ePlus inc. ($PLUS)

Good day, ladies and gentlemen. Welcome to the ePlus Fourth Quarter Fiscal Year 2026 Earnings Results Conference Call. As a reminder, this conference call is being recorded. [Operator Instructions] I would like to introduce your host for today's conference, Mr. Clay Parker, Senior Vice President. Sir, you may begin.

Thank you for joining us today. On the call is Mark Marron, CEO and President; Darren Rage, COO and 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 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 use certain non-GAAP measures during the call. We have included a GAAP financial reconciliation in our earnings press release, which was 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?

Thank you, Clay. Good afternoon, everyone, and thank you for joining us today for our fourth quarter and full year fiscal 2026 earnings call. . The year was defined by the strong execution of our team and our ability to meet evolving customer IT needs, which resulted in achieving meaningful milestones across the business. The momentum drove strong full year results with double-digit growth across our key revenue and operating metrics and gross billings, which reached a record $3.8 billion, in addition, we experienced continued operational efficiencies, improve the scalability of our platform with fully diluted EPS from continuing operations in the fourth quarter, increasing 53% on a year-over-year basis. It is worth noting for the full year diluted EPS from continuing operations increased 64%. Our performance reflects continued market share gains as we saw strong demand across our diverse customer base, particularly with respect to their AI journey. Throughout the year, we continue to broaden our core portfolio offerings by adding professional and managed services. Moreover, we continue to build out our higher-value consultative services to assist our customers with a more holistic approach. Our agile model allows us to pivot and meet marketplace opportunities while fulfilling customer needs. Growth throughout the year was largely organic and broad-based across our core focus areas of AI, cloud, data center, networking and security as well as across customer segments from the mid-market to large enterprises. Our integrated solutions-led approach continues to resonate with customers, particularly as they increasingly adopt AI-driven technologies and accelerate their digital transformation strategies. Strategically, we have proactively transformed into a pure-play technology solutions and services provider by divesting our domestic financing business earlier in the fiscal year. This has allowed us to increase our focus on and allocate resources to the faster-growing IT markets and pivot all of our resources to building IT solutions and capturing market share. We continue to execute on our plans for disciplined cost management, leveraging AI for internal efficiency and revenue growth initiatives and aligning resources to our highest growth opportunities. Our balance sheet remains healthy. We ended the year with a cash balance of $411 million and increased our working capital. Our balance sheet provides the flexibility to invest in our business organically and through acquisitions while also returning capital to shareholders through dividend payments and share repurchases as part of our capital allocation plan. Reflecting long-term confidence in the business and the strength of our financial position, our Board recently authorized an 8% increase in our quarterly dividend to $0.27 per share. As noted, we ended fiscal year 2026 with record gross billings and backlog and which provides us with solid momentum as we move into the new fiscal year. We're also mindful of potential headwinds, including the worldwide memory chip shortage and geopolitical issues, as we have mentioned in the past, offsetting that potential risk are the core drivers of digital transformation and AI that are supportive of growth. Overall, I'm very pleased with our performance in fiscal year 2026. Our results reflect the strength of our business model, our focus on high-growth technology areas and our ability to execute consistently. With strong momentum, healthy backlog and solid demand across our key markets as well as thoughtful capital allocation plans, we are well positioned to build on the success and drive profitable growth in the year ahead. I will now turn the call over to Darren to discuss the segments in more detail. Darren?

Thank you, Mark, and good afternoon, everyone. As you just heard from Mark, we delivered a very good year with broad-based demand across the business with increasing contribution from AI, let me dive a bit more into the business drivers. In our Products segment, fourth quarter sales increased 25% and full year sales advanced 24% to nearly $2 billion driven by strong customer demand across data center and cloud networking and security. We continue to engage customers early in their AI journey to help them develop AI use cases and prioritize related investments. leading to increased demand for infrastructure modernization across the breadth of our focused product categories. This trend is also translating into continued and expanding demand for infrastructure. We are well positioned to benefit from those seeking consolidation of spend and strategic guidance from their partners. At the same time, customers remain disciplined in how they spend balancing long-term AI initiatives with efficiency and cost management priorities. Further validating our success and execution in the area of digital transformation were 2 new honors awarded last week. We were just recognized as the Dell channel Strategic Impact Partner of the Year at Dell Technology World and Digital Realty announced ePlus as its 2025 Americas Partner of the Year. Our creation of an AI experience center inside Digital Realty's Innovation Lab, which is being leveraged by customers for a handle on demonstrations of a complete advanced AI infrastructure stack with undoubtedly a catalyst for the award. Moving next to services. Managed services continue to grow, but was partially offset by smaller growth and elongation of some professional services projects. Services revenue for the fourth quarter increased 5% compared to the prior year's quarter. For the full year, services revenue increased a more robust 16% with solid performance across both professional and managed services. Looking at professional services, we had some project timing delays in the fourth quarter with retail customers, which resulted in revenue growth of 2% in the fourth quarter. For the full year, professional services revenue increased 19%, supported by the addition of bailiwick services. Full year margins were modestly lower due to the mix impact from Daily Wick, which has a different margin profile than our legacy services business. Moving next to managed services, which continue to perform well, in the fourth quarter, managed services revenue increased approximately 9%. For the full year, Managed services revenue increased approximately 11% as we continue to build out our capabilities in this segment. The portfolio continues to grow based on both customer demand and offering development via partners. For example, we now have managed collaboration offerings for Cisco, Zoom and Microsoft. Our ever-broadening enhanced maintenance services capabilities layered on top of OEM support have helped us deliver a better experience for our customers. We have several multiyear wins in the storage and backup space. Some of these wins are being delivered as ePlus storage as a service and back up as a service managed service offerings with others as annuitized solutions with the OEMs. These longer-term engagements show customer confidence in our ability to deliver tangible business outcomes and provide strategic value over time. Our managed services solutions continue to see strong customer interest yielding new bookings to support our outlook for continued growth. Security also remains an important growth and investment area for us. Security gross billings grew 23.1% to $842 million for the full year and represented approximately 22% of fiscal year 2026 gross billings. Customers continue to prioritize cybersecurity investments, whether due to increasing AI sophistication or the ongoing matrix of threats across their enterprise. With respect to other industry trends, Aon continues to be 1 of the biggest drivers of technology investment across our customer base. In recent quarters, customers are increasingly focused on how AI can improve productivity, streamline operations and enhanced customer engagement. We currently have a strong pipeline of customer requests with our technical teams to deliver these business outcomes. We believe our expanding capabilities position us well to help customers navigate this evolving landscape. We are further encouraged by the Net Promoter Score we earned of 74. To put this in perspective, global NPS standards rank any score above 70 as world class. A score of 74 places ePlus in the top quartile of the technology and IT services industry where the average score is 55. Our score shows we are not just meeting customer expectations but are building loyalty and our customers are becoming advocates for ePlus as they believe in the value we provide. Our high NPS speaks to the work we have put into responding quickly solving problems and truly listening to our customers. I will now turn the call over to Elaine to discuss our fourth quarter and full year financial results.

Thank you, Darren, and thank you, everyone, for joining us. Today, I will review our financial performance for the fourth quarter and full year of fiscal 2026. The fourth quarter capped a strong fiscal year in which we delivered double-digit growth across key metrics. Importantly, we posted net sales growth of 22% and adjusted EBITDA growth of nearly 50%, while holding head count flat and growing operating expenses at a more modest 9% and underscoring the operating leverage inherent in our business model. Beyond our financial results, fiscal year 2026 was a transformative year for ePlus, as Mark mentioned, as we completed the divestiture of our domestic financing business, simplifying our business model and enhancing our focus on our core technology growth areas. As we initiated our first quarterly dividend, reinforcing our strong financial performance and our commitment to returning capital to our shareholders. Moving on to our fourth quarter results. Consolidated net sales increased 20.6% to 576.2 million, driven by broad-based growth across product categories and customer segments. Gross billings grew 11.7% to $881 million, reflecting sustained demand across our strategic focus areas of AI, cloud, security and networking. Product revenue increased 25% to $466.2 million, demonstrating healthy demand across our core growth areas as well as a higher proportion of revenue from enterprise customers in the quarter. Services revenue grew 4.9% to $110 million. Managed services revenue increased 9.3% to $48.7 million, reflecting continued strength in our enhanced maintenance support and cloud offerings, underscoring the progress we continue to make in building out our recurring revenue base. Professional services revenue grew to $61.3 million, reflecting timing delays from select retail customers -- as we noted on our third quarter call, we expect these projects to normalize in fiscal 2027, and we are seeing signs of positive progress. Sales across our customer verticals remain broad-based -- on a trailing 12-month basis, telecom, media and entertainment accounted for 30% of net sales, while health care and SLED, each accounted for 13%, technology accounted for 12% and Financial services accounted for 10% and retail accounted for 6%. The remaining 16% was divided among other end markets. Consolidated gross profit in the fourth quarter was $141.6 million with a gross margin of 24.6% compared to 26.5% in the prior year quarter, primarily due to lower product margins. Product segment gross margin was 22.2% compared to 24.7% in the prior year quarter, reflecting a lower proportion of revenue recognized on a net basis and an increase in large enterprise sales at competitive gross margins. Professional services gross margin was 38.3%, up 240 basis points from 35.9% in the prior year, benefiting from improved project mix while Managed Services gross margin came in at 30.5% and above the 29.1% reported in the prior year quarter. Operating expenses in the quarter were $110.7 million, an increase of 2.4% year-over-year mainly due to higher variable compensation commensurate with the increase in gross profit. Operating income increased 64.7% to $30.9 million Other expense was $600,000 compared to other income of $1 million in the fourth quarter of fiscal year 2025 and included a $3 million charge related to an adjustment to the fair value of contingent consideration associated with the sale of our domestic financing business. The fourth quarter effective tax rate was 32.2%, which was higher than 31.4% reported last year due to higher state income taxes and nondeductible expenses. Net earnings from continuing operations were $20.5 million versus $13.5 million last year, and diluted earnings per share from continuing operations were $0.78 compared to $0.51 in the prior year quarter. Net loss from discontinued operations was $400,000 or $0.02 per share compared to net income of $3.9 million or $0.15 per share in the prior year quarter. Fourth quarter adjusted EBITDA increased 40.2% to $40.1 million. Non-GAAP diluted earnings per share from continuing operations was $1, up 44.9% from $0.69 and in the fourth quarter of fiscal year 2025. Turning to our full year results for fiscal year 2026, net sales were $2.4 billion, up 22.1% and with product sales growing 23.7% and services revenue increasing 15.6%. Growth was broad-based across customer sizes and verticals and was primarily organic. Our full year gross billings were $3.8 billion, growing 17% from the prior year, highlighting sustained demand across our suite of offerings. Consolidated gross profit for the full year grew 20.3% and to $66.1 million. Gross margin was 25.2% compared to 25.6% in fiscal 2025, and with the year-over-year decline primarily attributable to the product mix consistent with the dynamic we saw in the fourth quarter. As I mentioned, the operating leverage in our business model was evident in fiscal year 2026. The Full year operating expenses grew 9.1% against 22.1% net sales growth and 49.5% adjusted EBITDA growth with head count remaining essentially flat year-over-year. This reflects our workforce focus on high-growth areas and creating and maintaining a scalable operating model. This leverage, combined with strong top line performance led to the operating income growth of 67% in fiscal year 2026. Our effective tax rate was 28.4% compared to 28% last year. For the full year, net earnings from continuing operations increased 62.4% to $124.1 million, and diluted EPS from continuing operations was $4.71 and compared with $2.87 in the prior year. Net earnings from discontinued operations totaled $8.5 million or $0.32 per diluted share compared to $28.1 million or $1.06 per diluted share in the prior year. Non-GAAP EPS from continuing operations increased to $5.39 from $3.53 and and adjusted EBITDA increased 49.5% to $204.8 million. Now taking a look at our balance sheet. Cash and cash equivalents remained strong, ending the fiscal year at $410.8 million, up from $326.3 million at the end of the third quarter and above the $389.4 million at the end of fiscal year 2025. Inventory at quarter end was $200.9 million, down from $241 million in the prior sequential quarter reflecting increased shipments to enterprise customers. Our cash conversion cycle was 51 days compared to 29 days in the prior year quarter. Sequentially, our cash conversion cycle increased 10 days -- the year-over-year increase was driven by the timing of large enterprise shipments and an increase in projects in progress. As Mark noted, our balance sheet is strong, and we are well positioned to pursue organic investments and strategic opportunities in our core growth areas. We also remain committed to returning capital to our shareholders through share repurchases and dividends. To that end, we repurchased 90,000 shares in the quarter. We also raised our quarterly dividend by 8% to $0.27 per common share, which will be paid on June 30, 2026, to shareholders of record as of the close of business on June 17, 2026. In summary, we are pleased with our full year fiscal 2026 results. Our team performed well, and we delivered strong broad-based growth while expanding our operating leverage simplifying our business model and initiating a quarterly dividend. We enter fiscal year 2027 with strong momentum and a solid foundation to continue supporting our customer success. Back to you, Mark, for closing remarks.

In closing, we believe our results show that our strategy is working and our teams are focused on executing in key areas where our customers require our solutions and services. Over the long term, we will continue to focus on increasing our overall market presence and expanding our customer base in the enterprise and mid-market space. . The strength of our balance sheet provides financial flexibility to implement key organic hires, make strategic M&A decisions and return shareholder value through share buyback and dividend plans. As you saw in our earnings release, we have introduced fiscal year 2027 guidance and expect net sales, gross profit and adjusted EBITDA to all grow in the mid-single-digit range. I'd like to close by thanking the entire ePlus team for their ongoing commitment and strong execution in delivering a year we can all be proud of. Their contributions are instrumental in creating value for both our customers and shareholders. We believe we are well positioned for another year of growth ahead. Operator, can you now turn it over for questions.

[Operator Instructions] We'll go first to Maggie Nolan at William Blair

Mark, you just gave the guidance there. And at the beginning of your prepared remarks, you said you were continuing to be mindful of potential headwinds. So could you expand a little bit on the framework for the guidance, what you factored in, where you're being conservative versus ambitious?

Yes, Maggie. First off, how are you? In terms of the guidance, there's a few things that we looked at. One, we had a really tough compare. As you saw from the numbers for the year, we were up over 20% on the top and almost 50% on the bottom with everything going on from a memory shortage with some of the lead times, we are being a little conservative. Our open orders are up, which is a good sign for our business, but it's also dictated based on lead times, which we don't control. The other things that we're starting to see is a AI strategy is starting to work. We're starting to see some significant progress in the areas in that space, both in terms of opportunities. But once again, it really comes down to being conservative with the memory shortage and some of the geopolitical unrest that's going on that we don't control. .

Okay. And then I think also in the prepared remarks, there was a comment about large enterprise sales coming in at maybe competitive rates and the impact on margins there. Is there an opportunity to expand margins at some of these large enterprises over time? Or is this reflective of maybe a more heightened competitive environment? Should we expect this going forward?

Matt, it's Darren. I'll take that one. I think there's plenty of opportunity for expansion. We talk about land and expand all the time. And I think we're seeing more opportunity as we're providing value to the larger enterprises and also look at a services as well. So optimistic on that as opposed to thinking this is going to continue. .

[Operator Instructions] And that does conclude our Q&A session. I would like to turn the conference back over to Mark Marron for any additional remarks. .

Okay. Thanks, operator, and thanks, everybody. Hey, if I look at the year, it was a big year for ePlus. I think the team did a really nice job of delivering. We sold our Finance segment -- and we see -- we did that because we saw what was happening in the market with AI and everything in that space. So we wanted to become a pure technology solutions and services player -- we continue to do our share buybacks. We -- our board approved an increased dividend by 8%. When I look at the team in terms of executing on our go-to-market plans, in all the key focus areas, they actually delivered both from a product and services perspective. All the customer size segments were up. We're going to continue to drive our strategic initiatives around expanding our market presence and our customer base driving our AI initiative and continue to enhance our service offerings and capabilities while focusing on profitability and our operating leverage as we go forward, -- the other thing that gives us strength, if you will, is our balance sheet with the financial flexibility. So as it relates to our capital allocation plans, we have the ability, both with organic hires and M&A to help fuel long-term growth. And as I mentioned, the dividend and buybacks are ways to return shareholder value. So with that, I'll conclude. I will thank all of you for joining us today and look forward to speaking with all of you at our next earnings call in August. Enjoy the summer, and take care.

And this concludes today's conference call. Thank you for your participation. You may now disconnect.