ePlus Inc. — Form 10-Q summary
Business context and period: ePlus provides IT products, software, professional and managed services, and customer financing. This report covers the quarter and six months ended September 30, 2016 (the second quarter of fiscal 2017), compared with the same periods in 2015. Amounts below are in millions of dollars unless stated otherwise.
Key financial results
| Metric | Three months ended Sep. 30, 2016 | Year-over-year change | Six months ended Sep. 30, 2016 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $371.5 | +10.5% | $670.0 | +10.5% |
| Gross profit | $81.9 | +13.9% | $149.6 | +14.2% |
| Gross margin | 22.1% | +0.7 percentage points | 22.3% | +0.7 percentage points |
| Operating income | $28.2 | +5.8% | $45.7 | +9.5% |
| Operating margin | 7.6% | -0.3 percentage points | 6.8% | -0.1 percentage points |
| Net earnings | $16.8 | +7.0% | $27.4 | +12.1% |
| Diluted EPS | $2.42 | +12.6% | $3.91 | +16.7% |
| Adjusted EBITDA (non-GAAP) | $29.9 | +7.4% | $49.2 | +11.4% |
Product and services sales increased 11.4% for the quarter and 11.6% for the six-month period. Adjusted gross billings, a non-GAAP operating measure, rose 13.0% and 15.9%, respectively, reflecting a higher mix of third-party services reported net of related costs. Product and services gross margin increased to 20.2% for the quarter and 20.5% year to date, helped by sales mix and higher vendor incentives.
Operating expenses grew faster than sales: 18.7% for the quarter and 16.3% for the six months. Management attributed the increase mainly to variable compensation and added staff; total headcount rose 9.9% year over year to 1,096. Accordingly, operating margin declined despite higher gross profit.
Segments and notable comparisons
- Technology: Six-month net sales rose 11.4% to $654.2 million and operating income rose 9.6% to $39.1 million. Growth was attributed to customer demand, including large corporate and state and local government/education accounts, and the IGX acquisition.
- Financing: Six-month net sales fell 15.4% to $15.8 million, mainly because portfolio earnings and transactional gains were lower. Operating income nevertheless increased 8.6% to $6.6 million, as lower direct lease costs more than offset revenue weakness. Quarterly segment operating income declined 7.4%.
- More than 70% of the increase in product and services sales came from large corporate and SLED customers. Cisco represented about 49% of trailing-twelve-month sales; Cisco, HP/HPE and NetApp together represented 60%.
Cash flow, liquidity and debt
- Cash and cash equivalents were $48.0 million at September 30, down $46.7 million from March 31, 2016. Six-month operating cash flow was negative $43.8 million, versus negative $21.5 million a year earlier. Increased trade receivables and inventory were the main working-capital uses; inventory was $80.5 million, up from $33.3 million at fiscal year-end.
- Investing cash outflow was $18.6 million, principally from financing receivables; financing cash inflow was $15.3 million. The company repurchased $30.5 million of stock during the period. The technology-segment cash conversion cycle increased to 16 days from 12 days a year earlier, primarily due to inventory for a large customer project.
- At September 30, current assets were $546.0 million and current liabilities were $341.1 million. Notes payable totaled $57.4 million: $54.8 million non-recourse and $2.6 million recourse. Separately, floor-plan payables were $150.1 million, compared with $121.9 million at March 31.
- The WFCDF working-capital facility had a $300 million aggregate limit and no balance under its accounts-receivable component. The limit had been temporarily increased from $250 million through October 31, 2016. The company reported covenant compliance and said cash, operating funds, available credit and potential portfolio monetization should meet requirements for at least the next 12 months.
Outlook, commentary and risks
The filing provides no numerical earnings or revenue guidance. Management expects to continue investing in growth, including potential new locations and additional staff, and cautioned that these investments may weigh on short-term results. Management also stated that reduced IT demand could materially affect operating cash flow.
- Key risks include dependence on large customers and major vendors, vendor incentive programs, competitive and rapid IT-market changes, customer credit quality, and the ability to retain skilled personnel.
- Financing results are exposed to lease residual values, transaction timing, portfolio performance and the availability of non-recourse funding. The WFCDF facility is important to daily technology-segment working capital; its loss could materially harm results.
- Management considered UK operations and Brexit-related currency and economic exposures insignificant to consolidated results at the time of filing. Foreign currency translation and transaction exposure remain potential risks.
- No material legal proceedings were reported. A $0.38 million DRAM class-action recovery was recorded as other income. Early adoption of stock-compensation accounting guidance produced a $0.5 million tax benefit for the six months, or $0.07 per diluted share. The CEO and President appointment became effective August 1, 2016.
Important facts for investors to verify
- Whether elevated receivables and inventory convert to cash as the large customer project progresses, and whether operating cash flow improves.
- Whether the temporary WFCDF facility increase was extended or replaced after October 31, 2016, and the effect of facility availability on working capital.
- Whether technology-segment growth and improved product margins can offset rising compensation and other operating costs.
- Whether financing-segment portfolio earnings recover, and how credit exposure, lease residual values and non-recourse funding evolve.
- The sustainability of earnings growth after considering the DRAM recovery, stock-based compensation tax benefit, acquisition-related amortization and share repurchases.