Edited Transcript of PLUS earnings conference call or presentation 6-Feb-19 9:30pm GMT

We will continue to focus on cost optimization, while still ensuring that we have the optimal number and properly experienced customer-facing professionals to support our consistent migration to a services-led approach to customer engagement.

ePlus has a good track record of striking a balance between controlling costs and investing in our business. An example of this is that our headcount declined 1.5% on a year-over-year basis, but increased modestly on a sequential basis as we added more client-facing professionals and highly skilled engineers in areas of current and emerging customer demand.

In addition, security is an important business driver for ePlus, and we continue to deepen our expertise in supporting and developing security solutions for our enterprise and mid-market customers.

Adjusted gross billings of security products and services in third quarter increased by 23.6% year-to-year, and on a trailing 12-month basis, security products and services comprised 19.9% of our trailing 12-month adjusted gross billings, up from 16.7% just 1 year ago.

Security now represents 1/5 of our business. Given customer demand dynamics, this is an area that we expect will continue to increase in importance.

In fact, many of the key wins we had in the third quarter had important security solution components. For example, we helped a large global manufacturing client in multiple countries looking for a solution to secure their multi-cloud workloads in their environment. This customer was heavily invested in cloud-based office productivity tools that require them to extend security outside of their internal infrastructure and application. Protection and data loss were their key concerns.

ePlus delivered a cloud usage and risk workshop to help the customer understand the challenges they would face from a business, technical and compliance standpoint in these SaaS environments.

ePlus helped the customer evaluate the top cloud security solutions in the market and facilitated the selection of the best tools and processes to gain and maintain compliance with multiple internal and external rules, while securing their data.

Finally, in the third quarter, we successfully negotiated the SLAIT acquisition, which was completed in mid-January. SLAIT satisfies many elements of our acquisition strategy. Based in Virginia Beach, it strengthens our geographic presence in key markets, including the Thai border enrichment regions.

With annual revenues of over $100 million, this acquisition brings us a large customer base with concentration in the higher education and state and local government space and in the healthcare verticals.

Importantly, SLAIT complements our existing expertise and national practices focus on IT, security and hybrid cloud and brings ePlus additional consultative services in the areas of governance, risk and compliance, or GRC, and adds bespoke help desk and managed services solutions as well as a strong staffing practice.

Over time, we will bring these new capabilities to our existing clients and bring core ePlus services and offerings to SLAIT's customer base.

SLAIT's focus on providing consultative solutions, along with security advisory and managed services, is fully aligned with the offerings that ePlus has been building out over the last several years, which tend to be higher margin and represent recurring demand.

From a strategic standpoint, we are very enthusiastic about this combination, and we are pleased to welcome SLAIT's 300 associates to the ePlus team.

In closing, we are very pleased with the progress we have made in building our footprint and geographic reach, expanding and enhancing our solutions and service offerings and growing our annuity services and revenues. The expansion of ePlus services business has been a positive contributor to our gross profit performance, and we have acquired a complementary services portfolio through the SLAIT transaction.

With that, I will turn the call over to Elaine Marion, our CFO, to review our third quarter and 9-month results. Elaine?

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

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Thank you, Mark, and thanks to everyone for joining our call. Our net sales in the third quarter of fiscal 2019 increased 0.4% year-over-year to $345.7 million and gross profit increased 8.1% to $82.9 million.

Our consolidated gross margin expanded 170 basis points to 24%, driven by 160 basis points of margin improvement in the technology segment, which I'll discuss further in a moment with the remaining contribution from the financing segment.

Operating income increased 22.2% to $20 million year-over-year, more than compensating for a 4.3% increase in operating expenses. Higher operating expenses reflected a 4.7% increase in salaries and benefits, resulting from higher variable compensation that was directly tied to higher gross profit.

Our headcount was down 19 employees year-over-year; however, our headcount increased modestly from 1,255 at the end of the second quarter to 1,265 at the end of the third quarter.

Adjusted EBITDA was up 17.7% year-over-year and amounted to $25.6 million, while our adjusted EBITDA margin expanded 90 basis points to 7.4%.

In the last year's third quarter, we had a 4.2% tax rate due to the provisional adjustment for our deferred tax balance as well as an adjustment of our tax provision for the new corporate tax rate, which resulted in a tax benefit of $5.7 million.

This year, our third quarter tax rate was 28.3%, resulting in net earnings of $14.9 million, a decrease of 4.6%.

Note that sequentially, our tax rate went up from 27.7% to 28.3%. As we have had said on our previous call, we expect our tax rate to range from 28% to 29% for fiscal 2019.

Fully diluted earnings per share were $1.10, down slightly from last year's $1.11. Conversely, non-GAAP diluted EPS amounted to $1.29, representing a 17.3% year-over-year increase.

Our weighted average diluted share count totaled 13.5 million compared to 14 million in the year-ago quarter.

Now let me give you more color on our technology segment performance. Net sales amounted to $334.7 million, 0.8% ahead of last year's third quarter, mainly reflecting higher demand for our products and services that more than offset the last portion of the competitively bid project we completed in last year's third quarter.

Technology and SLED continue to be our largest end markets on the trailing 12-month basis accounting for 22% and 17% of the technology segment net sales, respectively.

Telecom, Media & Entertainment represented approximately 14% of net sales and healthcare, 14%. The balance includes financial services at 15% and 18% from several other client types.

Adjusted gross billings amounted to $478.4 million compared to $465.2 million in the same period a year ago, reflecting a 2.8% increase.

The adjustment from adjusted gross billings to net sales was $143.7 million, representing 30% compared to $133.2 million or 28.6% in the year-ago quarter as a greater proportion of sales derived from third-party maintenance, subscriptions and services.

Our gross profit grew 8.6% to $74 million, while our gross margin expanded by 160 basis points year-over-year to 22.1%, reflecting the benefit from a more profitable product mix and higher sales of third-party maintenance and subscriptions.

As we previously mentioned in last year's third quarter, we completed the remainder of a large competitively bid priced project that partially contributed to the year-over-year increase in our gross margin.

Our technology segment operating income amounted to $14.7 million, up 28.4% compared to $11.4 million in the year-ago quarter, reflecting our higher gross profit year-to-year and operating leverage. Adjusted EBITDA increased 20.7% to $20.1 million.

Now let me share more details about the financing segment performance. As a reminder, the results from the financing segment have historically fluctuated due to the timing and nature of originations, transaction gains and post-contract transaction.

We reported net sales of $11 million, representing a 10% decline from $12.2 million in the year-ago quarter as a result of lower proceeds from a large sale of off-lease equipment, which was partially offset by higher portfolio earnings and transaction gains.