ePlus inc (PLUS) 2020 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the ePlus Inc. Q4 Fiscal Year 2020 Earnings Release Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Kley Parkhurst, Senior Vice President. Thank you. Please go ahead.

Thank you for joining us today. On the call is Mark Marron, CEO and President; Elaine Marion, CFO; Darren Raiguel, COO and President of ePlus Technology; 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, 2020, 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?

Thank you, Kley, and thank you, everyone, for participating in today's call to discuss our fourth quarter and full year fiscal 2020 results.

I'd like to start by thanking all ePlus associates for their perseverance and dedication in serving our customers and supporting each other during these unusual and stressful times. We came together as a team by adapting and adjusting to this new market, proving not only that our business model is sound, but that we have a durable and resilient culture. Our teams also did a great job pivoting and customizing our solutions to meet evolving customer requirements, enabling remote workforces with leading-edge collaboration, networking, cloud and security solutions.

The fourth quarter, with revenue growth of 13%, marked the successful completion of a strong year for ePlus. COVID-19 had a modest impact on our revenue. Some noncritical orders were delayed or deferred by customer choice or supply chain constraints, but were partially offset by additional spend on investments required to support their remote workforce transition and related IT projects.

In the fourth quarter, our gross margin was 25.1%, reflecting a favorable mix and a positive contribution from our financing business. Operating income increased 23.6% to $17.9 million, and adjusted EBITDA was up 20% to $23.5 million. Elaine will provide more details in her remarks.

For Fiscal 2020, net sales were up 16%. And our gross margin increased 50 basis points to 24.6%. This translated into a 19.8% increase in operating income and an 18.9% increase in adjusted EBITDA. We ended the year with a strong balance sheet, which provides the resources to execute on opportunistic initiatives to support our growth strategy. Our digital infrastructure, security, cloud and networking solutions were in high demand by our customers as they shifted to the COVID-19 environment and will continue to be relevant as enterprises transition to the new normal.

Operating in this new environment brings many challenges. We will continue to adjust our solutions to meet customer and marketplace demands. For example, supporting a hybrid workforce increases and changes the security posture and cost structure for many of our customers with more data exchanged over home networks and personal devices and in the public cloud. Our recently announced public cloud-managed services solutions addresses head-on the most critical issues of cloud cost optimization, cloud security monitoring and cloud data protection faced by our customers in this new environment. Our consultative offerings in the security area continue to be in high demand. Sales of our security products and services increased 15% in fiscal 2020, and represented roughly 19% of our adjusted gross billings.

To give you an example of how we were able to help our customers adjust to the new work-from-home environment, we were retained by a long-term large financial industry customer to shift 40,000 employees to work-from-home status in a short period. By leveraging cloud and VDI technologies, it enables remote workers to access business applications, be able to provision new users in any location and maintain business continuity. We continue to build out our service offerings that are in most demand, including managed services, help desk, cloud and other hosted offerings, which fulfill client needs while building out our annuity quality revenue base.

In the fourth quarter, our services revenue increased approximately 9%. Our investments in people and infrastructure have enabled us to provide clients with end-to-end solutions, and this is a key element of our strategic growth plan that is more relevant today than it's ever been.

Our financing segment had a strong year with net sales increasing 35% to $58.3 million. We can provide financing alternatives to support our clients with flexible and creative structures, which allows them to acquire critical IT assets, even in an era of reduced IT budgets and capital spending constraints. We stand ready to support our customers while achieving good returns on our capital. As we've mentioned in the past, our financing segment results can be uneven and we closed several large transactions in the past year. Our financing capabilities remain a significant competitive differentiator in the market. The pandemic's effect on the overall economy and IT spending is uncertain. Future IT spending will be determined, in part, by how quickly the country reopens and the pace of economic recovery, or conversely, the length of an economic downturn. We have minimal exposure to some of the hardest hit industries such as small business, retail, travel and hospitality. And we have some customers who may actually benefit from the pandemic in sectors such as technology, communications, video gaming and health care. We do expect some headwinds as our customers determine their IT spending plans in the post COVID-19 environment, but we are confident that our focus on the right solution sets and customer segments along with our dedicated staff will enable us to weather the storm and remain a key partner to our customers.

I will now turn the call over to our CFO, Elaine Marion, who will provide a detailed review of our quarter results. Elaine?

Thank you, Mark. First, let's talk about this quarter. The March quarter consolidated net sales increased 12.6% to $366.5 million compared to $325.4 million reported in the fourth quarter of fiscal 2019. This positive year-over-year comparison was driven by strong performance from both our technology and financing segments.

Adjusted gross billings were up 8.8% to $514.1 million compared to $472.4 million in the same period a year ago, benefiting from organic growth and acquisitions. The adjusted gross billings to net sales adjustment was 31.3% in the fourth quarter of 2020 compared to 33.7% in the year ago quarter, reflecting a lower proportion of third-party software subscription and maintenance sales.

Our technology revenue increased 12.8% to $353.3 million, from $313.2 million in the fourth quarter of fiscal 2019 due to higher sales from our customers in the Telecom, Media & Entertainment industry.

Service revenue grew 8.6%, primarily from an increase in our managed services. Our financing segment revenue grew 7.8% to $13.2 million compared to $12.3 million in the fourth quarter of fiscal 2019 due to higher transaction gains from several large transactions in the quarter. Revenue from our financing segment tends to fluctuate due to transaction gains and post-contract earnings.

Our consolidated gross profit increased 13% and our consolidated gross margin expanded 10 basis points to 25.1%, reflecting higher product margin in our technology segment and strong gross profit growth in our financing segment. However, due to a slight reduction in services margins, gross margin in the technology segment declined 20 basis points to 22.5%.

Operating expenses for the quarter were $73.9 million, representing a 10.7% increase, mainly driven by 11.3% higher SG&A. This year-over-year change is mainly attributed to an increase in salaries and benefits due to the acquisitions of SLAIT in January 2019 and ABS Technology in August 2019 as well as an increase in variable compensation. Our total head count at the end of March 2020 amounted to 1,579 compared to 1,537, primarily due to the ABS acquisition.

Operating income for the quarter was up 23.6% to $17.9 million from $14.5 million in the comparable quarter last year as a result of higher revenue, improved gross margin and operating leverage. Our consolidated net earnings were $13.2 million or $0.99 per diluted share compared to $15.1 million or $1.12 per diluted share last year. Last year's net earnings included other income of $5.6 million, primarily from a bankruptcy distribution. Non-GAAP diluted earnings per share increased 20.4% to $1.24. Our diluted share count was $13.4 million compared to $13.5 million at the end of fiscal 2019.

Now I'll summarize our financial results for the full fiscal year 2020. We reported 15.7% consolidated revenue growth to $1.59 billion from $1.37 billion in fiscal 2019. Technology segment net sales increased 15.1% to $1.53 billion, and net sales in our financing segment increased 35% to $58.3 million due to higher transactional gains. Adjusted gross billings for the full year were $2.2 billion, up 16.1% from $1.92 billion in fiscal 2019.

Looking at the end markets in our technology segment for fiscal 2020, technology and Telecom, Media & Entertainment were the largest markets, representing 21% and 19% of segment net sales, respectively. SLED and health care accounted for 16% and 15%, respectively. Financial services represented 13% of technology sales. The remaining 16% is attributed to smaller client types.

Gross profit for our fiscal 2020 was up 18.4% and amounted to $391.2 million. Gross profit in the technology segment increased 15.6% to $340.6 million, and gross profit in the financing segment increased by 41.6% to $50.6 million. Consolidated gross margin was 24.6%, representing a 50 basis point expansion from fiscal 2019. Technology gross margin expanded 10 basis points to 22.3%. Other income decreased to $700,000 from $6.7 million in the prior year due to a distribution in a bankruptcy case during fiscal year 2019. Our tax rate for fiscal 2020 was in line with our expectation at 28% compared to 26.7% a year ago. Net earnings in 2020 increased 9.3% to $69.1 million, and fully diluted earnings per share were $5.15, up 10.8% from $4.65. Non-GAAP earnings per diluted share increased 19.7% to $6.13.

We have maintained a strong balance sheet and ended the year with cash and cash equivalents of $86.2 million. We recently increased the credit limit on our credit facility for the technology segment to $275 million, which can be flexed up to $350 million at our option on an as-needed basis for working capital or strategic opportunities. In addition, we have approximately $107 million invested in our financing portfolio, a portion of which may be monetized by funding transactions with third-party financial institutions. Our net inventory was flat year-over-year. Deferred revenue increased 17.4% to $55.5 million, primarily due to growth in our managed services offerings. Our cash conversion cycle at the end of the quarter was 37 days, up from 27 in the year ago quarter and up from 26 days in the third quarter of fiscal 2020, primarily due to an increase in sales customers with regular payment terms of 60 days or longer.

We believe COVID-19 had a minimal downward effect on our sales in our fourth quarter of fiscal 2020. As this pandemic is unprecedented, we are uncertain as to how it will affect demand in fiscal 2021. As you are aware, we focus on innovative solutions for medium and large commercial businesses as well as state, local and higher education customers, and we'll continue to monitor and adjust for the pandemic's impact on our business.

I'd like to thank my colleagues for their dedication and resilience during this crisis. And also our vendor partners for their efforts in assisting us with supporting our customers. Thank you for your time today. I will now turn the call back over to Mark. Mark?

Thanks, Elaine. Fiscal 2020 was a successful year on many fronts for ePlus, including growth, market share gains and continued execution of our long-term strategy. While many of the same demand drivers such as digital transformation, cloud and security are expected to continue in the long term, in the near term, we remain cautious about the economy and demand environment.

In summary, we believe we are well positioned and remain confident that we can adjust and adapt to the challenges in the COVID-19 era and beyond. Operator, I would now like to open the call for questions.

(Operator Instructions) Your first question comes from Maggie Nolan from William Blair.

I'm hoping you can talk us through some of the dynamics that you saw in both products and services during the quarter. Maybe kind of breaking it up to the first half or first couple of months of the quarter versus that final month of March? And how they may have differed?

Sure. No problem, Maggie. So first off, overall, it was a solid quarter. As Elaine mentioned a little bit earlier, we had a slight impact towards the end of the quarter, last few weeks when COVID-19 really took place. As it relates to our solutions, the things that we've been talking about for years in terms of security, in terms of digital infrastructure, cloud, data center, we're still strong through that period. Once COVID-19 hit and it became clear that everybody had to work from home, we were adjusting pretty quickly with work-from-home solutions as it relates to VDI, as it relates to collaboration tools, cloud, security. And we also saw a lot of customers really starting to take advantage of digital transformation.

To be clear, though, in the quarter, it was a short time period. So I'd say of the 12 weeks in the quarter, first 9 to 10 were running as always and the last few weeks, there were some adjustments with trying to get customers up to speed with their work-from-home solutions, taking advantage of the cloud and trying to help them with their digital footprint. As it relates to services, we had a fairly strong services quarter overall against the tough compare. We saw that our -- what I'd call our annuity services, managed services were strong, both in terms of from a rev rec as well as from a billing standpoint. And then on a security perspective, for the year, we were up 15% on security. So I don't know if that answered everything you were looking for.

It definitely helps. And then how have you seen that progress as you've kind of gotten into April and May here?

So, so far, as it relates to April, we saw a minimal impact in April. So our business kind of held in April. But I want to be clear, Maggie, it's only 1 month. I mean there's still way too much uncertainty in our business and really kind of can't predict the future. And I think you know as well as I do, a lot of the analysts, some of the bigger OEMs, some of our peers are talking about declining in the -- in this quarter and beyond. So I think for the quarter, April held up well. And some of that's due to, I believe, some of the pipeline established as well as some of the COVID spend at customers'. And then we're going to have to see as we move throughout this quarter and throughout the year where things take us.

Okay. Understood. And then as you think about maybe a less certain environment going forward, can you talk a little bit about the ability to kind of manage expenses in response to that?

Yes. Well, I don't know if you want to jump in?

Go ahead. You can start.

Yes. So Maggie, I think, like anything, in terms of how we normally do it, if at a very high level, there's kind of 3 parts to our business. It's our solutions that we're developing for our customers that they need. So we believe the good thing is we've been in the right solution areas for our customers with cloud, security and digital, and they really fit now with a lot of the technologies that customers are looking to optimize their workforce through the cloud. They're looking for collaboration tools. They still need security. So we feel good there.

Second, from a go to market, we feel like we're kind of positioned in the right verticals that haven't been hit as hard as some of the other verticals, and in our go-to-market in terms of the accounts that we have in the mid-market and the enterprise market. So we don't have a lot of S in SMB, if you will, customers.

And then directly to your question, yes, we're managing OpEx as tightly as tightly can be and watching it as we move throughout the quarter. And I don't know, Elaine, if you want to add anything?

No. I think that was perfect.

Okay. Okay, Maggie?

No, that's great. If I can fit in one more, priorities in terms of capital allocation. You did just announce a stock repurchase program yesterday. So an update on kind of your priorities there would be helpful.

Okay. Maggie, first thing is keeping our employees. So we actually -- if you think back to the fiscal crisis, I think we did a good job back then of keeping our employees in place. We kind of weathered the storm, for lack of saying in any other way. And we're -- right now, we're doing the same thing and hoping that will continue and believe that will continue. So that's kind of the first thing from a capital perspective.

Second is our strategy hasn't changed in terms of expanding our footprint as well as our solutions. So both from an organic and M&A perspective, we're going to continue to look at that. I want to be clear, though, I think the M&A market has changed a little bit. I do believe there'll be consolidation. But also, I think there's going to be sometime between companies that are being acquired of where their numbers are now and where they might be in the future. But it's still something we're going to consider. And as Elaine alluded to when she spoke a little bit earlier, in terms of our balance sheet and some other things, it gives us that capabilities. And then the buyback just gives us the flexibility we need in that space if we need it.

Your next question is from Matt Sheerin from Stifel.

Mark, I'll ask another question just regarding what you're seeing. Some other resellers and distributors have talked about double-digit declines in bookings in the month of April. Some also talking into May. Could you give us any color in terms of any metrics that you can in terms of what you're seeing? It sounds like April was relatively normal. And then also just on the larger IT projects. I mean I guess the COVID catch-up in those kind of investments. But are you seeing customers just put on hold those longer-term IT projects and they're just reassessing their strategies or their budget?

Yes. So Matt, I can't talk to the peers. I mean, I kind of know their business, but obviously, not as well as they do. For April, it was somewhat normal for us. Now we believe some of that was the work from home, the COVID solutions and things like that. Where it really is starting to get harder to predict is as this continues on, Matt, it gets tougher and tougher to predict where companies are going to be, both from a financial standpoint, whether they're letting their employees go and things like that. So that's where it gets a little bit tougher. I can tell you, we didn't see the decline, maybe for a couple of different reasons. We're not big in the retail, hospitality, airlines kind of verticals. So I don't think we may have felt the squeeze that they may have felt there. We don't play in the S, the small in SMB. So there's -- we had minimal impact. Also, as I think you know over the years, we really don't play in the PC laptop kind of space, if you will. We kind of moved away from that. Now that's not to say we didn't provide it for some of our bigger customers through this crisis, but that's not kind of our focus area.

So to answer your question directly, April, yes, kind of held in line. Still a lot of uncertainty that's really going to be dictated by the customers in terms of budget available constraints they might be under in the near term as well as resources that are available. As we all know, I think it's almost 40 million people that have become unemployed in the last month or so. So it's a tough one to kind of predict the future.

Yes. For sure. And then, Elaine, on the revenue growth for fiscal '20 of 15.7%. Could you give us a ballpark of what that organic number was? Because I know there were some acquisitions that you did, some have anniversaried already, some haven't, but could you give us that pro forma number?

Yes. Sure. For the year, the organic was about 67%. Acquisition...

67% of the growth, you mean? Okay. Of the growth? Okay.

Yes. That's correct. Of the growth, correct.

Okay. Okay. And then on the operating margin, I noticed that the technology operating margin number was the lowest, I think, in 6 years or so. And I know gross margin was sort of flattish, so that might have played a role and also expenses because I know you're hiring lot of specialty sales and technical folks, and most of your incremental operating profit came from the leasing business. So as we look forward and given that the mix of business is slanted more towards service, would we -- I mean, can we get back to that 5% plus number at some point? And how do we get there? Is that a volume game or is that a mix game?

Well, Matt, I think it's a mix game, but I just want to make sure one thing. In Q4, our tech operating income was actually up 25.6%. So I'm not sure in terms of -- I don't have the numbers in front of me, so I don't want to just make it up. But when we look at our businesses, there are always going to be -- what's nice is we have the strength of the 2 business units, and that played out both in the quarter and in the year. So our financing team had a very strong quarter and year. Some of that, to point out, so to be clear, is some large transactions that will probably be tough to replicate. But on our tech, in terms of our operating income, as it relates to tech, it was up 25.6% for Q4.

I got it. But for the fiscal year, it was -- the operating margin was down, correct?

I don't -- do you know -- I don't have it...

It was slightly -- 20 basis point.

It was down 20 basis points. Okay.

Yes. Well, exactly. Yes, on 12% -- on 15% revenue growth. I guess that was my point, when given your mix of business...

Yes. You also have to take into account that there was increased acquisition-related expenses in the year too, pulling that down, that had an effect on the operating margin.

Okay. Okay. And then just on the leasing business, which has been strong and a very big contributor to profitability. In this environment, in this sort of post-COVID environment and maybe when customers are obviously protecting their own balance sheets and CapEx. Could you see or would you expect to see more -- an acceleration towards the leasing model I mean is that -- could that be a positive catalyst for that business or not?

A couple of different things, Matt. Could it be a catalyst? Yes. We're -- companies are looking for OpEx versus CapEx models, if they're looking for innovative financing with deferred payments and things along those lines, if they don't have budget due to this new norm and they need IT to get ahead in their business, sure, there could be some things there. But in this new economy or new world, we have to see how it plays out.

The other thing I do want to point out, though, that's important is you've got to watch the credit markets, right, for one. And two is, last year was a really nice year for our finance team that had some large transactions that will be tough to replicate. That would be the big-picture message, if I had, from our financing perspective.

(Operator Instructions) Our next question comes from Greg Burns from Sidoti & Company.

Just a follow-up on the financing segment. Can you talk about the complexion of the lease book? And maybe do you feel the need to increase any reserves or -- bad debt reserves or how does that business look right now, the environment right now?

Yes. Sure. We did increase some reserves in the quarter. They were mostly technology related, related to industries that are in duress, such as some travel and also some retail-related accounts. Our investment -- our portfolio is really made up of mostly investment-grade credits. And we had a pretty thorough evaluation of those credits. And at March 31, we felt pretty comfortable with where we were with our reserve status on those. Obviously, we'll be keeping an eye on the portfolio. We also did some risk mitigation in terms of funding some transactions to relieve our portfolio and also generate some cash during the quarter.

Okay. Great. And I'll get back to your expense management. So what's mix of your cost structure, variable versus fixed? And kind of what kind of decremental margins we might expect if revenue is down this year?

Yes. A couple of different things there, Greg. So first, related to this quarter, you saw a little bit of uptick. Some of that was due to acquisition head count, if you will. Also with our GP being up, the variable was up. What I think you can expect going forward, I think this quarter is probably a good quarter to model off from an SG&A perspective. Second is, I think you'll start to see as this work from home, I don't know if I'd call it phenomenon, but what's going on is there's probably some things from a facility standpoint and other things from a G&A perspective that we'll be looking at, travel and entertainment and things along those lines. So there's a whole host of things that we're looking at across the bigger bucket expenses within SG&A to manage to it. Where it gets a little bit tougher is we actually believe we're in a pretty good spot, both financially, the solution sets we have and the customer base. So we believe there's an opportunity for us to continue to go out and grab market share, if we do it smartly from an expense standpoint.

Okay. You mentioned the service margins were down a little bit. Is that a mix issue? What was driving that?

Yes. It's just a mix issue. Nothing we're worried about. We've seen some pickup with our staffing business and things along those lines. That's a little bit lower margin than some of our, what I'd call, professional services, consultative services. That's going to trend, depending on the quarter, depending on what we sell. So nothing of major concern at this point.

Okay. And then finally, on the technology segment, the difference between adjusted revenue and adjusted gross billings, it seems like there's a shifting mix there of what -- where the demand is. Can you just talk about maybe what you're seeing in terms of demand versus products versus some of these -- or ratable services?

Demand. So demand-wise, it was a proportion change in the quarter. So we had more or less maintenance as a proportion of the total adjusted gross billings in the quarter. But for the year, we kind of leveled out a little bit. It was -- 31.3% was the reclass versus 30.7% in the previous year. There was a large delta this quarter, about 240 basis point delta, which is really attributable to mix in the particular quarter. But it is leveling out for us in terms of the proportion that we're selling product to third-party maintenance sales. But the maintenance is still continuing to increase. So we're -- it's a good business for us in software.

In software and subscription, so. Anything else, Greg?

Okay. Do we have any other questions or -- I don't think so. All right. With that, I want to thank everybody for attending and hearing about our Q4 and year-to-date, and I just wish everybody to be safe and healthy. Take care. And we'll talk to you next quarter.

Have a good holiday.

Take care.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.