Edited Transcript of PLUS earnings conference call or presentation 22-May-19 8:30pm GMT

As we continue to expand the Lifecycle Services we provide to our customers, we are now breaking out our services revenue, which accounted for almost 14% of the fourth quarter revenues, up 22.8% over the same period last fiscal year. Fiscal 2019 was a successful year for ePlus across a number of key metrics including growth in adjusted gross billings, services revenue, gross margin, net income and EPS.

There are 3 key takeaways I would like to focus on: one, we grow our services business nicely and are now disclosing services revenues and cost; two, we increased our gross margin; and three, we invested in our business, both organically and the acquisition to support future growth. All of this has come together to further strengthen our market positioning even from where we were 1 year ago.

Let me provide additional color on each of the 3 areas. First, growth in our services business. Our services revenues have increased at a CAGR of just under 24% over the last 3 years and we believe our services gross margins are very strong compared to many of our industry peers. We will continue to expand our consultative and advisory services along with optimized services that monitor and manage our customers' IT infrastructures. At the same time, we are providing staffing resources to support what our customers are trying to accomplish enabling them to focus on their core business. This allows us to stay close to our customers while a portion of this provides annuity quality revenue to our base of business.

In addition, this year's reclassification from gross to net was approximately $590 million. Keep in mind that this provides us with important renewal opportunity as it relates to subscription-based software and maintenance contracts giving us an additional source of annuity-like revenues.

Second, we continue to see gross margin improvement. For fiscal 2019, our consolidated gross margin reached an industry-leading 24.1%, up 130 basis point year-on-year. We believe, this demonstrates the value that our clients place in the customized solutions that we are providing, particularly in our key focus areas of cloud, security and digital infrastructure. Additionally, gross margin benefited from the expansion of our services portfolio and the flexibility and margin of our financing business, which is a key competitive differentiator for ePlus.

Finally, investment in our business. We continue to invest in customer-facing headcount and the expansion of our solutions and service offerings along with broadening our reach to support our enterprise, mid-market, state, local and education customer base. Along those lines, the acquisition of SLAIT, in late January, expanded our geographic footprint and service offerings while expanding our security consulting and managed service capabilities. It is important to note that we are continuing to see our industry transition to solutions sold on a subscription or ratable basis. While this trend started several years ago, we have seen it exhilarating over the last 12 months. Our vendors are increasingly transitioning to this model and many of our customers prefer purchasing this way.

Thanks to our size and scope of our operations, ePlus is well positioned to support our customer base with many innovative consumption models they may prefer. This gives us the opportunity to leverage our financing arm, which is a significant competitive advantage for ePlus as compared to our peers given our extensive underwriting experience financing a wide array of IP products, services and software assets.

Also security continues to be a significant area of focus for ePlus and its customers. Security products and services represented nearly 20% of our adjusted gross billings for fiscal 2019. Security remains at top of mind for many CIOs within our customer base. I will now turn the call over to Elaine, to discuss the financial results of the fourth quarter and our fiscal 2019.

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Elaine D. Marion, ePlus inc. - CFO [4]

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Thank you, Mark, and thank you, everyone, for joining our call. Let me give you some more detailed overview of our financial performance in the fourth quarter and full fiscal year 2019. Starting with the quarterly results, our consolidated net sales amounted to $325.4 million, 1.3% below the $329.9 million reported in the fourth quarter of fiscal 2018, mainly due to a higher percentage of third-party software subscriptions and maintenance sales recorded on a net basis.

Adjusted gross billings amounted to $472.4 million, a 6.8% increase compared to $442.5 million in the same period a year ago reflecting strong demand for our products and services. The adjustment from adjusted gross billings to net sales was 33.7% in the fourth quarter of 2019 compared to 27.9% in the year ago quarter reflecting a higher portion of third-party software subscriptions and maintenance sales.

In our technology segment, our service revenues increased to $45 million or 22.8% in the quarter due to an increase in managed services and staff augmentation. Our services include revenues from professional services, managed services and staff augmentations.

Our financing segment had revenue growth of 14.2% to $12.3 million compared to $10.7 million in the fourth quarter and fiscal 2018 reflecting higher transactional gains.

While gross profit was essentially flat at $81.3 million, our consolidated gross margin expanded 30 basis points to 25%, mainly due to the increase in sales recorded on a net basis and an increase in service revenues and gross profit in the financing segment. Gross margin in the technology segment declined 10 basis points to 22.7% due to a less favorable mix of products and services. We had several large, competitively priced product orders and had a shift in services with staff augmentation and enhanced maintenance services, which yielded lower margins than professional services.

Staff augmentation and EMS offer more consistent revenue streams and helped build annuity-quality revenue. Offsetting this was a positive impact on margins from an increase in the gross-to-net reclass. Operating expenses for the quarter amounted to $66.8 million representing 5.8% increase from $63.1 million. This is mainly attributable to a 3.9% increase in salaries and benefits as a result of higher headcount primarily due to the acquisition of SLAIT Consulting and an increase in health care costs. Please note that our total headcount at the end of March 2019 amounted to 1,537 compared to 1,260 due to the acquisition that I just mentioned, which brought on 256 professionals.

Our G&A expenses increased mainly due to the SLAIT acquisition. As a result of higher SG&A as well as an increase in acquisition-related amortization, operating income for the quarter declined 21.8% to $14.5 million from $18.5 million in the comparable quarter last year.

Other income was $5.6 million for the quarter primarily due to distribution from a bankruptcy case. Our tax rate for the quarter was 24.8% compared to 51% in the year ago quarter. Last year's quarter contained an adjustment from the remeasurement of our deferred tax assets and liabilities relating to the Tax Cuts and Jobs Act. Our consolidated net earnings were $15.1 million or $1.12 per diluted share compared to $8.9 million or $0.65 per share last year. Non-GAAP diluted earnings per share were $1.03 compared to $1.06 in the fourth quarter of fiscal 2018. Our diluted shares outstanding totaled 13.5 million for the quarter compared to 13.8 million at the end of fiscal 2018 as we repurchased 185,000 shares for a total of $14.1 million.

Now let me briefly summarize our financial results for the full fiscal year 2019. Our net sales reached $1.37 billion, 3.3% below the $1.42 billion reported in fiscal 2018.

Technology segment net sales decreased 3.2% to $1.33 billion and net sales in our financing segment decreased 6.3% to $43.2 million due to lower post-contract revenues. Net sales decreased in the technology segment primarily due to an increase in sales reported on a net basis.

Adjusted gross billings for the full year increased to $1.92 billion compared to $1.90 billion in fiscal 2018 despite the large competitively bid project that was partially completed last year.