ePlus inc. (PLUS) Earnings Call Transcript & Summary

Good day, ladies and gentlemen. Welcome to the ePlus First Quarter Fiscal Year 2027 Earnings Results Conference Call. As a reminder, this conference call is being recorded. [Operator Instructions] I would now like to introduce your host for today's conference, Mr. Kleyton Parkhurst, Senior Vice President. Sir, you may begin.

Thank you for joining us today. On the call is Mark Marron, CEO and President; Darren Raiguel, COO and President of ePlus Technology; Elaine Marion, CFO; and Amanda Dupree, Deputy General Counsel. 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 press 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 other documents that we may 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've included a GAAP financial reconciliation in our earnings release, which is posted on the Investor Information section of our website at www.eplus.com. I'd now like to turn the call over to Mark Marron. Mark?

Thank you, Kley. Good afternoon, everyone, and thank you for joining us today for our fiscal first quarter 2027 earnings call. We delivered a solid quarter against a difficult comparison. The prior year benefited from the timing of several large enterprise orders. While the first quarter included some costs related to investments we are making in the business to support future growth, demand across our business was healthy, particularly among mid-market customers. We are encouraged by the current level of bookings and open orders, which are up significantly as we move through the remainder of the year. Most importantly, our results indicate that we are executing well on our key operational and strategic initiatives -- we are expanding our geographic footprint and customer base, focused on growing our presence in attractive markets and helping customers solve increasingly complex technological challenges while leveraging our multi-architecture capabilities. As AI, cloud, security and networking continue to converge, our ability to bring together innovative solutions is becoming an even larger competitive differentiator. A key part of that effort is continuing to build out our AI capabilities. Our customers are focused on how to deploy AI securely, efficiently and at scale. We have leveraged our security practice to build secure AI solutions around a data-first strategy, and we continue to build the new innovative solutions our customers need going forward. An example of this is the self-contained Agentic AI platform we built in collaboration with Cisco and NVIDIA that results in a more secure AI infrastructure and requires less human interaction to self-diagnose and self-heal. It reduces operational complexity, it accelerates incident response and enables IT and security teams to shift from reactive issue resolution to autonomous operations. We are also investing in the future of ePlus by continuing to add customer-facing resources and improve efficiency through systems and processes to support long-term growth and scale the business. Internally, we are using AI to improve efficiency and effectiveness throughout the sales organization to enhance the customer experience. Our customer-first approach remains central to everything we do, and we made meaningful progress in deepening and strengthening our relationships with customers over the past year. Underscoring this was our recent above-industry average Net Promoter Score of 74. That's something we are proud of because it reflects the trust we have built over many years and allows us to capture greater share across our customer base and win new customers. Our balance sheet remains strong as we generated solid cash flow and allocate capital effectively. We will continue to invest in organic growth, pursue strategic M&A opportunities and return capital to shareholders through dividends and share repurchases. We initiated a dividend 1 year ago, and to date, we have paid $26.7 million. Over the same period, we have repurchased $53.1 million in shares. Our current share buyback authorization is up to 1.5 million shares, and we expect to continue purchasing shares opportunistically. Overall, we had a solid start to fiscal 2027. We are seeing healthy customer demand, strong activity across our strategic focus areas and solid growth across our managed services revenue and offerings. As a result, we are maintaining our fiscal 2027 guidance. We remain focused on executing our strategy, driving greater operating leverage over time and creating long-term value for our customers and shareholders and continue to monitor potential headwinds, including the worldwide memory chip shortage and geopolitical issues, as we have mentioned in the past. With that, I'll turn the call over to Darren to discuss the quarter in more detail. Darren?

Thanks, Mark. I will discuss the quarter, our segments and our overall strategy, and then Elaine will cover our results in more detail. From a product perspective, we had modest growth in both gross billings and net sales coming off a strong year and a tough compare, as Mark noted. A substantial positive for the quarter were bookings and open orders, both up significantly. Open orders were up over $650 million higher year-over-year at quarter end of healthy demand for our breadth of offerings. Outsized AI opportunities, particularly related to AI infrastructure, are surfacing regularly, and we have booked some large AI-linked modern network infrastructure and data center wins across multiple industries, including financial services, telecom, service providers and NeoCloud. While it will take some time to deliver and convert these wins to revenue, they are a testament to our strategic execution. They also highlight our ability to help customers design and provide solutions to support forthcoming AI investments. AI-related demand for infrastructure is robust with a strong pipeline. We are also seeing our clients show interest in exciting services-rich AI offerings such as Agentic AI and Memory as a service. Security remained another area of strong performance with gross billings increasing 15.6% during the quarter. Security is less affected by some of the product availability issues because of the software mix in that product type. More importantly, it remains a priority for our customers. We also had multiple significant multiyear enterprise software licensing agreements of several million dollars or more in security in the first quarter, which contributed to our growth. ePlus provides a wealth of knowledge and expertise to help consolidate multiple security products and platforms, improve the way security is managed across the enterprise and connect customers with our strategic vendor partner solutions. A good way to frame much in the energy we are seeing in the market is the phrase security for AI and AI for security. As I mentioned, we are seeing more services activity and opportunities tied to customer AI initiatives. On the heels of the Realwave acquisition last year, we delivered detailed insights and help a customer to navigate challenges related to some of the recent FIFA World Cup matches. The custom solution included our services with AI, cameras and light detecting and ranging technology layered on top of our Realwave platform. The team did a great job executing on short notice to deliver a successful outcome, creating significant additional opportunities to broaden the potential use cases for this customer and others. Professional services were down slightly with some projects slowed by product delivery delays. Our professional services teams are very involved in all aspects of our business and are important contributors to our product sales as well. Managed services posted double-digit growth once again, eclipsing $50 million for the first time. That is an important milestone for us because it reflects continued execution against our strategy and the progress we have made in building a larger recurring revenue business. Growth was primarily driven by additional revenue tied to cloud and data center services. Customers continue to look for us to provide ongoing management and support across our many offerings. We are working to broaden and expand the managed service portfolio even further to address customer needs and market developments. We continue to have wins across our portfolio of enhanced maintenance and support services within the segment. With regard to a multimillion dollar booking this quarter, we are seeing customers opting for our higher-touch U.S.-based support experience for essentially the same price as the vendor partner equivalent offerings. Our ability to provide these services across multiple vendors adds even more value. We are also winning business for managed backup or disaster recovery initiatives as customers focus more closely on security and risk mitigation. These additional consumption-based OpEx models dovetail with the storage as a service wins mentioned last quarter by helping provide customers with options amid market price increases and other memory shortage-related impacts. Our product offerings and outstanding customer service continues to be recognized by our strategic vendor partners. Following the Dell and Digital Realty awards announced in May, we were awarded HPE's 2026 North America Networking Partner of the Year and Everpure's Service Partner of the Year. We also received SentinelOne's 2026 Momentum Award and Assured Data Protection's North American Top Revenue Partner for 2025. These awards reflect the capabilities, commitment and consistent execution of our team. I'm proud of what we have accomplished. One other note, our employee base increased approximately 1% sequentially. Of the new additions, nearly all of the net incremental employee additions since March 31, 2026, are customer-facing in sales and engineering, demonstrating we remain a growth-focused company that is also actively managing our SG&A with an eye towards generating operating leverage. In summary, the demand environment remains healthy. Our pipeline continues to build and bookings and open orders are strong. We are investing in our solutions and delivering full cycle outcomes in the areas we believe will drive long-term growth in AI, security, cloud, networking and data center. Our agile operating model, broad portfolio and expanding geographic and services capabilities position us well to meet changing customer needs, grow and gain market share. Thank you, and I'll turn it over to Elaine. Elaine?

Thank you, Darren, and thank you, everyone, for joining us. I will review our financial performance for the first quarter of fiscal 2027. We had a solid start to fiscal 2027, especially in light of a challenging year-over-year comparison. As a reminder, the first quarter last year benefited from the timing of large project-specific purchases by certain enterprise customers, which contributed to net sales growth of 20% in that period. Even with that difficult comparison, first quarter consolidated net sales of $649.1 million increased 1% year-over-year as growth in product and managed services was partially offset by a decline in professional services. Gross billings grew modestly, up 0.5% year-over-year to $957.1 million. Product revenue totaled $529.7 million, a 0.6% increase from last year's first quarter, led by continued strength in security and networking as demand in both areas continues to benefit from increased AI adoption. In particular, security remains a key focus area for us and represented 24.2% of gross billings on a trailing 12-month basis. Turning to services. Revenue rose 2.6% to $119.4 million. Managed services delivered a standout quarter with net sales surpassing $50 million and increasing over 15% year-over-year, primarily led by continued strength in managed services related to data center and cloud. We are pleased to see the ongoing momentum and a growing recurring revenue base and continue to build out our offerings to align with customer needs. Professional services net sales declined 5.1% to $68.1 million, reflecting project delays. Looking at our customer verticals, sales remain broad-based. Telecom, media and entertainment and technology are our 2 largest markets, representing 28% and 14% of net sales on a trailing 12-month basis, respectively. Health care, SLED and financial services accounted for 13%, 12% and 11%, respectively, with the remaining 22% divided among other end markets. First quarter gross profit was $151.3 million with a gross margin of 23.3%, down from 23.9% in the prior year. By segment, product margins declined 30 basis points to 21%, reflecting the shift in product mix and a lower proportion of sales of third-party maintenance and subscriptions. Managed Services gross margin declined 100 basis points to 29.4% and professional services gross margin declined 230 basis points to 36.9%, each reflecting a shift in mix of services provided. Operating expenses increased 1.6% to $112.5 million, reflecting higher professional fees and salaries and benefits. Headcount increased by 33 employees compared to the prior year quarter. As Darren mentioned, the bulk of employees were hired in customer-facing roles. Operating income in the quarter was $38.8 million compared to $42.9 million. Other income net was $3.1 million compared to $0.6 million in the prior year quarter, driven by higher interest income as well as lower foreign currency transaction losses. Earnings before taxes totaled $42 million compared to $43.6 million, and our effective tax rate was 27.8% versus 26.5% in the prior year quarter. Net earnings from continuing operations in the fiscal first quarter were $30.3 million or $1.16 per diluted share compared to $32 million or $1.21 per diluted share in last year's first quarter. Non-GAAP net earnings per common share from continuing operations diluted totaled $1.28 versus $1.41 in the prior comparable year. Adjusted EBITDA amounted to $47.8 million compared to adjusted EBITDA of $52.7 million in the prior year quarter. Turning to our balance sheet. Our cash position remains strong, ending the quarter at $448.9 million, up from $410.8 million at the end of fiscal 2026. Inventory decreased $54.9 million to $146 million due to the completion of projects during the quarter. As a result, our inventory days outstanding declined 6 days sequentially, contributing to a 10-day sequential improvement in our cash conversion cycle, which ended the quarter at 41 days compared to 51 days at the end of fiscal 2026. Our strong balance sheet enables us to continue to pursue our capital allocation priorities, investing in organic growth, evaluating strategic acquisitions that expand our capabilities and geographic footprint and returning capital to shareholders through dividends and share repurchases. In the quarter, we repurchased approximately 251,000 shares under our share repurchase program for a total of $20.8 million. We are also pleased to announce a dividend of $0.27 per common share payable on September 16, 2026, to shareholders of record as of August 25, 2026, as well as the Board of Directors authorizing a new repurchase plan of up to 1.5 million shares over a 12-month period commencing on August 11, 2026. With that, I will turn the call back over to Mark. Mark?

Our first quarter results reflect solid execution across the business and reinforce our confidence in the strategy we have put in place. We are continuing to invest for the future by expanding our capabilities, enhancing our service offerings and advancing our AI strategy. At the same time, we are maintaining financial discipline. Our strong balance sheet gives us the flexibility to invest organically, pursue strategic acquisition opportunities and return capital to shareholders through our dividend and share repurchase program. As we look ahead, we are confident in our outlook for fiscal 2027 and remain focused on executing our strategy, deepening customer relationships and creating long-term value for our customers and shareholders. Finally, I'd like to thank our employees for their continued dedication and commitment to our customers. Thank you for joining us today, and we appreciate your continued interest and support. Operator, let's open the line for questions.

[Operator Instructions] Your first question comes from the line of Greg Burns with Sidoti & Company.

The $650 million of open orders that you mentioned in the quarter, what was that up on a percentage basis? And what's your view on the timing of when some of this backlog gets converted into revenue?

Greg, it's Darren. I'll give you the overall numbers. So it was above $1.5 billion in total at the end of the quarter, and it's even higher than that at this point. A portion of that is ratable subscription type thing, but the vast majority of it is not that way, but it will take some time to flush. We're thinking that we're going to see some of that in the back half of the year, but it will be over time beyond that as well.

Okay. And are you seeing like increased activity like amongst your larger customers or maybe just your customers in general in terms of getting ahead of this if lead times are extending? Or are you seeing the pipeline fill at a faster rate?

We're seeing it broadly across the customer base. In general, there are some large customers that are accelerating some purchases per se. But it's just -- it's a testament that the strategy is working, all the different conversations we're having, a lot of it is AI related, but it's pretty broad at this point in a good way.

Okay. I guess maybe this leans on that a little bit. But last year was a very strong year in terms of large enterprise orders. It's creating some difficult comparisons for this year. But what is your view on maybe the pipeline of larger enterprise type opportunities this year, similar to what you saw last year?

Very similar. The activity, the requests we're getting, the pipeline of quotes and RFPs and such, there's a lot of large opportunities out there. Obviously, we have to convert them as well, and we saw some of that in the quarter, which was great.