Safe Harbor Statement

This transcript of the earnings call that occurred on February 5, 2025, 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,” “would,” “intend,” “estimate,” “will,” “potential,” “possible,” “could,” “believe,” “expect,” “intend,” “plan,” “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, and such statements 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 later 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:

• exposure to fluctuation in foreign currency rates, interest rates, and inflation, including as a result of national and international political instability fostering uncertainty and volatility in the global economy, which may cause increases in our costs and wages and our ability to increase prices to our customers, negative impacts to the arrangements that have pricing commitments over the term of an agreement and/or the loss of key lenders or constricting credit markets as a result of changing interest rates, which may result in adverse changes in our results of operations and financial position;
• significant adverse changes in our relationship with one or more of our larger customer accounts or vendors, including decreased account profitability, reductions in contracted services, or a loss of such relationships;
• a material decrease in the credit quality of our customer base, or a material increase in our credit losses, including by the federal government’s actual or attempted termination for convenience, other contract termination or non-performance;
• 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 ability to remain secure during a cybersecurity attack or other information technology (“IT”) outage, including disruptions in our, our vendors or other third party’s IT systems and data and audio communication networks;
• 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 and appropriately providing required notice and disclosure of cybersecurity incidents when and if necessary;
• ongoing remote work trends, and the increase in cybersecurity attacks that have occurred while employees work remotely and our ability to adequately train our personnel to prevent a cyber event;
• the possibility of a reduction of vendor incentives provided to us;
• our dependence on key personnel to maintain certain customer relationships, and our ability to hire, train, and retain sufficient qualified personnel by recruiting and retaining highly skilled, competent personnel, and vendor certifications;
• risks relating to use or capabilities of artificial intelligence (“AI”) including social and ethical risks;
• our ability to manage a diverse product set of solutions, including AI products and services, in highly competitive markets with a number of key vendors;
• changes in the IT industry and/or rapid changes in product offerings, including the proliferation of the cloud, infrastructure as a service (“IaaS”), software as a service (“SaaS”), platform as a service (“PaaS”), and AI;
• 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 delay 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;
• our inability to identify acquisition candidates, perform sufficient due diligence prior to completing an acquisition, successfully integrate a completed acquisition, or identify an opportunity for or successfully completing a business disposition, may affect our earnings;
• our ability to raise capital, maintain or increase as needed our lines of credit with vendors or our floor plan facility, obtain debt for our financing transactions, or the effect of those changes on our common stock price; and
• our ability to implement comprehensive plans for the integration of sales forces, cost containment, asset rationalization, systems integration, and other key strategies.

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 Annual Report on Form 10-K for the fiscal year ended March 31, 2024 as well as other reports that we file with the Securities and Exchange Commission.

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 February 5, 2025, a copy of which is posted on our website at www.eplus.com/investors.

February 5, 2025 – FY25Q3

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, Senior Vice President. Sir, you may begin.

Kley Parkhurst, SVP

Thank you for joining us today. On the call is Mark Marron, CEO & President; Darren Raiguel, COO & President of ePlus Technology, 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 and Exchange Commission including our most recent Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and in other documents that we file with the SEC. Any forward-looking statement speaks only as of the date of which the statement is made, and the Company undertakes no responsibility to update any of these forward-looking statements in light of new information, future events, or otherwise. In addition, we will be using certain non-GAAP measures during the call. 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. Good afternoon everyone and thank you for joining us. I will give a recap of our fiscal third quarter 2025 highlights and an update on our business overall. Elaine will follow with a discussion of our financial results, and I will then conclude with an update of our current outlook.

We continue to execute on our strategic priorities of expanding our footprint and customer base and broadening our suite of solution and service offerings as we are investing in the most promising growth areas. We continue to see the evolution of our industry transition to a more ratable, consumption and subscription-based model, which has impacted the comparability of our quarterly results.

As noted last quarter, our revenue trend reflects an acceleration of gross billings recorded on a net basis, as well as a move towards more ratable revenue models. Software subscription orders have continued to increase year over year with these deals being recognized on a net basis or ratably. While this evolution helped contribute to flat year over year revenue, we delivered solid growth in gross billings, gross profit, and gross margin. It is also a solid forward indicator for growth with our subscription orders up 51.4% YoY, accounting for almost 46% of our open orders currently compared to 31.7% last year and growth of over $100M.

On a consolidated basis, total revenues were flat as lower product sales were partially offset by faster growing high margin service revenue, which is partially reflected in our gross profit being up 5.3%. We believe customers are still digesting purchases from last year’s inventory flush primarily impacting our networking and data center/cloud sales. The main factor though was that we had a much higher gross to net adjustment this year, which was up 840 basis points from the prior year and impacted our top line revenues by approximately $60 million

The year over year increase in SG&A expenses was primarily due to increased headcount from the Bailiwick acquisition as well as investments in the business. Of note, much of the increased headcount were customer facing employees. Adjusted EBITDA decreased 15% as higher earnings in the Financing segment were offset by a decrease in Technology business adjusted EBITDA. We continued to see softer than expected hardware sales and lower demand from some enterprise customers.

As we have moved towards a services led model, our services revenues continue to grow nicely, increasing 52% year on year and reaching a new high of $114 million, with services gross profit up 45% YoY. Revenue in the quarter benefitted from the acquisition of Bailiwick earlier in the year, which is integrating well, and organic Managed Services revenue increased 28% year over year.

Our Finance segment delivered another solid quarter with revenue increasing 20% primarily due to an increase in proceeds from the sale of equipment as well as higher portfolio earnings and transaction gains.

As we look at our longer-term growth drivers, AI is a good place to start. In an ePlus AI survey, 76% of IT leaders have said their organizations have yet to reach AI maturity. They noted the top challenges they are facing are a skills gap, security concerns and cost. There is a disparity between AI aspirations and AI readiness and most companies are in the early stages of their AI journey.

We continue to build out our AI Ignite and Secure GenAI programs that deliver services and solutions our customers need to make informed decisions. Our Secure GenAI program is a platform developed by ePlus utilizing leading AI technology from our strategic partners to deliver a secure GenAI Chatbot experience. This allows customers to test use cases and convert them into actionable plans with built in guard rails. Ultimately, our secure GenAI program helps our customers more quickly make informed decisions, and adopt GenAI safely.

We are also leveraging the benefits of AI internally to create efficiencies that improve customer satisfaction and that we expect will provide cost savings long term. With our internal use of AI, we are seeing an increase in quality due to automation and an ability to resolve inquiries and tickets faster. As such, we expect that AI will help us deliver enhanced customer experiences.

Security is key to customers’ long term roadmap especially related to AI initiatives around data strategy, Governance and Risk. Our security offerings also continue to be a solid performer for us. Our security gross billings accounted for 21.2% of our TTM gross billings.

We continue to benefit from very attractive cash flow characteristics. In turn, our balance sheet provides financial flexibility to support future growth initiatives. We will continue to be disciplined and strategic with our deployment of capital as we prioritize investing in the business to drive long-term growth both organically and via M&A transactions as well as return excess cash to our shareholders.

I will now turn the call over to Elaine to discuss our financial results in more detail.

Elaine D. Marion, CFO

Thank you, Mark, and thank you, everyone, for joining us today.

I will now review our financial performance in the third quarter of fiscal 2025.

Consolidated net sales of $511.0 million were modestly above the $509.1 million reported in last year’s third quarter. In our technology business, sales were flat year-over-year, as a decline in product sales was more than offset by continued strength in services demand. The decline in product sales reflects a shift towards sales of third-party software and services, resulting in higher netted down revenues, as Mark mentioned, as well as lower sales of product as a result of last year’s supply chain easing, particularly from Enterprise customers. Notably, gross billings growth of 6.6% year over year outpaced net sales growth, highlighting continued demand for ePlus’ offerings and the netting down effect.

Our strategic focus on services continues to deliver results, as service revenue grew 52% in the quarter, with strong contribution from both Professional and Managed services. The Professional Services segment benefited from the Bailiwick acquisition, while growth in the Managed Services segment was broad-based.

Within our technology business, our two largest markets continue to be Telecom, Media & Entertainment and Technology, representing 24% and 17%, respectively, of technology business net sales on a trailing 12-month basis. SLED, Healthcare, and Financial Services accounted for 16%, 13%, and 10%, respectively, with the remaining 20% from other end markets.

Our financing segment posted a solid quarter, with revenues of $17.8 million, up 19.8% from $14.9 million in last year’s third quarter, due to higher proceeds from sales of equipment and portfolio earnings.

Consolidated gross profit grew 5.3%, faster than our revenue growth, to $140.9 million, representing a consolidated gross margin of 27.6%, up from 26.3% in the prior year. The 130-basis point expansion was primarily driven by higher product margins, which benefitted from a shift in mix to third party maintenance and subscriptions.  While product margins were higher than last year, a higher proportion of product sales to certain enterprise customers at lower overall margins weighed on product margins, but this was offset by contribution from the netting effect I mentioned.  Professional Services gross margin declined to 40.1% from 43.3%, due to a shift in mix of services provided, while Managed Services gross margin declined to 29.8%, from 31.8%.

Consolidated operating expenses increased 17.3% year-over-year to $112.4 million, primarily reflecting increased headcount due to the Bailiwick and Peak Resources acquisitions, as well as continued investments in our business to support our growth. Our headcount at the end of the quarter increased to 2,291 from 1,897 a year ago, primarily reflecting additions of customer-facing professionals acquired in the Bailiwick transaction. 

Operating income was $28.5 million, down from $38.0 million and earnings before taxes declined to $32.2 million, from $38.4 million in the prior year quarter. During the third quarter, we realized interest income of $1.8 million and foreign exchange gains of $1.9 million, resulting in other income of $3.7 million.

Our effective tax rate was 25.0% versus 29.0% a year ago due to lower state taxes.

Third quarter consolidated net earnings were $24.1 million, or $0.91 per share, down from net earnings of $27.3 million, or $1.02 per share in last year’s third quarter. Non-GAAP diluted earnings came in at $1.06 per share, compared to $1.18 per share last year. Our diluted share count at the end of the quarter was 26.6 million, compared to 26.7 million in the prior year third quarter.

Consolidated adjusted EBITDA amounted to $39.2 million, versus $46.2 million in the third quarter of fiscal 2024.

For the nine months ended December 31, 2024, our consolidated net sales totaled $1.57 billion, down from $1.67 billion in the prior year. The decrease primarily reflects lower product sales in the technology business, partially offset by growth in services and stronger performance in our financing segment. Technology business net sales were $1.52 billion year-to-date, compared to $1.63 billion last year. Despite the decline in net sales, gross billings in the technology business were essentially flat year over year, at $2.49 billion. Year to date consolidated gross profit rose 0.7% to $423.4 million, while gross margin rose 180 basis points to 27.0%. Gross margin expansion was driven by higher product margins, which benefited from an increase in netted down revenues partially offset by lower upfront margins. For the nine months ended December 31, 2024, consolidated net earnings were $82.8 million or $3.10 per diluted share, compared to $93.8 million or $3.52 per diluted share in the comparable period last year, and non-GAAP earnings per share were $3.56, versus $3.99. Adjusted EBITDA was $134.4 million, down from $153.6 million in the comparable period last year.

We ended the quarter with cash and cash equivalents of $253.1 million, consistent with the balance at the close of fiscal 2024. Operating cash flow for the first nine months was $141.2 million, compared to $143.5 million last year, and included cash used to fund working capital, the Bailiwick acquisition and share repurchases.

We ended the quarter with $99.0 million in inventory, down from $139.7 million at the end of fiscal 2024. Inventory turns were 13 days, down significantly from 27 days in the third quarter of fiscal 2024. As a result, our cash conversion cycle improved to 32 days, down meaningfully from 54 days in the prior year.

During the first nine months of the year, we repurchased approximately 380,000 shares under our repurchase plan at a cost of $30.0 million.

Our strategy continues to focus on our core priorities: driving organic growth, expanding through accretive acquisitions, and returning capital to shareholders through our repurchase program.

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

Mark Marron, CEO, President

Thank you, Elaine.

We are investing both organically and inorganically to develop a portfolio that provides us with multiple levers for growth across a broad range of verticals to drive growth and diversification.

Growth of our gross profit and services are key indicators of the success of our “go to” market plans and being a trusted advisor for our customers. Our recent results reflect both the fast growth of our services led business model and the accelerating shift towards ratable, subscription and as a service revenue recognition model. This has resulted in mixed results for the quarter and we will continue to adjust and adapt as the market transitions. As a result, we are adjusting our fiscal 2025 financial outlook.

Turning to guidance, we now forecast a revenue range of $2.07 billion to $2.11 billion for fiscal year 2025, and an adjusted EBITDA range of $165 million to $171 million. Our guidance reflects higher gross to net adjustments than previously expected and also factors in the near- term potential of tariffs and how this might affect short -term decisions. We will continue to monitor this closely and expect to share more insight at the time of our year-end conference call.

We are making investments in the business, focusing on high growth areas where we seek the best return opportunities, and we are confident this will support our commitment to growth in 2025 and beyond. Our balance sheet and financial condition are healthy which gives us a solid foundation for expansion.

In conclusion, we remain confident in the growth opportunities for our business moving forward and our ability to execute.

Operator, please open the line for questions.

Operator

Thank you. Ladies & gentlemen, we will now begin the question-and-answer session. If you have dialed in and would like to ask a question, please press * followed by the number 1 on your telephone keypad. If you would like to withdraw your question, simply press *1 again. Your first question comes from the line of Maggie Nolan with William Blair. Please go ahead.

Maggie Nolan, William Blair

Hi thank you. Can you talk a little bit about your expectations for product sales that are included in the guide and maybe a couple of quarters beyond that?

Mark Marron, CEO, President

Sorry, Maggie, did you say -- we didn't hear you. expectation for product sales in the quarter and then going forward? Or...

Maggie Nolan, William Blair

Yes, the fiscal fourth quarter and if you can go a couple of quarters beyond that kind of flesh out the trends you're seeing given that it's been a weak spot.

Mark Marron, CEO, President

Yes. It's actually -- I think we noted it on the last earnings call as well, Maggie, that there's a softening in the market around some of the hardware or product demands, if you will. We specifically saw it with some select enterprise accounts in this quarter. We would expect it to continue into next quarter. The other things that affected our, I'll say, bottom line, not so much top line was some of the upfront gross margins on product sales that was more of an anomaly, but that was offset by the netted down revenues.

The other interesting thing in play here, Maggie, is the market is really changing. The OEMs are going more to as-a-service consumption subscription model. So, they're recognized on a net and ratable basis I think you may have seen our netted down revenues, product sales were actually affected by 840 basis points. To put that in perspective, that's about $60 million in net sales that would have went to our top line if it were flat to last year. So, it's a moving target. I would expect that they continue to be a soft demand for Q4 and then would expect it to start to pick up a little bit as we move into our Q1.

Maggie Nolan, William Blair

So, on that last point, Mark, I mean, we've talked about the shift toward netted down product revenues. Are you calling an acceleration? Do you have an idea of maybe what might be driving that trend to accelerate at this moment in time?

Mark Marron, CEO, President

Yes. We've seen a couple of different things, Maggie. One, we still don't know if it's a new trend. If you look at just the last 2 quarters, last quarter, our netted down revenues for product sales was affected by 940 basis points. This quarter, it was 840 basis points. That's significantly higher than last year and higher than what we were projecting in the beginning of the year. So, there is that play. What's really happening here is the OEMs are changing how they're going to market. As we sell more software, that subscription normally recognized on a net or maybe an annual basis. So, it's really the product mix and solutions that we're selling that's affecting this right now.

Maggie Nolan, William Blair

Okay, thank you.

Mark Marron, CEO, President

No problem. Good hearing from you Maggie. We’ll talk to you soon.

Operator

Your next question comes from the line of Greg Burns with Sidoti. Please go ahead.

Greg Burns, Sidoti

Good afternoon, so I just wanted to talk, I guess, a little bit more about the demand environment. I know you've been kind of calling out this digestion of some of the product that's in the channel from the supply chain kind of improving over the last year. That seems to be lingering longer than probably we would have expected. So, is there anything else going on? Are you -- what are you hearing from your customers? Like is it beyond that at this point? Is there other things driving the soft demand? Or is it really just kind of this digestion of product in the channel?

Mark Marron, CEO, President

Yes. It's the digestion, Greg. We can see it specifically in the networking space and a few select enterprise customers. So, it is around supply chain for the most part. There are things going on overall in the industry, I think, as with tariffs and DOGE and everything else that's going on. I do think the election actually slowed things down a little bit for us in the beginning of the quarter. We did see our billings were flat to down in the October, November time frame and picked up in December.

But we didn't pick up a lot of what I call the year-end flush or what we normally expect in this quarter. So those are still the cases there. We still, from a, I'll say, a customer set standpoint, both size and by vertical, we're pretty diversified. In fact, we've actually diversified more with the Bailiwick acquisition with some of their customers or expanded the verticals we were in, in some cases. So, we feel somewhat protected long term, but there are some things going on that are affecting decisions right now.

Greg Burns, Sidoti

Okay. And then in terms of this ongoing shift towards more software subscription ratable models, can you just talk about like what the value proposition for a VAR is in that type of model? Is there an increased risk of maybe disintermediation over time? Can they go more easily direct to customers with that model?

Mark Marron, CEO, President

No, no, Greg. In fact, it's actually an opportunity for us to build up our services. So in a lot of cases with the subscription, there's add-on services -- there's renewals. There's what they call life cycle management. So you try to get them to adopt the technology or software, if you will, upsell additional features and an incremental services, maybe provide some type of staffing and/or managed service. So no, it's not -- it's no different in terms of -- with the subscription versus hardware, I believe, that would affect the channel.

Greg Burns, Sidoti

Okay great thank you.

Mark Marron, CEO, President

No problem. Thanks Greg.

Operator

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

All right. Thank you, everybody. Look, I will reiterate, we still feel very strongly about our strategy and our focus areas that we're in. We're going to continue to build out our services-led model. Our services were up 52%. They were approximately 23% of our net sales this quarter. We'll continue to leverage our customer base and customer segments. Our strong balance sheet gives us flexibility to make inorganic and organic moves. So we feel good where we're positioned. And we've been in business for a long time. So we will adapt and adjust to this new norm short term and be able to make the moves that we need to make. So I want to thank everybody for joining us today and look forward to seeing or hearing you on the next call. Thank you.

Operator

That concludes today's call. Thank you for your participation. You may now disconnect.

ePlus reserves the right to make changes to documents, content, or other information on this web site without obligation to notify any person of such changes.

In the earnings calls upon which this transcript is based, ePlus may make projections or other forward-looking statements regarding a variety of items. Such forward-looking statements are based upon current expectations and involve risks and uncertainties. Actual results may differ materially from those stated in any forward-looking statement based on a number of important factors and risks, which are more specifically identified in ePlus’ most recent filings with the Securities and Exchange Commission. Although ePlus may indicate and believe that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate or incorrect and, therefore, there can be no assurance that the results contemplated in the forward-looking statements will be realized.

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