Safe Harbor Statement
This transcript of the earnings call that occurred on May 21, 2020, contains certain statements that are, or may be deemed to be, “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or “Exchange Act,” and are made in reliance upon the protections provided by such acts for forward-looking statements. Such statements are not based on historical fact, but are based upon numerous assumptions about future conditions that may not occur. Forward-looking statements are generally identifiable by use of forward-looking words such as “may,” “should,” “intend,” “estimate,” “will,” “potential,” “could,” “believe,” “expect,” “anticipate,” “project,” and similar expressions. Readers are cautioned not to place undue reliance on any forward-looking statements made by us or on our behalf. Forward-looking statements are made based upon information that is currently available or management’s current expectations and beliefs concerning future developments and their potential effects upon us, speak only as of the date of the earnings call, and are subject to certain risks and uncertainties. We do not undertake any obligation to publicly update or correct any forward-looking statements to reflect events or circumstances that subsequently occur, or of which we hereafter become aware. Actual events, transactions and results may materially differ from the anticipated events, transactions or results described in such statements. Our ability to consummate such transactions and achieve such events or results is subject to certain risks and uncertainties. Such risks and uncertainties include, but are not limited to, the matters set forth below:
· national and international political instability fostering uncertainty and volatility in the global economy including exposure to fluctuations in foreign currency rates, interest rates, and downward pressure on prices;
· the duration and impact of the COVID-19 pandemic, which could materially adversely affect our financial condition and results of operations and has resulted in governmental authorities imposing numerous unprecedented measures to try to contain the virus that have impacted and may further impact our workforce and operations, the operations of our customers, and those of our respective vendors, suppliers, and partners;
· domestic and international economic regulations uncertainty (e.g. tariffs and trade agreements);
· significant adverse changes in, reductions in, or loss of our largest volume customer or one or more of our large volume customers or vendors;
· exposure to changes in, interpretation of, or enforcement trends in legislation and regulatory matters;
· managing a diverse product set of solutions in highly competitive markets with a number of key vendors:
· increasing the total number of customers using integrated solutions by up-selling within our customer base and gaining new customers;
· adapting to meet changes in markets and competitive developments;
· maintaining and increasing advanced professional services by recruiting and retaining highly skilled, competent personnel and vendor certifications;
· increasing the total number of customers who use our managed services and professional services and continuing to enhance our managed services offerings to remain competitive in the marketplace;
· performing professional and managed services competently;
· maintaining our proprietary software and updating our technology infrastructure to remain competitive in the marketplace;
· reliance on third-parties to perform some of our service obligations to our customers;
· our dependence on key personnel to maintain certain customer relationships, and our ability to hire, train and retain sufficient qualified personnel;
· our ability to implement comprehensive plans for the integration of sales forces, cost containment, asset rationalization, systems integration and other key strategies;
· a possible decrease in the capital spending budgets of our customers or a decrease in purchases from us;
· our ability to protect our intellectual property rights and successfully defend any challenges to the validity of our patents, or allegations that we are infringing upon any third-party patents, and the costs associated with those actions, and, when appropriate, license required technology;
· the creditworthiness of our customers and our ability to reserve adequately for credit losses;
· the possibility of goodwill impairment charges in the future;
· changes in the IT industry and/or rapid changes in product offerings, including the proliferation of the cloud, infrastructure as a service and software as a service, and our dependency on continued innovations in hardware, software and services offerings by our vendors and our ability to partner with them;
· our contracts may not be adequate to protect us, and we are subject to audit in which we may not pass, and our professional and liability insurance policies coverage may be insufficient to cover a claim;
· future growth rates in our core businesses;
· reduction of vendor incentives provided to us;
· failure to comply with public sector contracts or applicable laws and regulations;
· our ability to secure our own and our customers’ electronic and other confidential information, and remain secure during a cyber-security attack;
· our ability to raise capital, maintain or increase as needed our lines of credit with vendors or floor planning facility, or obtain debt for our financing transactions or the effect of those changes on our common stock price;
· changes to or loss of members of our senior management team and/or failure to successfully implement succession plans;
· disruptions or a security breach in our or our vendors’ IT systems and data and audio communications networks;
· our ability to realize our investment in leased equipment;
· our ability to successfully perform due diligence and integrate acquired businesses; and
· significant changes in accounting standards including changes to the financial reporting of leases which could impact the demand for our leasing services, or misclassification of products and services we sell resulting in the misapplication of revenue recognition policies or inaccurate costs and completion dates for our services which could affect our estimates.
We cannot be certain that our business strategy will be successful or that we will successfully address these and other challenges, risks and uncertainties. For a further list and description of various risks, relevant factors and uncertainties that could cause future results or events to differ materially from those expressed or implied in our forward-looking statements, see the Item 1A, “Risk Factors” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections in our Form 10-K for the year ended March 31, 2020, when filed, as well as other reports that we file with the SEC.
This document may also contain non-GAAP financial information. Management uses this information in its internal analysis of results and believes that this information may be informative to investors in gauging the quality of our financial performance, identifying trends in our results and providing meaningful period-to-period comparisons. For a reconciliation of non-GAAP measures presented in this document, see our earnings press release issued May 21, 2020, a copy of which is posted on our website at www.eplus.com/investors.
May 21, 2020 – FY20Q4
Prepared Remarks
Operator
Good day, ladies and gentlemen. Welcome to the ePlus Earnings Results Conference Call. As a reminder, this conference call is being recorded.
I would like to introduce your host for today's conference, Mr Kley Parkhurst, SVP. Sir, you may begin.
Kley Parkhurst, SVP
Thank you for joining us today. On the call is Mark Marron, CEO & 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 & 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 have 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, CEO, President
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 revenue. Some non-critical 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 the positive contribution from our financing business. Operating income increased 23.6% to $17.9 million and adjusted EBITDA was up 20.0% 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, and 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 on how were we are 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 most in 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 35.0% 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, 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 healthcare.
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 this 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?
Elaine D. Marion, CFO
Thank you, Mark.
First, let’s talk about the 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, benefitting 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 to customers in the telecom, media and 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 13.0%, 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 headcount 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 and Entertainment were the largest markets representing 21% and 19% of segment net sales, respectively. SLED and Healthcare 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 thousand 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 28.0%, 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 by 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 to customers with regular payment terms of 60 days or longer.
We believe COVID-19 had a minimal downward effect on sales in our 4th quarter of FY2020. As this pandemic is unprecedented, we are uncertain as to how it will affect demand in FY2021. As you are aware, we focus on innovative solutions for medium and large commercial business as well as state, local and higher education customers and will 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 Marron, CEO, President
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
Thank you. At this time, I would like to remind everyone in order to ask a question, please press star, then the number one on your telephone keypad. If you would like to remove yourself from the queue you may press the pound key. Thank you.
Your first question comes from Maggie Nolan from William Blair. Your line is open.
Maggie Nolan, William Blair
Thank you. Hi, good afternoon.
Mark Marron, CEO, President
Hey, Maggie.
Maggie Nolan, William Blair
Hi, I am hoping you can talk us through some of the dynamics that you saw in both products and services during the quarter, maybe breaking it up to the first half of first couple of months of the quarter versus that final month of March, and how they may have differed.
Mark Marron, CEO, President
Sure, no problem. Maggie. 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 were 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 nine 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 RevRec as well as from a billings standpoint. Then on a security perspective for the year, we were up 15% on security.
I don't know if that answered everything you were looking for.
Maggie Nolan, William Blair
It definitely helps. Then how have you seen that progress as you've gotten into April and May here?
Mark Marron, CEO, President
So far, as it relates to April, we saw minimal impact in April. Our business held in April, but want to be clear, Maggie, it's only one month. I mean, there's still way too much uncertainty in our business and really can't predict the future. 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 this quarter and beyond.
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. Then we're going to have to see as we move throughout this quarter and throughout the year where things take us.
Maggie Nolan, William Blair
Okay. Understood. Then as you think about maybe a less certain environment going forward, can you talk a little bit about the ability to manage expenses in response to that?
Mark Marron, CEO, President
Yes, well, I don't know if you want to jump in …
Elaine D. Marion, CFO
You go ahead and start.
Mark Marron, CEO, President
Yes, so—hey, Maggie, I think like anything in terms of how we normally do it, at a very high level, there's three parts to our business. It's our solutions that we're developing for our customers that they need. 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. We feel good there.
Second, from a go-to-market, we feel like we're 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. We don't have a lot of S in SMB if you will, customers.
Then the directly to your question, yes, we're managing OpEx as tightly as tightly can be and watching it as we move throughout the quarter. I don't—Elaine, if you want to add anything or …
Elaine D. Marion, CFO
No, I think that was perfect.
Mark Marron, CEO, President
Okay. Okay, Maggie?
Maggie Nolan, William Blair
Yes, 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. An update on your priorities there would be helpful. Thanks.
Mark Marron, CEO, President
Okay. Hey, Maggie, first thing is keeping our employees. 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 weathered the storm, for lack of saying it any other way and we are—right now we're doing the same thing and hoping that will continue and believe that will continue. That's 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. 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 can change a little bit. I do believe there'll be consolidation. But also I think there is going to be some time between the 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. 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.
Maggie Nolan, William Blair
Thank you very much.
Mark Marron, CEO, President
All right, Maggie. Take care.
Operator
Your next question is from Matt Sheerin from Stifel. Your line is open.
Matt Sheerin, Stifel
Yes, thank you and good afternoon. 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 get the COVID catch up and those kind of investments, but are you seeing customers just put on hold those longer-term IT projects and just reassessing their strategies for their budget?
Mark Marron, CEO, President
Yes. Matt, I can't talk to the peers. I mean, I kind of know their business, but obviously not as well as they do. Before 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 hard 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 are letting their employees go and things like that. That's where it gets a little bit tougher.
I can tell you, we didn't see the decline, may be for a couple of different reasons. We are not big in the retail, hospitality, airlines verticals. 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. There is—we had minimal impact.
Also, as I think you know, over the years, we really don't play in the PC laptop 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 our focus area. To answer your question directly, April, yes, 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. It's a tough one to predict the future.
Matt Sheerin, Stifel
Yes, for sure. 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?
Elaine D. Marion, CFO
Yes, sure, for the year the organic was about 67%, acquisitions …
Matt Sheerin, Stifel
Sixty-seven percent of the growth, you mean?
Elaine D. Marion, CFO
Yes.
Matt Sheerin, Stifel
Of the growth, okay.
Elaine D. Marion, CFO
That's correct. Of the growth, correct.
Matt Sheerin, Stifel
Okay, and then on the operating margin, I noticed that the technology operating margin number was the lowest, I think in six years or so. I know gross margin was flattish. That might have played a role and also expenses because I know you're hiring a lot of specialty sales and technical folks. Most of your incremental operating profit came from the leasing business.
As we look forward, and given that the mix of business is slanted more towards service—would we—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?
Mark Marron, CEO, President
Well, Matt, I think it's a mix game. But I just want to make sure of one thing. In Q4, our tech operating income was actually up 25.6%. 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 two business units and that played out both in the quarter and in the year.
Our financing team had a very strong quarter and year. Some of that to point out, so to be clear, there's 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.
Matt Sheerin, Stifel
I got it. But for the fiscal year, it was—the operating margin was down, correct.
Mark Marron, CEO, President
Do you know? I don't have it in front of me.
Elaine D. Marion, CFO
Slightly, 20 basis points.
Mark Marron, CEO, President
It was down 20 basis points, okay.
Matt Sheerin, Stifel
Yes, exactly. On 12%—on 15% revenue growth, I guess that was my point, given your mix of business.
Elaine D. Marion, CFO
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.
Matt Sheerin, Stifel
Okay, and then just on the leasing business, which has been strong and a very big contributor to profitability, in this environment, in this 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 of an acceleration towards of the leasing model? I mean, is that—would that be a positive catalyst for that business or not?
Mark Marron, CEO, President
A couple of different things, Matt. Could it be a catalyst? Yes, where 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.
Matt Sheerin, Stifel
Got it, okay. All right, thanks a lot, Mark.
Mark Marron, CEO, President
All right, see you, Matt. Thanks.
Operator
Again, if you would like to ask a question, please press star, then the number one, on your telephone keypad.
Our next question comes from Greg Burns from Sidoti & Company. Your line is open.
Greg Burns, Sidoti & Company, LLC
Good afternoon. Just to follow up on the financing segment, can you just talk about the complexion of the lease book, and maybe you feel the need to increase any reserves or bad debt reserves? How does that business look now right now given the uncertainty in the environment, right now?
Elaine D. Marion, CFO
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 did a pretty thorough evaluation of those credits. At March 31, we felt pretty comfortable with where we were with our reserve status on those.
Obviously we will 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.
Greg Burns, Sidoti & Company, LLC
Okay, great, thanks. Let's get back to your expense management, can you let us know what—in the mix of your cost structure, variable versus fixed and what kind of detrimental margins we might expect with revenues down?
Mark Marron, CEO, President
Yes, a couple of different things there, Greg. First, related to this quarter you saw a little bit of uptick. Some of that was due to acquisition headcount 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 a SG&A perspective.
Second is, I think you'll start to see as this work from home—I don't know, if I call it phenomenon, but what's going on is—there is 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. There is 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. We believe there is an opportunity for us to continue to go out and grab market share if we do it smartly from an expense standpoint.
Greg Burns, Sidoti & Company, LLC
Okay, thanks. You mentioned the service margins were down a little bit. Is that a mix issue, what was driving that?
Mark Marron, CEO, President
Yes, it's just a mix issue, nothing we are worried about. We've seen some pick up 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. Nothing of major concern at this point.
Greg Burns, Sidoti & Company, LLC
Okay, and then finally, in the technology segment, the difference between adjusted revenue and adjusted gross billings, seems like there is a shifting mix there of where the demand is. Can you just talk about maybe what you're seeing there in terms of demand versus for products versus some of these more ratable services?
Elaine D. Marion, CFO
Demand. Demand-wise, it was a proportion change in the quarter. We had more—or less maintenance as a proportion of the total adjusted gross billings in the quarter. But for the year, we leveled out a little bit. It was 31.3% was the re-class 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. It's a good business for us and software.
Mark Marron, CEO, President
Software and subscription, so—anything else Greg or …?
Greg Burns, Sidoti & Company, LLC
No, that's all. Thanks.
Mark Marron, CEO, President
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.
Elaine D. Marion, CFO
Have a good holiday.
Mark Marron, CEO, President
Take care.
Operator
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
