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Edited Transcript of PLUS earnings conference call or presentation 22-May-19 8:30pm GMT

Q4 2019 ePlus inc Earnings Call

HERNDON Jun 6, 2019 (Thomson StreetEvents) -- Edited Transcript of ePlus inc earnings conference call or presentation Wednesday, May 22, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Elaine D. Marion

ePlus inc. - CFO

* Kleyton L. Parkhurst

ePlus inc. - Senior VP of Corporate Development & Assistant Secretary

* Mark P. Marron

ePlus inc. - CEO, President & Director

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Conference Call Participants

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* Brett Anthony Knoblauch

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Gregory John Burns

Sidoti & Company, LLC - Senior Equity Research Analyst

* Margaret Marie Niesen Nolan

William Blair & Company L.L.C., Research Division - Analyst

* Matthew John Sheerin

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen. Welcome to the ePlus Earnings Results Conference Call. As a reminder, this conference call is being recorded. I would like to introduce your host for today's conference, Mr. Kley Parkhurst, SVP. Sir, you may begin.

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Kleyton L. Parkhurst, ePlus inc. - Senior VP of Corporate Development & Assistant Secretary [2]

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Thank you, Daniel, and thank you for joining us today. On the call is Mark Marron, CEO and President; and Elaine Marion, Chief Financial Officer. 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 Form 10-K for the year ended March 31, 2018 and our Form 10-K for the year ended March 31, 2019, when filed. The company undertakes no responsibility to update any of these forward-looking statements in light of the new information or future events. In addition, during the call, we may make reference to non-GAAP financial measures and 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'll now like to turn the call over to Mark Marron. Mark?

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Mark P. Marron, ePlus inc. - CEO, President & Director [3]

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Thanks, Kley. And thank you, everyone, for participating in today's call to discuss our fourth quarter and full year fiscal 2019 results and accomplishments. I will start with an overview of the fourth quarter results, do a deeper dive into the business trends that drove our fiscal 2019 performance and then provide additional color on our thinking heading into this new fiscal year.

First, to our fourth quarter results, in which we reported strong growth in adjusted gross billings of 6.8%. The gross billings to net sales adjustment was 33.7% in the quarter representing a 580 basis point increase versus last year's 27.9%, and up from 23.2% just a few years ago. By contrast, net sales declined 1.3% due to industry trends that we've been discussing over the last several quarters, namely, the transition to as-a-service and ratably recognize revenue. We are seeing higher contributions from software, maintenance and subscription-based solutions that are recognized on a net basis along with our push to drive, more optimized or annuity services that are recognized ratably. Consolidated gross margin reached 25% in the quarter, up 30 basis points year-on-year. Lower technology segment comparisons with the last year's fourth quarter were more than offset by improved financing segment margins. Excluding the gross to net impact, this was a difficult quarter for product margins as we had a tough compare with last year and also had several deals at lower margins as part of our land and expand initiative. With that said, we continue to expand our customer base, which provides us with the ability to up-sell and cross-sell our solutions and services.

As we continue to expand the Lifecycle Services we provide to our customers, we are now breaking out our services revenue, which accounted for almost 14% of the fourth quarter revenues, up 22.8% over the same period last fiscal year. Fiscal 2019 was a successful year for ePlus across a number of key metrics including growth in adjusted gross billings, services revenue, gross margin, net income and EPS.

There are 3 key takeaways I would like to focus on: one, we grow our services business nicely and are now disclosing services revenues and cost; two, we increased our gross margin; and three, we invested in our business, both organically and the acquisition to support future growth. All of this has come together to further strengthen our market positioning even from where we were 1 year ago.

Let me provide additional color on each of the 3 areas. First, growth in our services business. Our services revenues have increased at a CAGR of just under 24% over the last 3 years and we believe our services gross margins are very strong compared to many of our industry peers. We will continue to expand our consultative and advisory services along with optimized services that monitor and manage our customers' IT infrastructures. At the same time, we are providing staffing resources to support what our customers are trying to accomplish enabling them to focus on their core business. This allows us to stay close to our customers while a portion of this provides annuity quality revenue to our base of business.

In addition, this year's reclassification from gross to net was approximately $590 million. Keep in mind that this provides us with important renewal opportunity as it relates to subscription-based software and maintenance contracts giving us an additional source of annuity-like revenues.

Second, we continue to see gross margin improvement. For fiscal 2019, our consolidated gross margin reached an industry-leading 24.1%, up 130 basis point year-on-year. We believe this demonstrates the value that our clients place in the customized solutions that we are providing, particularly in our key focus areas of cloud, security and digital infrastructure. Additionally, gross margin benefited from the expansion of our services portfolio and the flexibility and margin of our financing business, which is a key competitive differentiator for ePlus.

Finally, investment in our business. We continue to invest in customer-facing headcount and the expansion of our solutions and service offerings along with broadening our reach to support our enterprise, mid-market, state, local and education customer base. Along those lines, the acquisition of SLAIT, in late January, expanded our geographic footprint and service offerings while expanding our security consulting and managed service capabilities. It is important to note that we are continuing to see our industry transition to solutions sold on a subscription or ratable basis. While this trend started several years ago, we have seen it exhilarating over the last 12 months. Our vendors are increasingly transitioning to this model and many of our customers prefer purchasing this way.

Thanks to our size and scope of our operations, ePlus is well positioned to support our customer base with many innovative consumption models they may prefer. This gives us the opportunity to leverage our financing arm, which is a significant competitive advantage for ePlus as compared to our peers given our extensive underwriting experience financing a wide array of IP products, services and software assets.

Also security continues to be a significant area of focus for ePlus and its customers. Security products and services represented nearly 20% of our adjusted gross billings for fiscal 2019. Security remains at top of mind for many CIOs within our customer base. I will now turn the call over to Elaine, to discuss the financial results of the fourth quarter and our fiscal 2019.

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Elaine D. Marion, ePlus inc. - CFO [4]

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Thank you, Mark, and thank you, everyone, for joining our call. Let me give you some more detailed overview of our financial performance in the fourth quarter and full fiscal year 2019. Starting with the quarterly results, our consolidated net sales amounted to $325.4 million, 1.3% below the $329.9 million reported in the fourth quarter of fiscal 2018, mainly due to a higher percentage of third-party software subscriptions and maintenance sales recorded on a net basis.

Adjusted gross billings amounted to $472.4 million, a 6.8% increase compared to $442.5 million in the same period a year ago reflecting strong demand for our products and services. The adjustment from adjusted gross billings to net sales was 33.7% in the fourth quarter of 2019 compared to 27.9% in the year ago quarter reflecting a higher portion of third-party software subscriptions and maintenance sales.

In our technology segment, our service revenues increased to $45 million or 22.8% in the quarter due to an increase in managed services and staff augmentation. Our services include revenues from professional services, managed services and staff augmentations.

Our financing segment had revenue growth of 14.2% to $12.3 million compared to $10.7 million in the fourth quarter and fiscal 2018 reflecting higher transactional gains.

While gross profit was essentially flat at $81.3 million, our consolidated gross margin expanded 30 basis points to 25%, mainly due to the increase in sales recorded on a net basis and an increase in service revenues and gross profit in the financing segment. Gross margin in the technology segment declined 10 basis points to 22.7% due to a less favorable mix of products and services. We had several large, competitively priced product orders and had a shift in services with staff augmentation and enhanced maintenance services, which yielded lower margins than professional services.

Staff augmentation and EMS offer more consistent revenue streams and helped build annuity-quality revenue. Offsetting this was a positive impact on margins from an increase in the gross-to-net reclass. Operating expenses for the quarter amounted to $66.8 million representing 5.8% increase from $63.1 million. This is mainly attributable to a 3.9% increase in salaries and benefits as a result of higher headcount primarily due to the acquisition of SLAIT Consulting and an increase in health care costs. Please note that our total headcount at the end of March 2019 amounted to 1,537 compared to 1,260 due to the acquisition that I just mentioned, which brought on 256 professionals.

Our G&A expenses increased mainly due to the SLAIT acquisition. As a result of higher SG&A as well as an increase in acquisition-related amortization, operating income for the quarter declined 21.8% to $14.5 million from $18.5 million in the comparable quarter last year.

Other income was $5.6 million for the quarter primarily due to distribution from a bankruptcy case. Our tax rate for the quarter was 24.8% compared to 51% in the year ago quarter. Last year's quarter contained an adjustment from the remeasurement of our deferred tax assets and liabilities relating to the Tax Cuts and Jobs Act. Our consolidated net earnings were $15.1 million or $1.12 per diluted share compared to $8.9 million or $0.65 per share last year. Non-GAAP diluted earnings per share were $1.03 compared to $1.06 in the fourth quarter of fiscal 2018. Our diluted shares outstanding totaled 13.5 million for the quarter compared to 13.8 million at the end of fiscal 2018 as we repurchased 185,000 shares for a total of $14.1 million.

Now let me briefly summarize our financial results for the full fiscal year 2019. Our net sales reached $1.37 billion, 3.3% below the $1.42 billion reported in fiscal 2018.

Technology segment net sales decreased 3.2% to $1.33 billion and net sales in our financing segment decreased 6.3% to $43.2 million due to lower post-contract revenues. Net sales decreased in the technology segment primarily due to an increase in sales reported on a net basis.

Adjusted gross billings for the full year increased to $1.92 billion compared to $1.90 billion in fiscal 2018 despite the large competitively bid project that was partially completed last year.

Looking at our end markets in our technology segment for fiscal 2019, technology and SLED were once again our largest markets representing 22% and 17% of segment net sales, respectively. Health care and financial services each represented 15% while Telecom, Media & Entertainment accounted for 13%, the remaining 18% is attributed to certain smaller clients that we classify as other. Gross profit for fiscal 2019 was up 2.1% and amounted to $330.4 million. Consolidated gross margin was 24.1% representing a 130 basis point expansion from fiscal 2018 due to a more favorable mix of products and services.

Service revenue increased 15.4% over last year. Gross profit in the financing segment decreased $470,000 to $35.7 million. Other income of $6.7 million included distributions from claims at a bankruptcy. Our tax rate for fiscal 2019 was 26.7% as compared to 34.3%. Net earnings increased 14.6% to $63.2 million and fully diluted earnings per share were $4.65, up 17.7%. Non-GAAP earnings per diluted share was $5.12 compared to $5.04 in fiscal 2018.

Moving to the balance sheet. We ended the year with cash and cash equivalents of $79.8 million compared to $118.2 million at the end of fiscal 2018. The decrease was primarily due to $50 million paid for the SLAIT acquisition in January of 2019 and $14.1 million spent to repurchase our stock. Our net inventory increased by 26.7% year-on-year due to an increase in projects underway for specific customers.

Current deferred revenue increased by 32.5% to $47.3 million primarily due to our managed and professional services offerings. For modeling purposes for fiscal year 2020, we expect our effective tax rate to be between 28% and 29% and expect intangible amortization expense to be approximately $9.8 million for the year. Going forward, our capital allocation strategy remains the same, pursue growth opportunities, both organic and through acquisitions and share repurchases. We will continue to focus on adding capabilities in the faster growing segments of the market and believe we are well positioned to outpace the overall IT market growth for the foreseeable future. Thank you for your time today. I will now turn the call back over to Mark.

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Mark P. Marron, ePlus inc. - CEO, President & Director [5]

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Thanks, Elaine. While less favorable products mix impacted our fourth quarter year-on-year comparisons, one quarter does not make a trend. We are very pleased with our positioning heading into fiscal year 2020 as market demand remains positive and we've made focus investments into solutions areas necessary to capture opportunities. Many of our customers are involved in a business model transformation adopting digital infrastructure as multi-cloud environments, IoT and utilizing AI and data analytics to drive efficiencies in their internal IT as well as improving their own customer experience. And virtually all of our customers consider the security as the #1 threat to their businesses. In each of these areas, ePlus has the right solutions whether it be integrating leading vendors' products and services or providing professional or managed services, all in an advisory approach delivered by our consultants.

We are currently serving over 3,400 middle-market enterprise and state, local and education customers and we have the resources to drive organic growth as well as to take advantage of the acquisition opportunities that present the right fit. We continue to execute effectively on the key elements of our strategy, namely, growing our services revenues, which have been increasing at a significant double-digit rate, increasing our security products and services, which now account for approximately 20% of our business and completing acquisitions that are building our capabilities and footprint. We believe, we are well positioned in a market that continues to evolve and transform. Going forward, we expect to balance our growth initiatives with actions to optimize product mix and core structure while providing the solutions and services our customers need in the way they want to consume them. I will now open the call for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Maggie Nolan with William Blair.

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Margaret Marie Niesen Nolan, William Blair & Company L.L.C., Research Division - Analyst [2]

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Mark, Elaine, I wanted to dive into kind of that last comment that you just made, Mark, when you're talking about balancing growth initiatives to optimize product mix. What does an optimized product mix look like to you all? And what are some of the things you can do to kind of achieve that and better balance it as you said?

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Mark P. Marron, ePlus inc. - CEO, President & Director [3]

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Well, there's a few things there, Maggie. So one, as you know, in our prior calls, we've talked about continuing to expand our customer-facing headcount, so in terms of getting the productivity piece of that, it would be getting those sales reps and service engineers up to speed quicker and delivering results. On the optimize side, there are some things that we've looked at within our expense structure that we think, over time, we should be able to get some operating leverage. And then the second or third piece of that, I guess I should say would be services. We think over time we'll continue to get operating leverage within our services business, specifically our annuity services where revenue should continue to trend up where expenses don't keep up at the same pace.

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Margaret Marie Niesen Nolan, William Blair & Company L.L.C., Research Division - Analyst [4]

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Okay. Great. And then -- but really happy to see that breakout of products and services. I think that will be really informative going forward. Obviously, there's a little bit of variability there in terms of just my initial calcs with the margin -- gross margin profile looked like, this quarter, the same quarter last year, this year versus last year. So can you give us an expectation of what you would consider to be a kind of a normalized range for gross margin for both products and then for services as well?

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Mark P. Marron, ePlus inc. - CEO, President & Director [5]

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Okay. So here are a couple of different things, Maggie, to give you a feel. So if you look at our services, so -- and we've talked about it, which is -- I think Elaine and I are relieved that what actually is starting to break it out, which will make the conversations easier. Our services for this quarter were up at a 22.8% growth rate and 14% of our overall revenues for the quarter. What's nice about our services though over the last 3 years, we've had a CAGR of 24% and more importantly, or annuity services are more than double that in terms of the CAGR over the last 3 years. Now to your question that gets a little bit harder in terms of giving you a true margin mix, is what we saw this quarter is we had some increase in our staffing services that are traditionally at a lower margin than our professional services. And then what's interesting about annuity is, as I've mentioned a little bit earlier, as we continue to drive those revenues up, the expenses won't keep up, so those blended margins should continue to go up. So if I had to put a ballpark on it, in the 38% to 40% range, if I had to put a ballpark on it. Overall blended service is all clear.

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Margaret Marie Niesen Nolan, William Blair & Company L.L.C., Research Division - Analyst [6]

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That's very helpful. And then I'm wondering if I heard you properly. So I heard some mention of the land and expand approach and it seems like, maybe some of that hit in the fourth quarter here. And then Elaine, you also mentioned on -- mentioned some competitively -- some large competitively priced product orders. So is there a larger project kind of ramping up now? And can we expect that to contribute in 2020? Am I interpreting that properly?

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Mark P. Marron, ePlus inc. - CEO, President & Director [7]

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Yes. Well, yes and no, Maggie. So I'll start off and then if Elaine wants to jump in is, what we saw was we actually had a really tough compare on our product margins over the last year, so that was one of the factors that affected our gross -- I should say, our GP for this quarter. And then we did have a few nice size deals that we used our land and expand where we were aggressively going in to win the deal and then a number of time we think the margins will go up. So we'll continue to do that. Ballpark, we were up 175, 180 customers year-on-year. So what we like about that is we're building up our customer base that we can continue to go back and up-sell and cross-sell all the different services and solutions that we're focused on.

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Elaine D. Marion, ePlus inc. - CFO [8]

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Yes. And Maggie, just to add to that. One thing that impacts our product margins that you see on now the income statement is that growth to net variance, and that does swing quarter-to-quarter depending on what that product mix is. So there's 2 things that impact the product margins, one is the actual margin that we sell the products for, but two is that growth-to-net impact. And we've said this quarter that it was up quite a bit, on a quarter-over-quarter basis, 580 basis points over the last year's quarter. So that -- while the product margins were impacted by the large competitively priced product transactions negatively, the growth-to-net impact improved margins, so you're seeing kind of an offset there.

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Mark P. Marron, ePlus inc. - CEO, President & Director [9]

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Yes.

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Margaret Marie Niesen Nolan, William Blair & Company L.L.C., Research Division - Analyst [10]

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That's helpful. And then just one more quick one if I can. A little more color on kind of preliminary outlook of 2020? Is this a year where we continue to focus on gross margin expansion? Do you expect to see revenue growth come back a little bit? How should we be thinking about this upcoming year here?

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Mark P. Marron, ePlus inc. - CEO, President & Director [11]

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So customer demand is still solid, Maggie. We haven't seen any slowdowns and feel good where we look so far through the quarter and where the year looks. If I had to look at it where it gets a little bit tougher, on the sales growth. If you look at -- I'd never thought we'd have 34% in terms of gross to net from an adjustment of 580 basis points that Elaine's talked about from an increase. So I think if that continues and as our software subscription licensing continues to grow, which is also taken out of net, I think that will be tough on the top line. I think as we expand our services and some other things, we should see some uptick in the gross margin. But also want to be very clear here, our gross margins for this quarter were 25% and when I look at the year, we are at 24.1%, which was up 130 basis points over last year. So there's not a lot of -- I don't think it would be a big uptick as it relates to gross margins, but the customer demand looks solid.

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Margaret Marie Niesen Nolan, William Blair & Company L.L.C., Research Division - Analyst [12]

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And not a big uptick related to that 25% that you exited the year at or related to that 24% for the full year?

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Mark P. Marron, ePlus inc. - CEO, President & Director [13]

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Well, I think you got to start at the 24%, Maggie, because you got to look at -- I would look at each of the quarters last year and not see a solid uptick in -- as it relates to gross margin. What I would stress is something that we talked in other calls, I would focus on gross profit, so that's really what we are focused on driving. Now gross margin and top line is obviously important but we're trying to -- we've moved away from the commodity sales, we're trying to draw more of these solutions that are value add to the customers that they're willing to pay more for and drive the services, both consultative as well as annuity. So it's really about the GP is what we're focused on.

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Operator [14]

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Our next question comes from Greg Burns with Sidoti.

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Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [15]

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Just going back to the split out now with the service -- services piece. You talked about the 3-year CAGR of around 24%, but going forward, do you -- is that kind of -- how you think of that business growing prospectively?

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Mark P. Marron, ePlus inc. - CEO, President & Director [16]

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Greg, really good question. I think that gets a little bit tougher, just normal math, as the numbers get bigger, I think it'd be tougher to kind of keep up with that percentage. With that said, we do expect services to continue to grow and be a big contributor to our gross profits as we go forward. Because as we move more into the consultative and provide more annuity services for our customers across cloud, security and digital, we think there's opportunity within our existing customer base and net new customers.

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Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [17]

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Okay. Great. And then in terms of the land and expand, I guess what dictates I guess your willingness to accept lower margins? Like is there a certain size of the deal like a prospective size of the deal? And maybe historically, can you give us a little idea of like how this has worked out in the past? Maybe you've accepted lower margins on some upfront sales. And what you were able to accomplish by winning that customer through that land and expand strategy?

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Mark P. Marron, ePlus inc. - CEO, President & Director [18]

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Yes. So Greg, so first of all, it's not like we're just taking any deals at any margin, it's really strategic account. So accounts that we've identified for our regional vice presidents in the field that come to us that they feel as a strategic account for them to win within their region. And then secondly, is that they have an IT budget that is substantial that we would then be able to go back in and after providing something, let's say, a lower margin, be able to go back in and provide all the consultative and annuity services and other solutions that we have that kind of drive those margins up. So it's mainly focused on strategic accounts that are identified either at the national or at the regional level. It's not -- we track it -- by the way, we have systems in place for deals based on a certain size, not to go below a certain margin, have to actually go up for our COO to get approval. But it's mainly on strategic accounts, we think we can then grow to be substantial accounts for ePlus.

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Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [19]

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Okay. Great. And then security. What percent of adjusted gross billings was that this quarter? And what was the growth rate?

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Mark P. Marron, ePlus inc. - CEO, President & Director [20]

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It was 19.3%, I believe, is what it was. And last year, it was like -- I want to say, 18.6%.

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Elaine D. Marion, ePlus inc. - CFO [21]

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Yes, it was for the year. Right.

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Mark P. Marron, ePlus inc. - CEO, President & Director [22]

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For the year.

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Elaine D. Marion, ePlus inc. - CFO [23]

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For the quarter, it's 20.6%.

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Mark P. Marron, ePlus inc. - CEO, President & Director [24]

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20.6%? Okay. 20.6%, Greg.

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Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [25]

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Okay. And lastly, you talked about investing in the customer-facing assets and headcount. Can you give us an idea of what the current utilization rate is now? Or a sense of kind of your capacity -- your existing capacity and maybe the need to add there? And how do you determine when new assets need to be added?

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Mark P. Marron, ePlus inc. - CEO, President & Director [26]

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Yes. I got you. Now -- hey, Greg, that's kind of a broad question. So there's a few things that kind of go into it. So one, I'll give you a little historical and then I'll try to address what you're saying. So we've made investments that we believe have paid off and I'll give you just a couple: one of our strategic initiatives was to expand our geographic reach and our customer base and we've done that; second is, was to build out our service capabilities and our offerings that we talk about and you heard it was up 22.8% for the quarter and there was a CAGR of 24% over the last 3 years. Years ago, we invested in a small security company and said that we're going to build up our security expertise and right now, it's almost approximately 1/5 of our overall adjusted gross billings or business; and the third was, we were going to sell -- or fourth, I should say, was going to sell solutions that were going to increase our gross margins. And for this quarter, it was 25%; for the year, it was 24.1%. So we feel good that we're making the right investments. We also feel like we're in a space now, we're at a size and scale that we can continue in investing customer-facing headcount, both from a sales and services because our customer base is growing. And over time, we're going to look to get that operating leverage, whether it be from a cost perspective or, more importantly, hopefully, from a productivity perspective. Did that give you what you were looking for?

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Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [27]

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Yes. Yes. And I guess when you do that headcount, how do you determine -- what's I guess full capacity? How quickly do they get ramped up to scale? And maybe -- with your existing tax and -- salesmen, how much more growth or room to -- how much utilization are you getting out of them now, I guess, is what I'm trying to get at?

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Mark P. Marron, ePlus inc. - CEO, President & Director [28]

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Okay. Utilization, so here, we've got, I'll call them, quotas and processes in place. So both from a sales as well as from a services perspective, there's a certain productivity that's expected. But as you can imagine, whether it's on the sales or services side, it's normally a quarter or so before people ramp up and we kind of track that religiously. So we've got reports that actually track from our top rep to our bottom rep, what type of GP they've driven and what areas they've driven in and it is hitting the expected targets and goals. And then we have utilization that we track both for our presales as well as post-sales resources. And Greg, that's one thing we do have tracked pretty tightly. You can count on that.

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Operator [29]

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(Operator Instructions) Our next question comes from Matt Sheerin with Stifel.

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [30]

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Just another question on the gross margin. And -- I mean I know it was 25%, but it was down a little bit on the technology side. You talked about the mix there and the fact that there are some competitive deals. As you look at your pipeline over the next quarter or 2, I mean you're still looking at that land and expand strategy where you may give up a little bit of margin just to win business and establish those relationships. So -- because I know, in Maggie's question, you talked about maybe gross margin sort of stabilizing from here. I mean is that one of the reasons?

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Mark P. Marron, ePlus inc. - CEO, President & Director [31]

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Well, no, I don't know if that's one of the reasons, Matt. The reason I was somewhat conservative with Maggie, is when you look at it -- at 24.1% gross margins and 25% for the quarter, it's pretty much -- I believe, it's some of the highest in the industry. So we're in that phase of continue to build out the solutions and services, so do we believe it potentially could uptick? Yes. But we've had, to give you a feel, over the last few years, I think our gross margins have grown 250 basis points, right? So I just don't think it's realistic to think that, that will continue. Do we have land -- to your question, do we have land and expand deals? Yes, we always have them in the pipeline. But realize, those are deals that we've got to go in, we've got to build the customer relationship that we don't have, we have to provide some type of value, not just price that they see a reason to invest in us, as they go forward. So they'll always be there, but there's nothing specific that I know of right this minute that's going to happen.

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [32]

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Okay. And then -- so your -- can you talk about the contribution from that SLAIT acquisition? I know they're focused on services, so -- whether the billings growth or other metrics, so we can sort of back that out and look at your organic numbers in the quarter.

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Mark P. Marron, ePlus inc. - CEO, President & Director [33]

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So from an adjusted gross billing, approximately 50% of the upside on the adjusted gross billings was from SLAIT, the rest was organic, Matt. But like anything with most of the acquisitions, they take time from when we acquire, when they get settled in for us to see the true upside. What I will tell you about SLAIT that we are kind of excited is, we've talked about expanding our geographic coverage and our technical expertise and SLAIT actually gives us both. With that acquisition, we believe, we're a dominant player in the mid-Atlantic. The other thing is, they had SLED relationships and contracts that we're going to be able to leverage across the rest of ePlus in those regions. And then on top of that, they had some security expertise and programs that, we believe, we're going to be able to build out our security revenues and capabilities, in addition to having a nice staffing business that we're going to add to the existing staffing business we're doing. So it's a nice -- we believe, it's a nice add for us. But like all acquisitions, you start to see the return in subsequent quarters more and more as they get to know ePlus and all the offerings.

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Matthew John Sheerin, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [34]

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Okay. Great. And then as you look at just the spending environment, we're hearing from some of the storage players that your -- last night, night after night, it sounded like there's some pushouts of some big deals. There's also a concern about tariffs and we're also seeing increase in tariffs on networking equipment, like Cisco and others. Are you seeing any impact there on the demand front or customers pausing at all?

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Mark P. Marron, ePlus inc. - CEO, President & Director [35]

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No. So 2 different things: one, we haven't -- so your first quarter with the storage play, and just overall, we haven't seen any drop-off in our pipeline or forecast or customer demand, in fact, customer demand is fairly solid from what we've seen so far; on tariffs, it's still a little early. Now there's 2 things that can come into play with that though, Matt. It could either potentially pull a deal forward if the vendor hasn't implemented tariffs and you could pull it in for this quarter or if they haven't implemented tariffs, you may have some customers that may wait and see to see if those tariffs are going to go away. But so far, I've not heard anything or seen anything through -- well, through our first half of our quarter effectively and haven't heard anything from our sales leaders that is holding up a deal or bringing a deal forward just yet.

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Operator [36]

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And our next question comes from Brett Knoblauch with Berenberg Capital Markets.

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Brett Anthony Knoblauch, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [37]

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So I guess just a couple of things. Just on the SLAIT acquisition. I guess, was that -- I know when you initially announced that this will be a bit dilutive. Was that kind of in the range of what you were expecting? I mean, does that have anything to do with the year-over-year decrease in gross profit? Or is that solely due to the competitive price project and tough comp in terms of product mix?

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Mark P. Marron, ePlus inc. - CEO, President & Director [38]

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Brett, I apologize, you broke up a little. So I'm not sure what your question was. Can you ask that again?

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Brett Anthony Knoblauch, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [39]

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Yes. I am sorry. I was just asking if the SLAIT acquisition played a part in gross profit declining year-over-year. Or if that was solely due to the tough comps and product mix plus the competitively bid priced project?

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Mark P. Marron, ePlus inc. - CEO, President & Director [40]

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Yes. It did not affect the GP. In fact, it would've helped if anything, right, in terms of GP. So it was more the product margins that was the big effect on our GP and then some of the competitively priced deals, obviously affect GP, more affect our gross margins because you're getting the incremental GP, I guess. But that's how I look at that one.

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Brett Anthony Knoblauch, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [41]

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Okay. That helps. And then just that big increase year-over-year in that gross to net adjustment. I guess, is that something you see continually stepping up? Or do you think 34% is kind of going to be -- kind of the top and then that should help flow -- feel some revenue growth going forward?

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Mark P. Marron, ePlus inc. - CEO, President & Director [42]

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Brett, here is the easiest thing. I never would've thought we'd be at 34%. So I'm guessing, probably about 4 years ago, we were in the 23%, 24% range. I'm going on memory, but I won't be off by a lot. For the year, we were at 30.7%, so on a -- just short of the $2 billion business, that's a big swing in terms of gross to net, in terms of roughly $600 million going from gross to net. So do I expect that it may continue? Yes, we've seen it kind of trend up because: one, we've got loyal customers that we're able to go back and continually renew their maintenance. I don't want to jinx myself by saying that, but that's part of the gross to net. The other thing we're seeing is our software is picking up. So as the customers are looking for new buying models and a lot of our security vendors are software and subscriptions, if you will, that are recognized on a net basis. I would expect it to potentially trend up for a little while. But really, this is one of those things I think we've got to -- as we continue to transform with the market, see where it takes us.

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Brett Anthony Knoblauch, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [43]

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Okay. And then just one more is my thinking correct that if you have a higher gross to net adjustment, shouldn't that kind of help benefit the gross profit? Since as you're recognizing more on that basis, so shouldn't -- if you had a nice -- or a big increase in that adjustment, that should help benefit gross profit.

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Mark P. Marron, ePlus inc. - CEO, President & Director [44]

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Yes -- no. Gross margin, not gross profit, if you will. So wouldn't -- it would help your gross margins where they would be higher. The things that will affect your gross profit, Brett, are effectively if we were to build up our services, which are stronger gross margins and our product sales and then if we didn't have the tough compare or the hit we took this quarter with the product margins. And if I could, just for everybody on the call too is, when I looked at the quarter, I wouldn't say it was a strong quarter as traditionally from an ePlus perspective, but I never look at a quarter as a trend and there's a lot of positives that have been happening, both in the quarter and as well as what we see in the future.

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Operator [45]

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And I'm not showing any further questions at this time. I'd now like to turn the call back over to Mark Marron for any closing remarks.

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Mark P. Marron, ePlus inc. - CEO, President & Director [46]

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All right. Thanks, Daniel. Hey, everyone, just want to thank you for taking the time to listen to us on the call. We appreciate you listening in and will speak to you soon. Take care.

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Operator [47]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a wonderful day.