ePlus(PLUS) - 2025 Q2 - Earnings Call Transcript

Financial Data and Key Metrics - Consolidated net sales decreased by 12.3% YoY to $515.2 million, primarily due to a decline in product sales, which was partially offset by strong growth in higher-margin services revenues [9][22] - Gross profit increased by 2.5% YoY to$ 148 million, driven by strength in services and higher product margins, with gross margins expanding by 410 basis points to 28.7% [10][27] - Operating income decreased by 4.8% to $42.7 million, and net earnings declined by 4.1% to$ 31.3 million, or $1.17 per diluted share [29][30] - Adjusted EBITDA for the quarter was$ 52.1 million, down from $53.6 million in the prior year [30] Business Line Performance - Technology business net sales declined by 13.8% YoY to$ 493.3 million, reflecting lower product sales, particularly in hardware, due to softer demand and a tough comparison with the prior year [22][23] - Service revenues grew by 46% YoY to $104 million, driven by both professional and managed services, with managed services revenue up 28% YoY [12][24] - Financing segment net sales increased to$ 21.9 million, up from $15.7 million in the prior year, primarily due to higher transactional gains [26] Market and Customer Vertical Performance - Sales in the technology business were broad-based, with telecom, media, and entertainment accounting for 25% of net sales, while technology verticals represented 18% [25] - SLED, healthcare, and financial services accounted for 15%, 13%, and 9% of net sales, respectively, with the remaining 20% spread across other end markets [25] Strategic Initiatives and Industry Competition - The company continues to focus on AI, cloud, networking, data, and security, with the acquisition of Bailiwick enhancing its IT integration services and expanding its footprint in North America [7][14][15] - The AI Ignite program and the launch of the AI experience center with Digital Realty are key initiatives to position the company for AI market opportunities [17][18] - Security gross billings grew by 15.8% in the quarter, now representing 21.4% of trailing 12-month gross billings, reflecting continued customer investment in data security and governance [20] Management Commentary on Operating Environment and Future Outlook - Management noted a shift towards ratable revenue models and netted down revenues, which impacted product sales but contributed to higher gross margins [8][10] - The company expects positive comparisons for sales and earnings in fiscal 2025, with adjusted EBITDA guidance revised to$ 195 million to $205 million [38] - Economic uncertainty, election impacts, and AI-related sales cycle elongation were cited as headwinds, but the company remains optimistic about long-term growth opportunities in AI and security [41][50] Other Important Information - The company repurchased 250,234 shares during the first half of the fiscal year at a cost of$ 19.8 million [36] - Cash and cash equivalents declined to $187.5 million, reflecting working capital needs, the Bailiwick acquisition, and share repurchases [34] - Inventory turns improved to 12 days, reducing the cash conversion cycle to 32 days compared to 51 days in the prior year [35] Q&A Session Summary Question: Product demand and macro environment impact [40] - Product sales were softer than expected due to economic uncertainty, delayed enterprise spending, and AI-related decision-making delays [41][42] - Gross to net adjustments for product billings increased by 940 basis points, impacting revenue by approximately$ 60 million [42] Question: Bailiwick acquisition impact on revenue and margins [43] - Bailiwick is expected to contribute approximately $85 million in revenue in the second half of the fiscal year, with margins in line with the company's existing profile [43][44] - Organic professional services growth was in the 6% to 8% range, with managed services up 28% YoY [45] Question: OpEx impact from Bailiwick acquisition [46] - OpEx is expected to increase in Q3 due to full-quarter headcount and acquisition-related expenses [47] Question: Gross margin outlook [48] - Gross margins are expected to tighten in the second half, with product sales and services both expected to increase [48] Question: Macro assumptions in updated outlook [49] - The company expects hardware challenges in Q3, with potential impacts from elections, tariffs, and interest rates, while AI spending remains a headwind in the near term [50] Question: Early client feedback on Bailiwick acquisition [51] - Internal feedback on Bailiwick has been positive, with excitement about the team, offerings, and customer base [51]