ePlus Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2023, ePlus’s first quarter of fiscal 2024. Comparative results are for the three months ended June 30, 2022. Amounts below are in U.S. dollars; financial statement amounts are rounded to millions.
Business context
ePlus provides IT products and solutions, professional and managed services, and equipment and technology financing. The company now reports four operating segments: product, professional services, managed services, and financing. This is the first quarter reporting technology activities in three separate segments; prior-year segment comparisons reflect the company’s presented recast figures.
Financial performance and liquidity
| Metric | Q1 FY2024 | Q1 FY2023 |
|---|---|---|
| Net sales | $574.2 million | $458.4 million |
| Gross profit / gross margin | $142.3 million / 24.8% | $113.5 million / 24.8% |
| Operating income / margin | $46.3 million / 8.1% | $33.2 million / 7.2% |
| Net earnings | $33.8 million | $22.3 million |
| Diluted EPS | $1.27 | $0.84 |
| Adjusted EBITDA / margin | $53.9 million / 9.4% | $38.3 million / 8.4% |
| Cash from operating activities | $(20.9) million | $(102.9) million |
- Sales increased 25.3%, primarily from product and managed services growth; product sales rose 29.2% and managed services sales rose 23.2%. Professional services sales fell 4.3%, and financing segment sales fell 11.3%.
- Product and managed services gains lifted technology business operating income. Financing segment operating income declined 28.5% to $2.8 million, amid lower transactional gains and post-contract earnings.
- Operating cash use improved year over year but remained negative. Technology working capital absorbed cash, particularly from higher receivables; the company reported a 48-day cash conversion cycle, versus 44 days a year earlier.
- Cash and cash equivalents were $101.6 million at June 30, 2023, compared with $103.1 million at March 31, 2023. Current assets were $1,276.1 million and current liabilities were $800.8 million.
- At quarter-end, accounts payable-floor plan was $182.9 million, up from $134.6 million at March 31. The company also had $52.0 million outstanding on its revolving facility, versus none at March 31; recourse notes payable totaled $58.1 million and non-recourse notes payable totaled $22.7 million. The revolving facility limit was $200 million and the floor plan limit was $500 million; actual borrowing availability is subject to borrowing-base terms.
- Investing cash outflow was $63.1 million, including $59.6 million paid for the NSG acquisition. Financing activities provided $82.6 million, including net borrowings and $7.5 million of share repurchases.
Material changes and unusual items
- On April 30, 2023, ePlus acquired certain assets and liabilities of Network Solutions Group (NSG). Preliminary purchase consideration was $48.6 million, after an $11.0 million amount due from the sellers was deducted from $59.6 million paid at closing. The company recorded $22.1 million of goodwill and $30.0 million of customer-relationship intangibles. NSG’s post-acquisition revenue and earnings were not material for the quarter.
- Technology business sales growth also reflected the Future Com acquisition; NSG and Future Com together contributed $34.8 million to the increase in product sales.
- The company split its former technology segment into product, professional services, and managed services reporting units. It allocated existing goodwill among the new reporting units and recorded no impairment in the quarter.
- Cisco products represented 45% of technology business net sales, up from 35% in the prior-year quarter.
- The effective tax rate was 27.2%, down from 28.0%, primarily due to a lower state effective tax rate. Other income was $0.2 million, compared with a $2.2 million expense in the prior-year quarter, mainly reflecting lower foreign-currency transaction losses.
Outlook, risks, and contingencies
- No specific revenue, earnings, or EPS guidance is provided. Management said cash on hand, funds generated from operations, and available credit are expected to fund working capital, capital expenditures, and other requirements for at least the next year.
- Management said product supply constraints and extended lead times were expected to persist for at least the next few quarters. Supply disruption could affect deliveries, inventory needs, costs, and cash flows. Inflation, rising wages and interest rates, customer IT spending, and vendor incentive changes may also pressure results.
- The company relies on its WFCDF credit facility for technology-business working capital and its accounts-payable process; loss of the facility could materially adversely affect results. Borrowings bear a variable market-based rate.
- Other disclosed risks include customer and vendor concentration, cybersecurity and data privacy, competition, hiring and retention, acquisition integration, foreign exchange, and dependence on vendor products and incentives. The filing reported no material change to the risk factors in the latest Form 10-K.
- ePlus is subject to ordinary-course legal matters. As of June 30, 2023, it did not believe a material loss beyond amounts already recognized was reasonably possible. Management stated that the company was compliant with performance guarantees and did not expect related liability to have a material adverse effect.
- Management concluded disclosure controls and procedures were effective as of June 30, 2023; no material change in internal control over financial reporting was reported during the quarter.
Important facts for investors to verify
- Whether receivables, cash conversion cycle, and floor-plan borrowings remain manageable as sales scale, and the facility’s actual borrowing availability under its borrowing base.
- Whether NSG integration and acquired customer relationships generate expected growth and returns, and whether acquisition-related amortization affects reported earnings.
- Whether product and managed services growth can continue while professional services and financing results are weaker, and how the elevated Cisco sales concentration affects exposure to vendor changes.
- How persistent supply constraints, variable borrowing rates, customer demand, and vendor incentives affect future margins, liquidity, and cash flow; the filing provides no formal earnings guidance.