ePlus Inc. (PLUS) Q4 2022 Results - Earnings Call

ePlus Inc. (NASDAQ:PLUS) Q4 2022 Earnings Conference Call May 25, 2022 4:30 PM ET

Company Participants

Kley Parkhurst - SVP of Corporate Development and Assistant Secretary

Mark Marron - CEO, President and Director

Elaine Marion - CFO

Darren Raiguel - COO

Erica Stoecker - General Counsel

Conference Call Participants

Maggie Nolan - William Blair

Greg Burns - Sidoti & Company

Matt Sheerin - Stifel

Operator

Good day, ladies and gentlemen. Welcome to the ePlus Earnings Results Conference Call. As a reminder, this conference call is being recorded.

I'd to introduce your host for today's conference, Mr. Kley Parkhurst, SVP. Sir, you may begin.

Kley Parkhurst

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, 2021, and our Form 10-K for the year ended March 31, 2022, 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?

Mark Marron

Thank you, Kley, and thank you, everyone, for participating in today's call to discuss our fourth quarter and fiscal 2022 results. This was a remarkable quarter and fiscal year for ePlus, marked by continued strong financial performance and significant progress in advancing our growth objectives. Once again, our dedicated team delivered exceptional results and effectively supported our customers in an evolving and dynamic market.

Our success speaks to the strength of our differentiated business model that couples the advantages and flexibility of providing both technology services and financing as well as our strategic focus on capturing emerging high-growth opportunities in fast-moving markets. In short, our strategy is working and ePlus is gaining market share as evidenced by our results in the fourth quarter and for our fiscal year.

Fourth quarter net sales increased 28% to $451.5 million with solid contributions from both segments, reflecting broad-based strength across our customer base and end markets. Fourth quarter adjusted gross billings increased approximately 21% year-over-year to $638.5 million with increases in every vertical market sector.

The growth in fourth quarter adjusted gross billings helped drive our fiscal 2022 adjusted gross billings to over $2.6 billion, representing approximately 16% growth from fiscal 2021. We continue to see nice growth in collaboration and networking as hybrid work models have become the de facto operating model for most of our customers.

Another highlight of the quarter was further expansion of our annuity quality revenues as we experienced broad gains in managed services, help desk services and staffing driven in part by the shortage of IT professionals as well as customer optimization of their IT spend through utilization of outsourced services to manage day-to-day IT operations. We believe we have the right mix of best-in-class services to capitalize on this favorable long-term trend.

In the fourth quarter, we generated robust growth in operating income, adjusted EBITDA and earnings per share, demonstrating the substantial operating leverage in our model as revenue scales. It is worth noting that our technology segment had a particularly strong fourth quarter with operating income up 88%. Our full year performance also featured solid operating leverage as net sales growth of 16% helped drive a year-over-year gain of more than 38% in operating income and a more than 41% improvement in diluted earnings per share.

Over the past several years, we have focused on investing in our teams and in our capabilities to capitalize on long-term trends that are driving IT spending in key high-growth markets. Whether it's private, public or hybrid cloud, data center, cybersecurity or managed services, our expanded breadth of integrated services and solutions is resonating with our customers who increasingly seek to partner with the skilled IT service partner to achieve their business objectives and maximize their return on investment. Customers continue to rely on ePlus to provide the guidance and solutions that enable them to meet the IT challenges they face today and for the future.

We continue to experience strong growth trends in our services business, which includes a wide range of professional and managed services, staffing, logistics and help desk services and remains an important competitive differentiator for ePlus. In fiscal 2022, for example, our services business generated sales growth of 19%.

Our service mix is trending towards recurring long-term services, such as managed help desk and staffing as compared to project-driven services. This is a positive trend as annuity quality services tend to have higher margins and more predictable financial performance.

The strong growth in our service business is also reflective of our expanded capabilities encompassing critical IT functions, such as cloud-hosted services, security and network monitoring that are often too complex and costly to manage internally. As organizations and enterprises increasingly outsource these and other IT functions, it will favorably impact our financial results by enhancing both our top line growth and our profitability given the higher margins associated with these services.

In terms of capital allocation priorities, we continue to evaluate a range of potential acquisition targets to enhance our growth and expand our geographic presence. Our focus remains primarily on bolt-on acquisition opportunities in high-growth market segments. Our strong balance sheet supports our ongoing M&A efforts, and our newly expanded credit facility provides additional liquidity and flexibility that we can draw on as needed.

Last year, at this time, we said that as the economy continues to recover and our customers return to a more normalized work environment, we expected to see the pace of IT spending gain momentum. This is exactly what happened in fiscal 2022, and we expect this trend to continue into this year as well, spurred by our customers' digital transformation initiatives and growing need to support more adaptable business models. I am encouraged by the strength of our open orders and backlog, which reflect the continued high level of demand for our products, services and solutions that will drive growth in fiscal 2023.

Against this favorable backdrop, we are seeing lead times extend as supply chains remain tight and product availability has become more limited. As a result, while we anticipate solid top line growth in fiscal 2023, we expect that time lines for IT project implementations will be extended, creating revenue headwinds as we move throughout the year.

Our team has done a very effective job navigating supply chain issues over the past year, working closely with our channel partners and distributors to minimize the impact on our customers, and we will continue to draw on the strength of our resources and relationships to deliver for our customers in fiscal 2023 and beyond.

Turning to our financing segment; this segment's performance for fiscal 2022 was particularly strong as adjusted EBITDA of $39 million increased 25% from the prior year and benefited in particular from an outsized transaction in the second quarter. As we look forward into fiscal 2023 based on our current visibility, we anticipate financing segment results will revert to a more normalized level as we saw in fiscal 2020 and fiscal 2021.

I will now turn the call over to our CFO, Elaine Marion, to provide details on our fourth quarter and full fiscal year 2022 results.

Elaine Marion

Thank you, Mark, and good afternoon, everyone. I appreciate you joining us today, and I'm pleased to share the details of our fourth quarter results with double-digit growth across key metrics, marking a strong finish to our fiscal 2022.

In the fourth quarter, consolidated net sales totaled $451.5 million, up 28.1% from $352.6 million reported in the comparable quarter of fiscal 2021. Net sales in the technology segment reflected broad-based growth, increasing 26.4% to $419.4 million. Product revenue increased 28.3% to $357.8 million, while services revenue was up 16.6% to $61.6 million.

Adjusted gross billings grew 20.8% to $638.5 million compared to $528.6 million in the same period a year ago. Our robust growth suggests market share gains and underscores the successful execution of our strategy. The adjusted gross billings to net sales adjustment was 34.3% compared to 37.2% in the fourth quarter of 2021.

Our financing segment also delivered robust revenue growth, up 54.4% to $32.1 million compared to $20.8 million in the last year's fourth quarter, mainly as a result of higher proceeds from sales of off-lease equipment. Consolidated gross profit increased 17.8% to $115.4 million compared to $97.9 million last year. However, consolidated gross margin declined 230 basis points to 25.5%, primarily as a result of a lower proportion of sales recorded on a net basis, lower gross margin in our financing segment due to a change in mix and lower service margins.

For our technology segment, gross profit increased 23% to $103.2 million. Looking more closely, product gross margin increased 20 basis points to 22.8%, while service gross margin decreased 390 basis points to 35.3%, reflecting lower professional service margins due to higher costs.

Consolidated SG&A was up 10.7% to $77 million, while consolidated operating expense increased 8.9% to $80.9 million given higher variable compensation as a result of our strong gross profit growth. Total headcount at the end of March 2022 was 1,577 compared to 1,560 in the prior year.

Operating income for the quarter of $34.5 million was up 46.1%. Our effective tax rate was 29.6% compared to 32.6% in the year ago quarter due to higher non-deductible compensation expense in the prior year. Consolidated net earnings of $24.2 million or $0.91 per diluted share increased 55.9% and 56.9%, respectively, from $15.6 million or $0.58 per diluted share in last year's fourth quarter.

Non-GAAP diluted earnings per share were $1.01, an increase of 42.3% adjusting for the two-for-one stock split on December 13, 2021. Adjusted EBITDA grew 34.4% to $39.8 million year-over-year. Our diluted share count at the end of fiscal 2022 was 26.7 million, flat after adjusting for the stock split.

To sum up our strong performance in fiscal 2022, consolidated net sales of $1.82 billion reflected a 16.1% year-over-year increase. Technology segment net sales grew 14.9% to $1.73 billion, and our financing segment net sales increased 45.7% to $88 million as a result of higher proceeds from leased equipment sales. Importantly, adjusted gross billings for the year were our highest in history at $2.6 billion, up 15.8% from fiscal 2021.

As we review top line numbers by end markets in our technology segment for fiscal 2022, Telecom, Media & Entertainment and health care were our largest markets, representing 29% and 16% of segment net sales respectively. Technology, SLED and financial services make up 14%, 14% and 9%, respectively. The remaining 18% is a combination of all other customers.

In fiscal 2022, consolidated gross profit was up 17.1% to $461 million. Gross profit in the technology segment increased 17.9% to $408.2 million, and gross profit in the financing segment was up 11.6% to $52.8 million, partly due to the outsized transactions we previously called out in our second quarter. The consolidated gross margin widened by 20 basis points to 25.3% from fiscal 2021, while the technology gross margin expanded 60 basis points to 23.6%.

Consolidated operating income improved 38.5% and totaled $147.3 million, while operating expenses rose only 9.2% to $313.7 million, demonstrating the favorable operating leverage in our business model. Our effective tax rate for fiscal 2022 was 28.1% compared to 30.4% a year ago. Positive operating leverage helped drive strong earnings growth as we saw net earnings of $105.6 million or $3.93 per diluted share, representing an increase of 41.9% for both metrics. Non-GAAP EPS grew 37.6% to $4.39.

As we continue to expand our business, our strong balance sheet supports our growth initiatives as cash and cash equivalents at the end of fiscal 2022 were $155.4 million, up 19.9% compared to $129.6 million. Additionally, we have approximately $126 million in our financing portfolio, a portion of which could be monetized if we have a need for additional capital as well as the availability on our recently expanded Wells Fargo credit facility of $375 million.

Inventories were up 121.6%, ending the year at $155.1 million with the year-over-year increase reflective of ongoing customer projects not yet completed partly due to the continued supply chain constraints. Our cash conversion cycle was 48 days compared to 37 days in the year ago quarter but similar to 47 days in the previous quarter, reflecting the same trend we spoke about last quarter, namely higher inventory levels and an increase in sales to customers with greater than 30-day terms.

Our robust results, combined with a favorable outlook for IT spending, underpin our confidence in our ability to continue to outpace industry growth. I want to express my gratitude to all of our talented ePlus employees for the strong results we continue to deliver together.

With that, I will now turn the call back over to Mark. Mark?

Mark Marron

Thank you, Elaine. Just to sum up, we are pleased with our strong fourth quarter results that capped off another great year for ePlus. Our diversified portfolio of products and services spanning the entire IT life cycle remains a key competitive differentiator, positioning us for continued growth as we provide both the solutions and flexibilities our customers require to realize their most critical business objectives.

We appreciate your participation today and your interest and look forward to speaking with you on our first quarter conference call in August. Operator, we are ready to open the line for questions.

Question-and-Answer Session

Operator

[Operator instructions] Our first question comes from Maggie Nolan with William Blair.

Maggie Nolan

Hi. Thank you for taking my question. I'm hoping -- can you give us a little more insight into what your clients are saying about the timeline for IT projects and how they're thinking about factors that are driving their budgets and spend with ePlus?

Mark Marron

Sure. Hey Maggie, how are you? So first off, demand still continues to outpace supply. Our customers, when we're working with them on solutions, are asking us if we know the lead times based on the different solutions that we're suggesting or providing. I think our team, the ePlus team, has done a really nice job of setting expectations with those customers and then working with the different OEMs to get the products and solutions where services are included out the door in a timely fashion.

From a demand standpoint, still solid, hasn't changed. Supply lead times, I think this is going to go through at least the end of this year, if not longer, Maggie. So customers are, I guess, I don't want to say aware of it and dealing with it, but that's probably the best way to say it at this point.

Maggie Nolan

Okay. Understood. And then on the services side of things, can you talk a little bit about the impact of the difficult talent environment on your service offerings in particular and the demand for those?

Mark Marron

Sure. Actually, the demand for our services has picked up. I think you saw our service were up 16.6% for the year. And I think it was 19 -- sorry, 16.6% for the quarter and 19% for the year. So I think our team has done a real nice job of building up our portfolio of services around our consultative and advisory services, specifically in a market like this, as well as our annuity services revenues continue to expand.

The other thing that comes into play, Maggie, is we're seeing some real nice staffing opportunities where we're placing multiple people for long-term projects with our customers. So the demand is nice and the -- we have been as it relates to the talent shortage, it does affect us. Our margins were down a little bit and that's really just a short term thing as it relates to services in terms of adjusting our bill rates and things like that. So it affected our margins a little bit this quarter. I don't see that as a long-term thing, but the demand is there.

Maggie Nolan

Okay. Thanks Mark.

Mark Marron

No problem. See you soon, Maggie.

Operator

[Operator Instructions] Our next question comes from Greg Burns with Sidoti & Company. Your line is open.

Greg Burns

Hi. Good afternoon. Is there any way you could quantify the growth in your open order book and backlog maybe against last year this time?

Mark Marron

It's big. How does that sound, Greg? It's actually over 100% up over last year. So when I talked a little bit earlier with Maggie, the demand is definitely outpacing supply for sure. So we're starting to see that continue to build up both in our open orders, our backlog, deferred revenue and things along those lines. So it's a positive sign. And I think over time, as supply chain starts to ease up and get better, it will be a positive sign for the future.

Greg Burns

So that plus 100% was on backlog or open orders or both?

Mark Marron

Open orders. Open orders.

Greg Burns

Okay. And I guess with the inventory continuing to grow, I guess, that's an indication of these open orders -- the level of open orders that you continue to have. But do you have any line of sight on when maybe that starts to unwind itself and you can start to reduce the working capital?

Mark Marron

Yes. Greg, to be honest, that's a tough one. It continually changed the -- we're working closely with the OEMs. The lead times are constantly changing, both getting better and getting worse in some cases, depending on the vendor and the type of technology. So that's a tough one. That's just a -- quite honestly, that's a work in progress that we're going to stay on top of and work closely with the vendors and customers to get things out the door.

Greg Burns

Okay. And then we've seen some guidance from some other large technology vendors that have not been so strong or disappointing. Why do you think your outlook is maybe a little bit stronger than that or continues to be positive? Is it just the markets you're playing in? Is there anything specific that you're doing? Maybe it's you're gaining share, but could you just maybe help us understand the strength you're seeing in your business versus maybe what we've seen from some other large technology vendors recently.

Mark Marron

Well, one of the quick easy added benefits, Greg, is that we have the ability of selling multiple OEM solution as compared to an OEM that's just selling their own technology. The other thing we have is we've got the two segments. So depending on a market, for example, as interest rates rise, that's actually, in some cases, presents an opportunity for our finance business to provide financing programs to buy technology where maybe some of the OEMs may not be taking advantage of programs like that, for example.

So I do believe we are taking share. So if you look at our growth, most of the industry analysts are out there saying anywhere from 5% to 6% in terms of IT spend. And if you look at it for the quarter, we were up 28%; for the year, we were up 16%.

I do think it has to do -- we feel really good about our strategy that we're in all the critical IT areas that we think we need to be in. And we've made the investments in the people, the solutions and the services to be well positioned as we go forward. The other thing we're seeing, too, Greg, is across our customer base and verticals, they're all up. So we've done a nice job of working with those different types of customers specific to the business outcomes that they're looking for.

Greg Burns

Great. Thank you.

Mark Marron

No problem. Thanks Greg.

Operator

Our next question comes from Matt Sheerin with Stifel. Your line is open.

Matt Sheerin

Yes. Thank you. Good afternoon, everyone. Just wanted to drill down a little bit more on the supply-demand environment and it sounds like a little bit more cautious tone from you, Mark, regarding the supply side. You're just coming off of 28% growth, 20%-plus product growth.

So you were able to meet demand and obviously beat expectations. So what's happened in the last couple of months of things to have gotten worse? And could you maybe drill down within the different product areas, networking, sort storage, etcetera, give us an idea of what may be better or worse in terms of the constraints?

Mark Marron

Yes. Okay. So starting with the last piece. So I'd say networking, wireless, security appliances are some of the things with longer lead times. Storage and servers, for the most part okay. Darren, I don't know if you have any insight there. You want to...

Darren Raiguel

Yes. Big iron networking is the longest lead time for us. I'd say, behind that -- there's all categories. But wireless has been pretty extended several months, if not longer, in some cases. Security appliances are now more than a few weeks in many cases. But servers and storage haven't been too bad. They -- and you know what, in general, it's not getting worse. It's kind of just treading water, it hasn't really gotten better, but there's a lot of movement in and out.

Mark Marron

Yes. So -- and Matt, to your first part of your question, look, I'll be honest with you. We think we had a really solid quarter and a solid year, and the team did a really nice job of working with customers. So I think some of that is pent-up demand, right, in terms of customers as they return to work in these hybrid work models and they need networking and connectivity and security and things like that.

The hesitancy, if that's the right way to say it, as it relates to the supply chain is, I think you'll hear from all the OEMs and our peers that everybody is just nervous that it hasn't lessened. You still got Ukraine-Russia war going on, you've got the China lockdown. So there's just a lot of variables that are beyond our control, if you will.

Matt Sheerin

Got it. Okay. But then maybe looking at the June quarter, I appreciate you don't give -- you don't issue forward guidance, but you're more than halfway through the quarter. It sounds like given lead times, you probably have visibility into what you're going to ship for at least the next few weeks. So are you still expecting double-digit year-over-year growth like you've seen in the last couple of quarters?

Mark Marron

Yes. You're prodding me here, aren't you, Matt? So here, we -- as you know, we don't give guidance. What we -- what I can tell you, we do have visibility into the open orders that we expect to ship. We do have visibility, obviously, where we're effectively two months through the quarter where we think we're going to wind up.

There are some variables as that relates to every quarter, we have a deal or two that might be a large deal that may slip or come into a quarter. That can always adjust the number. Do we feel good that -- do we believe we'll continue to outpace the IT spend market? Yes. I think you had an article out not too long ago. I think you said IDC was expecting 5% to 6% on IT spend, and we believe we'll definitely outpace that.

Matt Sheerin

Okay. All right. Thank you. And then on the leasing segment, as you said, it certainly been well above normal trends in the last few quarters, but you're expecting it to moderate. So in terms of kind of a revenue run rate or EBITDA, when are we expecting it to get back to where it was a couple of years ago? Or is it just hard to tell because it's so lumpy?

Mark Marron

Yes. You know what, it's a hard one because with interest rates rising and things that go along with that could be an opportunity. But remember, Matt, last year in Q2, we called it out early. We had a large transaction that we wouldn't expect to replicate or duplicate this year. So what we're saying is we would expect more normalized EBITDA to be in the line of the last year or two -- that we did in the last year or two.

Matt Sheerin

Okay. And just lastly on M&A. And obviously, you've done a very steady and strong job in terms of identifying good candidates, integrating them. Is there still a pipeline that you're looking at here in terms of opportunities over the next few quarters?

Mark Marron

Yes, Matt. Very strong pipeline out there both from a territory as well from a, I'll call it, technical or services standpoint across multiple markets. So still very much -- there's a lot of opportunity to fill out the M&A space for us to explore and consider with the right multiples.

Matt Sheerin

Okay. Thanks a lot.

Mark Marron

Thanks Matt. We'll talk to you soon.

Operator

We have reached the end of the question-and-answer session. I'll turn the call back over to Mark Marron, CEO, for closing remarks.

Mark Marron

Okay. Hey, I just want to thank everybody for joining us on the call. We thought we had a nice quarter and nice year. Also I want to wish everybody a happy holiday for Memorial Day weekend. Enjoy yourselves, be safe, and see you on the next call. Take care.

Operator

This concludes today's conference call. You may now disconnect.