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ePlus Inc (PLUS 3.33%)
Q2Â 2021 Earnings Call
Nov 4, 2020, 4:30 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, ladies and gentleman. Welcome to the ePlus Earnings Results Conference Call. [Operator Instructions]. I would like to introduce your host for today's conference, Mr. Kley Parkhurst, Senior Vice President. Sir, you may begin.
Kleyton Parkhurst -- Senior Vice President and Assistant Secretary
Thank you for joining us today. On the call is Mark Marron, CEO and President; Elaine Marion, CFO; Darren Raiguel, COO and President of ePlus Technology; and Erica Stoecker, General Counsel. I want to take a moment to remind you that the statements we make this afternoon that are not historical facts may be deemed to be forward-looking statements and are based on management's current plans, estimates, and projections.
Actual and anticipated future results may vary materially due to certain risks and uncertainties detailed in the earnings release we issued this afternoon and our periodic filings with the Securities & Exchange Commission including our Form 10-K for the year ended March 31st, 2020, and our form 10-Q for the period ending September 30th, 2020, when filed.
The Company undertakes no responsibility to update any of these forward-looking statements in light of new information or future events. In addition, during the call we may make reference to non-GAAP financial measures and we have included a GAAP financial reconciliation in our earnings release, which is posted on the Investor Information section of our website at www.eplus.com
I'd now like to turn the call over to Mark Marron. Mark?
Mark Marron -- Director, President and Chief Executive Officer
Thank you, Kley and thank you everyone for participating in today's call to discuss our fiscal 2021 second quarter results. There are several key takeaways from the quarter that I believe are important. First, we continue to successfully execute in a challenging business environment, supporting our customers with the solutions and services they need while addressing the health and safety of our staff.
Second, we are leveraging our scale and broad capabilities to address the IT requirements of enterprise customers where demand for products and solutions was strongest in the second quarter. And we continue to serve our mid-market customers as well, many of whom have required additional value added services from us as they are experiencing reduced staffing levels, yet need to support remote workforces as well as continue on the path of digital transformation to remain competitive.
Third, we are focused on optimizing our cost base while aligning resources to focus on growth areas and meet our customers' needs. Second quarter operating expenses declined 5.6% year-on-year attributable to reduced travel and entertainment expense and we are looking for long-term structural savings in areas such as facilities. During the quarter, operating income was up year-over-year even with the tough comparison.
Next, our portfolio approach of offering technology and financing to our clients provides ePlus a competitive advantage during these uncertain economic times. And finally, ePlus' strong balance sheet gives us the financial flexibility to make organic investments to drive growth and to consider acquisitions. Our second quarter was another period of strong execution in a challenging business environment. Our team continues to operate effectively and support our customers with the products and services they require for remote and hybrid workforces.
We have continuously adjusted our go-to-market plans and services delivery models to meet the challenges of the current environment. The positive for ePlus is our solutions, services and investments have always been focused on current and future customer needs. And we have the engineering and vendor credentials to pivot and adjust to changing requirements in the most relevant areas such as cloud, security, digital transformation and collaboration.
We are pleased to report that our technology segment grew both product sales and services revenues, which was even more impressive, given the very difficult comparison from last year. During the second quarter, our 5.4% technology net revenue growth reflected strong demand for our solutions and services led by diverse customer segments, including our largest enterprise customers and our state, local and education customers.
Given our continued emphasis on managed services, which offer annuity quality revenue and the build out of our related service offerings, we saw a year-on-year growth in services in the second quarter of 2.8% on top of 35% growth in services last year. Our professional and staffing services continues to be impacted by COVID-19 which limits access to customer facilities and can slow down projects.
We experienced a strong quarter for product sales to enterprise customers, which tend to be lower margin, as well as a change in business mix versus last year. While this pressured our gross margin, it remains at industry high levels. We believe that after investing in cloud, networking and security upgrades as a result of the early COVID-19 remote workforce initiatives, many customers turned to upgrading their end user devices which are typically sold at lower margins and require less services.
In addition, there was a very strong demand in the state, local and education space for these types of products. We also experienced a lower gross to net adjustment which impacted margins, which Elaine will discuss. More importantly, we fulfilled our customers' needs in a challenging environment and we remain very well positioned to continue to supply them as their trusted partner. At the same time, we made progress reducing operating expenses and other costs, which declined 4.2% sequentially, primarily reflecting reduced travel, entertainment and marketing expenses.
This led to growth in operating income despite lower gross profit. While we expect some of the cost to return once the pandemic passes, we continue to seek to optimize cost by taking additional actions, including reducing our facilities costs. ePlus has always had a conservative approach to credit risk and continues to benefit from its diversified customer base in many different industries with technology, telecom, financial healthcare and state, local and education representing the largest verticals.
Importantly, we have very limited exposure to categories that have been hardest hit by COVID such as hospitality, travel and retail. During these challenging times, many customers are looking for flexibility, cost savings and operational efficiencies from their technology partners along with building a stronger security postures. Some of the ways we've been able to help our customers in these solution areas is with enterprise software license agreements, cloud collaboration solutions and serviced [Phonetic] as deals along with providing flexible payment terms.
Shifting to our financing business is a key competitive advantage for ePlus. Clients can access our financing offerings to close budgetary gaps consistent with prior periods of economic softness. We think our financing arm has an important role to play with our state, local and education customers, given the likely reduction in state tax revenues associated with COVID-19. For example, we have been and will be able to provide the solutions they need now, while reducing their overall long-term costs. Our strong balance sheet provides us with the financial flexibility and the ability to continue to make organic growth investments and seek out acquisitions at a time when others are financially constrained.
We continue to look for opportunities to expand our geographic footprint and our solution set and service offerings. I will now turn the call over to Elaine to discuss the financial metrics of the second quarter, Elaine?
Elaine Marion -- Chief Financial Officer
Thank you, Mark, and thank you everyone for joining us today. We are pleased with our fiscal 2021 second quarter results.
Our consolidated net sales for the second quarter were $433.1 million, an increase of 5.2% from the prior year's quarter mainly due to increased demand from our enterprise and state, local and education customers and particularly for product sales as we sold more hardware during the quarter.
In the technology segment, net sales increased 5.4% year-over-year, to $419.4 million with product and service revenues increasing 5.8% and 2.8% respectively. The increase in service revenues was due to our emphasis on managed services and in particular, strength from our enhanced maintenance support offering. Adjusted gross billings were $601.1 million, a 3.8% increase from $579.1 million in the year ago quarter.
The adjustment from adjusted gross billings to net sales was 30.2% compared to 31.3% last year as we had a particularly strong growth period for sales of third-party maintenance software and services last year. Financing segment revenue decreased 0.9% to $13.7 million as an increase in transactional gains was more than offset by lower post contract earnings during the quarter. Results from our financing segment tend to be uneven from period to period.
Looking at our end markets in the technology segment on a trailing 12 month basis, Telecom, Media, & Entertainment and Technology continue to be our two largest customer end markets accounting for 20% and 19% of Technology net sales, respectively. State, Local and Education, Healthcare and Financial Services followed accounting for 16%, 15% and 13% respectively.
The remaining 17% were distributed among several other customer types. Consolidated gross profit decreased 3.9% to $99 million from $103 million in the prior year. Consolidated gross margin was down 210 basis points to 22.9% compared to 25% last year. Gross profit for the Technology segment decreased 4.8% to $87.2 million, primarily due to the decline in product margins. Product margin was 18.6%, a decrease of 230 basis points due to higher sales of hardware to enterprise customers during the period and a decrease in the proportion of sales recorded on a net basis.
Service margin was down 130 basis points to 37% primarily due to an increase in revenue from managed services, which tend to be at a lower average margin. In the financing segment, gross profit increased 2.7% to $11.8 million due to lower depreciation costs from operating leases. Consolidated operating expenses decreased 5.6% to $70.5 million. We benefited from lower travel and entertainment and advertising and marketing expenses due to COVID-19 travel restrictions that were on place.
Partly offsetting the decrease was a $719,000 increase in SG&A related to a higher allowance for credit losses within our financing segment due to growth in our financing receivables. Last year's quarter included partial quarter of salaries and benefits from the ABS acquisition, resulting in a lower compare. Our consolidated headcount at the end of September 2020 was 1,497, a decline of 8.1% compared to 1,629 last year, and a decline of 2.5% from the sequential quarter. Consolidated operating income increased 0.4% to $28.5 million. Our effective tax rate for the quarter increased to 30.8% above last year's 29.1%, due to an adjustment to the federal benefit from state taxes. For the year, we expect our tax rate to be between 29% and 30%.
Our consolidated net earnings amounted to $19.8 million or $1.48 per diluted share, down 1.3% and 2% from $20.1 million or $1.51 per diluted share respectively last year. Non-GAAP diluted earnings per share were $1.68 compared to $1.81 last year. Our diluted shares outstanding totaled 13.4 million, the same as in the year ago quarter.
I will now turn to our consolidated year-to-date results. Net sales for the first six months of fiscal 2021 decreased 0.6% to $788.1 million. Net sales in the technology segment decreased 0.7% to $760.6 million and adjusted gross billings increased 1.8% to $1.1 billion. Consolidated gross profit amounted to $197.5 million, a 0.9% increase.
Consolidated gross margin expanded 40 basis points to 25.1% and our technology segment gross margin increased 30 basis points to 22.9%. Net earnings grew 2.5% to $37.2 million or $2.78 per diluted share. Adjusted EBITDA increased 0.5% to $64.3 million and non-GAAP diluted earnings per share decreased 2.1% to $3.19.
Moving to the balance sheet, we ended the quarter with cash and cash equivalents of $161.1 million, an increase of 86.8% from March 31st, 2020 due to decreased working capital in our Technology segment. The majority of the increase in cash is related to certain of our manufacturer partners temporarily offering extended terms due to COVID-19.
The largest program ended on October 24th, 2020 and therefore we expect our working capital to normalize. As a reminder, we also have approximately $181 million in our financing portfolio and historically we have been able to monetize transactions within our financing portfolio by funding those transactions with third-party financial institutions.
Inventory levels increased to $73.8 million reflecting committed projects under way. Our inventory levels vary depending on specific customer projects and progress. Our cash conversion cycle at the end of the quarter was 23 days, a decrease of two days compared to the year-ago quarter and an improvement from 30 days at June 30th, 2020. Considering the environment we operate in right now, we continue to monitor the impact of COVID-19 on our business and capital allocation priorities.
At the same time we constantly evaluate opportunities to invest in our business organically and via acquisition. COVID-19 continues to impact our customer base, particularly in the mid-market. As the pandemic continues, we are uncertain as to how it will affect demand in the second half of fiscal 2021. We focus on innovative solutions for medium and large commercial businesses as well as state, local and higher education customers and we continue to believe our solutions are well positioned in the marketplace.
Most of our employees continue to work from home except for certain roles in our configuration centers: Those on site at our customer locations and; those who have voluntarily returned to our headquarters. As we approach our 30th anniversary, I am delighted with our success and culture, which has shined throughout the pandemic. Our employees have worked tirelessly juggling careers and families since the pandemic began, and I would like to thank them for all their diligence and strength.
Thank you for your time today, and I will now turn the call back over to Mark. Mark?
Mark Marron -- Director, President and Chief Executive Officer
Thanks, Elaine. I'm pleased with the ability our team has shown over the last few months to pivot where the business has shifted and to sell the solutions and services that are most in demand. We continue to manage well through a difficult environment and have taken steps to emerge a leaner enterprise aligned to growth areas and with the lower cost base.
Our competitive advantages, including our highly qualified team of sales professionals and engineers and our strong balance sheet support our long-term growth potential.
Operator, I would now like to open the call for questions.
Questions and Answers:
Operator
Certainly. [Operator Instructions]. Your first question comes from the line of Maggie Nolan from William Blair. Your line is open.
Maggie Nolan -- William Blair -- Analyst
Thank you. Hi, Mark and Elaine.
Mark Marron -- Director, President and Chief Executive Officer
Hey Maggie.
Elaine Marion -- Chief Financial Officer
Hey, Maggie. It's Elaine.
Maggie Nolan -- William Blair -- Analyst
Hi. I know, Elaine, you were saying it's difficult to assess the impact of COVID from here on out. But a lot of companies that have been seeing that maybe in the June quarter was kind of at the low point from a COVID standpoint for a lot of the services businesses. As you look at the next couple of quarters, do you think you can build on the sequential growth, kind of continue that trend going forward, just keeping in mind that COVID aside, you've got some tough compares on a year-over-year basis as well, particularly coming up in that December quarter.
Mark Marron -- Director, President and Chief Executive Officer
Yeah. Hey Maggie, it's Mark. How are you? So related to services, one, it was a tough compare. So, last year it was up roughly 35%. What we saw in the services space is a couple of different things we've talked about over time. In the annuity part of our business, it was actually pretty strong. So the things we've talked about with managed services, enhanced maintenance services was actually pretty strong is what -- and what kind of carried our services. We did see where there were some projects where customers were just buying products in some of the enterprise accounts. And we also saw some of the -- what I'd call project services and staffing was actually down year-over-year, mainly due to not being able to get on site at our customer sites.
Maggie Nolan -- William Blair -- Analyst
Got it. Then, as you think about moving forward plus direct contact as you're just kind of mentioning, have there been changes to the pricing structure of your services deal?
Mark Marron -- Director, President and Chief Executive Officer
To the pricing? No difference on the pricing. In fact what you normally see in that space and what we've seen Maggie, if you're providing the right value from a consultative and annuity, the customers are willing to pay for it because they need the service. So haven't seen anything dramatically related to any kind of what I'd call price reductions in that space.
Maggie Nolan -- William Blair -- Analyst
And then on the margin side of things in the prepared remarks, you mentioned some long-term structural savings. Can you give us an idea of what the new kind of normalized margin profile of the Company might look like given some of these structural changes to expenses?
Mark Marron -- Director, President and Chief Executive Officer
Yeah. Hey Maggie, there is a few things there. So I'll do kind of your gross margins and then drop down to your -- I'll call it, operating margins for lack of anything else. On the gross margins what we saw this quarter was, it was a really tough compared to last year. If you look at our margin, so that was the first thing that came into play.
The other things that affected our gross margins this quarter, one was a lower gross to net which affected our margins by about 100 basis points. We also -- as we talked on prior calls, it wasn't land and expand in this case, but we had some of our bigger enterprise customers that were buying laptops, kind of the commodity play that we don't normally play that were at lower margin.
So between the tough compare, the gross to net, and kind of the product margins on some of those bigger deals, that's what affected our gross margins. What I think you're starting to see in our opex is, we've obviously seen savings in our travel and entertainment, you're seeing some savings in our acquisition-related cost, if you will. And I think over time, you'll see a little more operating leverage as it relates to just operating expenses overall, as we go forward.
As we kind of streamline things, for example, when folks are leaving through attrition, we're not hiring. We aren't making hires as it relates to strategic hires, but I think you'll see some savings as we move through the coming quarters.
Maggie Nolan -- William Blair -- Analyst
All right, thank you. Good talking to you guys.
Mark Marron -- Director, President and Chief Executive Officer
You too Maggie, we'll see you soon.
Operator
Your next question comes from the line of Matt Sheerin from Stifel. Your line is open.
Matt Sheerin -- Stifel Nicolaus -- Analyst
Yes, thank you. A question Mark, just following up on Maggie's question regarding demand. You did talk about, you saw a big increase sequentially in products. But it sounds like more transactional type of products, you did talk about client devices and laptops. But could you be more specific in terms of what you're seeing? And is that more on the client device side versus network infrastructure storage and servers?
Mark Marron -- Director, President and Chief Executive Officer
Yeah, Matt. So we did see some on the device side that we normally don't sight. As we've kind of talked about in previous calls, we moved away from the commodity play years ago and kind of tried to move toward the value-add with the services and higher end kind of value products.
With that said, in the new market that we're in with COVID, we've had some of our bigger customers looking for some serious laptop orders that we've been able to fulfill, as you know at lower margins. With that said though, we're still fulfilling infrastructure needs for our customers. So as they're building up their devices and working from home, we're building out their infrastructure. We're supporting a lot of customers move to the cloud, and then we're seeing a lot in the collaboration and security space as well.
So it's kind of across the board, what we're -- what we're seeing there. We are seeing a little uptick in software as well. With some of the software plays that are out there. With customers leveraging what we call enterprise license agreement, so kind of gives them a -- the flexibility on licensing and also in some cases, it reduces their cost if they make a longer-term commitment. So we're seeing some of that as well, Matt.
Matt Sheerin -- Stifel Nicolaus -- Analyst
And in terms of the -- the strength that you're seeing on the product side, are you seeing that continue where there is some backlog particularly maybe on the client devices where there's still some product constraints and particularly on, in the enterprise, I mean, sorry the education space with Chromebooks?
Mark Marron -- Director, President and Chief Executive Officer
Yeah. Well, not so much in the education space for us. Matt. That's not where we play as we've talked about with Chromebooks. So for us, our SLED was up nicely and a lot of it believe it or not, was in the state and local space that was up real nice for us. And the reason being is leveraging some of our financing capabilities, we're able to help some of those state and localities that are going to have some issues, due to tax revenues going forward.
So we had a nice quarter for SLED overall. But state and local was up, K-12 was up actually with some devices and higher end was actually down a little bit this quarter where last quarter it was up.
Matt Sheerin -- Stifel Nicolaus -- Analyst
Okay. And just talking to customers and I'm sure all of your sales folks have been talking to customers, what's your sense of budgets, are you going to see, kind of the normal budget flush or are things on hold and things being switched around just because of priorities and still COVID concerns?
Mark Marron -- Director, President and Chief Executive Officer
Yeah, good question, Matt, I think it's a few things I think things are being moved around a little bit based on what technology needs the customers have. Some are trying to do a leap, what I'd call a leap forward and buying newer technologies to kind of enable their business from a digital transformation.
But to be honest with you, it's still really hard. Matt, if you think of what we're going through with COVID and how hard it is to predict and all the uncertainty there, then you throw in the election and not knowing what's going to happen with the HEROES act or the stimulus, which could help with some of the spending in some of the verticals that we play in.
It's kind of tough to predict. We are seeing that the enterprise seems to have the budget to be able to make the purchases they need to make and others it's kind of on a case-by-case basis. But we are seeing some budgets being extended and some sales cycle being extended due to COVID.
Matt Sheerin -- Stifel Nicolaus -- Analyst
Okay. And just last from me on the M&A front, and you've certainly been very active there and it's been a big part of the growth strategy. Just can you talk about in the environment now, vis-a-vis COVID and potential challenges there in terms of, in terms of doing deals?
Mark Marron -- Director, President and Chief Executive Officer
Yeah, it's -- Matt, it is active. So there are a number of companies that are out there actively looking to be acquired. So the market hasn't slowed down as it relates to opportunities. Where it gets tougher is, normally, you'd go and do your due diligence on site and with COVID with all the regulations across state lines, it makes a little bit more difficult and probably extends the timeline in doing M&A based on having to do a lot of it virtual versus face to face.
And then also understanding once you, when you're acquiring a company, you kind of want to sit across from the people and get to know them and have them get to know you to feel good. So some of that has obviously slowed down due to COVID, but in terms of opportunities and acquisition opportunities that are out there, it's still fairly robust across the board, both from a territory and from a technical standpoint.
Matt Sheerin -- Stifel Nicolaus -- Analyst
Understood. Okay, thanks a lot, Mark.
Mark Marron -- Director, President and Chief Executive Officer
All right, see you Matt.
Operator
[Operator Instructions]. Your next question comes from the line of from Brett Knoblauch from Berenberg Capital. Your line is open.
Brett Knoblauch -- Berenberg Capital Markets -- Analyst
Hi guys, thanks for taking my question. I was just wondering if you could maybe expand on the headcount reductions, you talked about. Is this may be due to a combination of attrition is downsizing or are you guys just trying to drive efficiencies and maybe what do you expect that to look like going forward?
Mark Marron -- Director, President and Chief Executive Officer
Yeah. I think -- hey, Brett, it's more about realigning. So as the market is changing, as it relates with the drive toward cloud, all the security opportunities that come into it, the consultative opportunities that we're seeing from our customers that need, we're kind of realigning resources. We've made some decisions with underperformers, so make no mistake about that and through attrition, where we haven't backfilled.
So we've been able to pair back the head count that way in a logical way. We've made the commitment to our employees that we're keeping everybody and doing everything in our power, but we're still going to continue to manage to the business. The other thing is, we do have recs [Phonetic] open, so there are hires that we want to make. And based on what Elaine talked about in her piece, our financial stability kind of gives us, our balance sheet gives us that ability to make those decisions as we move forward.
Brett Knoblauch -- Berenberg Capital Markets -- Analyst
Perfect, thank you.
Mark Marron -- Director, President and Chief Executive Officer
Okay. Brett. Hey, thank you. I think -- any other questions?
Operator
There are no further questions at this time. I turn the call back to Mark Marron, CEO for closing remarks.
Mark Marron -- Director, President and Chief Executive Officer
All right, thank you. If I could thank everybody for joining us and more importantly, hope everybody has a healthy and happy Thanksgiving and holiday season with everything we've gone through in 2020, just enjoy with your family and friends. Be safe and take care. We'll see you in February. Thank you.
Operator
[Operator Closing Remarks].
Duration: 28 minutes
Call participants:
Kleyton Parkhurst -- Senior Vice President and Assistant Secretary
Mark Marron -- Director, President and Chief Executive Officer
Elaine Marion -- Chief Financial Officer
Maggie Nolan -- William Blair -- Analyst
Matt Sheerin -- Stifel Nicolaus -- Analyst
Brett Knoblauch -- Berenberg Capital Markets -- Analyst
