Safe Harbor Statement

 

This transcript of the earnings call that occurred on November 3, 2022, 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 an economic downturn, exposure to fluctuations in foreign currency rates, interest rates, and inflation, including increases in our costs and our ability to increase prices to our customers, which may result in adverse changes in our gross profit;

·          supply chain issues, including a shortage of IT products, may increase our costs or cause a delay in fulfilling customer orders, or increase our need for working capital, or completing professional services, or purchasing IT products or services needed to support our internal infrastructure or operations, resulting in an adverse impact on our financial results;

·          the duration and ongoing impact of the COVID-19 pandemic, including but not limited to the impact and severity of new variants, vaccine efficacy and immunization rates, the closure of non-essential businesses and other associated governmental containment actions, and the increase in cyber-security attacks that have occurred while employees work remotely;

·          domestic and international economic regulations uncertainty (e.g. tariffs and trade agreements);

·          the creditworthiness of our customers and our ability to reserve adequately for credit losses;

·          loss of our credit facility or credit lines with our vendors may restrict our current and future operations;

·          significant adverse changes in, reductions in, or losses of relationships with one or more of our large volume customers or vendors;  

·          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, and the reliance on a small number of key vendors in our supply chain with whom we do not have long-term supply agreements, guaranteed price agreements, or assurance of stock availability;

·          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;

·          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, software as a service and platform as a service;

·          our dependency on continued innovations in hardware, software and services offerings by our vendors, availability of those products from our venders and our ability to partner with them;

·          significant and rapid inflation may cause price, wage and interest rate increases, as well as increases in operating costs which may impact the arrangements that have pricing commitments over the term of the agreement;

·          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;

·          exposure to changes in, interpretation of, or enforcement trends in legislation and regulatory matters;

·          future growth rates in our core businesses;

·          rising interest rates or the loss of key lenders or the constricting of credit markets;

·          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, while maintaining compliance with evolving data privacy and regulatory laws and regulations;

·          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;

·          our ability to remain secure during a cybersecurity attack, including both disruptions in our or our vendors’ IT systems and data and audio communication networks;

·          our ability to realize our investment in leased equipment;

·          our ability to successfully perform due diligence and integrate acquired businesses; and

·          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.

 

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, 2022 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 November 3, 2022, a copy of which is posted on our website at www.eplus.com/investors.

 

November 3, 2022

 

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; 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, 2022, and our form 10-Q for the quarter ended September 30, 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 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 results for the second quarter of fiscal 2023.

 

Building on our first quarter performance, ePlus generated solid second quarter results, with nearly 8% consolidated net sales growth, and Adjusted Gross Billings growth of more than 15%.  We saw growth in most vertical markets and customer sizes, driven primarily by increased demand for our data center, cloud computing, networking and security solutions, with particular strength from our Mid to Enterprise-size customers.  We believe our solutions, services and continued focus on our strategy plans has allowed us to continue to capture market share.

 

I’m proud of our team which continues to execute at a high level, delivering strong top-line growth while meeting our customers’ needs despite persistent supply chain constraints.

 

Our services business remains an important growth driver and an area of continued investment focus as our customers adopt a broad range of technologies to enhance productivity, increase profitability and drive revenue. Services grew 7.1%, primarily due to our managed services which encompass our on-premise, remote, and cloud offerings. Our managed services business produces consistent, annuity-quality revenue, reducing quarter-to-quarter variability in our revenue stream.  For our clients, managed services provide holistic IT solutions that can optimize their IT platforms, supplement scarce IT personnel especially in the most sought-after areas and reduce operating costs.  

 

We continue to see an uptick in demand for our annuity services and our Cloud and Security advisory services.  Some of our new offerings in this space include our ePlus Lifecycle Services Support.  eLSS was developed to centralize and streamline the technical support experience by providing first call, multi-product, multi-vendor architecture support for Cisco and adjacent technologies.  In addition, our ePlus Azure assessments are designed to focus on high profile security and configuration risks and areas of cost inefficiencies in our customers’ current Azure deployments.

 

I am particularly pleased with the growth in our security business.  On a trailing twelve months basis (TTM), security is now 22% of our AGB. The security market continues to outpace our overall top line and AGB growth, as our customers prioritize investments to protect against escalating cybersecurity risks.  In fact, we are seeing the cybersecurity market shift from traditional compliance-only based approaches to more comprehensive enterprise security strategies that provide a higher level of protection against threats.  This trend can further drive growth at ePlus as we can provide a broader range of innovative security solutions and can also strengthen our customer relationships over a longer time period via managed services and multi-year contracts.

 

Net sales in our financing segment were up slightly to $22.2 million compared to $21.7 million in the prior-year period.  As expected, Q2 financing segment operating income declined due to tough year-over-year comparisons, which reflect the variable nature of this business from quarter-to-quarter.  Despite the lumpiness inherent in this business, we believe our financing business remains an important competitive differentiator, particularly in today’s economic environment where payment flexibility offers an attractive option.

 

Second quarter GAAP earnings per share decreased 8.5% to $1.07, reflecting investments in customer-facing personnel and investments in our internal IT capabilities to help us scale, increases in reserves and foreign currency translation losses; and a challenging year-over-year comparison in our financing segment that we called out on our last earnings call.  Excluding the effects of foreign currency translation losses and acquisition expenses, non-GAAP earnings per share of $1.29 was essentially flat. 

 

Most importantly, we remain committed to investing in our people, tools and processes not only to meet our customers’ current needs but also to build the foundational capabilities to be their partner of choice in the future as well.  We added 175 employees year-over-year, which includes the addition of Future Com team members during the second quarter.

 

The majority of our new hires have been for customer-facing roles, highlighting our growing business opportunities, particularly in our focus solution areas.  These customer facing hires have strengthened our sales, Cloud, and security practices, providing the necessary capabilities to deliver on our increased services revenue and backlog. 

 

We have added significantly to our work force, particularly for new specialized talent in professional and annuity services, in order to fulfill current and anticipated future demand.  These hires, plus increased 3^rd party costs and overall services mix, affected our services margins.  We are continuing to monitor and manage expenses and aligning our project and services pricing to reflect market costs.  Due in part to supply chain delays, our professional services backlog is up over 68% year over year.

 

Now turning to our outlook: Despite increasing economic uncertainty over the past several months, the outlook for IT spending is solid across most market segments.  While ePlus is not recession-proof, our business is recession-resilient, supported by our financial strength and the nature of the mission critical technology we sell and support.

 

We have continued to experience broad-based demand across end markets and customer size segments, underscoring our ability to address our customers’ critical needs, from managing cybersecurity risks to enabling digital transformation. These positive demand trends are reflected in our high level of open orders that are up 42% over last year, as well as our backlog– all of which support our confidence in the outlook for the second half of our fiscal year.

 

Our favorable view is balanced against the challenges we continue to see in the supply chain, where limited product availability has led to extended customer project implementation timelines.  Our inventory levels, which are up over 100% from last year, reflect these supply chain constraints, as well as a developing trend toward larger, more complex customer projects that cannot be fully deployed until all the necessary equipment are procured.

 

In closing, I would like to commend the entire ePlus team for their dedication to providing the highest levels of service to our customers every day.  We are successfully executing on our strategy, generating solid sales and AGB growth in our focus markets while maximizing our long-term opportunity through continued investments in our employees and in our capabilities. 

 

I will now turn the call over to Elaine Marion, our CFO, to provide details on our second quarter financial results. Elaine.

 

Elaine Marion, CFO

 

Thank you, Mark, and good afternoon, everyone. I will review our financial performance in the second quarter of fiscal 2023 and year-to-date.

 

Net sales were up 7.8% year-over-year totaling $493.7 million in the second quarter. As Mark mentioned, we saw an expansion across the majority of our end markets and customer segments demonstrating that we are focusing on the right growth areas. Net sales in the Technology segment increased 8.1% to $471.5 million. To be more specific, Product and Service revenues increased 8.2% and 7.1% year-over-year to $406.3 million and $65.2 million, respectively.

 

We were pleased with the growth in adjusted gross billings of 15.3%, amounting to $765.8 million, compared to the $664.1 million reported in the year ago quarter.  The adjusted gross billings to net sales adjustment increased 413 bps to 38.4% compared to 34.3% in the second quarter fiscal 2022. As we look deeper into our end market sales in our Technology segment on a trailing 12-month basis, we see similar trends to the prior quarter with Telecom, Media and Entertainment, and Technology, our largest markets, representing 29% and 16% of segment net sales, respectively. Healthcare, SLED and Financial Services accounted for 14%, 13% and 9%, respectively, with the remaining 19% representing other customer types.  As of September 30, 2022, our customers total approximately 4200.  I just want to note that we now calculate our customer count as discrete customers who have purchased over the past 24 months rather than the prior 12 months used in previous communications due to lengthened customer buying cycles and supply chain delays.

 

Our Financing segment revenue was $22.2 million compared to $21.7 million in last year's second quarter as a result of higher proceeds from sales of leased equipment offsetting lower portfolio earnings and transactional gains.

 

As we move to our consolidated gross profit, we reported 8.4% growth, to $133.3 million in the second quarter, compared to $123.0 million reported last year. Consolidated gross margin increased 10 basis points to 27.0%. Gross profit in the Technology segment was up 10.7% to $116.3 million. Technology segment gross margin increased 60 basis points to 24.7%, as higher Product margins more than offset lower Service margins. Product gross margin expanded 150 basis points to 23.2% as we benefitted from a higher proportion of sales of third-party maintenance, subscriptions, and services, which are recorded on a net basis. While our Service margin was 33.6%, compared to 38.6% in the second quarter of fiscal 2022, as Mark mentioned, this was primarily due to higher third-party costs related to our professional services and several large project related contracts that were competitively priced which blended down our service margins as well as an increase in costs in from managed services. Gross profit in the Financing segment totaled $17.0 million, compared to $17.9 million reported in the second quarter of fiscal 2022. As a reminder, last year’s quarter had several large transaction gains, which did not replicate; however, this year’s quarter contained several early lease buyouts which partially offset the lower transaction gains compared to last year.   Early lease buyouts are customer driven events that pull forward future earnings from the underlying leases.

 

During the quarter, we saw increases in salaries and benefits.  Our investments in personnel are evident in the headcount increase to 1,729 at the end of September 2022 which includes 25 employees from the July 2022 acquisition of Future Com, compared to 1,554 in the prior year.  The quarter over quarter increase contains 48 sales-related roles and 100 professional services and technical support personnel as we experienced an increase in demand for our services . As you think about these investments, please keep in mind there is some lag between the upfront costs and revenue generation. 

 

In addition, we saw increases in variable compensation, tied to our gross profit performance and had higher travel expenses related to the resumption of customer and in-person meetings.  We also reported an increase in interest expense related to higher borrowing on our credit facility and a change in reserves due to an increase in exposure across our receivables.  Our reserve calculation methodology did not change. All these factors together drove an increase in consolidated operating expense of 13.3% year-over-year to $89.2 million.

 

Although we made significant investments in personnel, operating income for the quarter was $44.1 million, essentially flat compared to the exceptionally strong level of $44.3 million reported in the second quarter of 2022, which benefited from several outsized transactions in our Financing segment.  The effective tax rate was 29.3%, compared to 28.6% in the year ago quarter.

 

Including foreign currency translation losses from US dollar denominated loans with our subsidiaries in the United Kingdom that totaled $3.9 million, consolidated net earnings in the second quarter of fiscal 2023 were $28.5 million or $1.07 per diluted share, compared to $31.4 million or $1.17 per diluted share in last year's second quarter. Non-GAAP diluted earnings per share were $1.29 compared to $1.30 in the year ago quarter. Last year’s EPS is adjusted to reflect the stock split in December of 2021.  Our diluted share count at the end of the quarter was 26.6 million, compared to 26.9 million in the second quarter of fiscal 2022.

 

Adjusted EBITDA was $50.3 million, slightly ahead of $50.2 million in the comparable quarter in fiscal 2022.

 

Just to briefly recap our financial performance year-to-date, net sales for the first 6 months of fiscal 2023 increased 8.8% to $952.1million, driven by net sales growth of 10.0% in the Technology segment to $920.3 million. Adjusted gross billings were up 13.2%, reaching $1.47 billion. Consolidated gross profit increased 8.0% to $246.8 million. Consolidated gross margin was 25.9% compared to 26.1% a year ago. However, our Technology segment gross margin increased 10 basis points to 24.1%. Net earnings totaled $50.8 million or $1.91 per diluted share, compared to $54.9 million or $2.04 per diluted share, respectively, adjusted for the stock split effected in December 2021. Adjusted EBITDA was up 0.2% to $88.6 million and non-GAAP diluted earnings per share was flat year over year at $2.28 per diluted share.

 

Our healthy balance sheet enables us to execute our strategy effectively. Cash and cash equivalents were $99.5 million at September 30, 2022.  On Tuesday, we announced the expansion of our credit facility, agented by Wells Fargo bank, from $375M to $425M. The expanded credit line will help facilitate and support our growth strategy, and we are grateful for the long term support of Wells Fargo and the participant banks.

 

We continue to experience supply chain challenges and have ongoing delays to deliver completed orders and corresponding services which resulted in inventory increasing 77.3% to $274.9 million at the September quarter end, compared to the end of fiscal 2022. As a reminder, our inventory is primarily related to committed orders by our customers.  This variation also explains the increase in our cash conversion cycle to 54 days compared to 35 days in the year ago quarter. However, we expect our cash conversion cycle to improve as supply chain constraints ease.

 

Despite near-term economic uncertainty, we believe that our strategic focus on the right technologies positions ePlus well for the future. 

 

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

 

Mark Marron, CEO, President

 

Thank you, Elaine.             

 

To recap, ePlus recorded a solid quarter in both business segments. With strong levels of open orders, backlog and inventory, we are well positioned to have a solid second half, despite heightened economic uncertainty.  In light of escalating cyberthreats, our flexible and evolving security solutions are proving more critical to customers than ever.

 

Supply chain constraints continue to be a challenge, variously affecting revenue, margins, and operating expenses in many of our solutions areas, for both product and services.  We continue to monitor and adjust to fulfill our customers’ critical IT needs. 

 

In closing, we are well positioned to capture future growth while defending against recessionary risks, given our strong balance sheet, excellent vendor and customer relationships and our talented and dedicated workforce.

 

Operator, I would not like to turn it over to you for questions.

 

Question and Answer

 

Operator

 

[Operator Instructions] Your first question comes from the line of Matt Sheerin with Stifel.

 

Matt Sheerin, Stifel

Yes. Thank you. Hello, everyone. Just a – first question just on the strength of the gross profit in the technology segment. I think you called out higher hardware product sales because of the third-party warranty sales and the seasonality of that business. Is that right?

 

Mark Marron, CEO, President

Yeah, Matt. Our gross to net was, I think, up just about 400 basis points. So, on our gross margins, there's a couple of things. One, the gross to net affected the margins in a positive way. Our product margins were actually up, too, based on some of the more mission-critical technology that we sold. Where we took a little bit of a hit was on our services margins, and that really had to do with product delays with some of the supply chain. So, it's really just a timing thing.

 

And then the other thing I'd just highlight, if you look at it, the tech GM was up 60 basis points. And I believe we're some of the highest in the industry where we wound up, on a consolidated basis, at 27% on gross margins.

 

Matt Sheerin, Stifel

Yeah. No, no, I understand. What I was getting at is how sustainable is that and how much of that is seasonal? I mean, last year in the September quarter, you were up 400 basis points or so. So that seems like a seasonally stronger quarter. In other words, I mean, should we be modeling these levels, or is there a seasonal decline in the December quarter because of a change of some of the products like the third-party warranties?

 

Mark Marron, CEO, President

Yeah. And now I got you, Matt, so sorry about that. So, yeah, it's more seasonal. So, a lot of this has to do in this quarter where we get the uptick is due to Cisco's fiscal year-end, where's there's a lot of third-party maintenance in software that goes from a gross to net perspective. So this is traditionally a higher quarter than the other three quarters within ePlus.

 

Matt Sheerin, Stifel

Okay. And on the expense side, it sounds like you're making some prudent investments in various resources, particularly on the technical side. So how should we think about that going forward in terms of OpEx increasing? How should we think about that?

 

Mark Marron, CEO, President

Yeah, that's fair. So, let me give you a little detail, Matt, and then maybe I'll try to help you fence it in a little bit. So from a OpEx standpoint, there's a couple of different things. The big investment is in head count, what we're seeing based on some of the market share that we're grabbing specifically in the services, annuity services, specifically, security and cloud, we're adding head count in that space. For example, we hired a bunch of junior associates in the security space that we've trained over the last five to six weeks that we're then going to have be customer-facing. So we're kind of making those investments. Where you see the OpEx up a little bit this quarter, it kind of takes time not only for the security folks I've mentioned, but others to get productive.

 

The other thing we saw was our annuity bookings were up. I think it was 36% year-over-year in terms of our annuity bookings. We had a few large service desk deals that we actually had to hire addition talent to meet the SLAs with those services. So those are some of the things that built up our OpEx From the investment standpoint, we do think that the revenue will catch up to the expense over time. If I were modeling at a very high level, I would say this is probably a decent model in terms of from an OpEx going forward, we're going to diligently manage the business and add hires as needed.

 

Matt Sheerin, Stifel

So stable from here?

 

Mark Marron, CEO, President

That's fair.

 

Matt Sheerin, Stifel

Yeah. Okay. And just lastly, on the inventory build and the product constraints, it looks like you had some upside in the quarter. So it looks like you may have benefited from some improving supply or perhaps the inventory build that's been going on. But are you encouraged at all in terms of things opening up at all? And is that going to limit perhaps upside in the December quarter, where in previous years, you've been up mid-to-high single digits sequentially?

.

Mark Marron, CEO, President

Yeah. So Matt, a couple of things there. One, this is still very fluid, as you know. So we're hearing different things from the OEMs in terms of timing of when things will be getting out. So, it's still very fluid. So it's not an easy answer on this one. What I would tell you to look at our open orders were up 42% over last year, for one. Second, I think Elaine touched on it, our inventory was up 100% and I think it's up 77% since March alone. So, what we're seeing is we are grabbing market share. Our adjusted gross billings continue to grow both in the quarter as well as the half. And then some of this is a timing to get out the door, but it's positive in the long run. But it's not a simple easy answer since we don't control when some of these things are going to get out.

 

Matt Sheerin, Stifel

Okay. Okay. Thanks a lot, Mark.

 

Mark Marron, CEO, President

All right, Matt. We'll see you soon.

 

Operator

 

Your next question comes from the line of Maggie Nolan with William Blair.

 

Maggie Nolan, William Blair

Hi. This is Jessie on for Maggie. Thanks for taking our questions. I wanted to start off with revisiting product margins. So can you talk about some of the puts and takes there? Are you able to achieve higher pricing for those mission-critical products you mentioned? And what are your expectations going forward?

 

Mark Marron, CEO, President

Yeah. That's – hey, Jessie Thanks. So two things that affect that. One which I talked about was the gross to net, so having more third-party software SaaS plays that are recognized on a net and/or ratable basis depending on the technology and how the term. On the product side, yes. We've seen a little bit of an uptick on the product margins based on the technology we sell. I will remind you, if you think about it, we kind of sell more value selling services, mission-critical technology. We don't play in the PC device space as much as some of the others. We do sell in that space for some of our bigger customers, but it's not a big focus. So traditionally, we'd see our product margins be a little bit higher based on selling storage, security and some of the other technologies that get a higher gross margin.

Maggie Nolan, William Blair

And then a quick follow-up to that. Are you able to achieve better pricing as customers seek the solutions more quickly? And would you expect that to change as supply eases?

 

Mark Marron, CEO, President

Well, I don't know if it'd be more quickly, Jessie. I think it's more along the lines of if we go in – and here I'll take a step back for you. We've kind of made our mantra as customer first, services led, results driven.

 

And what that means is we're leading with our consultative and advisory services in the hopes that we're helping our customers understand what security posture they have to put in place, what security have to do from a ransomware or risk mitigation and things along those lines. So normally, if you do that upfront work and you show the value, potentially you should be able to get increased margin based on the value that you're seeing, both from a product and from a services' perspective.

I don't know if it's a timing thing. There may be some customers that are buying from us that have a very tight timeframe and they're worried about supply chain and they're not worried about cost. But I don't think that's the driver on the gross margin for us that much.

 

Maggie Nolan, William Blair

 

Okay. That's helpful. And then the last – I had one last question. So, net head count additions, they seemed strong in the quarter, even when you exclude the impact from Future Com. So how are you thinking about the cadence throughout the rest of the year and implications for the business?

 

Mark Marron, CEO, President

Yeah. Good question, Jessie. So, of the roughly 175 heads, approximately 25 to 30 was Future Com. The other 145, most of those were customer-facing and I'd say the majority in the services space. And when I say that both the service desk annuity plays that I talked about that we had to add head count to meet certain SLAs per customers and also in pre-sales and delivery for cloud and our security practices. So, I – we'll continue to monitor and manage that. So we'll manage the business tightly and add the head count as we need it. As we see the net sales and AGB adjust upwards, if you will.

Maggie Nolan, William Blair

Understood. Thank you.

 

Mark Marron, CEO, President

All right. Thanks, Jessie. Tell Maggie we said hello.

 

Operator:

 

[Operator Instructions] At this time, there are no further questions. I would like to turn the call back over to Mr. Mark Marron for closing remarks.

 

Mark Marron, CEO, President

Okay. Thank you. Just want to say thank you for everybody for joining us today for our Q2 call – earnings call. I wish everybody a happy and healthy holiday season for Thanksgiving and every other holiday season that's out there between now and our next earnings call. Take care, and thanks for joining.

 

Operator

 

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