ePlus (NASDAQ:PLUS) Q2 2027 Earnings Call

0:00 Good day, ladies and gentlemen. Welcome to the E-plus second quarter fiscal year 2027 earnings results conference call. As a reminder, this conference call is being recorded. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. I would like to introduce your host for today's conference, Mr. Kley Parkhurst, Senior Vice President. Sir, you may begin.

0:38 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 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 on the earnings release we issued this afternoon. and our periodic filings with the Securities and Exchange Commission, including our most recent annual report on Form 10-K, quarterly reports on Form 10-Q, and other documents we may file with the SEC.

1:26 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 the Gap Financial Reconciliation in our earnings release, which was posted on the investor information section of our website at www.eplus.com. I'd like to turn the call over to Mark Marron. Mark?

1:55 Thank you, Kley. Good afternoon, everyone, and thank you for joining us for our fiscal second quarter 2027 earnings call. In the second quarter, we delivered robust growth across key metrics with improved profitability and a record quarter for gross billings. Net sales increased nearly 10% and gross profit increased 11.2% with adjusted EBITDA growing even faster. We achieved improved operating leverage in our business with operating income up 15.8% and expect that trend to continue in the second half of our fiscal year. What is noteworthy is that our growth was largely organic and was spread across our diversified customer base. Lastly, the combination of our strong backlog and pipeline with open orders up nearly $750 million compared to last year underscores our confidence as we shift to the second half of fiscal 2027.

2:51 Our balance sheet is healthy with the cash possession of $381 million at quarter end, providing flexibility to invest in organic growth, pursue strategic acquisitions, and return capital to shareholders via dividends and share repurchases. Furthering that strategy was our acquisition of Daymark Solutions during the quarter. Daymark broadens our presence in the Northeast market and it brings us a Microsoft Tier 1 CSP certification with expertise in highly regulated and data-intensive industries, which we believe we can scale across all of Eplus markets. Daymark complements our existing offerings and creates additional opportunities to deliver integrated solutions to a broader customer base.

3:36 Exiting the domestic finance business last year has enabled us to focus solely on the faster growing areas of AI, cloud, data centers, security, and networking. As customers navigate increasingly complex IT requirements, they are looking for partners that can help them modernize infrastructure, strengthen security, and deploy emerging technologies effectively. AI remains an important catalyst for technology investment and represents a significant long-term growth driver for us. We are seeing this demand translate into business opportunities, particularly across data center, agentic AI, and security. On the operational front, we are modernizing our internal systems and processes, including leveraging AI to improve efficiency and support greater operating leverage over time.

4:26 Our solid performance in the quarter and year to date reflects successful execution of our strategy, the strength of our diversified business model, and our ability to drive profitable growth. Given our strong first half performance, the healthy demand environment, and significant growth in bookings and open orders, we are raising our fiscal 2027 guidance and now look for upper single digit growth in both net sales and gross profit with adjusted EBITDA expected to grow into low double digits reflecting operating leverage inherent in our business. In closing, we remain confident in our strategy and our ability to capitalize on the opportunities ahead while maintaining financial discipline and a balanced approach to capital allocation.

5:12 I'll turn the call over to Darren to discuss the quarter in more detail. Darren?

5:18 Thank you, Mark, and good afternoon, everyone. I will discuss the second quarter and overall strategy relating to our business segments in more detail. Then Elaine will cover the second quarter financial results. We had a strong quarter in our product business with net sales increasing 12.8% year over year to 547.1 million, and we achieved record gross billings exceeding 1 billion. Additionally, open orders were up nearly 750 million year-over-year, led by data center and cloud, with additional growth in networking and security. These results reflect healthy demand across our broad portfolio. We are also seeing a significant increase in AI-related customer engagements, ranging from use case validation to purchasing and implementation.

6:05 As customers advance these initiatives, they are looking to Eplus to help design, deploy, and secure the infrastructure required to support increasingly complex workloads. This activity is contributing to our strong pipeline and buildup of open orders. Data center and cloud net sales grew 39.2% in the quarter. We secured several multi-million dollar wins across data center, cloud, security, and networking, fueled by AI and IT modernization initiatives. A few examples include assisting a NeoCloud customer with data center connectivity requirements for build-offs around the globe, helping a service provider evaluate compute options and configurations to deliver business outcomes for its customers, and supporting a utility as it updates its growing storage environment.

6:53 We are also working with DefenseTech to design solutions and investments in secure network infrastructure. Security also performed well, with product net sales increasing 10.3% during the quarter. On a trailing 12-month basis, sales of security products represented 22.9% of gross billings. We are seeing a wide range of opportunities to engage our security practice from both a product and services perspective. Cybersecurity remains a priority for our customers as they manage increasingly complex IT environments and others. We are also seeing security more closely integrated with infrastructure projects as customers look to deploy AI securely and at scale. Our skills and experience in this area enable us to help customers better secure their environments, consolidate into platform solutions and make more effective investments.

7:50 Turning next to services, Customers increasingly look to Eplus to provide a full lifecycle suite of services from design to ongoing management and support across their technology environments. Managed services continue to strong performance with net sales increasing 12% year over year driven by several different portfolio offerings, including storage as a service and enhanced maintenance services. We continue to work alongside our partners and customers to broaden and expand our portfolio. These recurring services support longer-term customer relationships and the base for recurring revenue. Professional services net sales declined against a difficult comparison, as the prior year quarter was our strongest professional services quarter to date.

8:35 The decline was primarily related to project delays among large retail customers, which had a particularly strong quarter last year. We are continuing to invest in exceptional talent, such as our field chief technology officer and principal technologist teams to facilitate and drive additional strategic services engagements. Professional services is an integral part of our overall business. What often begins as a product opportunity at times requires extensive collaboration between our sales organization, highly skilled technical resources, and customers. Our ability to bring together multiple technologies and partners and design solutions around specific customer requirements is an important competitive differentiator. Our extensive portfolio of professional and managed services allows us to augment and support customers throughout the technology lifecycle, from planning and design to implementation and management. This services-led approach distinguishes Eplus and reinforces our role as a trusted, value-added solutions provider.

9:39 Reflective of that, both our partners and our customers regularly recognize and reward Eplus for this significant distinction During the second quarter, Eplus became the first company in North America to achieve ever-pure ambassador status. We were also named NetApp North American Flash Partner of the Year, and we became a Certified Services Partner in Anthropix Claude Partner Network. These distinctions reflect the depth of our capabilities, the commitment of our teams, and our continued investment in areas that matter to customers. To conclude, we are enthusiastic about the continued growth in our product business Momentum and AI-related engagements, pipeline of quality services opportunities, and noteworthy open orders. As customers modernize their IT environment and strengthen cyber resilience, our deep relationships and broad portfolio of products and services position us well to meet their evolving needs. We remain focused on engaging around our multi-architectural capabilities in high-growth markets, continually enhancing our professional and managed services offerings, and leveraging our services-led operating model.

10:48 Thank you. I will now turn it over to Elaine to discuss our financial results in more detail. Elaine?

10:55 Thank you, Darren, and thank you everyone for joining us. First, I will review our financial performance for the second quarter of fiscal 2027, which ended September 30th, 2026. We delivered solid second quarter results with growth across our key financial metrics and record quarterly gross billings of $1.07 billion. We also continued to generate operating leverage as adjusted EBITDA grew 14.3%, outpacing net sales growth of 9.7%. We were particularly pleased with this improvement in light of the difficult comparison from last year's second quarter when net sales grew more than 23% and adjusted EBITDA grew more than 39%. Consolidated net sales in the quarter totaled $667.9 million, up 9.7%, as double-digit growth in product and managed services was partially offset by lower professional services revenue. Gross billings rose 4.3%, reflecting continued momentum across our strategic focus areas, including AI, data center, and cloud, and security.

12:05 Product segment net sales increased 12.8% to $547.1 million, led by data center and cloud, where AI-related demand increased significantly and strength from security and collaboration, as Darren noted. Services revenue was $120.8 million compared to $123.8 million in the second quarter of fiscal 2026. Managed services revenue grew 11.9% to $53.1 million, and David Mellor. Thank you for joining us today. as last year's second quarter was our largest professional services revenue quarter to date.

13:07 Our sales by vertical remain broad-based. On a trailing 12-month basis, telecom, media, and entertainment accounted for 26% of net sales and healthcare for 14%. Technology, SLED, and financial services accounted for 13%, 12%, and 12% respectively, with the remaining 23% divided among other end markets. Second quarter gross profit was $180.3 million, an 11.2% increase from $162.1 million in the prior year quarter, and gross margin expanded 40 basis points to 27%. Product segment gross margin increased 130 basis points to 25.8%, reflecting a shift in product mix and an increase in revenue from third-party maintenance and subscriptions.

13:58 Services growth margin was 32.5% compared to 34.8% a year ago, reflecting a shift in mix in both segments. Managed services growth margin was 28.8% versus 29.4%, mainly driven by increased third-party costs. And professional services margin declined at 35.4% from 38.2% due to a higher proportion of third-party costs and lower professional services revenue. Operating expenses increased 9.2% to $123.8 million. The increase was mainly due to higher salaries and benefits driven by growth in customer-facing headcount and higher variable compensation tied to the increase in gross profit. We added 35 employees when compared to last year's quarter, 19 of which were from the Daymark acquisition.

14:51 The second quarter also included certain costs related to the acquisition of Daymark, and professional fees as we continue to enhance our systems and processes to drive efficiencies. Operating income rose 15.8% to 56.5 million. Earnings from continuing operations before taxes increased 3.7% to 56 million as higher operating income was partially offset by other expense of 500,000 compared to other income of 5.2 million in last year's second quarter. The decline reflects lower interest income, foreign exchange losses of $300,000 versus a gain of $700,000 last year and a $3.5 million decrease to the fair value of the contingent consideration associated with the sale of our domestic financing business. Our effective tax rate was 27.9% down from 29.3% due to state and local taxes and non-deductible expenses.

15:55 Net earnings from continuing operations were $40.4 million or $1.56 per diluted share, up 7.6% from $38.2 million or $1.45 per diluted share in last year's second quarter. Non-GAAP diluted earnings per share increased 19% to $1.82. Adjusted EBITDA grew 14.3% to $67.1 million from 58.7 million in the prior year quarter. Turning to the first six months of fiscal year 2027, consolidated net sales rose 5.2% to 1.32 billion, led by a 6.5% increase in product segment sales.

16:40 Services revenue was flat year to date as 13.4% growth in managed services was offset by lower professional services revenue. Gross billings increased 2.5% to $2.02 billion. Consolidated gross profit grew 5% to $331.6 million, and gross margin held steady at 25.2%. Net earnings from continuing operations were $70.7 million, up 0.7% from $70.2 million in the prior year, and diluted earnings per share was $2.72 up from $2.66 in the first half of fiscal year 2026. Non-GAAP earnings per share grew 5.1% to $3.11 and adjusted EBITDA rose 3.2% to $114.9 million. Moving to the balance sheet, we ended the quarter with cash and cash equivalents of $380.9 million compared to $448.9 million at the end of the first quarter. The sequential change primarily reflects an increase in inventory, which ended the quarter at $271.4 million, up from $146 million as of June 30, 2026.

17:58 The increase relates to several projects for a large customer that we expect to ship in the second half of the fiscal year. Our cash conversion cycle improved to 36 days from 41 days at the end of the first quarter. Our strong balance sheet gives us flexibility to execute our capital allocation priorities, which include investing in organic growth, pursuing strategic acquisitions, and returning capital to shareholders through dividends and share repurchases. On that note, we repurchased approximately 148,000 shares during the quarter, bringing our first half Thank you all for joining us.

19:04 reinforce our confidence in the strength of our business and the opportunities ahead. We are executing well across core markets, expanding our capabilities, and positioning Eplus to benefit from continued customer investment in AI, security, cloud, and data centers. With strong open orders, a solid balance sheet, and an increased outlook for fiscal 2027, we remain focused on profitable growth and delivering long-term value for our shareholders. Finally, I would like to thank our employees for their continued dedication and commitment to our customers. Thank you for joining us today and for your continued support. Operator, you may open the call to questions. We will now begin the question and answer session. Please limit yourself to one question and one follow-up.

19:52 If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Greg Burns with Sidoti Company. Your line is now open. Please go ahead.

20:27 Good afternoon. Can you just maybe give us an update on what you're seeing in terms of supply constraints, particularly around memory, how that might be impacting the business and, you know, your view on maybe when you might get some relief on that front?

20:47 Hi, Greg. It's Darren. Good. There are some still issues in the compute space on the memory side. It's more on the high-end compute, especially the GPU type arenas. and there's some delays that's also causing in the high-end networking space. But in general, it's not affecting broadly across the market as far as delays. It's just more about price increases than anything else. Hope that answers it for you.

21:15 Okay.

21:16 So, yeah, I guess so then the follow-on.

21:18 So what is causing the large increase in the open orders if, you know, there's not really

21:25 supply issues and maybe could you give us what the number was like what is that 750 off of uh increase off of like where was that last year yeah so so even with the uh the increase in gross billings the record gross dollars we had it's about a 300 million dollar increase from where we were last quarter on the open order side of things the backlog of open orders is some of that higher end networking and some of that higher end data center stuff that we're seeing in the market and we're also seeing more activity overall, which is helping to build the numbers.

21:59 Hey, Greg, if I could add, we are seeing an accelerating adoption of AI around the modernization space. The demand for, as you know, in terms of data center infrastructure has picked up across the board and there's more emphasis on cybersecurity with what's going on. So that's all fits within our sweet spot in terms of where our strengths are, both from a services and from a product perspective.

22:25 Okay thanks just lastly what was like the the year-over-year increase like that 750 is up off of like is it up 100 percent from last year like what was the number last year?

22:37 Well it's a it's about a it's over 1.8 billion total so that gives you 1.1 billion.

22:47 Okay great all right thank you yeah I got it thanks for your questions Greg. Your next question comes from the line of Maggie Nolan with William Blair. Your line is now open. Please go ahead.

23:03 Hi. Maybe I could come at the open orders from a slightly different angle. When you think about the raised guidance, what's the assumption there for conversion rates in the second half versus what you experienced in the first half?

23:18 Hi, Mike. It's Darren again. I think we're just seeing some of that come to fruition now. We've been building the open orders over previous quarters, and we're starting to see some of that flush. You saw some of the inventory that Elaine mentioned as well, and we expect some of that to go out. A good portion of that inventory to go out the second half of the fiscal, and it's just a lot of really positive activity. So while the open orders are building and a good portion that will push into FY28, we expect to see increasing growth as the year has progressed in the fiscal.

23:53 Okay, thank you. And then on the higher third-party costs and the professional and managed services, can you talk about how that's impacting customers and pricing and how you're thinking about that going forward?

24:08 From the cost and professional service, third-party cost and professional service, we have a lot of partners that we work with. So some of that just may be the mix of who's delivering which services that we have in the portfolio. More than anything else, the product costs are being passed through to the customers on that side of things, on the vendors.

24:32 But can the more expensive third party costs also be passed through effectively?

24:38 Yes. Yes. They're all built into how we place our projects for the customer base.

24:43 Yes. And Maggie, some of that is reflective of the business. The Bailey Wick acquisition had a higher proportion of third party costs in that business. So some of that's reflective of that blend.

24:55 Understood. Thank you, guys.

24:58 Thanks, Maggie. Thanks, Maggie. There are no further questions at this time. I will now turn the call back to Mark Marron for closing remarks.

25:08 Thank you, everyone. Look, we believe it was a very solid quarter on a really tough compare last year. We had record gross billings and believe we're well positioned for the second half. If you look at this quarter, we saw really nice operating leverage where both operating income and adjusted EBITDA exceeded the growth of our net sales and gross profit, and we expect that to continue in the second half. We're excited about the momentum we're starting to see with our AI and cybersecurity solutions, the strength of our diversified customer base, and the flexibility in our cash, I should say our balance sheet in cash, where it provides both the growth opportunity with M&A as well as organic hires, but also, as Elaine noted, with the first half of buying back 400,000 shares with share buyback and dividends.

26:02 and that allowed us to increase our guidance both across net sales, GP and adjusted EBITDA. So with that, I want to thank you all for attending today's call. I wish everyone a happy and healthy holiday season and we look forward to seeing you or hearing from you on next earnings call. Take care and have a good night. This concludes today's call. Thank you for attending. You may now disconnect.