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, 2017 (fiscal Q2 and first half of fiscal 2018); figures below are in millions unless stated otherwise. Financial statements are unaudited.
Key financial results
- Quarter: Revenue was $370.8, down 0.2% year over year; gross profit was $87.6, up 6.9%; operating income was $28.8, up 2.2%; net earnings were $17.2, up 2.7%. Diluted EPS was $1.23 versus $1.21.
- Six months: Revenue was $738.0, up 10.2%; gross profit was $165.2, up 10.4%; operating income was $49.3, up 8.0%; net earnings were $30.6, up 11.7%. Diluted EPS was $2.19 versus $1.95.
- Margins: Consolidated gross margin was 23.6% for the quarter, up 1.5 percentage points, and 22.4% for six months, up 0.1 point. Operating margin was 7.8% for the quarter (up 0.2 point) and 6.7% for six months (down 0.1 point). Adjusted EBITDA was $31.0 for the quarter and $53.5 for six months; respective margins were 8.3% and 7.3%. Adjusted EBITDA and other adjusted measures are non-GAAP.
- Segment trends: Technology-segment operating income fell 13.4% to $21.2 for the quarter and 4.7% to $37.3 for six months, despite growth in six-month segment sales. Financing-segment operating income rose 104.8% to $7.6 for the quarter and 83.2% to $12.0 for six months. Financing gains reflected, among other factors, early termination of several large leases.
- Cash flow and liquidity: Six-month operating cash flow was $13.3, versus cash used of $43.8 a year earlier. Investing used $52.9, including $37.7 for acquisitions and investment in financing receivables; financing used $10.0. Cash declined $49.6 from March 31 to $60.2. Management said cash, operating cash generation, available credit, and possible portfolio monetization should fund requirements for at least the next 12 months.
- Debt and working capital: At September 30, floor-plan payables were $120.2; non-recourse notes were $36.4 and recourse notes $0.7. The Wells Fargo facility limit was temporarily increased to $325.0 through October 31, 2017; its accounts-receivable component had no balance outstanding. The company reported compliance with facility covenants. The facility is important to daily working capital and its loss could materially adversely affect results.
- Balance sheet: Total assets were $739.0 and stockholders’ equity $376.1. Current assets were $555.3 and current liabilities $336.1.
Material changes and notable items
- Quarterly reported sales were nearly flat, while adjusted gross billings of product and services increased 3.3%. Management attributed the divergence partly to a greater mix of third-party maintenance, software assurance, and services reported on a net basis. Six-month adjusted gross billings grew 11.4%.
- Quarterly gross-margin improvement reflected product mix and more services revenue. For the six-month period, lower vendor incentives and a large competitively bid, lower-margin project partly offset favorable mix.
- Operating expenses rose 9.3% for the quarter and 11.5% for six months, reflecting compensation, additional employees, and healthcare costs. Headcount was 1,282, up 17% year over year; 155 additions were associated with acquisitions.
- ePlus acquired OneCloud in May and Integrated Data Storage (IDS) in September 2017. The preliminary consideration was approximately $10.0 and $38.4, respectively, including contingent payments. The acquisitions expanded cloud, managed-services, and engineering capabilities. Acquisition-related goodwill and intangible assets increased; purchase accounting remained preliminary.
- A new plan authorized repurchases of up to 500,000 shares through August 18, 2018. The $4.4 of shares recorded as repurchased in the half-year related to employee tax withholding, not open-market purchases under the plan.
Outlook, risks, and contingencies
- The filing provides no numerical earnings or revenue guidance. Management expects to continue investing in personnel, locations, and growth, which may weigh on near-term results; it also states that quarterly results can fluctuate and a quarter should not be viewed as indicative of future performance.
- Risks include vendor incentive reductions, competition and changing IT markets, customer spending and credit quality, concentration in major vendors, execution and integration of acquisitions, retaining skilled personnel, lease residual values, and access to working-capital and financing facilities. Cisco, HP Inc./HPE, and NetApp together represented 59% of technology-segment sales over the trailing twelve months.
- The company reported no legal proceedings expected to have a material adverse effect and no material change in previously disclosed risk factors. It was not involved in unconsolidated special-purpose-entity transactions. Certain performance guarantees and lease-transfer indemnities exist; management did not expect them to be material and considered potential payments under one lease guarantee arrangement remote.
- Revenue recognition standard Topic 606 was expected to be adopted in the quarter ending June 30, 2018. The company was still assessing whether it would report some third-party product transactions as principal or agent; the ultimate impact was not yet determined. Management expected expanded revenue disclosures.
Important facts for investors to verify
- Whether technology-segment profitability improves as acquisition-related and other operating costs rise, and whether the stronger financing-segment results are repeatable.
- How much revenue growth reflects underlying demand versus reporting mix, large projects, asset sales, and early lease terminations.
- Whether vendor incentives and major-vendor relationships remain stable, and how customer and vendor concentration evolves.
- Cash conversion, receivables and inventory needs, financing-portfolio investment, and continued availability and terms of the Wells Fargo facility after the temporary limit increase.
- Final purchase accounting and contingent-consideration exposure for IDS and OneCloud, and the eventual Topic 606 impact on revenue presentation and comparability.