ePlus Inc. — Form 10-Q Summary
Business context and reporting period
Reports the unaudited first quarter of fiscal 2018, the three months ended June 30, 2017, compared with the three months ended June 30, 2016. ePlus provides IT products, software, consulting and managed services, and customer financing. Its technology segment generated 98% of quarterly net sales; financing generated 22% of operating income.
Financial performance
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Net sales | $367.2 million | $298.5 million | +23.0% |
| Gross profit / margin | $77.6 million / 21.1% | $67.7 million / 22.7% | Profit +14.7%; margin −160 bps |
| Operating income / margin | $20.5 million / 5.6% | $17.5 million / 5.9% | Income +17.3% |
| Net earnings | $13.4 million | $10.7 million | +25.8% |
| Diluted EPS | $0.96 | $0.75 | +28.0% |
| Adjusted EBITDA / margin | $22.6 million / 6.1% | $19.3 million / 6.5% | EBITDA +17.2% |
Adjusted gross billings of product and services, a company-defined non-GAAP measure, increased 21.2% to $481.7 million. Non-GAAP diluted EPS was $0.90 versus $0.77. The effective tax rate was 35.4%, including a $1.4 million tax benefit related to vesting share-based compensation. The filing cautions that non-GAAP measures have limitations and may not be comparable across companies.
Operating cash flow was negative $3.5 million, versus negative $12.7 million a year earlier. Investing cash outflow was $13.8 million and financing cash inflow was $5.8 million. Cash declined $11.5 million during the quarter to $98.2 million. Management attributed the cash use primarily to financing-portfolio investment, technology-segment working capital needs and the OneCloud acquisition.
Liquidity, debt and material changes
At June 30, 2017, current assets were $605.5 million and current liabilities were $381.5 million. Accounts payable-floor plan was $138.9 million. Non-recourse notes payable totaled $35.7 million ($28.8 million current); recourse notes payable were $0.8 million. The technology subsidiary’s Wells Fargo facility had a $250 million aggregate limit, with $138.9 million outstanding under the floor-plan component and no balance under the accounts-receivable component. The company was in compliance with facility covenants.
After quarter-end, on July 27, the company amended the facility to temporarily raise its aggregate limit to $325 million through October 31, 2017, with an annual election mechanism described in the filing. The company said cash, operating funds and available credit should be sufficient for working capital, capital expenditures and other requirements for at least the next 12 months; it noted that weaker IT-product demand could affect operating cash flow.
OneCloud Consulting was acquired on May 17 for preliminary consideration of approximately $10.0 million, including $7.9 million cash at closing and $2.1 million contingent consideration. The acquisition added cloud and application consulting capabilities; its contribution to reported-quarter revenue and earnings was described as immaterial. Goodwill increased to $55.4 million, primarily reflecting acquisitions.
Management commentary, outlook and risks
Sales growth was driven by commercial customers, particularly in the technology industry, and large customer projects. Gross margin declined due to product mix, a competitively bid project that partially shipped during the quarter, and lower vendor incentives. Operating expenses rose with variable compensation, additional employees and healthcare costs. The cash conversion cycle increased to 26 days from 18 days a year earlier, mainly because inventory days rose; management said deferred revenue associated with committed inventory partly offset the inventory increase economically but is excluded from that cycle calculation.
No specific revenue or earnings guidance is provided. Management expects to continue investing in staff and geographic expansion, which may weigh on near-term results. Key risks include dependence on major vendors and their incentive programs, customer and vendor concentration, competition and changing IT markets, customer credit and financing-portfolio performance, working-capital needs, and reliance on the Wells Fargo facility. Cisco represented approximately 49% of sales in the quarter; HPE/HP and NetApp represented approximately 8% and 4%, respectively.
The company reported no legal proceedings expected to have a material loss contingency and no material change to the risk factors in its prior annual report. It disclosed a maximum potential $0.8 million payment under certain lease-sale guarantees, with payment considered remote. Disclosure controls were assessed as effective at quarter-end.
Most important facts for investors to verify
- Whether sales growth and project-related demand persist, and whether gross and operating margins recover from their year-over-year declines.
- Whether vendor incentives, especially from major suppliers, remain stable and how vendor concentration evolves.
- Whether working-capital requirements, inventory levels and cash conversion improve, given negative operating cash flow and the longer cash conversion cycle.
- Facility availability and covenant compliance, including the terms and duration of the post-quarter temporary increase to $325 million.
- OneCloud’s integration, contingent-consideration outcomes and the eventual purchase-price allocation.