit.

Inclusive of $7.6 million of non-operating income from these two items segment earnings were $17.4 million. Adjusted EBITDA for the year was $75 million up from $62.9 million in fiscal 2014.

Moving to the balance sheet at March 31, 2015 we had cash and cash equivalents of $76.2 million compared with $80.2 million at March 31, 2014. Total stockholders' equity was $279.3 million compared to $266.4 million a year earlier.

During the year we repurchased 700,113 shares of our common stock for a total purchase price of $35.7 million under share repurchase plans which included 400,000 shares repurchased as part of the secondary offering conducted in May of 2014. In addition we had cash of $8.1 million for the acquisition of Evolve.

To sum up results for the full-year highlight the demand for the type of complex multivendor solutions we offer and our ability to expand gross margins and operating margin. I will now turn the call back to Phil for closing comments.

Thanks, Elaine. To sum up we are pleased with our fiscal 2015 results. We believe we are well-positioned for continued growth.

We have chalked up a solid track record of anticipating emerging market trends and today our increased scale gives us even greater ability to be at the forefront of change whether it be at the strong demand for security where we have significant expertise or the migration to more software solutions which benefits our services business over time. Also in fiscal 2016 we expect to be able to leverage the investments we have made in engineering capabilities and headcount as we continue to develop our professional and managed services business.

We recently completed a rebranding process which calls out the concept of more in the context of working smarter and doing more to satisfy the more sophisticated customers and to be more efficient. The genesis of this theme came from both our own organization and a cross-section of our top 40 clients in recognition of how much ePlus has evolved over the years and where we are going. As we move forward in this new fiscal year we'll continue to focus our efforts on gaining more traction with our existing clients where we will have significant opportunity to grow both products and services as well as expanding our customer base through targeted sales efforts across our diversified verticals.

We believe we are well-positioned in those areas that are most in demand, namely security, cloud infrastructure, data center and services combined with our increased scale that enable us to continue to gain share and report sales performance that comfortably exceeds the growth rate of the overall IT market. And our Company is fully committed to maintain industry-leading gross margins and investing in people, emerging technologies and consulting services through organic efforts as well as acquisitions.

Finally, with more than 2,900 customers and a comprehensive suite of offerings that address today's most advanced technologies, we are very well-positioned to capture additional upsell and cross-sell opportunities within our customer base. For example, we can provide security to our customers that integrate within the solutions they are already buying from us.

On that note, operator, we'd like to open the call for questions.

(Operator Instructions) Matt Sheerin, Stifel.

Yes, hello everyone. First question, just regarding the revenue in the quarter it looks like you saw a fairly significant deceleration of growth on a year-over-year basis and a sequential basis your tech segment was down 13% or so which is the biggest decline in five years. So just trying to figure out what you saw in the quarter which led to that slow down.

I know you had a very strong December quarter and the comps year on year are tougher. I know one of your suppliers has announced some difficulties. I know the education market is in a pause but what are some of the reasons you are seeing there?

Hey, Matt, it's Mark here. So a couple of things that are probably going on in the market.

As you see with a lot of our competitors as well as some of our key vendors the role in the mid-single-digits to flat to down from a revenue growth standpoint. I think there's a few things that are also going on in the storage space with some of the legacy storage vendors that's in play.

Now with that said, we think we might very well-positioned both with the legacy and emerging vendors in the storage space. And with some of the what I'd call customer-facing headcount that we added we feel very good and positive about what the future holds. I think the biggest thing when you look at the year-over-year growth our tech sales last year were up approximately at the gross level like 12.5% year over year, so it's a tough multiple to match when you have that kind of growth in the previous year.

Not making excuses, you had a few things with weather the probably affected some of the services numbers, nothing dramatic so unclear. But those would be the bigger pieces. I think overall we feel pretty good about the headcount that we added, the areas that we're focused on and some of the relationships we're building with some of these emerging technology vendors.

Do you think then Mark that we should start to see reacceleration of growth as we get into the back half of the year?

You know, here is the easiest thing, that we believe we'll continue to take marketshare from our competitors as we move forward. We think we'll continue to grow our services revenues at a bigger clip then our product revenues. As you noticed I think as Elaine highlighted our gross margin was up 120 basis points for the quarter and that's really focused on more of the more value add, higher complex solutions that a lot of customers are looking for.

We've expanded our service offerings in terms of or managed service offerings by offering video, FlexPod managed services, wireless managed services. We're investing in headcount to continue to pull down both for the professional services and the staffing that our customers are looking for. So we feel pretty good both from where the market is and what we see in our forecast currently.

Okay and I know you don't break out the revenue from services or as a percentage of your sales but could you give us an idea of the growth rate you're seeing in the services revenue? Not counting the warranty, the maintenance contracts, could you give us an idea of the growth rates there?

Yes, so I guess the biggest thing to talk about so Elaine or Phil had mentioned that we had 6.5% headcount growth year over year. I would say 85% to 90% of that is what I would call customer-facing meaning sales account executives and services, systems engineers, both pre, post-sales and solution-oriented architects and consultants. And that's where we're going to continue as we move forward to invest.

As I mentioned without overkilling it, Matt, the offerings that we built out in on-demand services and staffing capabilities and we're going to continue to build that out. We built out our national presales capabilities so we're able to provide more value to our customers in key areas that they are looking for. And the offerings, the service offerings that I talked about by adding video, we also extended, so when it Elaine talks about the net gross sales through third-party maintenance contracts, that's by design at ePlus.

We've actually expanded what we call our renewals team. And they are responsible for customer satisfaction and providing the information and the tools from an asset management standpoint that our customers need to manage their assets as they move forward. So we believe that we're well-positioned for renewals, we believe we're well-positioned from a support standpoint and we believe we're well-positioned to add on the optimized, what I call optimized services of managed services, staffing and what we call enhanced maintenance services which is where we provide level 1 and level 2 support for Cisco and NetApp customers.

Okay. So I'm just trying to get an answer to the questions in terms of the growth rate of that business of services. Or it sounds like you're not ready to talk about that yet.

Matt at this time we're not ready. What I can tell you our services growth rate as a percentage will exceed our product growth rate. That I can tell you.

And I think the part that I'm trying to give you as much as I can here most of the headcount we're adding is in the services space and I'm trying to highlight some of the offerings that we're building out that are all services related. So we think we'll continue to see our transactional and annuity services continue to grow.

And hopefully that will continue, based on what we proved in the past, our gross margin percentages will continue to trend in the right direction. And as I mentioned a little bit earlier, if you look at it our tech gross margin was up 120 basis points for the quarter and I think was 110 basis points for the year.

Yes, got it. Just lastly could you tell us what your top customer was as a percentage of sales, Cisco?

Top customer or top vendor you mean?

I'm sorry, vendor.

It was Cisco. I think they came in at 48% for the year.

Okay and any 10% customers?

We had none this year.

You had none, okay. I know last year Verizon was a double-digit customer and is that one reason why maybe the growth rates look slower because of the lumpiness of that customer?

No I don't think so Matt because if you look at it on a consolidated we're up 8% revenue year over year. So if you think about the IT industry as a whole I think it's Gartner IDC says it's 3% to 4% is what the IT spend is expected. So from a revenue standpoint we're more than double the industry average and then when you look at our operating income that's up at 17.7%.

No, no, I certainly understand that. I'm just getting -- you had that one customer was plus 10% last year, now it's below 10% which means either that customer was flat or was down.

Yes, hey, Matt I believe they were approximately flat but it wasn't a big difference. I believe and I'm going on memory here, I don't have it in front of me, they were just barely over the 10% mark last year. So I don't remember the exact percentage so we can get that to you.

That's fine. Ballpark is fine. Okay, that's fair enough. Thanks a lot.

Prab Gowrisankaran, Canaccord.

Hi, thanks for taking my questions. Just following up on the previous questions, just can you provide more color in terms of the macro trends, is the bigger slowdown in storage? And if you can compare it to networking and converged infrastructure it sounded like you had a lot of growth in converged infrastructure but it looks like there was more of a slowdown in storage.

Hey, Prab, it's Mark. So in terms of here I'll give you two quick things. Why we feel we're pretty well-positioned, the reason we mentioned the awards, the Cisco partner of the year, EMC breakthrough partner, the HP storage growth partner, the NetApp FlexPod partner of the year, we feel compared to our competitors with the resources, the scale and the capabilities we had we're very well-positioned as the market moves to from a converged to hyper-converged market if you will and all the different types of cloud offerings that are out there.

If you look at the market as a whole I think there's probably four things that you're looking at from a macro level that everybody's trying to figure out. It's all about the customer experience, it's about the employee experience, it's about big data analytics and how do you use that from a business risk as well as a business opportunity and it's about security and compliance.

And then if you think about some of the bigger macro things going on with moving from your traditional disk and hard drive to flash and object storage you've got a lot of that going on. So I think customers are trying to evaluate what's the right solution for them both in a converged and hyper-converged infrastructure.

And then as a true macro if you start thinking about the digital transformation that's going on in the Internet of Things and all the things that that means I think it just really opens up more opportunities for somebody like ePlus. Because the Internet of Things is really just centers on everyday devices and then taking that data and utilizing that data to provide some value to the customer. So those are the things at a macro level.

The other big thing, everybody is trying to figure out how to harness big data. And obviously they are worried about cyber security both at the Board level and at the CIO level. So that's kind of the bigger picture of things going on.

Okay. And the other question I had was just piggybacking on your how are you positioned on these emerging flash and hyper-converged infrastructures?

It looks like Pure and some of these newer guys have similar offerings to Vblock and FlexPod offerings. So how are you positioned with some of these emerging vendors?

Well, I think we're very well-positioned because if you think about it it kind of plays to our strength. So if you think about the converged players with FlexPod and Vblock and all of that hyper-converged really all it is is a preconfigured rack of storage and compute if you will, so this integrated stack. So it kind of fits within our strength in terms of the space that we play in.

It also plays into the six or seven integration centers that we have across the US. I think it's actually a good play for us.

Now obviously with our size and scale a lot of the newer players in that space are looking for ePlus to help them go to market. So when I had mentioned earlier we feel we are pretty well-positioned with both the legacy as well as the emerging vendors in that space.

And the last question I had was just in terms of it looks like you have kind of the lead in terms of security and other advanced technology, if you could provide any qualitative color on growth that you are seeing there? Is it still early innings or are you seeing a lot of growth from security and managed services?

We don't break out any of our what I call focus areas or architectures. I can tell you just as you know by looking at the market with all the different breaches and everything going on in the market, all the talk about threat intelligence both across public and private sectors if you will in terms of trying to take that information and use it to protect against the bad guys if you will, it's obviously a growing market.

And I can tell you that it's a market we're focused on. We're adding headcount and resources in that space. And we would expect those numbers to continue to grow for us in the security space going forward.

Thanks for taking my questions and good luck.

Bhavan Suri, William Blair.

Hey guys. Can you hear me okay?

Yes, we can hear your.

Thanks. Just to return to that first question you haven't had that sort of growth when I look at the revenue growth for a while now and obviously there are some storage guys going through pressure and things like that. Was there any deal slippage?

Was the stuff that might've come in that got pushed out? Was there to sort of a buying pattern that you might have seen in a specific vertical that was different?

Do you feel it was more on your side in terms of the sales execution side, Mark? How should we think about that? Because the overall year growth was fine but sort of that quarterly number was just a little lighter than we had seen in the past.

So one you have the year-over-year multiple. I think what you're seeing also as you know like in the E-Rate space for example with a lot of the schools that are out there over the last few years you've had zero dollars as it relates to E-Rate. That's now opened up.

We actually feel like we're very well-positioned based on the schools that selected us with E-Rate. So we've got a, which is all public, we've got a significant share of that business. So we would expect our SLED business which is our strongest business overall to continue to grow.

I think you've got some of the legacy storage vendors that definitely hit some tailwinds. I think you've seen with NetApp and HP and EMC with their with some of the things that they announced that you have probably got some customers out there that are evaluating whether to look at some of the new flash and hyper-converged players out there. But once again in terms of our forecast and our optimism we still feel pretty good about where we're positioned both with the legacy and the emerging vendors.

I think also to add to that our fourth quarter is generally a softer quarter for us. There's no what we call event that occurs in the quarter like a manufacturing year-end or a budget year-end that occurs. We did have a very good comparable year last year in that quarter that to contend with as a comp, we knew that going into this quarter.

Mark mentioned also weather which I think did have a small effect on some of our services revenue. That did occur. So the combination of things but also to look at the gross sales portion I mean we did go up 4.9% in terms of gross sales and we did have a larger portion this quarter of maintenance sales than we normally have in this quarter.

So I think it was 23% were reclassified as net sales which is a larger percentage. Normally that percentages in that 18% to 19% range. So when you're looking at that reclassification that is a larger percentage than normal for us, in this particular quarter it's just unusual.

Yes, I mean it's one quarter but it was interesting. I was just looking back and obviously your Q4 is past the December quarter, so certainly seasonality and budgets doesn't play into your hands. Can we talk a little bit about and I know there has been plenty of questions about services and everything else but when you look at visibility at a high level given you've got recurring, you've got some of the contractual stuff, you've got managed services, how is your visibility as we look at to fiscal 2016 especially given that services are becoming a bigger part of the business?

So are you asking do we have the visibility or you're asking for exact numbers and percentages here?

What's a relative percentage in terms of visibility? If you look out your internal plans and you look at what again you're not giving guidance but as you look at your internal plans for fiscal 2016 what sort of visibility do you have into that number today?

And again we don't need to know the plan, just a sense of how visible things are? Because obviously there's parts of the business like customers will come in and buy chunks of hardware or super pods or whatever they are going to do but some of that's not visible.

We actually have very good visibility into our services numbers going forward and that includes everything from what we call backlog. That includes what I'd call the managed services or annuity business as well as the pipeline for what I'd call our transactional professional services. So that's kind of your installation implementation of a solution, if you will, is kind of the transactional, your annuity is your managed services and some of the other offerings in that space and then you have what you call backlog, meaning services that you have already booked but you have to fulfill.

So we have very good visibility into all three of those. We track them religiously and feel very good about where we are and where we think we are going in that space.

That's why we're continuing, I try to give you as much as I can here, but since we don't break out services we continue to invest in headcount in the services space and we continue to invest in our services offering. So from that end that should give you an indicator of what we as we move up the stack if you will of our gross margin percentages and the value that we provide to our customers they are looking for that assessment-led consultative sale to help them in the environments that they are looking for in the areas that are hot in the market today.

That's helpful. And just keeping in mind with that gross margin you've shown nice improvement here but how should we think about the metric long-term A, as services, managed services the whole consultative approach all of it becomes a bigger part of the businesses?

Is there any sort of even medium- to long-term targets you guys could share on the gross margin line of where you think things might happen again? Again not putting in necessarily a fixed time frame to it but a sense of where this might go?

Well, here's the hard thing without the forward-looking piece there is the easy thing is if you look at it I think we have a track record. So historically you can look at the numbers and you look at the track record for our margin expansion. And we believe we're well-positioned in this space going forward.

So you're not going to give me anything. All right.

Let's talk about something a little more fundamental for second. When you look at some of the emerging areas are there areas that customers are asking for whether it's in software-defined networking or software-defined storage that either require additional investment or you might try and develop that by someone develop that expertise via acquisition?

Well here acquisition is always part of our strategy. So part of our one of our corporate objectives is to continue to build out our national footprint. And that's both organically which you heard with the 6.5% headcount that we added as well as acquisition which you heard with Evolve that gave us a greater SLED presence in the West Coast, gave us contracts that we can now leverage and now with the Evolve team is able to leverage the size and scale of ePlus.

The good news is a lot of the areas that are coming out, the hyper-converged and some of the storage plays that are out there meaning your flash and object storage and things like that, we've already got the technical talent in that space, so there's not a major reinvestment in terms of headcount. I think the biggest thing that most companies struggle with including ePlus is adding the right number of headcount to touch as many customers as you can but the good news is as it relates to a lot of the new technologies coming on board we've already built out our emerging technologies team.

I had mentioned we built out our national presales team to support some of those activities. And we've continued to invest in what I call presales and post-sales engineers to be proficient in those areas.

So a lot of them fit. The hyper-converged is really just a play on converged infrastructure, right? So no big investment there.

In fact our biggest thing is based on what we've accomplished a lot of the emerging vendors are obviously looking for us to take their technology or solutions to market and you can only be so many things to so many people. So that's why we've created the emerging technologies and solutions go-to-market teams to help us vet through and look at the technologies that fit within the core focus areas that we sell and how it's complementary to what we're doing. And it keeps training to a minimum where we can.

It's always a challenge with new ones, which one to invest in, which one not too. And then one last one for me.

Just off the new wins or even expansions of existing customers in terms of projects or deals how many would you say were involved bundled, so managed services and financing or financing? Because obviously the sales guys incented through gross margin dollars it would just be interesting to know how many of those involved multiple products or multiple bundles of the various offerings?

Well, here's the thing. The two that I highlighted were both bundles of services and/or products. So multiple security vendors in the education institution that I talked about, that was the large $4 million-plus that they have a large security budget that we think we'll continue to go back to the well on, if you will. And the other was a combination of managed services, our enhanced maintenance support staffing on-site.

If you think about that where we believe that the goodness is we've built up our services capabilities to go back to our approximately 3,000 customers to provide these add-on services. So after we've sold the product to them we're now trying to go back and say hey, you're doing the maintenance renewal, we can provide level 1 support and services around NetApp and Cisco to start.

We have managed service capabilities across your networking security storage server compute plays and then we have the ability to provide staffing or bodies to help you as you rollout these technologies. So it's a good way to go back to customers.

The security stuff what's really interesting is obviously it's top of mind with every management team at every Company. It's top of mind at every board with cyber security.

So it's easy to get a meeting if you have the capabilities to talk about your security capabilities and how you can help that customer ensure that the data is protected. And if you think about the cloud which you know is you have got more and more people moving towards the SaaS or cloud offerings and you've got to worry about encrypting that data as it is leaving the network to go out to the cloud and vice versa. So there's security opportunities within things we've already sold to our existing customer base.

That's helpful, Mark. Thanks, guys, thanks for taking my questions.

I would now like to turn the call back over to management for any further remarks.

Thank you, Abigail, and thank you all for participating in today's call. We look forward to seeing you at upcoming conferences and updating you after our first-quarter results. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program.

You may all disconnect. Everyone have a good day.